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Press Release -- November 4th, 2011
Source: PAETEC
Tags: Consolidation, Equipment, Exchange, Expansion, Merger

PAETEC Holding Corp. Announces Third Quarter 2011 Results

FAIRPORT, N.Y. – November 4, 2011

  • 31% revenue growth year-over-year to $536.3 million
  • 2.6% organic revenue growth in core network services sequentially
  • $102.3 million in adjusted EBITDA, 64% growth year-over-year
  • Improvement in customer and revenue churn

PAETEC Holding Corp. (NASDAQ GS: PAET) today announced third quarter 2011 financial and operating results. “We are pleased with our strong financial performance in the third quarter,” said Arunas A. Chesonis, chairman and CEO. “Higher sales, lower churn, and operating efficiencies enabled us to exceed $100 million in adjusted EBITDA for the first time in the company’s history.” Financial results for third quarter 2011 included the following:

  • Revenue of $536.3 million;
  • Adjusted EBITDA* of $102.3 million;
  • Net loss of $17.1 million;
  • Free cash flow* of $56.7 million, which represented the 35th consecutive quarter in which PAETEC generated positive free cash flow;
  • Net cash provided by operating activities of $40.0 million; and
  • Cash and cash equivalents of $94.8 million at September 30, 2011.

Proposed Merger Transaction
On August 1, 2011, PAETEC and Windstream Corporation (NASDAQ GS: WIN) announced a proposed merger transaction pursuant to the terms of the Agreement and Plan of Merger, dated as of July 31, 2011, among PAETEC Holding Corp., Windstream Corporation and Peach Merger Sub, Inc., a wholly-owned subsidiary of Windstream. The merger received approval of the PAETEC stockholders at a special meeting of PAETEC stockholders held on October 27, 2011. Upon completion of the merger, PAETEC stockholders will receive 0.460 shares of Windstream common stock for each share of PAETEC common stock they own as of the effective time of the merger. The companies continue to expect the merger to be completed by December 31, 2011, following the satisfaction or waiver of all conditions to the merger.

Quarterly Results – Third Quarter 2011 Compared to Third Quarter 2010
Revenue

  • Total revenue of $536.3 million increased 31.3% or $127.8 million for third quarter 2011 from third quarter 2010, primarily due to the inclusion of revenue from Cavalier Telephone, which was acquired in December 2010.
  • Core network services revenue increased 22.2% or $62.3 million to $343.0 million for third quarter 2011 from third quarter 2010.
  • Core carrier services revenue for third quarter 2011 increased 32.0% or $14.4 million to $59.5 million from third quarter 2010.
  • Integrated solutions revenue of $65.0 million for third quarter 2011 increased 73.3% or $27.5 million over third quarter 2010, primarily due to PAETEC’s May 31, 2011 acquisition of XETA Technologies, Inc.

Adjusted EBITDA and Margins

Adjusted EBITDA for third quarter 2011 increased 64.4% to $102.3 million from adjusted EBITDA of $62.2 million for third quarter 2010. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of total revenue, increased to 19.1% for third quarter 2011 from 15.2% for third quarter 2010, a 390 basis point improvement. The increase in adjusted EBITDA margin was a result of higher margin business acquired in the Cavalier Telephone acquisition and network synergies through network integration and migration efforts.

Cost of goods sold for third quarter 2011 was $256.9 million, representing an increase of $50.5 million or 24.5% from third quarter 2010. The increase in cost of goods sold for third quarter 2011 was a result of higher costs associated with the acquisition of Cavalier Telephone and equipment sales from XETA Technologies. Gross margin for third quarter 2011 increased to 52.1% from 49.5% for third quarter 2010 primarily due to higher margin revenue from Cavalier Telephone and network synergies.

Selling, general, and administrative (“SG&A”) expenses for third quarter 2011 were $182.6 million, including stock-based compensation of $5.4 million, which represented an increase of 28.1% or $40.1 million from third quarter 2010. The increase in SG&A was primarily due to the Cavalier Telephone and XETA Technologies acquisitions. As a percentage of total revenue, SG&A expenses were 34.1% for third quarter 2011 compared to 34.9% for third quarter 2010.

