RCN Corporation Rating: Hold

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1 SATELLITE, CABLE & BROADCASTING David B. Kestenbaum James Leahy Company Update / Estimates Change March 15, 2007 Key Metrics RCNI - NASDAQ $27.46 Pricing Date 03/15/2007 Price Target NA 52-Week Range $30.74-$22.98 Shares Outstanding (mm) 37.9 Market Capitalization ($mm) $1, Mo Average Daily Volume 148,288 Institutional Ownership 92% Debt/Total Capital 26.2% ROE Book Value/Share $15.05 Price/Book 1.8x Dividend Yield LTM EBITDA Margin EPS($) FY: December Prior Curr. Prior Curr. 2005A 2006A 2006A 2007E 2007E 1Q-Mar (0.89) Q-Jun (0.87) -- (0.69) Q-Sep (1.17) -- (0.60) Q-Dec (0.92) (0.70)E (0.65) FY (3.85) (0.31)E (0.25) (2.78)E (2.51)E P/E Revenue($mm) Prior Curr. Prior Curr. 2005A 2006A 2006A 2007E 2007E 1Q-Mar Q-Jun Q-Sep Q-Dec E FY E E 637.7E 1 Year Price History for RCNI Q1 Q2 Q Created by BlueMatrix Company Description: RCN Corporation ( is a provider of bundled telecommunication services in the US. These include analog cable TV, digital cable TV, high-speed Internet, and voice service. The company also provides a variety of commercial products and services to voice carriers, Internet Service Providers, data providers, and other enterprise customers. These services include SONET and Ethernet-based transport services, dark fiber leases, high-speed Internet access, managed servers and Webhosting, bulk and retail video service, and voice services RCN Corporation Rating: Hold Plan to Return Value to Shareholders Taking Shape; 4Q06 Results Mixed; Hold Investment Highlights: Results largely overshadowed by recapitalization plans; further details to follow. The company reported in-line 4Q06 results and announced a plan to return significant capital to shareholders. In our view, this largely overshadowed 4Q06 results and will be a source of much speculation until RCN provides more details. Until that time, we will maintain our Hold rating on RCN shares. Recapitalization, network expansion are call keys. RCN said that it plans to return $350.0mm-$400.0mm to shareholders by levering up the business to approximately 4.0x EBITDA, up from 1.5x currently on a gross basis. While details about the specifics of the plan are still limited, we expect the company to return much of the capital in the form of a dividend, though a share buyback is also an alternative. On the network expansion side, RCN plans to spend an incremental $10.0mm-$20.0mm this year to capture expansion opportunities on both the consumer and commercial side. We discuss these initiatives in more detail below. Total revenues and EBITDA of $158.3mm and $33.7mm were roughly in-line with our $160.2mm and $33.7mm expectations. This includes $7.7mm of revenue from the San Francisco operation, which RCN has now sold for $45.0mm in cash. Revenues were up 13.2% Y/Y, due almost entirely to the expansion of the Business segment to $21.8mm. RGU (revenue generating unit) additions light. RCN added just 4,000 new RGUs in the quarter vs. our 14,000 estimate. The company added 6,000 data RGUs (vs. our 14,000 estimate) but lost 1,000 video RGUs (vs. our 3,000 gain estimate) and 1,000 voice RGUs (vs. our 3,000 loss estimate). RCN saw ARPC (average revenue per customer) fall for the second straight quarter to $ from $ in 3Q06 while total bundled customers remained at 67%. Adjusting model. RCN expects 2007 revenue and EBITDA of $620.0mm-$630.0mm and $140.0mm-$150.0mm. The company also expects capital spending of $100.0mm-$110.0mm, including $10.0mm-$20.0mm in incremental spend. Our 2007E revenue and EBITDA move to $637.7mm and $147.7mm from $643.4mm and $138.6mm while EPS moves to ($2.51) from ($2.78). Our 2008E revenue and EBITDA are $665.5mm and $162.9mm; EPS is ($2.30). Maintain Hold; we believe shares remain fairly valued. We continue to believe there are other opportunities to invest in cable operators with much higher FCF yields. Our model indicates a 5.5% and 7.9% FCF yield based on 2007E and 2008E, respectively. The Disclosure section may be found on pages 4-5 of this report.

