UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)(Mark One)
OF THE SECURITIES EXCHANGE ACT OF 1934
þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Endedfiscal year ended December 31, 20052008
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  _____  to  _____ 
Commission File Number 000-51466000-51446
 
Consolidated Communications Holdings, Inc.CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
   
Delaware

02-0636095
(State or Other Jurisdiction of
Incorporation or Organization)
 02-0636095
(I.R.S. Employer
Identification No.)
121 South 17th 17thStreet

Mattoon, Illinois 61938-3987

(Address of principal executive offices)
Registrant’s telephone number, including area code:
(217) 235-3311
Securities registered pursuant to Section 12(b) of the Act:
   
(Title of Each Class)each class)
Common Stock, $0.01 par value per share
 (Name of Each Exchangeeach exchange on Which Registered)
Nonewhich registered)
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g)Section12 (g) of the Act: None
Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated FileroAccelerated Filero          Accelerated Filer o          Non-accelerated filer þNon-Accelerated FileroSmaller reporting companyo
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso or     Noþ
The number of shares of the registrant’s common stock, $.01 par value, outstanding as of March 20, 200612, 2009 was 29,788,851.29,488,408. The aggregate market value of the registrant’s common stock held by non-affiliates as of March 13, 2006June 30, 2008 was approximately $301,650,228,$344,780,109, computed by reference to the closing sales price of such common stock on The Nasdaq Stock Market, Inc.’s NationalNASDAQ Global Select Market as of March 20, 2006.June 30, 2008. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.
   
Part of Form 10-K Document Incorporated by Reference
Part III, Items 10, 11, 12, 13, and 14 Portion of the Registrant’s proxy statement to be filed in connection with the Annual Meeting of the Stockholders of the Registrant to be held on May 18, 2006.5, 2009.
 
 


 

TABLE OF CONTENTS
     
1
PART 1
  Business1
 2
  Risk Factors2
 26
  Unresolved Staff Comments3
 42
  Properties3
 42
  Legal Proceedings 44
  3
22
33
33
34
 4434
 
PART II
  
44
  34
45
  35
 4740
  Quantitative and Qualitative Disclosure about Market Risk62 68
  
69
  63
98
  98
98
  Other Information98 98
 
PART III
  Directors and Executive Officers of the Registrant98
 98
  Executive Compensation 98
  98
98
 98
  
98
  98
 9998
 
PART IV
  
 99
 
 100
 SIGNATURES 113
130
 
 114131
 EX-10.4: AMENDMENT N0. 3 TO CREDIT AGREEMENTExhibit 21
 EX-21: SUBSIDIARIES OF CONSOLIDATED COMMUNICATIONS HOLDINGS INC.Exhibit 23.1
 EX-23.1: CONSENT OF ERNST & YOUNG LLPExhibit 23.2
 EX-23.2: CONSENT OF DELOITTE & TOUCHE LLPExhibit 31.1
 EX-31.1: CERTIFICATIONExhibit 31.2
 EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATIONExhibit 32.1


Acronyms Used in this Annual Report on Form 10-K
CLECCompetitive local exchange carrier
DSLDigital subscriber line
EBITDAEarnings before interest, taxes, depreciation and amortization
ETFLEast Texas Fiber Line, Inc.
FASBFinancial Accounting Standards Board
FCCFederal Communications Commission
GAAPGenerally accepted accounting principles
ICCIllinois Commerce Commission
ICTCIllinois Consolidated Telephone Company
ILECIncumbent local exchange carrier
IPInternet protocol
IPOInitial public offering
IPTVInternet protocol digital television
ISPInternet service provider
LIBORLondon interbank offer rate
NECANational Exchange Carrier Association
NOLNet operating loss
PAPUCPennsylvania Public Utility Commission
PAUSFPennsylvania Universal Service Fund
PUCTPublic Utility Commission of Texas
PURATexas Public Utilities Regulatory Act
SFASStatement of Financial Accounting Standards
TXUCVTXU Communications Ventures Company
UNEUnbundled network element
UNE-PUnbundled network element platform
VOIPVoice over Internet Protocol

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Terminology Used in this Annual Report on Form 10-K
Access line equivalentsrepresent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface (BRI), primary rate interface (PRI), DSL, DS-1, DS-3, and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line.
Competitive local exchange carriers(CLECs) are telecommunications providers formed after enactment of the Telecommunications Act of 1996 to provide local exchange service that competes with ILECs and other established carriers.
Digital telephone, or VOIP serviceinvolves the routing of voice calls, at least in part, over the Internet through packets of data instead of transmitting the calls over the telephone system.
Anexchangeis a geographic area established for administration and pricing of telecommunications services.
Hosted VOIPis our broadband phone product that utilizes our soft switch to provide an Internet Protocol based voice service to business and residential customers. The product provides the flexibility of utilizing new telephone technology and features provided by our hosted soft switch but does not require an investment in a new telephone system to use the advanced features.
Incumbent local exchange telephone companies(ILECs) are the local telephone companies that provided local telephone exchange service on the effective date of the Telecommunications Act of 1996, or their predecessors. This designation is important because, in light of their competitive advantage, ILECs have statutory obligations that other telephone companies do not have. For example, ILECs are required to give other carriers access to certain equipment (known as unbundled network elements) or to house equipment for other carriers (known as colocation), on reasonable and nondiscriminatory terms. For more information, see Part I—Item 1—“Business—Regulatory Environment.”
Metro Ethernetis the use of carrier Ethernet technology in metropolitan area networks. Metro Ethernet services are provided over a standard, widely used Ethernet interface and can connect business local area networks to wide area networks or to the Internet. Metro Ethernet offers cost-effectiveness, reliability, scalability and bandwidth management superior to most proprietary networks.
MPLS or Multiprotocol Label Switchingrefers to a highly scalable data carrying mechanism in which data packets are assigned labels. Packet-forwarding decisions are made solely on the contents of this label, without the need to examine the packet itself. This allows for end-to-end circuits across any type of transport medium, using any protocol.
Rural telephone companiesprovide communications services to geographic areas that are not heavily populated. This designation is important because rural telephone companies are eligible to receive government subsidies to compensate for the disproportionate cost of providing service in low density areas. In addition, ILECs that are rural telephone companies, as defined in the Telecommunications Act of 1996, are exempt from some obligations to provide access to competitors.
Unified messagingis the integration of multiple messaging technologies into a single system. With this application, voice mail, fax, cellular and other messages are sent to the email inbox. From the email system, the messages can be heard, read or forwarded to others.

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FORWARD-LOOKING STATEMENTS
Any statements contained in this Reportreport that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statementsstatements. We use words like “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate,” “target,” “project,” “should,” “may,” and should be evaluated as such. The words “anticipates”, “believes”, “expects”, “intends”, “plans”, “estimates”, “targets”, “projects”, “should”, “may”, “will” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are contained throughout this Report, including, but not limited to, statements found in Part I — Item 1 — “Business”, Part II — Item 5 — “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”, Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Part II — Item 7A — “Quantitative and Qualitative Disclosures about Market Risk”. Such forward-lookingreport.
Forward-looking statements reflect, among other things, our current expectations, plans, strategies, and anticipated financial results and involveresults. There are a number of known and unknown risks, uncertainties, and factorsconditions that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Many of these riskscircumstances are beyond our ability to control or predict. Moreover, forward-looking statements necessarily involve assumptions on our part.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements containedthat appear throughout this Report. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements.report. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC,Securities and Exchange Commission, we doare not undertakeunder any obligation to update or review any forward-looking information, information—whether as a result of new information, future events, or otherwise. You should not place undue reliance on forward-looking statements.
Please see Part I — I—Item 1A — “Risk1A—“Risk Factors” of this Report,report, as well as the other documents that we file with the SEC from time to time, for important factors that could cause our actual results to differ from our current expectations and from the forward-looking statements discussed in this Report.report.

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MARKET AND INDUSTRY DATA
Market and industry data and other information used throughout this report are based on independent industry publications, government publications, publicly available information, reports by market research firms, or other published independent sources. Although we believe these sources are reliable, we have not verified the information. Some data also is based on estimates that members of management derive from their industry knowledge and review of internal surveys.
We cannot know, or reasonably determine, our market share in each of our markets or for our services because there is significant overlap in the telecommunications industry; it is difficult to isolate information regarding individual services. For example, wireless providers both compete with and complement our local telephone services.
PART I
Item 1.Business
Item 1.Business
“Consolidated Communications” or the “Company” refers to Consolidated Communications Holdings, Inc.—either alone or with its wholly-owned subsidiaries, as the context requires. The words “we,” “our,” or “us,” also refer to the Company and its subsidiaries.
On December 31, 2007, the Company acquired all of the capital stock of North Pittsburgh Systems, Inc. The results of operations for North Pittsburgh are included in the Company’s Telephone Operations segment for December 31, 2007, and thereafter.
Website Access to Securities and Exchange Commission Reports
The Company’s website can be found atwww.consolidated.com. From our website, you can obtain, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as practicable after they are filed with, or furnished to, the Securities and Exchange Commission.

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Overview
      We are anConsolidated Communications owns established ruralincumbent local exchange companytelephone companies (“ILECs”) that providesprovide communications services to residential and business customers in Illinois, Texas, and Texas. AsPennsylvania. Our ILECs are “rural telephone companies,” which essentially means they provide service in areas that are not heavily populated.
We offer a wide range of December 31, 2005, we estimate that we were the 17th largest local telephone company in the United States, based on publicly available information, with approximately 242,024 local access lines and approximately 39,192 digital subscriber lines, or DSL, in service. Our main sources of revenues are our local telephone businesses in Illinois and Texas, which offer an array oftelecommunications services, including local dial tone,and long distance service, custom calling features, private line services, long distance,dial-up and high-speed Internet access, inside wiring service and maintenance,digital TV, carrier access billingservices, network capacity services over our regional fiber optic network, and collection services and telephone directory publishing. In addition, we launched our Internet Protocol digital video service, which we refer to as DVS, in selected Illinois markets in 2005 and offer wholesale transport services on a fiber optic network in Texas. We also operate a number of complementary businesses, which offerincluding telemarketing and order fulfillment, telephone services to county jails and state prisons, equipment sales, operator services, equipment sales, and telemarketing and order fulfillmentmobile services.
      EachWith our acquisition of North Pittsburgh in 2007, we are the subsidiaries through which we operate our12th largest local telephone businesses is classified as a rural telephone company underin the Telecommunications Act of 1996, or the Telecommunications Act. Our rural telephone companies are Illinois Consolidated Telephone Company, whichUnited States. We have 264,323 local access lines, 74,687 Competitive Local Exchange Carrier (“CLEC”) access line equivalents, 91,817 high-speed Internet subscribers (which we refer to as ICTC, Consolidated Communications of Fort Bend Companydigital subscriber lines, or DSL), 16,666 Internet Protocol digital television (which we refer to as IPTV) subscribers and Consolidated Communications of Texas Company. Our rural telephone companies in general benefit from stable customer demand and a favorable regulatory environment. In addition, because we primarily provide service in rural areas, competition for local6,510 digital telephone service has been limited due to the generally unfavorable economics of constructing and operating competitive systems in these areas.(commonly known as Voice over Internet Protocol, or “VOIP”) subscribers.
For the years ended December 31, 20052008, and 2004,2007, we had $321.4$418.4 million and $269.6$329.2 million of revenues, respectively, of which approximately 16.8% and 15.0%, respectively, came from state and federal subsidies.respectively. In addition, we had agenerated net lossincome of $4.5$5.3 million, and $1.1exclusive of an after tax extraordinary gain of $7.2 million for the yearsyear ended December 31, 20052008, and 2004, respectively.we generated net income of $11.4 million for the year ended December 31, 2007. As of December 31, 2005,2008, we had $555.0$880.3 million of total long-term debt, an accumulated deficitnet of $57.5current portion. In addition, as of December 31, 2008, we had retained earnings of $0.0 million and stockholders’ equity of $199.2$70.1 million.
History of the Company
Founded in 1894 as the Mattoon Telephone Company by the great-grandfather of our Chairman, Richard A. Lumpkin, we began as one of the nation’s first independent telephone companies. After several subsequent acquisitions, the Mattoon Telephone Company was incorporated as Illinois Consolidated Telephone Company, or ICTC, on April 10, 1924. On September 24,In 1997, McLeodUSA acquired ICTC and all related businesses from the predecessor of Consolidated Communications, Inc., which we refer to as CCI.
      The Lumpkin family, has been continuously involved in managing our Illinois operations since inception, including the period during which it was owned by McLeodUSA, whenbut Mr. Lumpkin served as Vice Chairman of McLeodUSA and Chairman of ICTC. In December 2002, Mr. Lumpkin, through his affiliated entity Central Illinois Telephone, LLC, or Central Illinois Telephone,two private equity firms, Spectrum Equity and Providence Equity, Partners IV L.P. and its affiliates, or Providence Equity, and Spectrum Equity Investors IV, L.P. and its affiliates, or Spectrum Equity, purchased the capital stock and assets ofrepurchased ICTC and several related businesses from McLeodUSA for $284.8 million and assumed specified liabilities. Consolidated Communications Illinois Holdings, Inc., which we refer to as Illinois Holdings, was formed on March 22, 2002 as an acquisition vehicle for the purpose of acquiring ICTC and several related businesses from McLeodUSA.five years later.
      TXU Communications Ventures Company, which we refer to as TXUCV, began operations in November 1997 with the acquisition by TXU Corp. of Lufkin-Conroe Communications, a fourth-generation family-owned business founded in 1898. The regional telephone company subsidiary of Lufkin-

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Conroe Communications was renamed TXU Communications Telephone Company. In August 2000, TXU Corp. contributed the parent company of Fort Bend Telephone Company, a family-owned business based in Katy, Texas which began operations in 1914, to TXUCV.
On April 14, 2004, we acquired TXUCV, an indirect, wholly owned subsidiary of TXU Corp. Consolidated Communications Acquisition Texas, Inc., which we refer to as Texas Holdings, was formed on October 8, 2003 for the sole purpose of acquiringVentures Company, or TXUCV, from TXU Corp.Corporation. TXUCV was subsequently renamed to Consolidated Communications Ventures Company,owned rural telephone operations in Lufkin, Conroe, and Katy, Texas, which we refer to as CCV.had been operating in those markets for over 90 years. This acquisition approximately tripled the size of the Company.
On July 27, 2005, we completed the initial public offering or IPO, of our common stock. At the same time, Spectrum Equity sold its entire investment and Providence Equity sold 50 percent of its investment. In connection withJuly 2006, the IPO,Company repurchased the remaining shares owned by Providence Equity.
On December 31, 2007, we effectedcompleted the acquisition of North Pittsburgh. Through its subsidiaries, North Pittsburgh advanced communication services to residential and business customers in several counties in western Pennsylvania and a reorganization pursuant to which Texas Holdings and Homebase Acquisition, LLC, our former parent company, merged with and into Illinois Holdings, and Illinois Holdings changed its name to Consolidated Communications Holdings, Inc., which is referred to throughout this Report as “we”, “us”,CLEC that operates in the “company”, or “CCH”. We are a holding company with no income from operations or assets except for the capital stock of CCI and Texas Holdings. Instead, all of our operations are conducted through our subsidiaries.Pittsburgh metropolitan area.
Our Strengths
Stable Local Telephone Business
      We are the incumbent local telephone company in the rural communities we serve, and demandbusiness
Demand for local telephone services from our residential and business customers has been stable despite changing economic conditions. We operate in a favorablesupportive regulatory environment, and competition in our markets is limited. As a result of these favorable characteristics, the cash flow generated byconditions, our local telephone business isgenerates relatively consistent cash flow from year to year, and our long-standingyear. Our longstanding relationship with our local telephone customers providesenables us with an opportunity to pursue increased revenue per access line by selling additional services to existing customers such as local, long distance, DSL and DVS, in selected markets, through a bundling strategy, on a single monthly bill.that includes our triple play offering of voice, DSL, and IPTV services.

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Attractive markets
Favorable Regulatory Environment
      Each of the subsidiaries through which we operate our local telephone businesses is classified as a rural telephone company under the Telecommunications Act. As a result, we are exempt from some of the more burdensome unbundling requirements that have affected larger incumbent telephone companies. Also, we benefit from federal and Texas state subsidies designed to promote widely available, quality telephone service at affordable prices in rural areas, which are also referred to as universal service. For the year ended December 31, 2005, we received $33.3 million in payments from the federal universal fund and $20.6 million from the Texas universal service fund, $1.7 million of which represented the recovery of additional subsidy payments from the federal universal service fund for prior periods. In the aggregate, these payments comprised 16.8% of our revenues for the year ended December 31, 2005. For the year ended December 31, 2004, we received $21.5 million from the federal universal service fund and $19.0 million from the Texas universal service fund, $4.6 million of which represented the recovery of additional subsidy payments from the federal universal service fund for prior periods. In the aggregate, these payments comprised 15.0% of revenues for the year ended December 31, 2004.
Attractive Markets and Limited Competition
The geographic areas in which our rural telephone companies operatewe serve are characterized by a balanced mix of stable, insular territories in which we have limited competition and growing suburban areas whereand stable, rural territories. In the past we expect our business to benefit. Historically, we have had limited competition for basic voice services from wireless carriers and nonon-facilities-based providers using VOIP, but cable providers have started offering voice competition fromservices. Both Suddenlink and Comcast, cable providers.competitors in Texas, launched a competing voice product in the second quarter of 2008. The cable operator Mediacom also has launched a voice product in our Illinois markets in 2007. In 2008, NewWave Communications launched a competing voice product in the portions of our Illinois market that is not serviced by Mediacom. In our North Pittsburgh territory, each of the two incumbent cable providers, Armstrong and Comcast, launched a competitive VOIP offering in 2006.
Our Lufkin, Texas, and central Illinois markets have experienced only nominal population growth over the past decade. As of December 31, 2005, 127,127,2008, 106,419, or approximately 53%40.2%, of our local access lines were located in these markets. We haveUntil the cable operators launched voice services, we had experienced limited competition in these markets because the low

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customer density and highpredominantly residential componentcharacter of the area have discouraged competing networks from making the significant capital investment required to offer service over a competing network.service.
Our Conroe Texas and Katy, Texas markets are suburban areas locatedsuburbs on the outskirts of the Houston metropolitan area thatarea. As of December 31, 2008, 99,044, or approximately 37.5%, of our local access lines were located in these markets. Conroe and Katy have experienced above-average population and business employment growth over the past decade as compared to Texas and the United States as a whole. According to the most recent census, the median household income in the primary county in our Conroe market was over $50,000 per year, and in our Katy market was over $60,000 per year, both significantly higher than theyear. In contrast, median annual household income was $39,927 in Texas and $42,148 in the United States.
At the time of $39,927 per year. Asthe acquisition, North Pittsburgh had three operating subsidiaries: an ILEC, a CLEC, and an Internet service provider (ISP). North Pittsburgh operates in a territory of December 31, 2005, 114,897,approximately 285 square miles, including portions of Allegheny, Armstrong, Butler, and Westmoreland counties. Over the past decade, North Pittsburgh’s ILEC territory has experienced population growth because suburban communities have been expanding into its serving area. (The southernmost point of this territory is only 12 miles from Pittsburgh.) For the same reason, the ILEC has benefited from growth in business activity and favorable market demographics. Approximately 58,860, or approximately 47%22.3%, of our local access lines wereare located in these markets.the North Pittsburgh territory.
North Pittsburgh’s CLEC business furnishes telecommunication and broadband services south of the ILEC’s territory to customers in Pittsburgh and its surrounding suburbs as well as to the north in the City of Butler and its surrounding areas. Verizon is the ILEC in the Pittsburgh area, while Embarq (formerly Sprint) is the ILEC in Butler.
Technologically Advanced Network
Technologically advanced network
We have invested significantly inover the last several years in building a technologically advanced network capable of delivering a broad array of reliable, high quality voice, and data, and Internetvideo services to our Illinois and Texas customers on a cost-effective basis. For example, as of December 31, 2005, 92%approximately 95% of our total local access lines were DSL-capable excluding accessas of December 31, 2008. Approximately 96% of these DSL-capable lines already served by other high speed connections. Of our DSL capable lines, 80% are capable of speeds of 6 mega bits3 megabits per second (Mbps) or greater. This is made possible by the completion ofWe believe our superior Internet Protocol, or IP, backbone network in Illinois and the expansion of our IP backbone network in Texas, which we expect will be completed in mid-2006. We believe this IP network will positiongives us with a lower cost, better quality, and flexible platform that will enable the developmentus to develop and delivery ofdeliver new broadband applications to our customers. The service options we are able to providecustomers over our existing network, allow us to generategenerating additional revenues per customer. Other than the provision of success-basedWe will need to provide set-top boxes for subscribers, but otherwise we believe our current network in Illinois is capable of supportingcan support increased DVS subscriber levelsIPTV subscribers with limited additional network preparation.
Our Pennsylvania market offers many of the same advanced IP network capabilities, with DSL available to 100% of the customer base. Metro-Ethernet, VOIP services, and other additional IP services leverage the extensive MPLS (Multi-Protocol Label Switching) core network, making it more efficient and scalable. The wide-ranging network and extensive use of fiber provide an easy reach into existing and new areas. By bringing the fiber network closer to the customer premises, we can enhance service offerings, quality and higher bandwidth services.
Broad Service Offerings and Bundling of Services

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Broad service offerings and bundling of services
We offer our residential and business customers a single point of contact for access to a broad array of voice, data, Internet and DVSvideo services. For example, we offer allWe provide local and long distance service, multiple speeds of our customers custom calling features, such as caller nameDSL service, and number identification, call forwardinga robust IPTV video offering with over 200 all-digital channels, high definition (“HD”) offerings, and call waiting.digital video recorder (“DVR”) services. We also offer value-added services such as teleconferencing and voicemail. In addition to ourcustom calling services, we offer ourcarrier access services, digital telephone service to residential and business customers, and directory publishing, telephone equipment sales, installations services and inside wiring installation and maintenance. These sales andpublishing.
Bundling our service options allow us to generate additional revenues per customer.
      We also generate additional revenues per customer by bundling services. Bundlingofferings enables us to provideoffer and sell a more complete package of services, to our customers, which simultaneously increases our average revenue per user or ARPU, while adding additionaland adds value for the consumer. We also believe thethat bundling of services results inleads to increased customer loyalty and higher customer retention. As of December 31, 2005,2008, we had 36,62742,054 customers who subscribed to service bundles that included local service and a selection of other services including custom calling features, DSL, and voicemail. Collectively, this represents an increase of approximately 20.1% overIPTV.
Favorable regulatory environment
We benefit from federal and Texas and Pennsylvania state subsidies designed to promote “universal service,” or widely available quality telephone service at affordable prices in rural areas. For the number of customers who subscribed to service bundles as ofyear ended December 31, 2004.2008, we received $32.1 million in payments from the federal universal service fund, $17.9 million from the Texas universal service fund, and $5.2 million from the Pennsylvania universal service fund. In the aggregate, these payments constituted 13.2% of our revenues for the year ended December 31, 2008. For the year ended December 31, 2007, we received $27.0 million from the federal universal service fund and $19.0 million from the Texas universal service fund, constituting 14.0% of revenues for the year.
Experienced management team with proven track record
Experienced Management Team with Proven Track Record
With an average of approximatelyover 20 years of experience in both regulated and non-regulated telecommunications businesses, our management team has demonstrated the ability tothat it can deliver profitable growth while providing high levels of customer satisfaction. Specifically, our management team has:has a proven track record of:
 particular expertise in providing superior quality services to rural customers in a regulated environment;
 
 a proven track record ofimplementing successful business integrations and acquisitions, including the integration of ICTC and several related businesses into McLeodUSA in 1997, the acquisition of ICTC in 2002 and the TXUCV acquisition and related integration in 2004 and 2005;acquisitions; and

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 a proven track record of launching and growing of new services, such as DSL and IPTV, along with managing CLEC businesses and complementary services, such as operator, telemarketing, and order fulfillment services and directory publishing.
Business Strategy
Improve Operating Efficiency and Maintain Capital Expenditure DisciplineIncrease revenues per customer
      Since acquiring our Illinois operations in December 2002 and our Texas operations in April 2004, we have made significant operating and management improvements. We have centralized many of our business and back office functions for our operating companies. By providing these centrally managed resources to our operating companies, we have allowed our management and customer service functions to focus on their business and to better serve our customers in a cost-effective manner. We intend to continue to seek and implement more cost efficient methods of managing our business, including sharing best practices across our operations.
We believe we have successfully managed our capital expenditures in order to optimize our returns, while appropriately allocating resources to allow us to maintain and upgrade our network and enable new service delivery. We intend to maintain our capital expenditure discipline across our company.
Increase Revenues Per Customer
      We will continue to focus on increasing our revenues per customer, primarily by seeking to increaseimproving our DSL service’sand IPTV market penetration, increasing the sale of other value-added services, and encouraging customers to subscribe forto our service bundles. We believe that our strategy enables us to provide a more complete package of services to our customers and increase our ARPU while improving
Over the value for the customer.
      Welast three years we have expanded our service bundle in Illinois with the introduction of DVSby introducing IPTV in selected Illinois and Texas markets. Having made theAfter making necessary upgrades to our network and purchasedpurchasing programming content, we introduced DVS with little promotion in the first quarter of 2005launched IPTV in our key Illinois exchanges: Mattoon; Charleston;Pennsylvania markets in April 2008, four months after acquiring the company. All of our markets currently offer HD programming and Effingham. Upon completion of back-office testing, vendor interoperability between system components, and final network preparation, we began aggressively marketingDVR service that further increases our “triple play” bundle, which includes local service, DSL and DVS, in our key Illinois exchanges in September 2005.average revenue per user. As of December 31, 2005, DVS was available to approximately 19,500 homes, and2008, over 90% of our video customers have taken our triple play offering. In total, we had 2,14616,666 video subscribers which represented 11.0% penetration of available homes. We are expanding our DVS availability in Illinois, and believe that we will pass 36,000 homes by mid-2006. In addition, we continue to study our current results and the opportunitycapability of offering the service to introduce DVS serviceover 142,800 households in our Texas markets.territories.
Build on our Reputation for High Quality Service
      We will seek to continue to build on our strong reputation, which dates to 1894 in Illinois and 1898 in Texas. We plan to do this by continuing to offer a broad array of high quality telecommunications services and consistent, high quality customer service. We have consistently exceeded all Illinois Commerce Commission, or ICC, and Public Utility Commission of Texas, or PUCT, quality of service requirements, and we believe we can continue this standard of excellence throughout the company. We will continue to focus on building long-term relationships with our customers by having an active local presence and trained customer service representatives and account managers who represent our full product set to larger commercial accounts. We believe these strategies will lead to high levels of customer loyalty and increased demand for our services.

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Improve operating efficiency
Selective Acquisitions
Over the years, we have made significant operating and management improvements. In particular, we centralized many of our business and back office operations into one functional organization with common work groups, processes, and systems. Following our acquisition of North Pittsburgh, all of its financial, human resource, and supply chain systems were immediately integrated into our existing systems. Because of these efficiencies, management and customer service personnel can focus on running the business and better serving our customers in a cost-effective manner. We intendalso identified several “fast track” projects that allowed us to improve our cost structure while launching new products and improving the customer experience. By mid-2009 we will convert the North Pittsburgh ILEC billing system to a common platform currently used by our Illinois and Texas operations.
Maintain capital expenditure discipline
Across all of our territories we have successfully managed capital expenditures to optimize returns through disciplined planning and targeted capital investment. For example, specific investments in our IP core and access networks allow us to continue to have significant flexibility to expand our new service offerings such as IPTV and digital telephone services in a very cost-efficient manner while maintaining our reputation as a high-quality service provider.
Pursue selective acquisitions
Although we focused on integrating North Pittsburgh in 2008, in the longer term we will continue to pursue a disciplined process of selective acquisitions ofselectively acquiring access lines from Regional Bell Operating Companies and other rural local exchange carriers. Over the past five years, Regional Bell Operating Companies have divested a significant number of access lines nationwide and are expected to continue these divestitures in order to focus on larger markets. We also believe there may be attractive opportunities to acquire rural local exchange carriers. For example, in Illinois and Texas, there are approximately 90 rural local exchange carriers serving a fragmented market representing approximately 1.5 million total access lines. Our acquisition criteria include:or operating companies. When we evaluate potential acquisitions, we consider whether:
 attractiveness of the markets;market is attractive;
 
 qualitythe network is of the network;appropriate quality;
 
 our ability towe can integrate the acquired company efficiently;
 
 there are potential operating synergies; and
 
  the potential of any proposed transaction to permit increased dividends on our common stock.is cash flow accretive from day one.
      Currently, we are not pursuing any acquisitions or other strategic transactions.Source of Revenues
The following chart summarizes our primary sources of revenues for the last two years:
                 
  2008  2007 
      % of Total      % of Total 
  $ (millions)  Revenues  $ (millions)  Revenues 
                 
Revenues
                
Telephone Operations                
Local calling services $104.6   25.0% $82.8   25.2%
Network access services  94.6   22.6   70.2   21.3 
Subsidies  55.2   13.2   46.0   14.0 
Long distance services  24.0   5.7   14.0   4.2 
Data and Internet services  62.7   15.0   38.0   11.5 
Other services  36.9   8.8   35.8   10.9 
             
Total Telephone Operations  378.0   90.3   286.8   87.1 
Other Operations  40.4   9.7   42.4   12.9 
             
Total operating revenues $418.4   100% $329.2   100%
             

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Telephone Operations
Our Telephone Operations segment consists of local telephone,calling services, network access services, subsidies, long distance services, data and Internet services (including DSL, IPTV and directory publishingdigital telephone service), and serves both residential and business customers in Illinois and Texas. In addition, we offer DVS in selected Illinois markets and transport services in our Texas service area.other services. As of December 31, 2005,2008, our Telephone Operations segment had approximately:
 242,024264,323 local access lines in service, of which approximately 67%61.3% served residential customers and 33%38.7% served business customers;
 
 143,882 total165,953 long distance lines, including 126,299 lines from within our service areas, which represented 52.2%62.8% penetration of our local access lines;
 
 15,971dial-up Internet customers;
 • 39,19291,817 DSL lines, which represented an approximately 16.2% penetration of our local access lines. Over 92% of our total local access lines, excluding local access lines already served by other high speed connections, are DSL-capable;lines; and
 
 and 2,146 video subscribers, which represented approximately 11.0% penetration of available homes.16,666 IPTV subscribers.
      The following chart summarizes the primary sourcesOur Telephone Operations segment generated approximately $91.9 million of revenues for Telephone Operationscash flows from operating activities for the year ended December 31, 2005. The percentages2008, and $82.5 million for the year ended December 31, 2007. As of revenues listed below have been adjusted to eliminate intra-company revenues and provides more detail than that presented inDecember 31, 2008, our consolidated statementTelephone Operations had total assets of operations. See our consolidated financial statements and related notes included elsewhere in this Report.approximately $1,227.3 million.
% of Net Revenue of
Revenue SourceTelephone Operations
Local Calling31.3%
Network Access22.8
Subsidies19.1
Long Distance Service5.7
Data and Internet9.2
Directory4.2
Transport3.6
Other Services4.1
100.0%

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Local calling servicesinclude dial tone and local callingother basic services. We generally charge residential and business customers a fixed monthly rate for access to the network and for originating and receiving telephone calls within their local calling area.
Custom calling features consist of caller name and number identification, call forwarding, and call waiting. Value addedValue-added services consist of teleconferencing and voicemail. For custom calling features and value added services, wevoice mail. We usually charge a flat monthly fee which varies depending onfor custom calling features and value-added services. Otherwise, we bundle the type of service. In addition, weselected services with local calling services at a discounted rate.
We offer local private lines providingthat provide direct connections between two or more local locations locations—primarily to business customers customers—at flat monthly rates. In our Pennsylvania and Texas markets, we offer small- and medium-sized businesses a hosted VOIP package, which utilizes our current switch and allows the customer the flexibility of utilizing new telephone technology and features without investing in a new telephone system to get the features. The package bundles local service, calling features, IP business telephones, and unified messaging, which integrates multiple messaging technologies into a single system, such as allowing the customer to receive and listen to voice messages through email. We have introduced a similar product to our residential customers in Texas and Illinois and expect to extend the offering it our Pennsylvania residential customers in 2009.
Network access servicesallow the originationcustomers to make or termination ofreceive calls in our service areaarea. Our long-distance customers typically pay a monthly fee for which we charge long distance orthis service. In addition, other carriers pay network access charges for originating or terminating calls within our service areas. These charges, which are regulated. Network access feesregulated, also apply to private lines provisioned betweenthat connect a customer in one of our service areas andto a location outside of our service areas. For long distance calls, we bill the long distance or other carrier on a per minute or per minute, per mile usage basis. For private lines, we bill the long distance or other carrier at a flat monthly rate. Included in this category areNetwork access charges include subscriber line charges paid by(a fee for being connected to the end user.telephone network), local number portability fees (whereby consumers can keep their telephone number when changing carriers), and universal services surcharges.
We record the details of the long distance and private line calls through our carrier access billing system and bill the applicable carriercarriers on a monthly basis. The network access charge rates for intrastate long distance calls and private lines within Illinois, Texas, and TexasPennsylvania are regulated and approved by the ICCIllinois Commerce Commission (the “ICC”), the Public Utility Commission of Texas (“PUCT”), and PUCT, respectively, whereas the Pennsylvania Public Utility Commission (“PAPUC”), respectively. The access charge rates for interstate long distance calls and private lines are regulated and approved by the Federal Communications Commission or FCC.(the “FCC”). See “Regulatory Environment—Federal Regulation” and “Regulatory Environment—Access Charges.”
Subsidiesconsist of federal and state subsidies designed to promote widely available, quality telephone service at affordable prices in rural areas. The subsidies are allocated and distributed to usSubsidies come from fundspools to which telecommunications providers, including local, long distance, and wireless carriers, must contribute on a monthly basis. FundsSubsidies are allocated and distributed to us on arural carriers monthly basis based upon ourtheir respective costs for providing local service in our two service territories.service. In Illinois we receive federal but not state subsidies, whilesubsidies; in Texas and Pennsylvania we receive both federal and state subsidies.

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Long distance servicesinclude services provided to subscribers to our long distance plansenable customers to originate calls that terminate outside the caller’stheir local calling area. For this service, we charge our subscribersWe offer a variety of long distance plans, including an unlimited calling plan, and offer a combination of subscription and usage fees.
Data and Internet servicesinclude revenues from non-local private lines and the provision offor providing access to the Internet by DSL, T-1 lines anddial-up access. IPTV. We also offer a variety of data connectivity services, including Asynchronous Transfer Mode and gigabit Ethernet products and frame relay networks. Frame relay networks are public data networks commonly used for local area network to local area network communications as an alternative to private line data communications. In addition,our Pennsylvania markets we offer enhanced Internetalso provide virtual hosting services, which include basiccollocation services, custom web site designdelevopment, and hosting, content feeds, domain namee-commerce enabling technologies.
Other servicese-mailinclude revenues from telephone directory publishing, wholesale transport services and obtaining Internet protocol addresses.
Directory Publishingsells advertising and publishes yellow and white pages directories inon our Texas and Illinois service areas and neighboring communities. As of December 31, 2005, approximately 75% of our Directory Publishing revenues generated in Texas were derived from customers within our Texas service areas, while approximately 95% of our Directory Publishing revenues generated in Illinois were derived from customers within our Illinois service areas. Directory Publishing customers are primarily small-to medium-sized local businesses and companies in surrounding service areas and large national accounts that advertise nationally in local yellow and white pages directories. The directories are each published once per year and have a combined circulation of approximately 686,000 books.
Transport Servicesprovides connectivity in and between major markets in Texas, including Austin, Corpus Christi, Dallas, Fort Worth, Houston, San Antonio and many second- and third-tier markets in-between these centers over a fiber optic transport network consisting of approximately 2,500 route-miles of fiber. This transport network supports our long distance, Internet access and data services in Texas, and provides bandwidth on a wholesale basis to third party customers, including national long distance and wireless carriers. The transport network includes fiber owned by Consolidated Communications Transport Company, a wholly owned subsidiary of CCV, and East Texas Fiber Line Incorporated, a corporation in

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which we own a 63.0% equity interest. In addition, we own a 39.1% equity interest in, and are the managing partner of, Fort Bend Fibernet, a partnership. Major third party customers in Texas include some of the largest national wireless and long distance carriers, such as Cingular Wireless and AT&T.
Other Servicesincludes revenues from billing and collection services, inside wiring service, and maintenance, DVS and the salemaintenance.
Wireless partnershipinvestments are included as a component of customer telephone equipment.
Cellular Partnerships. We holdother income in our Telephone Operations segment. This includes our limited partnership interests in the following twoBoulevard Communications, a competitive access provider, and five cellular partnerships: GTE Mobilnet of South Texas, GTE Mobilnet of Texas RSA #17, Pittsburgh SMSA, Pennsylvania RSA 6(I), and Pennsylvania RSA 6(II).
We own approximately 2.3% of GTE Mobilnet of South Texas, which serves the greater Houston metropolitan area. Because we have a minor ownership interest and cannot influence operations, we account for this investment using the cost basis; income is recognized only on cash distributions paid to us up to our proportionate earnings in the partnership. We recognized income on cash distributions of $4.1 million from this partnership for the year ended December 31, 2008, and $4.2 million for the year ended December 31, 2007.
• GTE Mobilnet of South Texas, which serves the greater Houston metropolitan area. We own approximately 2.3% of this partnership. Because of our minor ownership interest and our inability to influence the operations of this partnership, we account for this investment using the cost basis effective with the TXUCV acquisition. As a result, income is recognized only on cash distributions paid to us up to our proportionate earnings in the partnership. For the year ending December 31, 2005, we received cash dividends of $0.8 million that were recognized as income. In 2004, we recognized income of $2.5 million and received cash distributions totaling $3.2 million from this partnership.
• GTE Mobilnet of Texas RSA #17, which serves rural areas in and around Conroe, Texas. We own approximately 17.0% of the equity of this partnership. Because of our ownership interest in this partnership, we account for this investment under the equity method. As a result, we recognize income based on the proportion of the earnings generated by the partnership that would be allocated to us. Cash distributions are recorded as a reduction in our investment amount. For the year ended December 31, 2005, we recognized income of $1.8 million and received cash distributions of $0.3 million from this partnership. In 2004, we recognized income of $1.7 million and received cash distributions totaling $0.8 million from this partnership.
We own approximately 17.0% of GTE Mobilnet of Texas RSA #17, which serves areas in and around Conroe, Texas. Because we have some influence over the operating and financial policies of this partnership, we account for the investment under the equity method, recognizing income based on the proportion of the earnings generated by the partnership that would be allocated to us. Cash distributions are recorded as a reduction in our investment amount. For the year ended December 31, 2008, we recognized income of $2.6 million and received cash distributions of $0.9 million from this partnership. For the year ended December 31, 2007, we recognized income of $2.2 million and received cash distributions of $1.9 million.
San Antonio MTA, L.P., a wholly ownedwholly-owned partnership of Cellco Partnership (doing business as Verizon Wireless), is the general partner for both partnerships.GTE Mobilnet of South Texas and GTE Mobilnet of Texas RSA #17.
In 2005,connection with the acquisition of North Pittsburgh, we acquired 3.6% of Pittsburgh SMSA, 16.6725% of Pennsylvania RSA 6(I), and 23.67% of Pennsylvania RSA 6(II) wireless partnerships, all of which are majority owned and operated by Verizon Wireless. These partnerships cover territories that almost entirely overlap the markets served by North Pittsburgh’s ILEC and CLEC operations. Because of our Telephone Operations segment generated $282.3limited influence over Pittsburgh SMSA, we account for the investment using the cost basis. We recognized income on cash distributions from Pittsburgh SMSA of $5.6 million of revenue and $70.1 million of cash flows from operating activities. For 2004, our Telephone Operations segment generated $230.4 million of revenue and $77.0 million of cash flows from operating activities. As offor the year ended December 31, 2005, our Telephone Operations had total assets2008. The Pennsylvania RSA 6(I) and RSA 6(II) partnerships are accounted for under the equity method. We recognized income of $903.2 million.$7.5 million and received cash distributions of $7.0 million from these partnerships for the year ended December 31, 2008.
Boulevard Communications, L.L.P. is a Pennsylvania limited liability partnership equally owned by North Pittsburgh and a company in the Armstrong Holdings, Inc. group of companies. Boulevard provides point-to-point data services to businesses in western Pennsylvania, including access to ISPs, connections to interexchange carriers, and high-speed data transmission. We account for the Boulevard investment under the equity method.

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Other Operations
Our Other Operations segment, which does not include any North Pittsburgh operations, consists of the followingfive complementary businesses:
Public Serviceshas provided local and long distance service and automated calling service for correctional facilities since 1990, and is currently providing service to 59 state and county correctional institutions. Additional services include fraud control, customer service, call management and technical field support. The range of customized applications include institution-specific branding, call time and dollar limits, 3-way call detection, Personal Identification Number System, call blocking and screening, public defender access, call restriction application,on-site training, fully automated collect calls, touch tone and rotary dial acceptable, inmate tested equipment and monitors and recorders. In addition, Public Services provides payphone services to approximately 319 payphones in the Illinois service area.
Public Servicesprovides local and long distance service and automated calling service for correctional facilities.
      In 2005 and 2004, approximately 93.0% and 92.8%, respectively, of our Public Services revenues, which were 45.5% and 42.8%, respectively, of our Other Operations revenues over the same periods were derived from a contract with the Department of Corrections of the State of Illinois. Under the contract, the State of Illinois does not pay us directly, but rather, we bill and collect revenue from the called parties and rebate commissions to the State of Illinois based on this revenue. In 2005 and 2004, the actual commissions recognized by us under this contract were approximately $10.0 million and $9.4 million, respectively. The initial term of the contract expires in June 2007, with five additional one-year extensions

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available at the State of Illinois’ option. We currently serve all 46 Illinois state correctional facilities pursuant to this contract.
Business Systemssells and installs telecommunications equipment, such as key, private branch exchange (PBX), and IP-based telephone systems, to business customers in Texas and Illinois.
Operator Servicesoffers both live and automated local and long distance operator services and national directory assistance on a wholesale and retail basis to incumbent telephone companies, competitive telephone companies, long distance companies and payphone providers. We also provide specialized message center services and corporate and governmental attendant services. We provide service 24 hours per day in two call centers using bilingual agents. McLeodUSA represented 35.5% and 48.1%, respectively, of Operator Services revenues for 2005 and 2004, which was 6.6% and 9.7%, respectively, of our Other Operations segment’s revenues over the same periods.
Market Responseprovides telemarketing and order fulfillment services.
Market Responseprovides telemarketing and order fulfillment services to customers nationwide. Our order fulfillment services provide our clients with the ability to quickly and cost-effectively meet their customers’ requests for shipment of information and products. Typically, these customers are responding to a direct-response advertising campaign by the Internet, mail or telephone. AT&T represented 47.3% and 22.2% of Market Response revenues for 2005 and 2004, respectively, which was 6.2% and 3.4%, respectively, of our Other Operations segment’s revenues over the same periods. Discover Financial Services, a new customer in 2005, represented 33.0% of our Market Response revenues for the year and 4.3% of our Other Operations segment’s revenues over the same period.
Operator Servicesoffers both live and automated local and long distance operator services and national directory assistance on a wholesale and retail basis.
Business Systemssells, installs and, through maintenance contracts, maintains telecommunications equipment, such as key and private branch exchange telephone systems and wiring
Mobile Servicesprovides one-way messaging service predominantly to residential and business customers in our service area and in nearby, larger markets including Champaign, Decatur and Springfield, Illinois. This operation allows us to cross-sell our services to many of our business customers in Illinois such as colleges, hospitals and secondary schools. Most of our Business Systems’ equipment sales are telephone systems and associated wiring to small business customers. A portion of the 2008 revenues included our Illinois cellular agency and Texas Mobile Virtual Network Operator (“MVNO”) operations, which were discontinued in 2008. Beginning in 2009, the remaining product, paging services, will be classified as a product in our Telephone Operations segment rather than as a business within Other Operations.
Mobile Servicesprovides one-way messaging service to residential and business customers. The basic paging capability has been supplemented with other complimentary mobile information services, including Internet, 800 service, info-text and voicemail.
      In 2005, ourOur Other Operations segment generated $39.1 million of revenues and $2.4approximately $0.5 million of cash flows from operating activities. In 2004, our Other Operations generated $39.2activities for the year ended December 31, 2008, and ($0.4) million of revenues and $2.4 million of cash flows from operating activities.for the year ended December 31, 2007. As of December 31, 2005, our2008, Other Operations had total assets of $42.8approximately $14.3 million.
Customers and Markets
Customers and Markets
Illinois
Our Illinois local telephone markets consist of 35 geographically contiguous exchanges serving predominantly small towns and rural areas inareas. We cover an area of approximately 2,681 square mile areamiles, primarily in five central Illinois counties: Coles; Christian; Montgomery; Effingham;Coles, Christian, Montgomery, Effingham, and Shelby. An exchange is a geographic area established for administration and pricing of telecommunications services. We are the incumbent provider ofprovide basic telephone services within these exchanges,in this territory, with approximately 82,19768,679 local access lines, or approximately 3125.6 lines per square mile, as of December 31, 2005.2008. Approximately 64%57.9% of our local access lines serve residential customers, andwith the remainder serveserving business customers. Our Illinois business customers are predominantly small retail, commercial, light manufacturing, and service industry accounts, as well as universities and hospitals.
      According to the U.S. Census 2000, the population in our Illinois service areas has grown slightly in the last ten years, which is consistent with our belief that these markets are mature and stable. Each of the counties in which we operate consists of predominately small town and agricultural areas with a mix of small business. Our two largest exchanges in Illinois are Mattoon and Charleston, both of which are in Coles County. Effingham, which is Effingham County’s largest town, is our third largest exchange in Illinois.

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Key Illinois Market Data
      We list below selected data from the U.S. Census 2000, together with our number of local access lines in Illinois as of December 31, 2005.
                              
  Coles Christian Montgomery Effingham Shelby Other Totals
               
2000 Census Data                            
 County Population (2000)  53,196   35,372   30,652   34,264   22,893   n/a   176,377 
 County Population CAGR 1990- 2000  0.30%  0.27%  (0.03)%  0.78%  0.28%  n/a   n/a 
 County Median Household Income $32,286  $36,561  $33,123  $39,379  $37,313   n/a   n/a 
Market Territory (sq. miles)  531   662   585   26   520   357   2,681 
Local Access Lines                            
 Residence  16,973   11,630   9,188   4,075   5,786   4,817   52,469 
 Business  12,246   4,447   4,037   5,302   1,865   1,831   29,728 
                             
 Total  29,219   16,077   13,225   9,377   7,651   6,648   82,197 
Number of Exchanges  5   9   7   1   8   5   35 
Texas
Our 21 exchanges in Texas serve three principal geographic markets: markets—Lufkin, Conroe, and Katy, Texas Katy—in an approximately 2,054 square mile area. Lufkin is located in east Texas and Conroe and Katy are located in the suburbs of Houston and adjacent rural areas. We are the incumbent provider ofprovide basic telephone services within these exchanges,in this territory, with approximately 159,827136,784 local access lines, or approximately 7866.6 lines per square mile, as of December 31, 2005. As of December 31, 2005, approximately 69%2008. Approximately 65.5% of our Texas local access lines servedserve residential customers, andwith the remainder servedserving business customers. Our Texas business customers are predominately manufacturing and retail industries accounts, andindustries; our largest business customers are hospitals, local governments, and school districts.
The Lufkin market is centered primarily in Angelina Countycounty in east Texas, approximately 120 miles northeast of Houston, and extends into three neighboring counties. Lufkin is the largest town within this market, which also includes the towns of Diboll, Hudson and Huntington. The area is a center for the lumber industry and includes other significant industries such as education, health care, manufacturing, retail, and social services.
The Conroe market is located primarily in Montgomery County and is centered approximately 40 miles north of Houston on Interstate I-45.Houston. Parts of the Conroe operating territory extend south to within 28 miles of downtown Houston, including parts of the affluent suburb of Thethe Woodlands. Major industries in this market include education, health care, manufacturing, retail, and social services.
The Katy market is located in parts of Fort Bend, Harris, Waller, and Brazoria counties and is centered approximately 30 miles west of downtown Houston along the busy and expanding I-10 corridor. The majorityMost of the Katy market is considered part of metropolitan Houston, with major industries including administrative, education, health care, management, professional, retail, scientific and waste management services.
The population growth within Fort BendPennsylvania ILEC territory covers 285 square miles and Montgomery has outpaced bothserves portions of Allegheny, Armstrong, Butler, and Westmorland counties in western Pennsylvania. The southernmost point of the TexasILEC territory is just 12 miles from Pittsburgh. We provide basic telephone services in this territory, with approximately 58,860 local access lines, or approximately 206.5 lines per square mile, as of December 31, 2008. Approximately 55.7% of our North Pittsburgh local access lines serve residential customers and U.S. national averages. Accordingthe remainder serve business customers. The CLEC operations expand south to data fromserve Pittsburgh and north to serve the U.S. Census 2000, the populationcity of these counties grew by 3.6% annually between 1990Butler. The CLEC primarily targets small to mid-sized businesses, educational institutions, and 2000. This compares to a growth rate of 1.9% for Texas and 1.2% for the United States during the same period. In addition, according to the most recent census, the weighted average median household income in our three Texas markets was $55,298, which was higher than the average for Texas, which was $39,927, and for the United States, which was $42,148.healthcare facilities.

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Sales and Marketing
Key Texas Market Data
      We list below selected data from the U.S. Census 2000, together with our number of local access lines in Texas as of December 31, 2005.Telephone Operations
                   
  Lufkin Market Conroe Market Katy Market  
  (Angelina (Montgomery (Fort Bend  
  County) County) County) Totals
         
2000 Census Data                
 County Population (2000)  80,130   293,768   354,452   728,350 
 County Population CAGR 1990-2000  1.4%  4.9%  4.6%    
 County Median Household Income $33,806  $50,864  $63,831   n/a 
Market Territory (sq. miles)  1,080   433   541   2,054 
Local Access Lines                
 Residence  28,861   48,803   32,585   110,249 
 Business  15,226   22,677   11,675   49,578 
                 
  Total  44,087   71,480   44,260   159,827 
                 
Number of Exchanges  9   7   5   21 
Sales and Marketing
The key components of our overall sales and marketing strategy in ourthe Telephone Operations segment have included the following:include:
positioning ourselves as a single point of contact for our customers’ communications needs;
• positioning ourselves as a single point of contact for our customers’ telecommunications needs;
• providing our customers with a broad array of voice and data services and bundling services where possible;
• providing excellent customer service, including providing24-hour,7-day a week centralized customer support to coordinate installation of new services, repair and maintenance functions;
• developing and delivering new services; and
• leveraging our history and involvement with local communities and expanding “Consolidated Communications” and “Consolidated” brand recognition.
providing customers with a broad array of voice and data services, and bundling services where possible;
providing excellent customer service, including 24-hour, 7-day a week centralized customer support to coordinate installation of new services, repair and maintenance functions;
developing and delivering new services; and
leveraging our history and involvement with local communities and expanding “Consolidated Communications” and “Consolidated” brand recognition.
Our consumer sales and marketing strategy is focused on:on increasing our penetration of broadband services, including DSL, IPTV and digital telephone, in all of our service areas. We are also focused on cross-selling our services, developing additional services to maximize revenues and increase revenues per user, and increasing customer loyalty through superior service, local presence, and motivated service employees.
• accelerating DSL service penetration in all of our service areas;
• cross-selling our services;
• developing additional services to maximize revenues and increase ARPU;
• increasing customer loyalty through superior customer service, local presence and motivated service employees; and
• leveraging the telemarketing, order fulfillment and directory-assistance capabilities to provide functions that were previously outsourced by our Texas telephone operations.
Telephone Operations
Our Telephone Operations segment currently has two mainthree sales channels: call centers, communication centers, and commissioned sales people. Our customer service call centers areserve as the primary sales channels for residential and business customers with one or two phone lines, whereas commissionedlines. Commissioned sales representatives provide customized proposals to larger business customers. In 2006, we formed a new group of commissioned sales people, called our “Feet on the Street” team. This team canvasses our territory offering residential customers our full suite of products, leading with our triple-play bundled offering of voice, DSL, and IPTV services. In addition to being a strong sales point of contact, this sales channel also helps us to identify and address customer service issues, if any, on a proactive face-to-face basis. This team of individuals can be scaled up or down to match our business needs, including, for example, if we launch a new product.
Our customers also can also visit one of our eight communications centers in Illinois for theirto address various communications needs, including paying bills or ordering new telephone, Internet service and DVS

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purchases.service. We believe that customer servicethe availability of communication centers havehas helped decrease our customers’ late payments and bad debt due to their ability to pay their bills easily at these centers. debt.
Our Telephone Operations’ sales efforts are supported by direct mail, bill inserts, newspaper advertising, public relations activities, sponsorship of community events, and website promotions.
Directory Publishing is supported by a dedicated sales force, which spends a certain number of months each year focused on each of the directory markets in order to maximize the advertising sales in each directory.sales. We believe the directory business has been an efficient tool for marketing our other services and for promoting brand development and awareness.
Transport Services has a sales force that consists of commissioned sales people specializing in wholesale transport products.
Other Operations
Other Operations
Each of our Other Operations businesses executes our sales and marketing strategy primarily usethrough an independent sales and marketing team comprised ofcomprising dedicated field sales account managers, management, teams and service representatives to execute our sales and marketing strategy. Theserepresentatives. Salespeople enhance these efforts are supported by attendance atattending industry trade shows and assuming leadership roles in industry groups including the United StatesU.S. Telecom Association, the Associated Communications Companies of America, and the Independent Telephone and Telecommunications Alliance.

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Information Technology and Support Systems
Information Technology and Support Systems
Our information technology and support systems staff is a seasoned organization that supportsday-to-day day-to-day operations and develops system enhancements. The technology supporting our Telephone Operations segment is centered on a core of commercially available and internally maintained systems.
      We have developed detailed plans to migrateIn 2005 and 2006 we successfully migrated most of the key business processes of our Illinois and Texas telephone operations onto single company-wide systems and platforms. Our objective is to improve profitability by reducing individual company costs through the sharing of best practices, centralization or standardization of functions and processes and the use of technologies and systems that provide for greater efficiencies. A number of key billing,platforms including common network provisioning, network management, and workforce management systems, and financial systems. In 2007, we upgraded and integrated our telephone billing system in Illinois. All of North Pittsburgh’s financial, human resource, and supply chain systems were immediately integrated into our Illinoisexisting systems, while provisioning, network management, and Texas Telephone Operations already usetrouble management were integrated to common softwareplatforms throughout 2008 and hardware platforms, and we have successfully completed large-scale customer andthe ILEC billing migration projectsplatform will be integrated in the last five years in both Illinois and Texas. Phase one of the end user billing project was completed in July, 2005. Phase two is currently scheduled to be completed in August 2006 and Phase three is currently scheduled to be completed in July 2007. We believe ourmid-2009. Our core operating systems and hardware platform will have significant scalability.are readily expandable.
Network Architecture and Technology
Network Architecture and Technology
      OurAll of our local networks are based on a carrier serving areaCarrier Serving Area, or CSA, architecture. Carrier serving areaCSA architecture is a structure that allows access equipment to be placed closer to customer premises, enabling the customer towhich means customers can be connected to the equipment over shorter copper loops than would be possible if all customers were connected directly to the carrier’s main switch. The access equipment is then connected back to thatthe main switch on a high capacity fiber circuit, resulting in extensive fiber deployment throughout the network. The access equipment is sometimes referrednetwork, which enables us to as a digital loop carrier and the geographic area that it serves is the carrier serving area.provide broadband services in excess of 20 Mbps to our customers.
A single engineering team is responsible for the overall architecture and interoperability of the various elements in the combined network of our Illinois, Texas, and TexasPennsylvania telephone operations. Currently, our Texas telephone operations have aOur network operations center, or NOC, in Lufkin, whichTexas, monitors the network performance of our telephone operations 24 hours per day, 365 days per year.enterprise wide communications network around the clock. This center is connected to aour NOC in Mattoon, Illinois, and together they function as one organization.which deals with customer-specific issues. We believe theseour NOCs allow our Illinois and Texas Telephone Operations to maintain high network performance standards. Our goal is

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to complete the functional interconnection of the Illinois and NOCs,standards using common network systems and platforms, which will allowallows us to shareefficiently handle weekend and after-hours coverage between all of our markets and more efficiently allocate personnel to manage fluctuations in our workload volumes. This plan is expected to be completed in the second quarter of 2006.
Our network in Illinois is supported by three advanced 100% digital switches, with a fiber network connecting 3363 of our 35 exchanges and 69 of our 103 field-deployed carriers.65 exchanges. These switches provide all of our Illinois local telephone customers with access to custom calling features, value-added services, anddial-up Internet access. In addition, approximately 94% of our total local access lines in Illinois, excluding local access lines already served by other high speed connections, are served by exchanges or carriers equipped with digital subscriber line access multiplexers, or DSLAMs, and are within distance limitations for providing DSL service. DSLAMs are devices designed to separate voice-frequency signals from DSL traffic. We have twofour additional switches in Illinois,switches: one primarilythat supports feature-rich VOIP, two dedicated to long distance service, and the other primarily dedicated toone that supports our Public Services and Operator Services.Services businesses.
      In late 2003, we commenced theAfter years of making network improvements needed to support the introduction of our DVSand developing content relationships, we introduced IPTV service which(which is functionally similar to a digital cable television offeringtelevision) in selected Illinois markets in 2005, Texas markets in 2006, and Pennsylvania markets in 2008. As of December 31, 2008, IPTV was available to approximately 142,800 homes in our Illinois marketsmarkets. Our IPTV subscriber base grew from 12,241 as of Mattoon, Charleston and Effingham.December 31, 2007, to 16,666 as of December 31, 2008. We have since completed the initial capital investments including associated IP backbone projects and developed the content relationships necessarywill need to provide these services and introduced DVS in these markets in January, 2005. Other than the provision of success-based set-top boxes to future subscribers, but we do not anticipate having to make any material capital upgrades to our network infrastructure in connection with our introductionexpansion of DVS in these markets. As of December 31, 2005, these services are available to approximately 19,500 of our residential customers, of whom, 2,146, or 11.0%, have subscribed to the service.IPTV.
      Our network inIn Texas is supported by advanced 100% digital switches, with fiber network connecting all of our 21 exchanges. These switches provide all of our Texas local telephone customers with access to custom calling features. In addition, as of December 31, 2005, approximately 92% of our Texas total local access lines, excluding local access lines already served by other high speed connections, were served by exchanges or carriers equipped with DSLAMs and were within distance limitations for providing DSL service. Wewe also dedicateoperate a separate switch in Texas for the provision of long distance service. We expect to complete the deployment of our IP backbone in Texas in the second quarter of 2006.
      Our Texas transport network, which consists of approximately 2,500 route-miles of fiber optic cable. Approximately 54% of this network consists of cable sheath owned by us,that we own, either directly or through our majority-owned subsidiary East Texas Fiber Line Incorporated (our majority-owned subsidiary) and aFort Bend Fibernet (a partnership partly owned by us, Fort Bend Fibernet.us). For most of the remaining route-miles of the network, we purchased strands on third-party fiber networks pursuant tounder contracts commonly known as indefeasible rights of use. In limited cases, we also lease capacity on third-party fiber networks to complete routes,routes. These assets also support our IPTV video product in Texas.
In the past ten years, North Pittsburgh has invested over $160 million to develop a high quality 100% digital switching network, comprising nine central offices and 86 CSAs. The CSA architecture has enabled North Pittsburgh to provide DSL service, with speeds up to 3 Mbps, to all of its access lines. In addition, North Pittsburgh has deployed fiber optic cable extensively throughout its network, resulting in a 100% Synchronous Optical Network (SONET) that supports all of the inter-office and host-remote links, as well as the majority of business parks within its ILEC serving area.

