Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**for thequarterly period ended June 30, 2010**

 

**OR**

 

**o****         Transition reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**for thetransition period from                  to                  .**

 

**COMMISSION FILE NUMBER 000-51446**

 

**CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **02-0636095**                    |
|---------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of |       | (IRS Employer Identification No.) |
| incorporation or organization)  |       |                              |

 

| **121 South 17****th**** Street**   | ** ** | ** **     |
|------------------------------------------|------------|----------------|
| **Mattoon, Illinois**               | ** ** | **61938-3987** |
| (Address of Principal Executive Offices) |       | (Zip Code)     |

 

**(217) 235-3311**

(Registrant’s Telephone Number, including Area Code)

 

Indicateby checkmark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  YES x NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   YES o NO o

 

Indicateby checkmark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 

| Large accelerated filer o                                              |   | Accelerated filer x    |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o

(Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

Indicateby checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   YES o NO x

 

Indicatethe number of shares outstanding of each class of Common Stock, as of thelatest practicable date

 

| **Class**                     | ** ** | **Outstanding as of August 6, 2010** |
|-------------------------------|------------|---------------------------------------------------------------|
| Common Stock, $0.01 Par Value |       | 29,822,604 Shares                                             |

 

 

 

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** **

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**TABLEOF CONTENTS**

 
| ** **   | ** **                                                                                                                       | **Page No.** |
|--------------|----------------------------------------------------------------------------------------------------------------------------------|-------------------|
|         |                                                                                                                             |              |
| PART I  |
|         |                                                                                                                             |              |
| Item 1.      | Financial Statements                                                                                                             |              |
|         | Condensed Consolidated Statements of Operations  (Unaudited) - Three and six month periods ended June 30, 2010 and 2009     | 1                 |
|         | Condensed Consolidated Balance Sheets — June 30,  2010 (Unaudited) and December 31, 2009                          | 2                 |
|         | Condensed Consolidated Statement of Changes in  Stockholders’ Equity (Unaudited) — Six months ended June 30, 2010 | 3                 |
|         | Condensed Consolidated Statements of Cash Flows  (Unaudited) - Six month periods ended June 30, 2010 and 2009               | 4                 |
|         | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                  | 5                 |
|         |                                                                                                                             |              |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      | 20                |
|         |                                                                                                                             |              |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                                                      | 35                |
|         |                                                                                                                             |              |
| Item 4.      | Controls and  Procedures                                                                                                         | 36                |
|         |                                                                                                                             |              |
| PART II |
|         |                                                                                                                             |              |
| Item 1.      | Legal Proceedings                                                                                                                | 37                |
|         |                                                                                                                             |              |
| Item 1A.     | Risk Factors                                                                                                                     | 37                |
|         |                                                                                                                             |              |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                     | 37                |
|         |                                                                                                                             |              |
| Item 3.      | Defaults  Upon Senior Securities                                                                                                 | 37                |
|         |                                                                                                                             |              |
| Item 4.      | [Removed and  Reserved]                                                                                                          | 37                |
|         |                                                                                                                             |              |
| Item 5.      | Other Information                                                                                                                | 37                |
|         |                                                                                                                             |              |
| Item 6.      | Exhibits                                                                                                                         | 38                |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Consolidated Communications Holdings, Inc. and Subsidiaries**

**Condensed Consolidated Statementsof Operations**

(Unaudited)

** **
| ** **                                                                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In thousands except per share amounts)**                                                        | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                               | * *   | * *                             | * *   | * *                           | * *   | * * | * * | * * | * * |
| Net revenues                                                                                       | ** ** | **$**                                | **95,737** |                               | $          | 102,042 | ** ** | **$** | **194,039** |   | $ | 203,752 |   |
| Operating expense:                                                                                 | ** ** | ** **                           |       |                               | ** ** | ** ** |   |   |   |
| Cost of services and products (exclusive of  depreciation and amortization shown separately below) | ** ** | **35,649**                           |       | 36,344                             | ** ** | **71,589** |   | 72,444 |   |
| Selling, general and administrative expenses                                                       | ** ** | **21,390**                           |       | 25,850                             | ** ** | **44,193** |   | 53,727 |   |
| Depreciation and amortization                                                                      | ** ** | **21,460**                           |       | 20,981                             | ** ** | **43,002** |   | 42,658 |   |
| Operating income                                                                                   | ** ** | **17,238**                           |       | 18,867                             | ** ** | **35,255** |   | 34,923 |   |
| Other income (expense):                                                                            |       |                                 |       |                               |       |   |   |   |   |
| Interest income                                                                                    | ** ** | **22**                               |       | 15                                 | ** ** | **38** |   | 37 |   |
| Interest expense                                                                                   | ** ** | **(13,069**                          | **)**      | (14,564                            | )          | **(25,990** | **)** | (29,056 | ) |
| Investment income                                                                                  | ** ** | **7,136**                            |       | 6,761                              | ** ** | **13,438** |   | 11,809 |   |
| Other, net                                                                                         | ** ** | **(516**                             | **)**      | 1,766                              | ** ** | **(452** | **)** | 1,215 |   |
| Income before income taxes                                                                         | ** ** | **10,811**                           |       | 12,845                             | ** ** | **22,289** |   | 18,928 |   |
| Income tax expense                                                                                 | ** ** | **3,638**                            |       | 5,186                              | ** ** | **8,064** |   | 7,572 |   |
| Net income                                                                                         | ** ** | **7,173**                            |       | 7,659                              | ** ** | **14,225** |   | 11,356 |   |
| Less: net income attributable to noncontrolling  interest                                          | ** ** | **124**                              |       | 136                                | ** ** | **255** |   | 543 |   |
| Net income attributable to common stockholders                                                     | ** ** | **$**                                | **7,049**  |                               | $          | 7,523 | ** ** | **$** | **13,970** |   | $ | 10,813 |   |
| ** **                                                                                         |       |                                 | ** ** | ** **                         |       |   |   |   |   |
| Net income per common share—basic                                                             | ** ** | **$**                                | **0.24**   |                               | $          | 0.25 | ** ** | **$** | **0.47** |   | $ | 0.36 |   |
| ** **                                                                                         |       |                                 | ** ** | ** **                         |       |   |   |   |   |
| Net income per common share—diluted                                                           | ** ** | **$**                                | **0.24**   |                               | $          | 0.25 | ** ** | **$** | **0.47** |   | $ | 0.36 |   |
| ** **                                                                                         |       |                                 | ** ** | ** **                         |       |   |   |   |   |
| Cash dividends per common share                                                                    | ** ** | **$**                                | **0.38**   |                               | $          | 0.38 | ** ** | **$** | **0.77** |   | $ | 0.77 |   |

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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** **

**Consolidated Communications Holdings, Inc. and Subsidiaries**

**Condensed ConsolidatedBalance Sheets**

 
| **(In thousands except share and per share amounts)**                                                                                                                                     | ** ** | **June 30,********2010********(Unaudited)** | ** **    | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|---------------|-----------------------------|------------|
|                                                                                                                                                                                      |       |                                             |          |                        |       |
| **Assets**                                                                                                                                                                                | ** ** | ** **                                       |          |                        |       |
| Current assets:                                                                                                                                                                           | ** ** | ** **                                       |          |                        |       |
| Cash and equivalents                                                                                                                                                                      | ** ** | **$**                                            | **53,574**    |                        | $          | 42,758 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $1,931 in 2010 and $1,796 in 2009                                                                                         | ** ** | **41,898**                                       |          | 42,125                      |       |
| Inventories                                                                                                                                                                               | ** ** | **7,671**                                        |          | 6,874                       |       |
| Deferred income taxes                                                                                                                                                                     | ** ** | **5,970**                                        |          | 5,970                       |       |
| Prepaid expenses and other current assets                                                                                                                                                 | ** ** | **7,802**                                        |          | 6,639                       |       |
| Total current assets                                                                                                                                                                      | ** ** | **116,915**                                      |          | 104,366                     |       |
| Property, plant and equipment, net                                                                                                                                                        | ** ** | **365,195**                                      |          | 377,200                     |       |
| Investments                                                                                                                                                                               | ** ** | **98,277**                                       |          | 98,748                      |       |
| Goodwill                                                                                                                                                                                  | ** ** | **520,562**                                      |          | 520,562                     |       |
| Customer lists, net                                                                                                                                                                       | ** ** | **91,019**                                       |          | 102,088                     |       |
| Tradenames                                                                                                                                                                                | ** ** | **13,446**                                       |          | 13,446                      |       |
| Deferred debt issuance costs, net and other assets                                                                                                                                        | ** ** | **5,838**                                        |          | 6,633                       |       |
| Total assets                                                                                                                                                                              | ** ** | **$**                                            | **1,211,252** |                        | $          | 1,223,043 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                            | ** ** | ** **                                       |          |                        |       |
| Current liabilities:                                                                                                                                                                      | ** ** | ** **                                       |          |                        |       |
| Accounts payable                                                                                                                                                                          | ** ** | **$**                                            | **15,265**    |                        | $          | 13,482 |   |
| Advance billings and customer deposits                                                                                                                                                    | ** ** | **21,797**                                       |          | 20,025                      |       |
| Dividends payable                                                                                                                                                                         | ** ** | **11,553**                                       |          | 11,476                      |       |
| Accrued expense                                                                                                                                                                           | ** ** | **17,249**                                       |          | 26,268                      |       |
| Current portion of capital lease obligations                                                                                                                                              | ** ** | **—**                                       |          | 344                         |       |
| Current portion of derivative liability                                                                                                                                                   | ** ** | **3,308**                                        |          | 6,074                       |       |
| Current portion of pension and postretirement  benefit obligations                                                                                                                        | ** ** | **2,908**                                        |          | 2,908                       |       |
| Total current liabilities                                                                                                                                                                 | ** ** | **72,080**                                       |          | 80,577                      |       |
| Senior secured long-term debt                                                                                                                                                             | ** ** | **880,000**                                      |          | 880,000                     |       |
| Deferred income taxes                                                                                                                                                                     | ** ** | **74,095**                                       |          | 74,711                      |       |
| Pension and other postretirement obligations                                                                                                                                              | ** ** | **81,972**                                       |          | 80,298                      |       |
| Other long-term liabilities                                                                                                                                                               | ** ** | **31,212**                                       |          | 26,740                      |       |
| Total liabilities                                                                                                                                                                         | ** ** | **1,139,359**                                    |          | 1,142,326                   |       |
| Stockholders’ equity:                                                                                                                                                                | ** ** | ** **                                       |          |                        |       |
| Common stock, par value $0.01 per share;  100,000,000 shares authorized, 29,822,604 and 29,608,653, shares outstanding  as of June 30, 2010 and December 31, 2009, respectively | ** ** | **298**                                          |          | 296                         |       |
| Additional paid-in capital                                                                                                                                                                | ** ** | **101,733**                                      |          | 109,746                     |       |
| Retained earnings                                                                                                                                                                         | ** ** | **—**                                       |          | —                      |       |
| Accumulated other comprehensive loss                                                                                                                                                      | ** ** | **(36,608**                                      | **)**         | (35,540                     | )          |
| Noncontrolling interest                                                                                                                                                                   | ** ** | **6,470**                                        |          | 6,215                       |       |
| Total stockholders’ equity                                                                                                                                                           | ** ** | **71,893**                                       |          | 80,717                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                           | ** ** | **$**                                            | **1,211,252** |                        | $          | 1,223,043 |   |

 

*The accompanying notes are an integral part of these condensedconsolidated financial statements.*

 

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**Consolidated Communications Holdings, Inc. andSubsidiaries**

**ConsolidatedStatement of Changes in Stockholders’ Equity**

(Unaudited)

** **
| ** **                                                      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                                                      | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**       | ** ** | **Non-**     | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | **controlling** | ** ** | ** **   | ** ** |
| **(In thousands, except share amounts)**                        | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Loss**        | ** ** | **Interest** | ** ** | **Total**  | ** ** |
|                                                            |       |             |       |        |       |           |       |              |       |            |       |         |       |       |       |
| Balance -  December 31, 2009                               |       | 29,608,653       |       | $           | 296        |           | $          | 109,746           |       | $               | —     |         | $          | (35,540    | )          | $ | 6,215 |   | $ | 80,717 |   |
|                                                            |       |             |       |        |       |           |       |              |       |            |       |         |       |       |       |
| Dividends on common  stock                                      |       | —           |       | —      |       | (4,626         | )          | (6,920            | )          | —          |       | —       |       | (11,546    | )          |
| Shares issued under  employee plan, net of forfeitures          |       | 213,951          |       | 2           |       | (2             | )          | —            |       | —          |       | —       |       | —     |       |
| Non-cash, stock-based  compensation                             |       | —           |       | —      |       | 503            |       | —            |       | —          |       | —       |       | 503        |       |
| Comprehensive income:                                           |       |             |       |        |       |           |       |              |       |            |       |         |       |       |       |
| Net income                                                      |       | —           |       | —      |       | —         |       | 6,920             |       | —          |       | 131          |       | 7,051      |       |
| Change in prior service  cost and net loss, net of tax of $26   |       | —           |       | —      |       | —         |       | —            |       | 47              |       | —       |       | 47         |       |
| Change in fair value of  cash flow hedges, net of tax of $54    |       | —           |       | —      |       | —         |       | —            |       | 90              |       | —       |       | 90         |       |
| Total comprehensive  income                                     |       |             |       |        |       |           |       |              |       |            |       |         |       | 7,188      |       |
|                                                            |       |             |       |        |       |           |       |              |       |            |       |         |       |       |       |
| Balance - March 31,  2010                                  |       | 29,822,604       |       | $           | 298        |           | $          | 105,621           |       | $               | —     |         | $          | (35,403    | )          | $ | 6,346 |   | $ | 76,862 |   |
|                                                            |       |             |       |        |       |           |       |              |       |            |       |         |       |       |       |
| Dividends on common  stock                                      |       | —           |       | —      |       | (4,504         | )          | (7,049            | )          | —          |       | —       |       | (11,553    | )          |
| Non-cash, stock-based  compensation                             |       | —           |       | —      |       | 616            |       | —            |       | —          |       | —       |       | 616        |       |
| Comprehensive income:                                           |       |             |       |        |       |           |       |              |       |            |       |         |       |       |       |
| Net income                                                      |       | —           |       | —      |       | —         |       | 7,049             |       | —          |       | 124          |       | 7,173      |       |
| Change in prior service  cost and net loss, net of tax of $26   |       | —           |       | —      |       | —         |       | —            |       | 48              |       | —       |       | 48         |       |
| Change in fair value of  cash flow hedges, net of tax of $(722) |       | —           |       | —      |       | —         |       | —            |       | (1,253          | )          | —       |       | (1,253     | )          |
| Total comprehensive  income                                     |       |             |       |        |       |           |       |              |       |            |       |         |       | 5,968      |       |
|                                                            |       |             |       |        |       |           |       |              |       |            |       |         |       |       |       |
| Balance - June 30,  2010                                   |       | 29,822,604       |       | $           | 298        |           | $          | 101,733           |       | $               | —     |         | $          | (36,608    | )          | $ | 6,470 |   | $ | 71,893 |   |