*Free cash flow, as defined by PAETEC, consists of adjusted EBITDA less capital expenditures (purchases of property and equipment). See the accompanying tables for additional information as to PAETEC’s reasons for including these measures, for a quantitative reconciliation of adjusted EBITDA to net loss, as net loss is calculated in accordance with GAAP, and for a quantitative reconciliation of free cash flow to net cash provided by operating activities, as net cash provided by operating activities is calculated in accordance with GAAP.

Net Loss

Net loss for third quarter 2011 was $17.1 million compared to net loss of $14.8 million for third quarter 2010. Higher operating margins in the current quarter were offset by higher integration and merger costs, depreciation and amortization, and interest expense.

Interest expense for third quarter 2011 increased to $36.3 million from $23.0 million for third quarter 2010. The increase in interest expense was primarily due to an increase in average outstanding debt following PAETEC’s December 2010 issuance of $450.0 million of additional 9 7/8% senior notes due 2018.

Sequential Results – Third Quarter 2011 Compared to Second Quarter 2011

Revenue

– Total revenue of $536.3 million for third quarter 2011 increased 5.8% or $29.2 million from second quarter 2011, due to strong growth in core network service revenue and the inclusion of a full quarter of results from XETA Technologies.

– Core network services revenue increased 2.6% or $8.8 million for third quarter 2011 from second quarter 2011 due to higher organic growth in monthly recurring revenues, higher data and data center revenue, and lower revenue churn.

– Core carrier services revenue of $59.5 million for third quarter 2011 decreased 3.0% or $1.8 million from second quarter 2011, due to attrition associated with certain rate increases.

– Integrated solutions revenue of $65.0 million for third quarter 2011 increased 44.0% or $19.9 million from second quarter 2011, primarily due to the inclusion of a full quarter of results from XETA Technologies and modest growth in equipment sales.

Adjusted EBITDA and Margins

Adjusted EBITDA of $102.3 million for third quarter 2011 increased 3.7% or $3.7 million from $98.6 million for second quarter 2011. Adjusted EBITDA margin was 19.1% for third quarter 2011 compared to 19.4% for second quarter 2011, primarily due to the inclusion of a full quarter of lower margin XETA Technologies results.

Third quarter 2011 cost of goods sold increased 7.9% or $18.8 million from second quarter 2011. As a result of higher costs from equipment sales, gross margin decreased to 52.1% for third quarter 2011 from 53.0% for second quarter 2011.

SG&A expenses for third quarter 2011 were $182.6 million, including stock-based compensation of $5.4 million, an increase of 5.4% or $9.3 million from second quarter 2011. As a percentage of total revenue, SG&A expenses were 34.1% for third quarter 2011 compared to 34.2% for second quarter 2011.

Net Loss

Net loss for third quarter 2011 increased to $17.1 million from a net loss of $9.4 million for second quarter 2011. The net loss for third quarter 2011 was primarily impacted by $8.1 million of Windstream-related merger costs compared to second quarter 2011.

Capital Expenditures

Capital expenditures for third quarter 2011 were $45.6 million, or 8.5% of total revenue, compared to $34.0 million, or 8.3% of total revenue, for third quarter 2010. Capital expenditures for third quarter 2011 were largely applied to PAETEC’s network, including investments in our fiber infrastructure, network enhancements in specific markets to support growth, and a modest expansion of PAETEC’s data center portfolio. Capital expenditures for third quarter 2011 decreased 13.9% or $7.4 million from $52.9 million for second quarter 2011.

Cash Flow and Liquidity

PAETEC had cash and cash equivalents of $94.8 million on September 30, 2011 compared to a June 30, 2011 balance of cash and cash equivalents of $102.6 million. Cash flow provided by operations decreased to $40.0 million in third quarter 2011 from $51.8 million in second quarter 2011, due in part to merger-related expenses. Free cash flow for third quarter 2011 was $56.7 million, which represented an $11.1 million increase from second quarter 2011 and was the company’s 35th consecutive quarter of positive free cash flow generation.

