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 September 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

 

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, anon-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.  (check one):

 

| Large accelerated filer o                     |   | Accelerated filer x    |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

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 November 3, 2010** |
|-------------------------------|------------|-----------------------------------------------------------------|
| Common Stock, $0.01 Par Value |       | 29,816,659 Shares                                               |

 

 

** **

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Table of Contents

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**TABLEOF CONTENTS**

 
| ** **   | ** **                                                                                                                             | **Page No.** |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------|-------------------|
| ** **   | ** **                                                                                                                             | ** **        |
| PART I  |
|         |                                                                                                                                   |              |
| Item 1.      | Financial  Statements                                                                                                                  |              |
|         | Condensed Consolidated Statements of Operations  (Unaudited) - Three and nine month periods ended September 30, 2010 and  2009    | 1                 |
|         | Condensed Consolidated Balance Sheets —  September 30, 2010 (Unaudited) and December 31, 2009                           | 2                 |
|         | Condensed Consolidated Statement of Changes in  Stockholders’ Equity (Unaudited) — Nine months ended September 30, 2010 | 3                 |
|         | Condensed Consolidated Statements of Cash Flows  (Unaudited) - Nine month periods ended September 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                                            | 21                |
|         |                                                                                                                                   |              |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                                                            | 37                |
|         |                                                                                                                                   |              |
| Item 4.      | Controls and  Procedures                                                                                                               | 37                |
|         |                                                                                                                                   |              |
| PART II |
|         |                                                                                                                                   |              |
| Item 1.      | Legal Proceedings                                                                                                                      | 39                |
|         |                                                                                                                                   |              |
| Item 1A.     | Risk Factors                                                                                                                           | 39                |
|         |                                                                                                                                   |              |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                           | 39                |
|         |                                                                                                                                   |              |
| Item 3.      | Defaults  Upon Senior Securities                                                                                                       | 39                |
|         |                                                                                                                                   |              |
| Item 4.      | [Removed and  Reserved]                                                                                                                | 39                |
|         |                                                                                                                                   |              |
| Item 5.      | Other Information                                                                                                                      | 39                |
|         |                                                                                                                                   |              |
| Item 6.      | Exhibits                                                                                                                               | 40                |

 

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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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per share amounts)**                              | ** **   | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| * *                                                                                           | *** *** | *** ***                                         | * *   | * *                                            | * *   | * * | * * | * * | * * |
| Net revenues                                                                                       | ** **   | **$**                                                | **95,576** |                                                | $          | 101,590 | ** ** | **$** | **289,615** |   | $ | 305,342 |   |
| Operating expense:                                                                                 | ** **   | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Cost of services and products (exclusive of  depreciation and amortization shown separately below) | ** **   | **36,371**                                           |       | 36,151                                              | ** ** | **107,960** |   | 108,595 |   |
| Selling, general and administrative expenses                                                       | ** **   | **21,686**                                           |       | 25,600                                              | ** ** | **65,879** |   | 79,327 |   |
| Depreciation and amortization                                                                      | ** **   | **21,918**                                           |       | 21,341                                              | ** ** | **64,920** |   | 63,999 |   |
| Operating income                                                                                   | ** **   | **15,601**                                           |       | 18,498                                              | ** ** | **50,856** |   | 53,421 |   |
| Other income (expense):                                                                            |         |                                                 |       |                                                |       |   |   |   |   |
| Interest expense, net                                                                              | ** **   | **(11,723**                                          | **)**      | (14,775                                             | )          | **(37,675** | **)** | (43,794 | ) |
| Investment income                                                                                  | ** **   | **6,830**                                            |       | 6,237                                               | ** ** | **20,268** |   | 18,046 |   |
| Other, net                                                                                         | ** **   | **210**                                              |       | (183                                                | )          | **(242** | **)** | 1,032 |   |
| Income before income taxes                                                                         | ** **   | **10,918**                                           |       | 9,777                                               | ** ** | **33,207** |   | 28,705 |   |
| Income tax expense (benefit)                                                                       | ** **   | **(1,049**                                           | **)**      | 2,494                                               | ** ** | **7,015** |   | 10,066 |   |
| Net income                                                                                         | ** **   | **11,967**                                           |       | 7,283                                               | ** ** | **26,192** |   | 18,639 |   |
| Less: net income attributable to noncontrolling  interest                                          | ** **   | **130**                                              |       | 226                                                 | ** ** | **385** |   | 769 |   |
| Net income attributable to common stockholders                                                     | ** **   | **$**                                                | **11,837** |                                                | $          | 7,057 | ** ** | **$** | **25,807** |   | $ | 17,870 |   |
|                                                                                               | ** **   | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Net income per common share—basic                                                             | ** **   | **$**                                                | **0.40**   |                                                | $          | 0.24 | ** ** | **$** | **0.86** |   | $ | 0.60 |   |
|                                                                                               | ** **   | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Net income per common share—diluted                                                           | ** **   | **$**                                                | **0.40**   |                                                | $          | 0.24 | ** ** | **$** | **0.86** |   | $ | 0.60 |   |
|                                                                                               | ** **   | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Cash dividends per common share                                                                    | ** **   | **$**                                                | **0.38**   |                                                | $          | 0.39 | ** ** | **$** | **1.16** |   | $ | 1.16 |   |