 

*The accompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**Consolidated Communications Holdings, Inc. and Subsidiaries**

**Condensed Consolidated Statementsof Cash Flows**

(Unaudited)

 
| ** **                                                                               | ** ** | **Six Months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(In thousands)**                                                                       | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Operating Activities**                                                                 | ** ** | ** **                         |       |   |   |
| Net income                                                                               | ** ** | **$**                              | **14,225** |   | $ | 11,356 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       | ** ** | ** **                         |       |   |   |
| Depreciation and amortization                                                            | ** ** | **43,002**                         |       | 42,658 |   |
| Deferred income taxes                                                                    | ** ** | **616**                            |       | 1,392 |   |
| Loss on disposal of assets                                                               | ** ** | **888**                            |       | — |   |
| Cash distributions from wireless partnerships in  excess of/(less than) current earnings | ** ** | **177**                            |       | (1,972 | ) |
| Stock-based compensation expense                                                         | ** ** | **1,119**                          |       | 932 |   |
| Amortization of deferred financing costs                                                 | ** ** | **647**                            |       | 655 |   |
| Changes in operating assets and liabilities:                                             | ** ** | ** **                         |       |   |   |
| Accounts receivable, net                                                                 | ** ** | **227**                            |       | (1,137 | ) |
| Inventories                                                                              | ** ** | **(797**                           | **)**      | 414 |   |
| Other assets                                                                             | ** ** | **(1,015**                         | **)**      | 1,678 |   |
| Accounts payable                                                                         | ** ** | **1,783**                          |       | (1,546 | ) |
| Accrued expenses and other liabilities                                                   | ** ** | **(5,800**                         | **)**      | (6,432 | ) |
| Net cash provided by operating activities                                                | ** ** | **55,072**                         |       | 47,998 |   |
| **Investing Activities**                                                                 | ** ** | ** **                         |       |   |   |
| Additions to property, plant and equipment, net                                          | ** ** | **(21,820**                        | **)**      | (20,375 | ) |
| Proceeds from the sale of assets                                                         | ** ** | **972**                            |       | 300 |   |
| Proceeds from the sale of investments                                                    | ** ** | **35**                             |       | — |   |
| Net cash used for investing activities                                                   | ** ** | **(20,813**                        | **)**      | (20,075 | ) |
| **Financing Activities**                                                                 | ** ** | ** **                         |       |   |   |
| Payment of capital lease obligation                                                      | ** ** | **(344**                           | **)**      | (453 | ) |
| Repurchase and retirement of common stock                                                | ** ** | **—**                         |       | (9 | ) |
| Dividends on common stock                                                                | ** ** | **(23,099**                        | **)**      | (22,907 | ) |
| Net cash used for financing activities                                                   | ** ** | **(23,443**                        | **)**      | (23,369 | ) |
| Net increase in cash and equivalents                                                     | ** ** | **10,816**                         |       | 4,554 |   |
| Cash and equivalents at beginning of year                                                | ** ** | **42,758**                         |       | 15,471 |   |
| Cash and equivalents at end of period                                                    | ** ** | **$**                              | **53,574** |   | $ | 20,025 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements.*

 

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**Consolidated Communications Holdings, Inc**.**and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

**1.****                                     ****Nature of Operations**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Consolidated Communications Holdings, Inc. and itssubsidiaries, which are collectively referred to as “Consolidated”,  the “Company”, “we”, “our” or “us”, unlessthe context otherwise requires.  Allsignificant intercompany transactions have been eliminated in consolidation.

 

We have prepared theunaudited condensed consolidated financial statements included herein pursuantto the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in statements prepared in accordance with generally acceptedaccounting principles have been omitted pursuant to such rules andregulations, although we believe that the disclosures are adequate to make theinformation presented not misleading. These financial statements should be read in conjunction with thefinancial statements and notes thereto included in our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

Theaccompanying unaudited condensed consolidated financial statements presentedherewith reflect all adjustments (consisting of only normal and recurringadjustments) which, in the opinion of management, are necessary for a fairpresentation of the results of operations for the three and six month periodsended June 30, 2010 and 2009.  Theresults of operations for interim periods are not necessarily indicative ofresults to be expected for an entire year.

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially fromthose estimates.

 

As of June 30, 2010,the Company’s Summary of Critical Accounting Policies for the year ended December 31,2009, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed.

 

The Company has evaluatedsubsequent events and transactions for potential recognition or disclosure inthe financial statements through the day the financial statements are issued.

 

**2.****                                     ****Recent Accounting Pronouncements**

 

EffectiveJanuary 1, 2010, we adopted the Financial Accounting Standards Board’s (“FASB”)updated guidance related to fair value measurements and disclosures, whichrequires a reporting entity to disclose separately the amounts of significanttransfers in and out of the Level 1 and Level 2 fair value measurements and todescribe the reasons for the transfers. In addition, in the reconciliation for fair value measurements usingsignificant unobservable inputs, or Level 3, a reporting entity should discloseseparately information about purchases, sales, issuances and settlements (thatis, on a gross basis rather than one net number).  The updated guidance also requires that anentity provide fair value measurement disclosures for each class of assets andliabilities and disclosures about the valuation techniques and inputs used tomeasure fair value for both recurring and non-recurring Level 2 and Level 3fair value measurements.  The guidancewas effective for interim or annual financial reporting periods beginning afterDecember 15, 2009, except for the disclosures about purchases, sales,issuances and 

 

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settlementsin the roll forward activity in Level 3 fair value measurements, which areeffective for fiscal years beginning after December 15, 2010.  Therefore, we have not yet adopted theguidance with respect to the roll forward activity in Level 3 fair valuemeasurements.  We have updated ourdisclosures to comply with the updated guidance.  Adoption of the updated guidance did not havean impact on our consolidated results of operations or financial condition.

 

**3.****                                     ****Prepaidand other current assets**

 

Prepaidand other current assets are as follows:

 
| **(In  thousands)**     | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                    |       |                    |       |                        |       |
| Prepaid maintenance     | ** ** | **$**                   | **2,532**  |                        | $          | 3,152 |   |
| Prepaid taxes           | ** ** | **1,012**               |       | 43                          |       |
| Deferred charges        | ** ** | **1,178**               |       | 718                         |       |
| Prepaid insurance       | ** ** | **622**                 |       | 471                         |       |
| Prepaid expense - other | ** ** | **2,393**               |       | 2,200                       |       |
| Other current assets    | ** ** | **65**                  |       | 55                          |       |
| Total                   | ** ** | **$**                   | **7,802**  |                        | $          | 6,639 |   |

 

**4.****                                     ****Property,plant and equipment**

 

Property,plant and equipment are as follows:

 
| **(In  thousands)**                  | ** ** | **June 30,  2010** | ** **  | **December 31,  2009** | ** ** |
|--------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
|                                 |       |                    |        |                        |       |
| Land and buildings                   | ** ** | **$**                   | **65,623**  |                        | $          | 66,700 |   |
| Network and outside plant facilities | ** ** | **846,349**             |        | 833,879                     |       |
| Furniture, fixtures and equipment    | ** ** | **80,123**              |        | 80,315                      |       |
| Assets under capital lease           | ** ** | **5,144**               |        | 5,144                       |       |
| Less: accumulated depreciation       | ** ** | **(646,052**            | **)**       | (617,141                    | )          |
|                                 | ** ** | **351,187**             |        | 368,897                     |       |
| Construction in progress             | ** ** | **14,008**              |        | 8,303                       |       |
| Totals                               | ** ** | **$**                   | **365,195** |                        | $          | 377,200 |   |

 

Depreciationexpense totaled $15.9 million and $15.4 million for the three months ended June 30,2010 and 2009, respectively, and $31.9 million and $31.6 million for the sixmonths ended June 30, 2010 and 2009, respectively.

 

**5.****                                     ****Investments**

 

Weown 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “MobilnetSouth Partnership”).  The principalactivity of the Mobilnet South Partnership is providing cellular service in theHouston, Galveston, and Beaumont, Texas metropolitan areas.  We also own 3.60% of Pittsburgh SMSA LimitedPartnership (“Pittsburgh SMSA”), which provides cellular service in and aroundthe Pittsburgh metropolitan area. Because of our limited influence over these partnerships, we use thecost method to account for both of these investments.  For each of the three month periods ended June 30,2010 and 2009, we received cash distributions from these partnerships totaling$3.0 million.  For the six months ended June 30,2010 and 2009, we received cash distributions from these partnerships totaling$6.0 million and $5.5 million, respectively.

 

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Wealso own 17.02% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”),16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”), and23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to alimited rural area in Texas.  RSA 6(I) andRSA 6(II) provide cellular service in and around our Pennsylvania serviceterritory.  In addition, we have a 50%ownership interest in Boulevard Communications LLP, a competitive access providerin western Pennsylvania.  Because we havesignificant influence over the operating and financial policies of these fourentities, we account for the investments using the equity method.  For the three months ended June 30, 2010and 2009, we received cash distributions from these partnerships totaling $3.6million and $1.5 million, respectively. For the six months ended June 30, 2010 and 2009, we received cashdistributions from these partnerships totaling $7.5 million and $4.2 million,respectively.

 

Ourinvestments are as follows:

 
| **(In  thousands)**                                                  | ** ** | **June 30,  2010** | ** ** | **December 31,   2009** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
|                                                                 |       |                    |       |                         |       |
| Cash surrender value of life insurance policies                      | ** ** | **$**                   | **1,415**  |                         | $          | 1,797 |   |
| Cost method investments:                                             | ** ** | ** **              |       |                         |       |
| GTE Mobilnet of South Texas Limited Partnership  (2.34%)             | ** ** | **21,450**              |       | 21,450                       |       |
| Pittsburgh SMSA Limited Partnership (3.60%)                          | ** ** | **22,950**              |       | 22,950                       |       |
| CoBank, ACB Stock                                                    | ** ** | **3,025**               |       | 2,902                        |       |
| Other                                                                | ** ** | **25**                  |       | 60                           |       |
| Equity method investments:                                           | ** ** | ** **              |       |                         |       |
| GTE Mobilnet of Texas RSA #17 Limited Partnership  (17.02% interest) | ** ** | **18,984**              |       | 19,080                       |       |
| Pennsylvania RSA 6(I) Limited Partnership  (16.6725% interest)  | ** ** | **7,187**               |       | 7,301                        |       |
| Pennsylvania RSA 6(II) Limited Partnership  (23.67% interest)   | ** ** | **23,084**              |       | 23,049                       |       |
| Boulevard Communications, LLP (50% interest)                         | ** ** | **157**                 |       | 159                          |       |
| Total                                                                | ** ** | **$**                   | **98,277** |                         | $          | 98,748 |   |

 

CoBankis a cooperative bank owned by its customers.  Annually, CoBankdistributes patronage in the form of cash and stock in the cooperative based onthe Company’s outstanding loan balance with CoBank, who has traditionally beena significant lender in the Company’s credit facility.   The investment in CoBank represents theaccumulation of the equity patronage paid by CoBank to the Company.

 

**6.****                                     ****FairValue Measurements**

 

TheCompany’s derivative instruments related to interest rate swap agreements arerequired to be measured at fair value on a recurring basis.  The fair values of the interest rate swapsare determined using an internal valuation model which relies on the expectedLIBOR-based yield curve and estimates of counterparty and Consolidated’snon-performance risk as the most significant inputs.  Because each of these inputs are directlyobservable or can be corroborated by observable market data, we havecategorized these interest rate swaps as Level 2 within the fair valuehierarchy.

 

TheCompany’s swap liabilities measured at fair value on a recurring basis subjectto disclosure requirements at June 30, 2010 are as follows:

 

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| ** **                               | ** ** | ** **             | ** ** | **Fair Value Measurements at Reporting Date Using**                    | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------------------------------------------------------|------------|
| **(In  thousands)**                      | ** ** | **June 30, 2010** | ** ** | **Quoted Prices  In Active  Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                                     |       |                   |       |                                                                   |       |   |   |   |   |
| Current interest rate swap liabilities   |       | $                      | (3,308     | )                                                                      | $          | — |   | $ | (3,308 | ) | $ | — |   |
| Long-term interest rate swap liabilities |       | (30,623                | )          | —                                                                 |       | (30,623 | ) | — |   |
| Totals                                   |       | $                      | (33,931    | )                                                                      | $          | — |   | $ | (33,931 | ) | $ | — |   |

 

Thechange in the fair value of the derivatives is primarily a result of a change inmarket expectations for future interest rates.

 

Wehave not elected the fair value option for any of our financial assets orliabilities.  The carrying value of otherfinancial instruments, including cash, accounts receivable, accounts payableand accrued liabilities approximate fair value due to their short maturities orvariable-rate nature of the respective balances.  The following tablepresents the other financial instruments that are not carried at fair value butwhich require fair value disclosure as of June 30, 2010 andDecember 31, 2009.

 
| ** **                | ** ** | **As of June 30, 2010** | ** **  | **As of December 31, 2009** | ** ** |
|---------------------------|------------|------------------------------|-------------|----------------------------------|------------|
| **(In  thousands)**       | ** ** | **Carrying Value**           | ** **  | **Fair Value**                   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Investments, equity basis | ** ** | **$**                        | **49,412**  | ** **                       | ** ** | **(a)** | $ | 49,589 |   |   | (a) |
| Investments, at cost      | ** ** | **$**                        | **47,450**  | ** **                       | ** ** | **(a)** | $ | 47,362 |   |   | (a) |
| Long-term debt            | ** ** | **$**                        | **880,000** | ** **                       | **$**      | **880,000** |   | $ | 880,000 |   | $ | 880,000 |   |
|                           |            |                              |             |                                  |            |  |  |  |  |  |  |  |  |

 

----

(a) The Company’s investments at June 30, 2010 and December 31, 2009accounted for under both the equity and cost methods consist of minoritypositions in various cellular telephone limited partnerships.  Theseinvestments are recorded using either the equity or cost methods, and it is notpractical to estimate a fair value for these non-publicly traded entities.

 

Ourlong-term debt allows us to select a one month LIBOR repricing option, which wehave elected.  As such, the fair value ofthis debt approximates its carrying value.