Indebtedness

At September 30, 2011, PAETEC had $1,499.5 million in debt outstanding under its senior secured credit facility and senior notes, which was comprised of a $99.5 million term loan under its credit facility, $650.0 million principal amount of senior secured notes and $750.0 million principal amount of senior unsecured notes.

At September 30, 2011, PAETEC also had a senior secured revolving credit facility under which no revolving loans were outstanding and under which PAETEC could obtain from time to time revolving loans of up to an aggregate principal amount of $125.0 million.

Full Year 2011 Outlook

“We continue to reaffirm our full year 2011 guidance,” said Keith Wilson, PAETEC’s chief financial officer.

PAETEC’s revenue and adjusted EBITDA expectations for full year 2011 assume, among other matters, that there is no further significant decline in economic conditions and that there are no significant changes in the competitive or regulatory environments. PAETEC’s revenue and adjusted EBITDA expectations for full year 2011 are as follows:

        ($ in millions)
        -------------------------------
        Revenue            $2,025 to $2,125
        Adjusted EBITDA    $375 to $395

Conference Call

No conference call will be hosted by PAETEC.

Supplemental Information

A supplemental presentation of information complementary to the information presented in this release will be made available on the Investors portion of www.paetec.com .

Forward-Looking Statements

Except for statements that present historical facts, this release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would,” or similar expressions. Such forward-looking statements include the financial guidance in this press release with respect to revenue and adjusted EBITDA for full year 2011, which reflects PAETEC’s current analysis of existing trends and information. These statements represent PAETEC’s judgment only as of the date of this press release. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause PAETEC’s actual operating results, financial position, levels of activity or performance to be materially different from those expressed or implied by such forward-looking statements. Some of the risks, uncertainties and factors are discussed under the caption “Risk Factors” in PAETEC’s 2010 Annual Report on Form 10-K and in PAETEC’s subsequently filed SEC reports. They include, but are not limited to, the following risks, uncertainties and other factors: the risks and uncertainties associated with PAETEC’s proposed merger with Windstream; adverse effects to PAETEC’s business resulting from business uncertainties and contractual restrictions while PAETEC’s proposed merger with Windstream is pending; general economic conditions and trends; the continued availability of necessary network elements at acceptable cost from competitors; changes in regulation and the regulatory environment; industry consolidation; PAETEC’s ability to manage its business effectively; competition in the markets in which PAETEC operates; failure to adapt product and service offerings to changes in customer preferences and in technology; PAETEC’s ability to integrate the operations of acquired businesses; PAETEC’s ability to implement its acquisition strategy; any significant impairment of PAETEC’s goodwill; future sales of PAETEC’s common stock in the public market and PAETEC’s ability to raise capital in the future; PAETEC’s significant level of debt and interest payment obligations and compliance with covenants under PAETEC’s debt agreements; PAETEC’s ability to attract and retain qualified personnel and sales agents; PAETEC’s failure to obtain and maintain network permits and rights-of-way; PAETEC’s involvement in disputes and legal proceedings; PAETEC’s ability to maintain and enhance its back office systems; and effects of network failures, system breaches, natural catastrophes and other service interruptions. PAETEC disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

About PAETEC

PAETEC PAET +2.16% is personalizing communications and energy solutions in 86 of the top 100 metropolitan areas across the United States. We offer a comprehensive suite of network services (voice, data and fiber solutions), as well as managed services, cloud and data center services, software and technology, and energy services. For more information, visit www.paetec.com .

