Emerging Strategic Challenges for Rural Carriers: Financial Outlook and Directions

1. Emerging Strategic Challenges for Rural Carriers: Financial Outlook and Directions Francis X. Gallagher June 19, 2012 Georgia Telecommunications Association

2. GTA Overview • Purpose • Financial perspectives on current ILEC challenges and opportunities • Potential directions • Presentation • Telecom industry operating trends • Financial import of the regulatory sea change • Opportunities for Georgia ILECs • Philosophical view • Industry has been remarkable for more than a century • Fundamental changes—technology, competition, regulation • Next epoch will emerge from insightful, correct strategic choices

3. GTA Relevant Telecom Industry Trends

4. GTA Detailed Quarterly Wireline Trends Revenue Growth Access Line Growth • Access line losses at rates that show no material sign of improvement • Revenues stable year-over-year • Margins weakening, but negative seasonal effect in the fourth quarter • Broadband sub growth is stable; except results reported at ALSK EBITDA Margin Broadband Sub Growth

5. GTA Broadband Trends HSD Subscriber Growth HSD Market Share • Broadband growth has weakened precipitously since mid-2011 • DSL growth stopped and then began to contract materially in 2Q11 • ILEC growth has slowed v. cable growth; cable offerings more robust • Market share shift toward cable since mid-2010; has cable “won” the wireline battle in non-FTTH markets • ILEC / total broadband growth driven by fiber-based adds Source: UBS Investment Research, company data

6. Cable Index (1) RLEC Index (2) GTA Revenue Generating Unit Trends Year-over-Year Change in Revenue Generating Units • Cable losing basic video subs, replacing with High Speed Data and voice • RLEC RGUs contracting since 3Q08, as broadband adds can’t fully offset access line losses Source: Company filings and press releases (1) Cable index is comprised of CVC, CHTR, CMCSA, MCCC, and TWC. (2) RLEC index is comprised of ALSK, CTL, CNSL, FTR, TDS, and WIN.

7. Cable Index (1) : Revenue EBITDA RLEC Index (2) : Revenue EBITDA GTA Revenue and EBITDA Trends Year-over-Year Change in Revenue and EBITDA • Trends generally mirror RGUs • RLEC trends improving since mid-2010, largely due to diversification efforts (broadband, business, data centers, etc.), and management of costs Source: Company filings and press releases (1) Cable index is comprised of CVC, CHTR, CMCSA, MCCC, and TWC. (2) RLEC index is comprised of ALSK, CTL, CNSL, FTR, TDS, and WIN.

8. GTA Wireless Overview • VZ/AT&T generate ~90% of U.S. wireless FCF • Question about service revenues (w/o handset revs) and profitability quarterly through 4Q11 • AT&T 4Q11 service revs slipped to 4% growth • VZ service rev growth more stable; ~6% in 4Q11 • ATT 4Q11 EBITDA growth -12.7%; for VZW -5.3% • ARPU growth pressured, suggesting weakness in the future in spite of data volume growth • AT&T ARPU 4Q11 growth contracted (-4.0%) • VZW ARPU growth in 4Q11 was 0.0% • Industry-wide ARPU growth negative since late 2008 • High-margin smartphones v. lower-margin devices (tablets, dongles, data cards, etc.) Total Service Revenue Growth EBITDA Growth

9. Verizon LTE coverage equal to 2010 3G coverage Verizon completes LTE network build Clearwire committed to WiMAX through 2015 T-Mobile launches LTE network Clearwire offers service to ~130M POPs Clearwire offers service to ~120M POPs MetroPCS launches LTE network Verizon offers service to ~200M POPS U.S. Cellular launches LTE network AT&T launches LTE network Verizon launches service to ~110M POPs GTA The Race to 4th Generation Services Long Term Evolution WiMAX 2014 Clearwire launches LTE network 2013 2012 2011 2010 Source: Company websites and press releases