 

**7.****                                     ****Goodwilland Other Intangible Assets**

 

Inaccordance with the applicable accounting guidance, goodwill and tradenames arenot amortized but are subject to impairment testing—no less than annually ormore frequently if circumstances indicate potential impairment.

 

Thefollowing table presents the carrying amount of goodwill by segment:

 
| **(In thousands)** | ** ** | **June 30,   2010** | ** **  | **December 31,   2009** | ** ** |
|-------------------------|------------|-------------------------------|-------------|-----------------------------------|------------|
|                    |       |                          |        |                              |       |
| Telephone Operations    | ** ** | **$**                         | **519,541** |                              | $          | 519,541 |   |
| Other Operations        | ** ** | **1,021**                     |        | 1,021                             |       |
| Totals                  | ** ** | **$**                         | **520,562** |                              | $          | 520,562 |   |

 

Ourmost valuable tradename is the federally registered mark CONSOLIDATED, which isused in association with our telephone communication services and is a designof interlocking circles.  The Company’scorporate branding strategy leverages a CONSOLIDATED naming structure.  All of the Company’s business units andseveral of our products and services incorporate the CONSOLIDATED 

 

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name.  These tradenames are indefinitely renewableintangibles.  The carrying value of thetradenames was $13.4 million at both June 30, 2010 and December 31,2009.

 

TheCompany’s customer lists consist of an established base of customers thatsubscribe to its services.  The carryingamount of customer lists is as follows:

 
| ** **                     | ** ** | **Telephone Operations** | ** **  | **Other Operations**        | ** ** |
|--------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| **(In  thousands)**            | ** ** | **June 30,  2010**  | ** **  | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|                           |       |                     |        |                        |       |   |   |   |   |
| Gross carrying amount          | ** ** | **$**                    | **193,124** |                        | $          | 193,124 | ** ** | **$** | **11,712** |   | $ | 11,712 |   |
| Less: accumulated amortization | ** ** | **(103,207**             | **)**       | (92,358                     | )          | **(10,610** | **)** | (10,390 | ) |
| Net carrying amount            | ** ** | **$**                    | **89,917**  |                        | $          | 100,766 | ** ** | **$** | **1,102** |   | $ | 1,322 |   |

 

Amortizationassociated with customer lists totaled approximately $5.6 million and $11.1million in each of the three and six month periods ended June 30, 2010 and2009, respectively.

 

**8.****                                     ****DeferredDebt Issuance Costs, Net and Other Assets**

 

Deferredfinancing costs, net and other assets are as follows:

 
| **(In  thousands)**               | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                              |       |                    |       |                        |       |
| Deferred debt issuance costs, net | ** ** | **$**                   | **5,817**  |                        | $          | 6,464 |   |
| Other assets                      | ** ** | **21**                  |       | 169                         |       |
| Total                             | ** ** | **$**                   | **5,838**  |                        | $          | 6,633 |   |

 

Deferreddebt issuance costs are subject to amortization.  Remaining deferred debt issuance costs of$5.8 million at June 30, 2010 related to our secured credit facility willbe amortized over the remaining life of 4.5 years, resulting in amortizationexpense of $1.3 million yearly unless the facility is extinguished earlier.

 

**9.****                                     ****Accrued Expenses**

 

Accruedexpenses are as follows:

 
| **(In  thousands)**            | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                           |       |                    |       |                        |       |
| Salaries and employee benefits | ** ** | **$**                   | **8,511**  |                        | $          | 11,727 |   |
| Taxes payable                  | ** ** | **936**                 |       | 7,766                       |       |
| Accrued interest               | ** ** | **1,458**               |       | 1,177                       |       |
| Other accrued expenses         | ** ** | **6,344**               |       | 5,598                       |       |
| Total accrued expenses         | ** ** | **$**                   | **17,249** |                        | $          | 26,268 |   |

 

**10.****                              ****Debt**

 

Long-termdebt consists of the following:

 

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| **(In  thousands)**                                  | ** ** | **June 30,  2010** | ** **  | **December 31,  2009** | ** ** |
|------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
|                                                 |       |                    |        |                        |       |
| Senior secured credit facility — revolving loan | ** ** | **$**                   | **—**  |                        | $          | — |   |
| Senior secured credit facility - term loan           | ** ** | **880,000**             |        | 880,000                     |       |
| Obligations under capital lease                      | ** ** | **—**              |        | 344                         |       |
|                                                 | ** ** | **880,000**             |        | 880,344                     |       |
| Less: current portion                                | ** ** | **—**              |        | (344                        | )          |
| Total long-term debt                                 | ** ** | **$**                   | **880,000** |                        | $          | 880,000 |   |

 

*CreditAgreement*

 

TheCompany, through certain of its wholly owned subsidiaries, has outstanding acredit agreement with several financial institutions, which consists of a $50million revolving credit facility (including a $10 million sub-limit forletters of credit) and an $880 million term loan facility.  Borrowings under the credit agreement aresecured by substantially all of the assets of the Company with the exception ofIllinois Consolidated Telephone Company. The term loan requires no principal reductions prior to maturity andthus matures in full on December 31, 2014. The revolving credit facility matures on December 31, 2013.  There were no borrowings outstanding underthe revolving credit facility as of June 30, 2010.

 

Atour election, borrowings under the credit facilities bear interest at a rateequal to an applicable margin plus either a “base rate” or LIBOR.  As of June 30, 2010, the applicablemargin for interest rates was 2.50% per year for the LIBOR-based term loans and1.50% for alternative base rate loans. The applicable margin for our $880 million term loan is fixed for theduration of the loan.  The applicablemargin for borrowings on the revolving credit facility is determined via apricing grid.  Based on our leverageratio of 4.73:1 at June 30, 2010, borrowings under the revolving creditfacility will be priced at a margin of 2.50% for LIBOR-based borrowings and1.50% for alternative base rate borrowings for the three month period ending September 30,2010.  The applicable borrowing marginfor the revolving credit facility is adjusted quarterly to reflect the leverageratio from the prior quarter-end.

 

Theweighted-average interest rate incurred on our term loan facility during thethree months ended June 30, 2010 and 2009, including amounts paid on ourinterest rate swap agreements and the applicable margin, was 5.61% and 6.27%per annum, respectively.  Theweighted-average interest rate incurred on our term loan facility during thesix months ended June 30, 2010 and 2009, including amounts paid on ourinterest rate swap agreements and the applicable margin, was 5.59% and 6.29%per annum, respectively.  Interest ispayable at least quarterly.

 

Thecredit agreement contains various provisions and covenants including, amongother items, restrictions on the ability to pay dividends, incur additionalindebtedness, issue capital stock, and commit to future capital expenditures.  We have agreed to maintain certain financialratios, including interest coverage, and total net leverage ratios, all asdefined in the credit agreement.  As of June 30,2010, we were in compliance with our credit agreement covenants.

 

**11.****                              ****Derivatives**

 

Inorder to manage the risk associated with changes in interest rates, we haveentered into interest rate swap agreements that effectively convert a portionof our floating-rate debt to a fixed-rate basis, thereby reducing the impact ofinterest rate changes on future cash interest payments.  We account for these transactions as cashflow hedges under the FASB’s Accounting Standards Codification Topic 815 (“ASC815”), *Derivatives and Hedging*.  The swaps are designated as cash flow

 

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hedgesof our expected future interest payments. In a cash flow hedge, the effective portion of the change in the fairvalue of the hedging derivative is recorded in accumulated other comprehensiveloss and is subsequently reclassified into earnings during the same period inwhich the hedged item affects earnings. The change in fair value of any ineffective portion of the hedgingderivative is recognized immediately in earnings.

 

Wecurrently have in place interest rate swap agreements whereby we receive3-month LIBOR-based interest payments from the swap counterparties and pay afixed rate.  We also have interest rateswap agreements whereby we make 3-month LIBOR-based payments, less a fixedpercentage to a counterparty and receive 1-month LIBOR.  The combination effectively hedges theinterest payments based on 1-month LIBOR resets on a portion of our creditfacility.  The net effect of these swapsis that we pay a weighted-average fixed rate of 4.42% to our swapcounterparties on $605 million of notional amount and receive 1-month LIBORless a fixed percentage, which amounted to 0.06% for the second quarter of2010.  At both June 30, 2010 and December 31,2009, interest on 68.75% of our outstanding debt was fixed through the use ofinterest rate swap agreements.

 

Ourcredit facility requires us to maintain a minimum floating to fixed ratio of noless than 50%.  On December 31,2010, $175 million notional amount of existing interest rate swap agreementswill expire, which would reduce our floating to fixed ratio to less than50%.  As a result of this, and becauseinterest rates continue to be near historic lows, we have entered into $200 millionnotional amount of forward floating to fixed interest rate swap agreementswhich become effective on December 31, 2010.  Under these floating to fixed rate forwardswap agreements, we will make fixed payments to the swap counterparties at aweighted-average fixed rate of 1.83% and receive 1-month LIBOR.  These forward swap agreements have a maturitydate of March 31, 2013.

 

Thecounterparties to our various swaps are 5 major U.S. and European banks.  None of the swap agreements provide foreither Consolidated or the counterparties to post collateral nor do theagreements include any covenants related to the financial condition ofConsolidated or the counterparties.  Theswaps of any counterparty that is a “Lender” as defined in our credit facilityare secured along with the other creditors under the credit facility.  Each of the swap agreements provides that inthe event of a bankruptcy filing by either Consolidated or the counterparty,any amounts owed between the two parties would be offset in order to determinethe net amount due between parties.  Thisprovision allows us to partially mitigate the risk of non-performance by acounterparty.

 

Wereport the gross fair value of our derivatives in either Current portion ofderivative liability or Other long-term liabilities on our CondensedConsolidated Balance Sheets.  The tablebelow shows the balance sheet classification and fair value of our interestrate swaps designated as hedging instruments under ASC 815:

 
| ** **                              | ** ** | **Fair Value**    | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **(In  thousands)**                     | ** ** | **2010**          | ** ** | **2009** | ** ** |
|                                    |       |              |       |   |   |
| Current portion of derivative liability | ** ** | **$**             | **(3,308** | **)** | $ | (6,074 | ) |
| Other long-term liabilities             | ** ** | **(30,623**       | **)**      | (26,105 | ) |
|                                         |            |                   |            |  |  |  |  |

 

Information regarding ourcash flow hedge transactions is as follows:

 

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| ** **                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In  thousands)**                                                                               | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                        | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gain arising from ineffectiveness included in  interest expense                                   | ** ** | **$**                                 | **(107**   | **)**                               | $          | (39 | ) | **$** | **(78** | **)** | $ | (62 | ) |
| Losses reclassed from accumulated other  comprehensive loss (“OCI”) to interest expense | ** ** | **$**                                 | **1,334**  |                                | $          | 3,025 | ** ** | **$** | **2,916** |   | $ | 5,880 |   |

 
| ** **                                                     | ** ** | **June 30,**   | ** **  |
|----------------------------------------------------------------|------------|---------------------|-------------|
| **(In  thousands)**                                            | ** ** | **2010**            | ** **  | **2009** | ** ** |
|                                                           |       |                |        |   |   |
| Aggregate notional value of derivatives  outstanding           | ** ** | **$**               | **605,000** |   | $ | 740,000 |   |
| Period through which derivative positions  currently exist     | ** ** | **March 2013** |        | March 2013 |   |
| Loss in fair value of derivatives                              | ** ** | **$**               | **33,931**  |   | $ | 37,326 |   |
| Deferred losses included in OCI (pretax)                       | ** ** | **$**               | **33,721**  |   | $ | 36,993 |   |
| Losses included in OCI to be recognized in the  next 12 months | ** ** | **$**               | **2,711**   |   | $ | 8,086 |   |
| Number of months over which loss in OCI is to be  recognized   | ** ** | **33**              |        | 45 |   |

 

**12.****                              ****InterestExpense**

 

The following table summarizes interest expense:

 
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**                      | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                    | * *   | * *                              | * *   | * *                            | * *   | * * | * * | * * | * * |
| Interest expense — credit facility | ** ** | **$**                                 | **6,229**  |                                | $          | 6,492 | ** ** | **$** | **12,249** |   | $ | 12,994 |   |
| Payments on swap liabilities, net       | ** ** | **6,217**                             |       | 7,497                               | ** ** | **12,463** |   | 14,852 |   |
| Other interest                          | ** ** | **354**                               |       | 282                                 | ** ** | **717** |   | 631 |   |
| Amortization of deferred financing fees | ** ** | **323**                               |       | 323                                 | ** ** | **646** |   | 647 |   |
| Capitalized interest                    | ** ** | **(54**                               | **)**      | (30                                 | )          | **(85** | **)** | (68 | ) |
| Total interest expense                  | ** ** | **$**                                 | **13,069** |                                | $          | 14,564 | ** ** | **$** | **25,990** |   | $ | 29,056 |   |

 

**13.****                              ****Retirementand Pension Plans**

 

Wehave 401(k) plans covering substantially all of our employees.  We recognized expense with respect to theseplans of $0.6 million and $0.7 million for the three month periods ended June 30,2010 and 2009 respectively, and $1.3 and $1.4 million for the six month periodsended June 30, 2010 and 2009, respectively.  Contributions made under our definedcontribution plans include a match, at the Company’s discretion, of employeesalaries contributed to the plans.

 

*Qualified Retirement Plan*

 

Wesponsor a defined-benefit pension plan (“Retirement Plan”) that isnon-contributory covering substantially all of our hourly employees who fulfillminimum age and service requirements. Certain salaried employees are also covered by the Retirement Plan,although these benefits have previously been frozen.

 

Thefollowing table summarizes the components of net periodic pension cost for thequalified retirement plan for the three and six month periods ended June 30:

 

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| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**                | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                              |       |                                  |       |                                |       |   |   |   |   |
| Service cost                      | ** ** | **$**                                 | **467**    |                                | $          | 527 | ** ** | **$** | **934** |   | $ | 1,054 |   |
| Interest cost                     | ** ** | **2,784**                             |       | 2,775                               | ** ** | **5,568** |   | 5,550 |   |
| Expected return on plan assets    | ** ** | **(2,546**                            | **)**      | (2,355                              | )          | **(5,092** | **)** | (4,710 | ) |
| Net amortization loss             | ** ** | **189**                               |       | 668                                 | ** ** | **378** |   | 1,336 |   |
| Prior service credit amortization | ** ** | **(11**                               | **)**      | (10                                 | )          | **(22** | **)** | (20 | ) |
| Net periodic pension cost         | ** ** | **$**                                 | **883**    |                                | $          | 1,605 | ** ** | **$** | **1,766** |   | $ | 3,210 |   |

 

*Non-qualified Pension Plan*

 

TheCompany also has non-qualified supplemental pension plans (“Restoration Plans”),which we acquired as part of our North Pittsburgh Systems, Inc. (“NorthPittsburgh”) and TXU Communications Venture Company (“TXUCV”)acquisitions.  The Restoration Planscover certain former employees of our North Pittsburgh and TXUCVoperations.  The Restoration Plansrestore benefits that were precluded under the Retirement Plan by InternalRevenue Service limits on compensation and benefits applicable to qualifiedpension plans, and by the exclusion of bonus compensation from the RetirementPlan’s definition of earnings.  TheRestoration Plans are unfunded and have no assets, and benefits paid under theRestoration Plans come from the general operating funds of the Company.