        
        PAETEC Holding Corp. and Subsidiaries
        Consolidated Statements of Operations
        (in thousands)
                                                                              Three Months Ended                               Nine Months Ended
                                                             ----------------------------------------------------  -----------------------------------------
                                                                September 30,      June 30,       September 30,        September 30,        September 30,
                                                                    2011             2011             2010                 2011                 2010
                                                             ------------------ -------------- ------------------  -------------------- --------------------
        Revenue:
           Network services revenue                             $ 384,288        $ 376,243        $ 305,799           $ 1,137,563          $   926,515
           Carrier services revenue                                86,968           85,660           65,111               254,840              191,242
           Integrated solutions revenue                            65,026           45,152           37,524               146,447               76,828
                                                                  -------          -------          -------             ---------            ---------
                 Total revenue                                    536,282          507,055          408,434             1,538,850            1,194,585
        Cost of sales (exclusive of operating items shown         256,865          238,077          206,339               728,854              595,872
        separately
        below)
        Selling, general and administrative expenses              182,605          173,287          142,542               528,584              413,605
        (exclusive of
        operating items shown separately below
        and inclusive of
        stock-based compensation)
        Acquisition, integration and separation costs              10,843            3,406            3,724                16,742                3,724
        Depreciation and amortization                              65,911           65,758           47,261               194,982              141,873
                                                                  -------          -------          -------             ---------            ---------
        Income from operations                                     20,058           26,527            8,568                69,688               39,511
        Debt extinguishment and related costs                           -                -                -                     -                4,423
        Other income, net                                            (111)           (141)            (98)                (333)               (360)
        Interest expense                                           36,294           35,306           23,021               106,064               67,658
                                                                  -------          -------          -------             ---------            ---------
        Loss before income taxes                                  (16,125)         (8,638)        (14,355)             (36,043)            (32,210)
        Provision for (benefit from) income taxes                     952              800              400                 2,402                 (389)
                                                                  -------          -------          -------             ---------            --------- ----
        Net loss                                                $ (17,077)      $  (9,438)      $ (14,755)         $   (38,445)        $   (31,821)
                                                             ==== ======= ====  == ======= ==  ==== ======= ====   ==== ========= ====  ==== ========= ====
        Net cash provided by operating activities                                                                     $   152,449          $    86,373
        Net cash used in investing activities                                                                         $  (215,955)        $  (121,081)
        Net cash provided by financing activities                                                                     $    62,764          $     6,402
        
        PAETEC Holding Corp. and Subsidiaries
        Adjusted EBITDA Reconciliation
        (in thousands)
        Adjusted EBITDA, as defined by PAETEC for the periods presented,
        represents net loss before depreciation and amortization, interest
        expense, provision for (benefit from) income taxes, stock-based
        compensation, acquisition, integration and separation costs, debt
        extinguishment and related costs, and gain on non-monetary
        transaction. PAETEC's adjusted EBITDA is not a financial
        measurement prepared in accordance with United States generally
        accepted accounting principles, or "GAAP." Adjusted EBITDA is used
        by PAETEC's management, together with financial measurements
        prepared in accordance with GAAP such as net loss and revenue, to
        assess PAETEC's historical and prospective operating performance.
        Management uses adjusted EBITDA to enhance its understanding of
        PAETEC's core operating performance, which represents management's
        views concerning PAETEC's performance in the ordinary, ongoing and
        customary course of its operations. See "Management's Discussion
        and Analysis of Financial Condition and Results of Operations --
        Overview -- Adjusted EBITDA Presentation" in PAETEC's annual report
        on Form 10-K for the year ended December 31, 2010, as amended on
        Form 10-K/A, for additional information regarding PAETEC's reasons
        for including adjusted EBITDA and for material limitations with
        respect to the usefulness of this measurement. The table below
        sets forth, for the periods indicated, a reconciliation of
        adjusted EBITDA to net loss, as net loss is calculated in
        accordance with GAAP:
                                                                               Three Months Ended                             Nine Months Ended
                                                               ---------------------------------------------------  -------------------------------------
                                                                  September 30,     June 30,       September 30,       September 30,      September 30,
                                                                      2011            2011             2010                2011               2010
                                                               ------------------ ------------- ------------------  ------------------ ------------------
        Net loss                                                  $ (17,077)      $ (9,438)      $ (14,755)         $ (38,445)        $ (31,821)
        Add back non-EBITDA items included in net loss:
            Depreciation and amortization                            65,911          65,758           47,261             194,982            141,873
            Interest expense, net of interest income                 36,259          35,244           22,914             105,916             67,331
            Provision for (benefit from) income taxes                   952             800              400               2,402               (389)
                                                                    -------          ------          -------             -------            ------- ----
        EBITDA                                                       86,045          92,364           55,820             264,855            176,994
            Stock-based compensation                                  5,389           2,902            2,651              10,707              7,706
            Acquisition, integration and separation costs            10,843           3,406            3,724              16,742              3,724
            Debt extinguishment and related costs                         -               -                -                   -              4,423
            Gain on non-monetary transaction                              -             (82)              -                 (82)                -
                                                                    -------          ------ --       -------             ------- ----       -------
        Adjusted EBITDA                                           $ 102,277        $ 98,590        $  62,195           $ 292,222          $ 192,847
                                                               ==== =======       == ======     ==== =======        ==== =======       ==== =======
        