2 RCN begins to shed light on its plans to distribute capital to shareholders. Today, the company carries debt of $202.8mm and net debt of $78.3mm, respectively (vs. $492.0mm and $349.0mm at the end of 2005), alongside gross and net leverage ratios of 1.5x and 0.6x, respectively (vs. 5.4x and 3.8x exiting 2005). In 2006, RCN focused on improving its balance sheet by paying down debt and generating some free cash flow (the company generated $12.0mm in free cash flow in 4Q06 and $23.0mm in 2H06, reaching $5.0mm in free cash flow for the year). Now the company is looking to return some value to shareholders. To that end, the company announced yesterday that it would return $350.0mm-$400.0mm in capital by using existing cash on hand and by levering up its balance sheet, increasing total debt to approximately $500.0mm and by taking its leverage to approximately 4.0x. The financing would include a first-lien credit facility, which is expected to take approximately 30 days to complete and any return of capital would require the approval of first-lien facility and second-lien notes holders or a refinance of these obligations. While the details about the actual capital return remain limited, the company did say that it plans to finalize its views on the issue once the new credit facility is closed. We believe that a dividend is the most likely option for RCN but also feel that the company may buy back some shares on the open market. Footprint build-out plans also becoming clearer; commercial now a real possibility. Excluding California, RCN currently passes 1.3mm homes with its network and holds licenses to pass a total of 5.4mm homes. Of the homes, the company has 425,000 total customers and 913,000 RGUs, providing a monthly ARPC of $ (with its Northeast Metro area generating an ARPC of $110.00). The company has said over the past few months that it intends to pass an additional 400,000 homes in its core markets, which can be built out for under $500 per home (we note that there are similar homes in adjacent markets, which can be built out at similar economics). Yesterday, RCN announced that it will spend an additional $10.0mm-$20.0mm this year on new home builds, on top of the approximately 50,000 homes embedded in its base line capital spending plans. At the high end of this incremental spending range, the company would build out about 100,000 total homes for the year, if it were to concentrate solely on residential opportunities. However, we believe RCN is also looking to direct some of its incremental spending towards its commercial opportunity and expand its commercial footprint. We see significant potential to target buildings which are close to or adjacent to the fiber assets it owns in these markets. In particular, New York City is an attractive region given that the acquisition of Con Edison's (ED - $ NYSE) CLEC (competitive local exchange carrier) business gave it an extensive fiber plant, which passes both commercial buildings and multi-dwelling consumer units. While we believe commercial will be a piece of RCN's 2007 spending plans, the real move towards building out adjacent markets in the New York City metro area is likely to be a late 2007 and 2008 story, given our view that a majority of 2007 spending will be directed towards commercial opportunities. Buildout economics look favorable. In our February 20 note, we provided a look at the potential economics for such a buildout and calculated 10-year IRRs for a $250 per home and $500 per home project (assuming 400,000 total homes) at 48.2% and 31.2%, respectively. Taking a $500 per home project and assuming that it begins in 2007 with an initial 75,000 homes passed, RCN takes a $0.09 per share hit to net income in 2007 but sees positive accretion of $0.01 per share in From 2009 to 2011, the buildout benefits the bottom line by a total of $2.26 per share. From a cash flow perspective, the company should see a hit to free cash flow for several years due to the capital spending costs in the initial years of the buildout program (the first boost to FCF is in 2011, where FCF is $2.5mm higher). However, from an operating cash flow perspective, the company takes a small hit (about $1.1mm) in 2007 but sees benefits beginning in 2008 ($4.2mm growing to $12.2mm in 2009 and $24.5mm in 2010). Overall, in our view, this model indicates that the long-term benefits to RCN are evident. 2 MORGAN JOSEPH & CO. INC.