10. GTA Financial Import of Regulatory Sea Change

11. GTA Order Provisions by Carrier Type

12. GTA Rural Financials

13. GTA Approximate Revenue Outlook • Rural USF/ICC loss • Reductions assume changes in HCLS, ICLS, Safety Net Additive, $250 per line per month cap, ICC reductions, and changes to ROR • The rural industry could have reductions of nearly $1 billion in support in 2020 • Cumulative reductions could be $5.2 billion from 2012 to 2020 Source: NECA estimates

14. GTA Small Company Metrics Source: Confidential company information; Balhoff & Williams, LLC

15. GTA Illustrative EBITDA Outlook • Simplifying assumptions • EBITDA margin = 36% • USF + access = 75% of revenues • Cost benefits of reforms = 0% • USF reform and effect of rural growth factor reduces EBITDA margin in this illustrative analysis slips from 36% to 13% by 2020 • Interest expense (typically 4%-6% of today’s revenues) would eliminate more than half of the residual cash flow by 2020, leaving ILEC with little cash for capex or principal repayment Source: Estimates by Balhoff & Williams, LLC

16. GTA Focus on Operating Cash Flow Sensitivity of Operating CF to Percentage of Revenues Lost • Minimal revenue impact can be substantial in terms of cash flow • Contracting cash flows put pressure on interest payments, appropriate returns to equity holders, principal repayment, capex and new business development

17. GTA Potential/Probable Outcomes Operating • Reduced or eliminated near-term capital investment (almost certainly no increase) • Proximate reductions in personnel and other operating costs Financial • Increased cost of capital • Insufficient recovery, skepticism about or avoidance of sector by debt (primary concern for RUS companies) and equity investors • Companies will evaluate consolidation, made more complex by financial risks and concern over potential bankruptcies Customer service • Growing urban-rural divide in terms of investment and telecommunications services • Rates will rise in rural regions for services less than comparable to those in urban areas Policy • COLR becomes more problematic if uneconomic mandates are underfunded or unfunded • Services will no longer be “comparable” in urban and rural regions • Potential exists that private-public partnership fails; no one may bid at reverse auctions

18. GTA Opportunities for Georgia ILECs

19. GTA Telecommunications Industry Dynamics Challenges Opportunities • Regulatory reforms • Continued cable competition • Continued wireless voice substitution • Increasing costs of capital • Decreasing credit availability • Wireless data substitution • Increased organic growth • Broadband • Video • CLEC • Wholesale fiber transport • Hosted and managed services • Acquisitions of assets/ operations: CLEC, Fiber, Hosted/managed services, ILEC

20. GTA ILEC Strategic Approaches • Strategic clarity is critical • Fundamental industry changes lead to value creation or destruction • Focus on opportunities and challenges • In view of the prevailing industry dynamics, ILECs have tended to pursue four broad strategic approaches (or some combination thereof) • Increase ILEC scope/scale through M&A (rationalizing cost structure) • Diversification • Reducing regulatory exposure • Geographic diversification • Expansion of network assets and business lines – CLEC and fiber • Entry into business-centric internet / data services • Hybrid – grow ILEC scope and scale while seeking business diversification • In-region organic opportunities

21. GTA ILEC M&A Valuations Purchase Price as a Multiple of LTM EBITDA Source: Company press releases and filings (1) Windstream / Iowa transaction value includes the value of Iowa’s net operating loss carry-forwards (multiple would have been lower without NOLs).

22. RBOCs Integrated ILECs High Yielding ILECs Pure Play ILECs GTA ILEC Enterprise Valuation Trends Enterprise Value as a Multiple of LTM EBITDA Source: Company filings and press releases

23. GTA The Power of Synergies Potential Synergies • Creating synergies in ILEC transactions • Approximately 11% of revenues • Approximately 27% of earnings before interest, taxes, depreciation, and amortization (operating cash flow or EBITDA) • Enterprise value to EBITDA • Pre-synergy valuations about 6.9x • Post-synergy valuations about 5.5x • Valuations declining more recently • Regulatory pressures will depress valuations Public Company Expenses Executive Expenses Back Office Support Information Technology and Systems Transport Synergies Revenue Synergies