 

Thefollowing table summarizes the components of net periodic pension cost for theRestoration Plans for the three and six months ended June 30:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**        | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Service cost              | ** ** | **$**                                 | **—** |                                | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost             | ** ** | **15**                                |       | 14                                  | ** ** | **30** |   | 28 |   |
| Net amortization loss     | ** ** | **8**                                 |       | 8                                   | ** ** | **16** |   | 16 |   |
| Net periodic pension cost | ** ** | **$**                                 | **23**     |                                | $          | 22 | ** ** | **$** | **46** |   | $ | 44 |   |

 

*Other Non-qualified DeferredCompensation Agreements*

 

Wealso are liable for deferred compensation agreements with former members of theboard of directors and certain other former employees of a subsidiary of TXUCV,which was acquired in 2004.  The benefitsare payable for up to the life of the participant and may begin as early as age65 or upon the death of the participant. Participants accrue no new benefits as these plans had previously beenfrozen by TXUCV’s predecessor company prior to our acquisition of TXUCV.  Payments related to the deferred compensationagreements totaled approximately $0.2 million for the three month periods endedJune 30, 2010 and 2009 and $0.3 million for the six month periods ended June 30,2010 and 2009.  The net present value ofthe remaining obligations was approximately $3.0 million at June 30, 2010and $3.1 million at December 31, 2009, and is included in pension andpostretirement benefit obligations in the accompanying balance sheets.

 

Wealso maintain 40 life insurance policies on certain of the participating formerdirectors and employees.  We did notrecognize any proceeds in other income for the three or six month periods endedJune 30, 2010 or 2009 due to the receipt of life insurance proceeds.  The excess of the cash surrender value of theremaining life insurance policies over the notes payable balances related tothese 

 

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policiesis determined by an independent consultant, and totaled $1.4 million at June 30,2010 and $1.8 million at December 31, 2009.  These amounts are included in investments inthe accompanying balance sheets.  Cashprincipal payments for the policies and any proceeds from the policies are classifiedas operating activities in the statements of cash flows.

 

**14.****                              ****PostretirementBenefit Obligation**

 

Wesponsor a healthcare plan and life insurance plan that provides postretirementmedical benefits and life insurance to certain groups of retired employees.  Retirees share in the cost of healthcarebenefits, making contributions that are adjusted periodically—either based uponcollective bargaining agreements or because total costs of the program havechanged.  We generally pay the coveredexpenses for retiree health benefits as they are incurred.  Postretirement life insurance benefits arefully insured.  Our postretirement planis unfunded and has no assets, and the benefits paid under the postretirementplan come from the general operating funds of the Company.

 

Thefollowing table summarizes the components of the net periodic costs forpostretirement benefits for the three and six months ended June 30:

 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**                       | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                     |       |                                  |       |                                |       |   |   |   |   |
| Service cost                             | ** ** | **$**                                 | **206**    |                                | $          | 216 | ** ** | **$** | **412** |   | $ | 433 |   |
| Interest cost                            | ** ** | **530**                               |       | 580                                 | ** ** | **1,060** |   | 1,159 |   |
| Net prior service cost amortization      | ** ** | **(112**                              | **)**      | (241                                | )          | **(224** | **)** | (482 | ) |
| Net amortization gain                    | ** ** | **—**                            |       | (6                                  | )          | **—** |   | (11 | ) |
| Net periodic postretirement benefit cost | ** ** | **$**                                 | **624**    |                                | $          | 549 | ** ** | **$** | **1,248** |   | $ | 1,099 |   |

 

In March 2010,President Obama signed into law comprehensive health care reform legislationunder the Patient Protection and Affordable Care Act and the Health Care andEducation Reconciliation Act of 2010 (the “Acts”).  Based on our analyses to date, we do notcurrently believe the provisions within the Acts will result in a materialremeasurement of our postretirement health care liabilities.  We will continue to assess the accountingimplications of the Acts as related regulations and interpretations of the Actsbecome available.  The actual extent ofimpact cannot be actuarially determined until related regulations arepromulgated under the Acts and additional interpretations of the Acts becomeavailable.  Provisions within the Actsfor which financial impacts to our postretirement health care liabilities arepossible, but not currently determinable, include application of the excise taxon high-cost employer coverage.  We donot expect the other provisions within the Acts to materially impact ourpostretirement health care liabilities or results of operations.

 

**15.****                              ****Stock-based Compensation Plans**

 

Pretaxstock-based compensation expense for the three and six month periods ended June 30was as follows:

 
| ** **          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In  thousands)** | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                |       |                                  |       |                                |       |   |   |   |   |
| Restricted stock    | ** ** | **$**                                 | **339**    |                                | $          | 275 | ** ** | **$** | **677** |   | $ | 551 |   |
| Performance shares  | ** ** | **277**                               |       | 225                                 | ** ** | **442** |   | 381 |   |
| Total               | ** ** | **$**                                 | **616**    |                                | $          | 500 | ** ** | **$** | **1,119** |   | $ | 932 |   |

 

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Stock-basedcompensation expense is included in “selling, general and administrativeexpenses” in the accompanying statements of operations.

 

Asof June 30, 2010, we had not yet recognized compensation expense on thefollowing non-vested awards.

 
| **(Dollars in thousands)** | ** ** | **Non-recognized   Compensation** | ** ** | **Average Remaining   Recognition Period   (years)** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                 |       |                                   |       |                                                                     |       |
| Restricted stock                     |       | $                                      | 2,410      |                                                                     | 1.6        |   |
| Performance shares                   |       | 1,709                                  |       | 1.3                                                                      |       |
| Total                                |       | $                                      | 4,119      |                                                                     | 1.5        |   |

 

Thefollowing table summarizes unvested restricted stock awards outstanding andchanges during the six month periods ended June 30:

 
| ** **                                                      | ** ** | **2010**          | ** ** | **2009**     | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                      | ** ** | **# of   Shares** | ** ** | **Price(1)** | ** ** | **# of   Shares** | ** ** | **Price(1)** | ** ** |
| Non-vested restricted shares outstanding —  January 1 | ** ** | **82,375**        | ** ** | **$**        | **12.08**  |   | 74,391 |   | $ | 16.62 |   |
| Shares granted                                                  | ** ** | **115,949**       | ** ** | **18.65**    |       | 96,447 |   | 9.05 |   |
| Shares vested                                                   | ** ** | **(3,000**        | **)**      | **13.00**    |       | (6,000 | ) | 13.45 |   |
| Non-vested restricted shares outstanding —  June 30   | ** ** | **195,324**       | ** ** | **$**        | **15.97**  |   | 164,838 |   | $ | 12.31 |   |

 

----

(1)           Represents theweighted—average fair value on date of grant.

 

Thefollowing table summarizes unvested performance share-based restricted stockawards outstanding and changes during the six month periods ended June 30:

 
| ** **                                                       | ** ** | **2010**          | ** ** | **2009**     | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                       | ** ** | **# of   Shares** | ** ** | **Price(1)** | ** ** | **# of   Shares** | ** ** | **Price(1)** | ** ** |
|                                                             |       |              |       |         |       |   |   |   |   |
| Non-vested performance shares outstanding —  January 1 | ** ** | **46,578**        | ** ** | **$**        | **11.72**  |   | 31,137 |   | $ | 15.68 |   |
| Shares granted                                                   | ** ** | **98,002**        | ** ** | **18.65**    |       | 61,544 |   | 9.05 |   |
| Shares vested                                                    | ** ** | **—**        | ** ** | **—**   |       | (1,202 | ) | 13.42 |   |
| Non-vested performance shares outstanding —  June 30   | ** ** | **144,580**       | ** ** | **$**        | **16.42**  |   | 91,479 |   | $ | 11.25 |   |

 

----

(1)          Represents theweighted—average fair value on date of grant.

 

**16.****                              ****IncomeTaxes**

 

Therehave been no changes to the balance of our unrecognized tax benefits reportedat December 31, 2009.  As of June 30,2010 and December 31, 2009, the amount of unrecognized tax benefits was$5.7 million.  The total amount ofunrecognized benefits that, if recognized, would affect the effective tax rateis $5.7 million.  A decrease inunrecognized tax benefits of $5.4 million and $1.4 million of related accruedinterest is expected in the third quarter of 2010 due to the expiration of thefederal statute of limitation.  Thisdecrease will significantly reduce our effective tax rate.

 

Ourpractice is to recognize interest and penalties related to income tax mattersin interest expense and general and administrative expense, respectively.  We had $1.3 million of interest and 

 

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penaltiesrelating to unrecognized tax benefits recorded as of June 30, 2010, ofwhich $0.1 million was recorded during the three months ended June 30,2010.

 

Theonly periods subject to examination for our federal return are years 2006through 2008.  The periods subject toexamination for our state returns are years 2005 through 2008.  We are not currently under examination byeither federal or state taxing authorities.

 

Oureffective tax rate was 33.7% and 40.4%, for the three months ended June 30,2010 and 2009, respectively and 36.2% and 40.0%, for the six months ended June 30,2010 and 2009, respectively.  Oureffective tax rates differ from the federal and state statutory rates primarilydue to state tax planning and the changes to our state tax reporting structureresulting from the completion of internal restructuring and relatedintercompany agreements.

 

Duringthe quarter ended March 31, 2009 we settled an IRS exam covering years2005 through 2007.  As a result, werecorded additional income tax expense of $0.1 million.

 

**17.****                              ****Accumulated Other Comprehensive Loss,**

 

Accumulatedother comprehensive loss is comprised of the following components at June 30,2010 and December 31, 2009:

 
| **(In  thousands)**                                           | ** ** | **2010**    | ** **  | **2009** | ** ** |
|---------------------------------------------------------------|------------|-------------|-------------|----------|------------|
|                                                          |       |        |        |     |       |
| Fair value of cash flow hedges                                | ** ** | **$**       | **(33,721** | **)**    | $          | (31,891 | ) |
| Prior service credits and net losses on  postretirement plans | ** ** | **(24,082** | **)**       | (24,229  | )          |
|                                                          | ** ** | **(57,803** | **)**       | (56,120  | )          |
| Deferred taxes                                                | ** ** | **21,195**  |        | 20,580   |       |
| Totals                                                        | ** ** | **$**       | **(36,608** | **)**    | $          | (35,540 | ) |

 

Thecomponents of comprehensive income are as follows:

 
| ** **                                                          | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended June   30,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| **(In  thousands)**                                                 | ** ** | **2010**                               | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                |       |                                   |       |                                 |       |   |   |   |   |
| Net income                                                          | ** ** | **$**                                  | **7,173**  |                                 | $          | 7,659 | ** ** | **$** | **14,225** |   | $ | 11,356 |   |
| Other comprehensive loss:                                           | ** ** | ** **                             |       |                                 | ** ** | ** ** |   |   |   |
| Prior service cost and net loss, net of tax                         | ** ** | **48**                                 |       | 261                                  | ** ** | **95** |   | 521 |   |
| Change in fair value of cash flow hedges, net of  tax               | ** ** | **(1,253**                             | **)**      | 5,539                                | ** ** | **(1,163** | **)** | 6,683 |   |
| Comprehensive income                                                | ** ** | **5,968**                              |       | 13,459                               | ** ** | **13,157** |   | 18,560 |   |
| Less: comprehensive income attributable to  noncontrolling interest | ** ** | **124**                                |       | 136                                  | ** ** | **255** |   | 543 |   |
| Comprehensive income attributable to common  stockholders           | ** ** | **$**                                  | **5,844**  |                                 | $          | 13,323 | ** ** | **$** | **12,902** |   | $ | 18,017 |   |

 

**18.****                              ****Environmental Remediation Liabilities**

 

Environmentalremediation liabilities were $0.4 million at June 30, 2010 and $0.3million at December 31, 2009, and are included in other liabilities.  These liabilities, which relate toanticipated remediation and monitoring costs, are undiscounted.  The Company believes the amount accrued isadequate to cover the remaining anticipated costs of remediation.

 

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**19.****                              ****Litigation and Contingencies**

 

OnApril 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunicationscompany, and certain of its affiliates filed a lawsuit against us and oursubsidiaries North Pittsburgh Telephone Company and North Pittsburgh SystemsInc. in the Court of Common Pleas of Allegheny County, Pennsylvania, allegingthat we have prevented Salsgiver from connecting their fiber optic cables toour utility poles.  Salsgiver seekscompensatory and punitive damages as the result of alleged lost projectedprofits, damage to its business reputation, and other costs.  It claims to have sustained losses ofapproximately $125 million, but does not request a specific dollar amount indamages.  We believe that these claimsare without merit and that the alleged damages are completely unfounded.  We intend to defend against these claimsvigorously.  In the third quarter of2008, we filed preliminary objections and responses to Salsgiver’scomplaint.  However, the court ruledagainst our preliminary objections.  On November 3,2008, we responded to Salsgiver’s amended complaint and filed a counter-claimfor trespass, alleging that Salsgiver attached cables to our poles without anauthorized agreement and in an unsafe manner. We are currently in the discovery and deposition stage.  In addition, we have asked the FCCEnforcement Bureau to address Salsgiver’s unauthorized pole attachments andsafety violations on those attachments. We believe that these are violations of an FCC order regarding Salsgiver’scomplaint against us. We do not believe that these claims will have a materialadverse impact on our financial results.

 

Weare from time to time involved in various other legal proceedings andregulatory actions arising out of our operations.  We do not believe that any of these,individually or in the aggregate, will have a material adverse effect upon ourbusiness, operating results or financial condition.