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Prior to thesebeing acquired by Consolidated Communications, North Pittsburgh completed a capital construction project to deploy fiber routes.
Employees
closer to the homes and businesses it serves. As of December 31, 2005,2008, approximately 90% percent of North Pittsburgh’s potential access lines have fiber within 5,000 feet, which will allow for DSL deployment at speeds ranging between 20 to 25 mbps and support our IPTV product in Pennsylvania. North Pittsburgh also has upgraded its data transmission network to a gigabit Ethernet backbone using a Multiple Protocol Label Switching (MPLS) network that will more efficiently and effectively handle the increased bandwidth demands from its next-generation DSL products and its business-class Ethernet offerings.
The Pennsylvania CLEC operates an extensive network with over 300 route miles of fiber optic facilities in the Pittsburgh metropolitan area. The CLEC has placed equipment in 27 Verizon central offices and one Embarq central office, and primarily serves its customers using UNE loops. In the Pittsburgh market, the CLEC operates a carrier hotel that serves as the hub for its fiber optic network. We offer space in this carrier hotel to ISPs, long distance carriers, other CLECs, and other customers who need a carrier-class location to house voice and data equipment and access to a number of networks, including ours.
Employees
As of December 31, 2008, we had a total of 1,2291,315 employees, of which 733 employees are located in Illinois (636 of which1,195 were full-time and 97120 were part-time. Approximately 343 of which were part-time) and 496 employees are located in Texas (491 of which were full-time and 5 of which were part-time).
      Of the 733 employees located in Illinois 291 employees are attributable to our Illinois rural telephone company. In addition, at December 31, 2005, we had 218 temporary employees hired through a local temporary employment agency in our Market Response business. In Illinois, 316 of our full-time employees and 88 of our part-time employees are represented by the International Brotherhood of Electrical Workers. OurWorkers under a collective bargaining agreement was renewedthat expired November 15, 2008. On February 3, 2009 the International Brotherhood of Electrical Workers ratified a new four year collective bargaining agreement, which will expire on November 15, 2005 for a period of three-years. We believe management currently has a good relationship with our Illinois union and non-union employees.
2012. Approximately 215316 of the employees located in Texas and Pennsylvania are represented by a collective bargaining agreement with the Communications Workers of America. On November 4, 2004, we signed a new three-

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year labor agreement with its unionized employees. In the winter of 2003, a union expansion campaign was initiated in Katy but was unsuccessful. We are not aware of any further attempts to organize employees in Texas.America under collective bargaining agreements that expire October 15, 2010, and September 30, 2011, respectively. We believe that management currently has a good relationship with our Texas union and non-union employees.the employees of the Company.
Industry Overview and Competition
Local Exchange Market
      The telecommunications industry is comprised of companies involved in the transmission of voice, data and video communications over various media and through various technologies. Traditionally, there were two predominant types of local telephone service providers, or carriers, in the telecommunications industry: incumbent telephone companies and competitive telephone companies. An independent telephone company refers to the Regional Bell Operating Companies, which were the local telephone companies created from the break up of AT&T in 1984 and incumbent telephone companies, such as Cincinnati Bell Inc. and Sprint’s local telephone division, which sell local telephone service. These incumbent telephone companies were the traditional monopoly providers of local telephone service prior to the break up of AT&T. Within the incumbent telephone company sector, there are rural telephone companies, such as our local telephone operations, that operate primarily in rural areas, and Regional Bell Operating Companies, such as AT&T and Verizon Communications. More recently, wireless and cable television providers have also begun providing local telephone service. Each of our subsidiaries that operates our local telephone businesses is classified as an incumbent telephone company and a rural telephone company under the Telecommunications Act. A competitive telephone company is a competitor to incumbent local telephone companies that has been granted permission by a state regulatory commission to offer local telephone service in an area already served by an incumbent telephone company.market
      The most common measure of the relative size of a local telephone company, including our rural telephone companies, is the number of access lines and total connections it operates. An “access line” is the telephone line connecting a person’s home or business to the public switched telephone network. An incumbent telephone company can acquire access lines either through normal growth or through a transaction with another incumbent telephone company. Total connections represents the aggregate of our total access lines, DSL subscribers and DVS subscribers. We believe the net increase or decrease in access lines and total connections incurred by an incumbent telephone company on an annual basis is a relevant measure. Local access lines, DSL subscribers and DVS subscribers represent a connection, each representing an opportunity to increase our ARPU.
      An incumbent telephone company experiences normal growth when it activates additional connections in a particular market due to increased demand for telephone Internet or television service by current customers or from new customers, such as a result of the construction of new residential or commercial buildings. Growth in access lines through transactions with other incumbent telephone companies occurs less frequently. Typically, one incumbent telephone company purchases access lines as well as the associated network infrastructure from another incumbent telephone company. Such purchases usually provide the acquiring incumbent telephone company the opportunity to expand the geographic areas it serves, rather than increasing its access lines totals in markets that it already serves.
Rural Telephone Company Cost Structure and Competition
In general, telecommunications service in rural areas is more costly to provide than service in urban areas becauseareas; the lower customer density necessitates higher capital expenditures on a per customer basis. In rural areas, local access line density is relatively low, typically less than 100 local access lines per square mile versus urban areas that can be in excess of 300 local access lines per square mile. This low customer density in rural areas means that switching and other facilities serve few customers. It also means that a given length of cable, connecting the telephone company office to end users, serves fewer customers than it would in a more densely populated area. As a result, the average operating and capital cost per lineit generally is highernot economically viable for rural telephone companies than non-rural operators. An industry source estimates that the total

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investment cost per loop for rural operators is $5,000, comparednew entrants to $3,000 for non-rural carriers. The amount is estimated to be as high as $10,000 for the smallest rural carriers. The rural telephone companies’ higher cost structure has two important consequences.
      The first consequence is that it is generally not commercially viable to overbuildoverlap existing networks in rural telephone company service territories. In urban areas, where population density is higher, some competitive telephone companies have built redundant wireline telephone networks within the incumbent provider’s service territory. These facilities-based competitive telephone companies compete with the incumbent providers on their own stand-alone networks. Because it is comparatively more expensive to build a redundant network in rural areas, overbuilding is less common in rural telephone company service territories.
      The second consequence associated with the rural telephone companies’ higher cost structure is the existence of federal and state subsidies designed to promote widely available, quality telephone service at affordable prices in rural areas. This is accomplished through two principal mechanisms. The first mechanism is through network access fees that regulators historically have allowed to be set at higher rates in rural areas than the actual cost of originating or terminating interstate and intrastate calls. The second mechanism is through explicit transfers to rural telephone companies via the universal service fund and state funds such as the Texas universal service fund.
      Furthermore, rural telephone companies face less regulatory oversight than the larger carriers and are exempt from the more burdensome interconnection requirements of the Telecommunications Act such as unbundling of network elements, information sharing and co-location.
Wireline Competition
Despite the barriers to entry, for voice services described above, rural telephone companies face some competition for voice services from new market entrants, such as cable providers, wireless providers, and competitive telephone companies and electric utility companies. Cable providers are entering the telecommunications market by upgrading their networks with fiber optics and installing facilities to provide fully interactive transmission of broadband voice, data, and video communications. ElectricCompetitive telephone companies have been granted permission by state regulators to offer local telephone service in areas already served by a local telephone company. Although they have not yet done so, electric utility companies have existing assets and low cost access to capital that may allow them to enter a market rapidly and accelerate network development. Increased competition could lead to price reductions, reduced operating margins and loss of market share. While we currently have no competition for basic voice services from cable providers and electric utilities, we anticipate that we will face competition from such providers in the future.
Wireless Competition
      Rural telephone companiesIndustry participants increasingly are facing increasing competition for voice services from wireless carriers. In particular, the FCC’s new number portability rules may result in increased competition from wireless providers. As of May 2004, the FCC required rural telephone companies to allow consumers to move a phone number from a wireline phone to a wireless phone. Generally, rural telephone companies face less wireless competition than non-rural providers of voice services because wireless networks in rural areas are generally less developed than in urban areas. Our Texas rural telephone companies’ service areas in Conroe and Katy, Texas are exceptions to this general rule due to their proximity to Houston and, as a result, are facing increased competition from wireless service providers. Although we do not believe that wireless technology represents a significant threat to our rural telephone companies in the near term, we expect to face increased competition from wireless carriers as technology, wireless network capacity and economies of scale improve, wireless service prices continue to decline and subscribers continue to increase.
VOIP Competition
embracing VOIP service, is increasingly being embraced by all industry participants. VOIP servicewhich essentially involves the routing of voice calls, at least in part, over the Internet through packets of data instead of transmitting the calls over the existing telephone system. While current VOIP applications typically complete calls using incumbent telephone companyILEC infrastructure and networks, as VOIP services obtain acceptance and market penetrationbecome more widespread and technology advances, further, a greater quantity of communication

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more calls may be placed without the use ofusing the telephone system. On March 10, 2004, the FCC issued a Notice of Proposed Rulemaking with respect toIP-enabled Services. services. Among other things, the FCC is considering whether VOIP Servicesservices are regulated telecommunications services or unregulated information services. The FCC has yet to issue a decision on the matter. We cannot predict the outcome of the FCC’s rulemaking or the impact onhow it will affect the revenues of our rural telephone companies. The proliferation of VOIP, particularly to the extent such communications do not utilize our rural telephone companies’ networks, may result in an erosion ofreduce our customer base and loss ofcause us to lose access fees and other funding.

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Mediacom, which serves portions of our Illinois territories, offers VOIP that competes with our basic voice services. In November 2005, ICTC entered into an interconnection agreement2008, NewWave Communications launched a competing voice product in the portions of our Illinois territory that is not served by Mediacom. In addition, both Suddenlink and Comcast, cable competitors in Texas, launched a competing voice product this year. These companies also compete with Sprint Communications, L.P., or Sprint,us for customers interested in which Sprint will provide interconnectionvideo and DSL services. In our North Pittsburgh territory, each of the two incumbent cable providers, Armstrong and Comcast, offer a competitive VOIP offering. Armstrong and Comcast also offer aggressive triple play packages of voice, video, and broadband service. In general, cable companies have modern networks and the capacity to serve a substantial number of customers. We estimate that cable companies now cover 85% of our territory.
Wireless service
Rural telephone companies usually face less wireless competition than non-rural providers of voice services because wireless networks in rural areas generally are less developed. Our service areas in Conroe and Katy, Texas are exceptions to this general rule because they are close to Houston. As a result, we are facing increased competition from wireless service providers in those markets. Our Pennsylvania markets also are exposed to increased competition from wireless service providers because of the public switched telephone network for an affiliateconcentration of interstate and major highways in the territory. We have experienced the loss of access lines by customers choosing to eliminate their wireline service in favor of a cable television companywireless provider. We believe that wireless substitution will eventually offercontinue to be a competing telephonecompetitive threat in the years to come.
Internet service in our service territory using Internet Protocol enabled technology.
Internet Competition
The Internet services market in which we operate is highly competitive and there are few barriers to entry. Industry sources expect competition to intensify. Internet services, services—meaning both Internet access, wired and wireless Internet access and on-line content services, services—are provided by cable providers, Internet service providers, long distance carriers, and satellite-based companies. Many of these companies provide direct access to the Internet and a variety of supporting services to businesses and individuals.services. In addition, many of these companies offer on-line content services consisting of access to closed, proprietary information networks.
Cable providers and long distance carriers, among others, arehave aggressively enteringentered the Internet access markets.markets over the last few years. Both have substantial transmission capabilities, traditionally carry data to large numbers of customers, and have a billing system infrastructure that permits them to add new services. Satellite companies are also offering broadband access to the Internet. WeIndustry sources expect, and we agree, that competition for Internet services will increase.continue to be very competitive.
Long distance service
Long Distance Competition
The long distance telecommunications market is highly competitive. Competition in the long distance business is based primarily on price, although service bundling, branding, customer service, billing service, and quality play a role inall influence customers’ choices.
Other competition
Other Competition
Our other lines of business are subject to substantial competition from local, regional, and national competitors. In particular, our directory publishing and transport businesses operate in competitive markets. We expect that competition as a general matter in all of our businesses will continue to intensify as new technologies and new services are offered. Our businesses operate in a competitive environment where long-term contracts are either not the norm or have cancellation clauses that allow quick termination of the agreements. Where long-term contracts are common, they are being renewed with shorter duration terms. Customers in these businesses can and do change vendors frequently. Customer business failuresLong-term contracts are unusual, and consolidation ofthose that do exist have cancellation clauses that allow quick termination. Where long-term contracts are in place, customers through mergers and buyouts can cause loss of customers.are renewing them for shorter terms.
Related Risks
      Our ability to compete successfully in our markets will depend on several factors, including the following:
• how well we market our existing services and develop new technologies and services;
• the quality and reliability of our network and service; and
• our ability to anticipate and respond to various competitive factors affecting the telecommunications industry, including a changing regulatory environment that may affect us differently from our competitors, pricing strategies by competitors, changes in consumer preferences, demographic trends and economic conditions.

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      We expect competition to intensify as a result of new competitors and the development of new technologies, products and services. In addition, we believe that the traditional dividing lines between different telecommunications services will be blurred and that mergers and strategic alliances may allow one telecommunications provider to offer increased services or access to wider geographic markets. Some or all of these risks may cause us to have to spend significantly more in capital expenditures than we currently anticipate to keep existing and attract new customers.
      Some of our voice and data competitors, such as cable providers, Internet access providers, wireless service providers and long distance carriers have brand recognition and financial, personnel, marketing and other resources that are significantly greater than ours. In addition, due to consolidation and strategic alliances within the telecommunications industry, we cannot predict the number of competitors that will emerge, especially as a result of existing or new federal and state regulatory or legislative actions. For example, the acquisition of AT&T, one of our largest customers, by SBC, the dominant local exchange company in the areas in which our Texas rural telephone companies operate, could increase competitive pressures for our services and impact our long distance and access revenues. Such increased competition from existing and new entities could lead to price reductions, loss of customers, reduced operating margins or loss of market share.
Market and Industry Data
      Market and industry data and other information used throughout this report are based on independent industry publications, government publications, publicly available information, reports by market research firms or other published independent sources. Some data is also based on estimates of our management, which are derived from their review of internal surveys and industry knowledge. Although we believe these sources are reliable, we have not independently verified the information. In addition, we note that our market share in each of our markets or for our services is not known or reasonably obtainable given the nature of our businesses and the telecommunications market in general (for example, wireless providers both compete with and complement local telephone services).
Regulatory Environment
The following summary does not describe all presentexisting and proposed federal, state and local legislation and regulations affecting the telecommunications industry. Some legislationRegulation can change rapidly, and regulations are currently the subject of judicialongoing proceedings legislativeand hearings and administrative proposals that could changealter the manner in which thisthe telecommunications industry operates. NeitherWe cannot predict the outcome of any of these developments, nor their potential impact on us, can be predicted at this time. Regulation can change rapidly in the telecommunications industry, and these changes may have an adverse effect on us in the future.us. See “Risk Factors — Factors—Regulatory Risks”.Risks.”
Overview
Overview
The telecommunications industry in which we operate is subject to extensive federal, state, and local regulation. Pursuant toUnder the Telecommunications Act of 1996 (“Telecommunications Act”), federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and the preservationto preserve and advancement ofadvance widely available, quality telephone service at affordable prices.
At the federal level, the Federal Communications Commission, or FCC, generally exercises jurisdiction over facilities and services of local exchange carriers such as our rural telephone companies to the extent they are used to provide, originate, or terminate interstate or international communications. The FCC has the authority to condition, modify, cancel, terminate, or revoke our operating authority for failure to comply with applicable federal laws or FCC rules, regulations, and policies. Fines or other penalties also may be imposed for any of these violations.
State regulatory commissions, such as the ICC in Illinois, PAPUC in Pennsylvania, and the PUCT in Texas, generally exercise jurisdiction over thesecarriers’ facilities and services to the extent they are used to provide, originate, or terminate intrastate communications. In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies. In addition, municipalities and other local government agencies regulate the publicrights-of-way rights-of-way necessary to install and operate networks.

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      The FCC has the authority to condition, modify, cancel, terminate or revoke our operating authority for failure to comply with applicable federal laws or rules, regulations and policies of the FCC. Fines or other penalties also may be imposed for any of these violations. In addition, the states have the authority to State regulators can sanction our rural telephone companies or to revoke our certifications if we violate relevant laws or regulations.
Federal regulation
Federal Regulation
Our rural telephone companies and competitive local exchange companies must comply with the Communications Act of 1934, as amended, or the Communications Act, which requires, among other things, that telecommunications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. The 1996 amendments to the Communications Act enacted in 1996 and contained(contained in the Telecommunications Act discussed below) dramatically changed, and are expected tolikely will continue to change, the landscape of the telecommunications industry.
Removal of entry barriers
The central aim of the Telecommunications Act is to open local telecommunications markets to competition while enhancing universal service. Before the Telecommunications Act was enacted, many states limited the services that could be offered by a company competing with an incumbent telephone company. The Telecommunications Act preempts these state and local laws.
The Telecommunications Act imposes a number of interconnection and other requirements on all local communications providers. All telecommunications carriers have a duty to interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers. Local exchange carriers, including our rural telephone companies, are required to:
allow other carriers to resell their services;
Access Chargesprovide number portability where feasible;
ensure dialing parity, meaning that consumers can choose their default local or long distance telephone company without having to dial additional digits;
ensure that competitors’ customers receive nondiscriminatory access to telephone numbers, operator service, directory assistance, and directory listing;
afford competitors access to telephone poles, ducts, conduits, and rights-of-way; and
establish reciprocal compensation arrangements with other carriers for the transport and termination of telecommunications traffic.

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Furthermore, the Telecommunications Act imposes on incumbent telephone companies (other than rural telephone companies that maintain their so-called “rural exemption” as our subsidiaries do) additional obligations to:
negotiate interconnection agreements with other carriers in good faith;
interconnect their facilities and equipment with any requesting telecommunications carrier, at any technically feasible point, at nondiscriminatory rates and on nondiscriminatory terms and conditions;
offer their retail services to other carriers for resale at discounted wholesale rates;
provide reasonable notice of changes in the information necessary for transmission and routing of services over the incumbent telephone company’s facilities or in the information necessary for interoperability; and
provide, at rates, terms, and conditions that are just, reasonable, and nondiscriminatory, for the physical collocation of other carriers’ equipment necessary for interconnection or access to UNEs at the premises of the incumbent telephone company.
Access charges
A significant portion of our rural telephone companies’ revenues come from network access charges paid by long distance and other carriers for originating or terminating calls within our rural telephone companies’ service areas. The amount of network access charge revenues our rural telephone companies receive is based on rates set or approved by federal and state regulatory commissions, and these rates are subject to change at any time.
Intrastate network access charges are regulated by state commissions. Network access charges in our Illinois market currently mirror interstate charges for everything but local switching. Interstate and intrastate network access charges in our North Pittsburgh market also are very similar. In contrast, as required by Texas regulators, our Texas rural telephone companies impose significantly higher network access charges for intrastate transmissions than for interstate transmissions.
The FCC regulates the prices our rural telephone companieswe may charge for the use of our local telephone facilities in originatingto originate or terminatingterminate interstate and international transmissions. The FCC has structured these prices as a combination of flat monthly charges paid by the end-userscustomers, and usage sensitiveusage-sensitive charges or flat monthly rate charges paid by long distance or other carriers. Intrastate network access charges are regulated by state commissions, which in our case are the ICC and the PUCT. Our Illinois rural telephone company’s intrastate network access charges currently mirror interstate network access charges for all but one element, local switching. In contrast, in accordance with the regulatory regime in Texas, our Texas rural telephone companies may charge significantly higher intrastate network access charges than interstate network access charges.
The FCC regulates levels of interstate network access charges by imposing price caps on Regional Bell Operating Companies, referred to as RBOC’s,RBOCs, and other large incumbent telephone companies. These price caps can be adjusted based on various formulae,formulas, such as inflation and productivity, and otherwise through regulatory proceedings. Small incumbentIncumbent telephone companies, such as our local telephone companies, may elect to base network access charges on price caps, but are not required to do so. Our Illinois
Historically, all of our rural telephone company and Texas rural telephone companies have elected not to apply federal price caps. Instead, our rural telephone companiesthey employrate-of-return rate-of-return regulation for their network interstate access charges, whereby they earn a fixed return on their investment investment—currently 11.25%—over and above operating costs. TheIn December 2007, we filed a petition with the FCC determinesseeking to permit our Illinois and Texas companies to convert to price cap regulation. Our petition was approved on May 6, 2008 and is effective on July 1, 2008. This conversion gives us greater pricing flexibility for interstate services, especially the profitsincreasingly competitive special access segment. It also provides us the potential to increase our net earnings by becoming more productive and introducing new services. On the other hand, we were required to reduce our interstate access charges in Illinois significantly, and because our Illinois intrastate access charges generally mirror interstate rates, this conversion also may result in lower intrastate revenues in Illinois. In addition, we will receive somewhat reduced subsidies from the interstate Universal Service Fund program.
Our Pennsylvania rural telephone companies can earncompany is an average schedule rate of return company, which means its interstate access revenues are based upon a statistical formula developed by setting therate-of-return National Exchange Carrier Association (“NECA”) and approved by the FCC, rather than upon its actual costs. In its 2006 and 2007 annual revisions of the average schedule formulas, NECA proposed and the FCC approved structural changes that were fully phased in during 2008, reducing our Pennsylvania rural telephone company’s annual interstate revenues by approximately $3.7 million compared to periods prior to the phase in of the structural changes. NECA and the FCC may make further changes to the formulas in future years, which could have an additional impact on their allowable investment base, which is currently 11.25%.our revenues. Our Pennsylvania rural telephone company has the option to become a cost company, meaning its rates would be subject to its own individual cost and demand data studies, but this option would be irrevocable if exercised. We cannot predict whether or when it would be advantageous to make this conversion.

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Traditionally, regulators have allowed network access rates for rural areas to be set higher in rural areas than the actual cost of terminating or originating long distance calls as an implicit means of subsidizing the high cost of providing local service in rural areas. Following a series of federal circuit court decisions in 2001 ruling that subsidies must be explicit rather than implicit, the FCC began to consider various reforms to the existing rate structure for interstate network access rates as proposed by the Multi Association Group and the Rural Task Force, each of which is a consortium of various telecommunications industry groups. We believe that the states will likely mirror any FCCadopted reforms in establishing intrastate network access charges.
      In 2001 the FCC adopted an order implementing the beginning phases of the plan of the Multi Association Group to reform the network access charge system for rural carriers. The FCC reformsthat reduced per-minute network access charges and shifted a portion of cost recovery, which historically was based on minutes of use and was imposed on long distance carriers, to flat-rate, monthly subscriber line charges imposed on end-user customers. While the FCC has simultaneouslyalso increased explicit subsidies to rural telephone companies through

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the universal service fund, to rural telephone companies, the aggregate amount of interstate network access charges paid by long distance carriers to access providers, such as our rural telephone companies, has decreased and may continue to decrease. In addition, the FCC initiated a rulemaking proceeding to investigate the Multi Association Group’s proposed incentive regulation plan for small incumbent telephone companies and other means of allowingrate-of-return carriers to increase their efficiency and competitiveness.
      The FCC’s 2001 access reform order had a negative impact on the intrastate network access revenues of our Illinois rural telephone company. Under Illinois network access regulations, our Illinois rural telephone company’s intrastate network access rates mirror interstate network access rates. Illinois, however, unlikeUnlike the federal system, Illinois does not provide an explicit subsidy in the form of a universal service fund. Therefore, while subsidies from the federal universal service fund offset Illinois Telephone Operations’the decrease in revenues resulting from the reduction in interstate network access rates in Illinois, there was not ano corresponding offset for the decrease in revenues from the reduction in intrastate network access rates. In Pennsylvania and Texas, because the intrastate network access rate regime applicable to our Texas rural telephone companies does not mirror the FCC regime, so the impact of the reforms was revenue neutral. The PUCTTexas legislature is continuingexpected to investigate possibleconsider potential changes to rates during the structure for intrastate access charges. No changes are expected before 2007.legislative session beginning in January 2009.
In recent years, long distance carriers such as AT&T, MCI and Sprint, have become more aggressive in disputing the FCC’s interstate access charge rates set by the FCC and the applicabilityapplication of access charges to their telecommunications traffic. We believe that these disputes have increased in part due tobecause advances in technology which have renderedmade it more difficult to determine the identity and jurisdiction of traffic, more difficult to ascertain and which have affordedgiving carriers an increased opportunity to assert regulatory distinctions and claims to lowerchallenge access costs for their traffic. For example, in October 2002, AT&T filed a petition with the FCC challenging its current and prospective obligation to pay access charges to local exchange carriers for the use of their networks. The FCC rejected AT&T’s petition. In September 2003, Vonage Holdings Corporation filed a petition with the FCC to preempt an order of the Minnesota Public Utilities Commission which had issued an order requiring Vonage to comply with the Minnesota Commission’s order.asserting jurisdiction over Vonage. The FCC determined that Vonage’s VOIP service was such that it was impossible to divide itVonage’s VOIP service into interstate and intrastate components without negating federal rules and policies. Accordingly, the FCC found it was an interstate service not subject to traditional state telephone regulation. While the FCC order did not specifically address the issue of the application ofwhether intrastate access charges were applicable to Vonage’s VOIP service, the fact that the service was found to be solely interstate raises that concern. We cannot predict what other actions that other long distance carriers may take before the FCC or with their local exchange carriers, including our rural telephone companies, to challenge the applicability of access charges. To date, no long distance or other carrier has made a claim to us contesting the applicability of network access charges billed by our rural telephone companies. We cannot assure you, however, that long distance or other carriers willhave not makereceived any such claims to us in the future nor, if such a claim is made, candate, but we predict the magnitude of the claim. As a result ofcannot guarantee that none will arise. Due to the increasing deployment of VOIP services and other technological changes, we believe that these types of disputes and claims willare likely to increase.
On July 25, 2006, the FCC issued for comment CC Docket 01-92, Missoula Intercarrier Compensation Plan, or the Missoula Plan—a proposal for a comprehensive reform of network access charges and other forms of compensation for the exchange of traffic among telecommunications carriers. Consolidated Communications has publicly supported the Missoula Plan; our state regulators have filed comments in opposition. The FCC has taken no action on the proposal to date. We continue to actively participate in shaping intercarrier compensation and universal service reforms through our own efforts as well as through industry associations and coalitions.
Removal of Entry Barriers
      The central aimOn October 23, 2006, Verizon Pennsylvania, Inc. and several of its affiliates filed a formal complaint with the PAPUC claiming that our Pennsylvania CLEC’s intrastate switched access rates violate Pennsylvania law. For a detailed description of the Telecommunications Act is to open local telecommunications markets to competition while enhancing universal service. Prior to the enactment of the Telecommunications Act, many states limited the services that could be offered by a company competing with an incumbent telephone company. The Telecommunications Act preempts these state and local laws.dispute, see “Regulatory Risks” included in Item 1A. “Risk Factors.”
      The Telecommunications Act imposes a number of interconnection and other requirements on all local communications providers. All telecommunications carriers have a duty to interconnect directly or

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indirectly with the facilities and equipment of other telecommunications carriers. Local exchange carriers, including our rural telephone companies, are required to:Unbundled network element rules
• allow others to resell their services;
• where feasible, provide number portability;
• ensure dialing parity, whereby consumers can choose their local or long distance telephone company over which their calls will automatically route without having to dial additional digits;
• ensure that competitors’ customers receive nondiscriminatory access to telephone numbers, operator service, directory assistance and directory listing;
• afford competitors access to telephone poles, ducts, conduits andrights-of-way;
• and establish reciprocal compensation arrangements for the transport and termination of telecommunications traffic.
Furthermore, the Telecommunications Act imposes on incumbent telephone companies, other than rural telephone companies that maintain their so-called “rural exemption”, additional obligations, by requiring them to:
• negotiate any interconnection agreements in good faith;
• interconnect their facilities and equipment with any requesting telecommunications carrier, at any technically feasible point, at nondiscriminatory rates and on nondiscriminatory terms and conditions;
• provide nondiscriminatory access to unbundled network elements, commonly known as UNEs, such as local loops and transport facilities, at any technically feasible point, at nondiscriminatory rates and on nondiscriminatory terms and conditions;
• offer their retail services for resale at discounted wholesale rates;
• provide reasonable notice of changes in the information necessary for transmission and routing of services over the incumbent telephone company’s facilities or in the information necessary for interoperability;
• and provide, at rates, terms and conditions that are just, reasonable and nondiscriminatory, for the physical co-location of equipment necessary for interconnection or access to UNEs at the premises of the incumbent telephone company.
The unbundling requirements while not applicable to our rural telephone companies as long as they maintain their rural exemption, have been some of the most controversial requirementsprovisions of the Telecommunications Act. TheIn its initial implementation of the law, the FCC has generally required incumbent telephone companies to lease a wide range of unbundled network elementsUNE’s to competitive telephone companiesCLEC’s. Those rules were designed to enable delivery ofcompetitors to deliver services to the competitor’stheir customers in combination with the competitive telephone companies’ networktheir existing networks or as a recombined service offeringofferings on an unbundled network element platform, commonly knowsknown as an UNEP.UNE-P. These unbundling requirements, and the duty to offer UNEs to competitors, imposed substantial costs on and resulted in customer attrition for, the incumbent telephone companies that hadand made it easier for customers to comply with these requirements. Ashift their business to other carriers. After a court challenge and a decision by the U.S. Court of Appeals for the D.C. Circuit vacated several componentsvacating portions of the latest FCC ruling concerning incumbent telephone companies’ obligations to offer UNEsUNE and UNEPs to competitors, effective June 30, 2004. In response to this court rulingUNE-P rules, the FCC issued revised rules onin February 4, 2005 that reinstated some unbundling requirements for incumbent telephone companies that are not protected by the rural exemption, but eliminated certain other unbundling requirements. Those new rules are subject to further court proceedings.

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Rural Exemption
Each of the subsidiaries through which we operate our local telephone businesses is an incumbent telephone company and aprovides service in rural telephone company underareas. As discussed above, the Telecommunications Act. The Telecommu-

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nications Act exempts rural telephone companies from certain of the more burdensome interconnection requirements. However, the Telecommunications Act provides that the rural exemption will cease to apply as to competing cable companies if and when the rural carrier introduces video services in a service area. In that event, a competing cable operator providing video programming and seeking to provide telecommunications services in the area may interconnect. Since each of our subsidiaries now provides video services in their major service areas, the rural exemption no longer applies to cable company competitors in those service areas. Additionally, in Texas, the PUCT has removed the rural exemption for our Texas subsidiaries with respect to telecommunications services furnished by Sprint Communications, L.P. on behalf of cable companies. We believe the benefits of providing video services outweigh the loss of the rural exemptions as to cable operators.
Under its current rules, the FCC has eliminated unbundling requirements such asfor ILECs providing broadband services over fiber facilities, but continues to require unbundled access to mass-market narrowband loops. ILECs are no longer required to unbundle packet switching services. In addition, the FCC found that CLECs generally are not at a disadvantage at certain wire center locations in regard to high bandwidth (DS-1 and DS-3) loops, dark fiber loops, and dedicated interoffice transport facilities. However, where a disadvantage persists, ILECs continue to be required to unbundle loops and transport facilities.
The FCC rules regarding the unbundling of network elements informationdid not have an impact on our Illinois and Pennsylvania ILEC operations because these ILEC’s have rural exemptions. Our Pennsylvania CLEC operations do not currently utilize line sharing, and co-location.
      As to eachutilize their own switching for business customers that are served by high-capacity loops, so the elimination of unbundling requirements for these network elements had no effect on our operations or revenues from our existing customer base. In July 2008, our Pennsylvania CLEC renewed, for a three year term, a commercial agreement with Verizon that has set the terms of the pricing and provisioning of lines served utilizing UNE-P. Our Pennsylvania CLEC currently provisions 3.63% of our rural telephone companies, the ICC or PUCT can remove the applicable rural exemption if the rural telephone company receives a bona fide request for full interconnection and the state commission determines that the request is technically feasible, not unduly economically burdensome and consistent with universal service requirements. Neither the ICC nor the PUCT has yet terminated, or proposed to terminate, the rural exemption for any of our rural telephone companies. If the ICC or PUCT rescinds the applicable rural exemption in whole, or in part, for any of our rural telephone companies or if the applicable state commission does not allow us adequate compensation forCLEC access utilizing UNE-P. Although the costs for UNE-P will increase over time pursuant to the terms of providing the interconnection or UNEs,agreement, our administrativerelatively low use of UNE-P and regulatory costsour ability to migrate some of the lines to alternative provisioning sources will limit the overall impact on our current cost structure. The CLEC has experienced moderate increases in the overall cost to provision high capacity loops, interoffice transport facilities, and dark fiber as a result of the FCC’s changes to unbundling requirements for those facilities.
In 2006, Verizon filed a petition requesting the FCC to refrain from applying a number of regulations to the Verizon operations in six major metropolitan markets, including the Pittsburgh market area. Among other things, Verizon urged the FCC to forbear from applying loop and transport unbundling regulations, claiming there was sufficient competition in the Pittsburgh market to mitigate the need for these rules. The FCC denied Verizon’s petition in December 2007, but Verizon (and other ILECs) remain free to petition the FCC for similar relief, in Pittsburgh and other markets, in the future. If any such petitions are granted in markets in which our CLEC operates, our cost to obtain access to loop and transport facilities could significantly increase and we could suffer a significant losssubstantially.
Promotion of customers to existing or new competitors.universal service
Promotion of Universal Service
In general, telecommunications service in rural areas is more costly to provide than service in urban areas because there is aareas. The lower customer density and higher capital requirements compared to urban areas. The low customer density in rural areas means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater capital expenditureexpenditures per customer to build and maintain. By supporting the high cost of operations in our rural markets, the federal universal service fund subsidies our rural telephone companies receive are intended to promote widely available, quality telephone service at affordable prices in rural areas. In 2005 and 2004, including payments received by TXUCV prior to the acquisition,2008 we received $53.9$55.2 million and $51.5 million, respectively, in aggregate payments from the federal universal service fund, the Pennsylvania universal service fund and the Texas universal service fund. In 2007 we received $46.0 million from the federal universal service fund and the Texas universal service fund.

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      The administration of collections and distributions of federal
Federal universal service fund payments is performed by the National Exchange Carrier Association, or NECA, which was formed by the FCC in 1983 to perform telephone industry tariff filings and revenue distributions following the breakup of AT&T. The board of directors of NECA is comprised of representatives from the RBOCs, large and small incumbent telephone companies and other industry participants. NECA also performs various other functions including filing access charge tariffs with the FCC, collecting and validating cost and revenues data, assisting with compliance with FCC rules and processing FCC regulatory fees.
      NECA distributes federal universal service fund subsidies are paid only to carriers that are designated as eligible telecommunications carriers, or ETCs, by a state commission. Each of our rural telephone companies has been designated as an ETC by the applicable state commission. UnderETC. However, under the Telecommunications Act, however, competitors can obtain the same level of federal universal service fund subsidies as we do, per line served, if the ICC or PUCT, as applicable state regulator determines that granting such federal universal service fund subsidies to competitors would be in the public interest and the competitors offer and advertise certain telephone services as required by the Telecommunications Act and the FCC. A number of applicationsThe ICC has granted several petitions for ETC designations, have been filed with the ICC during the past two years by potential competitorsbut to date no other ETCs are operating in Illinois.our Illinois service area. We are not aware ofthat any having beencarriers have filed petitions to be designated an ETC in our Pennsylvania or Texas service areas. Under current rules, the subsidies received by our rural telephone companies receive are not affected by any such payments to competitors. The FCC proposed on January 29, 2008, to amend its rules to reduce the support available when more than one carrier provides service in a particular market, but we are unable to predict whether or when it may adopt this proposal.
      With some limitations, incumbent telephone companies receive federalThe formula the FCC uses to calculate universal service fund subsidies pursuantis in flux. In November 2007, the Federal-State Joint Board on Universal Service offered some proposals to existing mechanisms for determining the amounts of such payments on a cost per loop basis. The FCC has adopted, with modifications,to address the proposed framework oflong-term reform issues facing the Rural Task Force for rural, high-cost universal service fund subsidies. The FCC order modifies the existing universal service fund mechanism for rural telephone companies and adopts an interim embedded, or historical, cost mechanism for a five-year period that provides predictable levels of support to rural carriers. The FCC intends to develop a long-term plan based on forward-looking costs when the five-year period expires in 2006.
      The FCC has made modifications to the universal service support system that changedand to make fundamental revisions in the sourcesstructure of support and the method for determining the level of support. These changes, which, among other things, removed the implicit support from network access charges and made it explicit support, have been,

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generally, revenue neutral to our rural telephone companies’ operations. It is unclear whether the changes in methodology will continue to accurately reflect the costs incurred by our rural telephone companies and whether it will provide for the same amount ofexisting universal service support that our rural telephone companies have received inmechanisms. On January 29, 2008, the past. In addition, several parties have raised objections toFCC issued a public notice requesting comments on the size of the federal universal service fund and the types of services eligible for support. A number of issues regarding the source and amount of contributions to, and eligibility for payments from, the federal universal service fund need to be resolved in the near future. The FCC recently adopted new rules making it more difficult for competitors to qualify for federal universal service subsidies.Joint Board’s proposals.
      In December 2005, Congress suspended the application of a law called the Anti Deficiency Act to the FCC’s universal service fund until December 31, 2006. The Anti Deficiency Act prohibits government agencies from making financial commitments in excess of their funds on hand. Currently, the universal service fund administrator makes commitments to fund recipients in advance of collecting the contributions from carriers that will pay for these commitments. The FCC has not determined whether the Anti Deficiency Act would apply to payments to our rural telephone companies. Congress is now considering whether to extend the current temporary legislation that exempts the universal service fund from the Anti Deficiency Act. If it does not grant this extension, however, the universal service subsidy payments to our rural telephone companies may be delayed or reduced in the future.
We cannot predict the outcome of any FCC rulemaking or similar proceedings. The outcome of any of these proceedingsproceeding or other legislative or regulatory changes could affect the amount of universal service support received by our rural telephone companies.companies receive.
State Regulation of CCI Illinois
      Illinois requires providersState regulation of telecommunications services to obtain authority from the ICC prior to offering common carrier services. OurCCI Illinois rural telephone company is certified to provide local telephone services. In addition,
Illinois Telephone Operations’ long distance, operator services, and payphone services subsidiaries holdsubsidiary holds the necessary certifications in Illinois and(and the other states in which they operate. In Illinois, our long distance, operator services and payphone services subsidiaries areit operates). This subsidiary is required to file tariffs with the ICC, but generally can change the prices, terms, and conditions stated in theirits tariffs on one day’s notice, with prior notice of price increases to affected customers. Our Illinois Telephone OperationsOperations’ other services are not subject to any significant state regulations in Illinois. OurIllinois, and our Other Illinois Operations are not subject to any significant state regulation outside of any specific contractually imposed obligations.
Our Illinois rural telephone company is certified by the ICC to provide local telephone services. This entity operates as a distinct company from an Illinoisa regulatory standpoint and is regulated under a rate of return system for intrastate revenues. Although, as explained above, the FCC has preempted certain state regulations pursuant to the Telecommunications Act, as explained above, Illinois retains the authority to impose requirements on our Illinois rural telephone company to preserve universal service, protect public safety and welfare, ensure quality of service, and protect consumers. For instance, our Illinois rural telephone company must file tariffs setting forth the terms, conditions, and prices for theirits intrastate services andservices; these tariffs may be challenged by third parties. Our Illinois rural telephone company has not had however, a general rate proceeding before the ICC since 1983.
The ICC has broad authority to impose service quality and service offering requirements on our Illinois rural telephone company, including credit and collection policies and practices, and tocan require our Illinois rural telephone company to take other actions in order to insureensure that it meets its statutory obligation to provide reliable local exchange service. In particular, we were required to obtain the approval of the ICC to effect the reorganization we implemented in connection with our IPO. AsFor example, as part of the ICC’s reviewits approval of the reorganization we implemented in connection with our 2005 IPO, the ICC imposed various conditions, as part of its approval of the reorganization, including (1) prohibitions on payment of dividends or other cash transfers from ICTC to us if itICTC fails to meet or exceed agreed benchmarks for a majority of seven service quality metrics, and (2) the requirement that our Illinois rural telephone companyICTC have access to the higher of $5.0 million or its currently approved capital expenditure budget (whichever is higher) for each calendar

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year through a combination of available cash and amounts available under credit facilities. During 20062008 we expect to satisfysatisfied each of the applicable Illinois regulatory requirements necessary to permit ICTC to pay dividends to us.
      Any requirements or restrictions of this type could limit the amount of cash that is available to be transferred from our Illinois rural telephone company to CCI Holdings and could adversely impact our ability to meet our debt service requirements and to pay dividends on our common stock.
The Illinois General Assembly has made major revisions and added significant new provisions to the portions of the Illinois Public Utilities Act governing the regulation and obligations of telecommunications carriers on at least three occasions since 1985. However,Most recently, in 2007, the Illinois legislature addressed competition for cable and video services and authorized statewide licensing by the ICC to replace the existing system of individual town franchises. This legislation also imposed substantial state-mandated consumer service and consumer protection requirements on providers of cable and video services. The requirements generally became applicable to us on January 1, 2008, and we are operating in compliance with the new law. Although we have franchise agreements for cable and video services in all the towns we serve, this statewide franchising authority will simplify the process in the future. The Illinois General Assembly concluded its session in May 20052008 and made no additional changes to the current state telecommunications law, except to extend thewhich currently has a sunset date fromof July 1, 2005 to July 1, 2007. The governor has signed this extension into law. As a result, we2009. We expect that the Illinois General Assemblylegislature will again consider additional amendments to the telecommunications articlein 2009.

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State regulation of the Illinois Public Utilities Act in 2007.CCI Texas
Local Government Authorizations
      In Illinois, we historically have been required to obtain franchises from each incorporated municipality in which our Illinois rural telephone company operates. Effective January 1, 2003, an Illinois state statute prescribes the fees that a municipality may impose on our Illinois rural telephone company for the privilege of originating and terminating messages and placing facilities within the municipality. Illinois Telephone Operations may also be required to obtain from municipal authorities permits for street opening and construction, or operating franchises to install and expand fiber optic facilities in specified rural areas and from county authorities in unincorporated areas. These permits or other licenses or agreements typically require the payment of fees.
State Regulation of CCI Texas
      Texas requires providers of telecommunications services to obtain authority from the PUCT prior to offering common carrier services. Our Texas rural telephone companies are each certified by the PUCT to provide local telephone services in their respective territories. In addition, our Texas long distance and transport subsidiaries are registered with the PUCT as interexchange carriers. The transport subsidiary also has obtained from the PUCT a service provider certificate of operating authority (“SPCOA”) to better assist the transport subsidiary with its operations in municipal areas. Recently, to assist with expanding services offerings, Consolidated Communications Enterprise Services, Inc. also obtained an SPCOA from the PUCT. While our Texas rural telephone company services are extensively regulated, by the PUCT, our other services, such as long distance and transport services, are not subject to any significant state regulation.
Our Texas rural telephone companies operate as distinct companies from a Texas regulatory standpoint. Each Texas rural telephone company is separately regulated by the PUCT in order to preserve universal service, protect public safety and welfare, ensure quality of service, and protect consumers. Each Texas rural telephone company also must file and maintain tariffs setting forth the terms, conditions, and prices for its intrastate services.
Currently, both of our Texas rural telephone companies have immunity from adjustments to their rates, including their intrastate network access rates, due to their election of incentive regulationbecause they elected “incentive regulation” under the Texas Public Utilities Regulatory Act, or PURA. In order to qualify for this incentive regulation, our rural telephone companies agreed to fulfill certain infrastructure requirements and, inrequirements. In exchange, they are not subject to challenge by the PUCT regarding their rates, overall revenues, return on invested capital, or net income.
      There arePURA prescribes two different forms of incentive regulation designated by PURA:in Chapter 58 and Chapter 59. Generally underUnder either election, the rates, including network access rates, an incumbent telephone company may charge in connection withfor basic local services generally cannot be increased from the amount(s) on the date of election without PUCT approval. Even with PUCT approval, increases can only occur in very specific situations. Pricing flexibility under Chapter 59 is extremely limited. In contrast,

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Chapter 58 allows greater pricing flexibility on non-basic network services, customer specificcustomer-specific contracts, and new services.
Initially, both of our Texas rural telephone companies elected incentive regulation under Chapter 59 and fulfilled the applicable infrastructure requirements, to maintain their election status. Consolidated Communications of Texas Company made its election on August 17, 1997. Consolidated Communications of Fort Bend Company made its election on May 12, 2000. On March 25, 2003, both Texas rural telephone companiesbut they changed their election status from Chapter 59 to Chapter 58. The rate freezes58 in 2003, which gives them some pricing flexibility for basic services, with respectsubject to the current Chapter 58 elections are due to expire on March 24, 2007.
      In connection with the 2003 election by each of our Texas rural telephone companies to be governed under an incentive regulation regime, our Texas rural telephone companies were obligated to fulfill certain infrastructure requirements. While our Texas rural telephone companies have met the current infrastructure requirements, thePUCT approval. The PUCT could impose additional infrastructure requirements or other restrictions of this type in the future. Any requirements or restrictions of this type could limit the amount of cash that is available to be transferred from our rural telephone companies to Texas Holdingsthe parent entities, and could adversely impactaffect our ability to meet our debt service requirements and repayment obligations.
In September 2005, the Texas Legislaturelegislature adopted significant telecommunications legislation. ThisAmong other things, this legislation created among other provisions, a statewide video franchise for telecommunications carriers,carriers; established a framework for deregulation ofto deregulate the retail telecommunications services offered by incumbent local telecommunications carriers, createdand imposed concurrent requirements for incumbent local telecommunications carriers to reduce intrastate access charges upon the deregulation of marketscharges; and directed the Texas Public Utility Commission, or the TPUC,PUCT to initiate a study of the Texas Universal Service Fund. We expectThe PUCT study submitted to participatethe legislature in numerous TPUC proceedings in the coming months related to this new legislation, and we expect2007 recommended that the Small Company Area High-Cost Program, which covers our Texas Legislaturetelephone companies, should be reviewed by the PUCT from a policy perspective regarding basic local telephone service rates and lines eligible for support. The PUCT has only addressed the large company fund and has no immediate plans to conduct a small company review. The Texas legislature may further address issues of importance to rural telecommunications carriers in Texas, including the Texas Universal Service Fund, in the 2007 Legislative2009 legislative session.
Texas universal service
Texas Universal Service
The Texas universal service fund was established within PURA and is administered by NECA. ThePURA, the governing law, directs the PUCT to adopt and enforce rules requiring local exchange carriers to contribute to a state universal service fund which assiststhat helps telecommunications providers in providingoffer basic local telecommunications service at reasonable rates in high cost rural areas. The Texas universal service fund is also used to reimburse telecommunications providers for revenues lost by providing Tel-Assistance and to reimburse carriers for providing lifeline service. The Texas universal service fund is funded by a statewide charge payable by specified telecommunications providers at rates determined by the PUCT. Our Texas rural telephone companies qualify forreceive disbursements from this fund pursuantfund.

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State regulation of North Pittsburgh
The PAPUC regulates the rates, the system of financial accounts for reporting purposes, and certain aspects of service quality, billing procedures and universal service funding, among other things, related to criteria establishedour rural telephone company and CLEC’s provision of intrastate services. In addition, the PAPUC sets the rates and terms for interconnection between carriers within the guidelines ordered by the PUCT.FCC.
Price regulation in Pennsylvania
North Pittsburgh’s intrastate rates are regulated under a statutory framework referred to as Act 183. Under this statute, North Pittsburgh’s rates for non-competitive intrastate services are allowed to increase based on an index that measures economy-wide price increases. In 2005, we received Texasreturn, North Pittsburgh committed to continue to upgrade its network to ensure that all its customers would have access to broadband services, and to deploy a ubiquitous broadband (defined as 1.544 Mbps) network throughout its entire service area by December 31, 2008, which it did.
Pennsylvania universal service fund subsidiesand access charges
On September 30, 1999, as part of $20.6 million, or 6.4%a proceeding that resolved a number of ourpending issues, the PAPUC ordered ILECs, including North Pittsburgh, to rebalance and reduce intrastate toll and switched access rates. In that same order, the PAPUC also created a Pennsylvania Universal Service Fund (PAUSF) to help offset the resulting loss of ILEC revenues. UnderIn 2003, the new PURA rulesPAPUC ordered ILECs to further rebalance and reduce intrastate access charges and left the PUCT must review the Texas universal service fundPAUSF in place pending further review. In 2008, North Pittsburgh’s annual receipts from and report backcontributions to the legislaturePAUSF total $5.2 million and $0.3 million, respectively. The CLEC receives no funding from the PAUSF but currently contributes $0.2 million annually. Since Act 183 was adopted in 2004, the PAPUC may not require a LEC to reduce intrastate access rates except on January, 2007. We are participatinga revenue neutral basis.
In 2004, PAPUC instituted a third review of access charges. This proceeding may affect access charge rates for North Pittsburgh and the CLEC, as well as the amount of funding that North Pittsburgh receives from the PAUSF and the amounts that both companies contribute to that fund. Since 2004, the PAPUC has twice agreed to stay those proceedings while awaiting an FCC ruling in its Unified Compensation docket. The request for a third stay is now pending before the proceedingsPAPUC and dois opposed by several parties. Parties have filed testimony and the hearing will begin in February 2009. It is not expect any material changes to impactknown when the fund through 2007.PAPUC will rule. During the period of the stay, the current PAUSF continues under the existing regulations.
Local government authorizations
Local Government Authorizations
In Texas, incumbent telephone companiesIllinois, we historically have historically been required to obtain franchises from each incorporated municipality in which our Texas rural telephone companies operate. In 1999,company operates. An Illinois state statute prescribes the fees that a municipality may impose for the privilege of originating and terminating messages and placing facilities within the municipality. Illinois Telephone Operations also may be required to obtain permits for street opening and construction, or for operating franchises to install and expand fiber optic facilities. These permits or other licenses or agreements typically require the payment of fees.
Similarly, Texas enacted legislation generally eliminating the need for incumbent telephone companies historically had been required to obtain franchises from each incorporated municipality in which they operate. Texas law now provides that incumbent telephone companies do not need to obtain franchises or other licenses to use municipalrights-of-way rights-of-way for delivering services. PaymentsInstead, payments to municipalities forrights-of-way rights-of-way are administered through the PUCT and through a reporting process by each incumbent telephone company and other similar telecommunications provider. Incumbent telephone companies still need to obtain permits from municipal authorities for street opening and construction, but most burdens of obtaining municipal authorizations for access torights-of-way rights-of-way have been streamlined or removed.

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Our Texas rural telephone companies still operate pursuant to the terms of municipal franchise agreements in some territories served by Consolidated Communications of Fort Bend Company. As the franchises expire, they are not being renewed.
Like Illinois, Pennsylvania operates under a structure in which each municipality may impose various fees.
Broadband and Internet Regulatory Obligations
      In connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet. regulatory obligations
To date, the FCC has treated Internet Service Providers, or ISP’s,ISPs as enhanced service providers rather than common carriers, and thereforecarriers. As a result, ISPs are exempt from most federal and state regulation, including the requirement to pay access charges or contribute to the federal USF.universal service fund. Currently, there is only a small body of law and regulation that governs access to, or commerce on, the Internet. As the Internet services expand, federal, state and local governmentsbecomes more significant, government at all levels may adopt new rules and regulations or apply existing laws and regulations to the Internet. The FCC is reviewing the appropriate regulatory framework governing high speed access to the Internet through telephone and cable providers’ communications networks. We cannot predict the outcome of these proceedings, and they may affect our regulatory obligations and the form of competition for these services.
In its September 23, 2005, Order, the FCC adopted a comprehensive regulatory framework for facilities-based providers of wireline broadband Internet access service. The FCC determinedservice after determining that facilities-based wireline broadband Internet accesssuch service is an information service. This decision places the federal regulatory treatment of DSL service in parity with the federal regulatory treatment of cable modem service. Facilities-based wireline carriers are permitted to offer broadband Internet access transmission arrangements for wireline broadband Internet access services on a common carrier basis or a non-common carrier basis, but they must continue to provide existing wireline broadband Internet access transmission offerings, on a grandfathered basis, to unaffiliated ISPs for a one-year transition period. Wireline broadband Internet access providers must maintain their current universal service contribution levels attributable to the provision ofbasis. Revenues from wireline broadband Internet access service are not subject to assessment for a period of 270 days from the date of the FCC Order. If the FCC is unable to complete new contribution rules within the270-day period, the FCC will take whatever action is necessary to preserve existing funding levels, including extending the270-day period discussed above or expanding the contribution base.federal universal service fund.
      The emerging technology application known as VoIPVOIP can be used to carry voice communications services over a broadband Internet connection. The FCC has ruled that some VoIPVOIP arrangements are not subject to regulation as telephone services. In particular, in 2004, the FCC ruled that certain VoIPVOIP services are jurisdictionally interstate, and it preemptedwhich means that states cannot regulate those applications or the ability of the states to regulate some VoIP applications orservice providers. A number of state regulators have filed judicial challenges to that preemption decision. The FCC has pending a proceeding that will address the applicability ofwhether various regulatory requirements apply to VoIPVOIP providers, including the payment of access charges and the support of programs such as Universal Serviceuniversal service and Enhanced-911. Expanded use of VoIPVOIP technology could reduce the access revenues received by local exchange carriers like us.our ILEC’s and our CLEC. We cannot predict whether or when VoIPVOIP providers may be required to pay or be entitled to receive access charges or USF support, the extent to which users will substitute VoIPVOIP calls for traditional wireline communications, or the impact of the growth of VoIPVOIP on our revenues.
      Our Internet access offerings may become subject to newly adopted laws and regulations. Currently, there exists only a small body of law and regulation applicable to access to, or commerce on, the Internet. As the significance of the Internet expands, federal, state and local governments may adopt new rules and regulations or apply existing laws and regulations to the Internet. The FCC is currently reviewing the appropriate regulatory framework governing high speed access to the Internet through telephone and cable providers’ communications networks. We cannot predict the outcome of these proceedings, and they may affect our regulatory obligations and the form of competition for these services.
Video service over broadband is lightly regulated by the FCC and state regulators.states. Such regulation is limited to company registration, broadcast signal call sign management, fee collection, service and billing requirements and administrative matters such as Equal Employment Opportunity reporting. DVSIPTV rates are not regulated.
Item 1A.Risk Factors
Risks Relating to Current Economic Conditions
The current volatility in economic conditions and the financial markets may adversely affect our industry, business, and financial performance.
The second half of 2008 brought unprecedented disruptions in the financial markets, including volatility in asset values and constraints on the availability of credit. At the same time, the U.S. economy slowed significantly. The impact, if any, that these developments might have on our business is uncertain, but current economic and financial market conditions have accentuated each of the risks discussed below and magnified their potential effect on us. Moreover, disruptions in the financial markets could adversely affect our ability to obtain additional credit or refinance existing loans.

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Adverse changes in the value of assets or obligations associated with our employee benefit plans could adversely affect our results.
The current economic environment has had an adverse impact on the fair value of pension assets and will cause an increase in our future funding requirements. If unfavorable economic conditions persist, our funding requirements could further increase and impair our liquidity.
Item 1A.Risk Factors
Poor economic conditions in our service areas could cause us to lose subscriber connections and revenues.
Substantially all of our customers and operations are located in Illinois, Pennsylvania, and Texas. Our customer base is small and geographically concentrated, particularly for residential customers. Because of our geographic focus, the successful operation and growth of our business depends primarily on economic conditions in the service areas of our rural telephone companies. The economies of these areas, in turn, are dependent upon many factors, including:
demographic trends;
in Illinois, the strength of the agricultural markets and the light manufacturing and services industries, continued demand from universities and hospitals, and the level of government spending;
in Pennsylvania, the strength of small- to medium-sized businesses, health care, and education spending; and
in Texas, the strength of the manufacturing, health care, waste management, and retail industries and continued demand from schools and hospitals.
Poor economic conditions and other factors beyond our control in these service areas could cause a decline in our local access lines and revenues.
Risks Relating to Our Common StockDividends
This section discusses reasons why we may be unable to pay dividends at our historic levels, or at all.
You may not receive dividends because ourOur board of directors could, in its discretion, depart from or change our dividend policy at any time.
We are not required to pay dividends, anddividends; our stockholders willdo not be guaranteed, or have contractual or other rights to receive dividends.them. Our board of directors may decide at any time, in its discretion, to decrease the amount of dividends, otherwise change or revoke the dividend policy, or discontinue entirely the payment of dividends. Our board could depart from or change our dividend policy, for example, if it were to determine that we had insufficient cash to take advantage of other opportunities with attractive rates of return. In addition, ifpaying dividends entirely. If we do not pay dividends, for whatever reason, your shares of our common stock could become less liquid and the market price of our common stock could decline.
We might not have cash in the future to pay dividends in the intended amounts or at all.
Our ability to pay dividends, and our board of directors’ determination to maintain our dividend policy, will depend on numerous factors, including:
the state of our business, the environment in which we operate, and the various risks we face, including competition, technological change, changes in our industry, and regulatory and other risks summarized in this Annual Report on Form 10-K;
changes in the following:factors, assumptions, and other considerations made by our board of directors in reviewing and adopting the dividend policy, as described under “Dividend Policy and Restrictions” in Item 5 of this Annual Report;
our results of operations, financial condition, liquidity needs, and capital resources;
our expected cash needs, including for interest and any future principal payments on indebtedness, capital expenditures, taxes, and pension and other postretirement contributions; and
potential sources of liquidity, including borrowing under our revolving credit facility or possible asset sales.

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• the state of our business, the environment in which we operate and the various risks we face, including, but not limited to, competition, technological change, changes in our industry, regulatory and other risks summarized in this prospectus;
• changes in the factors, assumptions and other considerations made by our board of directors in reviewing and adopting the dividend policy, as described under “Dividend Policy and Restrictions” in our Prospectus dated July 21, 2005, which is not incorporated by reference in this report;
• our future results of operations, financial condition, liquidity needs and capital resources;
• our various expected cash needs, including interest and any future principal payments on our indebtedness, capital expenditures, taxes, costs associated with compliance with Section 404 of Sarbanes Oxley, pension and other post-retirement contributions, costs to further integrate our Illinois and Texas billing systems and certain other costs; and
• potential sources of liquidity, including borrowing under our revolving credit facility or possible asset sales.
We might not have sufficient cash to maintain current dividend levels.
While our estimated cash available to pay dividends for the year ended December 31, 20052008, was sufficient to pay dividends in accordance with our dividend policy, if our future estimated cash available to pay dividends were to fall below our expectations, or if our assumptions as to estimated cash needs are too low or if other applicable assumptions were to prove incorrect, we may need to:
reduce or eliminate dividends;
• either reduce or eliminate dividends;
• fund dividends by incurring additional debt (to the extent we were permitted to do so under the agreements governing our then existing debt), which would increase our leverage, debt repayment obligations and interest expense and decrease our interest coverage, resulting in, among other things, reduced capacity to incur debt for other purposes, including to fund future dividend payments;
• amend the terms of our credit agreement or indenture to permit us to pay dividends or make other payments if we are otherwise not permitted to do so;
• fund dividends from future issuances of equity securities, which could be dilutive to our stockholders and negatively effect the price of our common stock;

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fund dividends by incurring additional debt (to the extent we are permitted to do so under the agreements governing our then-existing debt), which would increase our leverage, debt repayment obligations, and interest expense, decrease our interest coverage, and reduce our capacity to incur debt for other purposes, including to fund future dividend payments;
• fund dividends from other sources, such as such as by asset sales or by working capital, which would leave us with less cash available for other purposes; and
• reduce other expected uses of cash, such as capital expenditures.
amend the terms of our credit agreement, if our lenders agree, to permit us to pay dividends or make other payments the agreement would otherwise restrict;
fund dividends by issuing equity securities, which could be dilutive to our stockholders and negatively affect the price of our common stock;
fund dividends from other sources, such as by asset sales or working capital, which would leave us with less cash available for other purposes; and
reduce other expected uses of cash, such as capital expenditures.
Over time, our capital and other cash needs will invariably be subject to uncertainties, which could affect whether we pay dividends and the level of any dividends we may pay in the future.at what level. In addition, if we seek to raise additional cash from additionalby incurring debt incurrence or issuing equity security issuances,securities, we cannot assure you that such financing will be available on reasonable terms or at all. Each of the resultspossibilities listed above could negatively affect our results of operations, financial condition, liquidity, and ability to maintain and expand our business.
You may not receive dividends because of restrictions in our debt agreements, Delaware and Illinois law and state regulatory requirements.
      Our ability to pay dividends will be restricted by current and future agreements governing our debt, including our amended and restated credit agreement and our indenture, Delaware and Illinois law and state regulatory requirements.
• Our credit agreement and our indenture restrict our ability to pay dividends. Based on the results of operations from October 1 through December 31, 2005, we would have been able to pay a quarterly dividend of $16.7 million based on the restricted payment covenants contained in our credit agreement and indenture. This is based on the ability of the borrowers under the credit facility (CCI and Texas Holdings) to pay to CCH $16.7 million in dividends and the ability of CCH to pay to its stockholders $130.1 million in dividends under the general formula under the restricted payments covenants of the indenture, commonly referred to as thebuild-up amount. The amount of dividends we will be able to make under thebuild-up amount will be based, in part, on the amount of cash that may be distributed by the borrowers under the credit agreement to us. In addition, based on the indenture provision relating to public equity offerings, which includes our IPO that was completed July 27, 2005, we expect that we will be able to pay approximately $4.1 million annually in dividends, subject to specified conditions. This means that we could pay $4.1 million in dividends under this provision in addition to whatever we may be able to pay under thebuild-up amount, although a dividend payment under this provision will reduce the amount we otherwise would have available to us under thebuild-up amount for restricted payments, including dividends.
• Under Delaware law, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the Delaware General Corporation law, or the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Illinois Business Corporation Act also imposes limitations on the ability of our subsidiaries that are Illinois corporations, including ICTC, to declare and pay dividends.
• The ICC and the PUCT could require our Illinois and Texas rural telephone companies to make minimum amounts of capital expenditures and could limit the amount of cash available to transfer from our rural telephone companies to us. Our rural telephone companies are ICTC, Consolidated Communications of Fort Bend Company and Consolidated Communications of Texas Company. As part of the ICC’s review of the reorganization consummated in connection with the completion of our IPO, the ICC imposed various conditions as part of its approval of the reorganization, including (1) prohibitions on the payment of dividends or other cash transfers from ICTC, our Illinois rural telephone company, to us if it fails to meet or exceed agreed benchmarks for a majority of seven service quality metrics for the prior reporting year and (2) the requirement that our Illinois rural telephone company have access to the higher of $5.0 million or its currently approved capital expenditure budget for each calendar year through a combination of available cash and amounts available under credit facilities. In addition, the Illinois Public Utilities Act prohibits the payment of dividends by ICTC, except out of earnings and earned surplus, if ICTC’s capital is or would become impaired by payment of the dividend, or if payment of the dividend would impair ICTC’s

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ability to render reasonable and adequate service at reasonable rates, unless the ICC otherwise finds that the public interest requires payment of the dividend, subject to any conditions imposed by the ICC. See “Dividend Policy and Restrictions — Restrictions on Payment of Dividends — State Regulatory Requirements” in our Prospectus dated July 27, 2005, which is not incorporated by reference in this report.