 

*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)**                                                                                                      | ** ** | **September 30,********2010********(Unaudited)** | ** **    | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|---------------|-----------------------------|------------|
| * *                                                                                                                                                                                       |       |                                                  |          |                        |       |
| **Assets**                                                                                                                                                                                     | ** ** | ** **                                            |          |                        |       |
| Current assets:                                                                                                                                                                                | ** ** | ** **                                            |          |                        |       |
| Cash and equivalents                                                                                                                                                                           | ** ** | **$**                                                 | **55,961**    |                        | $          | 42,758 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $3,263 in 2010 and $1,796 in 2009                                                                                              | ** ** | **41,647**                                            |          | 42,125                      |       |
| Income taxes receivable                                                                                                                                                                        | ** ** | **5,425**                                             |          | 3,564                       |       |
| Inventories                                                                                                                                                                                    | ** ** | **7,339**                                             |          | 6,874                       |       |
| Deferred income taxes                                                                                                                                                                          | ** ** | **6,992**                                             |          | 5,970                       |       |
| Prepaid expenses and other current assets                                                                                                                                                      | ** ** | **7,440**                                             |          | 6,639                       |       |
| Total current assets                                                                                                                                                                           | ** ** | **124,804**                                           |          | 107,930                     |       |
| Property, plant and equipment, net                                                                                                                                                             | ** ** | **359,618**                                           |          | 377,200                     |       |
| Investments                                                                                                                                                                                    | ** ** | **98,123**                                            |          | 98,748                      |       |
| Goodwill                                                                                                                                                                                       | ** ** | **520,562**                                           |          | 520,562                     |       |
| Customer lists, net                                                                                                                                                                            | ** ** | **85,484**                                            |          | 102,088                     |       |
| Tradenames                                                                                                                                                                                     | ** ** | **13,446**                                            |          | 13,446                      |       |
| Deferred debt issuance costs, net and other assets                                                                                                                                             | ** ** | **6,023**                                             |          | 6,633                       |       |
| Total assets                                                                                                                                                                                   | ** ** | **$**                                                 | **1,208,060** |                        | $          | 1,226,607 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                 | ** ** | ** **                                            |          |                        |       |
| Current liabilities:                                                                                                                                                                           | ** ** | ** **                                            |          |                        |       |
| Accounts payable                                                                                                                                                                               | ** ** | **$**                                                 | **9,590**     |                        | $          | 13,482 |   |
| Advance billings and customer deposits                                                                                                                                                         | ** ** | **21,861**                                            |          | 20,025                      |       |
| Dividends payable                                                                                                                                                                              | ** ** | **11,553**                                            |          | 11,476                      |       |
| Accrued expense                                                                                                                                                                                | ** ** | **19,603**                                            |          | 23,133                      |       |
| Current portion of capital lease obligations                                                                                                                                                   | ** ** | **—**                                            |          | 344                         |       |
| Current portion of derivative liability                                                                                                                                                        | ** ** | **10,176**                                            |          | 6,074                       |       |
| Current portion of pension and postretirement  benefit obligations                                                                                                                             | ** ** | **2,908**                                             |          | 2,908                       |       |
| Total current liabilities                                                                                                                                                                      | ** ** | **75,691**                                            |          | 77,442                      |       |
| Senior secured long-term debt                                                                                                                                                                  | ** ** | **880,000**                                           |          | 880,000                     |       |
| Deferred income taxes                                                                                                                                                                          | ** ** | **70,380**                                            |          | 74,711                      |       |
| Pension and other postretirement obligations                                                                                                                                                   | ** ** | **82,568**                                            |          | 80,298                      |       |
| Other long-term liabilities                                                                                                                                                                    | ** ** | **27,492**                                            |          | 33,439                      |       |
| Total liabilities                                                                                                                                                                              | ** ** | **1,136,131**                                         |          | 1,145,890                   |       |
| Stockholders’ equity:                                                                                                                                                                     | ** ** | ** **                                            |          |                        |       |
| Common stock, par value $0.01 per share;  100,000,000 shares authorized, 29,816,659 and 29,608,653, shares outstanding  as of September 30, 2010 and December 31, 2009, respectively | ** ** | **298**                                               |          | 296                         |       |
| Additional paid-in capital                                                                                                                                                                     | ** ** | **102,639**                                           |          | 109,746                     |       |
| Retained earnings                                                                                                                                                                              | ** ** | **—**                                            |          | —                      |       |
| Accumulated other comprehensive loss                                                                                                                                                           | ** ** | **(37,608**                                           | **)**         | (35,540                     | )          |
| Noncontrolling interest                                                                                                                                                                        | ** ** | **6,600**                                             |          | 6,215                       |       |
| Total stockholders’ equity                                                                                                                                                                | ** ** | **71,929**                                            |          | 80,717                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                | ** ** | **$**                                                 | **1,208,060** |                        | $          | 1,226,607 |   |