 

**20.****                              ****Net Income per Common Share**

 

Thefollowing illustrates the earnings allocation method as required by the FASB’sauthoritative guidance on the treatment of participating securities in the calculationof earnings per share which we utilize in the calculation of basic and dilutedearnings per share.

 
| ** **                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In  thousands, except per share amounts)**                                                             | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Basic Earnings Per Share Using Two-class Method:                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net income                                                                                                | ** ** | **$**                                 | **7,173**  |                                | $          | 7,659 | ** ** | **$** | **14,225** |   | $ | 11,356 |   |
| Less: net income attributable to noncontrolling  interest                                                 | ** ** | **124**                               |       | 136                                 | ** ** | **255** |   | 543 |   |
| Net income attributable to common shareholders  before allocation of earnings to participating securities | ** ** | **7,049**                             |       | 7,523                               | ** ** | **13,970** |   | 10,813 |   |
| Less: earnings allocated to participating  securities                                                     | ** ** | **132**                               |       | 146                                 | ** ** | **182** |   | 181 |   |
| Net income attributable to common stockholders                                                            | ** ** | **$**                                 | **6,917**  |                                | $          | 7,377 | ** ** | **13,788** |   | $ | 10,632 |   |
|                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Weighted-average number of common shares  outstanding                                                     | ** ** | **29,483**                            |       | 29,389                              | ** ** | **29,483** |   | 29,388 |   |
|                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Net income per common share attributable to common  stockholders - basic                                  | ** ** | **$**                                 | **0.24**   |                                | $          | 0.25 | ** ** | **$** | **0.47** |   | $ | 0.36 |   |
|                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Diluted Earnings Per Share Using Two-class Method:                                                        | ** ** | ** **                            |       |                                | ** ** | ** ** |   |   |   |
| Net income                                                                                                | ** ** | **$**                                 | **7,173**  |                                | $          | 7,659 | ** ** | **$** | **14,225** |   | $ | 11,356 |   |
| Less: net income attributable to noncontrolling  interest                                                 | ** ** | **124**                               |       | 136                                 | ** ** | **255** |   | 543 |   |
| Net income attributable to common shareholders  before allocation of earnings to participating securities | ** ** | **7,049**                             |       | 7,523                               | ** ** | **13,970** |   | 10,813 |   |
| Less: earnings allocated to participating  securities                                                     | ** ** | **132**                               |       | 146                                 | ** ** | **182** |   | 181 |   |
| Net income attributable to common stockholders                                                            | ** ** | **$**                                 | **6,917**  |                                | $          | 7,377 | ** ** | **13,788** |   | $ | 10,632 |   |
|                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Weighted-average number of common shares  outstanding                                                     | ** ** | **29,483**                            |       | 29,674                              | ** ** | **29,483** |   | 29,620 |   |
|                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Net income per common share attributable to common  stockholders - diluted                                | ** ** | **$**                                 | **0.24**   |                                | $          | 0.25 | ** ** | **$** | **0.47** |   | $ | 0.36 |   |

 

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Wehad additional potential dilutive securities including unvested restrictedshares and performance shares outstanding representing 0.3 million and 0.2million common shares that were not included in the computation of potentiallydilutive securities at June 30, 2010 and 2009, respectively, because theywere anti-dilutive or the achievement of performance conditions had not beenmet at the end of the period.

 

**21.****                              ****Business Segments**

 

TheCompany is viewed and managed as two separate, but highly integrated,reportable business segments: “Telephone Operations” and “Other Operations.”  Telephone Operations consists of a wide rangeof telecommunications services, including local and long-distance service, VOIPservice, custom calling features, private line services, dial-up and DSLInternet access, IPTV, carrier access services, network capacity servicesover a regional fiber optic network, mobile services and directorypublishing.  The Company also operates anumber of complementary non-core businesses that comprise “Other Operations,”including telephone services to county jails and state prisons, equipment salesand operator services.  Managementevaluates the performance of these business segments based upon net revenue,operating income, and income before extraordinary items.

 
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In  thousands)**                                        | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| Telephone operations                                       | ** ** | **$**                                 | **87,713** |                                | $          | 91,143 | ** ** | **$** | **176,496** |   | $ | 182,838 |   |
| Other operations                                           | ** ** | **8,024**                             |       | 10,899                              | ** ** | **17,543** |   | 20,914 |   |
| Total net revenue                                          | ** ** | **95,737**                            |       | 102,042                             | ** ** | **194,039** |   | 203,752 |   |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| Operating expense — telephone operations              | ** ** | **49,790**                            |       | 52,101                              | ** ** | **99,764** |   | 106,409 |   |
| Operating expense — other operations                  | ** ** | **7,249**                             |       | 10,093                              | ** ** | **16,018** |   | 19,762 |   |
| Total operating expense                                    | ** ** | **57,039**                            |       | 62,194                              | ** ** | **115,782** |   | 126,171 |   |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| Depreciation and amortization — telephone  operations | ** ** | **21,247**                            |       | 20,670                              | ** ** | **42,573** |   | 42,029 |   |
| Depreciation and amortization — other operations      | ** ** | **213**                               |       | 311                                 | ** ** | **429** |   | 629 |   |
| Total depreciation expense                                 | ** ** | **21,460**                            |       | 20,981                              | ** ** | **43,002** |   | 42,658 |   |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| Operating income — telephone operations               | ** ** | **16,676**                            |       | 18,372                              | ** ** | **34,159** |   | 34,400 |   |
| Operating income - other operations                        | ** ** | **562**                               |       | 495                                 | ** ** | **1,096** |   | 523 |   |
| Total operating income                                     | ** ** | **17,238**                            |       | 18,867                              | ** ** | **35,255** |   | 34,923 |   |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| Interest income                                            | ** ** | **22**                                |       | 15                                  | ** ** | **38** |   | 37 |   |
| Interest expense                                           | ** ** | **(13,069**                           | **)**      | (14,564                             | )          | **(25,990** | **)** | (29,056 | ) |
| Investment income                                          | ** ** | **7,136**                             |       | 6,761                               | ** ** | **13,438** |   | 11,809 |   |
| Other, net                                                 | ** ** | **(516**                              | **)**      | 1,766                               | ** ** | **(452** | **)** | 1,215 |   |
| Income before income taxes                                 | ** ** | **$**                                 | **10,811** |                                | $          | 12,845 | ** ** | **$** | **22,289** |   | $ | 18,928 |   |
|                                                       |       |                                  |       |                                |       |   |   |   |   |
| Capital expenditures:                                      | ** ** | ** **                            |       |                                |       |   |   |   |   |
| Telephone operations                                       | ** ** | **$**                                 | **10,833** |                                | $          | 10,118 | ** ** | **$** | **21,744** |   | $ | 20,305 |   |
| Other operations                                           | ** ** | **53**                                |       | 100                                 | ** ** | **76** |   | 70 |   |
| Total                                                      | ** ** | **$**                                 | **10,886** |                                | $          | 10,218 | ** ** | **$** | **21,820** |   | $ | 20,375 |   |

 

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| ** **               | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|--------------------------|------------|-------------------|---------------|-----------------------|------------|
| **(In  thousands)**      | ** ** | **2010**          | ** **    | **2009**              | ** ** |
|                     |       |              |          |                  |       |
| Goodwill:                | ** ** | ** **        |          |                  |       |
| Telephone operations     | ** ** | **$**             | **519,541**   |                  | $          | 519,541 |   |
| Other operations         | ** ** | **1,021**         |          | 1,021                 |       |
| Total                    | ** ** | **$**             | **520,562**   |                  | $          | 520,562 |   |
|                     |       |              |          |                  |       |
| Total assets:            | ** ** | ** **        |          |                  |       |
| Telephone operations (1) | ** ** | **$**             | **1,201,454** |                  | $          | 1,210,765 |   |
| Other operations         | ** ** | **9,798**         |          | 12,278                |       |
| Total                    | ** ** | **$**             | **1,211,252** |                  | $          | 1,223,043 |   |

 

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(1) Included within the telephone operations segment assets are our equity methodinvestments totaling $49.4 million and $49.6 million at June 30, 2010 and December 31,2009, respectively.

 

**22.****                              ****Subsequent  Event**

 

On July 16, 2010, we entered into a $100 million forward interestrate swap agreement which becomes effective on September 30, 2011 andmatures on September 30, 2013. Under this forward interest rate swap agreement, we will pay a fixedrate of 1.65% and receive 1-month LIBOR.

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

Thefollowing discussion of our consolidated operating results and financialcondition for the three month and six month periods ended June 30, 2010and 2009 should be read in conjunction with the consolidated financialstatements and related notes contained elsewhere in this report.

 

*“Consolidated Communications” or the “Company” refers to ConsolidatedCommunications Holdings, Inc. alone or with its wholly owned subsidiariesas the context requires.  When thisreport uses the words “we,” “our,” or “us,” they refer to the Company and itssubsidiaries.*

 

**Forward-Looking Statements**

 

Anystatements contained in this Report that are not statements of historical fact,including statements about our beliefs and expectations, are forward-lookingstatements 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 identifyforward-looking statements.  Theseforward-looking statements are contained throughout this Report, including, butnot limited to, statements found in this Part I — Item 2 — “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,Part I — Item 3 — “Quantitative and Qualitative Disclosures aboutMarket Risk” and Part II — Item 1 — “Legal Proceedings”.  Such forward-looking statements reflect,among other things, our current expectations, plans, strategies, andanticipated financial results and involve a number of known and unknown risks,uncertainties, and factors that may cause our actual results to differmaterially from those expressed or implied by these forward-looking statements,including but not limited to:

 

·                  various risksto stockholders of not receiving dividends and risks to our ability to pursuegrowth opportunities if we continue to pay dividends according to our currentdividend policy;

·                  the currentvolatility in economic conditions and the financial markets;

·                  adverse changesin the value of assets or obligations associated with our employee benefitplans;

·                  various risksto the price and volatility of our common stock;

·                  our substantialamount of debt and our ability to incur additional debt in the future;

·                  our need for asignificant amount of cash to service and repay our debt and to pay dividendson our common stock;

·                  restrictionscontained in our debt agreements that limit the discretion of our management inoperating our business;

·                  the ability torefinance our existing debt as necessary;

·                  rapiddevelopment and introduction of new technologies and intense competition in thetelecommunications industry;

·                  risksassociated with our possible pursuit of future acquisitions;

·                  the length andseverity of weakened economic conditions in our service areas in Illinois,Texas and Pennsylvania;

·                  systemfailures;

·                  loss of largecustomers or government contracts;

·                  risksassociated with the rights-of-way for our network;

·                  disruptions inour relationship with third party vendors;

·                  loss of keymanagement personnel and the inability to attract and retain highly qualifiedmanagement and personnel in the future;

 

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·                  changes in theextensive governmental legislation and regulations governing telecommunicationsproviders, the provision of telecommunications services and access chargesand  subsidies, which are a material partof our revenues;

·                  telecommunicationscarriers disputing and/or avoiding their obligations to pay network accesscharges for use of our network;

·                  high costs ofregulatory compliance;

·                  the competitiveimpact of legislation and regulatory changes in the telecommunicationsindustry;

·                  liability andcompliance costs regarding environmental regulations; and

·                  the additionalrisk factors outlined in Part I — Item 1A — “Risk Factors”in our Annual Report on Form 10-K for the fiscal year ended December 31,2009, and the other documents that we file with the SEC from time to time thatcould cause our actual results to differ from our current expectations and fromthe forward-looking statements discussed in this Report.

 

Manyof these risks are beyond our ability to control or predict.  All forward-looking statements attributableto us or persons acting on our behalf are expressly qualified in their entiretyby the cautionary statements contained throughout this Report.  Because of these risks, uncertainties, andassumptions, you should not place undue reliance on these forward-lookingstatements.  Furthermore, forward-lookingstatements speak only as of the date they are made.   Except as required under the federalsecurities laws or the rules and regulations of the SEC, we do notundertake any obligation to update or review any forward-looking information,whether as a result of new information, future events or otherwise.

 

**Overview**

 

Weare an established rural local exchange company that provides communicationsservices to residential and business customers in Illinois, Texas, andPennsylvania. We offer a wide range of telecommunications services, includinglocal and long-distance service, digital telephone (“VOIP”), custom callingfeatures, private line services, dial-up and high-speed broadband Internetaccess (“DSL”), internet protocol digital television (“IPTV”), carrier accessservices, network capacity services over our regional fiber optic network,directory publishing and competitive local exchange carrier (“CLEC”) callingservices.  We also operate a number ofnon-core complementary businesses, including providing telephone services tocounty jails and state prisons and equipment sales.

 

**Executive Summary**

 

Wegenerated net income attributable to common stockholders of $7.0 million, or$0.24 per diluted share in the second of quarter of 2010, as compared to netincome attributable to common stockholders of $7.5 million, or $0.25 perdiluted share, in the second quarter of 2009. Higher depreciation expense and losses on asset disposals in the secondquarter of 2010, along with the gain recognized in the second quarter of 2009related to a settlement of a dispute with Verizon all affected quarter overquarter net income.  Second quarter 2010net income and revenue were also affected by reduced subsidy payments,primarily as a result of changes to the national average cost per loopcomponent.  We benefited during thesecond quarter of 2010 from lower operating costs, lower interest costs, andincreased earnings from our wireless partnerships.  Operating expenses declined principally dueto lower pension expense and professional fees, and lower integration andrestructuring costs.  The operatingexpense reductions were offset somewhat by higher video equipment andprogramming costs.  Operating expenses inthe second quarter of 2009 included $1.6 million of integration andrestructuring expense for which we are receiving cost savings on an ongoingbasis.

 

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Revenuein the second quarter of 2010 decreased to $95.7 million as compared to $102.0million in the second quarter of 2009. Decreased revenue in the second quarter of 2010 resulted primarily fromthe sale of our telemarketing business in the first quarter of 2010, along withlocal access line loss, reduced subsidy payments and lower operator servicesrevenue, offset partially by increases in DSL and IPTV subscriptions andincreased revenue in our public services.

 

Forthe first half of 2010, net income attributable to common stockholders totaled$14.0 million, or $0.47 per diluted share, as compared to $10.8 million, or$0.36 per diluted share, in the first half of 2009.  Net income in the first half of 2010benefited from increased earnings from our wireless partnerships, significantlylower operating expenses and significantly lower interest costs.  Operating expenses in the first half of 2009included $4.0 million of integration and restructuring expense.

 

Latein the first quarter of 2010, we completed the sale of our telemarketingbusiness, the assets and revenues of which were immaterial to our overallresults of operations.

 

**General**

 

Thefollowing general factors should be considered in analyzing our results ofoperations:

 

***Revenues***

 

*Telephone Operations and Other Operations.*  Our revenues are derived primarily from thesale of voice and data communication services to residential and businesscustomers in our rural telephone companies’ service areas.  Because we operate primarily in rural serviceareas, we do not anticipate significant growth in revenues in our TelephoneOperations segment except through acquisitions. However, we do expect fairly consistent cash flow from year to yearbecause of fairly stable customer demand, and a generally supportive regulatoryenvironment.