Because we are a holding company with no operations, we will not be able tocan only pay dividends unlessif our subsidiaries transfer funds to us.
As a holding company we have no direct operations and our principal assets are the equity interests we hold in our respective subsidiaries. In addition,However, our subsidiaries are legally distinct from us and have no obligation to transfer funds to us. As a result, we are dependent on theour subsidiaries’ results of operations, of our subsidiaries and, based on their existing and future debt agreements, (such as the credit agreement),governing state corporation law of the subsidiaries and state regulatory requirements, theirand ability to transfer funds to us to meet our obligations and to pay dividends.
Restrictions in our debt agreements or applicable state legal and regulatory requirements may prevent us from paying dividends.
Our ability to pay dividends will be restricted by current and future agreements governing our debt, including our credit agreement, as well as the corporate law and regulatory requirements in several states.
Based on the results of operations from October 1, 2005, through December 31, 2008, we would have been able to pay a dividend of $78.7 million under the restricted payment covenants in our credit agreement. After giving effect to the dividend of $11.4 million, which was declared in November 2008 and paid in February 2009, we could pay a dividend of $67.3 million under the credit facility.
Under Delaware law, our board of directors may not authorize a dividend unless it is paid out of our surplus (calculated in accordance with the Delaware General Corporation law), or, if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and the preceding fiscal year. Statutes governing Illinois and Pennsylvania corporations impose similar limitations on the ability of our subsidiaries that are incorporated in those states to declare and pay dividends.

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State regulators could require our rural telephone companies to make capital expenditures and could limit the amount of cash those entities may lawfully transfer to us. For example, the ICC imposed various conditions on its approval of the reorganization consummated in connection with our IPO. Those conditions prohibit our subsidiary, ICTC, from paying dividends or making other cash transfers to us if ICTC failed to meet or exceed agreed-upon benchmarks for a majority of seven service quality metrics for the prior reporting year. In addition, ICTC must have access to the higher of $5.0 million or its currently approved capital expenditure budget for each calendar year through a combination of available cash and amounts available under credit facilities. In addition, the Illinois Public Utilities Act prohibits ICTC from paying dividends, except out of earnings and earned surplus, if ICTC’s capital is or would become impaired by the payment, or if payment of the dividend would impair ICTC’s ability to render reasonable and adequate service at reasonable rates, unless the ICC otherwise finds that the public interest requires payment of the dividend, subject to any conditions that regulator may impose. The PAPUC has placed debt and transaction cost recovery restrictions for a three-year period that could have an impact to the payment of dividends.
We expect that our cash income tax liability will increase in 2006 as a result of the use of, and limitations on, our net operating loss carryforwards,2009, which will reduce our after-tax cash available to pay dividends and may require us to reduce dividend payments in future periods.dividends.
      Beginning in 2006, we expect that our cash income tax liability will increase, which may limit the amount of cash we have available to pay dividends. Under the Internal Revenue Code, in general, to the extent a corporation haswith losses in excess of taxable income in a taxable period it will generate(known as a net“net operating loss, or NOL thatNOL) generally may be carriedcarry the loss back or carried forward and useduse it to offset taxable income in prior or future periods. As of December 31, 2005, we have $17.0 million of federal net operating losses, net of valuation allowances, available to us to carry forward to periods beginning after December 31, 2005.a different period. The amount of an NOL that may be used in a taxable year to offset taxable income in a particular year may be limited, such as when a corporation undergoeshas experienced an “ownership change” under Section 382 of the Internal Revenue Code. We expect
As of December 31, 2008, we have utilized all our federal net operating losses, net of valuation allowances, that we can carry forward to generate taxable income in the future which will be offset by our NOLs, subjectperiods. Pursuant to limitations, such as under Section 382, there were some limitations on the amount of the Internal Revenue Code as a resultlosses we could use because of our IPO and prior ownership changes. OnceSince our NOLs have been used or have expired, we will be required to pay additional cash income taxes. The increase in our cash income tax liability will have the effect of reducingreduce our after-tax cash available to pay dividends in future periods and may require us to reduce dividend payments on our common stock in such future periods.the future.
Risks Relating to Our Common Stock
If we continue to pay dividends at the level currently anticipated under our dividend policy, our ability to pursue growth opportunities may be limited.
We believe that our dividend policy willcould limit, but not preclude, our ability to grow. If we continue paying dividends at the level currently anticipated, under our dividend policy, we may not retain a sufficient amount of cash and may need to seek financing, to fund a material expansion of our business, including any significant acquisitions or to pursue growth opportunities requiring significant and unexpected capital expenditures significantly beyond our current expectations. The risks relating to funding any dividends, or other cash needs as a result of paying dividends, are summarized above. In addition, because we expect a significant portion of cash available will be distributed to the holders of our common stock under our dividend policy,expenditures. For that reason, our ability to pursue any material expansion of our business willmay depend more than it otherwise would on our ability to obtain third partythird-party financing. We cannot assure youguarantee that such financing will be available to us on reasonable terms or at all.
Future sales, or the perception of future sales, of a substantial amount of our common stock may depress the price of the shares of our common stock.
      Future sales, or the perception or the availability for saleall, particularly in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities. As of December 31, 2005, we

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had 29,775,010 shares of common stock outstanding, 15,666,666 shares of which were registered with the SEC in connection with our IPO and are freely transferable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining 14,108,344 shares of common stock owned by those of our stockholders who received their shares in the reorganization are restricted securities within the meaning of Rule 144 under the Securities Act but will be eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144. Finally, certain of our stockholders have registration rights with respect to their common stock.
      We may issue shares of our common stock, or other securities, from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. We may also grant registration rights covering those shares or other securities in connection with any such acquisitions and investments.current economic environment.
Our organizational documents could limit or delay another party’s ability to acquire us and, therefore, could deprive our investors of the opportunity to obtain a possible takeover premium for their shares.
A number of provisions in our amended and restated certificate of incorporation and bylaws will make it difficult for another company to acquire us. TheseAmong other things, these provisions:
divide our board of directors into three classes, which results in roughly one-third of our directors being elected each year;
require the affirmative vote of holders of 75% or more of the voting power of our outstanding common stock to approve any merger, consolidation, or sale of all or substantially all of our assets;
provide that directors may only be removed for cause and then only upon the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock;
require the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock to amend, alter, change, or repeal specified provisions include, among others,of our amended and restated certificate of incorporation and bylaws;

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require stockholders to provide us with advance notice if they wish to nominate any candidates for election to our board of directors or if they intend to propose any matters for consideration at an annual stockholders meeting; and
authorize the following:issuance of so-called “blank check” preferred stock without stockholder approval upon such terms as the board of directors may determine.
• dividing our board of directors into three classes, which results in only approximately one-third of our board of directors being elected each year;
• requiring the affirmative vote of holders of not less than 75% of the voting power of our outstanding common stock to approve any merger, consolidation or sale of all or substantially all of our assets;
• providing that directors may only be removed for cause and then only upon the affirmative vote of holders of not less than two-thirds of the voting power of our outstanding common stock;
• requiring the affirmative vote of holders of not less than two-thirds of the voting power of our outstanding common stock to amend, alter, change or repeal specified provisions of our amended and restated certificate of incorporation and bylaws (other than provisions regarding stockholder approval of any merger, consolidation or sale of all or substantially all of our assets, which shall require the affirmative vote of 75% of the voting power of our outstanding common stock);
• requiring stockholders to provide us with advance notice if they wish to nominate any persons for election to our board of directors or if they intend to propose any matters for consideration at an annual stockholders meeting; and
• authorizing the issuance of so-called “blank check” preferred stock without stockholder approval upon such terms as the board of directors may determine.
We also are also subject to laws that may have a similar effect. For example, federal, Illinois, and IllinoisPennsylvania telecommunications laws and regulations generally prohibit a direct or indirect transfer of control over our business without prior regulatory approval. Similarly, sectionSection 203 of the DGCL prohibits us from engagingDelaware General Corporation Law restricts our ability to engage in a business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. As a result of the foregoing,“interested stockholder.” These laws and regulations make it will be difficult for another company to acquire us and therefore could limit the price that possible investors might be willing to pay in the future for shares of our common stock. In addition, the rights of our common stockholders will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that we may be issuedissue in the future.
The concentration of the voting power of our common stock ownership could limit youra shareholder’s ability to influence corporate matters.
On December 31, 2005,2008, Central Illinois Telephone, and Providence Equitywhich is controlled by our Chairman, Richard A. Lumpkin, owned approximately 18.9% and 12.7%19.1% of our common stock, respectively.stock. In addition, our executive management and key employees also

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owned approximately 3.7%2.3%. As a result, these investors will be able to significantly influence all matters requiring stockholder approval, including the ability to:including:
 elect a majority of the members of our boardelection of directors;
 
 enter into significant corporate transactions, such as a merger or other sale of our company or its assets, or to prevent any such transaction;assets;
 
 enter into acquisitions that increase our amount of indebtedness or sell revenue-generating assets;
 
 determine our corporate and management policies;
 
 amendamendments to our organizational documents; and
 
  other matters submitted to our stockholders for approval.
This concentrated control will limit yourshare ownership limits the ability of other shareholders to influence corporate matters and, as a result, wematters. We may take actions that othermany stockholders do not view as beneficial, which may adversely affect the market price of our common stock.
Central Illinois Telephone and Providence Equity may have conflicts of interests with you or us in the future, including by making investments in companies that compete with us, competing with us for acquisition opportunities or otherwise taking actions that further their interests but which might involve risks to, or otherwise adversely affect, us or you.
      While we do not believe Central Illinois Telephone and Providence Equity currently hold interests in companies that compete with us, they may make investments in companies in the future and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. These other investments may:
• create competing financial demands on these investors;
• create potential conflicts of interest; and
• require efforts consistent with applicable law to keep the other businesses separate from our operations.
      Central Illinois Telephone and Providence Equity may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Furthermore, these equity investors also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to our common stockholders. In addition, their rights to vote or dispose of equity interests in our company are not subject to restrictions in favor of our company other than as may be required by applicable law.
As a public company we are required to comply with new laws, regulations and requirements, which have increased our expenses and administrative workload and occupy a significant amount of the time of our board of directors, management and our officers.
      As a public company with listed equity securities, we are required to comply with additional laws, regulations and requirements, such as the Sarbanes-Oxley Act of 2002, related SEC regulations and requirements of The Nasdaq Stock Market, Inc., or Nasdaq, that we did not need to comply with as a private company. Complying with new statutes, regulations and requirements has occupied and will continue to occupy a significant amount of the time of our board of directors, management and our officers and has increased our costs and expenses. In addition, these new rules and regulations have made it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage in the future. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

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If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be unable to provide the required financial information in a timely and reliable manner and may be subject to sanctions by regulatory authorities. The perception of these matters could cause our share price to fall.
      Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the SEC and Nasdaq are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We will be evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by the December 31, 2006 deadline, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is presently no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or Nasdaq. Any such action could adversely affect our financial results or investors’ confidence us, and could cause our stock price to fall. In addition, the controls and procedures that we will implement may not comply with all of the relevant rules and regulations of the SEC and Nasdaq. If we fail to develop and maintain effective controls and procedures, we may be unable to provide financial information in a timely and reliable manner. The perception of these matters could cause our share price to fall.
      To date we have incurred operating costs in implementing the requirements under Section 404 of the Sarbanes-Oxley Act and we expect to incur additional operating expenses in connection with the completion of our initial implementation and assessment and the auditor attestation with respect to fiscal year 2006, as well as in meeting the requirements relating to internal control over financial reporting in the future. We cannot assure you that the operating expenses we actually incur will not exceed our expectations, both relating to fiscal year 2006 and subsequent periods.
Risks Relating to Our Indebtedness and Our Capital Structure
We have a substantial amount of debt outstanding and may incur additional indebtedness in the future, which could restrict our ability to pay dividends.dividends and fund working capital and planned capital expenditures.
      We have a significant amount of debt outstanding. As of December 31, 2005,2008, we had $555.0$880.3 million of total long-term debt outstanding, excluding the current portion, and $199.2$70.1 million of stockholdersstockholders’ equity. The degree to which we are leveragedThis amount of leverage could have important consequences, for you, including:
we may be required to use a substantial portion of our cash flow from operations to make interest payments on our debt, which will reduce funds available for operations, future business opportunities, and dividends;
 requiring uswe may have limited flexibility to dedicate a substantial portion ofreact to changes in our cash flow from operations to make payments onbusiness and our debt, which payments we currently expect to be approximately $37.0 to $38.0 million in 2006, thereby reducing funds available for operations, future business opportunities and other purposes and/or dividends on our common stock;industry;
 
 limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 • making it may be more difficult for us to satisfy our debt and other obligations;
• limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;
we may have a limited ability to borrow additional funds or to sell assets to raise funds if needed for working capital, capital expenditures, acquisitions, or other purposes;
we may become more vulnerable to general adverse economic and industry conditions, including changes in interest rates; and
we may be at a disadvantage compared to our competitors that have less debt.

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• increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates; and
• placing us at a competitive disadvantage compared to our competitors that have less debt.
We currently expect our cash interest expense to be approximately $58.0 million to $61.0 million in 2009. Interest expense is significantly higher than it has been in years preceding the acquisition of North Pittsburgh because we incurred additional indebtedness to consummate the merger. We cannot assure youguarantee that we will generate sufficient revenues to service and repay our debt and have sufficientadequate funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs, compete successfully in our markets, or pay dividends to our stockholders.
      Subject to the restrictions in our indenture and credit agreement, we may be able to incur additional debt. As of December 31, 2005, we would have been able to incur approximately $121.2 million of additional debt. Although our indenture and credit agreement contain restrictions on our ability to incur additional debt, these restrictions are subject to a number of important exceptions. If we incur additional debt, the risks associated with our substantial leverage, including our ability to service our debt, would likely increase.
We will require a significant amount of cash to service and repay our debt and to pay dividends on our common stock, and our ability to generate cash depends on many factors beyond our control.
      We currently expect our cash interest expense to be approximately $37.0 to $38.0 million in fiscal year 2006. Our ability to make payments on our debt and to pay dividends on our common stock will depend on our ability to generate cash in the future, which will depend on many factors beyond our control. We cannot assure you that:
• our business will generate sufficient cash flow from operations to service and repay our debt, pay dividends on our common stock and to fund working capital and planned capital expenditures;
• future borrowings will be available under our credit facilities or any future credit facilities in an amount sufficient to enable us to repay our debt and pay dividends on our common stock; or
• we will be able to refinance any of our debt on commercially reasonable terms or at all.
If we cannot generate sufficient cash from our operations to meet our debt service and repayment obligations, we may need to reduce or delay capital expenditures, the development of our business generally, and any acquisitions. If for any reason we arebecame unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt,credit agreement, which would allow theour lenders under our credit facilities to declare all outstanding borrowings outstanding to be due and payable, which would in turn trigger an event of default under our indenture.payable. If the amounts outstanding under our credit facilities or our senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the money owedowed.
As of December 31, 2008, our credit agreement would have permitted us to incur approximately $74.7 million of additional debt. However, additional debt would exacerbate the lenders or to our other debt holders.risks described above.
Our indenture and credit agreement containcontains covenants that limit themanagement’s discretion of our management in operating our business and could prevent us from capitalizing on business opportunities and taking other corporate actions.
      Our indenture and credit agreement impose significant operating and financial restrictions on us. These restrictions limit or restrict, amongAmong other things, our credit agreement limits or restricts our ability and(and the ability of certain of our subsidiaries that are restricted by these agreementssubsidiaries) to:
• 
incur additional debt and issue preferred stock;
make restricted payments, including paying dividends on, redeeming, repurchasing, or retiring our capital stock;
make investments and prepay or redeem debt;
enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans, or transfer assets to us;
create liens;
 
 make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock;
• make investments and prepay or redeem debt;
• enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans or transfer assets to us;
• create liens;

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 sell or otherwise dispose of assets, including capital stock of subsidiaries;
 
  engage in transactions with affiliates;
 
  engage in sale and leaseback transactions;
 
  make capital expenditures;
 
  engage in a business other than telecommunications businesses;telecommunications; and
 
  consolidate or merge.
In addition, our credit agreement requires and any future credit agreements may require, us to comply with specified financial ratios, including ratios regarding interest coverage, total leverage senior secured leverage and fixed chargeinterest coverage. Our ability to comply with these ratios may be affected by events beyond our control. These restrictions:restrictions limit our ability to plan for or react to market conditions, meet capital needs, or otherwise constrain our activities or business plans. They also may adversely affect our ability to finance our operations, enter into acquisitions, or engage in other business activities that would be in our interest.
• limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans; and
• adversely affect our ability to finance our operations, enter into acquisitions or to engage in other business activities that would be in our interest.
      In the event of a default under the amended and restated credit agreement, the lenders could foreclose on the assets and capital stock pledged to them.
A breach of any of the covenants contained in our credit agreement, or in any future credit agreements,agreement, or our inability to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all borrowings outstanding to be due and payable, which would in turn trigger an event of default under the indenture.payable. If the amounts outstanding under our credit facilities or our senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the money owed toowed. In such a situation, the lenders orcould foreclose on the assets and capital stock pledged to our other debt holders.them.

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Because we expect to needWe may not be able to refinance our existing debt if necessary, or we face the risks of either not beingmay only be able to do so or doing so at a higher interest expense.
Our senior notes mature in 2012 and our credit facilities mature in full in 2011. We2014, and we may not be able to refinance our senior notes or renew or refinance our credit facilities, orthose loans. Alternatively, any renewal or refinancing may occur on less favorable terms. If we are unable to refinance or renew our senior notes or our credit facilities, our failure to repay all amounts due on the maturity date would cause a default under the indenture or the credit agreement. In addition, our interest expense may increase significantly ifIf we refinance our senior notes, which bear interest at 93/4% per year, or our amended and restated credit facilities which bear interest at the London interbank offered rate, or LIBOR, plus 1.75% per year, on terms that are less favorable to us than the existing terms of our senior notes or credit facilities,existing debt, our interest expense may increase significantly, which could impair our ability to use our funds for other purposes, such as to pay dividends.
Risks Relating to Our Business
The telecommunications industry is generally subject to substantial regulatory changes, rapid developmentconstantly changing and introduction of new technologies and intense competition that could cause us to suffer price reductions, customer losses, reduced operating margins or loss of market share.is increasing.
The telecommunications industry has been, and we believe will continue to be, characterized by several trends, including including:
increased competition within established markets from providers that may offer competing or alternative services;
the following:blurring of traditional dividing lines between, and the bundling of, different services, such as local dial tone, long distance, wireless, cable, and data and Internet services; and
an increase in mergers and strategic alliances that allow one telecommunications provider to offer increased services or access to wider geographic markets.
• substantial regulatory change due to the passage and implementation of the Telecommunications Act, which included changes designed to stimulate competition for both local and long distance telecommunications services;

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• rapid development and introduction of new technologies and services;
• increased competition within established markets from current and new market entrants that may provide competing or alternative services;
• the blurring of traditional dividing lines between, and the bundling of, different services, such as local dial tone, long distance, wireless, cable, data and Internet services; and
• an increase in mergers and strategic alliances that allow one telecommunications provider to offer increased services or access to wider geographic markets.
We expect competition to intensify as a result of new competitors and the development of new technologies, products, and services. Some or all of these risksConsequently, we may cause us to haveneed to spend significantly more in capital expenditures than we currently anticipate to keep existing customers and to attract new customers.ones.
Many of our voice and data competitors, such as cable providers, Internet access providers, wireless service providers, and long distance carriers, have brand recognition and financial, personnel,technical, marketing, and other resources that are significantly greater than ours. In addition, due to consolidation and strategic alliances within the telecommunications industry, we cannot predict the number of competitors thatwe will emerge, especially as a result of existing or new federal and state regulatory or legislative actions. For example, the acquisition of AT&T, one of our largest customers, by SBC, the dominant local exchange company in the areas in which our Texas rural telephone companies operate, could increase competitive pressures for our services and impact our long distance and access revenues. Such increasedface at any given time. Increased competition from existing and new entities could lead to price reductions, loss of customers, reduced operating margins, or loss of market share.
The use of new technologies by other existing companies may increase our costs and cause us to lose customers and revenues.
The telecommunications industry is subject to rapid and significant changes in technology, frequent new service introductions, and evolving industry standards. Technological developments may reduce the competitiveness ofmake our services and requireless competitive. We may need to respond by making unbudgeted upgrades or significant capital expenditures, and the procurement ofor by developing additional services, thatwhich could be expensive and time consuming. New services arising out of technological developments may reduce the competitiveness of our services. If we fail to respond successfully to technological changes or obsolescence, or fail to obtain access tomake use of important new technologies, we could lose customers and revenues and be limited in our ability to attract new customers or sell new services to our existing customers. The successful development of new services, which is an element of our business strategy, is uncertain and dependent on many factors, and we may not generate anticipated revenues from such services, which would reduce our profitability. We cannot predict the effect of these changes on our competitive position, costs, or our profitability.
In addition, part of our marketing strategy is based on market acceptance of DSL and DVS. Wewe expect that an increasing amount of our revenues will come from providing DSL, digital telephone and DVS.IPTV services. The market for high-speed Internet access is still developing, and we expect current competitors and new market entrants to introduce competing services and to develop new technologies. Likewise, the ability to deliver high qualityhigh-quality video service over traditional telephone lines is a new developmentrecent advance that has not yet been proven.is still developing. The markets for these services could fail to develop, grow more slowly than anticipated, or become saturated with competitors with superior pricing or services. In addition, ourfederal or state regulators may expand their control over DSL, digital telephone service and DVS offerings may become subject to newly adopted laws and regulations.IPTV offerings. We cannot predict the outcome of these regulatory developments or how they may affect our regulatory obligations or the form of competition for these services. As a result, we could have higher costs and capital expenditures, lower revenues, and greater competition than expected for DSL, digital telephone and DVSIPTV services.

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If we are not successful in integrating TXUCV, we may have higher costs and fail to achieve expected cost savings, among other things.
      Our future success, and thus our ability to pay interest and principal on our indebtedness and dividends on our common stockWe will depend in part on our ability to integrate TXUCV into our business. Since the closing of the TXUCV acquisition, we have incurred approximately $14.4 in operating expenses associated with the integration and restructuring of TXUCV. Theseincur additional integration and restructuring costs are in addition to the additional costs associated with completing the integration of our Illinois and Texas billing systems and certain ongoing costs we expect to incur to expand certain administrative functions, such as those relating to SEC reporting and compliance and do not take into account other potential cost savings and expenses of the TXUCV acquisition. The integration of TXUCV involves numerous risks, including the following:
• greater demands on our management and administrative resources;
• difficulties and unexpected costs in integrating the operations, personnel, services, technologies and other systems of our Illinois and Texas operations;
• possible unexpected loss of key employees, customers and suppliers;
• unanticipated liabilities and contingencies of TXUCV and its business;
• unexpected costs of integrating the management and operation of the two businesses; and
• failure to achieve expected cost savings.
      These challenges and uncertainties could increase our costs and cause our management to spend less time than expected executing our business strategy. We may not be able to manage the combined operations and assets effectively or realize all or any of the anticipated benefits of the acquisition. To the extent that we make any additional acquisitions in the future, these risks would likely be exacerbated.
      We may become responsible for unexpected liabilities or other contingencies that we did not discover in the course of performing due diligence in connection with the TXUCV acquisition. Under the stock purchase agreement, the parent company of TXUCV agreedcompleted North Pittsburgh merger.
We have incurred and will continue to indemnify us against certain undisclosed liabilities. We cannot assure you, however, that any indemnification will be enforceable, collectible or sufficientincur significant integration and restructuring costs in amount, scope or duration to fully offset any possible liabilities associatedconnection with the acquisition. AnyNorth Pittsburgh merger. Although we expect to realize efficiencies from the integration of these contingencies, individually orthe businesses that will offset incremental transaction, integration, and restructuring costs over time, we cannot give any assurance that we will achieve this net benefit in the aggregate, could increase our costs.near term.
Our possible pursuit ofFuture acquisitions iscould be expensive and may not be successful and, even if it is successful, may be more costly than anticipated.successful.
Our acquisition strategy entails numerous risks. The pursuit of acquisition candidates iscould be expensive and may not be successful. Our ability to complete future acquisitions will depend on our ability towhether we can identify suitable acquisition candidates, negotiate acceptable terms, for their acquisition and, if necessary, finance those acquisitions,acquisitions. We may be competing in each case, before any attractive candidates are purchased bythese endeavors with other parties, some of whomwhich may have greater financial and other resources than us.we do. Whether or not any particular acquisition is closed successfully, eachthe pursuit of these activities is expensive and time consuming andan acquisition would likely require our management to spend considerable time and effort to accomplish them,from management, which would detract from their ability to run our current business. We may face unexpected challenges in receiving any required approvals from the FCC, the ICC, or other applicable state regulatory commissions,regulator(s), which could result in delay or our not being able to consummate theprevent an acquisition. Although we may spend considerable expense and effort to pursue acquisitions, we may not be successful in closing them.
If we are successful in closing any acquisitions,an acquisition, we would face several risks in integrating them, including those listed above regarding the risks of integrating TXUCV. In addition, any due diligence we perform may not prove to have been accurate.acquired business. For example, we may face unexpected difficulties in entering markets in which we have little or no direct prior experience or in generating expected revenue and cash flow from the acquired companiescompany or assets. The risks identified above may make it more

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challenging and costly to integrate TXUCV if we have not done so fully by the time of any new acquisition.
      Currently, we are not pursuing any acquisitions or other strategic transactions. But, if anyAny of these risks materialize, theypotential problems could have a material adverse effect on our business and our ability to achieve sufficient cash flow, provide adequate working capital, service and repay our indebtedness, and leave sufficient funds to pay dividends.
Poor economic conditions in our service areas in Illinois and Texas could cause us to lose local access lines and revenues.
      Substantially all of our customers and operations are located in Illinois and Texas. The customer base for telecommunications services in each of our rural telephone companies’ service areas in Illinois and Texas is small and geographically concentrated, particularly for residential customers. Due to our geographical concentration, the successful operation and growth of our business is primarily dependent on economic conditions in our rural telephone companies’ service areas. The economies of these areas, in turn, are dependent upon many factors, including:
• demographic trends;
• in Illinois, the strength of the agricultural markets and the light manufacturing and services industries, continued demand from universities and hospitals and the level of government spending; and
• in Texas, the strength of the manufacturing, health care, waste management and retail industries and continued demand from schools and hospitals.
      Poor economic conditions and other factors beyond our control in our rural telephone companies’ service areas could cause a decline in our local access lines and revenues.
A system failure could cause delays or interruptions of service, which could cause us to lose customers.
In the past, we have experienced short, localized disruptions in our service due to factors such as cable damage, inclement weather, and service failures ofby our third partythird-party service providers. To be successful, we will need to continue to provide our customers reliable service over our network. The principal risks to our network and infrastructure include:include physical damage to our central offices or local access lines, power surges or outages, software defects, and other disruptions beyond our control.
• physical damage to our central offices or local access lines;
• disruptions beyond our control;
• power surges or outages; and
• software defects.
Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and incur unexpected expenses, and thereby adversely affect our business, revenue and cash flow.expenses.
Loss of a large customer could reduce our revenues. In addition, a significant portion of our revenues from theThe State of Illinois is based ona significant customer, and our contracts thatwith the state are favorable to the government.
      Our success depends in part upon the retention of our large customers such as AT&TIn 2008 and the State of Illinois. AT&T accounted for 5.0%2007, 47.4% and the State of Illinois accounted for 5.8% of our revenues during 2005, and 5.0% and 7.4% of our revenues for December 31, 2004, respectively. In general, telecommunications companies such as ours face the risk of losing customers as a result of contract expiration, merger or acquisition, business failure or the selection of another provider of voice or data services. In addition, we generate a significant portion of our operating revenues from originating and terminating long distance and international telephone calls for carriers such as AT&T and MCI, which

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have recently been acquired or experienced substantial financial difficulties. We cannot assure you that we will be able to retain long-term relationships or secure renewals of short-term relationships with our customers in the future.
      In 2005 and 2004, 46.2% and 49.6%46.5%, respectively, of our Other Operations revenues were derived from our relationships with various agencies of the State of Illinois, Illinois—principally the Department of Corrections through Public Services. Our relationship with the Department of Corrections accounted for 93.0% and 92.8%, respectively,91.6% of our Public Services revenues during 20052008, and 2004.93.5% during 2007. Our predecessor’s relationship (initially through our predecessor) with the Department of Corrections has existedcontinued uninterrupted since 1990, despite changes in government administrations. Nevertheless, obtaining contracts from government agencies is challenging, and government contracts like our contracts with the State of Illinois, often include provisions that are favorable to the government in ways that are not standard in private commercial transactions. Specifically, each of our contracts with the State of Illinois:
permits the applicable state agency to terminate the contract without cause and without penalty under some circumstances;
has renewal provisions that require decisions of state agencies that are subject to political influence;

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• includes provisions that allow the respective state agency to terminate the contract without cause and without penalty under some circumstances;
• is subject to decisions of state agencies that are subject to political influence on renewal;
• gives the State of Illinois the right to renew the contract at its option but does not give us the same right; and
• could be cancelled if state funding becomes unavailable.
gives the State of Illinois the right to renew the contract at its option but does not give us the same right; and
could be cancelled if state funding becomes unavailable.
The failure of the State of Illinois to perform under the existing agreements for any reason, or to renew the agreements when they expire, could have a material adverse effect on our revenues. For example, the State of Illinois, which represented 40.8% of the revenues of our Market Response business for 2004, awarded the renewal of the Illinois State Toll Highway Authority contract, the sole source of those revenues, to another provider.
If we are unsuccessful in obtainingcannot obtain and maintainingmaintain necessaryrights-of-way rights-of-way for our network, our operations may be interrupted and we would likely face increased costs.
We need to obtain and maintain the necessaryrights-of-way rights-of-way for our network from governmental and quasi-governmental entities and third parties, such as railroads, utilities, state highway authorities, local governments, and transit authorities. We may not be successful in obtaining and maintaining theserights-of-way rights-of-way or obtaining them on acceptable terms whether in existing or new service areas.terms. Some of the agreements relating to theserights-of-wayrights-of-way may be short-term or revocable at will, and we cannot be certain that we will continue to have access to existingrights-of-way rights-of-way after they have expiredthe governing agreements are terminated or terminated.expire. If any of ourrights-of-way right-of-way agreements were terminated or could not be renewed, we may be forced to remove our network facilities from under the affectedrights-of-way areas or relocate or abandon our networks. We may not be ableThis would interrupt our operations and force us to maintain all of our existingrights-of-wayfind alternative rights-of-way and permits or obtain and maintain the additionalrights-of-way and permits needed to implement our business plan.make unexpected capital expenditures. In addition, our failure to maintain the necessaryrights-of-way, rights-of-way, franchises, easements, licenses, and permits may result in an event of default under the amended and restatedour credit agreement and other credit agreements we may enter into in the future and, as a result, other agreements governing our debt. As a result of the above, our operations may be interrupted and we may need to find alternativerights-of-way and make unexpected capital expenditures.agreement.
We are dependent on third partythird-party vendors for our information, billing, and billing systems. Any significant disruption in our relationship with these vendors could increase our costs and affect our operating efficiencies.network systems, as well as IPTV service.
Sophisticated information and billing systems are vital to our ability to monitor and control costs, bill customers, process customer orders, provide customer service, and achieve operating efficiencies. We currently rely on internal systems and third partythird-party vendors to provide all of our information and processing systems.systems, as well as applications that support our IP services, including IPTV. Some of our billing, customer service, and management information systems have been developed

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for us by third parties for us and may not perform as anticipated. In addition, our plans for developing and implementing our information andsystems, billing systems, network systems, and IPTV service rely primarily on the delivery of products and services by third partythird-party vendors. Our right to use these systems is dependent upon license agreements, with third party vendors. Somesome of which can be cancelled by the vendor. If a vendor cancels or refuses to renew one of these agreements, are cancelable byour operations may be impaired. If we need to switch vendors, the vendor, and the cancellation or nonrenewable nature of these agreements could impair our ability to process orders or bill our customers. Since we rely on third party vendors to provide some of these services, any switch in vendorstransition could be costly and affect operating efficiencies.
The loss ofWe depend on certain key management personnel, or the inabilityand need to continue to attract and retain highly qualified management and other personnel in the future, could have a material adverse effect on our business, financial condition and results of operations.future.
Our success depends upon the talents and efforts of key management personnel, many of whom have been with our company and in our industry for decades, including Mr. Lumpkin, Robert J. Currey, Steven L. Childers, Joseph R. Dively, Steven J. Shirar, C. Robert Udell, Jr. and Christopher A. Young. There are no employment agreements with any of these senior managers.decades. The loss of any such management personnel,of these individuals, due to retirement or otherwise, and the inability to attract and retain highly qualified technical and management personnel in the future, could have a material adverse effect on our business, financial condition, and results of operations.
Regulatory Risks
The telecommunications industry in which we operate is subject to extensive federal, state and local regulation that could change in a manner adverse to us.
Our main sources of revenues are our local telephone businesses in Illinois, Pennsylvania, and Texas. The laws and regulations governing these businesses may be, and in some cases have been, challenged in the courts, and could be changed by Congress, state legislatures, or regulators at any time.regulators. In addition, new regulations could be imposed by federal or state authorities increasingcould impose new regulations that increase our operating costs or capital requirements or that are otherwise adverse to us. We cannot predict the impact of future developments or changes to the regulatory environment or the impact such developments or changes may have on us. Adverse rulings, legislation or changes in governmental policy on issues material to us could increase our competition, cause us to lose customers to competitors and decrease our revenues, increase our costs and decrease profitability.
Our rural telephone companies could lose their rural status under interconnection rules, which would increase our costs and could cause us to lose customers and the associated revenues to competitors.
      The Telecommunications Act imposes a number of interconnection and other requirements on local communications providers, including incumbent telephone companies. Each of the subsidiaries through which we operate our local telephone businesses is an incumbent telephone company and is also classified as a rural telephone company under the Telecommunications Act. The Telecommunications Act exempts rural telephone companies from some of the more burdensome interconnection requirements such as unbundling of network elements and sharing information and facilities with other communications providers. These unbundling requirements and the obligation to offer unbundled network elements, or UNEs, to competitors, impose substantial costs on, and result in customer attrition for, the incumbent telephone companies that must comply with these requirements. The ICC or the PUCT can terminate the applicable rural exemption for each of our rural telephone companies if it receives a bona fide request for full interconnection from another telecommunications carrier and the state commission determines that the request is technically feasible, not unduly economically burdensome and consistent with universal service requirements. Neither the ICC nor the PUCT has yet terminated, or proposed to terminate, the rural exemption for any of our rural telephone companies. If the ICC or PUCT terminates the applicable rural exemption in whole or in part for any of our rural telephone companies, or if the applicable state commission does not allow us adequate compensation for the costs of providing the interconnection or

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UNEs, our administrative and regulatory costs could increase significantly and we could suffer a significant loss of customers and revenues to existing or new competitors.
Legislative or regulatory changes could reduce or eliminate the revenues our rural telephone companies receive from network access charges.
A significant portion of our rural telephone companies’ILECs’ revenues come from network access charges paid by long distance and other carriers for originating or terminating calls in our rural telephone companies’ service areas. The amount of network access charge revenues that our rural telephone companiesILECs receive is based on interstate rates set by the FCC and intrastate rates set by the ICC and PUCT.state regulators. The FCC has reformed, and continues to reform, the federal network access charge system, and the states, including Illinois and Texas, often establish intrastate network access charges that mirror or otherwise interrelate with the federal rules.system.
      Traditionally, regulators have allowed network access rates to be set higher in rural areas than the actual cost of originating or terminating calls as an implicit means of subsidizing the high cost of providing local service in rural areas. In 2001, the FCC adopted rules reforming the network access charge system for rural carriers, including reductions in per-minute access charges and increases in both universal service fund subsidies and flat-rate, monthly per line charges on end-user customers. Our Illinois rural telephone company’s intrastate network access rates mirror interstate network access rates. Illinois does not provide, however, an explicit subsidy in the form of a universal service fund applicable to our Illinois rural telephone company. As a result, while subsidies from the federal universal service fund have offset Illinois Telephone Operations’ decrease in revenues resulting from the reduction in interstate network access rates, there was not a corresponding offset for the decrease in revenues from the reduction in intrastate network access rates.
The FCC is currently considering even more sweeping potential changes in network access charges. Depending on the FCC’s decisions, our current network access charge revenues could be reduced materially, and wedecline materially. We do not know whether increases in other revenues, such as federal or Texas subsidies and monthly line charges, will be sufficient toeffectively offset any such reductions.reductions in access charges. The ICC and the PUCTstate regulators also may make changes in our intrastate network access charges which may also cause reductions inthat could reduce our revenues. To the extent any of our ruralregulators permit competitive telephone companies become subject to competition and competitive telephone companies increase their operations in the areas served by our rural telephone companies, a portion of long distance and other carriers’ network access charges will be paid to ourthose competitors rather than to our companies. In addition,Finally, the compensation our companies receive from network access charges could be reduced due to competition from wireless carriers.
      In addition, VOIP services are increasingly being embraced by cable companies, incumbent telephone companies, competitive telephone companies and long distance carriers. The FCC is considering whether VOIP services are regulated telecommunications services or unregulated information services and is considering whether providers of VOIP services are obligated to pay access charges for calls originating or terminating on incumbentOur Pennsylvania rural telephone company facilities. We cannot predict the outcomeis an average schedule rate of the FCC’s rulemaking or the impact on the revenues of our rural telephone companies. The proliferation of VOIP, particularly to the extent such communications do not utilize our rural telephone companies’ networks, may cause significant reductions to our rural telephone companies’ network access charge revenues.
We believe telecommunications carriers, such as long distance carriers or VOIP providers, are disputing and/or avoiding their obligation to pay network access charges to rural telephone companies for use of their networks. If carriers successfully dispute or avoid the applicability of network access charges, our revenues could decrease.
      In recent years, telecommunications carriers, such as long distance carriers or VOIP providers, have become more aggressive in disputingreturn company, which means its interstate access charge rates setrevenues are based upon a statistical formula developed by NECA and approved by the FCC, rather than upon its actual costs. The formulas are reviewed by NECA and the applicabilityFCC annually and there could be changes to the formulas in the future, which could have an impact on our revenues.
On October 23, 2006, Verizon Pennsylvania, Inc. and several of networkits affiliates filed a formal complaint with the PAPUC claiming that our Pennsylvania CLEC’s intrastate switched access chargesrates violate Pennsylvania law. The provision that Verizon cites in its complaint requires CLEC rates to their telecommunications traffic. be no higher than the corresponding incumbent’s rates unless the CLEC can demonstrate that higher access rates are “cost justified.” Verizon’s original claim requested a refund of $1.3 million through December 2006.
We believe that these disputes have increased in part dueour CLEC’s switched access rates are permissible, and we are vigorously opposing this complaint. In an Initial Decision dated December 5, 2007, the presiding administrative law judge (“ALJ”) recommended that the PAPUC sustain Verizon’s complaint. As relief, the Administrative Law Judge directed that our Pennsylvania CLEC reduce its access rates down to advances in technology that have rendered the identity and jurisdiction of traffic more

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difficult to ascertain and that have afforded carriers an increased opportunity to assert regulatory distinctions and claims to lower access costs for their traffic. As a resultthose of the increasing deploymentunderlying incumbent exchange carrier and provide a refund to Verizon in an amount equal to the access charges collected in excess of VOIP servicesthe new rate since November 30, 2004. We filed exceptions to the full PAPUC, which requested that Verizon and other technological changes,the Company attempt to resolve the issue through mediation. The parties had until November 29, 2008 to complete the mediation, but through mutual agreement, it has been extended to March 2009.
In the event we believeare not successful in this proceeding, our Pennsylvania CLEC’s operations could suffer material harm—both because of the refund sought by Verizon and because of the prospective decreases in access revenues resulting from the change in the CLEC’s intrastate access rates, which would apply to all carriers on a non-discriminatory basis. Preliminarily estimates suggest that these typesthe decrease in our annual revenues would be approximately $1.2 million on a static basis (keeping access minutes of disputes and claims will likely increase.use constant) if Verizon prevails completely. In addition, other interexchange carriers could file similar claims for refunds. As of December 31, 2008, we believe that there has been a general increasehave reserved $3.2 million in other liabilities on the unauthorized use of telecommunications providers’ networks without payment of appropriate access charges, or so-called “phantom traffic”, due in partbalance sheet relating to advances in technology that have made it easier to use networks without having to pay for the traffic. As a general matter, we believe that this phantom traffic is due to unintended usage and, in some cases, fraud. We cannot assure you that there will not be material claims made against us contesting the applicability of network access charges billed by our rural telephone companies or continued or increased phantom traffic that uses our network without paying us for it. If there is a successful dispute or avoidance of the applicability of network access charges, our revenues could decrease.complaint.
Legislative or regulatory changes could reduce or eliminate the government subsidies we receive.
The federal and Texas state systemsystems of subsidies, from which we deriveconstitute a significant portion of our revenues, are subject to modification. Our rural telephone companies receive significant federal and state subsidy payments.
• For the year ended December 31, 2005, we received an aggregate $53.9 million from the federal universal service fund and the Texas universal service fund, which comprised 16.8% of our revenues for the year.
• In 2004, we received an aggregate of $51.5 million from the federal universal service fund and the Texas universal service fund, which comprised 15.9% of our revenues in 2004, after giving effect to the TXUCV acquisition.
may be modified. During the last two years, the FCC has made modifications tomodified the federal universal service fund system that changedto change the sources of support and the method for determining the level of support recipients of federal universal service fund subsidies receive. It is unclear whether the changes in methodologythat will continue to accurately reflect the costs incurred by our rural telephone companies and whether we will continue to receive the same amount of federal universal service fund support that our rural telephone companies have received in the past.be distributed. The FCC is also currently considering a number of issues regarding the source and amount of contributionsproposals for additional changes to and eligibility for payments from, the federal universal service fund, and thesefund. These issues may also bebecome the subject of legislative amendments to the Telecommunications Act.
      In December 2004, Congress suspended the application of a law called the Urgent Deficiency Act to the FCC’s universal service fund until December 31, 2005. The Urgent Deficiency Act prohibits government agencies from making financial commitments in excess of their funds on hand. Currently, the universal service fund administrator makes commitments to fund recipients in advance of collecting the contributions from carriers that will pay for these commitments. The FCC has not determined whether the Urgent Deficiency Act would apply to payments to our rural telephone companies. Congress is now considering whether to extend the current temporary legislation that exempts the universal service fund from the Urgent Deficiency Act. If it does not grant this extension, however, the universal service subsidy payments to our rural telephone companies may be delayed or reduced in the future. We cannot predict the outcome of any federal or state legislative action or any FCC, PUCT or ICC rulemaking or similar proceedings. If our rural telephone companies do not continue to receive federal and state subsidies, or if these subsidies are reduced, our rural telephone companiesthese subsidiaries likely will likely have lower revenues and may not be able to operate as profitably as they have historically. In addition, if the number of local access lines that our rural telephone companies serve increases, under the rules governing the federal universal service fund, the rate at which we can recover certain federal universal service fund payments may decrease. This may have an adverse effect on our revenues and profitability.
      In addition, under the Telecommunications Act, our competitors can obtain the same level of federal universal service fund subsidies as we do if the ICC or PUCT, as applicable, determines that granting these subsidies to competitors would be in the public interest and the competitors offer and advertise certain telephone services as required by the Telecommunications Act and the FCC. Under current rules,past.

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any such payments
Proposed access and universal service reforms could have an adverse impact on our revenues.
The FCC was required to address the ISP remand order by November 5, 2008, to the U.S. Court of Appeals. In conjunction with the requirement, then-FCC Chairman Martin proposed to incorporate comprehensive intercarrier compensation and universal service reform. The FCC circulated an order internally and was scheduled to vote on it at the November 4, 2008, open meeting, but the vote was cancelled. Any comprehensive reform could have an adverse impact on our competitors would not affect the level of subsidies received by our rural telephone companies, but they would facilitate competitive entry into our rural telephone companies’ service areas and our rural telephone companies may not be able to compete as effectively or otherwise continue to operate as profitability.network access revenue.
The high costs of regulatory compliance could make it more difficult for us to enter new markets, make acquisitions, or change our prices.
Regulatory compliance results inis a significant costsexpense for us and diverts the time and effort of management and our officers away from running ourthe business. In addition, because regulations differ from state to state, we could face significant costs in obtaining information necessaryit would be expensive to compete effectively if we try to provide services, such as long distanceintroduce services in markets in different states. These information barriers could cause us to incur substantial costsstates where we do not currently operate and to encounter significant obstacles and delays in entering these markets.understand the regulatory requirements. Compliance costs and information barriers could also affect our abilitymake it difficult and time-consuming to enter new markets or to evaluate and compete for new opportunities to acquire local access lines or businesses as they arise.
Our intrastate services generally are also generally subject to certification, tariff filing, and other ongoing state regulatory requirements. Challenges to our tariffs by regulators or third parties, or delays in obtaining certifications and regulatory approvals, could cause us to incur substantial legal and administrative expenses. IfMoreover, successful these challenges could adversely affect the rates that we are able to charge to customers, which would negatively affect our revenues. Some states also require advance regulatory approval of mergers, acquisitions, transfers of control, stock issuance, and certain types of debt financing, which can increase our costs and delay strategic transactions.
Legislative and regulatory changes in the telecommunications industry could raise our costs by facilitating greater competition against us and reduce potential revenues.
      Legislative and regulatory changes in the telecommunications industry could adversely affect our business by facilitating greater competition against us, reducing our revenues or raising our costs. For example, federal or state legislatures or regulatory commissions could impose new requirements relating to standards or quality of service, credit and collection policies, or obligations to provide new or enhanced services such as high-speed access to the Internet or number portability, whereby consumers can keep their telephone number when changing carriers. Any such requirements could increase operating costs or capital requirements.
      The Telecommunications Act provides for significant changes and increased competition in the telecommunications industry. This federal statute and the related regulations remain subject to judicial review and additional rulemakings of the FCC, as well as to implementing actions by state commissions.
Currently, there existsis only a small body of law and regulation applicable to access to, or commerce on, the Internet. As the significance of the Internet expands, federal, state and localbecomes more significant, governments at all levels may adopt new rules and regulations or find new ways to apply existing laws and regulations to the Internet.regulations. The FCC currently is currently reviewing the appropriate regulatory framework governing broadband consumer protections for high speed Internet access to the Internet through telephone and cable providers’ communications networks. The outcome of these proceedings may affect our regulatory obligations and costs and competition for our services, which could have a material adverse effect on our revenues.
“Do not call” registries may increase our costs and limit our ability to market our services.
      Our Market Response business is subject to various federal and state “do not call” list requirements. Recently, the FCC and the Federal Trade Commission, or FTC, amended their rules to provide for a national “do not call” registry. Under these new federal regulations, consumers may have their phone numbers added to the national registry and telemarketing companies, such as our Market Response business, are prohibited from calling anyone on that registry other than for limited exceptions. In September 2003, telemarketers were given access to the registry and are now required to compare their call lists against the national “do not call” registry at least once every 31 days. We are required to pay a fee to access the registry on a quarterly basis. This rule may restrict our ability to market our services

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effectively to new customers. Furthermore, compliance with this new rule may prove difficult, and we may incur penalties for improperly conducting our marketing activities.
Because we are subject to extensive laws and regulations relating to the protection of the environment, natural resources, and worker health and safety, we may face significant liabilities or compliance costs in the future.safety.
Our operations and properties are subject to federal, state, and local laws and regulations relating to protection of the environment, natural resources, and worker health and safety, including laws and regulations governing and creating liability relating to,in connection with the management, storage, and disposal of hazardous materials, asbestos, and petroleum products and other regulated materials.products. We also are subject to environmental laws and regulations governing air emissions from our fleets of vehicles. As a result, we face several risks, includingincluding:
Hazardous materials may have been released at properties we currently own or formerly owned (perhaps through our predecessors). Under certain environmental laws, we could be held liable, without regard to fault, for the following:costs of investigating and remediating any actual or threatened contamination at these properties, and for contamination associated with disposal by us or our predecessors of hazardous materials at third-party disposal sites.
• Under certain environmental laws, we could be held liable, jointly and severally and without regard to fault, for the costs of investigating and remediating any actual or threatened environmental contamination at currently and formerly owned or operated properties, and those of our predecessors, and for contamination associated with disposal by us or our predecessors of hazardous materials at third party disposal sites. Hazardous materials may have been released at certain current or formerly owned properties as a result of historic operations.
• The presence of contamination can adversely affect the value of our properties and our ability to sell any such affected property or to use it as collateral.
• 
We could be held responsible for third party property damage claims, personal injury claims or natural resource damage claims relating to any such contamination.
• The cost of complying with existing environmental requirements could be significant.
• Adoption of new environmental laws or regulations or changes in existing laws or regulations or their interpretations could result in significant compliance costs or as yet identified environmental liabilities.
• Future acquisitions of businesses or properties subject to environmental requirements or affected by environmental contamination could require us to incur substantial costs relating to such matters.
• In addition, environmental laws regulating wetlands, endangered species and other land use and natural resource issues may increase costs associated with future business or expansion opportunities, delay, alter or interfere with such plans, or otherwise adversely affect such plans.
      As a result of the above, we may face significant liabilities and compliance costs in the future.future if we acquire businesses or properties subject to environmental requirements or affected by environmental contamination. In particular, environmental laws regulating wetlands, endangered species, and other land use and natural resource issues may increase costs associated with future business or expansion opportunities or delay, alter, or interfere with such plans.
The presence of contamination can adversely affect the value of our properties and make it difficult to sell any affected property or to use it as collateral.
We could be held responsible for third-party property damage claims, personal injury claims, or natural resource damage claims relating to contamination found at any of our current or past properties.
The cost of complying with environmental requirements could be significant. Similarly, the adoption of new environmental laws or regulations or changes in existing laws or regulations or their interpretations could result in significant compliance costs or unanticipated environmental liabilities.

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Item 1B.Unresolved Staff Comments
None.
Item 1B.Unresolved Staff CommentsItem 2.Properties
      None
Item 2.Properties
Our headquarters and most of the administrative offices for our Telephone Operations are located in Mattoon, Illinois.

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      The properties that weWe lease areproperties pursuant to leasesagreements that expire at various times between 20052009 and 2015. The following charts summarizechart summarizes the principal facilities owned or leased by us as of December 31, 2005.2008.
           
IllinoisOwned/Approx.
PropertiesPrimary UseLeasedSq. Ft.
CharlestonIllinois Telephone Operations Communications Center and Market Response Offices(1)Leased33,987
EffinghamOffice and Illinois Telephone Operations Communications CenterLeased2,500
MattoonSales and Administration Office(1)Leased30,687
MattoonCorporate Headquarters(1)Leased49,054
MattoonOperator Services and OperationsOwned36,263
MattoonArchiveOwned9,097
MattoonOperations and Distribution Center(1)Leased30,883
MattoonCommunications CenterLeased5,677
MattoonMarket Response Order Fulfillment(2)Leased20,000
MattoonOfficeOwned10,086
TaylorvilleOperations and Branch Distribution Center(1)Leased14,655
TaylorvilleOffice and Illinois Telephone Operations Communications CenterOwned15,934
TaylorvilleOperator Services Call Center(2)Leased11,500
        Approximate 
TexasOwned/Approx.
PropertiesLocation Primary Use Owned/Leased Sq. Ft.
Operating Segment Square Feet 
BrookshireGibsonia, PA Office and Switching Owned Telephone & Other 4,400111,931 
Conroe, TX Regional Office OwnedTelephone & Other51,900
Mattoon, ILOrder FullfillmentLeasedOther Operations50,000
Mattoon, ILCorporate HeadquartersLeasedTelephone & Other49,100
Mattoon, ILOperator Services and Operations Owned 51,875
ConroeTelephone & Other  Warehouse36,300
Charleston, ILCommunications Center and OfficeLeasedTelephone & PlantOther 34,000
Mattoon, ILOperations and Distribution CenterLeasedTelephone & Other30,900
Mattoon, ILSales and Administration OfficeLeasedTelephone & Other30,700
Lufkin, TXOffice and Switching Owned Telephone & Other28,707
Conroe, TXWarehouse and PlantOwnedTelephone & Other  28,500 
Terre Haute, INConroeCommunications Center and OfficeLeasedTelephone & Other  Office25,450 
Lufkin, TXCommunications Center and Office Owned 10,650
IrvingOfficeLeased44,060
DallasCurrent Texas Headquarters — AdministrationLeased5,997
KatyRegional OfficeOwned6,500
KatyOffice (Electric Shop)Owned1,600
KatyWarehouseOwned13,983
KatyOfficeOwned5,733
LufkinRegional OfficeOwned30,145
LufkinBusiness OfficeOwnedTelephone & Other  23,190 
LufkinKaty, TX Warehouse and OfficeOwnedTelephone & Other19,716
Butler, PAOffice and SwitchingOwnedTelephone & Other18,564
Taylorville, ILOffice and Communications CenterOwnedTelephone & Other15,900
Taylorville, ILOperations and Distribution CenterLeasedTelephone & Other14,700
Lufkin, TX Warehouse OwnedTelephone & Other14,200
Cranberry Twp, PAOffice and Switching Owned Telephone & Other 14,24013,110 
LufkinCharleston, IL Office and Communications CenterOwnedTelephone & Other12,661
Litchfield, ILOffice and SwitchingOwnedTelephone & Other12,190
Lufkin, TX Office and Data Center OwnedOwnedTelephone & Other  11,92011,900 
LufkinConroe, TX Office OwnedOwnedTelephone & Other  8,00010,650 
LufkinMattoon, IL Office and Parking Area Owned 7,925
NeedvilleTelephone & Other  OfficeOwned6,649
RosenbergStorageLeased10,00010,100 
(1) In 2002, we sold these facilities to, and leased them back from, LATEL, LLC, or LATEL, an entity affiliated with Mr. Lumpkin.
(2) All properties listed above other than these two properties are used by both our Telephone Operations and Other Operations. These two properties are used by our Other Operations only.
In addition to the facilities listed above, we own or have the right to use 489approximately 713 additional properties consisting of cabinet/popequipment at point of presence sites, central offices, remote switching sites and buildings, tower sites, small

43


offices, storage sites and parking lots. Some of the facilities listed above also serve as central office locations.

33


Item 3.Legal Proceedings
On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against us and our subsidiaries, North Pittsburgh Telephone Company and North Pittsburgh Systems Inc., in the Court of Common Pleas of Allegheny County, Pennsylvania. The complaint alleges that we have prevented Salsgiver from connecting fiber optic cables to North Pittsburgh’s utility poles, and seeks compensatory and punitive damages for alleged lost profits, damage to Salsgiver’s business reputation, and other costs. The alleged aggregate losses are approximately $125 million, though Salsgiver does not request a specific dollar amount in damages. We expectbelieve that these claims are without merit and that the damages are completely unfounded. We intend to continuedefend against these claims vigorously. In the third quarter of 2008 we filed preliminary objections and responses to executeSalsgiver’s complaint, but the court ruled against our current strategypreliminary objections. On November 3, 2008 we responded to an amended complaint and filed a counterclaim for trespass, alleging that Salsgiver attached cables to our poles without an authorized agreement and in an unsafe manner.
On October 23, 2006, Verizon Pennsylvania, Inc. and several of moving all employees into owned space,its affiliates filed a formal complaint with the exceptionPAPUC claiming that our Pennsylvania CLEC’s intrastate switched access rates violate Pennsylvania law. The provision that Verizon cites in its complaint requires CLEC rates to be no higher than the corresponding incumbent’s rates unless the CLEC can demonstrate that higher access rates are “cost justified.” As of December 31, 2008, we have reserved $3.2 million in other liabilities on the officesbalance sheet relating to this complaint. For further discussion, please see the discussion of Regulatory Risks included in Irving and the long distance switch location in Dallas, and canceling or subletting leased office space. We have recently initiated legal proceedings to terminate our office lease in Irving, Texas. We do not believe, however, that any liability that may result from such lease termination would have a material adverse effect on our results of operations or financial condition in Texas.Part I—Item 1A—“Risk Factors.”
Item 3.Legal Proceedings
      WeIn addition, we currently are, and from time to time may be, subject to claims arising in the ordinary course of business. However, weWe are not currently subject to any such claims that we believe could reasonably be expected to have a material adverse effect on our results of operations or financial condition.
Item 4.Submission of Matters to a Vote of Security Holders
Item 4.Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in 2005.during the fourth quarter of 2008.
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our common stock is quoted on the NASDAQ Inc.’s NationalGlobal Select Market under the symbol “CNSL.” As of March 20, 20062, 2009, we had 1311,575 stockholders of record. Because many of our outstanding shares of existing common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Dividends declared and the highlow and lowhigh reported sales prices per share of our common stock are set forth in the following table for the periods indicated:
             
      Dividends
Quarter Ended High Low Declared
       
September 30, 2005 (beginning July 27, 2005) $15.10  $13.20  $0.41 
December 31, 2005 $14.14  $12.00  $0.39 
             
          Dividends 
Quarter Ended Low  High  Declared 
March 31, 2007 $18.71  $23.00  $0.39 
June 30, 2007 $19.30  $23.71  $0.39 
September 30, 2007 $15.72  $23.11  $0.39 
December 31, 2007 $15.50  $21.45  $0.39 
March 31, 2008 $14.00  $19.19  $0.39 
June 30, 2008 $13.70  $15.71  $0.39 
September 30, 2008 $13.48  $15.74  $0.39 
December 31, 2008 $7.82  $14.65  $0.39 

34


Dividend Policy and Restrictions
Our board of directors has adopted a dividend policy based on numerous assumptions and considerations that were summarized in our prospectus dated July 21, 2005, that reflects its judgment that our stockholders would beare better served if we distributed to themdistribute a substantial portion of the cash generated by our business in excess of our expected cash needs rather than retaining itthe cash or using the cashit for investments, acquisitions, or other purposes, such as to make investments in our business or to make acquisitions. The expected cash needs referred to above include interest and any future principal payments on our indebtedness, capital expenditures, taxes, costs associated with compliance with Section 404 of Sarbanes-Oxley, pension and other post-retirement contributions, costs to further integrate our Illinois and Texas billing systems and certain other costs.
purposes. We expect to continue to pay quarterly dividends at an annual rate of $1.5495 per share during 2006,2009, but only if and to the extent declared by our board of directors and subject to various restrictions on our ability to do so. In accordance with our dividend policy, we paid an initial dividend of $0.4089 per share (representing a pro rata portion of the expected dividend for the first year following our IPO on November 1, 2005) to stockholders of record as of October 15, 2005. On December 21, 2005, our board of directors declared a dividend of $0.38738 per share that was paid on February 1, 2006 to stockholders of record as of January 15, 2006. Prior to announcing these dividends, we had no history of paying dividends on our common stock. Dividends on our common stock are not cumulative.

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      Although it is our current intention to pay quarterly dividends at an annual ratePlease see Part I — Item 1A — “Risk Factors” of $1.5495 per share for 2006,this report, which sets forth several factors that could prevent stockholders may not receivefrom receiving dividends in the future. The “Risk Factors” section also discusses how our dividend policy could inhibit future as a resultgrowth and acquisitions.
We expect to fund our expected cash needs, including dividends, with cash flow from operations. We also expect to have sufficient availability under our revolving credit facility for these purposes, but we do not intend to borrow to pay dividends.
Issuer Purchases of any ofCommon Stock During the following factors:
• Nothing requires us to pay dividends.
• While our current dividend policy contemplates the distribution of a substantial portion of the cash generated by our business in excess of our expected cash needs, this policy could be changed or revoked by our board of directors at any time, for example, if it were to determine that we had insufficient cash to take advantage of other opportunities with attractive rates of return.
• Even if our dividend policy is not changed or revoked, the actual amount of dividends distributed under this policy, and the decision to make any distributions, is entirely at the discretion of our board of directors.
• The amount of dividends distributed will be subject to covenant restrictions in the agreements governing our debt, including our indenture and our amended and restated credit agreement, and in agreements governing any future debt.
• We might not have sufficient cash in the future to pay dividends in the intended amounts or at all. Our ability to generate this cash will depend on numerous factors, including the state of our business, the environment in which we operate and the various risks we face, changes in the factors, assumptions and other considerations made by our board of directors in reviewing and adopting the dividend policy, our future results of operations, financial condition, liquidity needs and capital resources and our various expected cash needs.
• The amount of dividends distributed may be limited by state regulatory requirements.
• The amount of dividends distributed is subject to restrictions under Delaware and Illinois law.
• Our stockholders have no contractual or other legal right to receive dividends.
Item 6.Selected Financial Data
      We are a holding company with no income from operations or assets except for the capital stock of CCI and Texas Holdings. CCI was formed for the sole purpose of acquiring ICTC and related business onQuarter Ended December 31, 2002. We believe the operations of ICTC and the related businesses prior to December 31, 2002 represent the predecessor of CCI Holdings. Texas Holdings is a holding company with no income from operations or assets except for the capital stock of CCV (formerly TXUCV). Texas Holdings was formed for the sole purpose of acquiring TXUCV, which was acquired on April 14, 2004 and renamed CCV after the closing of the acquisition. Texas Holdings operates its business through, and receives all of its income from, CCV and its subsidiaries. Results for2008
During the year ended December 31, 2004 include the results2008, we acquired and cancelled 23,646 common shares surrendered to pay taxes in connection with employee vesting of operations of CCV since the daterestricted common shares issued under our stock-based compensation plan. Further detail of the TXUCV acquisition.acquired shares follows:

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          Total number of  Maximum number 
          shares purchased  of shares that may 
  Total number of  Average price paid  as part of publically  yet be purchased 
Purchase period shares purchased  per share  announced plans  under the plans 
                 
February 20, 2008  535  $14.46  Not applicable Not applicable
October 13, 2008  2,646  $11.55  Not applicable Not applicable
November 10, 2008  1,622  $11.05  Not applicable Not applicable
December 5, 2008  18,843  $10.61  Not applicable Not applicable
Item 6.Selected Financial Data
The selected financial information set forth below have been derived from the audited consolidated financial statements of CCI Holdingsthe Company as of and for the years ended December 31, 2008, 2007, 2006, 2005, 2004 and 2003 and the audited combined financial statements of ICTC and related businesses as of and for the years ended December 31, 2002 and 2001.2004. The following selected historical financial information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Item 8 “Financial InformationStatements and Supplementary Data.”
                        