 

*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**       | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|------------------------------|------------|--------------|------------|--------------------------|------------|-----------------------|------------|--------------|------------|------------|------------|
| ** **                                                      | ** ** | **Common Stock** | ** ** | **Additional  Paid in** | ** ** | **Retained** | ** ** | **Other  Comprehensive** | ** ** | **Non-  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                                      |       | —                |       | —                       |       | (4,503       | )          | (7,050                   | )          | —                |       | —       |       | (11,553    | )          |
| Non-cash, stock-based  compensation                             |       | —                |       | —                       |       | 616          |       | —                   |       | —                |       | —       |       | 616        |       |
| Comprehensive income:                                           |       |                  |       |                         |       |         |       |                     |       |                  |       |         |       |       |       |
| Net income                                                      |       | —                |       | —                       |       | —       |       | 7,050                    |       | —                |       | 124          |       | 7,174      |       |
| 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                                     |       |                  |       |                         |       |         |       |                     |       |                  |       |         |       | 5,969      |       |
|                                                            |       |                  |       |                         |       |         |       |                     |       |                  |       |         |       |       |       |
| Balance - June 30,  2010                                   |       | 29,822,604            |       | $                            | 298        |         | $          | 101,734                  |       | $                     | —     |         | $          | (36,608    | )          | $ | 6,470 |   | $ | 71,894 |   |
|                                                            |       |                  |       |                         |       |         |       |                     |       |                  |       |         |       |       |       |
| Dividends on common  stock                                      |       | —                |       | —                       |       | 284          |       | (11,837                  | )          | —                |       | —       |       | (11,553    | )          |
| Share forfeitures                                               |       | (5,945                | )          | —                       |       | —       |       | —                   |       | —                |       | —       |       | —     |       |
| Non-cash, stock-based  compensation                             |       | —                |       | —                       |       | 621          |       | —                   |       | —                |       | —       |       | 621        |       |
| Comprehensive income:                                           |       |                  |       |                         |       |         |       |                     |       |                  |       |         |       |       |       |
| Net income                                                      |       | —                |       | —                       |       | —       |       | 11,837                   |       | —                |       | 130          |       | 11,967     |       |
| Change in prior service  cost and net loss, net of tax of $35   |       | —                |       | —                       |       | —       |       | —                   |       | 61                    |       | —       |       | 61         |       |
| Change in fair value of  cash flow hedges, net of tax of $(616) |       | —                |       | —                       |       | —       |       | —                   |       | (1,061                | )          | —       |       | (1,061     | )          |
| Total comprehensive  income                                     |       |                  |       |                         |       |         |       |                     |       |                  |       |         |       | 10,967     |       |
|                                                            |       |                  |       |                         |       |         |       |                     |       |                  |       |         |       |       |       |
| Balance — September 30,  2010                         |       | 29,816,659            |       | $                            | 298        |         | $          | 102,639                  |       | $                     | —     |         | $          | (37,608    | )          | $ | 6,600 |   | $ | 71,929 |   |

 

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

 