        PAETEC Holding Corp. and Subsidiaries
        Expected Adjusted EBITDA Reconciliation
        (in millions)
        The table below sets forth, for the period indicated, a
        reconciliation of expected adjusted EBITDA to expected net loss,
        as net
        loss is calculated in accordance with GAAP:
                                                                   Twelve Months Ending  Twelve Months Ending
                                                                       December 31,          December 31,
                                                                   ------------------    ------------------
                                                                           2011                  2011
                                                                   --------------------- ---------------------
                                                                    Low End of Guidance  High End of Guidance
        Expected net loss                                               $    (66)            $    (46)
        Add back non-EBITDA items included in expected net loss:
            Depreciation and amortization                                    263                   263
            Interest expense, net of interest income                         142                   142
            Provision for income taxes                                         3                     3
                                                                          ------                ------
        Expected EBITDA                                                      342                   362
            Stock-based compensation                                          13                    13
            Acquisition, integration and separation costs                     20                    20
                                                                          ------                ------
        Expected adjusted EBITDA                                        $    375              $    395
                                                                   ====== ======         ====== ======
        
        PAETEC Holding Corp. and Subsidiaries
        Free Cash Flow Calculation and Reconciliation
        (in thousands)
        Free cash flow, as defined by PAETEC, consists of adjusted EBITDA
        less capital expenditures (purchases of property and equipment).
        Free cash flow, as defined by PAETEC, is not a financial measurement
        prepared in accordance with GAAP.
        PAETEC has included data with respect to free cash flow because its
        management believes free cash flow provides a measure of the cash
        generated by PAETEC's operations before giving effect to non-cash
        accounting charges, changes in operating assets and liabilities,
        acquisition-related items, tax items and similar items that do not
        directly relate to the day-to-day cash expenses of PAETEC's
        operations, and after giving effect to application of capital
        expenditures. PAETEC's management uses free cash flow to monitor the
        effect of PAETEC's daily operations on its cash reserves and its
        ability to generate sufficient cash flow to fund PAETEC's scheduled
        debt maturities and other financing activities, including potential
        refinancings and retirements of debt, and other cash items.
        PAETEC's management believes that consideration of free cash flow
        should be supplemental, however, because free cash flow has
        limitations as an analytical financial measure. These limitations
        include the following:
              - free cash flow does not reflect PAETEC's cash expenditures for
              scheduled debt maturities and other fixed obligations, such as
              capital leases, vendor financing arrangements and the other cash
              items excluded from free cash flow; and
              - free cash flow may be calculated in a different manner by other
              companies in PAETEC's industry, which limits its usefulness as a
              comparative measure.
        PAETEC's management compensates for these limitations by relying
        primarily on PAETEC's results under GAAP to evaluate its operating
        performance and by considering independently the economic effects of
        the foregoing items that are not reflected in free cash flow. As a
        result of these limitations, free cash flow should not be considered
        as an alternative to net cash provided by operating activities,
        investing activities, financing activities or changes in cash and
        cash equivalents as calculated in accordance with GAAP, nor should
        it be used as a measure of the amount of cash available for debt