  CCI Holdings  Predecessor
      
  Year Ended December 31,
      
  2005 2004 2003  2002 2001
            
  (In millions)
Consolidated Statement of Operations Data:
                     
 Total operating revenues $321.4  $269.6  $132.3   $109.9  $115.6 
 Cost of services and products (exclusive of depreciation and amortization shown separately below)  101.1   80.6   46.3    35.8   38.9 
 Selling, general and administrative  98.8   87.9   42.5    35.6   36.0 
 Asset impairment     11.6           
 Depreciation and amortization(1)  67.4   54.5   22.5    24.6   31.8 
                 
 Income from operations  54.1   35.0   21.0    13.9   8.9 
 Interest expense, net(2)  (53.4)  (39.6)  (11.9)   (1.6)  (1.8)
 Other, net(3)  5.7   3.7   0.1    0.4   5.8 
                 
 Income (loss) before income taxes  6.4   (0.9)  9.2    12.7   12.9 
 Income tax expense  (10.9)  (0.2)  (3.7)   (4.7)  (6.3)
                 
 Net income (loss)  (4.5)  (1.1)  5.5   $8.0  $6.6 
                 
 Dividends on redeemable preferred shares  (10.2)  (15.0)  (8.5)       
                 
 Net loss applicable to common shares $(14.7) $(16.1) $(3.0)       
                 
 Net loss per common share — basic and diluted $(0.83) $(1.79) $(0.33)       
Other Financial Data:
                     
 Telephone Operations revenues $282.3  $230.4  $90.3   $76.7  $79.8 
Other Data (as of end of period):
                     
 Local access lines in service                     
  Residential  162,231   168,778   58,461    60,533   62,249 
  Business  79,793   86,430   32,426    32,475   33,473 
                 
  Total local access lines  242,024   255,208   90,887    93,008   95,722 
 DVS subscribers  2,146   101           
 DSL subscribers  39,192   27,445   7,951    5,761   2,501 
                 
  Total connections  283,362   282,754   98,838    98,769   98,223 
Consolidated Cash Flow Data:
                     
 Cash flows from operating activities $79.3  $79.8  $28.9   $28.5  $34.3 
 Cash flows used in investing activities  (31.1)  (554.1)  (296.1)   (14.1)  (13.1)
 Cash flows from (used in) financing activities  (68.9)  516.3   277.4    (16.6)  (18.9)
 Capital expenditures  31.1   30.0   11.3    14.1   13.1 

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  CCI Holdings  Predecessor
      
  Year Ended December 31,
      
  2005 2004 2003  2002 2001
            
  (In millions)
Consolidated Balance Sheet Data:
                     
 Cash and cash equivalents $31.4  $52.1  $10.1   $1.1  $3.3 
 Total current assets  79.0   98.9   39.6    23.2   26.7 
 Net plant, property & equipment(4)  335.1   360.8   104.6    105.1   100.5 
 Total assets  946.0   1,006.1   317.6    236.4   248.9 
 Total long-term debt (including current portion)(5)  555.0   629.4   180.4    21.0   21.1 
 Redeemable preferred shares     205.5   101.5        
 Stockholders’ equity/ Members’ deficit/ Parent company investment  199.2   (18.8)  (3.5)   174.5   178.1 
                     
  Consolidated Communications Holdings, Inc. 
  Year Ended December 31, 
  2008  2007  2006  2005  2004 
  (dollars in millions except per share amounts) 
Consolidated Statement of Operations Data:
                    
Telephone operations revenues $378.0  $286.8  $280.4  $282.3  $230.4 
Other operations revenues  40.4   42.4   40.4   39.1   39.2 
                
Total operating revenues  418.4   329.2   320.8   321.4   269.6 
Cost of services and products (exclusive of depreciation and amortization shown separately below)  143.5   107.3   98.1   101.1   80.6 
Selling, general and administrative  108.8   89.6   94.7   98.8   87.9 
Intangible assets impairment  6.1      11.3      11.6 
Depreciation and amortization  91.7   65.7   67.4   67.4   54.5 
                
Income from operations  68.3   66.6   49.3   54.1   35.0 
Interest expense, net (1)  (66.3)  (46.5)  (42.9)  (53.4)  (39.6)
Other, net (2)  9.9   (4.0)  7.3   5.7   3.7 
                
Income (loss) before income taxes and extraordinary item  11.9   16.1   13.7   6.4   (0.9)
Income tax expense  (6.6)  (4.7)  (0.4)  (10.9)  (0.2)
                
Income before extraordinary item  5.3   11.4   13.3   (4.5)  (1.1)
Extraordinary item, net of tax  7.2             
                
Net income (loss)  12.5   11.4   13.3   (4.5)  (1.1)
                
Dividends on redeemable preferred shares           (10.2)  (15.0)
                
Net income (loss) applicable to common shares $12.5  $11.4  $13.3  $(14.7) $(16.1)
                
Net income (loss) per common share:                    
Basic:                    
Income (loss) before extraordinary item $0.18  $0.44  $0.48  $(0.83) $(1.79)
Extraordinary item  0.25             
                
Net income (loss) $0.43  $0.44  $0.48  $(0.83) $(1.79)
                
 
Diluted:                    
Income (loss) before extraordinary item $0.18  $0.44  $0.48  $(0.83) $(1.79)
Extraordinary item  0.24             
                
Net income (loss) $0.42  $0.44  $0.48  $(0.83) $(1.79)
                
                     
Consolidated Cash Flow Data:
                    
Cash flows from operating activities $92.4  $82.1  $84.6  $79.3  $79.8 
Cash flows used in investing activities  (48.0)  (305.3)  (26.7)  (31.1)  (554.1)
Cash flows from (used in) financing activities  (63.3)  230.9   (62.7)  (68.9)  516.3 
Capital expenditures  48.0   33.5   33.4   31.1   30.0 
Dividends declared per common share $1.55  $1.55  $1.55  $0.80  $ 
                     
Consolidated Balance Sheet Data:
                    
Cash and cash equivalents $15.5  $34.3  $26.7  $31.4  $52.1 
Total current assets  78.6   99.6   74.2   79.0   98.9 
Net plant, property and equipment (3)  400.3   411.6   314.4   335.1   360.8 
Total assets  1,241.6   1,304.6   889.6   946.0   1,006.1 
Total long-term debt (including current portion) (4) (5)  881.3   892.6   594.0   555.0   629.4 
Redeemable preferred shares              205.5 
Stockholders’ equity/members’ deficit/parent company investment  70.1   155.4   115.0   199.2   (18.8)
                     
Other Financial Data (unaudited):
                    
Consolidated EBITDA (6) $189.8  $143.8  $139.8  $136.8  $115.8 

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  Consolidated Communications Holdings, Inc. 
  Year Ended December 31, 
  2008  2007  2006  2005  2004 
  (unaudited) 
Other Data (as of end of period) (7):
                    
Local access lines in service:                    
Residential  162,067   183,070   155,354   162,231   168,778 
Business  102,256   103,116   78,335   79,793   86,430 
                
Total local access lines  264,323   286,186   233,689   242,024   255,208 
CLEC access line equivalents  74,687   70,063          
Digital telephone subscribers  6,510   2,494          
IPTV subscribers  16,666   12,241   6,954   2,146   101 
ILEC DSL subscribers  91,817   81,337   52,732   39,192   27,445 
                
Total connections  454,003   452,321   293,375   283,362   282,754 
                
 
(1) On January 1, 2002, ICTC and related businesses adopted SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142, ICTC ceased amortizing goodwill on January 1, 2002 and instead tested for goodwill impairment annually. Amortization expense for goodwill and intangible assets was $14.3 million, $11.9 million, $7.0 million, $10.1 million, and $17.6 million for the periods ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively. Depreciation and amortization excludes amortization of deferred financing costs.
 
(2)(1) Interest expense includes amortization of deferred financing costs totaling $5.5 million, $6.4 million and $0.5$1.4 million for the yearsyear ended December 31, 2008, $3.2 million for 2007, $3.3 million for 2006, $5.5 million for 2005, 2004 and 2003, respectively.$6.4 million for 2004.
 
(3) (2)In June 2005, weWe recognized $0.3 million and $2.8 million of net proceeds in other income due to the receipt ofin 2007 and 2005, respectively, because we received key-man life insurance proceeds relating to the passing of a former TXUCV employee. On September 30, 2001, ICTC sold two exchanges of approximately 2,750 access lines, received proceeds from the sale of $7.2 million and recorded a gain on the sale of assets of approximately $5.2 million.employees.
 
(4)(3) Property, plant and equipment are recorded at cost. The cost of additions, replacements, and major improvements is capitalized, while repairs and maintenance are charged to expenses. When property, plant and equipment are retired from our regulated subsidiaries, the original cost, net of salvage, is charged against accumulated depreciation, with no gain or loss recognized in accordance with composite group life remaining methodology used for regulated telephone plant assets.
 
(5)(4) In connection with the TXUCV acquisition on April 14, 2004, we issued $200.0 million in aggregate principal amount of senior notes and entered into credit facilities. In connection with the IPO and related financing,transactions, we retired $70.0 million of senior notes and amended and restated our credit facilities, which had $425.0 million outstanding asfacilities. In connection with the acquisition of North Pittsburgh on December 31, 2005.2007, we incurred $296.0 million new term debt, net of payoffs of existing debt. All remaining senior notes were retired on April 1, 2008.
(5)In July 2006, we repurchased and retired approximately 3.8 million shares of our common stock for approximately $56.7 million, or $15.00 per share. We financed this transaction using approximately $17.7 million of cash on hand and $39.0 million of additional term-loan borrowings.
(6)We present Consolidated EBITDA for three reasons: we believe it is a useful indicator of our historical debt capacity and our ability to service debt and pay dividends; it provides a measure of consistency in our financial reporting; and covenants in our credit facilities contain ratios based on Consolidated EBITDA.
Consolidated EBITDA is defined in our current credit facility as:
Consolidated Net Income (also defined in our credit facility),
(a)plusthe following, to the extent deducted in arriving at Consolidated Net Income:
(i) interest expense, amortization, or write-off of debt discount and non-cash expense incurred in connection with equity compensation plans;
(ii) provision for income taxes;
(iii) depreciation and amortization;
(iv) non-cash charges for asset impairment; all charges, expenses, and other extraordinary, non-recurring, and unusual integration costs or losses related to the acquisition of North Pittsburgh, including all severance payments in connection with the acquisition, so long as such costs or losses are incurred prior to December 31, 2009, and do not exceed $12.0 million in the aggregate;
(v) all non-recurring transaction fees, charges, and other amounts related to the acquisition of North Pittsburgh (excluding all amounts otherwise included in accordance with U.S. generally accepted accounting principles (“GAAP”) in determining Consolidated EBITDA), so long as such fees, charges, and other amounts do not exceed $18 million in the aggregate;

37


(b)minus(in the case of gains) orplus(in the case of losses) gain or loss on sale of assets;
(c)minus(in the case of gains) orplus(in the case of losses) non-cash income or charges relating to foreign currency gains or losses;
(d)plus(in the case of losses) orminus(in the case of income) non-cash minority interest income or loss;
(e)plus(in the case of items deducted in arriving at Consolidated Net Income) orminus(in the case of items added in arriving at Consolidated Net Income) non-cash charges resulting from changes in accounting principles;
(f)plusextraordinary losses andminusextraordinary gains as defined by GAAP;
(g)plus(in the case of any period ending on December 31, 2007, and any period ending during the seven immediately succeeding fiscal quarters of the Company, to the extent not otherwise included in Consolidated EBITDA) cost savings to be realized by the Company and its subsidiaries in connection with the acquisition of North Pittsburgh that are attributable to the integration of the Company’s operations and businesses in Illinois and Texas with the acquired Pennsylvania operations, which cost savings are deemed to be the amounts set forth on a schedule to the credit agreement for each such fiscal quarter; and
(h)minusinterest income.
(7)Beginning with 2007, Other data includes access lines, CLEC access line equivalents, and DSL subscribers for our North Pittsburgh operations, which were acquired on December 31, 2007.
If our Consolidated EBITDA were to decline below certain levels, there may be violations of covenants in our credit facilities that are based on this measure, including our total net leverage and interest coverage ratios covenants. The consequences could include a default or mandatory prepayment or a prohibition on dividends.
We believe that net cash provided by operating activities is the most directly comparable financial measure to Consolidated EBITDA under GAAP. Consolidated EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations and cash flows data prepared in accordance with GAAP. Consolidated EBITDA is not a complete measure of profitability because it does not include costs and expenses identified above. Nor is Consolidated EBITDA a complete net cash flow measure because it does not include reductions for cash payments for an entity’s obligation to service its debt, fund its working capital, make capital expenditures, make acquisitions, or pay its income taxes and dividends.

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The following table sets forth a reconciliation of Cash Provided by Operating Activities to Consolidated EBITDA:
                     
  CCI Holdings 
  Year Ended December 31, 
  2008  2007  2006  2005  2004 
  (dollars in millions) 
  (unaudited) 
EBITDA:                    
Net cash provided by operating activities $92.4  $82.1  $84.6  $79.3  $79.8 
Adjustments:                    
Compensation from restricted share plan  (1.9)  (4.0)  (2.5)  (8.6)   
Other adjustments, net (a)  3.8   (9.5)  (2.0)  (18.0)  (22.0)
Changes in operating assets and liabilities  9.9   8.5   0.6   10.2   (4.4)
Interest expense, net  66.3   46.5   42.9   53.4   39.6 
Income taxes  6.6   4.7   0.4   10.9   0.2 
                
EBITDA (b)  177.1   128.3   124.0   127.2   93.2 
                     
Adjustments to EBITDA (c):                    
Intergration, restructuring and Sarbanes-Oxley (d)  4.8   1.2   3.7   7.4   7.0 
Professional service fees (e)           2.9   4.1 
Other, net (f)  (19.9)  (6.6)  (7.1)  (3.0)  (3.7)
Investment distributions (g)  17.8   6.6   5.5   1.6   3.6 
Pension curtailment gain (h)           (7.9)   
Loss on extinghishment of debt (i)  9.2   10.3          
Intangible assets impairment (a)  6.1      11.2      11.6 
Extraordinary item (j)  (7.2)            
Non-cash compensation (k)  1.9   4.0   2.5   8.6    
                
                     
Consolidated EBITDA
 $189.8  $143.8  $139.8  $136.8  $115.8 
                
(a)Other adjustments, net includes $6.1 million, $11.2 million and $11.6 million of intangible asset impairment charges for years ended December 31, 2008, December 31, 2006, and December 31, 2004, respectively. During our annual impairment review for 2008, we determined that the projected future cash flows of the telemarketing business would not be sufficient to support the carrying value of the goodwill. In addition, based on a decline in estimated future cash flows in the telemarketing and operator services business, our 2006 annual impairment review determined that the value of the customer lists associated with these businesses was impaired. Our 2004 impairment testing determined that the goodwill of our operator services business and the tradenames of our telemarketing and mobile services businesses were impaired. Non-cash impairment charges are excluded in arriving at Consolidated EBITDA under our credit facility.
(b)EBITDA is defined as net earnings (loss) before interest expense, income taxes, depreciation, and amortization on an unadjusted basis.
(c)These adjustments reflect those required or permitted by the lenders under the credit facility in place at the end of each of the years included in the periods presented.
(d)In connection with the TXUCV acquisition, we incurred certain expenses associated with integrating and restructuring the businesses. These expenses include severance; employee relocation expenses; Sarbanes-Oxley start-up costs; and costs to integrate our technology, administrative and customer service functions, and billing systems. In connection with the North Pittsburgh acquisition we incurred similar expenses with the exception of Sarbanes-Oxley start-up costs.
(e)Represents the aggregate professional service fees paid to certain large equity investors prior to our initial public offering. Upon closing of the initial public offering, these service agreements terminated.

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(f)Other, net includes the equity earnings from our investments, dividend income, and certain other miscellaneous non-operating items. Key man life insurance proceeds of $0.3 million and $2.8 million received in 2007 and 2005, respectively, are not deducted to arrive at Consolidated EBITDA.
(g)For purposes of calculating Consolidated EBITDA, we include all cash dividends and other cash distributions received from our investments.
(h)Represents a $7.9 million curtailment gain associated with the amendment of our Texas pension plan. The gain was recorded in general and administrative expenses. However, because the gain is non-cash, it is excluded from Consolidated EBITDA.
(i)Represents the redemption premium and write-off of unamortized debt issuance costs in connection with the redemption and retirement of our senior notes during 2008 and the write off of debt issuance costs in connection with retiring the obligations under our former credit facility and entering into a new credit facility contemporaneously with the North Pittsburgh acquisition.
(j)Upon making the election to discontinue accounting for certain regulated property under Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation.” Accordingly, we recognized an extraordinary non-cash gain in connection with our adoption of SFAS No. 101 “Regulated Enterprises — Accounting for the Discontinuance of Application of FASB Statement No. 71.” See the financial statements and footnotes for additional information.
(k)Represents compensation expenses in connection with our Restricted Share Plan. Because of their non-cash nature, these expenses are excluded from Consolidated EBITDA.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
We present belowThis Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Consolidated Communications Holdings, Inc. and its subsidiaries on a consolidated basis. The following discussion should be read in conjunction with our historical financial statements and related notes contained elsewhere in this Report.
The following discussion gives retroactive effect to our reorganization as if it had occurred on December 31, 2004. As a result, the discussion below represents the financial results of CCI and Texas Holdings on a consolidated basis. For all periods prior to April 14, 2004, the date of the TXUCV acquisition, our financial results only include CCI and its consolidated subsidiaries, except as stated otherwise.. For all periods subsequent to April 14, 2004, our financial results include CCI and Texas Holdings on a consolidated basis.

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Overview
We are an established rural local exchange company that provides communications services to residential and business customers in Illinois, Texas, and Texas. As of December 31, 2005, we estimate that we were the 17th largest local telephone company in the United States, based on publicly available information, with approximately 242,024 local access lines and approximately 39,192 digital subscriber lines, or DSL, in service.Pennsylvania. Our main sources of revenues are our local telephone businesses, in Illinois and Texas, which offer an array of services, including local dial tone,tone; digital telephone service, custom calling features,features; private line services,services; long distance,distance; dial-up and Internet access; high-speed Internet access, which we refer to as Digital Subscriber Line or DSL; inside wiring service and maintenance ,carrier access,maintenance; carrier access; billing and collection services andservices; telephone directory publishing. In addition, we launched ourpublishing; wholesale transport services on a fiber optic network in Texas; and Internet Protocol digital video service, which we refer to as DVS, in selected Illinois markets in 2005 and offer wholesale transport services on a fiber optic network in Texas.IPTV. We also operate a number of complementary businesses whichthat offer telephone services to county jails and state prisons, operator services, equipment sales, and telemarketing, and order fulfillment services.
Share repurchase
Acquisitions
On July 28, 2006, we completed the repurchase of 3,782,379, or 12.7%, of the outstanding shares from Providence Equity for $56.7 million, or $15.00 per share. The repurchase was funded with $17.7 million of cash on hand and $39.0 million of new borrowings under our previous credit facility. The effect of the transaction was an annual increase of $3.0 million of cash flow due to:
a reduction in our annual dividend obligation of $5.9 million;
an increase in our after tax net cash interest of $2.9 million due to the increased borrowings incurred and increase in the interest rate on our credit facility of 25 basis points and a decrease in interest income resulting from reduced cash on hand.

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Acquisition of North Pittsburgh and new credit facility
On December 31, 2007, the Company began operationscompleted its acquisition of North Pittsburgh Systems, Inc (“North Pittsburgh”). At the effective time of the merger, 80% of the shares of North Pittsburgh common stock converted into the right to receive $25.00 in Illinoiscash, without interest, per share, for an approximate total of $300.1 million. Each of the remaining shares of North Pittsburgh common stock converted into the right to receive 1.1061947 shares of common stock of the Company, or an approximate total of 3.32 million shares. The total purchase price, including fees, was $347.0 million, net of cash acquired.
In connection with the acquisition, the Company, through its wholly-owned subsidiaries, entered into a credit agreement with various financial institutions. The credit agreement provides for aggregate borrowings of ICTC from McLeodUSA on$950.0 million, consisting of a $760.0 million term loan facility, a $50.0 million revolving credit facility (which remains fully available as of December 31, 2002,2008), and in Texas witha $140.0 million delayed draw term loan facility. The Company borrowed $120.0 million under the delayed draw term loan facility on April 1, 2008, to redeem the outstanding senior notes. The commitment for the remaining $20 million under the delayed draw facility expired. Other borrowings under the credit facility were used to retire the Company’s previous $464.0 million credit facility and to fund the acquisition of TXUCV from TXU Corp.North Pittsburgh.
Redemption of senior notes
On April 1, 2008, the Company redeemed all of the outstanding 9.75% senior notes using $120.0 million borrowed under the delayed draw term loan and cash on April 14, 2004.hand. The total amount of the redemption was $136.3 million, including a redemption premium of 4.875%, or $6.3 million. We recognized a $9.2 million loss on the redemption of the notes. As a result of the foregoing,period-to-period comparisonstransaction, we expect to realize $4.0 million reduction in annualized cash interest expense.
Discontinuance of the application of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”
Historically, our Illinois and Texas ILEC operations followed the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71 “Accounting for the Effects of Certain Types of Regulation” (“SFAS No. 71”). This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Recent changes to our operations, however, have impacted the dynamics of the Company’s business environment and caused us to evaluate the applicability of SFAS No. 71. In the last half of 2008, we experienced a significant increase in competition in our Illinois and Texas markets as, primarily, our traditional cable competitors started offering voice services. Also, effective July 1, 2008, we made an election to transition from rate of return to price cap regulation at the interstate level for our Illinois and Texas operations. The conversion to price caps gives us greater pricing flexibility, especially in the increasingly competitive special access segment and in launching new products. Additionally, in response to customer demand we have also launched our own VOIP product offering as an alternative to our traditional wireline services. While there has been no material changes in our bundling strategy and or in our end-user pricing, our pricing structure is transitioning from being based on the recovery of costs to a pricing structure based on market conditions.
Based on the factors impacting our operations, we determined in the fourth quarter 2008, that the application of SFAS No. 71 for reporting our financial results is no longer appropriate. SFAS No. 101, “Regulated Enterprises — Accounting for the Discontinuance of Application of FASB Statement No. 71,” specifies the accounting required when an enterprise ceases to date are not necessarily meaningful and should not be relied upon as an indicationmeet the criteria for application of future performance due toSFAS No. 71. SFAS No. 101 requires the following factors:
• Revenues and expenses for the year ended December 31, 2004 include the results of CCI Texas only from April 14, 2004, the date of the TXUCV acquisition. For all periods prior to April 14, 2004, our financial results only included CCI Illinois. For all periods subsequent to April 14, 2004, our financial statements include CCI Illinois and CCI Texas on a consolidated basis.
• In connection with the TXUCV acquisition, we incurred approximately $14.4 million in operating expenses associated with the integration and restructuring process in 2004 and 2005. These integration and restructuring costs were in addition to the ongoing costs we expect to incur in 2006 and 2007 to further integrate our Illinois and Texas billing systems and certain ongoing expenses we began to incur at that time to expand certain administrative functions, such as those related to SEC reporting and compliance, and do not take into account other potential cost savings and expenses of the TXUCV acquisition.
• Expenses for the years ended December 31, 2005, 2004 and 2003 contain $2.9 million, $4.1 million and $2.0 million, respectively, in aggregate professional service fees paid to our existing equity investors. In connection with the acquisition of ICTC and then TXUCV, the Company and certain of its subsidiaries entered into professional service agreements with our equity investors for consulting, advisory and other professional services. These arrangements and the rights of our existing equity investors to earn these fees terminated with the closing of the IPO described below.
Initial Public Offering
      On July 27, 2005, we completed our IPO. The IPO consistedelimination of the saleeffects of 6,000,000 sharesany actions of common stock newly issuedregulators that have been recognized as assets and liabilities in accordance with SFAS No. 71 but would not have been recognized as assets and liabilities by nonregulated enterprises. Depreciation rates of certain assets established by regulatory authorities for the Company and 9,666,666 sharesCompany’s telephone operations subject to SFAS No. 71 have historically included a systematic charge for removal costs in excess of common stock sold by certain of our selling stockholders. The shares of common stock were sold at an initial public offering price of $13.00 per sharethe related estimated salvage value on those assets, resulting in a net proceeds to usover depreciation of approximately $67.6those assets over their useful lives. Costs of removal were then appropriately applied against this reserve. Upon discontinuance of SFAS No. 71, we reversed the impact of recognizing removal costs in excess of the related estimated salvage value, which resulted in recording a non-cash extraordinary gain of $7.2 million, net of taxes of $4.2 million.
      We used the net proceeds from the IPO, together with additional borrowings under our credit facilities and cash on hand to:
• repay in full outstanding borrowings under our term loan A and C facilities, together with accrued but unpaid interest through the date of repayment and associated fees and expenses;

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Factors affecting results of operations
• redeem $70.0 million of the aggregate principal amount of our senior notes and pay the associated redemption premium of $6.8 million, together with accrued but unpaid interest through the date of redemption; and
• pre-fund expected integration and restructuring costs for 2005 relating to the TXUCV acquisition.
Revenues
Factors Affecting Future Results of Operations
Revenues
Telephone Operations and Other Operations. To date, ourOur revenues have beenare derived primarily from the sale of voice and data communications services to residential and business customers in our rural telephone companies’ service areas.
      Our Telephone Operations segment added revenues for the year ended December 31, 2005, Because we operate primarily because of the inclusion of the results from our Texas Telephone Operations. In 2004, our Telephone Operations segment included revenues from our Texas Telephone Operations only for periods after the April 14, 2004 acquisition of TXUCV. Wein rural service areas, we do not anticipate significant growth in revenues in our Telephone Operations segment, due to its primarily rural service area, butexcept through acquisitions such as that of North Pittsburgh. However, we do expect relatively consistent cash flow fromyear-to-year due year to year because of stable customer demand, limited competition, and a generally supportive regulatory environment.
      Our Other Operations segment increased revenues in its Public Services business for the year ended December 31, 2005 compared to the same period in 2004. Overall, revenues declined due primarily to losing the telemarketing and fulfillment contract with the Illinois Toll Highway Authority in mid-2004 as well as declines in our Mobile and Operator Services businesses. We expect the declining revenue trends in our Mobile and Operator Services businesses to continue.
Local Access Lines and Bundled Services.Local access lines are an important element of our business. and bundled services.An “access line” is the telephone line connecting a person’s home or business to the public switched telephone network. The number of local access lines in service directly affects the monthly recurring revenue we generate from end users, the amount of traffic on our network, and relatedthe access charges generatedwe receive from other carriers, the amount of federal and state subsidies we receive, and most other revenue streams are directly related to the number of local access lines in service. As illustrated in the tables below, westreams. We had 242,024264,323 local access lines in service as of December 31, 2005, which is a decrease2008, compared to 286,186 at the end of 13,184 from the 255,2082007. We had 233,689 local access lines we had on December 31, 2004.in service at the end of 2006, prior to our acquisition of North Pittsburgh.
Many rural telephone companies have experienced a loss of local access lines due to challenging economic conditions and increased competition from wireless providers, competitive local exchange carriers and, in some cases, cable television operators. We have not been immune to these conditions. Excluding the effectBoth Suddenlink and Comcast, cable competitors in Texas, as well as NewWave Communications in Illinois, launched a competing voice product this year, which caused a spike in our line loss. We estimate that cable companies are now offering voice service to all of the TXUCV acquisition, we have lost access lines in eachtheir addressable customers, covering 85% of the last two years. our entire service territory.
We also believe that we lost local access lines due to the disconnection ofbecause residential customers disconnected second telephone lines by our residential customers in connection with their substitutingwhen they substituted DSL or cable modem service fordial-up Internet access, and wireless service for wireline service. Aswired. Second lines decreased from 10,685 as of December 31, 2005 and 2004, we had 9,144 and 11,115 second lines, respectively.2007, to 8,822 as of December 31, 2008. The disconnection of second lines represented 30.1%8.9% of our residential line loss in 2005.2008, and 9.6% in 2007. In addition, since we began to more aggressively promote our digital telephone service, we estimate that approximately one-half of our digital telephone subscriber additions are switching from one of our traditional access lines. We expect to continue to experience modest erosion in access lines.lines both due to market forces and through our own cannibalization.
      A significant portion of our line loss in 2005 is attributable to the migration of MCIMetro’s Internet service provider, or ISP, traffic from our primary rate interface, or PRI, facilities and local T-1 facilities to interconnection trunks. As a result of this migration, our Telephone Operations segment experienced a loss of approximately 5,332 lines during the 2005. In total, the MCIMetro regrooming in our territories represented 40.4% of our access line loss on ayear-to-year basis. The migration of MCIMetro’s ISP traffic is essentially complete. As of December 31, 2005, we had 48 remaining MCIMetro ISP lines that we expect to be migrated in the first quarter of 2006.

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We have mitigated the decline in local access lines with increased ARPUaverage revenue per access line by focusing on the following:
aggressively promoting DSL service, including selling DSL as a stand-alone offering;
bundling value-adding services, such as DSL or IPTV, with a combination of local service and custom calling features;
 aggressively promoting DSL service;
• bundling value-adding services, such as DSL with a combination of local service, custom calling features, voicemail and Internet access;
 maintaining excellent customer service standards, particularly as we introduce new services to existing customers;standards; and
 
  keeping a strong local presence in the communities we serve.
We have implemented a number of initiatives to gain new local access lines and retain existing local access lines by enhancing the attractiveness of the bundle with newmaking bundled service offerings, includingpackages more attractive (for example, by adding unlimited long distance,distance) and promotional offersby announcing special promotions, like discounted second lines. In January 2005 we introduced DVS in selected Illinois markets. The initial roll-out was initiated in a controlled manner with little advertising or promotion. Upon completion of back-office testing, vendor interoperability between system components and final network preparation, we began aggressively marketingWe also market our “triple play” bundle, which includes local telephone service, DSL, and DVS, in our key Illinois exchanges in September 2005.IPTV. As of December 31, 2005, DVS2008, IPTV was available to approximately 19,500over 142,800 homes and we had 2,146 subscribers, which represented 11.0% of available homes. We are currently expanding DVS availability in Illinois and believe that we will pass 36,000 homes by mid-2006. We will continue to study our current results and the opportunity to introduce DVS service in our Texas markets. Our IPTV subscriber base has grown from 12,241 as of December 31, 2007, to 16,666 as of December 31, 2008. We launched IPTV in our Pennsylvania markets in April 2008.

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In addition to our access line and video initiatives, we intend to continue to integrate best practices across our Illinois, Texas, and Pennsylvania regions. We also continue to look for ways to enhance current products and introduce new services to ensure that we remain competitive and continue to meet our customers’ needs. These initiatives include offering:
hosted digital telephone service in certain Texas regions. and Pennsylvania markets to meet the needs of small- to medium-sized business customers that want robust function without having to purchase a traditional key or PBX phone system;
Digital telephone service for residential customers, which is being offered to our Texas and Illinois customers and will expand to our Pennsylvania customers in 2009 both as a growth opportunity and as an alternative to the traditional phone line for customers who are considering a switch to a cable competitor;
DSL service—even to users who do not have our access line—which expands our customer base and creates additional revenue-generating opportunities;
a DSL product with speeds up to 10 Mbps for those customers desiring greater Internet speed; and
High definition video service and digital video recorders in all of our IPTV markets.
These efforts may act to mitigate the financial impact of any access line loss we may experience.
      Because of our promotional efforts, theThe number of DSL subscribers we serve grew substantially. The number ofsubstantially in 2008. We had 91,817 DSL subscribers we serve increased by 42.8% to approximately 39,192 lines in service as of December 31, 2005 from approximately 27,445 lines2008, compared to 81,337 as of December 31, 2004.2007, including 14,713 as a result of the acquisition of North Pittsburgh, and 52,732 as of December 31, 2006. Currently over 92%95% of our rural telephone companies’ local access lines are DSL capable. The penetration rate for DSL lines inDSL-capable.
We also utilize service was approximately 16.2% of our local access lines at December 31, 2005.
      We have also been successful in generating Telephone Operations revenues by bundlingbundles, which include combinations of local service, custom calling features, voicemail and Internet access. The number of these bundles, which we referaccess, to asgenerate revenue and retain customers in our Illinois, Texas and Pennsylvania markets. Our service bundles increased 20.1% to approximately 36,627 service bundlestotaled 42,054 at December 31, 2005 from approximately 30,489 service bundles2008, compared to 45,971 at December 31, 2004.
      Our strategy is to continue to execute the plan we have had forend of 2007 and 43,175 at the past three years and to continue to implement the plan in Texas (where we acquired our rural telephone operations in April 2004). However, if these actions fail to mitigate access line loss, or we experience a higher degreeend of access line loss than we currently expect, it could have an adverse impact on our revenues and earnings.2006.

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The following sets forth several key metrics as of the end of the periods presented:presented. Only the information as of December 31, 2008 and 2007 include North Pittsburgh.
CCI Illinois
          
  December 31,
   
  2005 2004
     
Local access lines in service        
 Residential  52,469   55,627 
 Business  29,728   31,255 
       
 Total local access lines  82,197   86,882 
DVS subscribers  2,146   101 
DSL subscribers  14,576   10,794 
       
Total connections  98,919   97,777 
       
Long distance lines  56,097   54,345 
Dial-up subscribers  6,533   7,851 
Service bundles  10,827   9,175 
CCI Texas
          
  December 31,
   
  2005 2004
     
Local access lines in service        
 Residential  109,762   113,151 
 Business  50,065   55,175 
       
 Total local access lines  159,827   168,326 
DVS subsrcibers      
DSL subscribers  24,616   16,651 
       
Total connections  184,443   184,977 
       
Long distance lines  87,785   84,332 
Dial-up subscribers  9,438   13,333 
Service bundles  25,800   21,314 
Total Company
          
  December 31,
   
  2005 2004
     
Local access lines in service        
 Residential  162,231   168,778 
 Business  79,793   86,430 
       
 Total local access lines  242,024   255,208 
DVS subsrcibers  2,146   101 
DSL subscribers  39,192   27,445 
       
Total connections  283,362   282,754 
       
Long distance lines  143,882   138,677 
Dial-up subscribers  15,971   21,184 
Service bundles  36,627   30,489 

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  December 31,  December 31,  December 31, 
  2008  2007 (1)  2006 
Local access lines in service:            
Residential  162,067   183,070   155,354 
Business  102,256   103,116   78,335 
          
Total local access lines  264,323   286,186   233,689 
 
Digital telephone subscribers  6,510   2,494    
IPTV subscribers  16,666   12,241   6,954 
ILEC DSL subscribers  91,817   81,337   52,732 
          
Broadband Connections  114,993   96,072   59,686 
CLEC Access Line Equivalents (2)  74,687   70,063    
          
Total connections  454,003   452,321   293,375 
          
 
Long distance lines (3)  165,953   166,599   148,181 
Dial-up subscribers  3,957   5,578   11,942 
(1)ExpensesIn connection with the acquisition of North Pittsburgh, we acquired 36,411 residential access lines, 25,988 business access lines, 14,713 DSL subscribers, 87 digital telephone subscribers, 70,063 CLEC access line equivalents and 18,223 long distance lines.
(2)CLEC access line equivalents represent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line.
(3)Reflects the inclusion of long distance service provided as part of our VOIP offering while excluding CLEC long distance subscribers.
Expenses
Our primary operating expenses consist of cost of services,services; selling, general and administrative expensesexpenses; and depreciation and amortization expenses.
Cost of Services and Products
Cost of services and products.Our cost of services includes the following:
operating expenses relating to plant costs, including those related to the network and general support costs, central office switching and transmission costs, and cable and wire facilities;
• operating expenses relating to plant costs, including those related to the network and general support costs, central office switching and transmission costs and cable and wire facilities;
• general plant costs, such as testing, provisioning, network, administration, power and engineering; and
• the cost of transport and termination of long distance and private lines outside our rural telephone companies’ service area.
general plant costs, such as testing, provisioning, network, administration, power, and engineering; and
the cost of transport and termination of long distance and private lines outside our rural telephone companies’ service area.
We have agreements with various carriers to provide long distance transport and termination services. These agreements contain various commitments and expire at various times. We believe we will meet all of our commitments in these agreements and believe we will be able to procure services for future periods. We are currently procuring services for future periods and at this time, the costs and related terms under which we will purchase long distance transport and termination services have not been determined.after our current agreements expire. We do not expect however, any material adverse affectseffects from any changes in any new service contract.
Selling, General and Administrative Expenses
Selling, general and administrative expenses.In general, selling, general and administrative expenses include the following:selling and marketing expenses; expenses associated with customer care; billing and other operating support systems; and corporate expenses, such as professional service fees and non-cash stock compensation.

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• selling and marketing expenses;
• expenses associated with customer care;
• billing and other operating support systems; and
• corporate expenses, including professional service fees, and non-cash stock compensation.
Our Telephone Operations segment incurs selling, marketing, and customer care expenses from its customer service centers and commissioned sales representatives. Our customer service centers are the primary sales channels for residential and business customers with one or two phone lines, whereas commissioned sales representatives provide customized proposals tosystems for larger business customers. In addition, we use customer retail centers for various communications needs, including new telephone, Internet, and paging service purchases in Illinois.IPTV purchases.
Each of our Other Operations businesses primarily uses an independent sales and marketing team comprised of dedicatedcomprising field sales account managers, management teams, and service representatives to execute our sales and marketing strategy.
      We haveOur operating support and back office systems that are used to enter, schedule, provision, and track customer orders,orders; test services and interface with trouble management,management; and operate inventory, billing, collections, and customer care service systems for the local access lines in our operations. We have migrated most key business processes of our Illinois and Texas operations onto single company-wide systems and platforms. Our objective isWe hope to improve profitability by reducing individual company costs through centralization, standardizationcentralizing, standardizing, and sharing of best practices. ForWe converted the years ended December 31, 2005North Pittsburgh accounting and 2004 we spent $7.4 millionpayroll functions to our existing systems, and $7.0 million, respectively, onhave started to integrate many other functions. Our integration and restructuring expenses (which included projectswere $4.8 million for the year ended December 31, 2008, $1.2 million for 2007, and $2.9 million for 2006.
Depreciation and amortization expenses.Prior to integrate our support and back office systems). We expect to continue the integrationdiscontinuance of our Illinois and Texas billing systems through July 2007.

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Depreciation and Amortization Expenses
      We recognizethe accounting prescribed by SFAS No. 71 on December 31, 2008 as noted above, we recognized depreciation expenses for our regulated telephone plant using rates and lives approved by the ICC andstate regulators for regulatory reporting purposes. Upon the PUCT. discontinuance of SFAS No. 71, we revised the useful lives on a prospective basis to be similar to a non-regulated entity.
The provision for depreciation on nonregulated property and equipment is recorded using the straight-line method based upon the following useful lives:
     
  Years
Buildings  15-35 
Network and outside plant facilities  5-30 
Furniture, fixtures and equipment  3-175-17
Capital Leases11 
Amortization expenses are recognized primarily for our intangible assets considered to have finite useful lives on a straight-line basis. In accordance with Statement of Financial Accounting Standards, or SFAS No. 142,Goodwill “Goodwill and Other Intangible AssetsAssets”, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested annually for impairment. Because trade names have been determined to have indefinite lives, they are not amortized. Customer relationships are amortized over their useful life,life. The net carrying value of customer lists at December 31, 2008, is being amortized at a weighted average life of 11.7approximately 6.4 years.

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The following summarizes our revenues and operating expenses on a consolidated basis for the years ended December 31, 2005, 20042008, 2007, and 2003:2006:
                           
  Year Ended December 31,
   
  2005 2004 2003
       
    % of Total   % of Total   % of Total
  $ (millions) Revenues $ (millions) Revenues $ (millions) Revenues
             
Revenues
                        
Telephone Operations                        
 Local calling services $88.2   27.4% $74.9   27.8% $34.4   26.0%
 Network access services  64.4   20.0   56.8   21.1   27.5   20.8 
 Subsidies  53.9   16.8   40.5   15.0   4.7   3.6 
 Long distance services  16.3   5.1   14.7   5.5   8.8   6.7 
 Data and Internet services  25.8   8.0   20.9   7.8   10.8   8.2 
 Other services  33.7   10.5   22.6   8.4   4.1   3.1 
                   
  Total Telephone Operations  282.3   87.8   230.4   85.5   90.3   68.3 
 Other Operations  39.1   12.2   39.2   14.5   42.0   31.7 
                   
Total operating revenues  321.4   100.0   269.6   100.0   132.3   100.0 
                   
Expenses
                        
Operating Expenses                        
 Telephone Operations  165.0   51.3   133.5   49.5   54.7   41.3 
 Other Operations  34.9   10.9   46.6   17.3   34.1   25.8 
 Depreciation and amortization  67.4   21.0   54.5   20.2   22.5   17.0 
                   
  Total operating expenses  267.3   83.2   234.6   87.0   111.3   84.1 
Income from operations  54.1   16.8   35.0   13.0   21.0   15.9 
Interest expense, net  (53.4)  (16.6)  (39.9)  (14.8)  (11.9)  (9.0)
Other income, net  5.7   1.8   4.0   1.5   0.1   0.1 
Income tax expense  (10.9)  (3.4)  (0.2)  (0.1)  (3.7)  (2.8)
                   
  Net income (loss) $(4.5)  (1.4)% $(1.1)  (0.4)% $5.5   4.2%
                   

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      The following summarizes, for the revenues and operating expenses from continuing operations for TXUCV for the periods presented prior to the acquisition:
                         
  Year Ended December 31, 
  2008  2007  2006 
      % of Total      % of Total      % of Total 
  $ (millions)  Revenues  $ (millions)  Revenues  $ (millions)  Revenues 
Revenues
                        
Telephone Operations                        
Local calling services $104.6   25.0% $82.8   25.2% $85.1   26.6%
Network access services  94.6   22.6   70.2   21.3   68.1   21.2 
Subsidies  55.2   13.2   46.0   14.0   47.6   14.8 
Long distance services  24.0   5.7   14.0   4.2   15.2   4.7 
Data and Internet services  62.7   15.0   38.0   11.5   30.9   9.6 
Other services  36.9   8.8   35.8   10.9   33.5   10.5 
                   
Total Telephone Operations  378.0   90.3   286.8   87.1   280.4   87.4 
Other Operations  40.4   9.7   42.4   12.9   40.4   12.6 
                   
Total operating revenues  418.4   100.0   329.2   100.0   320.8   100.0 
                   
Expenses
                        
Operating expenses                        
Telephone Operations  213.0   50.9   153.4   46.6   152.4   47.5 
Other Operations  45.4   10.9   43.5   13.2   51.7   16.1 
Depreciation and amortization  91.7   21.9   65.7   20.0   67.4   21.0 
                   
Total operating expenses  350.1   83.7   262.6   79.8   271.5   84.6 
                   
 
Income from operations  68.3   16.3   66.6   20.2   49.3   15.4 
 
Interest expense, net  (66.3)  (15.8)  (46.5)  (14.1)  (42.9)  (13.4)
Other income (expense), net  9.9   2.4   (4.0)  (1.2)  7.3   2.2 
Income tax expense  (6.6)  (1.6)  (4.7)  (1.4)  (0.4)  (0.1)
                   
Income before extraordinary item  5.3   1.3   11.4   3.5   13.3   4.1 
Extraordinary item, net of tax  7.2   1.7             
                   
Net Income $12.5   3.0% $11.4   3.5% $13.3   4.1%
                   
                  
  Predecessor to CCV
   
  January 1 - April 13, Year Ended December 31,
  2004 2003
     
    % of Total   % of Total
  $ (millions) Revenues $ (millions) Revenues
         
Revenues
                
Telephone Operations                
 Local calling services $16.9   31.4% $56.2   28.9%
 Network access services  10.6   19.7   35.2   18.1 
 Subsidies  11.0   20.4   41.4   21.3 
 Long distance services  3.5   6.5   13.4   6.9 
 Data and Internet services  3.9   7.2   14.7   7.5 
 Other services  8.0   14.8   28.0   14.4 
 Exited services        5.9    
             
Total operating revenues  53.9   100.0   194.8   100.0 
             
Expenses
                
Operating Expenses  39.4   73.1   133.8   68.7 
Other charges        13.4   6.9 
Depreciation and amortization  8.1   15.0   32.9   16.9 
             
 Total operating expenses  47.5   88.1   180.1   92.5 
Income from operations  6.4   11.9   14.7   7.5 
Interest expense, net  (3.2)  (5.9)  (5.4)  (2.8)
Other income, net  1.1   2.0   0.8   0.4 
Income tax expense  (2.5)  (4.6)  (12.4)  (6.4)
             
 Net income (loss) $1.8   3.4% $(2.3)  (1.3)%
             
Segments
Segments
In accordance with the reporting requirement of SFAS No. 131Disclosure “Disclosure about Segments of an Enterprise and Related InformationInformation”, the Company has two reportable business segments,segments: Telephone Operations and Other Operations. The results of operations for North Pittsburgh are included in the Telephone Operations segment for the periods following the acquisition on December 31, 2007. The results of operations discussed below reflect our consolidated results.
Results of Operations
For the Year Ended December 31, 2005 Compared to December 31, 2004
Revenues
      Our revenues increased by 19.2%, or $51.8 million, to $321.4 million in 2005, from $269.6 million in 2004. Had our Texas Telephone Operations been included for the entire period, we would have had an additional $53.9 million of revenues for the year ended December 31, 2004, which would have resulted2008, compared to December 31, 2007
Revenues
Our revenues increased by 27.1%, or $89.2 million, to $418.4 million in a $2.12008, from $329.2 million decrease in our revenues between 20042007. We explain this change in the discussion and 2005. Revenues fluctuations are discussedanalysis below.
Telephone Operations Revenues
Telephone Operations Revenues
Local calling servicesrevenues increased by 17.8%,26.3% or $13.3$21.8 million, to $88.2$104.6 million in 20052008 compared to $74.9$82.8 million in 2004. Had our Texas Telephone Operations been included for the entire

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period in 2004, we would have had an additional $16.9 million of revenues, which would have resulted in a $3.6 million decrease in our local calling services revenues between 2004 and 2005.2007. The decrease would have beenincrease is primarily due to $27.5 million of new local calling revenue as a result of the acquisition of North Pittsburgh. Without the effect of North Pittsburgh, local calling revenue decreased by $5.7 million, primarily due to a decline in local access lines, as previously discussed under “—Factors Affecting Future Results of Operations.”

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Network access servicesrevenues increased by 13.4%34.8%, or $7.6$24.4 million, to $64.4$94.6 million in 20052008 compared to $56.8$70.2 million in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $10.6 million of revenues, which would have resulted in a $3.0 million decrease in network access services revenues between 2004 and 2005.2007. The decrease would have beenincrease is primarily due to higher than normal revenues for 2004 due to$29.5 million of new network access revenue as a result of the recognition in 2004acquisition of $3.1North Pittsburgh. Without the effect of North Pittsburgh, network access revenue decreased by $5.1 million. In 2007 we recognized $0.7 million of non-recurring interstaterevenue from the favorable settlement of an outstanding billing claim. In 2008, the Texas Infrastructure Fund and Local Number Portability surcharges for Texas were eliminated reducing revenues approximately $1.4 million. In addition, subscriber line charge revenue decreased $1.1 million due to access line loss. As a result of declining minutes of use, our switched access revenues previously reserved during the FCC’s prior two-year monitoring period. The current regulatory rules allow recognition of revenues earned when the FCC has deemed those revenues lawful.
Subsidiesrevenues increaseddecreased by 33.1%, or $13.4$3.4 million, to $53.9 million in 2005 compared to $40.5 million in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $11.0 million of revenues, which would have resulted in a $2.4 million increase in subsidies revenues between 2004 and 2005. The subsidy settlement process relates to the process of separately identifying regulated assets that are used to provide interstate services and, therefore, fall under the regulatory regime of the FCC, from regulated assets in Illinois used to provide local and intrastate services, which fall under the regulatory regime of the ICC. Since our Illinois rural telephone company is regulated under a rate of return system for interstate revenues, the value of all assets in the interstate base is critical to calculating this rate of return and, therefore, the subsidies our Illinois rural telephone company will receive. In 2004, our Illinois rural telephone company analyzed its regulated assets and associated expenses and reclassified some of these assets and expenses purposes of its regulatory filings. Due to this reclassification, we received $5.1 million of incremental payments from the subsidy pool in 2005, which was partially offset by a reduction of $2.7$1.0 million increase in special access revenue.
Subsidiesrevenues increased by 20.0%, or $9.2 million, to $55.2 million in 2008 compared to $46.0 million in 2007. The increase is primarily due to $7.3 million of new federal and state subsidy revenue as a result of the acquisition of North Pittsburgh. Without the effect of North Pittsburgh, subsidy revenue increased by $1.9 million. In 2008, we received $1.4 million in refunds of prior period subsidy receipts.payments; however in 2007 we made payments of $2.6 million for prior periods. Exclusive of the prior period settlements, we received $28.6 million in federal universal service fund (“USF”) support and $17.9 million in Texas USF support in 2008, compared to $29.6 million in federal USF support and $19.0 million in Texas USF support in 2007.
Long distance servicesrevenues increased by 10.9%71.4%, or $10.0 million, to $24.0 million in 2008 compared to $14.0 million in 2007. The increase is primarily due to $11.6 million of new long distance revenue as a result of the acquisition of North Pittsburgh. Without the effect of North Pittsburgh, long distance revenue decreased by $1.6 million to $16.3 millionas a result of a decline in 2005 compared to $14.7 million in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $3.5 million of revenues, which would have resulted in a decrease of $1.9 million in our long distance revenues between 2004 and 2005. Our long distance lines increased by 3.6%, or 5,205 lines, in 2005. Despite the increase in long distance lines, our long distance revenues would have decreased due to a reduction in the average rate per minute of use. This was driven by general industry trends and the introduction of our unlimited long distance calling plans. While these plans are helpful in maintaining existing customers and attracting new customers, they have also led to some extent to a reduction in long distance services revenues as heavy users of our long distance services take advantage of the fixed pricing offered by these service plans.billable minutes.
Data and Internetrevenues increased by 23.4%65.0%, or $4.9$24.7 million, to $25.8$62.7 million in 20052008 compared to $20.9$38.0 million in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $3.92007. The increase is primarily due to $16.7 million of revenues, which would have resulted innew data and Internet revenue as a $1.0 million increase in ourresult of the acquisition of North Pittsburgh. Without the effect of North Pittsburgh, data and Internet revenues between 2004 and 2005. The revenue increase wasincreased by $8.0 million due to increased DSL penetration. The number of DSL lines in service increased from 27,445 as of December 31, 2004 to 39,192 as of December 31, 2005. Thean increase in DSL subscriber revenue wasand IPTV subscribers. These increases were partially offset by a portionerosion of our residential customers substituting DSL or competitive broadband services for ourdial-up Internet service as well as a decrease in revenue from dedicated lines for our business customers.base.
Other Servicesservicesrevenues increased by 49.1%3.1%, or $11.1$1.1 million, to $33.7,$36.9 million in 20052008 compared to $22.6$35.8 million in 2004. Had our Texas Telephone Operations been included for the entire period2007. The acquisition of North Pittsburgh resulted in 2004, we would have had an additional $8.0$2.2 million of revenues, which would have resulted in a $3.1 million increase in ournew other services revenue between 2004 and 2005. The increase was primarilyrevenue. Without the effect of North Pittsburgh, other service revenues decreased by $1.1 million due to $1.5the recognition of $0.1 million of additional directory revenues. In addition to increased sales in our Texas markets, we generated new revenue by publishing our own directories in Illinois in 2005. We also realized $0.4 million

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of revenue from DVSthe settlement of a billing dispute in Illinois. The remainder2007 and a decrease of the increase$1.0 million in other services revenue was primarily due to increased equipment, inside wiring and maintenance contractsrevenue in our Texas operations.2008.
Other Operations Revenues
Other Operations Revenue
Other Operations revenues decreased by 0.3%4.7%, or $0.1$2.0 million, to $39.1$40.4 million in 20052008 compared to $39.2$42.4 million in 2004. Because2007. In 2007 our telemarketing business expanded its call volume capacity. As a result of the additional sites being served andexpansion, revenue for 2008 increased usage at current sites, our Public Services unit generated increased revenueby $0.9 million compared to 2007. Partially offsetting the increase was a decline of $1.1 million for the period. However,in our operator services business as a result of decreased call attempts, a decline of $0.7 million in business system sales, and lower revenues from our Market Response business decreased by $0.7 million resulting from the loss of the Illinois State Toll Highway agreement in 2004. Decreased revenue in Operator Serviceprison systems calling and Mobile Services, which accounted for the remainder of the loss, was due to competitive pricing adjustmentsmobile and declines in customer usage.paging services.
Operating Expenses
Operating Expenses
Our operating expenses increased by 13.9%33.3%, or $32.7$87.5 million, to $267.3$350.1 million in 20052008 compared to $234.6$262.6 million in 2004. Had our Texas 2007. We explain this change in the discussion and analysis below.
Telephone Operations operating expenses been included for the entire period in 2004, we would have had an additional $47.5 million of operating expenses, which would have resulted in a $14.8 million decrease in operating expenses for the year. As detailed below, the 2005 results are impacted by several transactions that occurred as a result of the IPO and from our integration efforts, while the 2004 results were affected by TXUCV sale related costs and an intangible asset impairment charge.Operating Expenses
Telephone Operations Operating Expense
Operating expenses for Telephone Operations increased by 23.6%38.9%, or $31.5$59.6 million, to $165.0$213.0 million in 20052008 compared to $133.5$153.4 million in 2004. Had our Texas Telephone Operations’2007. The increase is primarily due to an additional $57.0 million of telephone operations operating expenses been included for the entire period in 2004, we would have had an additional $39.4 million of Telephone Operations operating expenses, which would have resulted inas a $7.9 million decrease in our operating expenses for the year. Effective April 30, 2005, our Texas pension and other post-retirement plans were amended to freeze benefit accruals for all non-union participants. These amendments resulted in a $7.9 million non-cash curtailment gain and additional savings of approximately $3.0 million for the remainder of 2005 through reduced pension and other post-retirement expense. In addition, due to the terminationresult of the professional services agreement with Mr. Lumpkin, Providence Equity and Spectrum Equity, we saved an additional $1.3 million in 2005. The 2004 results contained TXUCV sale related costsacquisition of $8.2 million for severance, transaction and other costs that did not recur in 2005. Offsetting these savings was a non-cash compensation expense of $8.4 million associated with the amendment of our restricted share plan in connection with the IPO,North Pittsburgh, as well as a $3.1$1.5 million litigation settlement.of costs incurred during the recovery from Hurricane Ike, which caused severe power outages in both Texas and Pennsylvania in 2008.

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Other Operations Operating Expenses
Other Operations Operating Expenses
Operating expenses for Other Operations decreasedincreased by 25.1%4.4%, or $11.7$1.9 million, to $34.9$45.4 million in 20052008 compared to $46.6$43.5 million in 2004. In 2004, the Operator Services and Mobile Services businesses2007. Upon completion of our annual testing, we recognized an $11.5impairment charge of $6.1 million due to a decline in the future cash flows that are projected to be generated by the telemarketing and $0.1fulfillment business. Cost of services declined by $1.8 million intangible asset impairment, respectively, which is discusseddirectly related to the decrease in more detail below under “— Valuationrevenues for the various Other Operations businesses. In addition, our operator services business experienced a $1.5 million decrease on operating expense as a result of Goodwillsalary and Tradenames”. Our 2005 results contain non-cash compensation expense of $0.2 million associated with grants under our restricted share plan.benefit reductions.
Depreciation and Amortization
Depreciation and Amortization
Depreciation and amortization expenses increased by $12.939.6%, or $26.0 million, to $67.4$91.7 million in 20052008 compared to $54.5$65.7 million in 2004. Had our Texas Telephone Operations’2007. In connection with the acquisition of North Pittsburgh, we acquired property, plant and equipment valued at $116.3 million, which caused an increase in depreciation and amortization expenses been included for the entire period in 2004,expense. In addition, we would have had an additional $8.1allocated $49.0 million of depreciation and amortization expenses,the purchase price to customer lists, which would have resultedare being amortized over five years.
Non-Operating Income (Expense)
Interest Expense, Net
Interest expense, net of interest income, increased by 42.6%, or $19.8 million, to $66.3 million in a $4.82008 compared to $46.5 million in 2007. The increase is primarily due to an increase of $296.0 million in our depreciation and amortization expenses between 2004 and 2005. Aslong-term debt as a result of the purchaseacquisition of North Pittsburgh. The increase in interest expense resulting from the acquisition was partially offset by the redemption of our senior notes. On April 1, 2008, we redeemed $130.0 million of senior notes paying 9.75% interest by using cash on hand and borrowing $120.0 million at a rate of approximately 7.0%. In addition, during the third quarter of 2008, we entered into $790.0 million of basis swaps, as described in Note 14 to the financial statements. The recognition of ineffectiveness on our interest rate swaps created a non-cash charge of $0.4 million to interest expense.
Other Income (Expense)
Other income, net increased $13.9 million, to $9.9 million in 2008 compared to ($4.0) million in 2007. $13.1 million of income was recognized from three additional cellular partnerships acquired as part of the acquisition of North Pittsburgh, as well as additional earnings from our previously held wireless partnership investments in Texas. In connection with the 2008 redemption of our senior notes, we recognized a loss on extinguishment of debt of $9.2 million, which included a redemption premium of $6.3 million and the write off of unamortized deferred financing costs of $2.9 million. During 2007, we recognized a loss on extinguishment of debt of $10.3 million related to the debt refinancing from the acquisition of North Pittsburgh.
Extraordinary Item
In the fourth quarter of 2008, we determined it was no longer appropriate to continue the application of SFAS No. 71 for certain wholly-owned subsidiaries — Illinois Consolidated Telephone Company, Consolidated Communications of Texas Company, and Consolidated Communications of Fort Bend Company.
The decision to discontinue the application of SFAS No. 71 was based on recent changes to our operations which have impacted the dynamics of the Company’s business environment. In the last half of 2008, we experienced a significant increase in competition in our Illinois and Texas markets as, primarily, our traditional cable competitors started offering voice services. Also, effective July 1, 2008, we made an election to transition from rate of return to price allocation,cap regulation at the interstate level for our Illinois and Texas operations. The conversion to price caps gives us greater pricing flexibility, especially in the increasingly competitive special access segment and in launching new products. Additionally, in response to customer demand we have also launched our own VOIP product offering as an alternative to our traditional wireline services. While there has been no material changes in our bundling strategy and or in end-user pricing, our pricing structure is transitioning from being based on the recovery of costs to a pricing structure based on market conditions. As required by the provisions of SFAS No. 101 “Regulated Enterprises — Accounting for the Discontinuation of Application of FASB No. 71”, the Company recorded a non-cash extraordinary gain of $7.2 million, net of tax of $4.2 million from the write off of asset removal costs in excess of the salvage value of regulatory fixed assets which had previously been charged to depreciation over the assets’ useful life.

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most of our tangible and intangible assets in Texas increased, which resulted in higher depreciation and amortization expense.
Income Taxes
Non-Operating Income (Expense)
Interest Expense, Net
      Interest expense increased by 33.8%, or $13.5 million, to $53.4 million in 2005 compared to $39.9 million in 2004. Had the results of our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $3.2 million of interest expense, which would have resulted in a $10.3 million increase in our interest expense, net between 2004 and 2005. In connection with the redemption of $70.0 million of senior notes in 2005, we paid a redemption premium of $6.8 million and wrote off $2.5 million of deferred financing costs that had been incurred previously and were being amortized over the life of the notes. In addition, the additional debt incurred in connection with the TXUCV acquisition was included for the entire period in 2005 but only for the period after the April 14, 2004 acquisition date for 2004. The increase in 2005 interest expense was partially offset by a $4.2 million write-off of deferred financing costs in 2004 and a $1.9 million pre-payment penalty, which were incurred in connection with the acquisition in 2004.
Other Income (Expense)
      Other income and expense increased by 42.5%, or $1.7 million, to $5.7 million in 2005 compared to $4.0 million in 2004. Had the results of our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $1.1 million of other income, which would have resulted in a $0.6 million increase in other income between 2004 and 2005. The increase was primarily due to the recognition of $2.8 million of net proceeds in other income from the receipt of key-man life insurance proceeds in June 2005 relating to the passing of a former TXUCV employee. Offsetting this gain was a $2.3 million decrease in income recognized from our investments in cellular partnerships and the East Texas Fiber Line.
Income Taxes
Provision for income taxes increased by $10.7$1.9 million to $10.9$6.6 million in 20052008 compared to $0.2$4.7 million in 2004.2007. The effective tax rate was 55.8% for 2008 and 29.0% for 2007. The effective rate for 2008 including the extraordinary gain and corresponding tax was 46.3%.
Taxes were higher during 2008 due to state income taxes owed in certain states where we were required to file on a separate legal entity basis and the rate impact of the extraordinary gain presented net of tax. In addition, Consolidated Communications Holdings, Inc. (CCHI) completed a tax free legal entity reorganization project resulting in changes to our state reporting structure. This change resulted in a net decrease in the Company’s state deferred income tax rate. This change in the state deferred income tax rate resulted in approximately $1.2 million tax benefit in 2008 due to applying a lower effective deferred income tax rate to previously recorded deferred tax liabilities. Also, during 2008 the state of Texas completed an audit of two Texas subsidiaries resulting in additional tax expense of 168.9% and$.8 million.
The effective tax rate during 2007 was lower than the statutory rate due to a benefit2007 amendment to Texas tax legislation first enacted in 2006. For us, the most significant aspect of 25.6%, for 2005 and 2004, respectively. Immediately priorthis amendment was the revision to the Company’s initial public offering in July 2005, Consolidated Communications Texas Holdings, Inc.temporary credit on taxable margin to convert state loss carryforwards to a state tax credit carryforward. This new legislation effectively reduced our net deferred tax liabilities and Consolidated Communications Illinois Holdings, Inc. engaged in a tax-free reorganization, allowing the two formerly separate consolidated groups of companies to file as a single federal consolidated group. The federalcorresponding tax benefits of the reorganization which were achievedprovision by allowing the taxable income of certain subsidiaries to be offset by the taxable losses of other subsidiaries in the determination of the Company’s federal income taxes are reflected as a reduction in both cash taxes paid for the current year and current income taxes payable at December 31, 2005.
      Additionally, underapproximately $1.7 million. Under Illinois tax law, Consolidated Communications Texas Holdings, IncNorth Pittsburgh and its directly owned subsidiaries joined Consolidated Communications Illinois Holdings, IncInc. and its directly owned subsidiaries in the Illinois unitary tax group during 2005.for 2008. The addition of our Pennsylvania entities to our Illinois unitary group reduced the Company’s state deferred income tax rate. When applied to previously recorded deferred tax liabilities, that reduced rate lowered income tax expense by approximately $0.9 million in 2007.
Exclusive of these adjustments, our effective tax rate would have been approximately 48.1% for the year ended December 31, 2008, compared to 45.1% for the year ended December 31, 2007.
For the year ended December 31, 2007, compared to December 31, 2006
Revenues
Our revenues increased by 2.6%, or $8.4 million, to $329.2 million in 2007, from $320.8 million in 2006. We explain this change in the discussion and analysis below.
Telephone Operations Revenues
Local calling servicesrevenues decreased by 2.7% or $2.3 million, to $82.8 million in 2007 compared to $85.1 million in 2006. The decrease is primarily due to the decline in local access lines, as discussed under “—Factors Affecting Results of Operations.”
Network access servicesrevenues increased by 3.1%, or $2.1 million, to $70.2 million in 2007 compared to $68.1 million in 2006. The increase was primarily driven by rate increases in Illinois and increased demand for point-to-point circuits and other network access services.
Subsidiesrevenues decreased by 3.4%, or $1.6 million, to $46.0 million in 2007 compared to $47.6 million in 2006, primarily because out of period settlements increased and we received less in USF support. In 2007 we refunded $2.6 million in out of period settlements compared to $1.3 million in 2006. We received $27.0 million in federal USF support and $19.0 million in Texas USF support in 2007 compared to $28.1 million in federal USF support and $19.5 million in Texas USF support in 2006.