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

**Condensed ConsolidatedStatements of Cash Flows**

(Unaudited)

 
| ** **                                                                               | ** ** | **Nine Months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                                                  | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| **Operating Activities**                                                                 | ** ** | ** **                                          |       |   |   |
| Net income                                                                               | ** ** | **$**                                               | **26,192** |   | $ | 18,639 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       | ** ** | ** **                                          |       |   |   |
| Depreciation and amortization                                                            | ** ** | **64,920**                                          |       | 63,999 |   |
| Deferred income taxes                                                                    | ** ** | **(24**                                             | **)**      | (833 | ) |
| Loss on disposal of assets                                                               | ** ** | **902**                                             |       | — |   |
| Non-cash change in uncertain tax positions                                               | ** ** | **(5,186**                                          | **)**      | — |   |
| Cash distributions from wireless partnerships in  excess of/(less than) current earnings | ** ** | **304**                                             |       | (2,299 | ) |
| Stock-based compensation expense                                                         | ** ** | **1,740**                                           |       | 1,434 |   |
| Amortization of deferred financing costs                                                 | ** ** | **970**                                             |       | 978 |   |
| Changes in operating assets and liabilities:                                             | ** ** | ** **                                          |       |   |   |
| Accounts receivable, net                                                                 | ** ** | **478**                                             |       | 102 |   |
| Income tax receivable                                                                    | ** ** | **(4,936**                                          | **)**      | (1,316 | ) |
| Inventories                                                                              | ** ** | **(451**                                            | **)**      | 364 |   |
| Other assets                                                                             | ** ** | **(732**                                            | **)**      | 651 |   |
| Accounts payable                                                                         | ** ** | **(3,892**                                          | **)**      | (869 | ) |
| Accrued expenses and other liabilities                                                   | ** ** | **(540**                                            | **)**      | 1,360 |   |
| Net cash provided by operating activities                                                | ** ** | **79,745**                                          |       | 82,210 |   |
| **Investing Activities**                                                                 | ** ** | ** **                                          |       |   |   |
| Additions to property, plant and equipment, net                                          | ** ** | **(32,578**                                         | **)**      | (30,952 | ) |
| Proceeds from the sale of assets                                                         | ** ** | **997**                                             |       | 300 |   |
| Proceeds from the sale of investments                                                    | ** ** | **35**                                              |       | — |   |
| Net cash used for investing activities                                                   | ** ** | **(31,546**                                         | **)**      | (30,652 | ) |
| **Financing Activities**                                                                 | ** ** | ** **                                          |       |   |   |
| Payment of capital lease obligation                                                      | ** ** | **(344**                                            | **)**      | (685 | ) |
| Repurchase and retirement of common stock                                                | ** ** | **—**                                          |       | (9 | ) |
| Dividends on common stock                                                                | ** ** | **(34,652**                                         | **)**      | (34,452 | ) |
| Net cash used for financing activities                                                   | ** ** | **(34,996**                                         | **)**      | (35,146 | ) |
| Net increase in cash and equivalents                                                     | ** ** | **13,203**                                          |       | 16,412 |   |
| Cash and equivalents at beginning of year                                                | ** ** | **42,758**                                          |       | 15,471 |   |
| Cash and equivalents at end of period                                                    | ** ** | **$**                                               | **55,961** |   | $ | 31,883 |   |

 

*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 ofOperations**

 

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 ExchangeCommission.  Certain information andfootnote disclosures normally included in statements prepared in accordancewith generally accepted accounting principles have been omitted pursuant tosuch rules and regulations, although we believe that the disclosures areadequate to make the information presented not misleading.  These financial statements should be read inconjunction with the financial statements and notes thereto included in ourAnnual Report on Form 10-K for 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 nine month periodsended September 30, 2010 and 2009. The results of operations for interim periods are not necessarilyindicative of results 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 September 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.

 

Certain prior year amountshave been reclassified to conform to the current year’s presentation.  These reclassifications had no effect ontotal stockholders equity, total revenue, income from operations or net income.

 

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

 

**2.****            ****RecentAccounting Pronouncements**

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update No. 2010-06, *FairValue Measurements and Disclosures (Topic 820) - Improving Disclosuresabout Fair Value Measurements*(“ASUNo. 2010-06”).  ASUNo. 2010-06 provides amended disclosure requirements related to fair valuemeasurements.  Certain disclosurerequirements of ASU No. 2010-06 were effective beginning in the firstquarter of 2010, while other disclosure requirements of the ASU are effectivefor financial statements issued for reporting periods beginning afterDecember 15, 2010.  Since theseamended principles require only additional disclosures 

 

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concerningfair value measurements, adoption did not and will not affect the Company’sfinancial condition, results of operations or cash flows.