3 RCN Corporation - Quarterly and Annual Income Statements E ($ in millions) December 1Q05 2Q05 3Q05 4Q Q06 2Q06 3Q06 3Q06PF 4Q06 4Q06PF E 2008E Total Revenues $140.8 $141.4 $138.8 $139.9 $561.0 $143.6 $157.3 $157.6 $149.7 $158.3 $150.6 $616.8 $637.7 $665.5 Yr/Yr Change in Revenue ($) NE NE NE NE 19.2% 2.0% 11.2% 13.5% 7.8% 13.2% 7.6% 10.0% 3.4% 4.4% Qtr/Qtr Change in Revenue ($) NE 0.4% -1.9% 0.8% NE 2.6% 9.5% 0.2% -4.8% 5.8% 0.6% NE NE NE Costs and expenses Direct expenses $51.0 $50.7 $47.6 $47.5 $196.8 $49.9 $50.3 $51.9 $49.3 $54.8 $52.4 $206.8 $204.1 $209.6 % of Revenues 36.3% 35.9% 34.3% 33.9% 35.1% 34.8% 32.0% 32.9% 32.9% 34.6% 34.8% 33.5% 32.0% 31.5% Operating and selling, general and administr $66.6 $70.9 $68.0 $70.5 $276.0 $66.5 $70.7 $71.2 $67.0 $69.8 $66.0 $278.2 $286.0 $293.0 Total Costs $117.7 $121.6 $115.5 $118.0 $472.8 $116.5 $120.9 $123.0 $116.3 $124.6 $118.4 $485.0 $490.1 $502.6 EBITDA $23.2 $19.8 $23.3 $21.9 $88.1 $27.1 $36.4 $34.6 $33.4 $33.7 $32.3 $131.9 $147.7 $162.9 % of Revenues 16.4% 14.0% 16.8% 15.7% 15.7% 18.9% 23.1% 22.0% 22.3% 21.3% 21.4% 21.4% 23.2% 24.5% EBITDA Growth NE NE NE NE NE 17.2% 83.9% 48.6% 43.5% 53.9% 47.1% 49.6% 12.0% 10.3% Depreciation & Amortization Other Charges/Asset Impairments 2.6 (2.6) Stock Compensation Expenses Operating Income (expense) ($25.2) ($23.8) ($33.7) ($33.7) ($116.3) ($30.1) ($18.1) ($18.8) ($20.0) ($21.4) ($22.9) ($88.4) ($82.3) ($77.1) Operating Margin NE NE NE NE NE NE NE NE NE NE NE Interest Income (Expense) (10.2) (10.4) (10.7) (11.0) (42.3) (9.3) (4.9) (2.9) (2.9) (2.8) (2.8) (20.0) (10.9) (9.4) Other Income (expense) (2.2) (0.0) (0.0) (0.2) Pretax Income ($31.7) ($31.0) ($42.1) ($33.0) ($137.8) $68.4 ($25.3) ($21.8) ($23.0) ($24.4) ($24.5) ($3.0) ($93.3) ($86.6) Pretax Income Margin NE NE NE NE NE NE NE NE NE NE NE NE NE NE Income Tax (0.4) (0.3) (0.0) (0.1) (0.8) (7.5) (0.1) (0.1) (7.6) (0.4) (0.4) Net Income ($32.1) ($31.3) ($42.1) ($33.1) ($138.6) $61.0 ($25.3) ($21.8) ($23.0) ($24.5) ($24.7) ($10.6) ($93.7) ($87.0) EPS (weighted average) ($0.89) ($0.87) ($1.17) ($0.92) ($3.85) $1.68 ($0.69) ($0.60) ($0.63) ($0.65) ($0.65) ($0.25) ($2.51) ($2.30) EPS Growth NE NE NE NE NE NE NE NE NE NE NE NE NE NE Shares (weighted average) Source: Company reports and Morgan Joseph & Co. Inc. estimates 3 MORGAN JOSEPH & CO. INC.

4 Required Disclosures Rating and Price Target History for: RCN Corporation (RCNI) as of /07/06 I:Hold:NA Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix I, David Kestenbaum, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. I, James Leahy, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are 4 MORGAN JOSEPH & CO. INC.

5 our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2007 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.