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Long distance servicesrevenues decreased by 7.9%, or $1.2 million, to $14.0 million in 2007 compared to $15.2 million in 2006. This was driven by general industry trends and the adoption of our unlimited long distance calling plans. These plans are helpful in maintaining and attracting customers, but they also tend to reduce billable minutes since heavy users of long distance services take advantage of fixed pricing plans.
Data and Internetrevenues increased by 23.0%, or $7.1 million, to $38.0 million in 2007 compared to $30.9 million in 2006. The revenue increase was due to increased DSL and IPTV penetration. The number of DSL lines in service In Illinois and Texas increased from 52,732 as of December 31, 2006, to 66,624 as of December 31, 2007. IPTV customers increased from 6,954 at December 31, 2006, to 12,241 at December 31, 2007. These increases were partially offset by erosion of our dial-up Internet base.
Other servicesrevenues increased by 6.9%, or $2.3 million, to $35.8 million in 2007 compared to $33.5 million in 2006. The revenue increase was due to growth in our Directory and Carrier Services businesses and a full year effect of late payment fees implemented in the fourth quarter of 2006.
Other Operations Revenues
Other Operations revenues increased by 5.0%, or $2.0 million, to $42.4 million in 2007 compared to $40.4 million in 2006. Revenues from our telemarketing and order fulfillment business increased by $0.5 million due to increased sales to existing customers. Our prison systems unit generated increased revenue of $0.6 million for the period from increased minutes of use. The remaining $0.9 million increase was due to an increase in customer premise equipment sales.
Operating Expenses
Our operating expenses decreased by 3.3%, or $8.9 million, to $262.6 million in 2007 compared to $271.5 million in 2006. We explain this change in our discussion and analysis below.
Telephone Operations Operating Expenses
Operating expenses for Telephone Operations increased by 0.7%, or $1.0 million, to $153.4 million in 2007 compared to $152.4 million in 2006. In 2007 we incurred a $1.2 million reduction in severance costs compared to 2006. These decreases were partially offset by a $1.5 million increase in stock compensation expense and a $0.5 million increase in energy costs.
Other Operations Operating Expenses
Operating expenses for Other Operations decreased by 15.9%, or $8.2 million, to $43.5 million in 2007 compared to $51.7 million in 2006. In 2006, the Operator Services and Market Response businesses recognized intangible asset impairment of $10.2 million and $1.1 million, respectively. Excluding the impairment charges, operating expenses for Other Operations increased by $3.1 million. This increase primarily came from increased costs required to support the growth in our customer premise equipment sales and telemarketing revenues.
Depreciation and Amortization
Depreciation and amortization expenses decreased by 2.5%, or $1.7 million, to $65.7 million in 2007 compared to $67.4 million in 2006. In 2006, the Company recognized $11.0 million in impairment related to its Operator Services and Market Response customer lists. The reduced carrying value of the customer lists resulted in decreased amortization expense in 2007.

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Non-Operating Income (Expense)
Interest Expense, Net
Interest expense, net of interest income, increased by 8.4%, or $3.6 million, to $46.5 million in 2007 compared to $42.9 million in 2006. The increase is primarily due to the higher average level of outstanding debt in 2007 because we borrowed an additional $39.0 million in July 2006 to complete the share repurchase.
Other Income (Expense)
Other income, net decreased $11.3 million, to ($4.0) million in 2007 compared to $7.3 million in 2006. During 2007, we recognized a loss on extinguishment of debt of $10.3 million related to the debt refinancing from the acquisition of North Pittsburgh. In addition, we recognized $7.0 million of investment income in 2007, compared to $7.7 million in 2006. Investment income was lower because of lower equity earnings from our cellular partnership investments.
Income Taxes
Provision for income taxes increased by $4.3 million to $4.7 million in 2007 compared to $0.4 million in 2006. The effective tax rate was 29.0% for 2007 and 3.0% for 2006.
The effective tax rate during 2007 primarily resulted from a 2007 amendment to Texas tax legislation first enacted during 2006. The most significant impact of this amendment for us was the revision to the temporary credit on taxable margin converting state loss carryforwards to a state tax credit carryforward. This new legislation resulted in a reduction of our net deferred tax liabilities and corresponding credit to our tax provision of approximately $1.7 million. In addition, under Illinois tax law, North Pittsburgh and its directly owned subsidiaries joined Consolidated Communications Holdings, Inc. and its directly owned subsidiaries in the Illinois unitary tax group for 2008. The addition of our Pennsylvania entities to our Illinois unitary group changed the Company’s state deferred income tax rate. This change in the state deferred income tax rate resulted in approximately $3.3 million of additionala reduction in income tax expense of approximately $0.9 million in 2007 because the current year. The additional expense was recognized due to the impact of applying a higherlower effective deferred income tax rate was applied to previously recorded deferred tax liabilities.
The $3.3 million charge islow effective tax rate during 2006 resulted primarily from a non-cash expense. A change in the state deferred incomeTexas tax rate applied as a resultlegislation enacted in 2006. The most significant impact of the separate company Texas filings resulted in an additional $1.3 million of non-cash expense.
      In addition tonew legislation for us was the deferred tax adjustment described above, the change is due to state income taxes owed in certain states where we are required to file on a separate legal entity basis as well as differences between book and tax treatment of the non-cash compensation expense of $8.6 million, life insurance proceeds of $2.8 million, and the litigation settlement of $3.1 million, including legal fees. Upon review of

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our final tax provisions, we determined that litigation settlement expenses incurred in the third quarter of 2005 and previously thought to be tax deductible are, in fact, not deductible.
Year Ended December 31, 2004 Compared to December 31, 2003
Revenues
      Our revenues increased by 103.8%, or $137.3 million, to $269.6 million in 2004 from $132.3 million in 2003. Approximately $133.1 million of the increase resulted from the inclusion of the resultsmodification of our Texas Telephone Operations since the April 14, 2004 acquisition date. The balance of the increase is duefranchise tax calculation to a $7.0 million increase innew “margin tax” calculation used to derive taxable income. This new legislation reduced our Illinois Telephone Operations revenue, which was partially offset by a $2.8 million decrease in our Other Operations revenue.
Telephone Operations Revenues
Local calling servicesrevenues increased $40.5 million, to $74.9 million in 2004 from $34.4 million in 2003. The increase resulted entirely from the inclusion of our Texas Telephone Operations since the April 14, 2004 acquisition date. Excluding the impact of the TXUCV acquisition, local calling services revenues declined $0.5 million primarily due to the loss of local access lines, which was partially offset by increased sales of our service bundles.
Network access servicesrevenues increased $29.3 million, to $56.8 million in 2004 from $27.5 million in 2003. Excluding the impact of the TXUCV acquisition, network access services revenues increased 10.2%, or $2.8 million, to $30.3 million in 2004 from $27.5 million in 2003. The increase is primarily due to the recognition of interstate access revenues previously reserved during the FCC’s prior two-year monitoring period.
Subsidiesrevenues increased $35.8 million, to $40.5 million in 2004 from $4.7 million in 2003. Excluding the impact of the TXUCV acquisition, subsidies revenues increased 125.5%, or $5.9 million, to $10.6 million in 2004 from $4.7 million in 2003. The increase was primarily a result of an increase in universal service fund support due in part to normal subsidy settlement processesnet deferred tax liabilities and in part due to the FCC modificationscorresponding credit to our Illinois rural telephone company’s cost recovery mechanisms. In 2004, our Illinois rural telephone company analyzed its regulated assets and associated expenses and reclassified somestate tax provision of these assets and expenses for purposes of regulatory filings. The net effect of this reclassification was that our Illinois rural telephone company was able to recover $2.4 million of additional subsidy payments for prior years and for 2004.approximately $6.0 million.
Long distance servicesrevenues increased $5.9 million, to $14.7 million in 2004 from $8.8 million in 2003. Excluding the impact of the TXUCV acquisition, long distance services revenues decreased $1.1 million due to competitive pricing pressure and a decline in minutes used.
Data and Internetrevenues increased $10.1 million, to $20.9 million in 2004 from $10.8 million in 2003. Excluding the impact of the TXUCV acquisition, services revenues decreased 1.9%, or $0.2 million, to $10.6 million in 2004.
Other servicesrevenues increased $18.5 million, to $22.6 million in 2004 from $4.1 million in 2003. Excluding the impact of the TXUCV acquisition, other services revenues increased 2.4%, or $0.1 million, to $4.2 million in 2004.
Other Operations Revenues
      Other Operations revenues decreased 6.7%, or $2.8 million, to $39.2 million in 2004 from $42.0 million in 2003. The decrease was due primarily to a $1.1 million decline in operator services revenues resulting from a general decline in the demand for these services and a $1.3 million decrease in Market Response revenue due to the loss in 2004 of the Illinois State Toll Highway Authority as a customer.

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Public Servicesrevenues increased 2.3%, or $0.4 million, to $18.1 million in 2004 from $17.7 million in 2003. The increase was primarily due to an extension of the prison contract awarded by the State of Illinois Department of Corrections in December 2002 pursuant to which the number of prisons serviced by Public Services nearly doubled. The new prison sites were implemented during the first half of 2003. As a result, we did not receive the revenue from these additional prison sites for the entire year ended December 31, 2003.
Operator Servicesrevenues decreased 12.2%, or $1.1 million, to $7.9 million in 2004 from $9.0 million in 2003. The decrease was due to a general decline in demand for these services and competitive pricing pressure.
Market Responserevenues decreased by 17.8%, or $1.3 million, to $6.0 million in 2004 from $7.3 million in 2003. The decrease is due to the non-renewal of a service agreement with the Illinois State Toll Highway Authority, which resulted in a revenue loss of $1.6 million. This decrease in revenue was partially offset by additional revenues from new customers added during 2004.
Business Systemsrevenues decreased 9.0%, or $0.6 million, to $6.1 million in 2004 from $6.7 million in 2003. The decrease was primarily due to the weakened economy and general indecision or delay in equipment purchases.
Mobile Servicesrevenues decreased 21.4%, or $0.3 million, to $1.1 million in 2004 from $1.4 million in 2003. This decrease was primarily due to a continuing erosion of the customer base for one-way paging products as competitive alternatives are increasing in popularity.
Operating Expenses
      Our operating expenses increased $123.3 million to $234.6 million in 2004 from $111.3 million in 2003. Approximately $109.0 million of the increase resulted from the inclusion of our Texas Telephone Operations since April 14, 2004 acquisition date. An additional $11.6 million is the result of impairment of intangible assets in Other Operations. The remainder of the increase was partially due to expenses incurred in connection with our integration activities and increased labor costs.
Telephone Operations Operating Expenses
      Operating expenses for Telephone Operations increased $78.8 million, to $133.5 million in 2004 from $54.7 million in 2003. Excluding the impact of the TXUCV acquisition, operating expenses for Telephone Operations increased 3.7%, or $2.0 million, to $56.7 million in 2004 from $54.7 million in 2003, which was primarily due to expenses incurred in connection with our integration and restructuring activities.
Other Operations Operating Expenses
      Operating expenses for Other Operations increased 36.7%, or $12.5 million, to $46.6 million in 2004 from $34.1 million in 2003. In 2004, the Operator Services and Mobile Services units recognized $11.5 million and $0.1 million of intangible asset impairment, respectively. The remaining increase is due to increased costs incurred with the growth of the prison system business and increased expense in the telemarketing and fulfillment business unit.
Depreciation and Amortization
      Depreciation and amortization increased $32.0 million, to $54.5 million in 2004 from $22.5 million in 2003. Excluding the impact of the TXUCV acquisition, depreciation and amortization decreased by $0.2 million to $22.3 million in 2004.

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Non-Operating Income (Expense)
Interest Expense
      Interest expense increased $28.0 million, to $39.9 million in 2004 from $11.9 million in 2003. In connection with the TXUCV acquisition, CCI Holdings refinanced its CoBank credit facility resulting in a charge of $4.2 million to write-off unamortized deferred financing costs. The remaining $23.8 million increase is primarily due to an increase in long-term debt to help fund the TXUCV acquisition. Interest bearing debt increased by $449.0 million from $180.4 million in 2003 to $629.4 million in 2004.
Other Income (Expense)
      Other income increased $3.9 million, to $4.0 million in 2004 from $0.1 million in 2003 due primarily to $3.1 million of income received from investments in the cellular partnerships acquired in the TXUCV acquisition.
Income Taxes
      Provision for income taxes decreased $3.5 million, to $0.2 million in 2004 from $3.7 million in 2003. The effective tax rate was a benefit of 25.6% and an expense of 40.3% for 2004 and 2003, respectively. Our effective tax rate is lower primarily due to (1) the effect of the mix of earnings, losses and nondeductible impairment charges on permanent differences and derivative instruments and (2) state income taxes owed in certain states where we are required to file on a separate legal entity basis.
Critical Accounting Policies and Use of Estimates
      TheThis section discusses the accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. In making thesethe necessary estimates, we considered various assumptions and factors that will differ from the actual results achievedbased on our best estimates and will needall information available to be analyzedus; however, such assumptions and adjusted in future periods. These differencesfactors may prove to have been inaccurate, which could have a material impact on our financial condition, results of operations, or cash flows. These assumptions will be analyzed in future periods and adjusted if necessary. We believe that of our significant accounting policies, the following involve a higher degree ofthe most judgment and complexity.
Derivatives
Subsidies Revenues
We regularly use derivative contracts designated as cash flow hedges to convert a portion of our anticipated future floating interest rate cash flows associated with our credit facility to a fixed rate. The change in the market value of such derivative contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in interest rate movements of the hedged item. Gains and losses arising from the change in fair value of the hedging transactions are deferred in other comprehensive income, net of applicable income taxes, and recognized as a component of interest expense in the period in which the hedged item affects earnings. If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in the market value of these instruments would be recorded in the statement of earnings as a component of interest expense.

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Fair Value Measurements
Our derivative instruments related to interest rate swap agreements are required to be measured at fair value. The fair values of the interest rate swaps are determined using an internal valuation model which relies on the expected LIBOR based yield curve and estimates of counterparty and the Company’s non performance risk as the most significant inputs.
We evaluate the quality and reliability of the assumptions and data used to measure fair value in the three hierarchy levels, Level 1, 2 and 3, as prescribed by SFAS No. 157 (see note 15 for additional information). Certain material inputs to the interest rate swap valuations are not directly observable and cannot be corroborated by observable market data. We have categorized these interest rate derivatives as Level 3.
We evaluate our risk of non-performance based on risk premiums being assigned to companies of similar size and with similar credit ratings. Counterparty non-performance risk is assigned based on observable market data. The application of non-performance risk to our determination of the value of our derivatives resulted in a reduction of the reported liability of our derivative instruments of $7.1 million for the period ending December 31, 2008. The adjustment for non-performance risk is recorded in other comprehensive income, net of taxes.
The Company’s net liabilities measured at fair value on a recurring basis subject to disclosure requirements of SFAS No. 157 at December 31, 2008 were as follows:
                 
      Fair Value Measurements at Reporting Date Using 
      Quoted Prices  Significant    
      in Active  Other  Significant 
      Markets for  Observable  Unobservable 
      Identical Assets  Inputs  Inputs 
Description December 31, 2008  (Level 1)  (Level 2)  (Level 3) 
                 
Interest Rate Derivatives $47,908          $47,908 
              

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The following table presents the Company’s net liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in SFAS No. 157 at December 31, 2008:
     
  Fair Value 
  Measurements 
  Using Significant 
  Unobservable 
  Inputs (Level 3) 
  Interest Rate 
  Derivatives 
 
Balance at December 31, 2007 $12,769 
Settlements  (10,412)
Total gains or losses (realized/unrealized)    
Unrealized loss included in earnings  395 
Unrealized loss included in other comprehensive income  45,156 
    
     
Balance at December 31, 2008 $47,908 
    
     
The amount of total loss for the period included in earnings for the period as a component of interest expense $395 
    
Income taxes
Our current and deferred income taxes, and associated valuation allowances, are impacted by events and transactions arising in the normal course of business as well as in connection with the adoption of new accounting standards, acquisitions of businesses and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances. We account for tax benefits taken or expected to be taken in our tax returns in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return.
Subsidies revenues
We recognize revenues from universal service subsidies and charges to interexchange carriers for switched and special access services. In certain cases, our rural telephone companies ICTC, Consolidated Communications of Texas Company and Consolidated Communications of Fort Bend Company, participate in interstate revenue and cost sharingcost-sharing arrangements, referred to as pools, with other telephone companies. Pools are funded by charges madeimposed by participating companies toon their respective customers. The revenue we receive from our participation in pools is based on our actual cost of providing the interstate services. SuchThese costs are not precisely known until after the year-end and special jurisdictional cost studies have been completed. These cost studies are completed—generally completed during the second quarter of the following year. Detailed rules
Allowance for cost studiesuncollectible accounts
We use estimates and participation in the pools are established by the FCC and codified in Title 47 of the Code of Federal Regulations.
Allowance for Uncollectible Accounts
      Weassumptions to evaluate the collectibilitycollectability of our accounts receivable based on a combination of estimates and assumptions.receivable. When we are aware ofthat a specific customer’s inabilitycustomer is unable to meet its financial obligations, such as following a bankruptcy filing or substantial down-gradingdowngrading of credit scores, we record a specific allowance against amounts due to set the net receivable to an amount we believe is reasonable to be collected.we can collect. For all other customers, we reserve a percentage of the remaining outstanding accounts receivable balance as a general allowance based on a review of specific customer balances, trends, and our experience with prior receivables, the current economic environment, and the length of time the receivables are past due. If

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circumstances change, we review the adequacy of the allowance to determine if we should modify our estimates of the recoverability of amounts due us could be reduced by a material amount. At December 31, 2005,2008, our total allowance for uncollectible accounts for all business segments was $2.8$1.9 million. If our estimate were understated by 10%, the result would be a charge of approximately $0.3$0.2 million to our results of operations.

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Valuation of intangible assets
Valuation of Goodwill and Tradenames
      We review our goodwill and tradenamesIntangible assets not being amortized are reviewed for impairment as part of our annual business planning cycle in the fourth quarter andquarter. We also review all intangible assets for impairment whenever events or circumstances make it more likely than not that impairment may have occurred. Several factors could trigger an impairment review, such as:including:
  a change in the use or perceived value of our tradenames;
 
  significant underperformance relative to expected historical or projected future operating results;
 
  significant regulatory changes that would impact future operating revenues;
 
 significant changes in our customer base;
 significant negative industry or economic trends; or
 
  significant changes in the overall strategy in which we employ to operate our overall business.
We determine if impairment exists based on a method of usingthat uses discounted cash flows. This requires management to make certain assumptions regarding future income, royalty rates, and discount rates, all of which affect our impairment calculation. Upon completion of ourOur impairment review in December 2004 and as a2007 did not result of a decline in any impairment losses for the future estimated cash flowsyear ended December 31, 2007. Based on our review in our Mobile Services and Operator Services businesses,2008, we recognized an impairment losses of $0.1$6.1 million on Consolidated Market Response, our telemarketing and $11.5 million, respectively. In December 2005, we completed our annual impairment test,order fulfillment business.
Pension and the test indicated no further impairment existed. The carrying value of tradenames and goodwill totaled $328.8 million at December 31, 2005.postretirement benefits
Pension and Postretirement Benefits
The amounts recognized in our financial statements for pension and postretirement benefits are determined on an actuarial basis utilizing several critical assumptions.
A significant assumption used in determining our pension and postretirement benefit expense is the expected long-term rate of return on plan assets. Our pension investment strategy is to maximize long-term return on invested plan assets while minimizing the risk of volatility. Accordingly, we target our allocation percentage at 50% to 60% in equity funds, with the remainder in fixed income and cash equivalents. Our assumed rate considers this investment mix as well as past trends. We used a weighted average expected long-term rate of return of 8.0% in 20052008 and 8.3% in 2004 in response to the actual returns on our portfolio in recent years being significantly below our expectations.2007.
Another significant estimate is the discount rate used in the annual actuarial valuation of our pension and postretirement benefit plan obligations. In determining the appropriate discount rate, we consider the current yields on high qualityhigh-quality corporate fixed-income investments with maturities that correspond to the expected duration of our pension and postretirement benefit plan obligations. For 20052008 and 2004,2007, we used a weighted average discount rate of 5.9%6.14% and 6.0%6.25%, respectively.
In 2005, we accelerated approximately $1.1 million of required future contributions in order to meet certain regulatory thresholds that we expect will provide us with future funding flexibility. In total,2008 we contributed $5.3$6.1 million to our pension plans and $1.8$2.5 million to our other post retirementpostretirement plans. In 20042007 we contributed $3.9$4.8 million to our pension plans and $1.6$1.5 million to our other post retirementpostretirement plans. In connection with the sale of TXUCV, TXU Corp. contributed $2.9 million to TXUCV’s pension plan in 2004.

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The following table summarizes the effect of changes in selected assumptions on our estimate of pension plansplan expense and other post retirementpostretirement benefit plansplan expense:
                      
    December 31,  
    2005 Obligation 2005 Expense
  Percentage Point    
Assumptions Change Higher Lower Higher Lower
           
  (In millions)
Pension Plan Expense:                    
 Discount rate  + or - 0.5 pts  $(7.7) $8.6  $(0.2) $0.2 
 Expected return on assets  + or - 1.0 pts  $  $  $(0.9) $0.9 
Other Postretirement Expense:                    
 Discount rate  + or - 0.5 pts  $(1.5) $1.7  $(0.2) $0.1 
                     
      December 31,    
  Percentage  2008 Obligation  2008 Expense 
Assumptions Point Change  Higher  Lower  Higher  Lower 
     (in millions) 
Pension Plan Expense:                    
Discount rate + or - 0.5 pts $(10.2) $11.1  $  $ 
Expected return on assets + or - 1.0 pts $  $  $(1.6) $1.6 
                     
Other Postretirement Expense:                    
Discount rate + or - 0.5 pts $(1.8) $1.9  $  $ 
Liquidity and Capital Resources
General
General
Historically, our operating requirements have been funded from cash flow generated from our business and borrowings under our credit facilities. We expect to continue to rely on those sources of funds.
As of December 31, 2005,2008, we had $555.0$881.3 million of debt.debt, including capital leases. Our $30.0$50.0 million revolving line of credit however, remains unused. We expect thatOn April 1, 2008, we borrowed $120.0 million of our future operating requirements will continuedelayed draw term loan facility and used those proceeds, together with cash on hand, to be funded from cash flow generated fromredeem our businesssenior secured notes. In the second quarter of 2008, we recognized a loss on redemption of the senior notes of $9.2 million, which included the redemption premium and borrowings under our revolving credit facility. the write-off of unamortized deferred financing costs associated with the senior notes.
As a general matter, we expect that our liquidity needs in 20062009 will arise primarily from: (i) dividend payments of $46.1$45.7 million, reflecting quarterly dividends at an annual rate of $1.5495$1.55 per share; (ii) interest payments on our indebtedness of $37.0$58.0 million to $38.0$61.0 million; (iii) capital expenditures of approximately $31.0$42.0 million to $34.0$43.0 million; (iv) taxes; (v) incremental costs associated with being a public company, including costs associated with Section 404 of the Sarbanes-Oxley Act; (vi) other post-retirement contributions of $1.8 million; (vii) costs to further integrate our Illinois and Texas billing systems; and (viii)(v) certain other costs. These expected liquidity needs are presentedWe also expect to use cash in 2009 and beyond to make contributions to our pension plans. As of the most recent actuarial measurement, we were approximately 62% funded on our pension plans. As a format which is consistent withresult, we expect to contribute $9.0 million to $11.0 million to our prior disclosures and are a component of our total expenses as summarized above under “Factors Affecting Future Results of Operations — Expenses”. In addition,pension plans in 2009. Finally, we may use cash and incur additional debt to fund selective acquisitions. However, our ability to use cash may be limited by our other expected uses of cash, including our dividend policy, and our ability to incur additional debt will be limited by our existing and future debt agreements.
We believe that cash flow from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for approximately the next twelve months to fund our currently anticipated uses of cash. After 2006,2009, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance, and cash flow. Our ability to do so will beflow, all of which are subject to prevailing economic conditions and to financial, business, regulatory, legislative, and other factors, many of which are beyond our control.
We may be unable to access the cash flow of our subsidiaries since certain of our subsidiaries are, or may become, parties to credit or other borrowing agreements that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries’ ability to pay dividends or advance cash in any other manner to us.investments.
To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing, or the private or public sales of equity and debt securities. We cannot assure youguarantee that we will be able to generate sufficient cash flow from operations, in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash toadequately fund our expected uses of cash. Failure toIf we cannot obtain adequate

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financing, if necessary, could require uswe may need to significantly reduce our operations or level of capital expenditures, which could have a material adverse effect on our financial condition and the results of operations.

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      The following table summarizes our short-term
In recent months liquidity for the periods presented:
             
  As of
   
  December 31, December 31, December 31,
  2005 2004 2003
       
  (In millions)
Short-Term Liquidity
            
Current assets $79.0  $98.9  $39.6 
Current liabilities  (67.9)  (97.6)  (34.8)
          
Net working capital  11.1   1.3   1.3 
          
Cash and cash equivalents  31.4   52.1   10.1 
Availability on revolving credit facility $30.0  $30.0  $5.0 
      The decrease in current assets and cash on hand between 2004 and 2005 is primarily due to the June 7, 2005 payment of a $37.5 million distribution to our former preferred stockholders, Central Illinois Telephone, Providence Equity and Spectrum Equity. The distribution was partially offset by cash generated in the course of business during the period. In connection with the amendment ofcapital markets has become scarce; many commercial banks are reluctant to lend money. As discussed below, our credit facilities, scheduled principal payments were eliminated, resulting in $41.1term loan has been fully funded at a fixed spread above LIBOR and we have $50.0 million of our debt being reclassified as long-term. In all periods presented, we had no borrowingsavailable under our revolving credit facility. Based on our discussions with banks participating in the bank group, we expect that the funds will be available under the revolving credit facility if necessary.
For more information about the possible effects of the recent economic downturn, see the “Risk Factors” section of this Report.
The following table summarizes our sources and uses of cash for the periods presented:
             
  Year Ended December 31,
   
  2005 2004 2003
       
  (In millions)
Net Cash Provided (Used):
            
Operating activities $79.3  $79.8  $28.9 
Investing activities  (31.1)  (554.1)  (296.1)
Financing Activities  (68.9)  516.3   277.4 
             
  Year Ended December 31, 
  2008  2007  2006 
  (In millions) 
Net Cash Provided by (Used for):
            
Operating activities $92.4  $82.1  $84.6 
Investing activities  (48.0)  (305.3)  (26.7)
Financing activities  (63.3)  230.9   (62.7)
Operating Activities
Operating Activities
Net income adjusted for non-cash chargesitems is our primary source of operating cash. Cash provided by operating activities was $79.3 million in 2005. NetFor the year ended December 31, 2008, net income adjusted for non-cash charges generated $82.7$107.1 million of operating cash. Partially offsettingDuring the period we paid $13.5 million for federal and state income taxes, while our tax expense was $6.6 million. In addition we made cash payments of $6.1 million to fund our pension and income restoration plans. Changes in components of working capital—primarily accrued expenses, accounts receivable, and accounts payable—in the ordinary course of business accounted for the remainder of the cash flows from operations.
For 2007, net income adjusted for non-cash items generated were changes$95.3 million of operating cash. We paid $14.0 million of cash income taxes in 2007, compared to $8.2 million in 2006. In addition, accounts receivable used $4.6 million, including $4.7 million to cover our normal bad debt reserve. The timing of our accounts payable resulted in an increase of $1.3 million of available cash.
For 2006, net income adjusted for non-cash items generated $90.2 million of operating cash. Changes in certain working capital components.components partially offset the cash generated. Accounts receivable increases, dueused $4.0 million, including $5.1 million to increased fourth quarter business systemcover our normal bad debt experience, offset by $1.1 million from a slight improvement in our days sales and the timing of certain network related billings,outstanding. We also used $6.2$2.8 million of cash, during the period. In addition, accrued expensesprimarily to fund increased inventory supplies and other liabilities decreased by $4.9 million primarily as a result of lower accruals associated with TXUCV integration activities in 2005 as well as the completion of our IPO and senior note exchange offer, both of which had accrued professional fees as of December 31, 2004.miscellaneous prepaid expenses.
      For 2004, a net loss of $1.1 million adjusted for $76.5 million of non-cash charges accounted for the majority of our $79.8 million of operating cash flows. The primary component of our non-cash charges is depreciation and amortization, which was $54.5 million in 2004. In addition, we recorded $11.6 million of intangible asset impairment charges and our provision for bad debt expense was $4.7 million. We also recorded non-cash interest expense of $2.3 million for the amortization of deferred financing costs and wrote off $4.2 million of deferred financing costs upon entering into our prior credit facilities in connection with the TXUCV acquisition.Investing Activities

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Investing Activities
Cash used in investing activities has traditionally been for capital expenditures and acquisitions. CashFor the year ended December 31, 2008, we used in investing activities of $31.1 million in 2005, was entirely for capital expenditures. Of the $554.1 million used for investing activities in 2004, $524.1 million (net of cash acquired and including transaction costs) was for the acquisition of TXUCV. We used $30.0$48.0 million for capital expenditures, in 2004.
      Overwhich is an increase of $14.5 million over the three yearsyear ended December 31, 2005, we used $72.4 million in cash for capital investments. Of that total, over 90.0%,2007. The increase was fordue to increased incremental spending as a result of the expansion or upgradeacquisition of outside plant facilities and switching assets.North Pittsburgh. Because our networks, including the North Pittsburgh network, isare modern and hashave been well maintained, we do not believe we will substantially increase capital spending beyond current levels in the future. Any such increase would likely occur as a result of a planned growth or expansion, plan, if itat all.
In 2007, we used $271.8 million of cash, net of cash acquired, to acquire North Pittsburgh Systems, Inc. In addition, we used $33.5 million for capital expenditures.
Cash used in investing activities of $26.7 million in 2006 consisted of capital expenditures of $33.4 million, partially offset by $6.7 million in proceeds from the sale of assets.

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Over the three years ended December 31, 2008, we used $114.9 million in cash for capital investments. The majority of our capital spending was for the expansion or upgrade of outside plant facilities and switching assets. We expect our capital expenditures for 2006 willto be approximately $31.0between $42.0 million to $34.0and $43.0 million whichin 2009. We expect that the spending will be used primarily to maintain and upgrade our network, central offices and other facilities, and information technology for operating support and other systems.
Financing Activities
Financing Activities
In 2005,2008, we borrowed $120.0 million under our delayed draw term loan and used the proceeds, along with cash on hand, to retire $130.0 million of our outstanding senior notes and to pay a redemption premium of $6.3 million. In addition, we paid $45.4 million of cash to our common stockholders as dividends. The total amount of dividends paid increased in 2008 because we issued approximately 3.32 million shares of stock in connection with the North Pittsburgh acquisition. We also paid $0.2 million of deferred financing fees in connection with finalizing our new credit facility, and $1.0 million to satisfy obligations under capital leases.
In 2007, we generated $230.9 of cash from financing activities. We borrowed $760.0 million in connection with the acquisition of North Pittsburgh. In addition to funding the acquisition, we used $68.9proceeds from the borrowings and cash on hand to retire $464.0 million of term debt outstanding under our prior credit facility, to pay deferred financing costs of $8.7 million, to repay $15.4 million of North Pittsburgh’s long-term debt, and to pay $0.4 million in connection with registering shares that were issued to partially fund the acquisition. We also paid $0.3 million of deferred financing costs in connection with amending our credit facility in the first quarter of 2007. Finally, we paid $40.2 million of cash to our common stockholders as dividends.
In 2006, we used $62.7 million of cash for financing activities. The IPO generated net proceeds of $67.6 million. Using these proceeds, together with additional borrowings under our credit facilities and cash on hand, we redeemed $70.0 million of our senior notes andWe paid a $6.8 million redemption premium. In addition, we had a $4.4 million net decrease in our long-term debt and capital leases during the year, incurred financing costs of $5.6 million in connection with the amendment and restatement of our credit facility and made a pre-IPO distribution of $37.5 million to our former preferred stockholders. We also paid our first dividend in the amount of $12.2$44.6 million to our common stockholders as dividends. In July 2006, we repurchased and retired approximately 3.8 million shares of our common stock from Providence Equity for approximately $56.7 million, or $15.00 per share. With this transaction, Providence Equity sold its entire position in accordance withour company, which, prior to the dividend policy adopted bytransaction, totaled approximately 12.7 percent of our boardoutstanding shares of directors in connection with the IPO.
      For 2004, net cash provided by financing activitiescommon stock. This was $516.3 million. In connection with the TXUCV acquisition in April 2004, we incurred $637.0a private transaction and did not decrease our publicly traded shares. We financed this repurchase using approximately $17.7 million of new long-term debt, repaid $178.2cash on hand and $39.0 million of debt and received $89.0 million in net capital contributions from our former preferred stockholders. In addition, we incurred $19.0 million of expenses to finance the TXUCV acquisition. New long-term debt of $8.8 million was also repaid after the TXUCV acquisition in 2004.additional term loan borrowings.
Debt
Debt
The following table summarizes our indebtedness as of December 31, 2005:2008:
IndebtednessDebt and Capital Leases as of December 31, 20052008
(In Millions)
             
  Balance Maturity Date Rate(1)
       
Revolving credit facility     April 14, 2010   LIBOR + 2.00%
Term loan D  425,000   October 14, 2011   LIBOR + 1.75%
Senior notes  130,000   April 1, 2012   9.75%
             
  Balance  Maturity Date  Rate (1) 
Capital lease $1.3  April 12, 2010   7.40%
Revolving credit facility    December 31, 2013  LIBOR + 2.50%
Term loan  880.0  December 31, 2014  LIBOR + 2.50%
(1) As of December 31, 2005,2008, the90-day 1-month and 3-month LIBOR rate was 4.54%rates were 0.43625% and 1.425%, respectively. As of December 31, 2008, we were electing 1-month LIBOR on the variable portion of our debt.
Credit Facilities
      As of December 31, 2004, we had $428.2 million outstanding under our then outstanding Term Loan A and Term Loan C facilities. In connection with the IPO, we amended and restated our credit facilities to provide for a new $425.0 million term D facility, which matures on October 14, 2011, and a $30.0 million revolving credit facility, which matures on April 14, 2010. At that time, we incurred $425.0 million of borrowings under the Term Loan D facility and retired $419.3 million of debt then outstanding under the Term Loan A and C facilities.

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Credit Facilities
Borrowings under our credit facilities are our senior secured obligations that are secured by substantially all of the assets of the borrowers (CCI(Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., and Texas Holdings)North Pittsburgh Systems, Inc.) and the guarantors (CCHI(the Company and each of the existing subsidiaries of CCIConsolidated Communications, Inc., Consolidated Communications Ventures, and CCV, other thanNorth Pittsburgh Systems, Inc., but not ICTC and certain future subsidiaries). The credit agreement contains customary affirmative covenants, which require us andcovenants. For example, we (and our subsidiariessubsidiaries) are required to furnish specified financial information to the lenders, comply with applicable laws, and maintain our properties and assets and maintain insurance on our properties, among others, andthe related insurance. The credit agreement also contains customary negative covenants which restrict our and our subsidiaries’ ability to incurcovenants. For example, there are restrictions against incurring additional debt and issueissuing capital stock, create liens, repaystock; creating liens; repaying other debt, sell assets, makedebt; selling assets; making investments, loans, guarantees, or advances, pay dividends, repurchaseadvances; paying dividends; repurchasing equity interests or makemaking other restricted payments, engagepayments; engaging in affiliate transactions, maketransactions; making capital expenditures, engageexpenditures; engaging in mergers, acquisitions, or consolidations, enterconsolidations; entering into sale-leaseback transactions, amendtransactions; amending specified documents, enterdocuments; entering into agreements that restrict dividends from subsidiariessubsidiaries; and changechanging the business we conduct. In addition, the credit agreement requires us to comply with specified financial ratios that are summarized below under “—Covenant Compliance”.Compliance.”
      As of December 31, 2005, we had no borrowings under the revolving credit facility. Borrowings under our credit facilities bear interest at a rate equal to an applicable margin plus, at the borrowers’ election, either a “base rate” or LIBOR. The applicable margin is based upon the borrowers’ total leverage ratio. In November 2005, we further amended our credit facility to lower the applicable margin on the term D facility by 0.5%. As of December 31, 2005,2008, the applicable margin for interest rates was 1.75%2.50% per year for the LIBOR-based term loans and 2.00% on LIBOR based term D loan andthe revolving credit facility, respectively.facility. The applicable margin for our $880.0 million term loan is fixed for the duration of the loan. The applicable margin for alternative base rate loans was 0.75%1.50% per year for the term loan Dand the revolving credit facility. The applicable margin for borrowings on the revolving credit facility is based on a pricing grid. Based on our leverage ratio of 4.86:1 as of December 31, 2008, borrowings under the revolving credit facility will be priced at a margin of 2.75% for LIBOR-based borrowings and 1.0%1.75% for alternative base rate borrowings. The applicable borrowing margin for the revolving credit facility.facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end. At December 31, 2005,2008, the weighted average interest rate, including swaps, on our term debtcredit facilities was 5.72%6.3% per annum.
Derivative Instruments
Derivative Instruments
      On August 22, 2005,As of December 31, 2008, we executed a $100.0had $740.0 million of notional amount of floating to fixed interest rate swap arrangements relating to a portionagreements and $740.0 million of notional amount basis swaps. Approximately 84.1% of our $425.0 millionfloating rate term loan D facility. The arrangements are for six years and became effective September 30, 2005. On September 22, 2005, a participating institution terminated $50.0 million notional amountloans were fixed through interest rate swaps prior to the original expiration datesas of December 31, 2006 and May 19, 2007. We received proceeds of $0.8 million due to2008. Under the early termination. On October 12, 2005, we executed an additional $100.0 million notional amount of floating to fixed rate swap arrangements. After giving effectagreements, we receive 3-month LIBOR-based interest payments from the swap counterparties and pay a fixed rate. Under the basis swaps we pay 3-month LIBOR-based payments less a fixed percentage to the October 12, 2005basis swap arrangements,counterparties, and receive 1-month LIBOR. Concurrent with the execution of the basis swaps, we began electing 1-month LIBOR resets on our credit facility. The swaps are in place to hedge the change in overall cash flows related to our term loan, the driver of which became effective January 3, 2006, we had $359.4is changes in the underlying variable interest rate. Our objective is to have between 75% and 85% of our variable rate debt fixed so there is some certainty to our cash flow streams. The maturity dates of these swaps are laddered to minimize any potential exposure to unfavorable rates when an individual swap expires. The swaps expire at various times through March 31, 2013, and have a weighted average fixed rate of approximately 4.43%. The current effect of the swap portfolio is to fix our cash interest payments on $740.0 million of floating rate debt at a rate of 6.93%, including our $425.0 millionborrowing margin of term debt covered by interest rate swaps and $65.6 million of variable rate term debt.2.50% over LIBOR as discussed above.
Senior Notes
Senior Notes
      The senior notes areOn April 1, 2008, we redeemed our senior unsecured obligations. Thesecured notes and the related indenture contains customary covenants that restrictwas terminated.
Covenant Compliance
In general, our and our restricted subsidiaries’ ability to, incur debt and issue preferred stock, engage in business other than telecommunication businesses, make restricted payments (including paying dividends on, redeeming, repurchasing or retiring our capital stock), enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans, or transfer assets to us, enter into liens, enter into a change of control without making an offer to purchase the senior notes, sell or otherwise dispose of assets, including capital stock of subsidiaries, engage in transactions with affiliates, and consolidate or merge.
      We used a portion of the net proceeds from the IPO, together with additional borrowings under our credit facilities and cash on hand to redeem 35.0%, or $70.0 million, of our senior notes. The total cost of the redemption, including the associated redemption premium, was $76.8 million.
Covenant Compliance
      Our credit agreement restricts our ability to pay dividends. Fromdividends to the amount of our “Available Cash” accumulated after October 1, 2005, plus $23.7 million and minus the aggregate amount of dividends paid after July 27, 2005. The credit agreement defines Available Cash for any period as Consolidated EBITDA:
(a)minus, to the extent not deducted in the determination of Consolidated EBITDA,
(i) non-cash dividend income for such period;
(ii) consolidated interest expense for such period net of amortization of debt issuance costs incurred
(A) in connection with or prior to the consummation of the acquisition of North Pittsburgh, or
(B) in connection with the redemption of our senior notes;
(iii) capital expenditures from internally generated funds;
(iv) cash income taxes for such period;
(v) scheduled principal payments of indebtedness, if any;

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(vi) voluntary repayments of indebtedness, mandatory prepayments of term loans, and net increases in outstanding revolving loans during such period;
(vii) the cash costs of any extraordinary or unusual losses or charges; and
(viii) all cash payments made on account of losses or charges expensed prior to such period;
(b)plus, to the extent not included in Consolidated EBITDA,
(i) cash interest income;
(ii) the cash amount realized in respect of extraordinary or unusual gains; and
(iii) net decreases in revolving loans.
Based on the results of operations from October 1, 2005, through December 31, 2005,2008, we would have been able to pay a quarterly dividend of $16.7$78.7 million based on the restricted payments covenant contained in our credit agreement. We are also restricted from paying

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dividends under the indenture governing our senior notes. However, the indenture restriction is less restrictive than the restriction contained in our credit agreement. That is because the restricted payments covenant in our credit agreement allows a lower amount of dividends to be paid from the borrowers (CCI and Texas Holdings) to CCH than the comparable covenant in the indenture (referred to as thebuild-up amount) permits CCH to pay to its stockholders. However, the amount of dividends CCH will be able to make under the indenture in the future will be based, in part, on the amount of cash distributed by the borrowers under the credit agreementfacility covenant. After giving effect to CCH.the dividend of $11.4 million, which was declared in November 2008 and paid on February 1, 2009, we could pay a dividend of $67.3 million.
Under our credit agreement, if our total net leverage ratio (as such term is defined in the credit agreement), as of the end of any fiscal quarter is greater than 4.75:5.25:1.00 until December 31, 2008, and 5.10:1.00 thereafter, we generally will be required to suspend dividends on our common stock unless otherwise permitted bystock. (There is an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to make mandatory prepayments of loans and not used to fund acquisitions, capital expenditures, or make other investments.) During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in available cashAvailable Cash (as such term is defined in our credit agreement) during such dividend suspension period,above), among other things. In addition, we will not be permitted to pay dividends if an event of default under the credit agreement has occurred and is continuing. Among other things, it will be an event of default if:
• our senior secured leverage ratio, as of the end of any fiscal quarter is greater than 4.00 to 1.00; or
• our fixed charge coverage ratio as of the end of any fiscal quarter, is not (x) after January 1, 2006 and on or prior to December 31, 2006, at least 2.00 to 1.00 and (y) after January 1, 2007, at least 1.75 to if our interest coverage ratio as of the end of any fiscal quarter is below 2.25:1.00.
As of December 31, 2005, we were in compliance with2008, our debt covenants.total net leverage ratio was 4.86:1.00 and our interest coverage ratio was 2.85:1.00.
      The table below presents our ratios as of December 31, 2005:
Total net leverage ratio3.86:1.00
Senior secured leverage ratio3.11:1.00
Fixed charge coverage ratio3.51:1.00
The description of the covenants above and of our credit agreement and indenture generallythe covenants it contains in this Annual Report are summaries only. They do not contain a full description, including definitions, of the provisions summarized. As such, theseThese summaries are qualified in their entirety by thesethe actual documents, which are filed as exhibits to this report.were previously filed.
Effects of the IPO and the Related Transactions; Capital RequirementsDividends
      In completing the IPO, we raised $78.0 million through the sale of 6,000,000 shares of common stock. The IPO and the related transactions had the following principle effects on our results of operations, liquidity and capital resources in 2005:
• We incurred $10.4 million in one-time fees and expenses that were related to the offering and recorded as a reduction to paid-in capital;
• We redeemed $70.0 million of senior notes and incurred a $6.8 million redemption premium in doing so; and
• We incurred $3.4 million of fees in connection with the amendment and restatement of our credit facility.
      In addition to the IPO and related transactions, our primary uses of cash in 2005 consisted of:
• $49.9 million of principal and interest payments on our long-term debt;
• a $37.5 million distribution to our preferred stockholders;

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• $31.3 million of capital expenditures; and
• $7.4 million in TXUCV integration and restructuring costs.
      In 2006, we expect that capital expenditurescash flow from operations will be approximately $31.0 million to $34.0 million for network, central officesfund dividend payments and other facilities and information technology for operating systems and other systems. In the second quarter of 2006 we expect to receive a $5.9 million cash distribution due to the redemption of our holdings in Rural Telephone Bank. For purposes of our credit agreement, we will be able to use these proceeds to make capital expenditures, but these expenditures will not reduce our cash available to pay dividends and, therefore, have the effect of increasing the cumulative available cash under our credit agreement. We intend to use the proceeds to fund a portion of the capital expenditures.
      The cash requirements of the expected dividend policy are in addition to our other expected cash needs, both of which we expect to be funded with cash flow from operations.needs. In addition, we expect we will have sufficient availability under our amended and restated revolving credit facility to fund dividend payments, in addition toas well as any expected fluctuations in working capital and other cash needs, although we do not intend to borrow under this facility to pay dividends.
      WeFor various reasons, all of which are described in the “Risk Factors” section of this Annual Report, we believe that our dividend policy will limit, but not preclude, our ability to grow. If we continue paying dividends at the level currently anticipated under our dividend policy, we may not retain a sufficient amount of cash, and may need to seek refinancing, to fund a material expansion of our business, including any significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current expectations. In addition, because we expect a significant portion of cash available will be distributed to holders of common stock under our dividend policy, our ability to pursue any material expansion of our business will depend more than it otherwise would on our ability to obtain third-party financing.
Surety bonds
Surety Bonds
In the ordinary course of business, we enter into surety, performance, and similar bonds. As of December 31, 2005,2008, we had approximately $1.8$2.0 million of these bonds outstanding.

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Table of contractual obligations and commitments
Table of Contractual Obligations and Commitments
As of December 31, 2005,2008, our material contractual obligations and commitments were:
                             
  Payments Due by Period
   
  Total 2006 2007 2008 2009 2010 Thereafter
               
  (In thousands)
Long-term debt(a) $555,000  $  $  $  $  $  $555,000 
Operating leases  13,839   3,501   2,799   1,985   1,732   1,681   2,141 
Minimum purchase contracts(b)  759   396   363             
Pension and other post-retirement obligations(c)  47,674   1,770   5,435   5,625   5,849   6,134   22,861 
                      
Total contractual cash obligations and commitments $617,272  $5,667  $8,597  $7,610  $7,581  $7,815  $580,002 
                      
                     
      Less than  1 – 3  3 – 5  More than 
  Total  1 Year  Years  Years  5 Years 
  (In thousands) 
Long-term debt (a) $1,249,600  $61,600  $123,200  $123,200  $941,600 
Capital lease (b)  1,433   1,051   382       
Operating leases  10,294   4,187   4,661   758   688 
Other agreements and commitments (c)  3,062   1,120   1,692   140   110 
Pension and other post-retirement obligations (d)  107,306   10,290   36,858   36,939   23,219 
                
Total contractual cash obligations and commitments $1,371,695  $78,248  $166,793  $161,037  $965,617 
                
(a)This item consists of loans outstandinginterest and principal payments under our credit facilities and our senior notes.facilities. The credit facilities consist of a $425.0$760.0 million term loan D facility and a $120.0 delayed draw facility, both maturing on October 14, 2011December 31, 2014, and a $30.0$50.0 million revolving credit facility, which was fully available but undrawn as of December 31, 2005.2008.
 
(b)AsRepresents payments of December 31, 2005, the minimum purchase contract was a60-month High-Capacity Term Payment Plan agreement with Southwestern Bell, dated November 25, 2002. The agreement requires us to make monthly purchases of at least $33,000 from Southwestern Bellprincipal and interest on a take-or-pay basis. The agreement also providescapital lease entered into by North Pittsburgh for an early termination charge of 45% of the monthly minimum commitment multiplied by the number of months remaining through the expiration date of November 25, 2007. As of December 31, 2005, the potential early termination charge was approximately $0.3 million.equipment used in its operations.

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(c)Represents payments for two operational support systems obligations. Should we terminate either of the contracts prior to the expiration of their term, we will be liable for minimum commitment payments as defined in the contracts for the remaining term of the contracts. In addition, we have a contractual obligation for network maintenance.
(d)Pension funding is an estimate of our minimum funding requirements to provide pension benefits for employees based on service through December 31, 2005.2008. Obligations relating to other post retirementpost-retirement benefits are based on estimated future benefit payments. Our estimates are based on forecasts of future benefit payments, which may change over time due to a number of factors includingsuch as life expectancy, medical costs and trends, and on the actual rate of return on the plan assets, discount rates, discretionary pension contributions, and regulatory rules.
Under Financial Interpretation Number 48, unrecognized tax benefits of $5.7 million are excluded from the contractual obligations table because the timing of future cash outflows to settle these liabilities is highly uncertain.
Recent Accounting Pronouncements
In May 2005,June 2008, the Financial Accounting Standards Board, or FASB, issued SFAS 154 which replacesFASB Staff Position (“FSP”) No. EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities”. This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the provisionscomputation of SFAS 3 with respectearnings per share pursuant to reporting accounting changes in interim financial statements. SFAS 154the two-class method. This FSP is effective for accounting changes and corrections of errors made infinancial statements issued for fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes2008, and corrections of errors made in fiscalinterim periods within those years, beginning after June 1, 2005. Issuers that apply SFAS 154 in an interim period should provide the applicable disclosures specified in SFAS 154.with early application prohibited. We do not expect this FSP will have any material effect on future results of operations and financial condition.
In December 2008, the FASB issued FSP SFAS 154No. 132(R)-1(“SFAS 132(R)-1”),“Employers’ Disclosures about Postretirement Benefit Plan Assets” which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension and other postretirement plan. SFAS 132(R)-1 requires employers to disclose the fair value of each major category of plan assets as of each annual reporting date for which a statement of financial position is presented; the inputs and valuation technique used to develop fair value measurements of plan assets at the annual reporting date, including the level within the fair value hierarchy in which the fair value measurements fall as defined by SFAS No. 157; investment policies and strategies, including target allocation percentages; and significant concentrations of risk in plan assets. SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009 and will significantlynot have impact ouron future results of operations and financial condition.

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In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161(“SFAS No. 161”), “Disclosure about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires reporting entities to disclose additional information about the amounts and location of derivatives within the financial statements, how the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” have been applied, and the impact that hedges have on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We currently provide information about hedging activities and use of derivatives in our quarterly and annual filings with the SEC, and satisfy many of the SFAS No. 161 disclosure requirements. While SFAS No. 161 will have an impact on disclosures, it will not have an impact on our future results of operations and financial condition.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS No. 160”), “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51”. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in a consolidated entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. We have adopted SFAS No. 160 effective January 1, 2009 with regard to the minority interest held in the East Texas Fiber Line, a 63% owned subsidiary. We have included net income of $5.2 million in the mezzanine section of the balance sheet as of December 31, 2008 and recognized a charge to income of $0.9 million for earnings attributable to the minority shareholder for the year then ended. The impact of SFAS No. 160 on our future results of operations and financial condition will depend on the operating results of this subsidiary in future periods.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS No. 141(R)”), “Business Combinations”. SFAS No. 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date the acquirer achieves control, and requires the acquirer to recognize the assets acquired, liabilities assumed, and any non-controlling interest at their fair values as of the acquisition date. SFAS No. 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. We have adopted SFAS No. 141(R) effective January 1, 2009, and expect it to affect acquisitions completed thereafter, though the impact will depend upon the size and nature of the acquisition. In addition, the $5.7 million liability for unrecognized tax benefits as of December 31, 2008 relate to tax positions of acquired entities taken prior to their acquisition by the Company. Liabilities settled for lesser amounts will affect the income tax expense in the period of reversal. See Note 10 to the audited financial statements included herein.
In September 2006, the FASB issued SFAS No. 157 (“SFAS No. 157”), “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. We adopted the provisions of SFAS No. 157 as of January 1, 2008, for financial instruments that are required to be measured at fair value on a recurring basis. SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its adoptionown assumptions. For additional information about the impact of SFAS No.157 on the results of operations and financial condition, please refer to Note 15 of our audited financial statements.

61


In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS No. 158 requires an entity to (a) recognize in its statement of financial position an asset or an obligation for a defined benefit postretirement plan’s funded status, (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. We adopted the recognition and related disclosure provisions of SFAS No. 158 effective December 31, 2006. The measurement date provision was effective January 1,, 2008. After we combined the Texas and Illinois pension plans on December 31, 2007, we adopted the measurement date provisions of SFAS No. 158 effective January 1, 2008, for pension and postretirement plans with measurement dates other than December 31. Adopting the measurement date provisions resulted in an increase to opening accumulated deficit on January 1, 2006.2008, of $169,000, net of tax of $96,972.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 7A.Quantitative and Qualitative Disclosure about Market Risk
Market risk is the potential change in the fair market value of a fixed-rate long-term debt obligation due to an adverse change in interest rates, and the potential change in interest expense on variable-rate long-term debt obligations due to a change in market interest rates. We are exposed to market risk from changes in interest rates on our long-term debt obligations.
We estimate our market risk using sensitivity analysis. Market risk is defined as the potential change in the fair market value of a fixed-rate long-term debt obligation due to hypothetical adverse change in interest rates and the potential change in interest expense on variable rate long-term debt obligations due to a change in market interest rates. The fair value on long-term debt obligations is determined based on discounted cash flow analysis, using the rates and the maturities of these obligations compared to terms and rates currently available in long-term debt markets. The potential change in interest expense is determined by calculating the effect of thea hypothetical rate increase on the portion of variable ratevariable-rate debt that is not hedged through the interest swap agreements described below, and assumes no changes in our capital structure. As of December 31, 2005,2008, approximately 70.2%84.1% of our long-term debt obligations were fixedvariable-rate obligations subject to interest rate obligationsswap agreements, and approximately 29.8%15.9% were variable ratevariable-rate obligations not subject to interest rate swap agreements.
As of December 31, 2005,2008, we had $425.0$880.0 million of debt outstanding under our credit facilities. Our exposure to fluctuations in interest rates was limited by interest rate swap agreements that effectively converted a portion of our variable debt to a fixed-rate basis, thusfixed rate, thereby reducing the impact of interest rate changes on future interest expenses.expense. On December 31, 2005,2008, we had interest rate swap agreements covering $259.4$740.0 million of aggregate principal amount of our variable ratevariable-rate debt at fixed LIBOR rates ranging from 3.03%3.865% to 4.57%4.888% and expiring on Decembervarious dates through March 31, 2006, May 19, 20072013. In addition, we had $740.0 million of basis swap agreements under which we make 3-month LIBOR payments less a percentage ranging from 5.4 to 9.0 basis points, and September 30, 2011. receive 1-month LIBOR.
As of December 31, 2005,2008, we had $165.6$140.0 million of variable ratevariable-rate debt not covered by interest rate swap agreements. If market interest rates averagedchanged by 1.0% higher thanfrom the average rates that prevailed from January 1, 2005 through December 31, 2005,during the year, interest expense would have increased or decreased by approximately $1.9$0.9 million for the period. On October 12, 2005, the Company entered into agreements to hedge an additional $100.0 million of variable rate debt with swap agreements that were effective January 3, 2006 and terminate in September 2011. Had these swaps been effective prior to December 31, 2005, 88.2% of our long-term obligations would have been fixed rate and 11.8% would have been variable rate.period.. As of December 31, 2005,2008, the fair value of interest rate swap agreements amounted to an asseta liability of $2.5$30.2 million, net of taxes.
      As of December 31, 2005, we had $130.0 million in aggregate principal amount of fixed rate long-term debt obligations with an estimated fair market value of $138.5 million based on an overall weighted average interest rate of 9.75% and an overall weighted maturity of 6.25 years, compared to rates and maturities currently available in long-term debt markets. Market risk is estimated as the potential loss in fair value of our fixed rate long-term debt resulting from a hypothetical increase of 10.0% in interest rates. Such an increase in interest rates would have resulted in a decrease of $3.9 million in the fair market value of our fixed-rate long-term debt.

6862


Item 8.Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance that our financial reporting is reliable and our financial statements for external purposes are prepared in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Item 8.
(ii)Financial Statementsprovide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and Supplementary Datathat receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors; and
(iii)provide reasonable assurance that any unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements will be prevented or detected without delay.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that compliance with the policies or procedures may decline.
Management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework set forth inInternal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s assessment and the COSO criteria, management believes that, as of December 31, 2008, our internal control over financial reporting is effective to provide reasonable assurance that the desired control objectives were achieved. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on Consolidated Communications Holdings, Inc.’s internal control over financial reporting. That report is included on page 63 of this Annual Report.

63


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders andThe Board of Directors of
and Stockholders
Consolidated Communications Holdings, Inc.
We have audited Consolidated Communications Holdings, Inc’s. (the Company’s) internal control over financial reporting as of December 31, 2008, based on criteria established inInternal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Consolidated Communications Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Consolidated Communications Holdings, Inc. (the Company) as of December 31, 20052008 and 2004,2007, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005.2008, and our report dated March 13, 2009, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 13, 2009

64


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Consolidated Communications Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Consolidated Communications Holdings, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of GTE Mobilnet of Texas RSA #17 Limited Partnership (a partnership in which the Company has a 17.02% interest), Pennsylvania RSA 6(I) Limited Partnership (a partnership in which the Company has a 16.67% interest), and Pennsylvania RSA 6(II) Limited Partnership (a partnership in which the Company has a 23.67% interest) (collectively the Limited Partnerships) have been audited by other auditors whose reports have been furnished to us, and our opinion on the consolidated financial statements, insofar as it relates to the amounts included for the Limited Partnerships, is based solely on the reports of the other auditors. In the consolidated financial statements, the Company’s investment in the Limited Partnerships is stated at $46,659,000 and $44,410,000, respectively, at December 31, 2008 and 2007, and the Company’s equity in the net income of the Limited Partnerships is stated at $10,124,000 and $2,334,000, and $2,660,000 for each of the three years in the period ended Decemeber 31, 2008.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Consolidated Communications Holdings, Inc. at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 2 and 10 to the consolidated financial statements, on December 31, 2008, the Company adopted Statement of Financial Accounting Standards No. 101,Regulated Enterprises - Accounting for the Discontinuance of Application of FASB Statement No. 71,which specifies the accounting required when an enterprise ceases to meet the criteria for application of regulatory accounting, and on January 1, 2007, the Company adopted the provisions of FASB Interpretation No 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, which clarified the accounting for uncertainty in income taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Consolidated Communications Holdings, Inc.’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2009 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
St. Louis, Missouri
March 13, 2009

65


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of Pennsylvania RSA 6 (I) Limited Partnership:

We have audited the accompanying balance sheets of Pennsylvania RSA 6 (I) Limited Partnership (the “Partnership”) as of December 31, 2008 and 2007, and the related statements of operations, changes in partners’ capital, and cash flows for each of the three years in the period ended December 31, 2008. Such financial statements are not presented separately herein. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were notwe engaged to perform, an audit of the Company’sits internal control over financial reporting. Our auditsaudit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’sPartnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, thesuch financial statements referred to above present fairly, in all material respects, the consolidated financial position of Consolidated Communications Holdings, Inc. atthe Partnership as of December 31, 20052008 and 2004,2007, and the consolidated results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2005,2008, in conformity with U.S.accounting principles generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

      As discussed in Note 3 to the consolidated financial statements, on July 1, 2005, the Company changed its methodUnited States of accounting for share-based awards.
/s/Ernst & Young, LLP
Chicago, Illinois
America.

