Fitch: Quarterly Study Shows U.S. ILEC DSL Additions Slowing.

CHICAGO -- Data growth, especially high speed data (HSD) access provided by Digital Subscriber Lines (DSL), remains one of the steadiest sources of growth in the U.S. wireline industry. However, fourth-quarter 2006 (Q4 2006) incumbent local exchange carrier (ILEC) DSL/HSD net additions represented approximately 1.34 million, nearly flat with third-quarter results, but down over 160,000 compared to the previous year quarter, as outlined in Fitch's Quarterly ILEC Comparative Statistics and Commentary - Fourth Quarter of 2006, special report. These DSL/HSD addition results could be representative of a new trend for this important source of growth and reflective of climbing penetration rates in the industry.

ILECs continued to experience significant access-line erosion from wireless substitution and the growing impact of cable digital phone offerings. Generally, all of the operators experienced an increase in the rate of access-line erosion and forecast an increasing percentage loss in 2007. However, while erosion rates have been climbing, the absolute line erosion has been falling, in general, since early 2006. A moderating of absolute line losses is due in part to the stability of business access-line totals, the declining base of high erosion rate second lines and the success of bundling efforts. The relative success of bundling voice and data requires that total connections, defined as the sum of switched access lines and high-speed data subscribers, be reviewed.

The ILECs in this report lost approximately 9.7 million switched access lines in 2006, but gained approximately 5.5 million high speed data subscribers for a net connection loss of 4.2 million, which is a decline from the loss of approximately 4.6 million in 2005. Therefore, while DSL additions have slowed, absolute access line erosion has also slowed providing some stabilization to total connections.

Fitch expects that voice revenue erosion will likely accelerate in 2007 as cable digital phone offerings expand and meet pent-up demand. Although DSL additions appear to be slowing, the growing scale of this business will provide stronger support to overall revenues in 2007. Capital spending and debt are expected to be stable in 2007. While acquisition interest exists, agreements remain difficult and operators will focus on digesting recent activity. As a result, large amounts of excess free cash flow will be returned to shareholders again in 2007.

Additional trend discussion, data points, and individual operator comparisons are available in Fitch Ratings' 'Quarterly ILEC Comparative Statistics and Commentary' report. This report offers additional operational and financial comparisons as well as graphical representations while maintaining a broad ILEC comparable statistics and history base.

The full report is available on the Fitch Ratings web site at www.fitchratings.com.

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