 

*Local access lines and bundled services.* An “accessline” is the telephone line connecting a home or business to the publicswitched telephone network.  The numberof local access lines in service directly affects the monthly recurring revenuewe generate from end users, the amount of traffic on our network, the accesscharges we receive from other carriers, the federal and state subsidies we receive,and most other revenue streams.  We had242,282, 247,235 and 254,593 local access lines, respectively, in service as ofJune 30, 2010, December 31, 2009 and June 30, 2009.

 

Mostwireline telephone companies have experienced a loss of local access lines dueto challenging economic conditions and increased competition from wirelessproviders, competitive local exchange carriers and, in some cases, cabletelevision operators.  We have not beenimmune to these conditions.  Cablecompetitors in all of our markets offer a competing voice product.  We estimate that cable companies have thecapability to offer voice service to all of their addressable customers,covering 85% of our entire service territory. We expect to continue to experience modest erosion in access lines dueto market forces.

 

Wehave been able in some instances to offset the decline in local access lineswith increased average revenue per access line by:

 

·                  Aggressivelypromoting DSL service, including selling DSL as a stand-alone offering;

·                  Value bundlingservices, such as DSL or IPTV, with a combination of local service and customcalling features;

·                  Maintainingexcellent customer service standards; and

·                  Keeping astrong local presence in the communities we serve.

 

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Wehave implemented a number of initiatives to gain new local access lines andretain existing lines by making bundled service packages more attractive (forexample, by adding unlimited long-distance) and by announcing specialpromotions, like discounted second lines. We also market a “triple play” bundle, which includes local telephoneservice, DSL, and IPTV.

 

Asof June 30, 2010, IPTV was available to approximately 198,000 homesin our markets.  Our IPTV subscriber basecontinues to grow and totaled 26,074, 23,127 and 19,731 subscribers at June 30,2010, December 31, 2009 and June 30, 2009, respectively.

 

Wealso continue to experience growth in the number of DSL subscribers weserve.  We had 103,428, 100,122 and95,656 DSL lines in service as of June 30, 2010, December 31, 2009and June 30, 2009, respectively. Currently over 95% of our rural telephone companies’ local access linesare DSL-capable.

 

Inaddition to our access line, DSL and video initiatives, we intend to continueto integrate best practices across our markets. We also continue to look forways to enhance current products and introduce new services to ensure that weremain competitive and continue to meet our customers’ needs. These initiativeshave included:

 

·                  Hosted VOIPservice in all of our markets to meet the needs of small- to medium-sizedbusiness customers that want robust functionality without having to purchase atraditional key or PBX phone system;

·                  VOIP servicefor residential customers, which is being offered to our customers as a growthopportunity and as an alternative to the traditional phone line for customerswho are considering a switch to a cable competitor.

·                  DSLservice—even to users who do not have our access line—which expands our customerbase and creates additional revenue-generating opportunities;

·                  Metro-Ethernetservices delivered over our copper infrastructure with speeds of 25 mbps to 40mbps;

·                  DSL productwith speeds up to 20 mbps for those customers desiring greater Internet speed;and

·                  High definitionvideo service and digital video recorders in all of our IPTV markets.

 

Theseefforts may mitigate the financial impact of any access line loss weexperience.

 

***Expenses***

 

Ourprimary operating expenses consist of the cost of services; selling, generaland administrative expenses; and depreciation and amortization expenses.

 

*Cost of services and products.*  Our cost of servicesincludes the following:

 

·                  Operatingexpenses relating to plant costs, including those related to the network andgeneral support costs, central office switching and transmission costs, andcable and wire facilities;

·                  General plantcosts, such as testing, provisioning, network, administration, power, andengineering;

·                  The cost oftransport and termination of long-distance and private lines outside our ruraltelephone companies’ service area.; and

·                  Video equipmentand programming costs.

 

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We have agreements with various carriers to provide long-distancetransport and termination services.   Webelieve we will meet all of our commitments in these agreements and will beable to procure services for periods after our current agreements expire.  We do not expect any material adverse effectsfrom any changes in any new service contract.

 

*Selling, general and administrative expenses*.  Selling, general andadministrative expenses include expenses associated with customer care; billingand other operating support systems; and corporate expenses, such asprofessional service fees and non-cash, stock-based compensation.

 

Ouroperating support and back-office systems enter, schedule, provision, and trackcustomer orders; test services and interface with trouble management; andoperate inventory, billing, collections, and customer care service systems forthe local access lines in our operations. We have migrated most key business processes onto a single company-widesystem and platform.  We hope to improveprofitability by reducing individual company costs through centralizing,standardizing, and sharing best practices. We incurred $4.0 million of integration and restructuring expensesduring the first six months of 2009 related to moving the North Pittsburghaccounting, payroll and ILEC billings functions to our existing legacy systems.

 

*Depreciation and amortizationexpenses.*  Theprovision for depreciation on property and equipment is recorded using thestraight-line method based upon the following useful lives:

 
| **Years**                             | ** ** | ** ** |
|---------------------------------------|------------|------------|
| Buildings                             |       | 18 - 40    |
| Network  and outside plant facilities |       | 3 - 50     |
| Furniture,  fixtures and equipment    |       | 3 - 15     |
| Capital  Leases                       |       | 11         |

 

Amortizationexpenses are recognized primarily for our intangible assets considered to havefinite useful lives on a straight-line basis. In accordance with the applicableauthoritative guidance, goodwill and intangible assets that have indefiniteuseful lives are not amortized but rather are tested at least annually forimpairment.  Because tradenames have beendetermined to have indefinite lives, they are not amortized.  Customer relationships are amortized overtheir useful life.  The net carryingvalue of customer lists at June 30, 2010 is being amortized at a remainingweighted-average life of approximately 3.1 years.

 

**Resultsof Operations**

 

***Segments***

 

Wehave two reportable business segments, Telephone Operations and OtherOperations.  The results of operationsdiscussed below reflect our consolidated results.

 

***For the Three Months Ended June 30,2010  Compared to June 30, 2009***

 

Thefollowing summarizes our revenues and operating expenses on a consolidatedbasis for the three months ended June 30, 2010 and 2009:

 

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| ** **                                         | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| **(In  millions, except for percentages)**         | ** ** | **$**      | ** ** | **%**      | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                            |       |       |       |       |       |   |   |   |   |
| Telephone operations                               |       |       |       |       |       |   |   |   |   |
| Local calling services                             | ** ** | **$**      | **23.2**   | ** ** | **24.2**   |   | $ | 24.3 |   | 23.8 |   |
| Network access services                            | ** ** | **20.9**   | ** ** | **21.8**   |       | 22.1 |   | 21.7 |   |
| Subsidies                                          | ** ** | **11.8**   | ** ** | **12.3**   |       | 13.4 |   | 13.1 |   |
| Long-distance services                             | ** ** | **4.8**    | ** ** | **5.0**    |       | 5.4 |   | 5.3 |   |
| Data and Internet services                         | ** ** | **18.7**   | ** ** | **19.5**   |       | 16.7 |   | 16.4 |   |
| Other services                                     | ** ** | **8.3**    | ** ** | **8.7**    |       | 9.2 |   | 9.0 |   |
| Total telephone operations                         | ** ** | **87.7**   | ** ** | **91.6**   |       | 91.1 |   | 89.3 |   |
| Other operations                                   | ** ** | **8.0**    | ** ** | **8.4**    |       | 10.9 |   | 10.7 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Total operating revenue                            | ** ** | **95.7**   | ** ** | **100.0**  |       | 102.0 |   | 100.0 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Expenses                                           | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Telephone operations                               | ** ** | **49.8**   | ** ** | **52.0**   |       | 52.1 |   | 51.1 |   |
| Other operations                                   | ** ** | **7.2**    | ** ** | **7.5**    |       | 10.1 |   | 9.9 |   |
| Depreciation and amortization                      | ** ** | **21.5**   | ** ** | **22.5**   |       | 21.0 |   | 20.6 |   |
| Total operating expense                            | ** ** | **78.5**   | ** ** | **82.0**   |       | 83.2 |   | 81.6 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Income from operations                             | ** ** | **17.2**   | ** ** | **18.0**   |       | 18.8 |   | 18.4 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Interest expense, net                              | ** ** | **(13.0**  | **)**      | **(13.6**  | **)**      | (14.5 | ) | (14.2 | ) |
| Other income                                       | ** ** | **6.5**    | ** ** | **6.8**    |       | 8.5 |   | 8.3 |   |
| Income tax expense                                 | ** ** | **(3.6**   | **)**      | **(3.8**   | **)**      | (5.2 | ) | (5.0 | ) |
|                                               |       |       |       |       |       |   |   |   |   |
| Net income                                         | ** ** | **7.1**    | ** ** | **7.4**    |       | 7.6 |   | 7.5 |   |
| Net income attributable to noncontrolling interest | ** ** | **0.1**    | ** ** | **0.1**    |       | 0.1 |   | 0.1 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Net income attributable to common stockholders     | ** ** | **$**      | **7.0**    | ** ** | **7.3**    |   | $ | 7.5 |   | 7.4 |   |

 

*Revenue*

 

Revenuein the three month period ended June 30, 2010 declined by $6.3 million, or6.2%, to $95.7 million from $102.0 million in the three month period ended June 30,2009.  Overall, the decline in revenuewas principally the result of the decline in revenue from our exit of thetelemarketing business in the first quarter of 2010 which had little to noimpact on earnings.  A decrease insubsidy revenue was caused by a change to the national average cost per loopcomponent of the federal high cost fund. Revenue was also negatively impacted by a reduction in the number ofaccess lines, which reduced revenue for local calling services, network accessservices and long-distance.

 

Accessline loss continues to moderate and is being partially offset by growth in ournumber of broadband connections.  VOIP,DSL and IPTV connections all increased during the second quarter 2010 ascompared to 2009.  Connections by typeare as follows:

 

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| ** **                          | ** ** | **June 30,** | ** ** |
|-------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2010**          | ** ** | **2009** | ** ** |
|                                |       |              |       |   |   |
| Residential access lines in service | ** ** | **143,283**       |       | 151,937 |   |
| Business access lines in service    | ** ** | **98,999**        |       | 102,656 |   |
| Total local access lines in service | ** ** | **242,282**       |       | 254,593 |   |
|                                |       |              |       |   |   |
| IPTV subscribers                    | ** ** | **26,074**        |       | 19,731 |   |
| ILEC DSL subscribers                | ** ** | **103,428**       |       | 95,656 |   |
| Total broadband connections         | ** ** | **129,502**       |       | 115,387 |   |
|                                |       |              |       |   |   |
| VOIP subscribers                    | ** ** | **8,605**         |       | 7,883 |   |
| CLEC access line equivalents (1)    | ** ** | **73,686**        |       | 72,062 |   |
|                                |       |              |       |   |   |
| Total connections                   | ** ** | **454,075**       |       | 449,925 |   |
|                                |       |              |       |   |   |
| Long-distance lines (2)             | ** ** | **170,374**       |       | 166,006 |   |
| Dial-up subscribers                 | ** ** | **1,732**         |       | 3,406 |   |

 

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(1) CLEC access line equivalents represent a combination of voice services and datacircuits.  The calculations represent aconversion of data circuits to an access line basis.  Equivalents are calculated by converting datacircuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 andEthernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalentof an access line.

 

(2) Reflectsthe inclusion of long-distance service provided as part of our VOIP offeringwhile excluding CLEC long-distance subscribers.

 

Telephone Operations Revenue

 

*Local calling services* revenuedecreased by $1.1 million, or 4.5%, to $23.2 million in the second quarter of2010 compared to $24.3 million in the second quarter of 2009.  The decrease is primarily due to a decline inlocal line revenue caused by lower access lines.  We continue to see a reduction in the rate ofdecline in local access lines.

 

*Network access services* revenuedecreased by $1.2 million, or 5.4%, to $20.9 million in the second quarter of2010 compared to $22.1 million in the second quarter of 2009.  The decrease is primarily due to a decline inswitched access minutes of use, and to a lesser extent, a decline in specialaccess revenue.

 

*Subsidy* revenuedecreased by $1.6 million, or 11.9%, to $11.8 million in the second quarter of2010 compared to $13.4 million in the second quarter of 2009.  The decrease is principally the result of achange to the national average cost per loop component of the federal high costfund.

 

*Long-distance services* revenuedecreased by $0.6 million, or 11.1%, to $4.8 million in the second quarter of2010 as compared to $5.4 million in the second quarter of 2009.  The decrease is primarily due to a decline inbillable minutes as a result of customers moving to unlimited long-distanceplans.

 

*Data and Internet* revenueincreased by $2.0 million, or 12.0%, to $18.7 million in the second quarter of2010 as compared to $16.7 million in the second quarter of 2009.  The increase is primarily due to an increasein the number of DSL and IPTV subscribers.

 

*Other services* revenuedeclined by $0.9 million, or 9.8%, to $8.3 million in the second quarter of2010 as compared to $9.2 million in the second quarter of 2009.  The decrease is primarily due to a decreasein transport revenues.

 

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Other Operations Revenue

 

OtherOperations revenue decreased by $2.9 million, or 26.6%, to $8.0 million in thesecond quarter of 2010 as compared to $10.9 million in the second quarter of2009.  Declines in revenue resulting fromthe sale of our telemarketing business and from a decrease in incoming calls inour operator services business were offset by increases in our prison systemsbusiness.

 

*Operating Expenses*

 

Operatingexpenses decreased in the second quarter of 2010 by $5.2 million, or 8.4%, to$57.0 million as compared to $62.2 million in the second quarter of 2009.  Reductions in operating expenses by segmentare discussed below.

 

Telephone Operations Operating Expenses

 

Operatingexpenses for Telephone Operations decreased by $2.3 million, or 4.4%, to $49.8million in the second quarter of 2010 as compared to $52.1 million in thesecond quarter of 2009.  The decrease inTelephone Operations operating expenses was principally driven by lower salaryand severance expense, and lower pension expense and professional fees, alongwith lower integration and restructuring costs. These were offset somewhat by higher video equipment and programmingfees, and interconnection charges.  In2009, we incurred $1.6 million in integration and restructuring charges duringthe second quarter.

 

Other Operations Operating Expenses

 

Operatingexpenses for Other Operations decreased by $2.9 million, or 28.7%, to $7.2million in the second quarter of 2010 as compared to $10.1 million in thesecond quarter of 2009.  Operatingexpenses in our Other Operations Segment declined as a result of lower costsrelated to the disposition of our telemarketing business during the firstquarter of 2010 offset somewhat by higher commission for our public servicesbusiness as a result of higher sales.