/s/ Deloitte & Touche LLP

Atlanta, GA
March 13, 2006

16, 2009

69

66


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETSConsolidated Communications Holdings, Inc.
Consolidated Balance Sheets

(DollarsAmounts in thousands, except share and per share amounts)
          
  December 31,
   
  2005 2004
     
ASSETS
Current assets:        
Cash and cash equivalents $31,409  $52,084 
 Accounts receivable, net of allowance of $2,825 and $2,613, respectively  35,503   33,817 
 Inventories  3,420   3,529 
 Deferred income taxes  3,111   3,278 
 Prepaid expenses and other current assets  5,592   6,179 
       
Total current assets  79,035   98,887 
 Property, plant and equipment, net  335,088   360,760 
Intangibles and other assets:        
 Investments  44,056   42,884 
 Goodwill  314,243   318,481 
 Customer lists, net  135,515   149,805 
 Tradenames  14,546   14,546 
 Deferred financing costs and other assets  23,467   20,736 
       
Total assets $945,950  $1,006,099 
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:        
 Current portion of long-term debt $  $41,079 
 Accounts payable  11,743   11,176 
 Advance billings and customer deposits  14,203   11,061 
 Dividends payable  11,537    
 Accrued expenses  30,376   34,251 
       
Total current liabilities  67,859   97,567 
Long-term debt less current maturities  555,000   588,342 
Deferred income taxes  66,228   66,641 
Pension and postretirement benefit obligations  53,185   61,361 
Other liabilities  1,476   3,223 
       
Total liabilities  743,748   817,134 
       
Minority interests  2,974   2,291 
       
Redeemable preferred shares:        
 Class A, $1.00 par value, 182,000 shares authorized, 0 and 182,000 issued and outstanding, respectively     205,469 
       
Stockholders’ equity        
 Common stock, $0.01 par value, 100,000,000 shares, authorized, 29,775,010 and 10,000,000 issued and outstanding, respectively  297    
 Paid in capital  254,162   58 
 Accumulated deficit  (57,533)  (19,111)
 Accumulated other comprehensive income  2,302   258 
       
Total stockholders’ equity (deficit)  199,228   (18,795)
       
Total liabilities and stockholders’ equity $945,950  $1,006,099 
       
         
  December 31, 
  2008  2007 
 
ASSETS
        
Current assets:        
Cash and cash equivalents $15,471  $34,341 
Accounts receivable, net of allowance of $1,908 and $2,440, respectively  45,092   44,001 
Inventories  7,482   6,364 
Deferred income taxes  3,600   4,551 
Prepaid expenses and other current assets  6,931   10,358 
       
Total current assets  78,576   99,615 
         
Property, plant and equipment, net  400,286   411,647 
Intangibles and other assets:        
Investments  95,657   94,142 
Goodwill  520,562   526,439 
Customer lists, net  124,249   146,411 
Tradenames  14,291   14,291 
Deferred financing costs and other assets  8,005   12,046 
       
Total assets $1,241,626  $1,304,591 
       
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current liabilities:        
Current portion of capital lease obligation $922  $1,010 
Current portion of pension and postretirement benefit obligations  2,960   8,765 
Accounts payable  12,336   17,386 
Advance billings and customer deposits  19,102   18,167 
Dividends payable  11,388   11,361 
Accrued expenses  24,584  ��28,254 
       
Total current liabilities  71,292   84,943 
Capital lease obligation less current portion  344   1,636 
Long-term debt  880,000   890,000 
Deferred income taxes  58,134   97,289 
Pension and postretirement benefit obligations  107,741   56,729 
Other liabilities  48,830   14,306 
       
Total liabilities  1,166,341   1,144,903 
       
         
Minority interest  5,185   4,322 
       
         
Stockholders’ equity        
Common stock, $0.01 par value, 100,000,000 shares authorized, 29,488,408 and 29,440,587 issued and outstanding in 2008 and 2007, respectively  295   294 
Additional paid in capital  129,284   160,723 
Retained earnings      
Accumulated other comprehensive loss  (59,479)  (5,651)
       
Total stockholders’ equity  70,100   155,366 
       
Total liabilities and stockholders’ equity $1,241,626  $1,304,591 
       
See accompanying notes

7067


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSConsolidated Communications Holdings, Inc.
Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)
              
  Year Ended December 31,
   
  2005 2004 2003
       
Revenues $321,429  $269,608  $132,330 
Operating expenses:            
 Cost of services and products (exclusive of depreciation and amortization shown separately below)  101,159   80,572   46,305 
 Selling, general and administrative expenses  98,791   87,955   42,495 
 Intangible assets impairment     11,578    
 Depreciation and amortization  67,379   54,522   22,476 
          
Income from operations  54,100   34,981   21,054 
Other income (expense):            
 Interest income  1,066   384   154 
 Interest expense  (54,509)  (39,935)  (11,975)
 Investment income  3,215   3,785    
 Minority interest  (683)  (327)   
 Other, net  3,284   201   (15)
          
Income (loss) before income taxes  6,473   (911)  9,218 
Income tax expense  10,935   232   3,717 
          
Net income (loss)  (4,462)  (1,143)  5,501 
Dividends on redeemable preferred shares  (10,263)  (14,965)  (8,504)
          
Net loss applicable to common stockholders $(14,725) $(16,108) $(3,003)
          
Net loss per common share — basic and diluted $(0.83) $(1.79) $(0.33)
          
             
  Year Ended December 31, 
  2008  2007  2006 
Revenues $418,424  $329,248  $320,767 
Operating expenses:            
Cost of services and products (exclusive of depreciation and amortization shown separately below)  143,563   107,290   98,093 
Selling, general and administrative expenses  108,769   89,662   94,693 
Intangible assets impairment  6,050      11,240 
Depreciation and amortization  91,678   65,659   67,430 
          
Income from operations  68,364   66,637   49,311 
Other income (expense):            
Interest income  367   893   974 
Interest expense  (66,659)  (47,350)  (43,873)
Investment income  20,495   7,034   7,691 
Minority interest  (863)  (627)  (721)
Loss on extinguishment of debt  (9,224)  (10,323)   
Other, net  (577)  (167)  290 
          
Income before income taxes and extraordinary item  11,903   16,097   13,672 
Income tax expense  6,639   4,674   405 
          
             
Income before extraordinary item  5,264   11,423   13,267 
             
Extraordinary item (net of income tax of $4,154)  7,240       
          
             
Net income $12,504  $11,423  $13,267 
          
Net income per common share —            
Basic:            
Income per share before extraordinary item $0.18  $0.44  $0.48 
Extraordinary item per share  0.25       
          
Net income per share $0.43  $0.44  $0.48 
          
Diluted:            
Income per share before extraordinary item $0.18  $0.44  $0.47 
Extraordinary item per share  0.24       
          
             
Net income per share $0.42  $0.44  $0.47 
          
             
Cash dividends per common share $1.55  $1.55  $1.55 
          
See accompanying notes

7168


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Consolidated Communications Holdings, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
Year Ended December 31, 2005, 20042008, 2007 and 20032006

(Dollars in thousands)
thousands, except share amounts)
                             
        Accumulated    
  Common Stock     Other    
      Accumulated Comprehensive   Comprehensive
  Shares Amount Paid in Capital Deficit Income Total Income (Loss)
               
Balance, January 1, 2003
    $  $  $  $  $  $ 
Net income           5,501      5,501  $5,501 
Issuance of common stock  9,000,000                   
Shares issued under employee plan  975,000                   
Dividends on redeemable preferred shares           (8,504)     (8,504)   
Change in fair value of cash flow hedges, net of ($344) of tax              (515)  (515)  (515)
                      
Balance, December 31, 2003
  9,975,000         (3,003)  (515)  (3,518) $4,986 
                      
Net loss           (1,143)     (1,143) $(1,143)
Shares issued under employee plan  25,000      58         58    
Dividends on redeemable preferred shares           (14,965)     (14,965)   
Minimum pension liability, net of ($174) of tax                  (283)  (283)  (283)
Unrealized loss on marketable securities, net of ($33) of tax                  (49)  (49)  (49)
Change in fair value of cash flow hedges, net of $1,090 of tax              1,105   1,105   1,105 
                      
Balance, December 31, 2004
  10,000,000      58   (19,111)  258   (18,795) $(370)
                      
Net loss           (4,462)     (4,462) $(4,462)
Dividends on redeemable preferred shares           (10,263)     (10,263)   
Dividends on common stock           (23,697)     (23,697)   
Reorganization and conversion of redeemable preferred shares to common stock in connection with initial public offering  13,692,510   237   177,997         178,234    
Issuance of common stock  6,000,000   60   67,529         67,589     
Shares issued under employee plan  87,500                   
Non-cash stock compensation        8,590         8,590     
Purchase and retirement of restricted shares  (5,000)     (12)        (12)   
Minimum pension liability, net of ($129) of tax              (144)  (144)  (144)
Change in fair value of cash flow hedges, net of $1,582 of tax              2,188   2,188   2,188 
                      
Balance, December 31, 2005
  29,775,010  $297  $254,162  $(57,533) $2,302  $199,228  $(2,418)
                      
                             
                  Accumulated        
                  Other        
  Common Stock  Additional  Retained  Comprehensive      Comprehensive 
  Shares  Amount  Paid in Capital  Earnings  Income (Loss)  Total  Income (Loss) 
Balance, January 1, 2006
  29,775,010   297   202,234   (5,605)  2,302   199,228     
                             
Net income           13,267      13,267  $13,267 
Dividends on common stock        (35,434)  (7,662)     (43,096)   
Shares issued under employee plan, net of forfeitures  13,841                   
Non-cash stock compensation        2,482         2,482     
Purchase and retirement of common stock  (3,786,979)  (37)  (56,786)        (56,823)   
Reversal of minimum pension liability upon adoption of SFAS No. 158, net of $303 of tax              427   427    
Recognition of funded status upon adoption of SFAS No. 158, net of ($194) of tax              (324)  (324)   
Unrealized gain on marketable securities, net of $34 of tax              49   49   49 
Change in fair value of cash flow hedges, net of ($492) of tax              (252)  (252)  (252)
                      
                             
Balance, December 31, 2006
  26,001,872   260   112,496      2,202   114,958  $13,064 
                            
                             
Net income           11,423      11,423  $11,423 
Dividends on common stock        (30,090)  (11,423)     (41,513)   
Issuance of common stock  3,319,142   34   74,376         74,410    
Shares issued under employee plan, net of forfeitures  126,834                   
Non-cash stock compensation        4,034         4,034     
Purchase and retirement of common stock  (7,261)     (131)        (131)   
Permanent portion of tax on restricted stock vesting        38         38    
Recognition of funded status of pension and other post retirement benefit plans net of $1,606 of tax              2,785   2,785   2,785 
Change in fair value of cash flow hedges, net of ($6,139) of tax              (10,638)  (10,638)  (10,638)
                      
                             
Balance, December 31, 2007
  29,440,587   294   160,723      (5,651)  155,366   3,570 
                      
 
Effects of accounting change regarding postretirement plan measurement dates pursuant to SFAS No. 158:                            
Service cost, interest cost, and expected return on plan assets for October 1, 2007 through December 31, 2007, net of ($88) of tax           (154)     (154)   
Amortization of prior service cost and net loss for October 1, 2007 through December 31, 2007, net of ($9) of tax           (15)  15       
                      
            (169)  15   (154)   
                      
Balance, January 1, 2008 as adjusted
  29,440,587   294   160,723   (169)  (5,636)  155,212   3,570 
                             
Net income           12,504      12,504  $12,504 
Dividends on common stock        (33,141)  (12,335)     (45,476)   
Shares issued under employee plan, net of forfeitures  71,467                   
Non-cash stock compensation     1   1,900         1,901     
Purchase and retirement of common stock  (23,646)     (257)        (257)   
Permanent portion of tax on restricted stock vesting        (38)        (38)   
Pension tax adjustment        97         97    
Change in prior service cost and net loss, net of ($18,730) of tax              (31,765)  (31,765)  (31,765)
Change in fair value of cash flow hedges, net of ($12,666) of tax              (22,078)  (22,078)  (22,078)
                      
                             
Balance, December 31, 2008
  29,488,408  $295  $129,284  $  $(59,479) $70,100  $(37,769)
                      
See accompanying notes

7269


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSConsolidated Communications Holdings, Inc.
Consolidated Statements of Cash Flows

(Dollars in thousands)
                
  Year Ended December 31,
   
  2005 2004 2003
       
OPERATING ACTIVITIES            
 Net income (loss) $(4,462) $(1,143) $5,501 
 Adjustments to reconcile net income (loss) to cash provided by operating activities:            
  Depreciation and amortization  67,379   54,522   22,476 
  Provision for bad debt losses  4,480   4,666   3,412 
  Deferred income tax  10,232   201   3,388 
  Asset impairment     11,578    
  Pension curtailment gain  (7,880)      
  Partnership income  (1,809)  (1,288)   
  Non-cash stock compensation  8,590       
  Minority interest in net income of subsidiary  683   327    
  Penalty on early termination of debt  6,825       
  Amortization of deferred financing costs  5,482   6,476   504 
 Changes in operating assets and liabilities:            
  Accounts receivable  (6,166)  (3,499)  (9,799)
  Inventories  109   (249)  (73)
  Other assets  156   4,401   (480)
  Accounts payable  567   (2,689)  (2,267)
  Accrued expenses and other liabilities  (4,886)  6,463   6,227 
          
   Net cash provided by operating activities  79,300   79,766   28,889 
          
INVESTING ACTIVITIES            
  Capital expenditures  (31,094)  (30,010)  (11,296)
  Acquisition, net of cash acquired     (524,090)  (284,836)
          
   Net cash used in investing activities  (31,094)  (554,100)  (296,132)
          
FINANCING ACTIVITIES            
  Proceeds from issuance of stock  67,589   89,058   93,000 
  Proceeds from long-term obligations  5,688   637,000   190,000 
  Payments made on long-term obligations including early termination penalty  (86,934)  (190,826)  (10,193)
  Payment of deferred financing costs  (5,552)  (18,956)  (4,602)
  Proceeds from sale of building        9,180 
  Purchase of treasury shares  (12)      
  Dividends on common stock  (12,160)      
  Distribution to preferred shareholders  (37,500)      
          
   Net cash provided by (used in) financing activities  (68,881)  516,276   277,385 
          
Net increase (decrease) in cash and cash equivalents  (20,675)  41,942   10,142 
Cash and cash equivalents at beginning of year  52,084   10,142    
          
Cash and cash equivalents at end of year $31,409  $52,084  $10,142 
          
Supplemental cash flow information            
  Interest paid $53,065  $27,758  $11,463 
          
  Income taxes paid (refunded) $613  $(509) $2,000 
          
             
  Year Ended December 31, 
  2008  2007  2006 
OPERATING ACTIVITIES            
Net income $12,504  $11,423  $13,267 
Adjustments to reconcile net income to cash provided by operating activities:            
Depreciation and amortization  91,678   65,659   67,430 
Loss on extinguishment of debt  9,224   10,323    
Deferred income tax  (12,032)  (4,271)  (11,379)
Intangible assets impairment  6,050      11,240 
Extraordinary item, net of income tax  (7,240)      
Partnership income  (2,056)  (333)  (1,883)
Non-cash stock compensation  1,901   4,034   2,482 
Minority interest in net income of subsidiary  863   627   721 
Amortization of deferred financing costs  1,431   3,128   3,260 
Changes in operating assets and liabilities:            
Accounts receivable  (1,091)  171   1,107 
Inventories  (1,118)  (228)  (750)
Other assets  5,083   5,544   (3,089)
Accounts payable  (5,050)  1,258   (739)
Accrued expenses and other liabilities  (7,736)  (15,266)  2,926 
          
Net cash provided by operating activities  92,411   82,069   84,593 
          
INVESTING ACTIVITIES            
Proceeds from sale of investments     10,625   5,921 
Proceeds from sale of assets        815 
Securities purchased     (10,625)   
Acquisition, net of cash acquired     (271,780)   
Capital expenditures  (48,027)  (33,495)  (33,388)
          
Net cash used in investing activities  (48,027)  (305,275)  (26,652)
          
FINANCING ACTIVITIES            
Proceeds from issuance of stock     12    
Proceeds from long-term obligations  120,000   760,000   39,000 
Payments made on long-term obligations  (136,337)  (464,000)   
Repayment of North Pittsburgh long-term obligation     (15,426)   
Costs paid to issue common stock     (400)   
Payment of deferred financing costs  (240)  (8,988)  (262)
Payment of capital lease obligation  (971)      
Purchase and retirement of common stock  (257)  (131)  (56,823)
Dividends on common stock  (45,449)  (40,192)  (44,593)
          
Net cash provided by (used in) financing activities  (63,254)  230,875   (62,678)
          
Net increase (decrease) in cash and cash equivalents  (18,870)  7,669   (4,737)
Cash and cash equivalents at beginning of the year  34,341   26,672   31,409 
          
Cash and cash equivalents at end of the year $15,471  $34,341  $26,672 
          
             
Supplemental cash flow information            
Interest paid $65,061  $44,343  $44,509 
          
Income taxes paid $13,540  $13,976  $8,237 
          
See accompanying notes

7370


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. Description of Business
1.Description of Business
Consolidated Communications Holdings, Inc. and its wholly ownedwholly-owned subsidiaries (the “Company”) operatesoperate under the name Consolidated Communications. On July 27, 2005 the Company effected a reorganization pursuant to which Texas Holdings and Homebase Acquisition, LLC, our former parent company, merged with and into Illinois Holdings, and Illinois Holdings changed its name to Consolidated Communications Holdings, Inc. The Company is an established rural local exchange company (“RLEC”) providing communications services to residential and business customers in Illinois, Texas and Texas.Pennsylvania. With approximately 242,000264,323 local access lines, and approximately 39,00074,687 Competitive Local Exchange Carrier (“CLEC”) access line equivalents, 91,817 digital subscriber lines (“DSL”), Consolidated Communicationsand 16,666 digital television subscribers, the Company offers a wide range of telecommunications services, including local dial tone,and long distance service, digital telephone service, commonly known as Voice Over Internet Protocol (“VOIP”) calling, custom calling features, private line services, long distance,dial-up and high-speed Internet access, inside wiring service and maintenance,digital TV, carrier access telephoneservices, network capacity services over a regional fiber optic network, directory publishing and billing and collectionCLEC calling services. In addition, the Company launched its Internet Protocol digital video service (“DVS”) in selected Illinois markets in 2005 and offers wholesale transport services on a fiber optic network in Texas. The Company also operates a number of complementary businesses, including telemarketing and order fulfillment, telephone services to county jails and state prisons, equipment sales, operator services, equipment sales and telemarketingpaging services and order fulfillment services.has investments in several wireless partnerships.
2.Initial Public Offering
      On July 27, 2005, the Company completed the initial public offering2. Summary of its common stock (the “IPO”). The IPO consistedSignificant Accounting Policies
Principles of the sale of 6,000,000 shares of common stock newly issued by the Company and 9,666,666 shares of common stock sold by certain selling stockholders. The shares of common stock were sold at an initial public offering price of $13.00 per share resulting in net proceeds, after deduction of offering costs, to the Company of $67,589. The Company did not receive any proceeds from the sale of common stock by the selling stockholders.consolidation
      On July 29, 2005, the underwriters notified the Company of their intention to fully exercise their option to purchase an additional 2,350,000 shares of the Company’s common stock from the selling stockholders at the initial public offering price of $13.00 per share, less the underwriters’ discount. The sale of the over-allotment shares closed on August 2, 2005. The Company did not receive any proceeds from the sale of the over-allotment shares by the selling stockholders.
3.Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Consolidated Communications Holdings, Inc. and its wholly-owned subsidiaries and subsidiaries in which it has a controlling financial interest. All material intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principlesUnited States generally accepted in the United Statesaccounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the estimates and assumptions used.

74


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.Regulatory accounting
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except shareHistorically, the Company’s Illinois and per share amounts)
Regulatory Accounting
      Certain wholly-owned subsidiaries, Illinois Consolidated Telephone CompanyTexas Incumbent Local Exchange Carrier (“ICTC”), Consolidated Communications of Texas Company and Consolidated Communications of Fort Bend Company, are independent local exchange carriers (“ILECs”ILEC”) which followoperations followed the accounting for regulated enterprises prescribed by Statement of Financial Accounting StandardsSFAS No. 71“Accounting for the Effects of Certain Types of Regulation”Regulation" (“. This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Recent changes to our operations, however, have impacted the dynamics of the Company’s business environment and caused us to evaluate the applicability of SFAS No 71”).No. 71. In the last half of 2008, we experienced a significant increase in competition in our Illinois and Texas markets as, primarily, our traditional cable competitors started offering voice services. Also, effective July 1, 2008, we made an election to transition from rate of return to price cap regulation at the interstate level for our Illinois and Texas operations. The conversion to price caps gives us greater pricing flexibility, especially in the increasingly competitive special access segment and in launching new products. Additionally, in response to customer demand we have also launched our own VOIP product offering as an alternative to our traditional wireline services. While there has been no material changes in our bundling strategy and or in end-user pricing, our pricing structure is transitioning from being based on the recovery of costs to a pricing structure based on market conditions.

71


Based on the factors impacting its operations, the Company determined in the fourth quarter 2008, that the application of SFAS No. 71 permits rates (tariffs)for reporting its financial results is no longer appropriate. SFAS No. 101“Regulated Enterprises — Accounting for the Discontinuance of Application of FASB Statement No. 71,” specifies the accounting required when an enterprise ceases to be set at levels intended to recover estimated costsmeet the criteria for application of providing regulated services or products, including capital costs.SFAS No. 71. SFAS No. 101 requires the elimination of the effects of any actions of regulators that have been recognized as assets and liabilities in accordance with SFAS No. 71 requiresbut would not have been recognized as assets and liabilities by nonregulated enterprises. Depreciation rates of certain assets established by regulatory authorities for the ILECsCompany’s telephone operations subject to depreciate wireline plant over the useful lives approved by the regulators, which could be different than the useful lives that would otherwise be determined by management. SFAS No. 71 also requires deferralhave historically included a component for removal costs in excess of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years. Criteria that would give rise to the related estimated salvage value. Upon discontinuance of SFAS No. 71, include (1) increasing competition restricting the wireline business’ ability to establish prices to recover specificCompany reversed the impact of recognizing removal costs and (2) significant changes in excess of the manner byrelated estimated salvage value, which rates are set by regulators from cost-base regulation to another formresulted in recording a non-cash extraordinary gain of regulation.$7,240, net of taxes of $4,154. The gain was recognized in our Telephone Operations segment.
Cash equivalents
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with a remaining maturity of three months or less when purchased.
Investments
Investments
      Investments in affiliated companies thatIf the Company does not control but does have the ability tocan exercise significant influence over the operations and financial policies areof an affiliated company, even without control, the investment in the affiliated company is accounted for using the equity method. Investments in equity securities (excluding those describedIf the Company does not have control and also cannot exercise significant influence, the investment in the previous sentence) that have readily determinable fair values are categorized as availableaffiliated company is accounted for sale securities and are carried at fair value. The unrealized gains or losses on securities classified as available for sale are included as a separate component of stockholders’ equity. Investments that do not have readily determinable fair values are carried at cost.using the cost method.
To determine whether an impairment of an investment exists,is impaired, the Company monitors and evaluates the financial performance of theeach business in which it invests and compares the carrying value of the investeeinvestment to quoted market prices if available(if available) or the fair value of similar investments, which ininvestments. In certain circumstance,circumstances, fair value is based on traditional valuation models utilizing a multiple of cash flows. When circumstances indicate that athere has been an other-than-temporary decline in the fair value of the investment, has occurred and the decline is other than temporary, the Company records the decline in value as a realized impairment loss and a reduction in the cost of the investment.
Accounts receivable and allowance for doubtful accounts
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due to the Company from normal activities. AccountsA receivable areis determined to be past due when the amount is overdue based on the payment terms with the customer. In certain circumstances, the Company requires deposits from customers to mitigate potential risk associated with receivables. The Company maintains an allowance for doubtful accounts to reflect management’s best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance balancefor doubtful accounts based on known troubled accounts, historical experience, and other currently available evidence. Accounts receivable are charged to the allowance for doubtful accountswritten off when management of the Company determines that the receivablethey will not be collected.

75


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.Inventories
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
Inventory
      Inventory consistsInventories consist mainly of copper and fiber cable that will be used for network expansion and upgrades, and materials and equipment used in the maintenanceto maintain and installation ofinstall telephone systems. Inventory isInventories are stated at the lower of cost or market using the average cost or market.method.
Goodwill and other intangible assets
Goodwill and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets”Assets" (“SFAS 142”), goodwill and intangible assets that have indefinite useful lives are not amortized, but rather are tested at least annually for impairment. Tradenames have been determined to have indefinite lives; thus they are not being amortized, but are tested annually for impairment using discounted cash flows based on a relief from royalty method. The Company evaluates the carrying value of goodwill in the fourth quarter of each year. As part of the evaluation, the Companyyear and compares the carrying value for each reporting unit with theirits fair value to determine whether impairment exists. If impairment is determined to exist, any related impairment loss is calculated based upon fair value. Based upon its analysis in the fourth quarter of 2008, the Company recognized an impairment charge $6,050 on the goodwill of its telemarketing and order fulfillment business, Consolidated Communications Market Response, part of the Other Operations segment.

72


SFAS No. 142 also provides that assets whichthat have finite lives should be amortized over their useful lives. Customer lists are being amortized on a straight-line basis over their estimated useful lives (ranging from 5 to 13 years) based upon the Company’s historical experience with customer attritionattrition. In accordance with Statement of Financial Accounting Standards No. 144“Accounting for the Impairment or Disposal of Long-lived Assets", the Company evaluates the potential impairment of finite-lived acquired intangible assets when impairment indicators exist. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, the amount of the impairment is the difference between the carrying amount and the recommendationfair value of an independent appraiser. The estimated lives range from 10 to 13 years.the asset.
Property, plant and equipment
Property, Plant, and Equipment
Property, plant and equipment are recorded at cost. The cost of additions, replacements, and major improvements is capitalized, while repairs and maintenance are charged to expense.expense as incurred. Depreciation is determined based upon the assets’ estimated useful lives using either the group or unit method.
The group method is used for depreciable assets dedicated to providing regulated telecommunication services, including the majority of the network and outside plant facilities. Under the group method, a specific asset group has an average life. A depreciation rate for each asset group is developed based on the group’s average useful life for the specific asset group as approved by regulatory agencies.life. This method requires periodic revision of depreciation rates. When an individual asset is sold or retired, under the group method, the difference between the proceeds, if any, and the cost of the asset is charged or credited to accumulated depreciation, without recognition of a gain or loss.
The unit method is primarily used for buildings, furniture, fixtures, and other support assets. Under the unit method, assets areEach asset is depreciated on the straight-line basis over theits estimated useful life of the individual asset.life. When an individual asset is sold or retired, under the unit method, the cost basis of the asset and related accumulated depreciation are removed from the accounts and any associated gain or loss is recognized.
Estimated useful lives are as follows:
     
  Years
Buildings  15-35 
Network and outside plant facilities  5-305-40 
Furniture, fixtures, and equipment  3-175-17
Capital lease asset11 

76


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.Revenue recognition
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
Revenue Recognition
Revenue is recognized when evidence of an arrangement exists, the earnings process is complete, the price is fixed or determinable, and collectibility is reasonably assured. The prices for regulated services are filed in tariffs with the appropriate regulatory bodies that exercise jurisdiction over the various services. Marketing incentives, including bundle discounts, are recognized as revenue reductions in the period the service is provided.
Local calling services, including local dial tone, enhanced calling features, such as caller name and number identification, special access circuits, long distance flat rateflat-rate calling plans, and most data services are billed to end users in advance. Billed but unearned revenue is deferred and recorded in advance billings and customer deposits.
Revenues for providing usage basedusage-based services, such as per minuteper-minute long distance service and access charges billed to other telephone carriers for originating and terminating long distance calls on the Company’s network, are billed in arrears. Revenues for these services are recognized in the period these services are rendered. Earned but unbilled usage basedusage-based services are recorded in accounts receivable.
Subsidies, including Universal Serviceuniversal service revenues, are government sponsoredgovernment-sponsored support received in association with providing serviceto subsidize services in mostly rural, high costhigh-cost areas. These revenues typically are typically based on information provided by the Company and are calculated by the administering government agency responsible for administering the support program.agency. Subsidies are recognized in the period the service is provided withprovided; out of period subsidy adjustments are recognized in the period they are deemed probable and estimable. There is a reasonable possibility that out of period subsidy adjustments will be recorded in the future. Out of period subsidy adjustments were $1.1 million, ($2.6) million and ($1.3) million in 2008, 2007 and 2006, respectively.

73


      Operator
Revenues from operator services, paging services, telemarketing, and order fulfillment services are recognized monthly as services are provided. Telephone equipment revenues generated from retail channels are recorded at the point of sale. Telecommunications systems and structured cabling project revenues are recognized upon completionwhen the project is completed and billing of the project.billed. Maintenance services are provided on both a contract and time and material basis and are recorded when the service is provided. Print advertising and publishing revenues are recognized ratably over the life of the related directory, generally twelve months.
The Company reports taxes imposed by governmental authorities on revenue-producing transactions between the Company and our customers that are within the scope of EITF No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” in the consolidated financial statements on a net basis.
Advertising Costs
Advertising costs
The costs of advertising are charged to expense as incurred. Advertising expenses totaled $1,256, $1,521$2,308 in 2008, $1,944 in 2007, and $1,839$1,266 in 2005, 20042006.
Income taxes
Consolidated Communications Holdings, Inc. and 2003, respectively.
Income Taxes
      The Company filesits wholly-owned subsidiaries file a consolidated federal income tax return and its majority ownedreturn. The majority-owned subsidiary, East Texas Fiber Line Incorporated (“ETFL”), files a separate federal income tax return. StateSome state income tax returns are filed on a consolidated orbasis; others are filed on a separate legal entity basis depending on the state.basis. Federal and state income tax expense or benefit is allocated to each subsidiary based on separately determined taxable income or loss.
Amounts in the financial statements related to income taxes are calculated in accordance with SFASStatement of Financial Accounting Standards No. 109“Accounting for Income Taxes". On January 1, 2007, the Company adopted FASB Interpretation No. 48“Accounting for Uncertainty in Income Taxes” (“to account for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109”). 109. For more information, please see Note 10.
Deferred income taxes are provided for the temporary differences between assets and liabilities recognized for financial reporting purposes and such amountsassets and liabilities recognized for tax purposes, as well as for operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance for deferred income tax assets when, in the opinion of management, it is more likely than not that deferred tax assets will not be realized.

77


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
Provisions for federal and state income taxes are calculated on reported pre-tax earnings based on current tax law and also may include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determiningto determine deferred tax assets and liabilities. Such provisions may differ from the amounts currently receivable or payable because certain items of income and expense are recognized in differentone time periodsperiod for financial reporting purposes thanand another for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. TheEven if the Company establishes reserves for income tax when, despite the belief thatbelieves its tax positions are fully supportable, it will establish reserves for income tax when it is more likely than not there remain certain positionsincome tax contingencies that are probable towill be challenged and possibly disallowed by various authorities.disallowed. The consolidated tax provision and related accruals include the impact of such reasonably estimated losses. To the extent that the probable tax outcomes of these matters change, those changes such changes in estimate will impactalter the income tax provision in the period in which such determination is made.
Stock-based compensation
Stock Based Compensation
The Company maintains a restricted share plan to award certain employeesthat provides for the issuance of the Company restricted common shares of the Company as an incentiveto key employees to motivate them to enhance their long-term performance as well as anand to provide incentive to join or remain with the Company. In December 2004, the Financial Accounting Standards Board (“FASB”) issuedThe Company accounts for share-based compensation under Statement of Financial Accounting Standard (“SFAS”)Standards No. 123 Revised,“Share Based Payment” (“SFAS 123R”),123(R) which replaced SFAS No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”) and superseded Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees”. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning January 1, 2006, with early adoption encouraged.values. The Company adopted SFAS 123R was adopted by the CompanyNo. 123(R) effective July 1, 2005, using the modified-prospective transition method. Under the guidelines of SFAS 123R,No. 123(R), the Company recognized non-cash stock compensation expense of $8,590 during the second half of 2005.$1,901 in 2008, $4,034 in 2007, and $2,482 in 2006.

74


Financial instruments and derivatives
Financial Instruments and Derivatives
As of December 31, 2005,2008, the Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt obligations. At December 31, 20052008, and 20042007, the carrying value of these financial instruments approximated fair value, except for the Company’s senior notes payable.payable, which were retired in April 2008. As of December 31, 2005,2007, the carrying value and fair value of the Company’s senior notes approximated $130,000 and $138,450, respectively, based on quoted market prices.$133,900, respectively.
Derivative instruments are accounted for in accordance with Statement of Financial Accounting Standards No. 133Accounting for Derivative Instruments and Hedging Activity”Activity (“SFAS No. 133”). SFAS No. 133 provides comprehensive and consistent standards for the recognition and measurement of derivative and hedging activities. It requires that derivatives be recorded on the consolidated balance sheet at fair value and establishes criteria for hedges of changes in fair values of assets, liabilities, or firm commitments,commitments; hedges of variable cash flows of forecasted transactionstransactions; and hedges of foreign currency exposures of net investments in foreign operations. To the extent that the derivatives qualifya derivative qualifies as a cash flow hedge, the gain or loss associated with the effective portion is recorded as a component of Accumulated Other Comprehensive Income (Loss). Changes in the fair value of derivatives that do not meet the criteria for hedges are recognized in the consolidated statements of operations. Upon termination ofWhen an interest rate swap agreements,agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt obligation. Since the Company’s interest swap agreements are with major financial institutions, theThe Company does not anticipate any nonperformance by any counterparty.

78


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on total assets, total shareholders’ equity, total revenue, income from operations or net income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Recent Accounting Pronouncements
(DollarsIn June 2008, FASB issued FASB Staff Position (“FSP”) No. EITF 03-6-1 “Determining Whether Instruments Granted in thousands, except shareShare-Based Payment Transactions are Participating Securities”. This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation of earnings per share amounts)
Recent Accounting Pronouncements
      In May 2005,pursuant to the FASB issued SFAS Statement No. 154,“Accounting Changes and Error Corrections”(“SFAS 154”), a replacement of APB Opinion No. 20,���Accounting Changes”, and SFAS Statement No. 3,“Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”). SFAS 154 replaces the provisions of SFAS 3 with respect to reporting accounting changes in interim financial statements. SFAS 154two-class method. This FSP is effective for accounting changes and corrections of errors made infinancial statements issued for fiscal years beginning after December 15, 2005. Issuers that apply SFAS 154 in an2008, and interim period should provide the applicable disclosures specified in SFAS 154.periods within those years. Early application of this FSP is prohibited. The Company does not expect any material financial statement impact on future results of operations and financial condition.
In December 2008, the FASB issued FSP SFAS 154132(R)-1 (“SFAS 132(R)-1”),“Employers’ Disclosures about Postretirement Benefit Plan Assets”which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension and other postretirement plan. SFAS 132(R)-1 requires employers to disclose the fair value of each major category of plan assets as of each annual reporting date for which a statement of financial position is presented; the inputs and valuation technique used to develop fair value measurements of plan assets at the annual reporting date, including the level within the fair value hierarchy in which the fair value measurements fall as defined by SFAS No. 157; investment policies and strategies, including target allocation percentages; and significant concentrations of risk in plan assets. SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009 and will significantlynot have impact itson future results of operations and financial statements upon its adoption on January 1, 2006.condition.

75


4.Acquisitions
Acquisition of ICTC and Related Businesses
      On December 31, 2002,In March 2008, the Company, through its wholly owned subsidiary CCI, acquired allFASB issued Statement of the outstanding common stockFinancial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosure about Derivative Instruments and Hedging Activities—an Amendment of ICTC, McLeodUSA Public Services, Inc.,FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and Consolidated Market Response, Inc,strategies for using such instruments, as well as substantially allany details of credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires reporting entities to disclose additional information about the amounts and location of derivatives within the financial statements, how the provisions of Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” have been applied, and the impact that hedges have on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company currently provides information about its hedging activities and use of derivatives in its quarterly and annual filings with the SEC, including many of the assetsdisclosure requirements prescribed by SFAS No. 161. While SFAS No. 161 will have an impact on disclosures, it will not have an impact on the Company’s future results of three other related telecom linesoperations and financial condition.
In December 2007, the FASB issued Statement of business (or divisions) which were all owned by McLeodUSAFinancial Accounting Standards No. 160 (“SFAS No. 160”).”Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51”. SFAS No. 160 clarifies that a noncontrolling interest in a consolidated subsidiary should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and its affiliates.the noncontrolling interest. The purchase priceCompany has adopted SFAS No. 160 effective January 1, 2009. If the Company had adopted SFAS No. 160 as of January 1, 2009, the Company would have reported a noncontrolling interest of $5,185 as a component of equity as of December 31, 2008 and additional earnings attributed to the minority interest of $863 for the businesses acquired totaled $284,834, including acquisition costs, and was funded with proceeds fromyear then ended. The actual impact of adoption will depend upon earnings attributable to minority interest in 2009.
In December 2007, the issuanceFASB issued Statement of redeemable preferred stock and debt. The Company accounted forFinancial Accounting Standards No. 141 (revised 2007) (“SFAS No. 141(R)”) “Business Combinations”. SFAS No. 141(R) retains the acquisition usingfundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS No. 141(R) defines the acquirer as the entity that obtains control of accounting; accordinglyone or more businesses in a business combination, establishes the financial statements reflectacquisition date as the allocationdate the acquirer achieves control, and requires the acquirer to recognize the assets acquired, liabilities assumed, and any non-controlling interest at their fair values as of the total purchase priceacquisition date. SFAS No. 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. The Company is required to adopt SFAS No. 141(R) effective January 1, 2009, and expects it will affect acquisitions made hereafter, though the net tangibleimpact will depend upon the size and intangible assetsnature of the acquisition. In addition, the $5,740 liability for unrecognized tax benefits discussed in Note 10, as of December 31, 2008 relate to tax positions of acquired basedentities taken prior to their acquisition by the Company. Liabilities settled for lesser amounts will affect the income tax expense in the period of reversal.
In September 2006, the FASB issued SFAS No. 157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Company has adopted the provisions of SFAS No. 157 as of January 1, 2008, for financial instruments that are required to be measured at fair value on their respectivea recurring basis. SFAS No. 157 establishes a three-tier fair values. The accompanying consolidated financial statements includevalue hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. For additional information about the impact of SFAS No.157 on the results of operations and financial condition, please refer to Note 15.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS No. 158 requires an entity to (a) recognize in its statement of financial position an asset or an obligation for a defined benefit postretirement plan’s funded status, (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the acquired businesses from the date of acquisition.
      The allocationend of the purchase price toemployer’s fiscal year, and (c) recognize changes in the assets acquiredfunded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. The Company adopted the recognition and liabilities assumed is as follows:
     
Current assets $25,802 
Property, plant and equipment  118,057 
Customer list  59,517 
Tradenames  15,863 
Goodwill  99,554 
Liabilities assumed  (33,959)
    
Net purchase price $284,834 
    
      Goodwill represents the residual aggregate purchase price after all tangible and identified intangible assets have been valued, offset by the valuerelated disclosure provisions of liabilities assumed. The aggregate purchase price was derived from a competitive bidding process and negotiations and was influenced by our assessment of the value of the overall acquired business. The significant goodwill value reflects our view that the acquired business can generate strong cash flow and sales and earnings following acquisition. In accordance with SFAS No. 142,158 effective December 31, 2006. After combining the tradenamesTexas and goodwill acquired are not amortized but are testedIllinois pension plans on December 31, 2007, the Company adopted the measurement date provisions of SFAS No. 158 effective January 1, 2008, for impairment at least annually. The customer lists are amortized over their weighted average estimated useful livespension and postretirement plans with measurement dates other than December 31, resulting in an increase to opening accumulated deficit on January 1, 2008, of ten years. The Company made an election under the Internal Revenue Code that resulted in the$169 net of tax basis of goodwill and other intangible assets associated with this acquisition to be deductible for tax purposes ratably over a15-year period.$97.

7976


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.3. Acquisition
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
Acquisition of TXUCV
On April 14, 2004,December 31, 2007, the Company through its wholly owned subsidiary Consolidated Communications Texas Acquisition, Inc. (“Texas Acquisition”), acquired all of the capital stock of TXU Communications Ventures CompanyNorth Pittsburgh Systems, Inc. (“TXUCV”) from Pinnacle One Partners L.P. (“Pinnacle One”North Pittsburgh”). By acquiring all of the capital stock of TXUCV,As a result, the Company acquired substantially allan RLEC that serves portions of the telecommunications assets of TXU Corp., including two rural local exchange carriers (“RLECs”),Allegheny, Armstrong, Butler, and Westmoreland counties in western Pennsylvania; a CLEC that together serve marketsserves small to mid-sized businesses in Conroe, KatyPittsburgh and Lufkin, Texas, a directory publishing business, a transportits surrounding suburbs as well as in Butler County; an Internet Service Provider that furnishes broadband services business that provides connectivity within Texasin western Pennsylvania; and minority interests in twothree cellular partnerships.partnerships and one competitive access provider. The results of operations for North Pittsburgh are included in the Company’s telephone operations segment for December 31, 2007, and thereafter.
The Company accounted for the TXUCVNorth Pittsburgh acquisition using the purchase method of accounting. Accordingly, the financial statements reflect the allocation of the total purchase price to the net tangible and intangible assets acquired based on their respective fair values. At the time of the acquisition, 80% of the shares of North Pittsburgh converted into the right to receive $25.00 per share in cash; each of the remaining shares converted into the right to receive 1.1061947 shares of common stock of the Company, or 3,318,480 shares of stock valued at $74,398, net of issuance fees. The total purchase price, including acquisition costs and net of $9,897$32,902 of cash acquired, was allocated according to the following table, which summarizes the fair values of the North Pittsburgh assets acquired and liabilities assumedassumed:
     
Current assets $17,729 
Property, plant and equipment  116,308 
Customer list  49,000 
Goodwill  214,562 
Investments and other assets  53,360 
Liabilities assumed  (103,933)
    
Net purchase price $347,026 
    
Because of the proximity of this transaction to the prior year-end, the values of certain assets and liabilities were based on preliminary valuations and were subject to adjustment as follows:additional information was obtained. Adjustments of $173 were made to goodwill during the year ended December 31, 2008. The adjustments consist of $448 in additional acquisition costs incurred, a $333 adjustment to the capital lease liability and ($608) in liabilities assumed.
     
Current assets $27,478 
Property, plant and equipment  264,576 
Customer list  108,200 
Goodwill  224,554 
Other assets  43,291 
Liabilities assumed  (144,009)
    
Net purchase price $524,090 
    
The aggregate purchase price was derived fromthrough a competitive bidding process and negotiationsnegotiated bid and was influenced by the Company’s assessment of the value of the overall TXUCVNorth Pittsburgh business. The significant goodwill value reflects the Company’s view that the TXUCVNorth Pittsburgh business cancould generate strong cash flow and sales and earnings following the acquisition. All of the goodwill recorded as part of this acquisition is allocated to the telephone operationsTelephone Operations segment. In accordance with SFAS 142, the $224,554 in goodwill recorded as part of the TXUCV acquisition is not being amortized, but is tested for impairment at least annually. The customer list is being amortized over its estimated useful life of thirteenfive years. The goodwill and other intangibles associated with this acquisition didwere not qualify under the Internal Revenue Code as deductible for tax purposes.
      TheBecause the acquisition occurred on December 31, 2007, the Company’s consolidated financial statements prior to 2008 do not include the results of operations for the TXUCV acquisition since the April 14, 2004, acquisition date.North Pittsburgh. Unaudited pro forma results of operations data for the yearyears ended December 31, 20042007, and 2006, as if the acquisition had occurred at the beginning of the period presented are as follows:
     
Total revenues $323,463 
    
Income from operations $37,533 
    
Proforma net loss $(2,956)
    
Proforma net loss applicable to common shareholders $(20,146)
    
Loss per share — basic and diluted $(2.24)
    
         
  December 31 
  2007  2006 
Total revenues $424,917  $424,232 
       
Income from operations $59,752  $67,696 
       
Proforma net income $5,592  $26,888 
       
Income per share — basic $0.19  $0.87 
       
Income per share — diluted $0.19  $0.85 
       

8077


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.4. Prepaids and other current assets
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
5.Prepaids and other current assets
Prepaids and other current assets consist of the following:
         
  December 31,
   
  2005 2004
     
Deferred charges $431  $1,637 
Prepaid expenses  4,385   3,492 
Other current assets  776   1,050 
       
  $5,592  $6,179 
       
         
  December 31, 
  2008  2007 
Deferred charges $981  $1,334 
Prepaid expenses  5,913   7,864 
Other current assets  37   1,160 
       
  $6,931  $10,358 
       
6.5. Property, plant and equipment
Property, plant and equipment, net consist of the following:
          
  December 31,
   
  2005 2004
     
Property, plant and equipment:        
 Land and buildings $48,015  $49,567 
 Network and outside plant facilities  657,308   641,913 
 Furniture, fixtures and equipment  75,161   68,360 
 Work in process  6,480   7,783 
       
   786,964   767,623 
 Less: accumulated depreciation  (451,876)  (406,863)
       
Net property, plant and equipment $335,088  $360,760 
       
         
  December 31, 
  2008  2007 
Property, plant and equipment:        
Land and buildings $65,840  $65,128 
Network and outside plant facilities  808,886   781,684 
Furniture, fixtures and equipment  83,889   79,944 
Assets under capital leases  5,144   6,032 
Work in process  10,540   10,251 
       
   974,299   943,039 
Less: accumulated depreciation  (574,013)  (531,392)
       
Net property, plant and equipment $400,286  $411,647 
       
Depreciation expense totaled $53,089, $42,652$69,516 in 2008, $52,797 in 2007, and $16,518$53,170 in 2005, 2004 and 2003, respectively.2006.
6. Investments
7.Investments
Investments consist of the following:
          
  December 31,
   
  2005 2004
     
Cash surrender value of life insurance policies $1,259  $1,708 
Cost method investments:        
 GTE Mobilnet of South Texas Limited Partnership  21,450   21,450 
 Rural Telephone Bank stock  5,921   5,921 
 CoBank, ACB stock  2,071   1,879 
 Other  19   19 
Equity method investments:        
 GTE Mobilnet of Texas RSA #17 Limited Partnership (17.02% owned)  13,175   11,759 
 Fort Bend Fibernet Limited Partnership (39.06% owned)  161   148 
       
  $44,056  $42,884 
       
         
  December 31, 
  2008  2007 
Cash surender value of life insurance policies $1,779  $2,566 
Cost method investments:        
GTE Mobilnet of South Texas Limited Partnership  21,450   21,450 
Pittsburgh SMSA Limited Partnership  22,950   22,950 
CoBank, ACB stock  2,651   2,388 
Other  10   18 
Equity method investments:        
GTE Mobilnet of Texas RSA #17 Limited Partnership (17.02% owned)  17,116   15,359 
Pennsylvania RSA 6(I) Limited Partnership (16.6725% owned)  7,276   7,102 
Pennsylvania RSA 6(II) Limited Partnership (23.67% owned)  22,267   21,949 
Boulevard Communications, LLP (50% owned)  158   167 
Fort Bend Fibernet Limited Partnership (39.06% owned)     193 
       
  $95,657  $94,142 
       

8178


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
CoBank is a cooperative bank, owned by its customers. Annually, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, who has traditionally been a significant lender in the Company’s credit facility. The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
The Company has aowns 2.34% ownership of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”). The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas.
      The Rural Telephone Bank stock consists of 5,921 shares of $1,000 par value Class C stock which is stated at original cost plus a gain recognized at conversion of Class B to Class C. The Company anticipatesalso owns 3.60% of Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular service in and around the Pittsburgh metropolitan area. Because of its Rural Telephone Bank stock will be redeemed in 2006 atlimited influence over these partnerships, the current carrying value of $5,921.Company accounts for both under the cost method.
The Company has aowns 17.02% ownership of GTE Mobilnet of Texas RSA #17 Limited Partnership (the “Mobilnet (“RSA Partnership”17”). The principal activity of the Mobilnet RSA Partnership17 is providing cellular service to a limited rural area in Texas. The Company also owns 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”), and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”). These limited partnerships provide cellular service in and around the Company’s Pennsylvania service territory. In addition, the Company has a 50% ownership interest in Boulevard Communications, LLP, a competitive access provider in western Pennsylvania. The Company has some influence onover the operating and financial policies of this partnershipthese four entities, and accounts for this investment onthe investments using the equity basis.method. Summarized financial information for the Mobilnet RSA Partnership was as follows:
         
  2005 2004
     
For the year ended December 31:
        
Total revenues $42,032  $35,203 
Income from operations  10,959   9,636 
Income before income taxes  11,260   10,116 
Net income  11,260   10,116 
As of December 31:
        
Current assets  10,140   6,443 
Non-current assets  29,183   22,494 
Current liabilities  2,722   1,733 
Non-current liabilities  137    
Partnership equity  36,464   27,204 
             
  2008  2007  2006 
For the year ended December 31:
            
Total revenues $212,498  $180,412  $49,298 
Income from operations  50,479   41,682   15,161 
Income before income taxes  50,479   42,680   15,633 
Net income  50,619   42,680   15,633 
             
As of December 31:
            
Current assets  33,586   31,049   14,409 
Non-current assets  74,521   64,172   34,399 
Current liabilities  8,937   8,869   1,844 
Non-current liabilities  567   468   246 
Partnership equity  98,603   85,885   46,097 
The Company received partnership distributions totaling $379$7,892, $1,872 and $418$1,099 from its equity method investments in 20052008, 2007 and 2004,2006, respectively.
7. Minority Interest
8.Minority Interest
      East Texas Fiber Line, Inc. (“ETFL”)ETFL is a joint venture owned 63% by the Company and 37% by Eastex Celco. ETFL provides connectivity to certain customers within Texas over a fiber optic transport network.
8. Goodwill and Other Intangible Assets
9.Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, goodwill and tradenames are not amortized but are subject to an annual impairment test,testing—either annually, or to more frequent testingfrequently if circumstances indicate that they may be impaired.impairment. In December 2004,2008, the Company completed its annual impairment test relying primarily on a discounted cash flow valuation technique and determined that goodwill was impaired in one of itsthe Market Response reporting unitsunit within the Other Operations segment because of a decline in fair value due to underperformance of the Company, andbusiness. As a resulting goodwillresult, an impairment charge of $10,147$6,050 was recognized. The goodwill impairment was limited to the Company’s Operator Services reporting unit, and was due to a decline in current and projected cash flows for this reporting unit. In December 2005, the Company completed its annual impairment test, using a discounted cash flow method,2007 and the test2006, similar testing indicated no impairment of goodwill existed.

8279


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
The following table presents the carrying amount of goodwill by segment:
             
  Telephone Other  
  Operations Operations Total
       
Balance at January 1, 2004 $78,443  $21,111  $99,554 
Impairment     (10,147)  (10,147)
Finalization of ICTC and related businesses purchase accounting  2,292   (2,010)  282 
TXUCV acquisition  228,792      228,792 
          
Balance at December 31, 2004  309,527   8,954   318,481 
Finalization of TXUCV purchase accounting and other adjustments, net  (4,238)     (4,238)
          
Balance at December 31, 2005 $305,289  $8,954  $314,243 
          
             
  Telephone  Other    
  Operations  Operations  Total 
Balance at December 31, 2006 $308,850  $7,184  $316,034 
Utilization and release of NOL valuation allowance  (3,984)     (3,984)
Purchase of North Pittsburgh  214,389      214,389 
          
Balance at December 31, 2007  519,255   7,184   526,439 
Adjustment to purchase of North Pittsburgh  173      173 
Impairment     (6,050)  (6,050)
          
Balance at December 31, 2008 $519,428  $1,134  $520,562 
          
The Company’s most valuable tradename is the federally registered mark CONSOLIDATED, which is used in association with our telephone communication services and is a design of interlocking circles. The Company’s corporate branding strategy leverages a CONSOLIDATED naming structure. All business units and several product/names of products and services names incorporate the CONSOLIDATED name. These tradenames are indefinitely renewable intangibles. The carrying value of the tradenames totaled $14,291 at December 31, 2008 and 2007. In December 2004, the Company completed its annual impairment test2008 and determined that the recorded value of its tradename was impaired in two of its reporting units within the Other Operations segment of the Company, and a resulting impairment charge of $1,431 was recognized. The tradename impairment was limited to the Company’s Operator Services and Mobile Services reporting units, and was due to lower than previously anticipated revenues within these two reporting units. In December 2005,2007, the Company completed its annual impairment test using discounted cash flows based on a relief from royalty method and the test indicateddetermined that there was no impairment of the tradenames existed.
      The carryingCompany’s tradenames. In December 2006, similar testing indicated that the recorded value of tradenames was impaired in the Company’s tradenames totaled $14,546 at both December 31, 2005 and 2004 and was allocated to the business segments as follows: $10,046 to the Telephone Operations and $4,500 toOperator Services reporting unit within the Other Operations.Operations segment. As a result an impairment charge of $255 was recognized. The 2006 tradenames impairment was due to lower than previously anticipated revenues with the Operator Services reporting unit.
The Company’s customer lists consist of an established core base of customers that subscribe to its services. In December 2006, the Company identified a decline in current and projected cash flows from customers within two reporting units—Operator Services and Telemarketing Services—both within the Other Operations segment. The Company completed an impairment test and determined that the value of its customer list was partially impaired, and recognized an impairment charge of $10,985.
The carrying amount of customer lists is as follows:
         
  December 31,
   
  2005 2004
     
Gross carrying amount $167,633  $167,633 
Less: accumulated amortization  (32,118)  (17,828)
       
Net carrying amount $135,515  $149,805 
       
         
  December 31, 
  2008  2007 
Gross carrying amount $205,648  $205,648 
Less: accumulated amortization  (81,399)  (59,237)
       
Net carrying amount $124,249  $146,411 
       
The net carrying value of the customer lists was allocated to the business segments as follows: $122,464 to Telephone Operations and $1,785 to Other Operations as of December 31, 2008 and $144,161 to Telephone Operations and $2,250 to Other Operations as of December 31, 2007. The aggregate amortization expense associated with customer lists was $22,163 for the yearsyear ended December 31, 2005, 20042008, $12,862 for 2007, and 2003 was $14,290, $11,870 and $5,958, respectively. Customer lists are$14,260 for 2006. The net carrying value at December 31, 2008 is being amortized using a weighted average life of 11.7approximately 6.4 years. The estimated annualfuture amortization expense is $14,290 for each of the next five years.follows:
     
Calendar 2009 $22,163 
Calendar 2010  22,138 
Calendar 2011  22,138 
Calendar 2012  22,138 
Calendar 2013  8,323 
Thereafter  27,349 
    
  $124,249 
    
10.Affiliated Transactions

80


      Prior to the IPO, the Company and certain of its subsidiaries maintained two professional services fee agreements. The agreements required the Company to pay to
9. Affiliated Transactions
Richard A. Lumpkin, Chairman of the

83


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
Company, Providence Equity and Spectrum Equity professional services fees to be divided equally among them, for consulting, advisory and other professional services provided to the Company. The Company recognized fees totaling $2,867, $4,135 and $2,000 in 2005, 2004 and 2003, respectively, associated with these agreements. These fees are included in selling, general and administrative expenses in the Consolidated Statements of Operations. Effective July 27, 2005, in connection with the IPO, these agreements were cancelled.
      Agracel, Inc., or Agracel, is a real estate investment company of which Mr. Lumpkin, together with his family, beneficially owns 49.7%. In addition, of Agracel, Inc. (“Agracel”), a real estate investment company. Mr. Lumpkin also is a director of Agracel.
Agracel is the sole managing member and 50% owner of LATEL LLC.LLC (“LATEL”). Mr. Lumpkin directly owns the remaining 50% of LATEL. Effective December 31, 2002, theThe Company sold five of its buildings and associated land to LATEL, LLC for the aggregate purchase price of $9,180, and then entered into an agreement to leaseback the same facilities for generalleases certain office and warehouse functions.space from LATEL. The leases are triple net lease thatleases require the Company to continue to pay substantially all expenses associated with general maintenance and repair, utilities, insurance, and taxes.taxes associated with the leased facilities. The Company recognized operating lease expensesrent expense of $1,285, $1,251$1,387 in 2008, $1,352 in 2007, and $1,221 during 2005, 2004 and 2003, respectively,$1,320 in 2006 in connection with the LATELthese operating leases. There iswas no associated lease payable balance outstanding at December 31, 2005.2008, or 2007. The leases expire on September 11, 2011.in July 2011 but contain provisions for automatic renewal of one year terms through 2013.
Agracel is the sole managing member and 66.7% owner of MACC, LLC (“MACC”). Mr. Lumpkin, together with his family, owns the remainder of MACC. In 1997, a subsidiary of theThe Company entered into a lease agreement to rentleases certain office space for a period of five years. The parties extended the lease for an additional five years beginning October 14, 2002.from MACC. The Company recognized rent expense in the amount of $139 in 2005$192, $155, and $123 in both 2004$132 during 2008, 2007 and 20032006, respectively, in connection with the MACC lease.this lease, which expires in August 2012.
Mr. Lumpkin, together with members of his family, beneficially owns 100% of SKL Investment Group, LLC (“SKL”). The Company charged SKL $77$45 in both 20052008, 2007 and 2004 and $74 in 20032006, respectively, for use of office space, computers, telephone service, and for other office relatedoffice-related services.
Mr. Lumpkin also has an ownership interest in First Mid-Illinois Bancshares, Inc. (“First Mid-Illinois”), which provides the Company with general banking services, including depository, disbursement, and payroll accounts and retirement plan administrative services, on terms comparable to those available to other large business accounts. The Company provides certain telecommunications products and services to First Mid-Illinois. Those services areMid-Illinois based upon standard prices for strategic business customers. Following is a summary of the transactions between the Company and First Mid-Illinois:
              
  Year Ended
  December 31,
   
  2005 2004 2003
       
Fees charged from First Mid-Illnois for:            
 Banking fees $6  $5  $2 
 401K plan administration  69   77   46 
Interest income earned by the Company on deposits at First Mid-Illinois  443   170   97 
Fees charged by the Company to First Mid-Illinois for telecommunication services  514   476   437 
             
  Year ended December 31, 
  2008  2007  2006 
Fees charged from First Mid-Illnois for:            
Banking fees $11  $10  $10 
401K plan adminstration  65   81   100 
Interest income earned by the Company on deposits at First Mid-Illinois  48   174   206 
Fees charged by the Company to First Mid-Illinois for telecommunication services  482   465   542 
In 2008, the Checkley Agency, a wholly-owned insurance brokerage subsidiary of First Mid-Illinois, received a $145 commission relating to insurance and risk management services provided to the Company.

8481


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.10. Income Taxes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
11.Income Taxes
The components of the income tax provision are as follows:
              
  Year Ended December 31,
   
  2005 2004 2003
       
Current:            
 Federal $240  $393  $ 
 State  1,042   673    
          
   1,282   1,066    
          
Deferred:            
 Federal  4,972   (305)  3,252 
 State  4,681   (529)  465 
          
   9,653   (834)  3,717 
          
Income tax expense $10,935  $232  $3,717 
          
      Following
             
  Year Ended December 31, 
  2008  2007  2006 
Current:            
Federal $12,519  $7,790  $10,152 
State  6,152   1,155   1,632 
          
   18,671   8,945   11,784 
             
Deferred:            
Federal  (9,650)  (1,523)  (4,568)
State  (2,382)  (2,748)  (6,811)
          
   (12,032)  (4,271)  (11,379)
          
Income tax expense $6,639  $4,674  $405 
          
The following is a reconciliation between the statutory federal income tax rate and the Company’s overall effective tax rate:
             
  Year Ended December 31,
   
  2005 2004 2003
       
Statutory federal income tax rate (benefit)  35.0%  (35.0)%  35.0%
State income taxes, net of federal benefit  5.7   15.1   5.0 
Stock compensation  46.4       
Litigation settlement  16.6       
Life insurance proceeds  (15.0)      
Other permanent differences  4.6   28.8    
Derivative instruments     24.6    
Change in valuation allowance  4.9   (5.7)   
Change in deferred tax rate  71.3       
Other  (0.6)  (2.2)  0.3 
          
   168.9%  25.6%  40.3%
          
             
  Year Ended December 31, 
  2008  2007  2006 
Statutory federal income tax rate  35.0%  35.0%  35.0%
State income taxes, net of federal benefit  27.0   2.5   2.1 
Stock compensation  1.7   4.7   6.4 
Other permanent differences  4.3   1.9   3.3 
Change in tax law     (10.7)  (45.8)
Change in deferred tax rate  (9.9)  (5.4)  2.0 
Other  (2.3)  1.0    
          
   55.8%  29.0%  3.0%
          
Cash paid (refunded) for federal and state income taxes was $613, $(509)$13,540 during 2008, $13,976 during 2007, and $2,000$8,237 during 2005, 2004 and 2003, respectively.2006.