 

**3.****            ****Prepaidexpenses and other current assets**

 

Prepaidand other current assets are as follows:

 
| **(In thousands)**              | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                 | ** ** | ** **                   |       |                        |       |
| Prepaid maintenance                  | ** ** | **$**                        | **2,279**  |                        | $          | 3,152 |   |
| Prepaid taxes                        | ** ** | **655**                      |       | 43                          |       |
| Deferred charges                     | ** ** | **1,003**                    |       | 718                         |       |
| Prepaid insurance                    | ** ** | **991**                      |       | 471                         |       |
| Prepaid expense - other              | ** ** | **2,456**                    |       | 2,200                       |       |
| Current portion of derivative assets | ** ** | **33**                       |       | —                      |       |
| Other current assets                 | ** ** | **23**                       |       | 55                          |       |
| Total                                | ** ** | **$**                        | **7,440**  |                        | $          | 6,639 |   |

 

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

 

Property,plant and equipment are as follows:

 
| **(In thousands)**              | ** ** | **September 30,  2010** | ** **  | **December 31,  2009** | ** ** |
|--------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
|                                 |       |                         |        |                        |       |
| Land and buildings                   | ** ** | **$**                        | **66,138**  |                        | $          | 66,700 |   |
| Network and outside plant facilities | ** ** | **856,881**                  |        | 833,879                     |       |
| Furniture, fixtures and equipment    | ** ** | **80,806**                   |        | 80,315                      |       |
| Assets under capital lease           | ** ** | **5,144**                    |        | 5,144                       |       |
| Less: accumulated depreciation       | ** ** | **(661,274**                 | **)**       | (617,141                    | )          |
|                                 | ** ** | **347,695**                  |        | 368,897                     |       |
| Construction in progress             | ** ** | **11,923**                   |        | 8,303                       |       |
| Total                                | ** ** | **$**                        | **359,618** |                        | $          | 377,200 |   |

 

Depreciationexpense totaled $16.4 million and $15.8 million for the three months ended September 30,2010 and 2009, respectively, and $48.3 million and $47.4 million for the ninemonths ended September 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 the three month periods ended September 30,2010 and 2009, we received cash distributions from these partnerships totaling$2.9 million and $3.0 million, respectively. For the nine months ended September 30, 2010 and 2009, we receivedcash distributions from these partnerships totaling $8.9 million and $8.5million, respectively.

 

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 

 

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RSA6(II) Limited Partnership (“RSA 6(II)”). RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) providecellular service in and around our Pennsylvania service territory.  In addition, we have a 50% ownership interestin Boulevard Communications LLP, a competitive access provider in westernPennsylvania.  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 September 30,2010 and 2009, we received cash distributions from these partnerships totaling$4.0 million and $2.8 million, respectively. For the nine months ended September 30, 2010 and 2009, we receivedcash distributions from these partnerships totaling $11.5 million and $7.0million, respectively.

 

Ourinvestments are as follows:

 
| **(In thousands)**                                              | ** ** | **September 30,  2010** | ** ** | **December 31,   2009** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
|                                                                 | ** ** | ** **                   |       |                              |       |
| Cash surrender value of life insurance policies                      | ** ** | **$**                        | **1,327**  |                              | $          | 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                                                    | ** ** | **3,086**                    |       | 2,902                             |       |
| Other                                                                | ** ** | **25**                       |       | 60                                |       |
| Equity method investments:                                           | ** ** | ** **                   |       |                              |       |
| GTE Mobilnet of Texas RSA #17 Limited Partnership  (17.02% interest) | ** ** | **18,989**                   |       | 19,080                            |       |
| Pennsylvania RSA 6(I) Limited Partnership  (16.6725% interest)  | ** ** | **7,149**                    |       | 7,301                             |       |
| Pennsylvania RSA 6(II) Limited Partnership  (23.67% interest)   | ** ** | **22,990**                   |       | 23,049                            |       |
| Boulevard Communications, LLP (50% interest)                         | ** ** | **157**                      |       | 159                               |       |
| Total                                                                | ** ** | **$**                        | **98,123** |                              | $          | 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 assets and liabilities measured at fair value on a recurringbasis subject to disclosure requirements at September 30, 2010 are asfollows:

 

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| ** **                               | ** ** | ** **                   | ** ** | **Fair Value Measurements at Reporting Date Using**               | ** ** |
|------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| **(In thousands)**                  | ** ** | **September 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 assets        |       | $                            | 33         |                                                                                            | $          | — |   | $ | 33 |   | $ | — |   |
| Current interest rate swap liabilities   |       | (10,176                      | )          | —                                                                                          |       | (10,176 | ) | — |   |
| Long-term interest rate swap liabilities |       | (25,402                      | )          | —                                                                                          |       | (25,402 | ) | — |   |
| Totals                                   |       | $                            | (35,545    | )                                                                                               | $          | — |   | $ | (35,545 | ) | $ | — |   |

 

Thechange in the fair value of the derivatives is primarily a result of a changein market 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 September 30, 2010 andDecember 31, 2009.

 
| ** **                | ** ** | **As of September 30, 2010** | ** **  | **As of December 31, 2009** | ** ** |
|---------------------------|------------|--------------------------------------------------|-------------|-------------------------------------------------|------------|
| **(In thousands)**   | ** ** | **Carrying Value**                          | ** **  | **Fair Value**                             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Investments, equity basis | ** ** | **$**                                            | **49,285**  | ** **                                      | ** ** | **(a)** | $ | 49,589 |   |   | (a) |
| Investments, at cost      | ** ** | **$**                                            | **47,511**  | ** **                                      | ** ** | **(a)** | $ | 47,362 |   |   | (a) |
| Long-term debt            | ** ** | **$**                                            | **880,000** | ** **                                      | **$**      | **880,000** |   | $ | 880,000 |   | $ | 880,000 |   |
|                           |            |                                                  |             |                                                 |            |  |  |  |  |  |  |  |  |

 

----

(a)  The Company’s investments at September 30,2010 and December 31, 2009 accounted for under both the equity and costmethods consist of minority positions in various cellular telephone limitedpartnerships.  These investments are recorded using either the equity orcost methods, and it is not practical to estimate a fair value for these non-publiclytraded 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)** | ** ** | **September 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

 

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Company’sbusiness units and several of our products and services incorporate theCONSOLIDATED name.  These tradenames areindefinitely renewable intangibles.  Thecarrying value of the tradenames was $13.4 million at both September 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)**        | ** ** | **September 30,  2010**  | ** **  | **December 31,  2009** | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|                           | ** ** | ** **                    |        |                        | ** ** | ** ** |   |   |   |
| Gross carrying amount          | ** ** | **$**                         | **193,124** |                        | $          | 193,124 | ** ** | **$** | **11,712** |   | $ | 11,712 |   |
| Less: accumulated amortization | ** ** | **(108,632**                  | **)**       | (92,358                     | )          | **(10,720** | **)** | (10,390 | ) |
| Net carrying amount            | ** ** | **$**                         | **84,492**  |                        | $          | 100,766 | ** ** | **$** | **992** |   | $ | 1,322 |   |

 

Amortizationassociated with customer lists totaled approximately $5.5 million and $16.6million in each of the three and nine month periods ended September 30,2010 and 2009, respectively.

 

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

 

Deferredfinancing costs, net and other assets are as follows:

 
| **(In thousands)**           | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                              |       |                         |       |                        |       |
| Deferred debt issuance costs, net | ** ** | **$**                        | **5,494**  |                        | $          | 6,464 |   |
| Other assets                      | ** ** | **529**                      |       | 169                         |       |
| Total                             | ** ** | **$**                        | **6,023**  |                        | $          | 6,633 |   |

 

Theremaining deferred debt issuance costs at September 30, 2010 of $5.5million related to our secured credit facility will be amortized over theremaining life of 4.2 years, resulting in amortization expense of $1.3 millionyearly unless the facility is extinguished earlier.