24. GTA EATEL Acquires Vision Communications Service Territory Map • Announced: September 20, 2011 • Target: Vision Communications (“Vision”) (a portfolio company of BV Investment Partners) (“BV”) • Buyer: EATELCORP, LLC (“EATEL”) • Price: Not disclosed • Assets: Founded in 1945, Vision provides a broad array of advanced telecommunications services including digital cable TV, high-speed Internet access, local and long distance voice, and commercial data services. Headquartered in Larose, Louisiana, Vision serves residential and commercial customers throughout central and southern Lafourche and southern Jefferson Parishes. Vision served approximately 9,850 access lines at announcement. • Closed: January 5, 2012 • Comments: The acquisition enables EATEL to expand and diversify its service territory throughout southeastern Louisiana from Livingston Parish to southern Jefferson Parish. Charlesmead Advisors, LLC served as exclusive financial advisor to EATEL in this transaction. Source: EATEL press release and JSI

25. GTA Internet Infrastructure—Smaller ILEC Acquisitions • ILEC • Data Center Operation • Description

26. GTA North State Communications Acquires DataChambers DataChambers Data Center Facility • Announced: December 15, 2011 • Target: DataChambers, LLC • Buyer: North State Communications (OTC: NORSA.PK) • Price: Not disclosed • Assets: DataChambers provides information technology services, including electronic data storage, managed information technology solutions and secure co-location services for mission-critical infrastructure. Two data centers and disaster recovery space in its 120,000 square foot facility located in Winston-Salem, North Carolina. • Valuation Multiples: Not disclosed • Closed: December 28, 2011 • Comments: Acquisition enables North State to accelerate its strategy of diversifying its business and revenue mix. Transaction will strengthen North State’s efforts to become becoming a preferred business communications and data solutions provider. Charlesmead Advisors, LLC served as exclusive financial advisor to North State Communications in this transaction. DataChambers Products and Services • Data center services with remote hands services • Managed services incl. databases, firewalls, VPNs • Advanced monitoring services for servers, desktops, routers, switches, and applications • Data protection/backup with IBM’s Tivoli Storage Manager & eChambers Intelligent Data Protection • Virtualization and cloud solutions • Business continuity space w/ redundant networks • Desktop management/support to configure PCs, install patches, managed security and firewalls • 24/7 help desk provides Tier 1 to Tier 3 services Source: North State Communications press release and DataChambers website

27. GTA Import for Georgia ILECs . . . • Georgia ILECs • Significant competition from cable and wireless that will increase • Regulatory support revenues will erode rapidly • State regulatory oversight has limited acquisition activity • Regulators, however, recognize the changing environment • Lingering negative perceptions among potential acquirors • Several major ILECs in state with defined strategies • Many small ILECs in state with less strategic clarity • A small ILEC will need to . . . • Engage soon in a realistic strategic assessment • Focus on value preservation/creation • Operating focus • Scope and scale • Diversification • Reduced reliance on regulation

28. GTA Focused Alternatives • Create/evaluate a ten-year financial model (consistent with reforms) • Responding to the new public mandate • Assume the operating model is not the same as historical model • Create a “no-support” model that generates appropriate returns • New obligation—survive to serve customers for the long term • Communicate with customers/regulators about reasonable model • Develop alternatives for improving the operating outlook • Evaluate all non-strategic assets with a view to divestiture • Assess whether company is buyer or seller of strategic assets • Focus on efficiencies and optimization of operations • List and evaluate diversification opportunities • Consider all strategic approaches/combinations • Evaluate/discuss capital resources with all key parties • Shareholders • Lenders

29. GTA Representative Transactions Has Agreed to sell Spectrum to Has Acquired Spectrum from Has Acquired Has Acquired Advisor to Buyer January 2012 Advisor to Buyer February 2012 Advisor to Buyer December 2011 Advisor to Seller Pending