8582


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.Deferred Tax Assets
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
Net deferred taxes consist of the following components:
          
  December 31,
   
  2005 2004
     
Current deferred tax assets:        
 Reserve for uncollectible accounts $1,060  $1,020 
 Accrued vacation pay deducted when paid  1,215   1,504 
 Accrued expenses and deferred revenue  836   754 
       
   3,111   3,278 
       
Noncurrent deferred tax assets:        
 Net operating loss carryforwards  18,588   21,866 
 Derivative instruments      
 Goodwill and other intangibles     846 
 Pension and postretirement obligations  21,029   23,402 
 Minimum tax credit carryforward  1,045   806 
 Valuation allowance  (16,040)  (17,136)
       
   24,622   29,784 
       
Noncurrent deferred tax liabilities:        
 Goodwill and other intangibles  (36,862)   
 Derivative instruments  (1,443)  (547)
 Partnership investment  (7,070)  (6,898)
 Property, plant and equipment  (43,727)  (87,348)
 Basis in investment  (1,748)  (1,632)
       
   (90,850)  (96,425)
       
Net non-current deferred tax liabilities  (66,228)  (66,641)
       
Net deferred income tax assets (liabilities) $(63,117) $(63,363)
       
      In assessing
         
  Year Ended December 31, 
  2008  2007 
Current deferred tax assets:        
Reserve for uncollectible accounts $862  $877 
Accrued vacation pay deducted when paid  1,200   1,259 
Accrued expenses and deferred revenue  1,538   2,415 
       
   3,600   4,551 
         
Noncurrent deferred tax assets:        
Net operating loss carryforwards  1,998   5,968 
Pension and postretirement obligations  40,184   25,161 
Stock compensation  251   158 
Derivative instruments  17,321   4,657 
State tax credit carryforward  2,450   2,441 
Valuation Allowance     (2,871)
       
   62,204   35,514 
         
Noncurrent deferred tax liabilities:        
Goodwill and other intangibles  (44,487)  (50,483)
Partnership investment  (22,203)  (22,096)
Property, plant and equipment  (53,648)  (60,224)
       
   (120,338)  (132,803)
       
Net non-current deferred tax liabilities  (58,134)  (97,289)
       
Net deferred income tax liabilities $(54,534) $(92,738)
       
Deferred income taxes are provided for the realizabilitytemporary differences between assets and liabilities recognized for financial reporting purposes and assets and liabilities recognized for tax purposes. The ultimate realization of deferred tax assets depends upon taxable income during the future periods in which those temporary differences become deductible. To determine whether deferred tax assets can be realized, management considersassesses whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considersrealized, taking into consideration the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the gross deferred tax assets, the Company will need to generate future taxable income in increments sufficient to recognize net operating loss carryforwards prior to expiration as described below. strategies.
Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net oftemporary differences. However, management may reduce the existing valuation allowance at December 31, 2005. The amount of the deferred tax assets consideredit considers realizable however, could be reduced in the near term if estimates of future taxable income during the carry forwardcarryforward period are reduced. There is an annual limitation on the use of the NOL carryforwards, however theThe amount of projected future taxable income is expected to allow for the full utilization of the NOLnet operating loss (NOL) carryforwards (excluding those attributable to ETFL as described below).below.
Consolidated Communications Holdings, and its wholly owned subsidiaries,Inc. which filefiles a consolidated federal income tax return estimates itwith its wholly-owned subsidiaries has availablefully utilized its NOL carryforwardsas of approximately $32,417 for federal income tax purposes and $124,769 for state income tax purposes to offset against future taxable

86


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.December 31, 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
income. The federal NOL carryforwards expire from 2021 to 2024 and state NOL carryforwards expire from 2006 to 2016.
      East Texas Fiber Line Incorporated (“ETFL”),ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL carryforwards at December 31, 2008 of approximately $7,415$3,327 for federal income tax purposes and $4,054 for state income tax purposes to offset against future taxable income. TheDuring 2008 ETFL’s NOL and related valuation allowance was reduced by $3,831 for the portion of the NOL determined not to be utilizable due to limitations as prescribed by §382 of the Internal Revenue Code. ETFL’s federal NOL carryforwards expire from 20082009 to 2024 and state NOL carryforwards expire from 2006 to 2009.2024.
      The valuation allowance is primarily attributed to federal and state tax loss carryforwards andDuring 2008 the deferred tax asset related to ETFL,state income tax NOL carryforwards and related valuation allowance totaling $1,530 that was recorded as a result of the acquisition of North Pittsburgh Systems, Inc. and Subsidiaries was reduced by $633 for which no tax benefit is expectedthe portion of the NOL determined not to be utilized. If it becomes evident that sufficientutilizable due to limitations as prescribed by §382 of the Internal Revenue Code and as adopted by the state of Pennsylvania. In addition, the valuation allowance on state NOL carryforwards was reduced by $834 for the portion of the NOL determined to be fully utilizable based on taxable income will be availableprojections for the periods in which the jurisdictions where these deferred tax assets exist,are deductible. As a result of these adjustments, the 2007 NOL utilization provision to return adjustments and the 2008 projected utilization of state NOLs, the Company would release theestimates it has available state NOL carryforwards at December 31, 2008 of approximately $12,839 and related deferred tax assets of $834. The valuation allowance accordingly.
      If subsequently recognized, the tax benefit attributableon state NOLs has been reduced to $15,498 and $109$0 at December 31, 2008. The release of the valuation allowance for deferred taxes would be allocatedon state income tax NOLs was recorded as an increase to goodwill and accumulated other comprehensive income, respectively. This valuation allowance relates primarilygoodwill. The state NOL carryforwards expire from 2020 topre-acquisition 2027.

83


Texas Legislation
In 2007, Texas amended the 2006 tax operatinglegislation which modified the Texas franchise tax calculation to a new “margin tax” calculation used to derive Texas taxable income. The most significant impact of this amendment on the Company was the revision of the temporary credit on taxable margin converting state loss carryforwards to a state tax credit carryforward of $3,755 and related deferred tax assetsasset of $2,441. This new legislation effectively reduced the Company’s net deferred tax liabilities and created a corresponding credit to its tax provision of approximately $1,729 in 2007. During 2008, $86 of the Texas state tax credit carryforward was utilized. The Texas state tax credit carryforward of $3,669 and the related deferred tax asset of $2,385 is limited annually and expires in 2027.
Unrecognized Tax Benefits
The Company adopted FIN 48 effective January 1, 2007 with no impact on its results of operations or financial condition, and has analyzed filing positions in all of the federal and state jurisdictions where it is more likely thanrequired to file income tax returns, as well as all open tax years in these jurisdictions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements; prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
As of December 31, 2008, and December 31, 2007, the amount of unrecognized tax benefits was $5,740 and $6,030, respectively. The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is currently $0. Subsequent to the adoption of SFAS No. 141(R) on January 1, 2009, the total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is $5,740.
For the year ended December 31, 2008, there was a net decrease of $290 to the balance of unrecognized tax benefits reported at December 31, 2007. This net decrease includes a decrease of $562 due to the expiration of 2003 and 2004 federal and state statutes of limitations, of which only $236 had an effect on the effective tax rate. The above decrease was partially offset by an increase of $273 related to the 2007 income tax filing for North Pittsburgh, of which $0 had an effect on the effective tax rate.
The Company is continuing its practice of recognizing interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively. When it adopted FIN 48, the Company had no accrual balance for interest and penalties. For the twelve months ended December 31, 2008, the Company accrued $235 of net interest and penalties and in total has recognized a liability for interest and penalties of $633. For the twelve months ended December 31, 2007, the Company accrued $224 of net interest and penalties and in total had recognized a liability for interest and penalties of $398.
The only periods subject to examination for the Company’s federal return are years 2005 through 2007. The periods subject to examination for the Company’s state returns are years 2004 through 2007. The Company is currently under examination by both federal and state tax authorities. The Company does not expect that any settlement or payment that may result from the audits will have a material effect on results of operations or cash flows.
The Company does not anticipate that the benefittotal unrecognized tax benefits will not be realized. During 2005,significantly change due to the valuation allowance was reduced by $1,413 as a resultsettlements of a reduction in net deferred tax assets. This reductionaudits and the expiration of statute of limitations in the valuation allowance was credited against goodwill recorded with respectnext twelve months. There were no material changes to any of these amounts during 2008.

84


A reconciliation of the acquisition,beginning and did not impactending amount of unrecognized tax expense.benefits is as follows:
     
  Liability for 
  Unrecognized Tax 
  Benefits 
Balance at January 1, 2008 $6,030 
 
Additions for tax positions of acquisition   
Reductions for lapse of 2003 and 2004 federal and state statute of limitations  (562)
Additions for tax positions of prior years  272 
Reduction for lapse of 2003 federal statute of limitations   
Reduction for lapse of 2002 state statute of limitations   
    
 
Balance at December 31, 2008 $5,740 
    
12.Accrued Expenses
11. Accrued Expenses
Accrued expenses consist of the following:
         
  December 31,
   
  2005 2004
     
Salaries and employee benefits $10,040  $9,191 
Taxes payable  7,946   6,915 
Accrued interest  8,124   6,490 
Other accrued expenses  4,266   11,655 
       
  $30,376  $34,251 
       
         
  December 31, 
  2008  2007 
Salaries and employee benefits $9,453  $10,350 
Taxes payable  6,004   5,180 
Accrued interest  785   3,614 
Other accrued expenses  8,342   9,110 
       
  $24,584  $28,254 
       
13.Pension Costs and Other Postretirement Benefits
12. Pension Costs and Other Postretirement Benefits
The Company has several defined benefit pension plans covering substantially all of its hourly employees and certainemployees. Certain salaried employees primarily those located in Texas.are also covered by defined benefit plans, which are now frozen. The pension plans, which generally are noncontributory, provide retirement benefits based on years of service and earnings. The pension plans are generally noncontributory. The Company’s funding policy is to contributeCompany contributes amounts sufficient to meet the minimum funding requirements as set forth in employee benefit and tax laws.
The Company also has a qualified supplemental pension plan (“Restoration Plan”) covering certain former North Pittsburgh employees. The Restoration Plan restores benefits that are precluded under the pension plan by Internal Revenue Service limits on compensation and benefits applicable to qualified pension plans, and by the exclusion of bonus compensation from the pension plan’s definition of earnings. During 2008, a total of $5.9 million of benefits accrued under the Restoration Plan was paid in various lump sum distributions to all former North Pittsburgh employees except for one participant who continues to receive an annuity payment of approximately $3 annually. The cost and obligations associated with the Restoration Plan are included in the “Pension Benefits” columns on the following pages.
The Company currently provides other postretirement benefits (“Other(shown as “Other Benefits”) in the tables that follow) consisting of health care and life insurance benefits for certain groups of retired employees. Retirees share in the cost of health care benefits. Retireebenefits, making contributions for health care benefitsthat are adjusted periodicallyperiodically—either based upon either collective bargaining agreements for former hourly employees and asor because total costs of the program change for former salaried employees.have changed. The Company’s funding policyCompany generally pays covered expenses for retiree health benefits is generally to pay covered expenses as they are incurred. Postretirement life insurance benefits are fully insured.
      TheFor 2008, the Company used a December 31 measurement date for its Illinois, Texas and Pennsylvania plans. For 2007 and 2006 the Company used a September 30 measurement date for its Illinois plans in Illinois and a December 31 measurement datedated for its plans in Texas.it Texas and Pennsylvania plans.

8785


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
The following tables present the benefit obligation, plan assets, and funded status of the plans:
                         
  Pension Benefits Other Benefits
     
  December 31, December 31,
     
  2005 2004 2003 2005 2004 2003
             
The change in benefit obligation
                        
Projected benefit obligation, beginning of period $117,640  $55,528  $49,637  $35,747  $8,951  $7,966 
TXUCV acquisition     60,984         26,629    
Service cost�� 2,699   2,930   770   910   989   165 
Interest cost  7,003   5,902   3,207   1,638   1,579   557 
Plan participant contributions           196   158   135 
Plan amendments           (2,851)  (2,652)  454 
Plan curtailments  (4,728)        (7,880)  (772)   
Benefits paid  (6,722)  (7,237)  (3,403)  (1,882)  (1,747)  (692)
Administrative expenses paid     (410)     (141)      
Actuarial (gain)/ loss  8,442   (57)  5,317   2,094   2,612   366 
                   
Projected benefit obligation, end of period $124,334  $117,640  $55,528  $27,831  $35,747  $8,951 
                   
Accumulated benefit obligation $115,630  $105,451  $51,070             
                   
The change in plan assets
                        
Fair value of plan assets, beginning of period $94,292  $50,704  $45,446  $  $  $ 
TXUCV acquisition     40,633             
Actual return on plan assets  7,757   6,715   7,804          
Employer contributions  5,372   3,887   857   1,827   1,589   557 
Plan participant contributions           196   158   135 
Administrative expenses paid  (253)  (410)     (141)      
Benefits paid  (6,722)  (7,237)  (3,403)  (1,882)  (1,747)  (692)
                   
Fair value of plan assets end of period $100,446  $94,292  $50,704  $  $  $ 
                   
Funded status
                        
Funded status $(23,888) $(23,348) $(4,824) $(27,831) $(35,747) $(8,951)
Employer contributions after measurement date and before end of period           158   275   194 
Unrecognized prior service (credit) cost           (2,469)  918   952 
Unrecognized net actuarial (gain) loss  3,368   (177)  162   2,988   (115)  (128)
                   
Accrued benefit cost $(20,520) $(23,525) $(4,662) $(27,154) $(34,669) $(7,933)
                   
Amounts recognized in the consolidated balance sheet
                        
Accrued benefit liability $(21,250) $(23,982) $(4,662) $(27,154) $(34,669) $(7,933)
Accumulated other comprehensive income  730   457             
                   
Net amount recognized $(20,520) $(23,525) $(4,662) $(27,154) $(34,669) $(7,933)
                   
                         
  Pension Benefits  Other Benefits 
  December 31,  December 31, 
  2008  2007  2006  2008  2007  2006 
The change in benefit obligation
                        
Projected benefit obligation, beginning of year $187,851  $126,910  $124,334  $40,895  $26,994  $27,831 
Aquired with the acquisition of North Pittsburgh     61,651         13,165    
Service cost  2,120   1,802   2,024   900   809   842 
Interest cost  11,214   7,378   7,012   2,420   1,527   1,346 
Service cost adjustment to retained earnings  202         72       
Interest cost adjustment to retained earnings  976         163       
Post-measurement date contributions           (339)      
Plan participant contributions           375   246   109 
Plan amendments  (320)        (3,724)  916    
Special termination benefits and settlements  51         41       
Benefits paid  (17,534)  (7,743)  (6,666)  (2,873)  (1,792)  (1,150)
Actuarial (gain) / loss  3,472   (2,147)  206   (207)  (970)  (1,984)
                   
Projected benefit obligation, end of year $188,032  $187,851  $126,910  $37,723  $40,895  $26,994 
                   
                         
Accumulated benefit obligation $180,795  $180,003  $125,377             
                      
                         
The change in plan assets
                        
Fair value of plan assets, beginning of year $166,638  $103,790  $100,446  $  $  $ 
Acquired with the acquisition of North Pittsburgh     54,912             
Actual return on plan assets  (36,794)  10,870   9,685          
Employer contributions  6,139   4,809   402   2,498   1,546   1,041 
Plan participant contributions           375   246   109 
Administrative expenses paid        (77)         
Benefits paid  (17,534)  (7,743)  (6,666)  (2,873)  (1,792)  (1,150)
                   
Fair value of plan assets, end of year $118,449  $166,638  $103,790  $  $  $ 
                   
                         
Funded status
                        
Projected benefit obligation $(188,032) $(187,851) $(126,910) $(37,723) $(40,895) $(26,994)
Fair value of plan assets  118,449   166,638   103,790          
Employer contributions after measurement date and before end of year              339   136 
                   
Funded status  (69,583)  (21,213)  (23,120)  (37,723)  (40,556)  (26,858)
Unrecognized prior service (credit)  (455)  (151)  (164)  (3,233)  (131)  (1,758)
Unrecognized net actuarial (gain) loss  50,455   (3,640)  1,376   (169)  49   1,064 
                   
Net amount recognized $(19,583) $(25,004) $(21,908) $(41,125) $(40,638) $(27,552)
                   

8886


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
                         
  Pension Benefits  Other Benefits 
  December 31,  December 31, 
  2008  2007  2006  2008  2007  2006 
Amounts recognized in the balance sheet included in
                        
Current liabilities $(52) $(5,924) $  $(2,908) $(2,841) $ 
Noncurrent liabilities  (69,531)  (15,289)  (23,120)  (34,815)  (37,715)  (26,858)
                   
  $(69,583) $(21,213) $(23,120) $(37,723) $(40,556) $(26,858)
                   
                         
Amounts in accumulated other comprehensive income (loss):
                        
Unrecognized prior service (credit) $(455) $(151) $(164) $(3,233) $(131) $(1,758)
Unrecognized net actuarial (gain) loss  50,455   (3,640)  1,376   (169)  49   1,064 
                   
  $50,000  $(3,791) $1,212  $(3,402) $(82) $(694)
                   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)During 2009, the Company expects to recognize amortization of prior service credits of $43 for pension benefits and $964 for other postretirement benefits, and amortization of net actuarial loss of $2,664 for pension benefits and amortization of net actuarial gain of $21 for postretirement benefits.
(Dollars in thousands, except share and per share amounts)
The Company’s pension plan weighted average asset allocations by investment category are as follows:
         
  December 31,
   
  2005 2004
     
Plan assets by category
        
Equity securities  56.6%  54.8%
Debt securities  39.7%  36.8%
Other  3.7%  8.4%
       
   100.0%  100.0%
       
         
  December 31, 
  2008  2007 
Plan assets by category
        
Equity securities  52.2%  38.3%
Debt securities  44.2%  24.3%
Other  3.6%  37.4%
       
   100.0%  100.0%
       
The Company’s investment strategy isCompany seeks to maximize long-term return on invested plan assets while minimizing the risk of market volatility. Accordingly, the Company targets itits allocation percentage at 50% to 60% in equity funds, with the remainder in fixed income funds and cash equivalents.
On December 31, 2007, the Company combined its Illinois and Texas pension plans. Assets of the Texas plan were liquidated and the resulting cash was moved into the combined plan.

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The Company expects to contribute $60approximately $9,000 to $11,000 to its pension plans and $1,710$2,968 to its other postretirement plans in 2006.2009. The Company’s expected future benefit payments to be paid during the years ended December 31 are as follows:
         
  Pension Other
  Benefits Benefits
     
2006 $5,928  $1,710 
2007  6,186   1,865 
2008  6,429   1,855 
2009  6,799   1,929 
2010  7,186   2,014 
2011 through 2015  41,837   10,621 
      Effective as of April 30, 2005, the Company’s Board of Directors authorized amendments to several of the Company’s benefit plans. The Consolidated Communications Texas Retirement Plan was amended to freeze benefit accruals for all participants other than union participants and grandfathered participants. The rate of accrual for grandfathered participants in this plan was reduced. A grandfathered participant is defined as a participant age 50 or older with 20 or more years of service as of April 30, 2005. The Consolidated Communications Texas Retiree Medical and Life Plan was amended to freeze the Company subsidy for premium coverage as of April 30, 2005 for all existing retiree participants. This plan was also amended to limit future coverage to a select group of future retires who attain at least age 55 and 15 years of service, but with no Company subsidy. The amendments to the Retiree Medical and Life Plan resulted in a $7,880 curtailment gain that was included in general and administrative expenses during 2005.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
         
  Pension  Other 
  Benefits  Benefits 
2009 $12,225  $2,968 
2010  12,429   2,968 
2011  12,425   3,116 
2012  12,617   3,131 
2013  12,699   3,033 
2014 through 2018  45,320   14,926 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
The following table presents the components of net periodic benefit cost for the years ended December 31, 2005, 20042008, 2007, and 2003:2006:
                         
  Pension Benefits Other Benefits
     
  2005 2004 2003 2005 2004 2003
             
Service cost $2,699  $2,930  $770  $910  $989  $165 
Interest cost  7,003   5,902   3,207   1,638   1,579   557 
Expected return on plan assets  (7,383)  (6,434)  (3,507)         
Curtailment gain           (7,880)      
Other, net  48   (2)     (471)  (19)  (4)
                   
Net periodic benefit cost (income) $2,367  $2,396  $470  $(5,803) $2,549  $718 
                   
                         
  Pension Benefits  Other Benefits 
  2008  2007  2006  2008  2007  2006 
Service cost $2,120  $1,802  $2,024  $900  $809  $842 
Interest cost  11,214   7,378   7,012   2,420   1,527   1,346 
Expected return on plan assets  (12,689)  (8,034)  (7,790)         
Other, net  18   22   544   (638)  (667)  (772)
                   
Net periodic benefit cost $663  $1,168  $1,790  $2,682  $1,669  $1,416 
                   
                         
Additional loss due to:                        
Special termination benefits and settlments $51  $  $  $41  $  $ 
                   
The weighted average assumptions used in measuring the Company’s benefit obligations for its Illinois Texas, and Pennsylvania plans as of December 31, 2005, 20042008 and 2003for the Illinois and Texas plans as of December 31, 2007, and 2006 are as follows:
                         
  Pension Benefits Other Benefits
     
  2005 2004 2003 2005 2004 2003
             
Discount rate  5.9%  6.0%  6.0%  5.9%  6.0%  6.0%
Compensation rate increase  3.3%  3.5%  3.5%         
Return on plan assets  8.0%  8.3%  8.0%         
Initial heathcare cost trend rate           10.5%  10.0%  11.0%
Ultimate heathcare cost rate           5.0%  5.0%  5.0%
Year ultimate trend rate reached           2011 to 2012   2010 to 2012   2009 
                         
  Pension Benefits  Other Benefits 
  2008  2007  2006  2008  2007  2006 
Discount rate  6.1%  6.3%  6.0%  6.1%  6.3%  6.0%
Compensation rate increase  3.9%  3.5%  3.3%         
Return on plan assets  8.0%  8.0%  8.0%         
Initial heathcare cost trend rate           10.0%  10.0%  10.0%
Ultimate heathcare cost rate           5.0%  5.0%  5.0%
Year ultimate trend rate reached           2016   2013   2012 
Weighted average actuarial assumptions used to determine the net periodic benefit cost for 2005, 20042008, 2007, and 20032006 are as follows: discount rate —rate—5.9%, 6.3%, and 6.0%, 6.0% and 6.8%,; expected long-term rate of return on plan assets — assets—8.0%, 8.3%8.0%, and 8.0%,; and rate of compensation increases —increases—3.9%, 3.5%, 3.9% and 3.5%3.3%, respectively.

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The weighted average assumptions used in measuring the benefit obligations for the North Pittsburgh plans as of December 31, 2007, are as follows:
         
  Pension  Other 
  Benefits  Benefits 
Discount rate  6.4%  6.1%
Compensation rate increase  4.3%  4.3%
Return on plan assets  8.0%   
Initial healthcare cost trend rate     10.0%
Ultimate healthcare cost rate     5.0%
Year ultimate trend rate reached     2013 
In determining the discount rate, the Company considers the current yields on high quality corporate fixed income investments with maturities corresponding to the expected duration of the benefit obligations. The expected return on plan assets assumption was based upon the categories of the assets and the past history of thehistorical return on thethose assets. The compensation rate increase is based upon past history and long-term inflationary trends. A one percentage point change in the assumed health care cost trend rate would have the following effects on the Company’s other postretirement benefits:
         
  1% Increase 1% Decrease
     
Effect on 2005 service and interest costs $365  $(289)
Effect on accumulated postretirement benefit obligations as of December 31, 2005 $2,786  $(2,304)
         
  1% Increase  1% Decrease 
Effect on 2008 service and interest costs $339  $(291)
Effect on accumulated postretirement benefit obligations as of December 31, 2008 $3,083  $(2,692)
14.Employee 401k Benefit Plans and Deferred Compensation Agreements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The Company was required to adopt the recognition provisions of SFAS No. 158 effective December 31, 2006; however, the requirement to measure plan assets and benefit obligations as of the date of the Company’s fiscal year end is required to be effective as of December 31, 2008. Upon combining the Texas and Illinois pension plans on December 31, 2007, the Company adopted the measurement date provisions of SFAS No. 158 effective January 1, 2008 for pension and postretirement plans with measurement dates other than December 31. The impact of the adoption of the measurement date provisions resulted in an increase to opening accumulated deficit on January 1, 2008 of $169 net of tax of $97.
401k Benefit Plans
The Pension Protection Act of 2006 (“the Pension Protection Act”) may affect the manner in which many companies, including the Company, administer their pension plans. Effective January 1, 2008, the Pension Protection Act requires many companies to more fully fund their pension plans according to new funding targets, potentially resulting in greater annual contributions. The Company is currently assessing the impact that the Pension Protection Act will have on pension funding in future years.
13. Employee 401k Benefit Plans and Deferred Compensation Agreements
401k benefit plans
The Company sponsors several 401(k) defined contribution retirement savings plans. Virtually all employees are eligible to participantparticipate in one of these plans. Each employee may electplans by electing to defer a portion of his or hertheir compensation, subject to certain limitations. The Company provides matching contributions based on qualified employee contributions. Total Company contributions to the plans were $2,077, $1,223$2,609 in 2008, $2,385 in 2007, and $496$2,277 in 2005, 2004 and 2003, respectively.2006.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.Deferred compensation agreements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
Deferred Compensation Agreements
The Company has deferred compensation agreements with the former board of directors of TXUCV’s predecessor company,the Company’s subsidiary, Lufkin-Conroe Communications, and certain former employees. The benefits are payable for up to 15 years or life and may begin as early as age 65 or upon the death of the participant. These plans were frozen by TXUCV’s predecessor company prior tobefore the Company’s assumption ofCompany assumed the related liabilities and thus the participants accrue no new benefits to the existing participants.benefits. Company payments related to the deferred compensation agreements totaled approximately $564$561 in 2008, $569 in 2007, and $336$609 in 2005 and 2004, respectively.2006. The net present value of the remaining obligations totaled approximately $4,781$3,394 and $2,710$3,725 as of December 31, 20052008, and 2004,2007, respectively, and is included in pension and postretirement benefit obligations in the accompanying balance sheet.sheets.

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The Company maintains forty life insurance policies on certain of the participating former directors and employees. In June 2005, theThe Company recognized $2,800$0 and $300 of net proceeds in other income in 2008 and 2007, respectively, due to the receipt of life insurance proceeds related to the passing of a former employee.employees. The excess of the cash surrender value of the Company’s remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $1,259 and $1,708$1,779 as of December 31, 20052008, and 2004, respectively, and is$2,566 as of December 31, 2007. These amounts are included in other assets in the accompanying balance sheet.sheets. Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the statements of cash flows. The aggregate death benefit payable under these policies totaled $8,007 as of December 31, 2008, and $8,857 as of December 31, 2007.
14. Long-Term Debt
15.Long-Term Debt
Long-term debt consists of the following:
          
  December 31,
   
  2005 2004
     
Senior Secured Credit Facility        
 Revolving loan $  $ 
 Term loan A     115,333 
 Term loan C     312,900 
 Term loan D  425,000    
Senior notes  130,000   200,000 
Capital leases     1,188 
       
   555,000   629,421 
Less: current portion     (41,079)
       
  $555,000  $588,342 
       
         
  December 31, 
  2008  2007 
         
Senior Secured Credit Facility:        
Revolving loan $  $ 
Term loan  880,000   760,000 
Obligations under capital lease  1,266   2,646 
Senior notes     130,000 
       
   881,266   892,646 
Less: current portion  (922)  (1,010)
       
  $880,344  $891,636 
       
Future maturities of long-term debt as of December 31, 20052008, are as follows: 2011 — $425,000 and 2012 — $130,000.
     
2009 $922 
2010  344 
2011   
2012   
2013   
Thereafter  880,000 
    
  $881,266 
    
Senior Secured Credit Facility
      TheSenior secured credit facility
In 2007, the Company, through its wholly-owned subsidiaries, maintainsentered into a credit agreement with variousseveral financial institutions, whichinstitutions. The credit agreement provides for aggregate borrowings of $455,000$950,000, consisting of a $425,000$760,000 term loan facility, a $50,000 revolving credit facility, and a $30,000 revolving$140,000 delayed draw term loan facility (“DDTL”). The DDTL’s sole purpose was for the funding of the redemption of the Company’s outstanding senior notes plus any associated fees or redemption premium. As described below, the Company borrowed $120,000 under the DDTL on April 1, 2008, at which time the commitment for the remaining $20,000 that was originally available under the DDTL expired. Other borrowings under the credit facility.facility were used to retire the Company’s previous $464,000 credit facility and to fund the acquisition of North Pittsburgh. Borrowings under the credit facility are the Company’s senior, secured obligations that are secured by substantially all of the assets of the Company and its subsidiaries with the exception of Illinois Consolidated Telephone Company. The term loan hasand the DDTL have no interim principal maturities and thus maturesmature in full on October 14, 2011.December 31, 2014. The revolving credit facility matures on April 14, 2010.December 31, 2013. There were no borrowings under the revolving credit facility as of December 31, 2008.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
At the Company’s election, borrowings under the credit facilities bear interest at fluctuating interest rates based on: (a) a base rate (the highest of the administrative agent’s base rate in effect on such day, 0.5% per annum above the latest three week moving average of secondary market morning offering rates in the United States for three month certificates of deposit or 0.5% above the Federal Funds rate); or (b) the London Interbank Offered Rate, or LIBOR plus, in either case,equal to an applicable margin within the relevant range of margins (0.75% to 2.50%) provided for in the credit agreement. The applicable margin is based upon the Company’s total leverage ratio.plus either a “base rate” or LIBOR. As of December 31, 2005,2008, the applicable margin for interest rates on LIBOR basedwas 2.50% per year for the LIBOR-based term loans and the revolving credit facility. The applicable margin for our $880.0 million term loan is fixed for the duration of the loan. The applicable margin for alternative base rate loans was 1.50% per year for the term loan and the revolving credit facility. The applicable margin for borrowings on the revolving credit facility is based on a pricing grid. Based on our leverage ratio of 4.90:1 as of December 31, 2008, borrowings under the revolving credit facility will be priced at a margin of 2.75% for LIBOR-based borrowings and 1.75%. for alternative base rate borrowings. The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end. At December 31, 20052008, and 2004,2007, the weighted average rate including swaps, of interest on the Company’s term debtcredit facilities, including the effect of interest rate swaps and the applicable margin, was 5.72%6.30% and 5.23%7.11% per annum, respectively. Interest is payable at least quarterly.
The credit agreement contains various provisions and covenants, which include,including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue capital stock, as well as, limitations onand commit to future capital expenditures. The Company has also agreed to maintain certain financial ratios, including interest coverage, fixed charge coverage and total net leverage ratios, all as defined in the credit agreement. As of December 31, 2008, the Company was in compliance with the credit agreement covenants.
Senior notes
Senior Notes
On April 14, 2004,1, 2008, the Company through its wholly owned subsidiaries, issued $200,000 of 93/4% Senior Notes due on April 1, 2012. The senior notes are the Company’s senior, unsecured obligations and pay interest semi-annually on April 1 and October 1. During August 2005, proceeds from the IPO were used primarily to redeem $65,000redeemed all of the aggregate principaloutstanding senior notes. The total amount of the Senior Notes alongredemption was $136,337, including a call premium of $6,337. The senior note redemption and payment of accrued interest through the redemption date was funded using $120,000 of borrowing on the DDTL together with cash on hand. The Company recognized a loss on extinguishment of debt of $9,224 related to the redemption premium and the write-off of approximately $6,338. Duringunamortized deferred financing costs.
Capital lease
The Company has a capital lease, which expires in 2010, for certain equipment used in its operations. As of December 2005 an additional $5,00031, 2008, the present value of the aggregate principalminimum remaining lease commitments was $1,266. Of this amount, of$922 is due within the Senor Notes was redeemed along with a redemption premium of approximately $488.next year.
      Some or all of the remaining senior notes may be redeemed on or after April 1, 2008. The redemption price plus accrued interest will be, as a percentage of the principal amount, 104.875% in 2008, 102.438% in 2009 and 100% in 2010 and thereafter. In addition, holders may require the repurchase of the notes upon a change in control, as such term is defined in the indenture governing the senior notes. The indenture contains certain provisions and covenants, which include, among other items, restrictions on the ability to issue certain types of stock, incur additional indebtedness, make restricted payments, pay dividends and enter other lines of business.Derivative instruments
Derivative Instruments
The Company maintains interest rate swap agreements that effectively convert a portion of the floating-rate debt to a fixed-rate basis, thusthereby reducing the impact of interest rate changes on future interest expense. At December 31, 2005,2008, the Company has interest rate swap agreements covering $259,356$740,000 of notional amount floating to fixed interest rate swap agreements. Approximately 84.1% of the floating rate term debt was fixed as of December 31, 2008. The swaps expire at various times from September 30, 2009 through March 13, 2013. The swaps are designated as cash flow hedges of our expected future interest payments. Under the swap agreements, the Company receives 3-month LIBOR based interest payments from the swap counterparties and pays a fixed rate.
In September 2008, due to the larger than normal spread between 1-month LIBOR and 3-month LIBOR, the Company added basis swaps, under which it pays 3-month LIBOR-based payments less a fixed percentage to the basis swap counterparties, and receives 1-month LIBOR. At the same time, the Company began utilizing 1-month LIBOR resets on its credit facility. Concurrently basis swaps, in aggregate principal amountcombination with the prior swaps, were designated as cash flow hedges designed to mitigate the changes in cash flows on the Company’s credit facility. The effect of its variable ratethe swap portfolio is to fix the cash interest payments on the floating portion of $740,000 of debt at fixeda weighted average LIBOR rates ranging from 3.03% to 4.57%. The swap agreements expire on December 31, 2006, May 19, 2007, and September 30, 2011. On October 12, 2005, the Company entered into agreements to hedge an additional $100,000 of variable rate debt with swaps that will be effective as of January 3, 2006 at a blended average fixed rate of approximately 4.8% and expiration date4.43% exclusive of September 30, 2011.the applicable borrowing margin on the loans.
The fair value of the Company’s derivative instruments, comprised solely ofwhich are all interest rate swaps and basis swaps, amounted to an asseta liability of $4,117 and $1,060$47,908 at December 31, 20052008, and 2004, respectively.a liability of $12,769 at December 31, 2007. The fair value is included in deferred financing and other assets. The Company recognized a net credit of $13 and a net loss of $228 in interest expense during 2005 and 2004, respectively, related to its derivative instruments.Other Liabilities on the Balance Sheets. The change in the marketfair value of derivative instruments, net of the related tax effect, is recorded in otherOther Comprehensive Loss. The Company recognized comprehensive loss of $22,078 during 2008, $10,638 during 2007, and $252 during 2006. Included in the interest expense for the year ended December 31, 2008 was a non-cash charge of $395 for the ineffective portion of the Company’s cash flow hedges.

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In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings. To further reduce potential future income statement impacts from hedge ineffectiveness, the Company dedesignated its original interest rate swap contracts and redesignated them, in conjunction with the basis swaps, as of September 4, 2008 as a cash flow hedge.
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.15. Fair Value Measurements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except shareAs of December 31, 2008, the Company’s derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis. The fair values of the interest rate swaps are determined using an internal valuation model which relies on the expected LIBOR based yield curve and per share amounts)
comprehensive income.estimates of counterparty and the Company’s non performance risk as the most significant inputs. Though the expected LIBOR based yield curve, an observable input, has the most significant impact of the determination of fair value, certain other material inputs to the valuations are not directly observable and cannot be corroborated by observable market data. The Company recognized comprehensive incomehas categorized these interest rate derivatives as Level 3.
The Company’s net liabilities measured at fair value on a recurring basis subject to disclosure requirements of $2,188 and $1,105 andSFAS No. 157 at December 31, 2008 were as follows:
                 
      Fair Value Measurements at Reporting Date Using 
      Quoted Prices  Significant    
      in Active  Other  Significant 
      Markets for  Observable  Unobservable 
      Identical Assets  Inputs  Inputs 
Description December 31, 2008  (Level 1)  (Level 2)  (Level 3) 
                 
Interest Rate Derivatives $47,908          $47,908 
               

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The following table presents the Company’s net liabilities measured at fair value on a comprehensive lossrecurring basis using significant unobservable inputs (Level 3) as defined in SFAS No. 157 at December 31, 2008:
     
  Measurements 
  Using Significant 
  Unobservable 
  Inputs (Level 3) 
  Interest Rate 
  Derivatives 
Balance at December 31, 2007 $12,769 
Settlements  (10,412)
Total gains or losses (realized/unrealized)    
Unrealized loss included in earnings  395 
Unrealized loss included in other comprehensive income  45,156 
    
     
Balance at December 31, 2008 $47,908 
    
     
The amount of total loss for the period included in earnings for the period as a component of interest expense $395 
    
The change in fair value of $515 during 2005, 2004 and 2003, respectively.the derivatives is primarily a result of a change in market expectations for future interest rates.
16. Restricted Share Plan
16.Restricted Share Plan
The Company maintains a Restricted Share Plan whichrestricted share plan that provides for the issuance of common shares to key employees and as an incentiveto motivate them to enhance their long-term performance as well as anand to provide incentive to join or remain with the Company. In connection with the IPO, theThe Company amended and restated its Restricted Share Plan. The vesting schedule of outstanding awards was modified such that an additional 25% of the outstanding restricted shares granted became vested. The amendment and restatement also removed a call provision contained within the original plan. As a result, the accounting treatment changed from a liability plan, for which expense was recognized based on a formula ($0 immediately prior to the IPO), to an equity plan for which expense is recognized based upon fair value at the IPO date under the guidelines of SFAS 123R. The amendment and restatement represented a modification to the terms of the equity awards, resulting in a new measurement date and non-cash compensation expense associated with the restricted shares of $6,391 as of July 27, 2005.$1,901, $4,034 and $2,482 during the 2008, 2007 and 2006 calendar years, respectively. The $6,391 represents the fair value of the vested shares as of the new measurement date. The fair value was determined based upon the IPO price of $13.00 per share. An additional $2,199 was recognized as non-cash compensation expense duringis included in “selling, general and administrative expenses” in the period from July 28, 2005 through December 31, 2005.accompanying statements of operations. The measurement date value of the remaining unvested shares is expected to be recognized as non-cash compensation expense over the remaining three-year vesting period, less a provision for estimated forfeitures.
The following table presents the restricted stock activity by year:
         
  2005 2004
     
Restricted shares outstanding, beginning of period  750,000   975,000 
Shares granted  87,500   25,000 
Shares vested  (408,662)  (250,000)
IPO conversion adjustment  (1,773)   
Shares forfeited or retired  (5,000)   
       
Restricted shares outstanding, end of period  422,065   750,000 
       
             
  2008  2007  2006 
Restricted shares outstanding, beginning of period  129,302   248,745   422,065 
Shares granted  71,467   136,584   18,000 
Shares vested  (95,241)  (246,277)  (187,000)
Shares forfeited or retired     (9,750)  (4,320)
          
Restricted shares outstanding, end of period  105,528   129,302   248,745 
          
The shares granted under the Restricted Share Planrestricted share plan are considered outstanding at the date of grant asbecause the recipients are entitled to dividends and voting rights. As of December 31, 2005,2008, there were 422,065 of105,528 nonvested restricted shares outstanding with a weighted average measurement date fair value of $12.94$16.82 per share. As of December 31, 2007, there were 129,302 nonvested restricted shares outstanding with a weighted average measurement date fair value of $17.23 per share. The 87,500 shares granted during 20052008 include 14,750 restricted shares granted to certain key employees and directors as well as 56,717 performance based restricted shares. The performance based restricted shares were granted to key employees based upon the Company achieving certain financial and operating targets for 2007 based on a sliding scale. The 14,750 shares granted during 2008 had a weighted average measurement date fair value of $12.73$14.92 per share. In March 2008, a target of 64,447 performance based restricted shares was approved for issuance in the first quarter of 2009 based upon meeting operational and financial goals in 2008. Shares granted subsequent to the IPOgenerally vest at the rate of 25% per year on the anniversary of their grant date. The fair market value of vesting shares was $1,051, $4,693 and $3,865 for the periods ending December 31, 2008, 2007 and 2006, respectively. There was approximately $5,421$1,993 of total unrecognized compensation cost related to the 422,065 nonvested shares outstanding at December 31, 2005.2008. That cost less an estimated allowance of $54 for forfeitures, is expected to be recognized based upon future vesting as non-cash stock compensation in the following years: 2006 — $2,426, 2007 — $2,425, 2008 — $2762009—$1,234, 2010—$623, 2011—$152, and 2009 — $240.2012—$27.
17.Redeemable Preferred Shares
      At December 31, 2004, the Company had authorized 182,000 class A preferred shares of which 182,000 shares were issued and outstanding. The preferred shares were redeemable to the holders with a preferred return on their capital contributions at the rate of 9.0% per annum. On June 7, 2005, the Company made a $37,500 cash distribution to holders of its redeemable preferred shares. On July 27, 2005, all of the outstanding redeemable preferred shares, with a liquidation preference totaling

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.17. Accumulated Other Comprehensive Loss
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
approximately $178,200, were exchanged for 13,710,318 shares of the Company’s common stock which was computed based upon the initial offering price of $13.00 per common share.
18.Accumulated Other Comprehensive Income
Accumulated other comprehensive income is comprised of(loss) comprises the following components:
         
  December 31,
   
  2005 2004
     
Unrealized gain on cash flow hedges, net of tax $2,778  $590 
Minimum pension liability, net of tax  (427)  (283)
Unrealized loss on marketable securities, net of tax  (49)  (49)
       
Accumulated other comprehensive income $2,302  $258 
       
         
  December 31, 
  2008  2007 
Fair value of cash flow hedges $(47,513) $(12,769)
 
Prior service credits and net losses on postretirement plans  (46,598)  3,873 
       
   (94,111)  (8,896)
Deferred taxes  34,632   3,245 
       
 
Accumulated other comprehensive loss $(59,479) $(5,651)
       
19.Environmental Remediation Liabilities
18. Environmental Remediation Liabilities
Environmental remediation liabilities were $830 and $914$500 at December 31, 20052008, and 2004, respectively2007, and are included in other liabilities. These liabilities relate to anticipated remediation and monitoring costs in respect of two small vacant sites and are undiscounted. The Company believes the amount accrued is adequate to cover itsthe remaining anticipated costs of remediation.
19. Commitments and Contingencies
20.Commitments and Contingencies
Legal proceedings
Legal proceedings
      FromOn April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against the Company and its subsidiaries, North Pittsburgh Telephone Company and North Pittsburgh Systems Inc., in Allegheny County, Pennsylvania. The complaint alleges that the Company prevented Salsgiver from connecting fiber optic cables to North Pittsburgh’s utility poles, and seeks compensatory and punitive damages for alleged lost projected profits, damage to Salsgiver’s business reputation, and other costs. The alleged aggregate losses are approximately $125 million, though Salsgiver does not request a specific dollar amount in damages. The Company believes these claims are without merit and the damages are completely unfounded. On November 3, 2008 the Company responded to Salsgiver’s amended complaint and filed a counterclaim for trespass, alleging that Salsgiver attached cables to the Company’s poles without permission and in an unsafe manner.
In addition, from time to time the Company is involved in litigation and regulatory proceedings arising out of its operations. The Company isManagement does not currently a party tobelieve that an adverse outcome in any one or more legal proceedings to which the adverse outcome of which, individually or in aggregate, management believesCompany currently is a party would have a material adverse effect on the Company’s financial position or results of operations.
Operating leases
Operating leases
The Company has entered into several operating lease agreementsleases covering buildings and office space and equipment. Rent expense totaled $5,047, $4,515$4,245 in 2008, $3,810 in 2007, and $2,043$4,381 in 2005, 2004 and 2003, respectively.2006. Future minimum lease payments under existing agreements for each of the next five years and thereafter are as follows: 2006 — $3,501 2007 — $2,799, 2008 — $1,985, 2009 — $1,732, 2010 — $1,681 thereafter — $2,141.2009—$4,187, 2010—$3,021, 2011—$1,640, 2012—$471, 2013—$287, thereafter—$688.

94


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.Other commitments
The Company has entered into two operational support systems contracts. Should we terminate either of the contracts prior to the expiration of their term, we will be liable for minimum commitment payments as defined in the contracts for the remaining term of the contracts. In addition, we have a contractual obligation for network maintenance. The total of the Company’s other commitments are due as follows: 2009—$1,120, 2010—$1,121, 2011—$571, 2012—$69, 2013—$71, thereafter—$110.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Other contingencies
(DollarsOn October 23, 2006, Verizon Pennsylvania, Inc. and several of its affiliates filed a formal complaint with the PAPUC claiming that the Company’s Pennsylvania CLEC’s intrastate switched access rates violate Pennsylvania law. The provision that Verizon cites in thousands, except shareits complaint requires CLEC rates to be no higher than the corresponding incumbent’s rates unless the CLEC can demonstrate that the higher access rates are “cost justified.” Verizon’s original claim requested a refund of $480 from access billings through August 2006. That claim was later revised to include amounts from certain affiliates that had not been included in the original calculation. Verizon’s new complaint seeks $1,346 through December 2006.
The Company believes that its CLEC’s switched access rates are permissible, and per share amounts)is vigorously opposing this complaint. In an Initial Decision dated December 5, 2007, the presiding administrative law judge recommended that the Pennsylvania Public Utility Commission (“PAPUC”), sustain Verizon’s complaint. As relief, the judge directed the Company’s Pennsylvania CLEC to reduce its access rates down to those of the underlying incumbent exchange carrier and refund to Verizon an amount equal to the access charges collected in excess of the new rate since November 30, 2004. The Company filed exceptions to the full PAPUC, which requested that Verizon and the Company attempt to resolve the issue through mediation. The parties were given until November 29, 2008, to complete the mediation, but through mutual agreement, the deadline has been extended to March 2009.
If the Company is not successful in this proceeding, the Pennsylvania CLEC’s operations could suffer material harm—both because of the refund sought by Verizon and because of the prospective reduction in access revenues resulting from the change in its intrastate access rates, which would apply to all carriers on a non-discriminatory basis. The Company’s preliminary estimates indicate that the decrease in annual revenues would be approximately $1,200 on a static basis (keeping access minutes of use constant) if Verizon prevails completely. In addition, other interexchange carriers could file similar claims for refunds. The Company has estimated its potential liability to Verizon and other interexchange carriers to be $3,166 and has recorded a liability that is included in other liabilities in the accompanying consolidated balance sheets. The Company believes that the amount accrued is adequate to cover its potential liabilities.
20. Share Repurchase
In July 2006, the Company completed the repurchase of approximately 3.8 million shares of its common stock for approximately $56,736, or $15.00 per share. With this transaction, Providence Equity sold its entire position in the Company, which totaled approximately 12.7 percent of the Company’s outstanding shares of common stock. This was a private transaction and did not decrease the Company’s publicly traded shares. The Company financed the repurchase using approximately $17,736 of cash on hand and $39,000 of additional term-loan borrowings.
21.Net Loss per Common Share
21. Net Income per Common Share
The following table sets forth the computation of net lossincome per common share:
             
  December 31,
   
  2005 2004 2003
       
Basic and diluted:
            
Net loss applicable to common stockholders $(14,725) $(16,108) $(3,003)
Weighted average number of common shares outstanding  17,821,609   9,000,685   9,000,000 
          
Net loss per common share $(0.83) $(1.79) $(0.33)
          
      Non-vested shares issued pursuant to the Restricted Share Plan (Note 16) are not considered outstanding for the computation of basic and diluted net loss per share as their effect was anti-dilutive.
             
  December 31, 
  2008  2007  2006 
Net income applicable to common stockholders $12,504  $11,423  $13,267 
          
             
Basic weighted average number of common shares outstanding  29,321,404   25,764,380   27,739,697 
Effect of dilutive securities  209,332   358,104   430,804 
          
Diluted weighted average number of common shares outstanding  29,530,736   26,122,484   28,170,501 
          
             
Basic earnings per share $0.43  $0.44  $0.48 
          
             
Diluted earnings per share $0.42  $0.44  $0.47 
          

95


22. Business Segments
22.Business Segments
The Company is viewed and managed as two separate, but highly integrated, reportable business segments,segments: “Telephone Operations” and “Other Operations”.Operations.” Telephone Operations consists of a wide range of telecommunications services, including local and long distance service, digital telephone long-distanceservice, custom calling features, private line services, dial-up and networkhigh-speed Internet access, digital TV, carrier access services, telephone directoriesnetwork capacity services over a regional fiber optic network, and data and Internet products provided to both residential and business customers. All other business activitiesdirectory publishing. The Company also operates a number of complementary businesses that comprise “Other Operations”Operations,” including telemarketing and order fulfillment, telephone services to county jails and state prisons, equipment sales, operator services, products, telecommunications services to state prison facilities, equipment sales and maintenance, inbound/outbound telemarketing and fulfillment services, and pagingmobile services. Management evaluates the performance of these business segments based upon revenue, gross margins, and net operating income.
             
  Year Ended December 31, 
  2008  2007  2006 
Operating revenues            
Telephone Operations $377,967  $286,774  $280,334 
Other Operations  40,457   42,474   40,433 
          
Total $418,424  $329,248  $320,767 
          
             
Operating income (loss)            
Telephone Operations $74,554  $70,162  $65,939 
Other Operations  (6,190)  (3,525)  (16,628)
          
Total  68,364   66,637   49,311 
     
Interest income  367   893   974 
Interest expense  (66,659)  (47,350)  (43,873)
Investment income  20,495   7,034   7,691 
Minority interest  (863)  (627)  (721)
Loss on extinguishment of debt  (9,224)  (10,323)   
Other, net  (577)  (167)  290 
          
             
Income before income taxes and extraordinary item $11,903  $16,097  $13,672 
          
             
Capital expenditures:            
Telephone Operations $47,181  $32,245  $32,698 
Other Operations  846   1,250   690 
          
Total $48,027  $33,495  $33,388 
          
             
  Telephone  Other    
  Operations  Operations  Total 
As of December 31, 2008:
            
Goodwill $519,428  $1,134  $520,562 
          
Total assets $1,227,320  $14,306  $1,241,626 
          
As of December 31, 2007:
            
Goodwill $519,255  $7,184  $526,439 
          
Total assets $1,281,011  $23,580  $1,304,591 
          

9596


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.23. Quarterly Financial Information (unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Consolidated Communications
Quarterly Consolidated Statements of Income
(Dollars in thousands, except share and per share amounts)
                 
  March 31  June 30  September 30  December 31 
2008
                
Revenues $105,414  $106,444  $103,824  $102,742 
Operating expenses:                
Cost of services and products  33,863   36,108   37,778   35,814 
Selling, general and administrative expenses  28,144   26,911   26,162   27,552 
Intangible assets impairment           6,050 
Depreciation and amortization  22,871   22,350   22,841   23,616 
             
Total operating expenses  84,878   85,369   86,781   93,032 
             
Income from operations  20,536   21,075   17,043   9,710 
Other expenses, net  13,949   20,625   7,810   14,077 
             
Income (loss) before income taxes and extraordinary item  6,587   450   9,233   (4,367)
Income tax expense (benefit)  2,878   270   4,262   (771)
             
Income (loss) before extraordinary item  3,709   180   4,971   (3,596)
Extraordinary item (net of income tax)           7,240 
             
Net income $3,709  $180  $4,971  $3,644 
             
Net income per common share                
Basic $0.13  $0.01  $0.17  $0.12 
             
Diluted $0.13  $0.01  $0.17  $0.11 
             
                 
2007
                
Revenues $82,980  $80,944  $80,320  $85,004 
Operating expenses:                
Cost of services and products  25,629   25,788   27,698   28,175 
Selling, general and administrative expenses  22,299   22,296   21,800   23,267 
Depreciation and amortization  16,629   16,606   16,350   16,074 
             
Total operating expenses  64,557   64,690   65,848   67,516 
             
Income from operations  18,423   16,254   14,472   17,488 
Other expenses, net  10,117   9,704   10,119   20,600 
             
Pretax income (loss)  8,306   6,550   4,353   (3,112)
Income tax expense (benefit)  3,687   1,057   2,012   (2,082)
             
                 
Net income (loss) $4,619  $5,493  $2,341  $(1,030)
             
Net income (loss) per common share basic and diluted $0.18  $0.21  $0.09  $(0.04)
             
      The business segment reporting information is as follows:
             
  Telephone Other  
  Operations Operations Total
       
Year ended December 31, 2005:
            
Operating revenues $282,285  $39,144  $321,429 
Cost of services and products  75,884   25,275   101,159 
          
   206,401   13,869   220,270 
Operating expenses  89,043   9,748   98,791 
Depreciation and amortization  62,254   5,125   67,379 
          
Operating income (loss) $55,104  $(1,004) $54,100 
          
Capital expenditures $30,464  $630  $31,094 
          
Year ended December 31, 2004:
            
Operating revenues $230,401  $39,207  $269,608 
Cost of services and products  56,339   24,233   80,572 
          
   174,062   14,974   189,036 
Operating expenses  77,123   10,832   87,955 
Intangible assets impairment     11,578   11,578 
Depreciation and amortization  49,061   5,461   54,522 
          
Operating income (loss) $47,878  $(12,897) $34,981 
          
Capital expenditures $28,779  $1,231  $30,010 
          
Year ended December 31, 2003:
            
Operating revenues $90,282  $42,048  $132,330 
Cost of services and products  21,762   24,543   46,305 
          
   68,520   17,505   86,025 
Operating expenses  32,987   9,508   42,495 
Depreciation and amortization  16,488   5,988   22,476 
          
Operating income $19,045  $2,009  $21,054 
          
Capital expenditures $9,117  $2,179  $11,296 
          
As of December 31, 2005:
            
Goodwill $305,289  $8,954  $314,243 
          
Total assets $903,158  $42,792  $945,950 
          
As of December 31, 2004:
            
Goodwill $309,527  $8,954  $318,481 
          
Total assets $936,545  $69,554  $1,006,099 
          

9697


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share and per share amounts)
23.Quarterly Financial Information (unaudited)
                   
  March 31 June 30 September 30 December 31
         
2005
                
 Revenues $79,772  $78,264  $82,168  $81,225 
 Operating expenses:                
  Cost of services and products  24,417   24,353   25,953   26,436 
  Selling, general and administrative expenses  26,196   16,902   32,419   23,274 
  Depreciation and amortization  16,818   17,114   16,920   16,527 
             
Total operating expenses  67,431   58,369   75,292   66,237 
             
Income from operations  12,341   19,895   6,876   14,988 
Other expenses, net  11,054   8,351   18,371   9,851 
             
Pretax income (loss)  1,287   11,544   (11,495)  5,137 
Income tax expense (benefit)  586   4,385   (1,270)  7,234 
             
Net income (loss)  701   7,159   (10,225)  (2,097)
Dividends on redeemable preferred shares  (4,623)  (4,498)  (1,142)   
             
Net income (loss) applicable to common shareholders $(3,922) $2,661  $(11,367) $(2,097)
             
Net income (loss) per common share $(0.42) $0.27  $(0.49) $(0.07)
             
2004
                
 Revenues $34,067  $72,538  $84,405  $78,598 
 Operating expenses:                
  Cost of services and products  12,374   22,401   23,223   22,574 
  Selling, general and administrative expenses  10,589   22,441   27,768   27,157 
  Depreciation and amortization  5,366   15,176   16,942   17,038 
  Asset impairment           11,578 
             
Total operating expenses  28,329   60,018   67,933   78,347 
             
Income from operations  5,738   12,520   16,472   251 
Other expenses, net  2,797   12,984   10,143   9,968 
             
Pretax income (loss)  2,941   (464)  6,329   (9,717)
Income tax expense (benefit)  1,177   (357)  2,842   (3,430)
             
Net income (loss)  1,764   (107)  3,487   (6,287)
Dividends on redeemable preferred shares  (2,274)  (4,019)  (4,330)  (4,342)
             
Net loss applicable to common shareholders $(510) $(4,126) $(843) $(10,629)
             
Net loss per common share $(0.06) $(0.46) $(0.09) $(1.18)
             
Notes:
      Amendments to one of the Company’s retiree medical and life insurance plans resulted in a $7,880 curtailment gain that was included in general and administrative expenses during the quarter ended June 30, 2005.
      In June 2005, the Company recognized $2,800 of net proceeds in other income due to the receipt of key man life insurance proceeds relating to the passing of a former TXUCV employee.

97


Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Controls
None
Item 9A.Item 9A.Controls and Procedures
      We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our report under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management,Procedures
Management, with the participation of ourthe Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of ourCompany’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act) as of December 31, 2005. Based upon2008, the end of the Company’s fiscal year, and determined that evaluationsuch controls and subjectprocedures were effective in timely making known to management material information relating to the foregoing, our Chief Executive OfficerCompany required to be included in the Company’s periodic filings under the Exchange Act, and Chief Financial Officer concluded that the design and operation of ourthere were no material weaknesses in those disclosure controls and procedures provided reasonable assuranceprocedures. Management also indicated that during the disclosure controlsCompany’s fourth quarter of 2008 there were no changes that would have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and proceduresthe Report of Independent Registered Public Accounting Firm thereon are effective to accomplish their objectives.set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Item 9B.Other Information
Item 9B.Other Information
None
PART III
Item 10.Directors, Executive Officers and Corporate Governance
Item 10.Directors and Executive Officers of the Registrant
The Company has adopted a code of ethics that applies to all of its employees, officers, and directors, including its principal executive officer, principal financial officer, and principal accounting officer. The text of the Company’s code of ethics is posted on its website atwww.Consolidated.com within the Corporate Governance portion of the (select Investor Relations, section.and then Corporate Governance).
Additional information required by this Item is incorporated herein by reference to our proxy statement to be issued in connection with the Annual Meeting of our Stockholders to be held on May 18, 2006,5, 2009, which proxy statement will be filed within 120 days of the end of our fiscal year.before April 30, 2009.
Item 11.Executive Compensation
Item 11.Executive Compensation
The information required by this Item is incorporated herein by reference to our proxy statement to be issued in connection with the Annual Meeting of our Stockholders to be held on May 18, 2006,5, 2009, which proxy statement will be filed within 120 days of the end of our fiscal year.before April 30, 2009.
Item 12.Security Ownership of Certain Beneficial Owners and Management
Item 12.Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference to our proxy statement to be issued in connection with the Annual Meeting of our Stockholders to be held on May 18, 2006,5, 2009, which proxy statement will be filed within 120 days of the end of our fiscal year.before April 30, 2009.
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 13.Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference to our proxy statement to be issued in connection with the Annual Meeting of our Stockholders to be held on May 18, 2006,5, 2009, which proxy statement will be filed within 120 days of the end of our fiscal year.before April 30, 2009.

98


Item 14.Principal Accountant Fees and Services
Item 14.Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to our proxy statement to be issued in connection with the Annual Meeting of our Stockholders to be held on May 18, 2006,5, 2009, which proxy statement will be filed within 120 days of the end of our fiscal year.before April 30, 2009.

98


PartPART IV
Item 15.Exhibits and Financial Statement Schedules
Item 15.Exhibits and Financial Statement Schedules
Exhibits
See the Index to Exhibits following the signaturesSignatures page of this Report.
Financial Statement Schedules
The consolidated financial statements of the Registrant are set forth under Item 8 of this Report. Schedules not included have been omitted because they are not applicable or the required information is included elsewhere herein.
Schedule II — II—Valuation and Qualifying AccountsReserves is set forth below.
The financial statements of the Registrant’s 50% or less owned companies that are deemed to be material under Rule 3-09 of Regulation S-X, include Pennsylvania RSA 6(II) and GTE Mobilnet of Texas RSA #17, Limited Partnership are also set forth below.

99


CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
SCHEDULE II — II—VALUATION AND QUALIFYING ACCOUNTSRESERVES
(Dollars in thousands)
             
  December 31,
   
  2005 2004 2003
       
Allowance for Doubtful Accounts:
            
Balance at beginning of year $2,613  $1,837  $1,850 
TXUCV acquisition     1,316    
Provision charged to expense  4,480   4,666   3,412 
Write-offs, less recoveries  (4,268)  (5,206)  (3,425)
          
Balance at end of year $2,825  $2,613  $1,837 
          
Inventory reserves:
            
Balance at beginning of year $549  $143  $150 
TXUCV acquisition  264   328    
Provision charged to expense  70   126    
Write-offs  (253)  (48)  (7)
          
Balance at end of year $630  $549  $143 
          
Income tax valuation allowance:
            
Balance at beginning of year $17,136  $  $ 
TXUCV acquisition     12,331    
Adjustment to goodwill  (1,413)  6,142    
Provision charged to expense  317   (52)   
Release of valuation allowance     (1,285)   
          
Balance at end of year $16,040  $17,136  $ 
          
             
  2008  2007  2006 
Allowance for Doubtful Accounts:
            
Balance at beginning of year $2,440  $2,110  $2,825 
North Pittsburgh acquisition     471    
Provision charged to expense  4,819   4,734   5,059 
Write-offs, less recoveries  (5,351)  (4,875)  (5,774)
          
Balance at end of year $1,908  $2,440  $2,110 
          
             
Inventory reserves:
            
Balance at beginning of year $400  $429  $630 
North Pittsburgh acquisition     171    
Provision charged to expense  597   125    
Write-offs  (119)  (325)  (201)
          
Balance at end of year $878  $400  $429 
          
             
Income tax valuation allowance:
            
Balance at beginning of year $2,871  $5,349  $16,040 
North Pittsburgh acquisition     1,530    
North Pittsburgh ETFL adjustment to goodwill  (1,530)      
Reduction of related deferred tax asset  (1,341)  (3,984)  (5,021)
Provision (benefit) charged to expense     (24)  (283)
Release of valuation allowance        (5,387)
          
Balance at end of year $  $2,871  $5,349 
          

100


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of GTE Mobilnet of
Texas #17Pennsylvania RSA 6 (II) Limited Partnership:
We have audited the accompanying balance sheets of GTE Mobilnet of Texas #17Pennsylvania RSA 6 (II) Limited Partnership (the “Partnership”) as of December 31, 20052008 and 2004,2007, and the related statements of operations, changes in partners’ capital, and cash flows for each of the three years in the period ended December 31, 2005.2008. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 20052008 and 2004,2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005,2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP

Atlanta, Georgia
March 16, 20062009

101


GTE MOBILNET OF TEXAS #17PENNSYLVANIA RSA 6 (II) LIMITED PARTNERSHIP
BALANCE SHEETS
December
DECEMBER 31, 2005 and 2004
2008 AND 2007
(Dollars in thousands)Thousands)
           
  2005 2004
     
ASSETS
CURRENT ASSETS:        
 Accounts receivable, net of allowance of $385 and $268 $2,382  $2,061 
 Unbilled revenue  909   712 
 Due from General Partner  6,835   3,659 
 Prepaid expenses and other current assets  14   11 
       
  Total current assets  10,140   6,443 
PROPERTY, PLANT AND EQUIPMENT — Net  29,183   22,494 
       
TOTAL ASSETS $39,323  $28,937 
       
 
LIABILITIES AND PARTNERS’ CAPITAL
CURRENT LIABILITIES:        
 Accounts payable and accrued liabilities $2,105  $1,193 
 Advance billings and customer deposits  617   540 
       
  Total current liabilities  2,722   1,733 
       
LONG TERM LIABILITIES  137    
       
  Total liabilities  2,859   1,733 
COMMITMENTS AND CONTINGENCIES (see Notes 6 and 7)        
PARTNERS’ CAPITAL  36,464   27,204 
       
TOTAL LIABILITIES AND PARTNERS’ CAPITAL $39,323  $28,937 
       
         
  2008  2007 
ASSETS
        
 
CURRENT ASSETS:        
Accounts receivable, net of allowance of $225 and $154 $7,964  $6,638 
Unbilled revenue  784   727 
Due from General Partner  6,412   6,527 
Prepaid expenses and other current assets  17   17 
       
         
Total current assets  15,177   13,909 
         
PROPERTY, PLANT AND EQUIPMENT—Net  12,418   12,373 
         
OTHER ASSETS  140    
       
         
TOTAL ASSETS $27,735  $26,282 
       
         
LIABILITIES AND PARTNERS’ CAPITAL
        
         
CURRENT LIABILITIES:        
Accounts payable and accrued liabilities $2,173  $2,388 
Advance billings and customer deposits  2,392   2,097 
       
         
Total current liabilities  4,565   4,485 
         
LONG TERM LIABILITIES  187   160 
       
         
Total liabilities  4,752   4,645 
       
         
COMMITMENTS AND CONTINGENCIES (see Notes 6 and 7)        
         
PARTNERS’ CAPITAL  22,983   21,637 
       
         
TOTAL LIABILITIES AND PARTNERS’ CAPITAL $27,735  $26,282 
       
See notes to financial statements.