        service or for the payment of dividends or other discretionary
        expenditures.
        Following is a reconciliation of free cash flow to net cash provided
        by operating activities, as net cash provided by operating
        activities is calculated in accordance with GAAP:
                                                                             Three Months Ended                              Nine Months Ended
                                                            ----------------------------------------------------  --------------------------------------
                                                               September 30,      June 30,       September 30,       September 30,       September 30,
                                                                   2011             2011             2010                2011                2010
                                                            ------------------ -------------- ------------------  ------------------- ------------------
        Adjusted EBITDA (see previous page)                    $ 102,277        $  98,590        $  62,195           $  292,222          $ 192,847
        Purchases of property and equipment                      (45,566)        (52,929)        (34,013)           (145,342)          (94,884)
                                                                 ------- ----     ------- --       ------- ----        -------- ----       ------- ----
        Free cash flow, as defined                                56,711           45,661           28,182              146,880             97,963
           Purchases of property and equipment                    45,566           52,929           34,013              145,342             94,884
           Interest expense, net of interest income              (36,259)        (35,244)        (22,914)           (105,916)          (67,331)
           Other                                                    (903)           (827)           (520)             (2,425)           (1,928)
           Acquisition, integration and separation costs         (10,843)         (3,406)         (3,724)            (16,742)           (3,724)
           Bad debt expense                                        3,727            3,019            2,964               10,293             10,090
           Amortization of debt issuance costs                     1,158            1,226            1,221                3,448              2,577
           Amortization of debt discount                             802              795              325                2,389                977
           Changes in operating assets and liabilities           (19,963)        (12,385)          2,077              (30,820)          (47,135)
                                                                 ------- ----     ------- --       -------             -------- ----       ------- ----
        Net cash provided by operating activities              $  39,996        $  51,768        $  41,624           $  152,449          $  86,373
                                                            ==== =======       == =======     ==== =======        ==== ========       ==== =======
        
        PAETEC Holding Corp. and Subsidiaries
        Selected Financial and Operating Data
                                                                           As of                As of
                                                                    September 30, 2011    December 31, 2010
                                                                   --------------------  -------------------
        Financial Data (in thousands):
        Cash and cash equivalents                                          $    94,791          $    95,533
        Accounts receivable, net                                           $   308,679          $   253,175
        Property and equipment, net                                        $   882,753          $   860,782
        Accounts payable                                                   $    94,876          $   102,169
        Other accrued expenses                                             $   215,736          $   159,741
        Long-term debt and capital lease obligations (including            $ 1,523,382          $ 1,448,089
        current portion and net of debt discount)
        Operating Data:
        Geographic markets served (1)                                               86                   86
        Number of switches deployed                                                167                  166
        Total employees                                                          4,788                4,639
        _____________________________
            (1) In the top 100 metropolitan statistical areas
        