 

*Depreciation and Amortization*

 

Depreciationand amortization expense totaled $21.5 million during the second quarter of2010, as compared to $21.0 million in the second quarter of 2009.  Depreciation and amortization expenseincreased period over period primarily due to increased spending on videoequipment which has a relatively shorter depreciation period.

 

*Interest Expense, Net*

 

Interestexpense, net of interest income, declined by $1.5 million, or 10.3%, to $13.0million for the second quarter of 2010 as compared to $14.5 million in thesecond quarter of 2009.  Interest expensein the second quarter of 2010 benefited from the expiration of $135 million offloating to fixed interest rate swaps during the second half of 2009, as thefixed rates paid on the swaps were at a significantly higher rate than theLIBOR rates we received in return. Interest expense also benefited in the second quarter of 2010 from lowinterest rates in general.

 

*Other Income (Expense)*

 

Otherincome decreased $2.0 million to $6.5 million in the second quarter of 2010compared to $8.5 million in the second quarter of 2009.  The decrease was principally the result of again recognized 

 

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inthe second quarter of 2009 related to a settlement of a dispute with Verizonand a loss recognized in the second quarter of 2010 on the sale of real estate,all of which was offset by improved earnings from our wireless partnershipinterests.

* *

*Income Taxes*

 

Ourprovision for income taxes was $3.6 million in 2010 as compared to $5.2 millionin 2009.  Our effective tax rate was33.7% for the second quarter of 2010 compared to 40.4% for the second quarterof 2009.  Our effective tax rate differsfrom the federal and state statutory rates primarily due to state tax planningand the changes to our state tax reporting structure resulting from thecompletion of internal restructuring and related intercompany agreements.

 

*NetIncome Attributable to Noncontrolling Interest*

 

Thenet income attributable to noncontrolling interest totaled $0.1 million in boththe second quarter of 2010 and 2009.

 

***For the Six Months Ended June 30,2010  Compared to June 30, 2009***

 

Thefollowing summarizes our revenues and operating expenses on a consolidatedbasis for the six months ended June 30, 2010 and 2009:

 
| ** **                                         | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| **(In millions,  except for percentages)**         | ** ** | **$**      | ** ** | **%**      | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                            |       |       |       |       |       |   |   |   |   |
| Telephone operations                               |       |       |       |       |       |   |   |   |   |
| Local calling services                             | ** ** | **$**      | **47.0**   | ** ** | **24.2**   |   | $ | 49.0 |   | 24.1 |   |
| Network access services                            | ** ** | **42.1**   | ** ** | **21.7**   |       | 44.1 |   | 21.6 |   |
| Subsidies                                          | ** ** | **24.0**   | ** ** | **12.4**   |       | 27.5 |   | 13.5 |   |
| Long-distance services                             | ** ** | **9.4**    | ** ** | **4.9**    |       | 10.9 |   | 5.4 |   |
| Data and Internet services                         | ** ** | **36.7**   | ** ** | **18.9**   |       | 33.1 |   | 16.2 |   |
| Other services                                     | ** ** | **17.3**   | ** ** | **8.9**    |       | 18.2 |   | 8.9 |   |
| Total telephone operations                         | ** ** | **176.5**  | ** ** | **91.0**   |       | 182.8 |   | 89.7 |   |
| Other operations                                   | ** ** | **17.5**   | ** ** | **9.0**    |       | 20.9 |   | 10.3 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Total operating revenue                            | ** ** | **194.0**  | ** ** | **100.0**  |       | 203.7 |   | 100.0 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Expenses                                           | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Telephone operations                               | ** ** | **99.7**   | ** ** | **51.4**   |       | 106.4 |   | 52.2 |   |
| Other operations                                   | ** ** | **16.0**   | ** ** | **8.2**    |       | 19.7 |   | 9.7 |   |
| Depreciation and amortization                      | ** ** | **43.0**   | ** ** | **22.2**   |       | 42.7 |   | 21.0 |   |
| Total operating expense                            | ** ** | **158.7**  | ** ** | **81.8**   |       | 168.8 |   | 82.9 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Income from operations                             | ** ** | **35.3**   | ** ** | **18.2**   |       | 34.9 |   | 17.1 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Interest expense, net                              | ** ** | **(26.0**  | **)**      | **(13.4**  | **)**      | (29.0 | ) | (14.2 | ) |
| Other income                                       | ** ** | **13.0**   | ** ** | **6.7**    |       | 13.0 |   | 6.3 |   |
| Income tax expense                                 | ** ** | **(8.1**   | **)**      | **(4.2**   | **)**      | (7.6 | ) | (3.7 | ) |
|                                               |       |       |       |       |       |   |   |   |   |
| Net income                                         | ** ** | **14.2**   | ** ** | **7.3**    |       | 11.3 |   | 5.5 |   |
| Net income attributable to noncontrolling interest | ** ** | **0.2**    | ** ** | **0.1**    |       | 0.5 |   | 0.2 |   |
|                                               |       |       |       |       |       |   |   |   |   |
| Net income attributable to common stockholders     | ** ** | **$**      | **14.0**   | ** ** | **7.2**    |   | $ | 10.8 |   | 5.3 |   |

 

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*Revenue*

 

Revenuein the first half of 2010 declined by $9.7 million, or 4.8%, to $194.0 millionfrom $203.7 million in the first half of 2009. Overall, the decline in revenue was principally the result of our exitfrom the telemarketing business which occurred during the first quarter of2010.  Revenue was also reduced bydeclines in subsidy payments, principally from a change to the national averagecost per loop component of the federal high cost fund.  We also experienced a decline in the numberof access lines, which impacted revenue for local calling services, networkaccess services, and to a lesser extent, subsidies and long-distanceservices.  Access line loss continues tomoderate and is being partially offset by growth in our number of broadbandconnections.  VOIP, DSL and IPTVconnections all increased during the first half of 2010 as compared to 2009.

 

Telephone Operations Revenue

 

*Local calling services* revenuedecreased by $2.0 million, or 4.1%, to $47.0 million in the first half of 2010compared to $49.0 million in the first half of 2009.  The decrease is primarily due to the declinein local access lines.  We continue tosee a reduction in the rate of decline in local access lines.

 

*Network access services* revenuedecreased by $2.0 million, or 4.5%, to $42.1 million in the first half of 2010compared to $44.1 million in the first half of 2009.  The decrease is primarily due to a decline inswitched access minutes of use, and to a lesser extent, a decline in specialaccess revenue.

 

*Subsidy* revenuedecreased by $3.5 million, or 12.7%, to $24.0 million in the first half of 2010compared to $27.5 million in the first half of 2009.  The decrease is principally the result of anincrease in the national average cost per loop component of the federal highcost fund.

 

*Long-distance services* revenuedecreased by $1.5 million, or 13.8%, to $9.4 million in the first half of 2010as compared to $10.9 million in the first half of 2009.  The decrease is primarily due to a decline inbillable minutes, primarily due to customers moving to unlimited long-distanceplans.

 

*Data and Internet* revenueincreased by $3.6 million, or 10.9%, to $36.7 million in the first half of 2010as compared to $33.1 million in the first half of 2009.  The increase is primarily due to an increasein the number of DSL and IPTV subscribers.

 

*Other services* revenuedecreased $0.9 million, or 4.9%, to $17.3 million in the first half of 2010 ascompared to $18.2 million in the first half of 2009.  The decrease was primarily the result of adecrease in transport revenues.

 

Other Operations Revenue

 

OtherOperations revenue decreased by $3.4 million, or 16.3%, to $17.5 million in thefirst half of 2010 as compared to $20.9 million in the first half of 2009.  Declines in revenue resulting from the saleof our telemarketing business in the first quarter of 2010 and from a decreasein incoming calls in our operator services business were offset by increases inour prison systems.

 

*Operating Expenses*

 

Operatingexpenses decreased in the first half of 2010 by $10.4 million, or 8.2%, to$115.7 million as compared to $126.1 million in the first half of 2009.  Reductions in operating expenses by segmentare discussed below.

 

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Telephone Operations Operating Expenses

 

Operatingexpenses for Telephone Operations decreased by $6.7 million, or 6.3%, to $99.7million in the first half of 2010 as compared to $106.4 million in the firsthalf of 2009.  The decrease in TelephoneOperations operating expenses was principally driven by lower salary andseverance expense, lower pension expense and professional fees, along with lowerintegration and restructuring costs. These were offset somewhat by higher video equipment and programmingfees, and interconnection charges. During the first half of 2009, we incurred $4.0 million in integrationand restructuring charges that has resulted in ongoing cost savings.

 

Other Operations Operating Expenses

 

Operatingexpenses for Other Operations decreased by $3.7 million, or 18.8%, to $16.0million in the first half of 2010 as compared to $19.7 million in the firsthalf of 2009.  Operating expenses in ourOther Operations segment declined primarily as a result of lower costs relatedto the disposition of our telemarketing business during the first quarter of2010 offset somewhat by higher commission for our public services business as aresult of higher sales.

 

*Depreciation and Amortization*

 

Depreciationand amortization expense totaled $43.0 million for the first half of 2010 ascompared to $42.7 million for the first half of 2009.  The increase in depreciation and amortizationexpense was primarily due to increased spending on video equipment which has arelatively shorter depreciation period.

 

*Interest Expense, Net*

 

Interestexpense, net of interest income, declined by $3.0 million, or 10.3%, to $26.0million in the first half of 2010 as compared to $29.0 million in the firsthalf of 2009.  Interest expense in thefirst half of 2010 benefited from the expiration of $135 million of floating tofixed interest rate swaps during the second half of 2009, as the fixed ratespaid on the swaps were at a significantly higher rate than the LIBOR rates wereceived in return.  Interest expensealso benefited in the first half of 2010 from lower interest rates in general.

 

*Other Income (Expense)*

 

Otherincome was flat at $13.0 million during the first half of 2010 and 2009.  Other income in 2010 was affected positivelyby improved earnings from our wireless partnership interests and negatively bya loss on the sale of real estate.  Otherincome in 2009 was positively affected by the settlement of a dispute withVerizon.

 

*Income Taxes*

 

Ourprovision for income taxes was $8.1 million in 2010 compared to$7.6 million in 2009.  Our effectivetax rate was 36.2% for the six months ended June, 30, 2010 compared to 40.0%for the six months ended June 30, 2009. Our effective tax rate differs from the federal and state statutoryrates primarily due to state tax planning and the changes to our state taxreporting structure resulting from the completion of internal restructuring andrelated intercompany agreements.

 

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*NetIncome Attributable to Noncontrolling Interest*

 

Thenet income attributable to noncontrolling interest totaled $0.2 million in thefirst half of 2010 versus $0.5 million in the first half of 2009.  The income for our East Texas Fiber Line, Inc.subsidiary (a joint venture owned 63% by the Company and 37% by Eastex Celco)declined slightly period over period.

 

**Liquidityand Capital Resources**

 

*Outlook and Overview*

 

Thefollowing table sets forth selected information concerning our financialcondition.

 
| **(Dollars  in thousands)** | ** ** | **June 30,  2010** | ** ** | **December 31,   2009** | ** ** |
|-----------------------------|------------|-------------------------|------------|------------------------------|------------|
| Cash and cash equivalents   | ** ** | **$**                   | **53,574** |                         | $          | 42,758 |   |
| Working capital             | ** ** | **44,835**              |       | 23,789                       |       |
| Total debt                  | ** ** | **880,000**             |       | 880,344                      |       |
| Current ratio               | ** ** | **1.62**                |       | 1.30                         |       |
|                             |            |                         |            |                              |            |  |  |

 

Ouroperating requirements have historically been funded from cash flows generatedfrom our business and borrowings under our credit facilities.  We expect that our future operatingrequirements will continue to be funded from cash flows generated from ourbusiness and, if needed, from borrowings under our revolving credit facility.

 

Asa general matter, we expect that our liquidity needs for the remainder of 2010will arise primarily from: (i) dividend payments of between $23.0 millionand $23.5 million; (ii) interest payments on our indebtedness of between$25.0 million and $26.0 million; (iii) capital expenditures of between$20.0 million and $21.0 million; (iv) cash income tax payments; (v) pension,401(k) and other post retirement contributions of approximately $2.5million; and (vi) certain other costs. In addition, we may use cash and incur additional debt to fund selectiveacquisitions.  However, our ability to usecash may be limited by our other expected uses of cash, including our dividendpolicy, and our ability to incur additional debt will be limited by ourexisting and future debt agreements.

 

Webelieve that cash flows from operating activities, together with our existingcash and borrowings available under our revolving credit facility, will besufficient for the next twelve months to fund our currently anticipated uses ofcash.  After that, our ability to fundthese expected uses of cash and to comply with the financial covenants underour debt agreements will depend on the results of future operations,performance and cash flow.  Our abilityto do so will be subject to prevailing economic conditions and to financial,business, regulatory, legislative and other factors, many of which are beyondour control.

 

Wemay be unable to access the cash flows of our subsidiaries since certain of oursubsidiaries are parties to credit or other borrowing agreements, or subject tostatutory or regulatory restrictions, that restrict the payment of dividends ormaking intercompany loans and investments, and those subsidiaries are likely tocontinue to be subject to such restrictions and prohibitions for theforeseeable future.  In addition, futureagreements that our subsidiaries may enter into governing the terms ofindebtedness may restrict our subsidiaries’ ability to pay dividends or advancecash in any other manner to us.

 

Tothe extent that our business plans or projections change or prove to beinaccurate, we may require additional financing or require financing soonerthan we currently anticipate.  Sources ofadditional financing may include commercial bank borrowings, other strategicdebt financing, sales of 

 

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nonstrategicassets, vendor financing or the private or public sales of equity and debtsecurities.  There can be no assurancethat we will be able to generate sufficient cash flows from operations in thefuture, that anticipated revenue growth will be realized, or that futureborrowings or equity issuances will be available in amounts sufficient toprovide adequate sources of cash to fund our expected uses of cash.  Failure to obtain adequate financing, ifnecessary, could require us to significantly reduce our operations or level ofcapital expenditures which could have a material adverse effect on ourfinancial condition and the results of operations.

 

Asdiscussed below, our term loan has been fully funded at a fixed spread aboveLIBOR and we have $50 million available under our revolving creditfacility.   Based on our discussion withbanks participating in the bank group, we expect that the funds will beavailable under the revolving credit facility if necessary.

 

*Sourcesof Liquidity*

 

Ourcurrent principal sources of liquidity are cash, cash equivalents, workingcapital, cash available under our secured revolving credit facility, and cashprovided by operations.

 

*Cash and cash equivalents*.  For the first half of 2010, cash and cashequivalents increased by $10.8 million.