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GTE MOBILNET OF TEXAS #17PENNSYLVANIA RSA 6 (II) LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
Years Ended December
YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
2008, 2007 AND 2006
(Dollars in thousands)Thousands)
               
  2005 2004 2003
       
OPERATING REVENUES:            
 Service revenues $38,399  $32,687  $28,324 
 Equipment and other revenues  3,633   2,516   2,135 
          
  Total operating revenues  42,032   35,203   30,459 
          
OPERATING COSTS AND EXPENSES:            
 Cost of service (excluding depreciation and amortization related to network assets included below)  12,316   9,899   8,316 
 Cost of equipment  3,336   2,490   2,284 
 Selling, general and administrative  11,417   10,144   9,344 
 Depreciation and amortization  4,004   3,034   2,886 
          
  Total operating costs and expenses  31,073   25,567   22,830 
          
OPERATING INCOME  10,959   9,636   7,629 
          
OTHER INCOME:            
 Interest income, net  301   480   365 
          
  Total other income  301   480   365 
          
NET INCOME $11,260  $10,116  $7,994 
          
Allocation of Net Income:            
 Limited partners $9,007  $8,093  $6,396 
 General partner $2,253  $2,023  $1,598 
             
  2008  2007  2006 
             
OPERATING REVENUES            
Service revenues, net $83,807  $72,777  $69,795 
Equipment, net and other revenues  24,652   23,332   21,480 
          
             
Total operating revenues  108,459   96,109   91,275 
          
             
OPERATING COSTS AND EXPENSES:            
Cost of service (excluding depreciation and amortization related to network assets included below)  31,276   26,726   31,139 
Cost of equipment  25,329   22,718   19,701 
Selling, general and administrative  26,566   24,645   21,634 
Depreciation and amortization  2,177   2,356   2,607 
          
             
Total operating costs and expenses  85,348   76,445   75,081 
          
             
OPERATING INCOME  23,111   19,664   16,194 
          
             
INTEREST INCOME, NET  235   270   292 
          
             
NET INCOME $23,346  $19,934  $16,486 
          
             
Allocation of Net Income:            
Limited Partners $9,417  $8,042  $6,651 
General Partner $13,929  $11,892  $9,835 
See notes to financial statements.

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GTE MOBILNET OF TEXAS #17PENNSYLVANIA RSA 6 (II) LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
Years Ended December
YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
2008, 2007 AND 2006
(Dollars in thousands)Thousands)
                              
  General    
  Partner Limited Partners  
       
  San Eastex   Consolidated   San  
  Antonio Telecom Telecom Communications ALLTEL Antonio Total
  MTA, Investments, Supply, Transport Communications MTA, Partners’
  L.P. L.P. Inc. Company Investments, Inc. L.P. Capital
               
BALANCE — January 1, 2003 $4,220  $3,590  $3,590  $3,590  $3,590  $2,514  $21,094 
 Distributions  (1,402)  (1,191)  (1,191)  (1,191)  (1,191)  (834)  (7,000)
 Net income  1,598   1,361   1,361   1,361   1,361   952   7,994 
                      
BALANCE — December 31, 2003  4,416   3,760   3,760   3,760   3,760   2,632   22,088 
 Distributions  (1,000)  (851)  (851)  (851)  (851)  (596)  (5,000)
 Net income  2,023   1,722   1,722   1,722   1,722   1,205   10,116 
                      
BALANCE — December 31, 2004  5,439   4,631   4,631   4,631   4,631   3,241   27,204 
 Distributions  (400)  (341)  (341)  (341)  (341)  (236)  (2,000)
 Net income  2,253   1,917   1,917   1,917   1,917   1,339   11,260 
                      
BALANCE — December 31, 2005 $7,292  $6,207  $6,207  $6,207  $6,207  $4,344  $36,464 
                      
                 
  General       
  Partner  Limited Partners    
      Consolidated  Venus    
      Communications  Cellular    
      of Pennsylvania  Telephone  Total 
  Cellco  Company  Services,  Partners’ 
  Partnership  (Note 1)  Inc.  Capital 
BALANCE—January 1, 2006 $11,018  $4,371  $3,078  $18,467 
                 
Distributions  (10,291)  (4,083)  (2,876)  (17,250)
                 
Net income  9,835   3,902   2,749   16,486 
             
                 
BALANCE—December 31, 2006  10,562   4,190   2,951   17,703 
                 
Distributions  (9,546)  (3,787)  (2,667)  (16,000)
                 
Net income  11,892   4,719   3,323   19,934 
             
                 
BALANCE—December 31, 2007  12,908   5,122   3,607   21,637 
                 
Distributions  (13,125)  (5,207)  (3,668)  (22,000)
                 
Net income  13,929   5,525   3,892   23,346 
             
                 
BALANCE—December 31, 2008 $13,712  $5,440  $3,831  $22,983 
             
See notes to financial statements.

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GTE MOBILNET OF TEXAS #17PENNSYLVANIA RSA 6 (II) LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Years Ended December
YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
2008, 2007 AND 2006
(Dollars in thousands)Thousands)
                 
  2005 2004 2003
       
CASH FLOWS FROM OPERATING ACTIVITIES:            
 Net income $11,260  $10,116  $7,994 
 Adjustments to reconcile net income to net cash provided by operating activities:            
  Depreciation and amortization  4,004   3,034   2,886 
  Provision for losses on accounts receivable  931   793   496 
  Changes in certain assets and liabilities:            
   Accounts receivable  (1,252)  (934)  (253)
   Unbilled revenue  (197)  (179)  128 
   Prepaid expenses and other current assets  (3)  2   6 
   Accounts payable and accrued liabilities  283   76   (294)
   Advance billings and customer deposits  77   85   178 
   Long term liabilities  137       
          
    Net cash provided by operating activities  15,240   12,993   11,141 
          
CASH FLOWS FROM INVESTING ACTIVITIES:            
 Capital expenditures, including purchases from affiliates, net  (10,064)  (11,847)  (2,654)
 Change in due from General Partner, net  (3,176)  3,854   (1,487)
          
    Net cash used in investing activities  (13,240)  (7,993)  (4,141)
          
CASH FLOWS FROM FINANCING ACTIVITIES:            
 Distributions to partners  (2,000)  (5,000)  (7,000)
          
    Net cash used in financing activities  (2,000)  (5,000)  (7,000)
          
CHANGE IN CASH         
CASH — Beginning of year         
          
CASH — End of year $  $  $ 
          
             
  2008  2007  2006 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income $23,346  $19,934  $16,486 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization  2,177   2,356   2,607 
Provision for losses on accounts receivable  483   278   230 
Changes in certain assets and liabilities:            
Accounts receivable  (1,809)  (1,149)  (798)
Unbilled revenue  (57)  409   (442)
Prepaid expenses and other current assets     (1)  (3)
Accounts payable and accrued liabilities  58   (390)  634 
Advance billings and customer deposits  295   302   156 
Other long term liabilities  27   11   56 
          
             
Net cash provided by operating activities  24,520   21,750   18,926 
          
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Capital expenditures, including purchases from affiliates, net  (2,453)  (3,206)  (2,115)
Purchase of Customers from an affiliate  (182)      
Change in due from General Partner, net  115   (2,544)  439 
          
             
Net cash used in investing activities  (2,520)  (5,750)  (1,676)
          
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
             
Distributions to partners  (22,000)  (16,000)  (17,250)
          
             
Net cash used in financing activities  (22,000)  (16,000)  (17,250)
          
             
CHANGE IN CASH         
             
CASH—Beginning of year         
          
             
CASH—End of year $  $  $ 
          
             
NONCASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES:            
Accruals for capital expenditures $15  $14  $148 
          
See notes to financial statements.

105


GTE MOBILNET OF TEXAS #17PENNSYLVANIA RSA 6 (II) LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Years Ended December
YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
2008, 2007 AND 2006
(Dollars in Thousands)
1.Organization and ManagementORGANIZATION AND MANAGEMENT
GTE Mobilnet of Texas #17Pennsylvania RSA 6 (II) Limited Partnership GTE Mobilnet of Texas #17Pennsylvania RSA 6 (II) Limited Partnership (the “Partnership”) was formed on June 13, 1989.January 31, 1991. The principal activity of the Partnership is providing cellular service in the Texas #17Pennsylvania 6 (II) rural service area. Under the terms of the partnership agreement, the partnership expires on January 1, 2091.
The partners and their respective ownership percentages as of December 31, 2005, 20042008, 2007 and 20032006 are as follows:
     
General Partner:    
San Antonio MTA, L.P.*Cellco Partnership* (“General Partner”)  20.0000%59.66%
 
Limited Partners:    
Eastex Telecom Investments, L.P. 17.0213%
Telecom Supply, Inc. 17.0213%
Consolidated Communications Transport Company17.0213%
ALLTEL Communications Investments, Inc. 17.0213%
San Antonio MTA, L.P.of Pennsylvania Company**  11.9148%23.67%
Venus Cellular Telephone Services, Inc16.67%
 
*San Antonio MTA, L.P. (“General Partner”) is a wholly-owned subsidiary of Cellco Partnership (“Cellco”) doing business as Verizon Wireless.
**On January 1, 2008 North Pittsburgh Telephone Company changed its name to Consolidated Communications of Pennsylvania Company.
2.Significant Accounting PoliciesSIGNIFICANT ACCOUNTING POLICIES
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used for, but not limited to, the accounting for: allocations, allowance for uncollectible accounts receivable, unbilled revenue, fair value of financial instruments, depreciation and amortization, useful lives and impairment of assets, accrued expenses, and contingencies. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary.
Revenue Recognition—The Partnership earns revenue by providing access to the network (access revenue) and for usage of the network (airtime/usage revenue), which includes roaming and long distance revenue. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in advance billings. Airtime/usage revenue, roaming revenue and long distance revenue are recognized when service is rendered and included in unbilled revenue until billed. Equipment sales revenue associated with the sale of wireless handsets and accessories is recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. In accordance with the provisions of Emerging Issues Task Force (“ETIF”) Issue No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables,the Partnership recognizes customer activation fees as part of equipment revenue. The roaming rates charged by the Partnership to Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 5). The Partnership’s revenue recognition policies are in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “RevenueRevenue Recognition in Financial Statements”, and Statements,SAB No. 104, “Revenue Recognition”.Revenue Recognition,and EITF Issue No. 00-21.

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The Partnership reports taxes imposed by governmental authorities on revenue-producing transactions between the Partnership and our customers, that are within the scope of EITF No. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement,in the financial statements on a net basis.
Cellular service revenues and expenses resulting from cell site agreements with affiliates of Cellco are recognized based upon a rate per minute of use. See note 5.
Operating Costs and Expenses—Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of certain administrative and operating costs incurred by Cellco or its

106


GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS — (Continued)
affiliates on behalf of the Partnership. Employees of Cellco provide services performed on behalf of the Partnership. These employees are not employees of the Partnership and therefore, operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. The General Partner believes such allocations, principally based on the Partnership’s percentage of total customers, customer gross additions orminutes-of-use, minutes-of-use, are reasonable. The roaming rates charged to the Partnership by Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 5).
Retail Stores—The daily operations of all retail stores located within the Partnership are managed by Cellco. However, all income and expenses incurred by these retail stores are recorded in the financial statements of the Partnership.
Income Taxes—The Partnership is not a taxable entity for federal and state income tax purposes. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and would beis reported by them individually.
Inventory—Inventory is owned by Cellco and held on consignment by the Partnership. Such consigned inventory is not recorded on the Partnership’s financial statements. Upon sale, the related cost of the inventory is transferred to the Partnership at Cellco’s cost basis and included in the accompanying Statements of Operations.
Allowance for Doubtful Accounts—The Partnership maintains allowances for uncollectible accounts receivable for estimated losses resulting from the inability of customers to make required payments. Estimates are based on the aging of the accounts receivable balances and the historical write-off experience, net of recoveries.
Property, Plant and Equipment—Property, plant and equipment primarily represents costs incurred to construct and expand capacity and network coverage on Mobile Telephone Switching Offices (“MTSOs”) and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Major improvements to existing plant and equipment are capitalized. Routine maintenance and repairs that do not extend the life of the plant and equipment are charged to expense as incurred.
Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciation or amortization is eliminated from the accounts and any related gain or loss is reflected in the Statements of Operations.

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Network engineering costs incurred during the construction phase of the Partnership’s network and real estate properties under development are capitalized as part of property, plant and equipment and recorded asconstruction-in-progress construction-in-progress until the projects are completed and placed into service.
Other Assets —Other assets consist of a customer list acquired in 2008. The Partnership amortizes the customer list over its expected useful life of 6 years using a method consistent with historical customer turnover rates. As of December 31, 2008, the gross carrying value is $182 and the accumulated amortization is $42. As of December 31, 2008, the scheduled amortization of the customer list for the next five years is $32 for 2009 and $27 for the years 2010 through 2013.
FCC Licenses —- The Federal Communications Commission (“FCC”) issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993 the FCC adopted specific standards to apply to cellular renewals, concluding it will reward a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely. All wireless licenses issued by the FCC that authorize the Partnership to provide cellular services are recorded on the books of Cellco. The current term of the Partnership’s FCC license expires in December 2009.October 2010 and April 2017. Cellco believes it will be able to meet all requirements necessary to secure renewal of the Partnership’s cellular license.
Valuation of Assets— Long-lived assets, including property, plant and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss, if determined to be necessary, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS — (Continued)
As discussed above, the FCC licenselicenses under which the Partnership operates isare recorded on the books of Cellco. Cellco does not charge the Partnership for the use of any FCC license recorded on its books (except for the annual cost of $76$30 related to the spectrum lease, as discussed in Note 5). However, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for all licenses included in Cellco’s national footprint. Accordingly, the FCC licenses, including the license under which the Partnership operates, recorded on the books of Cellco are evaluated for impairment by Cellco, under the guidance set forth in Statement of Financial Accounting Standards (“SFAS”) No. 142, “GoodwillGoodwill and Other Intangible Assets.
The FCC licenses are treated as an indefinite life intangible asset on the books of Cellco under the provisions of SFAS No. 142 and are not amortized, but rather are tested for impairment annually or between annual dates, if events or circumstances warrant. All of the licenses in Cellco’s nationwide footprint are tested in the aggregate for impairment under SFAS No. 142. When testing the carrying value of the
Cellco evaluates its wireless licenses for potential impairment annually, and more frequently if indications of impairment exist. Cellco tests its licenses on an aggregate basis, in 2004 and 2003accordance with EITF No. 02-7,Unit of Accounting for impairment, Cellco determined the fairTesting Impairment of Indefinite-Lived Intangible Assets, using a direct value of the aggregated wireless licenses by subtracting from enterprise discounted cash flows (net of debt) the fair value of all of the other net tangible and intangible assets of Cellco, including previously unrecognized intangible assets. This approach is generally referred to as the residual method. In addition, the fair value of the aggregated wireless licenses was then subjected to a reasonableness analysis using public information of comparable wireless carriers. If the fair value of the aggregated wireless licenses as determined above was less than the aggregated carrying amount of the licenses, an impairment would have been recognized by Cellco and then may have been allocated to the Partnership. During 2004 and 2003, tests for impairment were performedmethodology in accordance with no impairment recognized.
      On September 29, 2004, the SEC issued a Staff Announcement No. D-108, “UseUse of the Residual Method to Value Acquired Assets other than Goodwill.” This Staff Announcement requires SEC registrants to adopt aGoodwill. The direct value methodapproach determines fair value using estimates of assigningfuture cash flows associated specifically with the wireless licenses. If the fair value to intangible assets, includingof the aggregated wireless licenses acquired in a business combination under SFAS No. 141, “Business Combinations,” effective for all business combinations completed after September 29, 2004. Further, all intangible assets, includingis less than the aggregated carrying amount of the wireless licenses, valued under the residual method prior to this adoption are required to be tested foran impairment using a direct value method no later than the beginning of 2005. Any impairment of intangible assets recognized upon application of a direct value method by entities previously applying the residual method should be reported as a cumulative effect of a change in accounting principle. Under this Staff Announcement, the reclassification of recorded balances from wireless licenses to goodwill prior to the adoption of this Staff Announcement is prohibited.
recognized. Cellco evaluated its wireless licenses for potential impairment using a direct value methodology as of January 1, 2005December 15, 2008 and December 15, 20052007. These evaluations resulted in no impairment of Cellco’s wireless licenses.

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Fair Value Measurements —SFAS No. 157,Fair Value Measurements,defines fair value, expands disclosures about fair value measurements, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. Under SFAS No. 157, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 also establishes a three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 — No observable pricing inputs in the market
On February 12, 2008, the FASB issued FSP No. FAS 157-2,Effective Date of FASB Statement No. 157,which delays the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Partnership elected a partial deferral of SFAS No. 157 under the provisions of FSP No. 157-2 related to the measurement of fair value used when evaluating wireless licenses and other long-lived assets for impairment. On October 10, 2008, the FASB issued FSP No. 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies application of SFAS No. 157 in a market that is not active. FSP No. 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The impact of partially adopting SFAS No. 157 on January 1, 2008 and the related FSP No. 157-3 was not material to the financial statements.
Effective January 1, 2009, as permitted by FSP No. 157-2, the Partnership adopted the provisions of SFAS No. 157 related to the non-recurring measurement of fair value used when evaluating certain nonfinancial assets, including wireless licenses and other long-lived assets, in the determination of impairment under SFAS No. 142 or SFAS No. 144, and when measuring the acquisition-date fair values of nonfinancial assets and nonfinancial liabilities in a business combination in accordance with SEC Staff AnnouncementSFAS No. D-108. The valuation and analyses prepared in connection with the adoption of a direct value method and subsequent revaluation resulted in no adjustment to the carrying value of Cellco’s wireless licenses and, accordingly, had no effect on its financial statements. Future tests for impairment will be performed at least annually and more often if events or circumstances warrant.141(R),Business Combinations (Revised).
Concentrations—To the extent the Partnership’s customer receivables become delinquent, collection activities commence. No single customer is large enough to present a significant financial risk to the Partnership. The Partnership maintains an allowance for losses based on the expected collectibility of accounts receivable.
Cellco and the Partnership rely on local and long distance telephone companies, some of whom are related parties, and other companies to provide certain communication services. Although management believes alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have an adverse impact on the Partnership’s operating results.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS — (Continued)
Although Cellco and the General Partner attemptattempts to maintain multiple vendors for its network assets and inventory, which are important components of its operations, they are currently acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnership’s operations. If the suppliers are unable to meet Cellco’s needs as it builds out its network infrastructure and sells service and equipment, delays and increased costs in the expansion of the Partnership’s network infrastructure or losses of potential customers could result, which would adversely affect operating results.
Financial Instruments—The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.
Segments — The Partnership has one reportable business segment and operates domestically, only. The Partnership’s products and services are materially comprised of wireless telecommunications services.
Due from General Partner—Due from General Partner principally represents the Partnership’s cash position. Cellco manages on behalf of the General Partner, all cash, inventory, investing and financing activities of the Partnership. As such, the change in due from General Partner is reflected as an investing activity or a financing activity in the Statements of Cash Flows depending on whether it represents a net asset or net liability for the Partnership. The Partnership reclassified the change in the amount Due from General Partner of ($3,854) and $1,487 from a financing activity to an investing activity in the 2004 and 2003 Statements of Cash Flows, respectively.

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Additionally, administrative and operating costs incurred by Cellco, on behalf of the General Partner, as well as property, plant, and equipment transactions with affiliates, are charged to the Partnership through this account. Interest income or interest expense is based on the average monthly outstanding balance in this account and is calculated by applying the General Partner’s average cost of borrowing from Verizon Global Funding, a wholly-owned subsidiary of Verizon Communications, Inc., which was approximately 4.8%3.9%, 5.9%5.4% and 5.0%5.4% for the years ended December 31, 2005, 20042008, 2007 and 2003,2006, respectively. Included in net interest income is $308, $488interest income of $240, $273 and $365$297 for the years ended December 31, 2005, 20042008, 2007 and 2003,2006, respectively, related to the due from General Partner.
Distributions — The Partnership is requiredDistributions are made to make distributions to its partners on a quarterly basisat the discretion of the General Partner based upon the Partnership’s operating results, cash availability and financing needs as determined by the General Partner at the date of the distribution.
Recently Issued Accounting Pronouncements — - In April 2008, the FASB issued FSP No. FAS 142-3,Determination of the Useful Life of Intangible Assets. FSP 142-3 removes the requirement under SFAS No. 142 to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions, and replaces it with a requirement that an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. FSP 142-3 also requires entities to disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The Partnership is required to adopt FSP 142-3 effective January 1, 2009 on a prospective basis. The adoption of FSP 142-3 on January 1, 2009 did not have an impact on the financial statements.
In March 2005,2008, the Financial Accounting Standards Board (“FASB”)FASB issued FASB InterpretationSFAS No. 47, “Accounting for Conditional Asset Retirement Obligations161,Disclosures about Derivative Instruments and Hedging Activities — an interpretationamendment of FASB Statement No. 133. This statement requires additional disclosures for derivative instruments and hedging activities that include how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for under SFAS No. 133 and related interpretations, and how derivative instruments and related hedged items affect the entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 143.” This interpretation clarifies that the term “conditional asset retirement obligation” refers to a legal obligation to perform a future asset retirement when uncertainty exists about the timing and/or method of settlement of the obligation. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists, as defined by the interpretation. An entity is required to recognize a liability for the fair value of the obligation if the fair value of the liability can be reasonably estimated. The Partnership adopted the interpretation161 on December 31, 2005. The adoption of this interpretationJanuary 1, 2009 did not have a materialan impact on the Partnership’s financial statements.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (Revised), to replace SFAS No. 141,Business Combinations. SFAS No. 141(R) requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more other businesses. This statement is effective for business combinations or transactions entered into for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) on January 1, 2009 did not have an impact on the financial statements.
NOTES TO FINANCIAL STATEMENTSIn December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements(Continued)an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 prospectively, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented. The adoption of SFAS No. 160 on January 1, 2009 did not have an impact on the financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure eligible items at fair value, and to report unrealized gains and losses in earnings on items for which the fair value option has been elected. The Partnership adopted SFAS No. 159 effective January 1, 2008 and the impact of adoption did not have an impact on the financial statements.

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3.Property, Plant and EquipmentPROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consistconsists of the following as of December 31, 20052008 and 2004:2007:
             
  Useful lives 2005 2004
       
Buildings and improvements  10-40 years  $9,991  $6,858 
Cellular plant equipment  3-15 years   40,320   34,259 
Furniture, fixtures and equipment  2-5 years   65   349 
Leasehold improvements  5 years   1,657   226 
          
       52,033   41,692 
Less accumulated depreciation and amortization      22,850   19,198 
          
Property, plant and equipment, net     $29,183  $22,494 
          
             
  Useful Lives  2008  2007 
             
Buildings and improvements 10-40 years  $5,915  $5,650 
Cellular plant equipment 3-15 years   22,043   25,770 
Furniture, fixtures and equipment 2-5 years   346   695 
Leasehold improvements 5 years   1,068   930 
           
             
       29,372   33,045 
             
Less accumulated depreciation and amortization      16,954   20,672 
           
             
Property, plant and equipment, net     $12,418  $12,373 
           
Capitalized network engineering costs of $389$126 and $257$109 were recorded during the years ended December 31, 20052008 and 2004,2007 respectively.Construction-in-progress Construction-in-progress included in certain of the classifications shown above, principally cellular plant equipment, amounted to $2,504$154 and $408$1,283 at December 31, 20052008 and 2004, respectively. Depreciation and amortization expense for the years ended December 31, 2005, 2004 and 2003 was $4,004, $3,034 and $2,886,2007 respectively.
4.Accounts Payable and Accrued LiabilitiesCURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following:following as of December 31:
         
  2005 2004
     
Accounts payable $1,228  $481 
Non-income based taxes and regulatory fees  599   449 
Accrued commissions  278   263 
       
Accounts payable and accrued liabilities $2,105  $1,193 
       
         
  2008  2007 
         
Accounts payable $1,785  $2,035 
Accrued liabilities  389   353 
       
Accounts payable and accrued libilities $2,174  $2,388 
       
Advance billings and customer deposits consist of the following as of December 31:
         
  2008  2007 
         
Advance billings $2,220  $1,935 
Customer deposits  172   162 
       
Advance billings and customer deposits $2,392  $2,097 
       

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5.Transactions with AffiliatesTRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Significant transactions with affiliates (Cellco and its related entities) and other related parties, including allocations and direct charges, are summarized as follows for the years ended December 31, 2005, 20042008, 2007 and 2003:
             
  2005 2004 2003
       
Service revenues(a) $12,758  $10,243  $8,288 
Equipment and other revenues(b)  (53)  (234)  (267)
Cost of service(c)  9,558   7,566   4,020 
Cost of equipment(d)  368   349   852 
Selling, general and administrative(e)  5,648   5,430   5,143 
2006:
             
  2008  2007  2006 
             
Service revenues (a) $15,720  $13,707  $18,065 
Equipment and other revenues (b)  1,066   1,084   1,244 
Cost of service (c)  29,439   25,803   30,319 
Cost of equipment (d)  1,354   1,089   756 
Selling, general and administrative (e)  17,040   15,889   13,733 
(a) Service revenues include roaming revenues relating to customers of other affiliated markets, long distance, paging, data and allocated contra-revenues including revenue concessions.
(b)Equipment and other revenues include cell sharing revenues, sales of handsets and accessories and allocated contra-revenues including equipment concessions and coupon rebates.
 
(c)Cost of service includes roaming costs relating to customers roaming in other affiliated markets, switch costs, cell sharing costs and allocated cost of telecom, long distance, paging, and handset applications.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS — (Continued)
(d)Cost of equipment includes warehousing, freight, handsets, accessories, and upgrades.allocated warehousing and freight.
 
(e)Selling, general and administrative expenses include salaries, commissions and billing, and allocated office telecom, customer care, billing, salaries, sales and marketing, advertising, and commissions.
All affiliate transactions captured above, are based on actual amounts directly incurred by Cellco on behalf of the Partnership and/or allocations from Cellco. Revenues and expenses were allocated based on the Partnership’s percentage of total customers or gross customer additions or minutes of use, where applicable. The General Partner believes the allocations are reasonable. The affiliate transactions are not necessarily conducted at arm’s length.
On January 1, 2008, the Partnership purchased 318 customers from an affiliate for $182.
The Partnership had net purchases involving plant, property, and equipment from affiliates with affiliatesa net book value of $3,269, $8,050$1,234, $2,740 and $1,116$1,710 in 2005, 20042008, 2007 and 2003,2006, respectively.
      During 2004, the methodology to charge shared switch costs toThe Partnership is involved in several cell sharing agreements with related affiliates in which the Partnership receives revenues from an affiliateaffiliates for the use of the General Partner was revised. The methodology change resulted in an increase inPartnership’s cell sites and incurs costs for the Partnership’s switch costs in 2004. In 2004use of affiliates’ cell sites. Cell sharing revenues were $1,419, $1,447 and 2003$1,731 for the Partnership recorded switchyears ended December 31, 2008, 2007 and 2006, respectively. Cell sharing costs of $1,615were $2,240, $1,880 and $336,$2,100 for the years ended December 31, 2008, 2007 and 2006 respectively. These costs are included above in “Cost of service”. The switch rates charged to the Partnership do not necessarily reflect current market rates.
On January 1, 2005,2007, the Partnership entered into a lease agreementagreements for the right to use additional spectrum owned by Cellco. The initial term of this agreement was one year, with annual renewal terms.these agreements is ten years. The Partnership renewed the lease for the year ended December 31, 2006. The2008 and 2007 annual lease commitment of $76$30 and $29 respectively represents the costs of financing the spectrum, and does not necessarily reflect the economic value of the services received. No additional spectrum purchases or lease commitments other than the $76, have been entered into by the Partnership as of December 31, 2005.2008.

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6.CommitmentsCOMMITMENTS
The General Partner, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities, equipment and equipmentspectrum used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual andend-of-lease end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellablenoncancelable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellablenoncancelable lease term. For the years ended December 31, 2005, 20042008, 2007 and 2003,2006, the Partnership recognized a total of $1,575, $988$1,100, $853 and $751,$1,040, respectively, as rent expense related to payments under these operating leases, which was included in cost of service and general and administrative expenses in the accompanying Statements of Operations.
Aggregate future minimum rental commitments under noncancelable operating leases, excluding renewal options that are not reasonably assured, for the years shown are as follows:
     
Years Amount
   
2006 $1,273 
2007  1,237 
2008  1,218 
2009  1,174 
2010  248 
2011 and thereafter  544 
    
Total minimum payments $5,694 
    

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
     
Years Amount 
     
2009 $794 
2010  646 
2011  476 
2012  349 
2013  258 
2014 and thereafter  399 
    
     
Total minimum payments $2,922 
    
NOTES TO FINANCIAL STATEMENTS — (Continued)
From time to time the General Partner enters into purchase commitments, primarily for network equipment, on behalf of the Partnership.
7.ContingenciesCONTINGENCIES
Cellco is subject to various lawsuits and other claims including class actions, product liability, patent infringement, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also defending lawsuits filed against itself and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and outcomes are not predictable with assurance.
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. Consequently, the ultimate liability with respect to these matters at December 31, 20052008 cannot be ascertained. The potential effect, if any, on the financial statements of the Partnership, in the period in which these matters are resolved, may be material.

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In addition to the aforementioned matters, Cellco is subject to various other legal actions and claims in the normal course of business. While Cellco’s legal counsel cannot give assurance as to the outcome of each of these matters, in management’s opinion, based on the advice of such legal counsel, the ultimate liability with respect to any of these actions, or all of them combined, will not materially affect the financial statements of the Partnership.
8.Valuation and Qualifying AccountsRECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
                  
  Balance at Additions Write-offs Balance at
  Beginning Charged to Net of End of the
  of the Year Operations Recoveries Year
         
Accounts Receivable Allowances:                
 2005 $268  $931  $(814) $385 
 2004  244   793   (769)  268 
 2003  320   496   (572)  244 
                 
  Balance at  Additions  Write-offs  Balance at 
  Beginning  Charged to  Net of  End 
  of the Year  Operations  Recoveries  of the Year 
                 
Accounts Receivable Allowances:                
2008 $154  $483  $(412) $225 
2007  202   278   (326)  154 
2006  105   290   (193)  202 
******

112115


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of GTE Mobilnet of Texas #17 Limited Partnership:
We have audited the accompanying balance sheets of GTE Mobilnet of Texas #17 Limited Partnership (the “Partnership”) as of December 31, 2008 and 2007, and the related statements of operations, changes in partners’ capital, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Atlanta, GA
March 16, 2009

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
(Dollars in Thousands)
         
  2008  2007 
         
ASSETS
        
         
CURRENT ASSETS:        
Accounts receivable, net of allowance of $385 and $373 $3,388  $3,006 
Unbilled revenue  1,051   952 
Due from General Partner  6,320   7,403 
Prepaid expenses and other current assets  20   8 
       
         
Total current assets  10,779   11,369 
         
PROPERTY, PLANT AND EQUIPMENT—Net  50,719   40,062 
       
         
TOTAL ASSETS $61,498  $51,431 
       
         
LIABILITIES AND PARTNERS’ CAPITAL
        
         
CURRENT LIABILITIES:        
Accounts payable and accrued liabilities $1,896  $1,579 
Advance billings and customer deposits  940   773 
       
         
Total current liabilities  2,836   2,352 
       
         
LONG TERM LIABILITIES  335   270 
       
         
Total liabilities  3,171   2,622 
         
COMMITMENTS AND CONTINGENCIES (see Notes 6 and 7)        
         
PARTNERS’ CAPITAL  58,327   48,809 
       
         
TOTAL LIABILITIES AND PARTNERS’ CAPITAL $61,498  $51,431 
       
See notes to financial statements.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars in Thousands)
             
  2008  2007  2006 
             
OPERATING REVENUES (see Note 5 for Transactions with Affiliates and Related Parties):            
Service revenues $55,376  $48,096  $45,295 
Equipment and other revenues  5,081   4,341   4,003 
          
             
Total operating revenues  60,457   52,437   49,298 
          
             
OPERATING COSTS AND EXPENSES (see Note 5 for Transactions with Affiliates and Related Parties):            
Cost of service (excluding depreciation and amortization related to network assets included below)  17,327   15,028   13,536 
Cost of equipment  6,609   5,085   3,709 
Selling, general and administrative  16,132   14,142   12,401 
Depreciation and amortization  6,013   5,020   4,491 
          
             
Total operating costs and expenses  46,081   39,275   34,137 
          
             
OPERATING INCOME  14,376   13,162   15,161 
          
             
OTHER INCOME:            
Interest income, net  142   550   472 
          
             
Total other income  142   550   472 
          
             
NET INCOME $14,518  $13,712  $15,633 
          
             
Allocation of Net Income:            
Limited partners $11,614  $10,970  $12,504 
General Partner $2,904  $2,742  $3,129 
See notes to financial statements.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars in Thousands)
                             
  General   ��   
  Partner  Limited Partners    
  San  Eastex      Consolidated  ALLTEL  San    
  Antonio  Telecom  Telecom  Communications  Communications  Antonio  Total 
  MTA,  Investments,  Supply,  Transport  Investments,  MTA,  Partners’ 
  L.P.  L.P.  Inc.  Company  Inc.  L.P.  Capital 
                             
BALANCE—January 1, 2006 $7,292  $6,207  $6,207  $6,207  $6,207  $4,344  $36,464 
                             
Distributions  (1,201)  (1,021)  (1,021)  (1,021)  (1,021)  (715)  (6,000)
                             
Net income  3,129   2,660   2,660   2,660   2,660   1,864   15,633 
                      
                             
BALANCE—December 31, 2006  9,220   7,846   7,846   7,846   7,846   5,493   46,097 
                             
Distributions  (2,200)  (1,872)  (1,872)  (1,872)  (1,872)  (1,312)  (11,000)
                             
Net income  2,742   2,334   2,334   2,334   2,334   1,634   13,712 
                      
                             
BALANCE—December 31, 2007  9,762   8,308   8,308   8,308   8,308   5,815   48,809 
                             
Distributions  (1,000)  (851)  (851)  (851)  (851)  (596)  (5,000)
                             
Net income  2,904   2,471   2,471   2,471   2,471   1,730   14,518 
                      
                             
BALANCE—December 31, 2008 $11,666  $9,928  $9,928  $9,928  $9,928  $6,949  $58,327 
                      
See notes to financial statements.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars in Thousands)
             
  2008  2007  2006 
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income $14,518  $13,712  $15,633 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization  6,013   5,020   4,491 
Provision for losses on accounts receivable  936   887   717 
Changes in certain assets and liabilities:            
Accounts receivable  (1,318)  (1,291)  (937)
Unbilled revenue  (99)  95   (138)
Prepaid expenses and other current assets  (12)  5   1 
Accounts payable and accrued liabilities  542   (149)  76 
Advance billings and customer deposits  167   152   4 
Long term liabilities  65   24   109 
          
             
Net cash provided by operating activities  20,812   18,455   19,956 
          
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Capital expenditures, including purchases from affiliates, net  (16,895)  (10,799)  (10,044)
Change in due from General Partner, net  1,083   3,344   (3,912)
          
Net cash used in investing activities  (15,812)  (7,455)  (13,956)
          
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Distributions to partners  (5,000)  (11,000)  (6,000)
          
Net cash used in financing activities  (5,000)  (11,000)  (6,000)
          
             
CHANGE IN CASH         
             
CASH—Beginning of year         
          
             
CASH—End of year $  $  $ 
          
             
NONCASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES:            
Accruals for capital expenditures $178  $242  $214 
See notes to financial statements.

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GTE MOBILNET OF TEXAS #17 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars in Thousands)
1.ORGANIZATION AND MANAGEMENT
GTE Mobilnet of Texas #17 Limited Partnership—GTE Mobilnet of Texas #17 Limited Partnership (the “Partnership”) was formed on June 13, 1989. The principal activity of the Partnership is providing cellular service in the Texas #17 rural service area.
The partners and their respective ownership percentages as of December 31, 2008, 2007 and 2006 are as follows:
General Partner:
San Antonio MTA, L.P.*20.0000%
Limited Partners:
Eastex Telecom Investments, L.P.17.0213%
Telecom Supply, Inc.17.0213%
Consolidated Communications Transport Company17.0213%
ALLTEL Communications Investments, Inc.17.0213%
San Antonio MTA, L.P.*11.9148%
*San Antonio MTA, L.P. (“General Partner”) is a wholly-owned subsidiary of Cellco Partnership (“Cellco”) doing business as Verizon Wireless.
2.SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used for, but not limited to, the accounting for: allocations, allowance for uncollectible accounts receivable, unbilled revenue, fair value of financial instruments, depreciation and amortization, useful lives and impairment of assets, accrued expenses, and contingencies. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary.
Revenue Recognition—The Partnership earns revenue by providing access to the network (access revenue) and for usage of the network (airtime/usage revenue), which includes roaming and long distance revenue. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in advance billings. Airtime/usage revenue, roaming revenue and long distance revenue are recognized when service is rendered and included in unbilled revenue until billed. Equipment sales revenue associated with the sale of wireless handsets and accessories is recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. In accordance with the provisions of Emerging Issues Task Force (“EITF”) Issue No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables, the Partnership recognizes customer activation fees as part of equipment revenue. The roaming rates charged by the Partnership to Cellco do not necessarily reflect current market rates.  The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 5). The Partnership’s revenue recognition policies are in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101Revenue Recognition in Financial Statements, SAB No. 104Revenue Recognitionand EITF Issue No. 00-21.

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The Partnership reports taxes imposed by governmental authorities on revenue-producing transactions between the Partnership and its customers that are within the scope of EITF No. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statements,in the financial statements on a net basis.
Operating Costs and Expenses—Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of certain administrative and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide services performed on behalf of the Partnership. These employees are not employees of the Partnership and therefore, operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. The General Partner believes such allocations, principally based on the Partnership’s percentage of total customers, customer gross additions or minutes-of-use, are reasonable. The roaming rates charged to the Partnership by Cellco do not necessarily reflect current market rates.  The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 5).
Income Taxes—The Partnership is not a taxable entity for federal and state income tax purposes. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and is reported by them individually.
Inventory—Inventory is owned by Cellco and held on consignment by the Partnership. Such consigned inventory is not recorded on the Partnership’s financial statements. Upon sale, the related cost of the inventory is transferred to the Partnership at Cellco’s cost basis and included in the accompanying Statements of Operations.
Allowance for Doubtful Accounts—The Partnership maintains allowances for uncollectible accounts receivable for estimated losses resulting from the inability of customers to make required payments. Estimates are based on the aging of the accounts receivable balances and the historical write-off experience, net of recoveries.
Property, Plant and Equipment—Property, plant and equipment primarily represents costs incurred to construct and expand capacity and network coverage on Mobile Telephone Switching Offices (“MTSOs”) and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Major improvements to existing plant and equipment are capitalized. Routine maintenance and repairs that do not extend the life of the plant and equipment are charged to expense as incurred.
Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciation or amortization is eliminated from the accounts and any related gain or loss is reflected in the Statements of Operations.
Network engineering costs incurred during the construction phase of the Partnership’s network and real estate properties under development are capitalized as part of property, plant and equipment and recorded as construction-in-progress until the projects are completed and placed into service.
FCC Licenses— The Federal Communications Commission (“FCC”) issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993, the FCC adopted specific standards to apply to cellular renewals, concluding it will reward a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely. All wireless licenses issued by the FCC that authorize the Partnership to provide cellular services are recorded on the books of, and owned by, Cellco. The current term of the Partnership’s FCC license expires in December 2009. Cellco believes it will be able to meet all requirements necessary to secure renewal of the Partnership’s cellular license.

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Valuation of Assets— Long-lived assets, including property, plant and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss, if determined to be necessary, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
As discussed above, the FCC license under which the Partnership operates is recorded on the books of Cellco. Cellco does not charge the Partnership for the use of any FCC license recorded on its books (except for the annual cost of $76 related to the spectrum lease, as discussed in Note 5). However, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for all licenses included in Cellco’s national footprint. Accordingly, the FCC licenses, including the license under which the Partnership operates, recorded on the books of Cellco are evaluated for impairment by Cellco, under the guidance set forth in Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets.
The FCC licenses are treated as an indefinite life intangible asset on the books of Cellco under the provisions of SFAS No. 142 and are not amortized, but rather are tested for impairment annually or between annual dates, if events or circumstances warrant. All of the licenses in Cellco’s nationwide footprint are tested in the aggregate for impairment under SFAS No. 142.
Cellco evaluates its wireless licenses for potential impairment annually, and more frequently if indications of impairment exist. Cellco tests its licenses on an aggregate basis, in accordance with EITF No. 02-7,Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets, using a direct value methodology in accordance with SEC Staff Announcement No. D-108,Use of the Residual Method to Value Acquired Assets other than Goodwill. The direct value approach determines fair value using estimates of future cash flows associated specifically with the wireless licenses. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses, an impairment is recognized. Cellco evaluated its wireless licenses for potential impairment as of December 15, 2008 and December 15, 2007. These evaluations resulted in no impairment of Cellco’s wireless licenses.
Fair Value Measurements —SFAS No. 157,Fair Value Measurements,defines fair value, expands disclosures about fair value measurements, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. Under SFAS No. 157, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 also establishes a three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 — No observable pricing inputs in the market

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On February 12, 2008, the FASB issued FSP No. FAS 157-2,Effective Date of FASB Statement No. 157,which delays the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Partnership elected a partial deferral of SFAS No. 157 under the provisions of FSP No. 157-2 related to the measurement of fair value used when evaluating wireless licenses and other long-lived assets for impairment. On October 10, 2008, the FASB issued FSP No. 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies application of SFAS No. 157 in a market that is not active. FSP No. 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The impact of partially adopting SFAS No. 157 on January 1, 2008 and the related FSP No. 157-3 was not material to the financial statements.
Effective January 1, 2009, as permitted by FSP No. 157-2, the Partnership adopted the provisions of SFAS No. 157 related to the non-recurring measurement of fair value used when evaluating certain nonfinancial assets, including wireless licenses and other long-lived assets, in the determination of impairment under SFAS No. 142 or SFAS No. 144, and when measuring the acquisition-date fair values of nonfinancial assets and nonfinancial liabilities in a business combination in accordance with SFAS No. 141(R),Business Combinations (Revised).
Concentrations—To the extent the Partnership’s customer receivables become delinquent, collection activities commence. No single customer is large enough to present a significant financial risk to the Partnership. The Partnership maintains an allowance for losses based on the expected collectibility of accounts receivable.
Cellco and the Partnership rely on local and long distance telephone companies, some of whom are related parties, and other companies to provide certain communication services. Although management believes alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have an adverse impact on the Partnership’s operating results.
Although Cellco and the General Partner attempt to maintain multiple vendors for its network assets and inventory, which are important components of its operations, they are currently acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnership’s operations. If the suppliers are unable to meet Cellco’s needs as it builds out its network infrastructure and sells service and equipment, delays and increased costs in the expansion of the Partnership’s network infrastructure or losses of potential customers could result, which would adversely affect operating results.
Financial Instruments—The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.
Due from General Partner—Due from General Partner principally represents the Partnership’s cash position. Cellco manages, on behalf of the General Partner, all cash, inventory, investing and financing activities of the Partnership. As such, the change in due from General Partner is reflected as an investing activity or a financing activity in the Statements of Cash Flows depending on whether it represents a net asset or net liability for the Partnership.
Additionally, administrative and operating costs incurred by Cellco on behalf of the General Partner, as well as property, plant, and equipment transactions with affiliates, are charged to the Partnership through this account. Interest income or interest expense is based on the average monthly outstanding balance in this account and is calculated by applying the General Partner’s average cost of borrowing from Verizon Global Funding, a wholly-owned subsidiary of Verizon Communications, Inc., which was approximately 3.9%, 5.4% and 5.4% for the years ended December 31, 2008, 2007 and 2006, respectively. Included in net interest income is interest income of $148, $554 and $477 for the years ended December 31, 2008, 2007 and 2006, respectively, related to the due from General Partner.
Distributions –The Partnership is required to make distributions to its partners on a quarterly basis based upon the Partnership’s operating results, cash availability and financing needs as determined by the General Partner at the date of the distribution.

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Recently Issued Accounting PronouncementsIn April 2008, the FASB issued FSP No. FAS 142-3,Determination of the Useful Life of Intangible Assets. FSP 142-3 removes the requirement under SFAS No. 142 to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions, and replaces it with a requirement that an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. FSP 142-3 also requires entities to disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The Partnership is required to adopt FSP 142-3 effective January 1, 2009 on a prospective basis. The adoption of FSP 142-3 on January 1, 2009 did not have an impact on the financial statements.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. This statement requires additional disclosures for derivative instruments and hedging activities that include how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for under SFAS No. 133 and related interpretations, and how derivative instruments and related hedged items affect the entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 on January 1, 2009 did not have an impact on the financial statements.
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (Revised), to replace SFAS No. 141,Business Combinations. SFAS No. 141(R) requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more other businesses. This statement is effective for business combinations or transactions entered into for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) on January 1, 2009 did not have an impact on the financial statements.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 prospectively, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented. The adoption of SFAS No. 160 on January 1, 2009 did not have an impact on the financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure eligible items at fair value, and to report unrealized gains and losses in earnings on items for which the fair value option has been elected. The Partnership adopted SFAS No. 159 effective January 1, 2008 and the impact of adoption did not have an impact on the financial statements.

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3.PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of December 31, 2008 and 2007:
             
  Useful lives  2008  2007 
             
Buildings and improvements 10-40 years  $18,790  $16,290 
Cellular plant equipment 3-15 years   54,396   51,268 
Furniture, fixtures and equipment 2-5 years   75   75 
Leasehold improvements 5 years   3,563   3,118 
           
             
       76,824   70,751 
             
Less accumulated depreciation and amortization      26,105   30,689 
           
             
Property, plant and equipment, net     $50,719  $40,062 
           
Capitalized network engineering costs of $565 and $410 were recorded during the years ended December 31, 2008 and 2007, respectively. Construction-in-progress included in certain of the classifications shown above, principally cellular plant equipment, amounted to $3,570 and $5,784 at December 31, 2008 and 2007, respectively.
4.CURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following as of December 31:
         
  2008  2007 
         
Accounts payable $551  $749 
Non-income based taxes and regulatory fees  600   618 
Texas margin tax payable  520    
Accrued commissions  225   212 
       
         
Accounts payable and accrued liabilities $1,896  $1,579 
       
Advance billings and customer deposits consist of the following as of December 31:
         
  2008  2007 
         
Advance billings $732  $595 
Customer deposits  208   178 
       
         
Advance billings and customer deposits $940  $773 
       

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5.TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Significant transactions with affiliates (Cellco and its related entities) and other related parties, including allocations and direct charges, are summarized as follows for the years ended December 31, 2008, 2007 and 2006:
             
  2008  2007  2006 
             
Service revenues (a) $15,459  $13,035  $15,819 
Equipment and other revenues (b)  (289)  (259)  (278)
Cost of service (c)  13,517   11,909   10,838 
Cost of equipment (d)  1,140   1,037   531 
Selling, general and administrative (e)  9,180   8,330   6,712 
(a)Service revenues include roaming revenues relating to customers of other affiliated markets, long distance, paging, data and allocated contra-revenues including revenue concessions.
(b)Equipment and other revenues include sales of handsets and accessories and allocated contra-revenues including equipment concessions and coupon rebates.
(c)Cost of service includes roaming costs relating to customers roaming in other affiliated markets, paging, switch usage and allocated cost of telecom, long distance and handset applications.
(d)Cost of equipment includes handsets, accessories, and allocated warehousing and freight.
(e)Selling, general and administrative expenses include commissions and billing, and allocated office telecom, customer care, billing, salaries, sales and marketing, advertising, and commissions.
All affiliate transactions captured above, are based on actual amounts directly incurred by Cellco on behalf of the Partnership and/or allocations from Cellco. Revenues and expenses were allocated based on the Partnership’s percentage of total customers or gross customer additions or minutes of use, where applicable. The General Partner believes the allocations are reasonable. The affiliate transactions are not necessarily conducted at arm’s length.
The Partnership had net purchases involving plant, property, and equipment with affiliates with a net book value of $5,940, $3,235 and $2,695 in 2008, 2007 and 2006, respectively.
On January 1, 2005, the Partnership entered into a lease agreement for the right to use additional spectrum owned by Cellco. The initial term of this agreement was one year, with annual renewal terms. The Partnership renewed the lease through June 23, 2015. The annual lease commitment of $76 represents the costs of financing the spectrum, and does not necessarily reflect the economic value of the services received. No additional spectrum purchases or lease commitments have been entered into by the Partnership as of December 31, 2008.
6.COMMITMENTS
The General Partner, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities, equipment and spectrum used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancelable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancelable lease term. For the years ended December 31, 2008, 2007 and 2006, the Partnership recognized a total of $2,511, $1,811 and $1,601, respectively, as rent expense related to payments under these operating leases, which was included in cost of service in the accompanying Statements of Operations.

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Aggregate future minimum rental commitments under noncancelable operating leases, excluding renewal options that are not reasonably assured, for the years shown are as follows:
     
Years Amount 
 
2009 $2,423 
2010  1,350 
2011  1,000 
2012  853 
2013  737 
2014 and thereafter  1,901 
    
     
Total minimum payments $8,264 
    
From time to time the General Partner enters into purchase commitments, primarily for network equipment, on behalf of the Partnership.
7.CONTINGENCIES
Cellco is subject to various lawsuits and other claims including class actions, product liability, patent infringement, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also defending lawsuits filed against itself and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and outcomes are not predictable with assurance.
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. Consequently, the ultimate liability with respect to these matters at December 31, 2008 cannot be ascertained. The potential effect, if any, on the financial statements of the Partnership, in the period in which these matters are resolved, may be material.
In addition to the aforementioned matters, Cellco is subject to various other legal actions and claims in the normal course of business. While Cellco’s legal counsel cannot give assurance as to the outcome of each of these matters, in management’s opinion, based on the advice of such legal counsel, the ultimate liability with respect to any of these actions, or all of them combined, will not materially affect the financial statements of the Partnership.

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8.RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
                 
  Balance at  Additions  Write-offs  Balance at 
  Beginning  Charged to  Net of  End 
  of the Year  Operations  Recoveries  of the Year 
                 
Accounts Receivable Allowances:                
2008 $373  $936  $(924) $385 
2007 $329  $887  $(843)  373 
2006  385   717   (773)  329 
******

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 Consolidated Communications Holdings, Inc.
(Registrant)
(Registrant)
Date: March 16, 2009 By:  /s/ Robert J. Currey
  
 Robert J. Currey
 President and Chief Executive Officer
(Principal (Principal Executive Officer)
Date: March 27, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated thereunto duly authorized as of March 27, 2006.16, 2009.
   
Signature Title
   
 
/s/ Robert J. Currey

Robert J. Currey
 President (Principal Executive Officer,, Chief Executive Officer and Director
(Principal Executive Officer)
 
/s/ Steven L. Childers

Steven L. Childers
 Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) Officer
 
/s/ Richard A. Lumpkin

Richard A. Lumpkin
 Chairman of the Board of Directors
 
/s/ Jack W. Blumenstein

Jack W. Blumenstein
 Director
 
/s/ Roger H. Moore

Roger H. Moore
 Director
 
/s/ Maribeth S. Rahe

Maribeth S. Rahe
 Director

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INDEX TO EXHIBITS
     
Exhibit  
No. Description
   
 2.1* Stock Purchase Agreement, dated January 15, 2004, between Pinnacle One Partners, L.P. and Consolidated Communications Acquisitions Texas Corp. (f/k/a Homebase Acquisition Texas Corp.)
 2.2** Reorganization Agreement, dated July 21, 2005, among Consolidated Communications Illinois Holdings, Inc., Consolidated Communications Texas Holdings, Inc., Homebase Acquisition, LLC, and the equity holders named therein
 3.1* Form of Amended and Restated Certificate of Incorporation
 3.2* Form of Amended and Restated Bylaws
 4.1* Specimen Common Stock Certificate
 4.2* Indenture, dated April 14, 2004, by and among Consolidated Communications Illinois Holdings, Inc., Consolidated Communications Texas Holdings, Inc., Homebase Acquisition, LLC and Wells Fargo Bank, N.A., as Trustee, with respect to the 93/4% Senior Notes due 2012
 4.3* Form of 93/4% Senior Notes due 2012
 10.1* Second Amended and Restated Credit Agreement, dated February 23, 2005, among Consolidated Communications Illinois Holdings, Inc., as Parent Guarantor, Consolidated Communications, Inc. and Consolidated Communications Acquisition Texas, Inc., as Co-Borrowers, the lenders referred to therein and Citicorp North America, Inc., as Administrative Agent
 10.2* Amendment No. 1, dated April 22, 2005, to the Second Amended and Restated Credit Agreement, dated as of February 23, 2005, and Waiver under the Existing Credit Agreement among Consolidated Communications Illinois Holdings Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the lenders referred to therein and Citicorp North America, Inc.
 10.3* Amendment No. 2, dated as of June 3, 2005, to the(i) Credit Agreement dated as of April 14, 2004, as amended and restated as of October 22, 2004 and (ii) the Second Amended and Restated Credit Agreement, dated as of February 23, 2005, as amended on April 22, 2005, among Homebase Acquisition, LLC, Consolidated Communications Illinois Holdings, Inc., Consolidated Communications Texas Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the lenders referred to therein and Citicorp North America, Inc.
 10.4 Amendment No. 3, dated as of November 25, 2006, to the(i) Credit Agreement dated as of April 14, 2004, as amended and restated as of October 22, 2004, (ii) the Second Amended and Restated Credit Agreement dated as of February 23, 2005, as amended on April 22, 2005 and as further amended June 3, 2005, among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the lenders referred to therein as Citicorp North America, Inc.
 10.5* Form of Amended and Restated Pledge Agreement, among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the subsidiary guarantors named therein and Citicorp North America, Inc., as Collateral Agent
 10.6* Form of Amended and Restated Security Agreement, among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the subsidiary guarantors name therein and Citicorp North America, Inc., as Collateral Agent

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Exhibit  
No. Description
   
 10.7* Form of Amended and Restated Guarantee Agreement, among Consolidated Communications Holdings, Inc., Consolidated Communications Acquisition Texas, each subsidiary of each of Consolidated Communications, Inc. and Consolidated Communications Acquisition Texas, Inc. signatory thereto and Citicorp North America, Inc., as Administrative Agent
 10.8* Lease Agreement, dated December 31, 2002, between LATEL, LLC and Consolidated Market Response, Inc.
 10.9* Lease Agreement, dated December 31, 2002, between LATEL, LLC and Illinois Consolidated Telephone Company
 10.10* Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company
 10.11* Amendment No. 1 to Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company, dated March 18, 2002
 10.12* Amended and Restated Consolidated Communications Holdings, Inc. Restricted Share Plan
 10.13* Form of 2005 Long-term Incentive Plan
 21  Subsidiaries of Consolidated Communications Holdings, Inc.
 23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
 23.2 Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit
NumberDescription
 * Incorporated
2.1Agreement and Plan of Merger, dated as of July 1, 2007, by and among Consolidated Communications Holdings, Inc., North Pittsburgh Systems, Inc. and Fort Pitt Acquisition Sub Inc. (incorporated by reference from the Registration Statement on Form S-1 (File No. 333-121086).
** Incorporated by reference from theto Exhibit 2.1 to Current Report on Form 8-K filed dated July 12, 2007).
3.1Form of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 7 to Form S-1 dated July 19, 2005).
3.2Form of Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 to Current Report on August 2, 2005.Form 8-K dated September 11, 2007).
4.1Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 7 to Form S-1 dated July 19, 2005).
10.1Credit Agreement, dated December 31, 2007, among Consolidated Communications Holdings, Inc., as Parent Guarantor, Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc. and Fort Pitt Acquisition Sub Inc., as Co-Borrowers, the lenders referred to therein, Wachovia Bank, National Association, as administrative agent, issuing bank and swingline lender, CoBank, ACB, as syndication agent, General Electric Capital Corporation, as co-documentation agent, The Royal Bank of Scotland PLC, as co-documentation agent, and Wachovia Capital Markets, LLC, as sole lead arranger and sole bookrunner (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 31, 2007).
10.2Form of Collateral Agreement, dated December 31, 2007, by and among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., Fort Pitt Acquisition Sub Inc., certain subsidiaries of Consolidated Communications Holdings, Inc. identified on the signature pages thereto, in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.2 to Form 10-K for the period ended December 31, 2007).
10.3Form of Guaranty Agreement, dated December 31, 2007, made by Consolidated Communications Holdings, Inc. and certain subsidiaries of Consolidated Communications Holdings, Inc. identified on the signature pages thereto, in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.3 to Form 10-K for the period ended December 31, 2007).
10.4Lease Agreement, dated December 31, 2002, between LATEL, LLC and Consolidated Market Response, Inc. (incorporated by reference to Exhibit 10.11 to Form S-4 dated October 26, 2004).
10.5Lease Agreement, dated December 31, 2002, between LATEL, LLC and Illinois Consolidated Telephone Company (incorporated by reference to Exhibit 10.12 to Form S-4 dated October 26, 2004).
10.6Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company (incorporated by reference to Exhibit 10.13 to Form S-4 dated October 26, 2004).
10.7Amendment No. 1 to Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company, dated March 18, 2002 (incorporated by reference to Exhibit 10.14 to Form S-4 dated October 26, 2004).
10.8Amended and Restated Consolidated Communications Holdings, Inc. Restricted Share Plan (incorporated by reference to Exhibit 10.11 to Amendment No. 7 to Form S-1 dated July 19, 2005).

115131


Exhibit
NumberDescription
10.9Form of 2005 Long-term Incentive Plan (incorporated by reference to Exhibit 10.12 to Amendment No. 7 to Form S-1 dated July 19, 2005).
10.10Stock Repurchase Agreement, dated July 13, 2006, by and among Consolidated Communications Holdings, Inc., Providence Equity Partners IV L.P. and Providence Equity Operating Partners IV L.P. (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 17, 2006).
10.11Form of Employment Security Agreement with certain of the Company’s executive officers (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 23, 2007).
10.12Form of Employment Security Agreement with the Company’s and its subsidiaries vice president and director level employees (incorporated by reference to Exhibit 10.12 to Form 10-K for the period ended December 31, 2007).
10.13Executive Long-Term Incentive Program, as revised March 12, 2007 (incorporated by reference to Exhibit 10.1 to Form 8-K dated March 12, 2007).
10.14Form of 2005 Long-Term Incentive Plan Performance Stock Grant Certificate (incorporated by reference to Exhibit 10.2 to Form 8-K dated March 12, 2007).
10.15Form of 2005 Long-Term Incentive Plan Restricted Stock Grant Certificate (incorporated by reference to Exhibit 10.3 to Form 8-K dated March 12, 2007).
10.16Form of 2005 Long-Term Incentive Plan Restricted Stock Grant Certificate for Directors (incorporated by reference to Exhibit 10.4 to Form 8-K dated March 12, 2007).
10.17Description of the Consolidated Communications Holdings, Inc. Bonus Plan (incorporated by reference to Exhibit 10.5 to Form 8-K dated March 12, 2007).
10.18Letter Agreement, dated March 31, 2008, by Wachovia Bank, National Association, and agreed to and acknowledged by Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc. and North Pittsburgh Systems, Inc. (formerly known as Fort Pitt Acquisition Sub Inc.) (incorporated by reference to Exhibit 10.1 to Form 8-K dated March 31, 2008).
10.19Letter Agreement dated August 6, 2008 by Wachovia Bank, National Association, and agreed to and acknowledged by Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc. and North Pittsburgh Systems, Inc. (formerly known as Fort Pitt Acquisition Sub Inc.) (incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended June 30, 2008).
21List of Subsidiaries of Consolidated Communications Holdings, Inc.
23.1Consent of Independent Registered Public Accounting Firm.
23.2Consent of Independent Registered Public Accounting Firm.
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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