 

**9.****            ****AccruedExpenses**

 

Accruedexpenses are as follows:

 
| **(In thousands)**        | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                           |       |                         |       |                        |       |
| Salaries and employee benefits | ** ** | **$**                        | **9,282**  |                        | $          | 11,727 |   |
| Taxes payable                  | ** ** | **3,673**                    |       | 4,631                       |       |
| Accrued interest               | ** ** | **180**                      |       | 1,177                       |       |
| Other accrued expenses         | ** ** | **6,468**                    |       | 5,598                       |       |
| Total accrued expenses         | ** ** | **$**                        | **19,603** |                        | $          | 23,133 |   |

 

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

 

Long-termdebt consists of the following:

 
| **(In thousands)**                         | ** ** | **September 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 September 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 September 30, 2010, the applicablemargin for interest rates is 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 4.79:1 at September 30, 2010, borrowings under the revolvingcredit facility will be priced at a margin of 2.75% for LIBOR-based borrowingsand 1.75% for alternative base rate borrowings for the three month periodending December 31, 2010.  Theapplicable borrowing margin for the revolving credit facility is adjustedquarterly to reflect the leverage ratio from the prior quarter-end.

 

Theweighted-average interest rate incurred on our term loan facility during thethree months ended September 30, 2010 and 2009, including amounts paid onour interest rate swap agreements and the applicable margin, was 5.58% and6.26% per annum, respectively.  Theweighted-average interest rate incurred on our term loan facility during thenine months ended September 30, 2010 and 2009, including amounts paid onour interest rate swap agreements and the applicable margin, was 5.59% and6.28% per annum, respectively.  Interestis payable at least quarterly.

 

Thecredit agreement contains various provisions and covenants including, amongother items, restrictions on the ability to pay dividends, incur additional indebtedness,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 September 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 4.36% to our swapcounterparties on $605 million of notional amount and receive 1-month LIBORless a fixed percentage.  The weightedaverage fixed percentage received was 0.06% for the third quarter of 2010.

 

Wealso have in place $200 million notional amount of forward floating to fixedinterest rate swap agreements that will become effective on December 31,2010 and a $100 million notional amount forward fixed to floating interest rateswap agreement that becomes effective on September 30, 2011.  Under the forward swap agreements that becomeeffective on December 31, 2010, we will make fixed payments to the swapcounterparties at a weighted-average fixed rate of 1.83% and receive 1-monthLIBOR.  The December 2010 forwardswap agreements have a maturity date of March 31, 2013.  For the swap agreement that becomes effectiveon September 30, 2011, we will make fixed payments to the swapcounterparty at a weighted-average fixed rate of 1.65% and receive 1-monthLIBOR.  The September 2011 forwardswap agreement has a maturity date of September 30, 2013.

 

AtSeptember 30, 2010 and December 31, 2009, approximately 68.75% of ouroutstanding debt was fixed through the use of interest rate swaps.

 

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 Prepaid expenses andother current assets, Current portion of derivative liability or Otherlong-term liabilities on our Condensed Consolidated Balance Sheets.  The table below shows the balance sheetclassification and fair value of our interest rate swaps designated as hedginginstruments under ASC 815:

 
| ** **                                | ** ** | **Fair Value**    | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **(In thousands)**                   | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                      |       |                   |       |   |   |
| Prepaid expenses and other current assets | ** ** | **$**                  | **33**     |   | $ | — |   |
| Current portion of derivative liability   | ** ** | **(10,176**            | **)**      | (6,074 | ) |
| Other long-term liabilities               | ** ** | **(25,402**            | **)**      | (26,105 | ) |
|                                           |            |                        |            |  |  |  |  |

 

Information regarding ourcash flow hedge transactions is as follows:

 

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| ** **                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                                           | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss/(gain) recognized in accumulated other  comprehensive loss (“OCI”) | ** ** | **$**                                                | **1,677**  |                                                | $          | (225 | ) | **$** | **3,508** |   | $ | 10,293 |   |
| Loss/(Gain) arising from ineffectiveness  increasing/(reducing) interest expense  | ** ** | **$**                                                | **(62**    | **)**                                               | $          | 7 | ** ** | **$** | **(142** | **)** | $ | (55 | ) |
| Losses reclassed from OCI to interest expense                                     | ** ** | **$**                                                | **1,037**  |                                                | $          | 2,884 | ** ** | **$** | **3,953** |   | $ | 8,764 |   |

 
| ** **                                                     | ** ** | **September 30,**  | ** **  |
|----------------------------------------------------------------|------------|-------------------------|-------------|
| **(In thousands)**                                        | ** ** | **2010**                | ** **  | **2009** | ** ** |
|                                                           | ** ** | ** **              |        |   |   |
| Aggregate notional value of current derivatives  outstanding   | ** ** | **$**                   | **605,000** |   | $ | 680,000 |   |
| Aggregate notional value of forward derivatives outstanding    | ** ** | **$**                   | **300,000** |   | $ | — |   |
| Period through which derivative positions  currently exist     | ** ** | **September 2013** |        | March 2013 |   |
| Loss in fair value of derivatives                              | ** ** | **$**                   | **35,545**  |   | $ | 37,559 |   |
| Deferred losses included in OCI (pretax)                       | ** ** | **$**                   | **35,399**  |   | $ | 37,219 |   |
| Losses included in OCI to be recognized in the  next 12 months | ** ** | **$**                   | **1,990**   |   | $ | 6,239 |   |
| Number of months over which loss in OCI is to be  recognized   | ** ** | **30**                  |        | 42 |   |