        PAETEC Holding Corp. and Subsidiaries
        Pro Forma Condensed Consolidated Statements of Operations
        (in thousands)
        The following pro forma results for the three and nine month
        periods endedSeptember 30, 2010 give effect to PAETEC's
        acquisition of Cavalier as if it had occurred on January 1, 2010.
        The pro forma information is not necessarily indicative of what
        the combined companies' results of operations actually would have
        been if the merger had been completed on the date indicated.For
        comparison purposes, PAETEC's actual results for the three months
        endedJune 30, 2011 and the three and nine month periods ended
        September 30, 2011 also are presented.
                                                                              Three Months Ended                               Nine Months Ended
                                                             ----------------------------------------------------  -----------------------------------------
                                                                September 30,      June 30,       September 30,        September 30,        September 30,
                                                                    2011             2011             2010                 2011                 2010
                                                             ------------------ -------------- ------------------  -------------------- --------------------
        Total revenue                                           $ 536,282        $ 507,055        $ 500,412           $ 1,538,850          $ 1,472,525
        Cost of sales (exclusive of operating items shown         256,865          238,077          246,169               728,854              715,248
        separately
        below)
        Selling, general and administrative expenses              182,605          173,287          173,065               528,584              505,240
        (exclusive of
        operating items shown separately below
        and inclusive of
        stock-based compensation)
        Acquisition, integration and separation costs              10,843            3,406            1,728                16,742                1,862
        Depreciation and amortization                              65,911           65,758           65,273               194,982              194,836
                                                                  -------          -------          -------             ---------            ---------
        Income from operations                                     20,058           26,527           14,177                69,688               55,339
        Other income, net                                            (111)           (141)           (126)                (333)               (429)
        Interest expense                                           36,294           35,306           35,033               106,064              104,328
                                                                  -------          -------          -------             ---------            ---------
        Loss before income taxes                                  (16,125)         (8,638)        (20,730)             (36,043)            (48,560)
        Provision for (benefit from) income taxes                     952              800              400                 2,402                 (389)
                                                                  -------          -------          -------             ---------            --------- ----
        Net loss from continuing operations                     $ (17,077)      $  (9,438)      $ (21,130)         $   (38,445)        $   (48,171)
                                                             ==== ======= ====  == ======= ==  ==== ======= ====   ==== ========= ====  ==== ========= ====
        
        PAETEC Holding Corp. and Subsidiaries
        Pro Forma Adjusted EBITDA Reconciliation
        (in thousands)
        Pro forma adjusted EBITDA, as defined by PAETEC for the periods
        presented, represents pro forma net loss from continuing
        operations before depreciation and amortization, interest expense,
        provision for (benefit from) income taxes, stock-based
        compensation, acquisition, integration and separation costs, debt
        extinguishment and related costs, and gain on non-monetary
        transaction. The table below sets forth, for the three and nine
        month periods endedSeptember 30, 2010, a reconciliation of pro
        forma adjusted EBITDA to pro forma net loss from continuing
        operations, as pro forma net loss from continuing operations is
        calculated in accordance with GAAP.For comparison purposes, a
        reconciliation of actual adjusted EBITDA to actual net loss from
        continuing operations, for the three months ended June 30, 2011
        and the three and nine month periods ended September 30, 2011 also
        are presented.
                                                                                          Three Months Ended                             Nine Months Ended
                                                                          ---------------------------------------------------  -------------------------------------
                                                                             September 30,     June 30,       September 30,       September 30,      September 30,
                                                                                 2011            2011             2010                2011               2010
                                                                          ------------------ ------------- ------------------  ------------------ ------------------
        Pro Forma:
        Net loss from continuing operations                                  $ (17,077)      $ (9,438)      $ (21,130)         $ (38,445)        $ (48,171)
        Add back non-EBITDA items included in net loss from continuing
        operations:
            Depreciation and amortization                                       65,911          65,758           65,273             194,982            194,836
            Interest expense, net of interest income                            36,259          35,244           34,907             105,916            103,970
            Provision for (benefit from) income taxes                              952             800              400               2,402               (389)
                                                                               -------          ------          -------             -------            ------- ----
        EBITDA                                                                  86,045          92,364           79,450             264,855            250,246
            Stock-based compensation                                             5,389           2,902            2,687              10,707              7,813
            Acquisition, integration and separation costs                       10,843           3,406            1,728              16,742              1,862
            Gain on non-monetary transaction                                         -             (82)              -                 (82)                -
                                                                               -------          ------ --       -------             ------- ----       -------
        Adjusted EBITDA                                                      $ 102,277        $ 98,590        $  83,865           $ 292,222          $ 259,921
                                                                          ==== =======       == ======     ==== =======        ==== =======       ==== =======

SOURCE: PAETEC Holding Corp.

        
        Investor Contact: 
        PAETEC 
        Darin Young, 585-340-8278 
        darin.young@paetec.com 
        or 
        Sandy DiLuglio, 585-340-2895 
        sandra.diluglio@paetec.com

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