 

*Cash provided by operations*.  Net cash provided by operating activities inthe first six months of 2010 was $55.1 million, as compared to cash provided byoperating activities of $48.0 million in the first six months of 2009.  Cash provided by operations in 2010 increasedprimarily as a result of increased cash provided from our wirelesspartnerships, and improved operating performance.

 

*Working capital*.  Ournet working capital position increased $21.0 million in the first half of 2010over the first half of 2009 as a result of improved cash provided fromoperations.

 

*Cash available under our secured revolving credit facility*.  At June 30, 2010, we had no borrowingsoutstanding under our secured revolving credit facility and $50 million ofavailability.

 

*Uses ofLiquidity*

 

Ourprincipal uses of liquidity are dividend payments, interest expense and otherpayments on our debt, capital expenditures and payments made to fund ourpension and other postretirement obligations.

 

*Dividend payments*.  Weused $11.6 million and $11.4 million of cash to make dividend payments toshareholders during the second quarter of 2010 and 2009, respectively.  We used $23.1 million and $22.9 million ofcash to make dividend payments to shareholders during the first six months of2010 and 2009, respectively.  Our currentquarterly dividend rate is approximately $0.38 per share.

 

*Interest and other payments related to outstanding debt*.  During the second quarter of 2010, we used$12.5 million of cash to make required interest payments on our outstandingdebt.  We also used $0.1 million of cashin the first quarter of 2010 to reduce our capital lease obligations.  For the first half of 2010, we used $24.8million of cash to make required interest payments on our outstanding debt and$0.3 million of cash on our capital lease obligations.

 

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* *

*Pension and postretirement obligations*.  In the first half of 2010, we used $2.8million of cash to fund pension, 401(k) and other postretirementobligations.

 

*Capital expenditures*.  We spent approximately $10.9 million in eachof the first and second quarters of 2010 on capital projects, totaling $21.8million for the first half of 2010.

 

*Debt*

 

Thefollowing table summarizes our indebtedness as of June 30, 2010:

 
| **(In  thousands)**       | ** ** | **Balance** | ** ** | **Maturity Date** | ** **              | **Rate (1)** | ** **        |
|---------------------------|------------|-------------|------------|-------------------|-------------------------|--------------|-------------------|
|                      |       |        |       |              |                    |         |              |
| Revolving credit facility |       | $           | —     |              | December 31,  2013 |         | LIBOR  plus 2.50% |   |
| Term loan                 |       | $           | 880,000    |              | December 31,  2014 |         | LIBOR  plus 2.50% |   |

 

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(1)          As of June 30, 2010,the 1-month LIBOR rate in effect on our borrowings was 0.35%.

 

*CreditFacilities*

 

Borrowingsunder our credit agreement are secured by substantially all of our assets(other than our Illinois Consolidated Telephone Company subsidiary, and certainfuture subsidiaries).  The creditagreement contains customary affirmative covenants, which require us and oursubsidiaries to furnish specified financial information to the lenders, complywith applicable laws, maintain our properties and assets and maintain insuranceon our properties, among others, and contains customary negative covenants whichrestrict our and our subsidiaries’ ability to incur additional debt and issuecapital stock, create liens, repay other debt, sell assets, make investments,loans, guarantees or advances, pay dividends, repurchase equity interests ormake other restricted payments, engage in affiliate transactions, make capitalexpenditures, engage in mergers, acquisitions or consolidations, enter intosale-leaseback transactions, amend specified documents, enter into agreementsthat restrict dividends from subsidiaries and change the business weconduct.  In addition, the creditagreement requires us to comply with specified financial ratios that aresummarized below under “—Covenant Compliance”.

 

Asof June 30, 2010, we had no borrowings outstanding under the revolving creditfacility.  Borrowings under our creditfacilities bear interest at a rate equal to an applicable margin plus, at theborrowers’ election, either a “base rate” or LIBOR.  As of June 30, 2010, the applicablemargin for interest rates was 2.50% per year for both the LIBOR-based term loanand the revolving credit facility.  Theapplicable margin for alternative base rate loans was 1.50% per year for boththe term loan and the revolving credit facility.  For the quarter ended June 30, 2010, theweighted-average interest rate incurred on our term loan facility, includingpayments made under our interest rate swap agreement, was 5.61% per annum.  For the six months ended June 30, 2010,the weighted-average interest rate incurred on our term loan facility, includingpayments made under our interest rate swap agreement, was 5.59% per annum.

 

*DerivativeInstruments*

 

Asof June 30, 2010, we had $605 million notional amount of floating to fixedinterest rate swap agreements outstanding and $605 million notional amount ofbasis swaps outstanding.  Under thefloating to fixed swap agreements, we receive 3-month LIBOR-based interestpayments from the swap counterparties and pay a fixed rate.  Under the basis swaps, we pay 3-monthLIBOR-based payments less a fixed percentage to the basis swap counterparties,and receive 1-month LIBOR.  Concurrentwith the execution of the basis swaps, we began electing 1-month LIBOR resetson our credit facility.  The 

 

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swapsare in place to hedge the change in overall cash flows related to our termloan, the driver of which is changes in the underlying variable interest rate.

 

Duringthe second quarter of 2010, the percentage of our floating-rate term debt thatwas fixed as a result of the interest rate swap agreements averaged68.75%.  The maturity dates of theseswaps are laddered to minimize any potential exposure to unfavorable rates whenan individual swap expires.  The swapsexpire at various times through March 31, 2013.   The net effect of the swaps is that we pay aweighted-average fixed rate of 4.42% to our swap counterparties on $605 millionnotional amount and receive 1-month LIBOR less a fixed percentage, whichamounted to 0.06% for the first half of 2010.

 

Ourcredit facility requires us to maintain a minimum floating to fixed ratio of noless than 50%.  On December 31,2010, $175 million notional amount of existing swap agreements will expire,which would reduce our floating to fixed ratio to less than 50%.  As a result of this, and because interestrates continue to be near historic lows, we entered into $200 million notionalamount of additional floating to fixed forward interest rate swap agreementswhich become effective on December 31, 2010.  Under these floating to fixed rate forwardswap agreements, we will make fixed payments to the swap counterparties at aweighted-average fixed rate of 1.83% and receive 1-month LIBOR.  These forward swap agreements have a maturitydate of March 31, 2013.

 

*Covenant Compliance*

 

Ingeneral, our credit agreement restricts our ability to pay dividends to theamount of our Available Cash accumulated after October 1, 2005, plus $23.7million and minus the aggregate amount of dividends paid after July 27,2005.  Available Cash for any period isdefined in our credit facility as Consolidated EBITDA (a) minus, to theextent not deducted in the determination of Consolidated EBITDA, (i) non-cashdividend income for such period; (ii) consolidated interest expense forsuch period net of amortization of debt issuance costs incurred (A) inconnection with or prior to the consummation of the acquisition of NorthPittsburgh or (B) in connection with the redemption of our thenoutstanding senior notes; (iii) capital expenditures from internallygenerated funds; (iv) cash income taxes for such period; (v) scheduledprincipal payments of indebtedness, if any; (vi) voluntary repayments ofindebtedness, mandatory prepayments of term loans and net increases inoutstanding revolving loans during such period; (vii) the cash costs ofany extraordinary or unusual losses or charges; and (viii) all cashpayments made on account of losses or charges expensed prior to such period (b) plus,to the extent not included in Consolidated EBITDA, (i) cash interestincome; (ii) the cash amount realized in respect of extraordinary orunusual gains; and (iii) net decreases in revolving loans.  Based on the results of operations from October 1,2005 through June 30, 2010, and after taking into consideration dividendpayments (including the $11.6 million dividend declared in June 2010 andpaid on August 1, 2010), we continue to have $121.7 million in dividendavailability under the credit facility covenant.

 

Under our credit agreement, if our total net leverage ratio (as suchterm is defined in the credit agreement), as of the end of any fiscal quarter,is greater than 5.10:1.00, we will be required to suspend dividends on ourcommon stock unless otherwise permitted by an exception for dividends that maybe paid from the portion of proceeds of any sale of equity not used to makemandatory prepayments of loans and not used to fund acquisitions, capitalexpenditures or make other investments. During any dividend suspension period, we will be required to repay debtin an amount equal to 50.0% of any increase in available cash (as such term isdefined in our credit agreement) during such dividend suspension period, amongother things.  In addition, we will notbe permitted to pay dividends if an event of default under the credit agreementhas occurred and is continuing.  Amongother things, it will be an event of default if our interest coverage ratio asof the end of any fiscal quarter is below 

 

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2.25:1.00.  As of June 30, 2010, our total netleverage ratio was 4.73:1.00 and our interest coverage ratio was 3.43:1.00.

 

Thedescriptions of the covenants above and of our credit agreement generally inthis Report are summaries only.  They donot contain a full description, including definitions, of the provisionssummarized.  As such, these summaries arequalified in their entirety by these documents, which are filed as exhibits toour Annual Report on Form 10-K, Quarterly Reports on Form 10-Q andCurrent Reports on Form 8-K.

 

*Dividends*

 

The cash required to funddividend payments is in addition to our other expected cash needs, which weexpect to fund with cash flows from our operations.  In addition, we expect we will havesufficient availability under our revolving credit facility to fund dividendpayments in addition to any expected fluctuations in working capital and othercash needs, although we do not intend to borrow under this facility to paydividends.

 

We believe that our dividendpolicy will limit, but not preclude, our ability to grow.  If we continue paying dividends at the levelcurrently anticipated under our dividend policy, we may not retain a sufficientamount of cash, and may need to seek refinancing, to fund a material expansionof our business, including any significant acquisitions or to pursue growthopportunities requiring capital expenditures significantly beyond our currentexpectations.  In addition, because weexpect a significant portion of cash available will be distributed to holdersof common stock under our dividend policy, our ability to pursue any materialexpansion of our business will depend more than it otherwise would on ourability to obtain third-party financing.

 

*SuretyBonds*

 

Inthe ordinary course of business, we enter into surety, performance, and similarbonds.  As of June 30, 2010, we hadapproximately $2.1 million of these bonds outstanding.

 

**Subsequent  Event**

 

OnJuly 16, 2010, we entered into a $100 million forward interest rate swapagreement which becomes effective on September 30, 2011 and matures on September 30,2013.  Under this forward interest rateswap agreement, we will pay a fixed rate of 1.65% and receive 1-month LIBOR.

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

Weare exposed to market risk from changes in interest rates.  Market risk is the potential loss arisingfrom adverse changes in market interest rates on our variable rateobligations.  We calculate the potentialchange in interest expense caused by changes in market interest rates bydetermining the effect of the hypothetical rate increase on the portion of ourvariable rate debt that is not hedged through the interest rate swapagreements.

 

Duringthe first six months of 2010, the interest rate on approximately $275.0 millionof our floating rate debt was not fixed through the use of interest rate swaps,thereby subjecting this portion of our debt to potential changes in interestrates.   If market interest rates changedby 1.0% from the average rates that prevailed during the first six months ofthis year, interest expense would have increased or decreased by approximately $1.4million for this six month period.

 

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Asof June 30, 2010, the fair value of our interest rate swap agreementsamounted to a liability of $20.7 million, net of deferred taxes, which isrecognized as a deferred loss within accumulated other comprehensive loss.

 

**Item 4. Controls and Procedures**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed by us in our reports that we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosures.  Our management, with the participation of ourChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of June 30, 2010. Based upon that evaluation and subject to the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective. No change in our internal control over financial reporting (as definedin Rule 13a-15(f) under the Exchange Act) occurred during our fiscalquarter ended June 30, 2010 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

OnApril 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunicationscompany, and certain of its affiliates filed a lawsuit against us and oursubsidiaries North Pittsburgh Telephone Company and North Pittsburgh SystemsInc. in the Court of Common Pleas of Allegheny County, Pennsylvania, allegingthat we have prevented Salsgiver from connecting their fiber optic cables toour utility poles.  Salsgiver seekscompensatory and punitive damages as the result of alleged lost projectedprofits, damage to its business reputation, and other costs.  It claims to have sustained losses ofapproximately $125 million but does not request a specific dollar amount indamages.  We believe that these claimsare without merit and the alleged damages are completely unfounded.  We intend to defend against these claims vigorously.In the third quarter of 2008, we filed preliminary objections and responses toSalsgiver’s complaint.  However, thecourt ruled against our preliminary objections. On November 3, 2008, we responded to Salsgiver’s amended complaintand filed a counter-claim for trespass, alleging that Salsgiver attached cablesto our poles without an authorized agreement and in an unsafe manner.  We are currently in the discovery anddeposition stage.  In addition, we haveasked the FCC Enforcement Bureau to address Salsgiver’s unauthorized poleattachments and safety violations on those attachments.  We believe that these are violations of a FCCorder regarding Salsgiver’s complaint against us.  We do not believe that these claims will havea material adverse impact on our financial results.

 

Weare from time to time involved in various other legal proceedings andregulatory actions arising out of our operations.  We do not believe that any of these,individually or in the aggregate, will have a material adverse effect upon ourbusiness, operating results or financial condition.

 

**Item 1A.****                                                 ****RiskFactors**

 

TheCompany included in its Annual Report on Form 10-K as of December 31,2009 a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (“Risk Factors”).

 

**Item 2.****                                                          ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

**None**

 

**Item3.****                                                          ****Defaults Upon Senior Securities**

 

**None**

 

**Item4.****                                                          ****[Removed and Reserved]**

 

**Item 5.**                                                           **OtherInformation**

 

**None**

 

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**Item 6. Exhibits**

 

(a)          Exhibits

 

10.1                           Consolidated CommunicationsHoldings, Inc. 2005 Long-Term Incentive Plan (incorporated by reference toExhibit 99.1 to the Registrant’s Form 8-K filed on May 10, 2010)

 

31.1                           Certification of the ChiefExecutive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of2002.

 

31.2                           Certification of the ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1                           Certification of the ChiefExecutive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                 | CONSOLIDATED  COMMUNICATIONS HOLDINGS, INC. |
|----------------------|--------------------------------------------------|
|                 |                                             |
| August 6,  2010 | By:                                              | /s/  Robert J. Currey |
|                 |                                             | Robert J. Currey |
|                 |                                             | President and Chief Executive Officer |
|                 |                                             | (Principal Executive Officer) |
|                 |                                             |
| August 6,  2010 | By:                                              | /s/  Steven L. Childers |
|                 |                                             | Steven L. Childers |
|                 |                                             | Chief Financial Officer |
|                 |                                             | (Principal Financial Officer and Chief Accounting  Officer) |
|                      |                                                  |  |  |

 

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