 

**12.****         ****Interest Expense, Net**

 

The following table summarizes interest expense,net:

 
| ** **                              | ** **   | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** **   |
|-----------------------------------------|--------------|------------------------------------------------------|------------|-----------------------------------------------------------|--------------|
| **(In thousands)**                 | ** **   | **2010**                                             | ** ** | **2009**                                                  | ** **   | **2010** | ** ** | **2009** | ** ** |
|                                    | *** *** | *** ***                                         | * *   | * *                                                  | *** *** | *** *** | * * | * * | * * |
| Interest expense — credit facility | ** **   | **$**                                                | **6,325**  |                                                      | $            | 6,272 | ** ** | **$** | **18,574** |   | $ | 19,266 |   |
| Payments on swap liabilities, net       | ** **   | **6,264**                                            |       | 7,833                                                     | ** **   | **18,727** |   | 22,685 |   |
| Other interest                          | ** **   | **165**                                              |       | 280                                                       | ** **   | **653** |   | 697 |   |
| Amortization of deferred financing fees | ** **   | **323**                                              |       | 323                                                       | ** **   | **970** |   | 970 |   |
| Uncertain tax position interest accrual | ** **   | **(1,265**                                           | **)**      | 109                                                       | ** **   | **(1,037** | **)** | 322 |   |
| Capitalized interest                    | ** **   | **(48**                                              | **)**      | (32                                                       | )            | **(133** | **)** | (99 | ) |
| Total interest expense                  | ** **   | **11,764**                                           |       | 14,785                                                    | ** **   | **37,754** |   | 43,841 |   |
| Less: interest income                   | ** **   | **(41**                                              | **)**      | (10                                                       | )            | **(79** | **)** | (47 | ) |
| Total interest expense, net             | ** **   | **$**                                                | **11,723** |                                                      | $            | 14,775 | ** ** | **$** | **37,675** |   | $ | 43,794 |   |

 

Forthe three and nine month periods ended September 30, 2010, we reversed anet $1.3 million and $1.0 million, respectively, of accrued interest as a resultof a change in our uncertain tax liabilities for which the statue oflimitations expired on September 30, 2010.

 

**13.****         ****Retirement and Pension Plans**

 

Wehave 401(k) plans covering substantially all of our employees.  We recognized expense with respect to theseplans of $0.6 million for each of the three month periods ended September 30,2010 and 2009, and $1.9 and $2.0 million for the nine month periods ended September 30,2010 and 2009, respectively. Contributions made under our defined contribution plans include a match,at the Company’s discretion, of employee salaries contributed to the plans.

 

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*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 nine month periods ended September 30:

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**           | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                              | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Service cost                      | ** ** | **$**                                                | **475**    |                                                | $          | 527 | ** ** | **$** | **1,409** |   | $ | 1,582 |   |
| Interest cost                     | ** ** | **2,799**                                            |       | 2,775                                               | ** ** | **8,367** |   | 8,325 |   |
| Expected return on plan assets    | ** ** | **(2,544**                                           | **)**      | (2,355                                              | )          | **(7,636** | **)** | (7,066 | ) |
| Net amortization loss             | ** ** | **211**                                              |       | 668                                                 | ** ** | **590** |   | 2,005 |   |
| Prior service credit amortization | ** ** | **(11**                                              | **)**      | (10                                                 | )          | **(33** | **)** | (32 | ) |
| Net periodic pension cost         | ** ** | **$**                                                | **930**    |                                                | $          | 1,605 | ** ** | **$** | **2,697** |   | $ | 4,814 |   |

 

*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 nine months ended September 30:

 
| ** **                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**   | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                      |       |                                                 |       |                                                |       |   |   |   |   |
| Service cost              | ** ** | **$**                                                | **—** |                                                | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost             | ** ** | **14**                                               |       | 14                                                  | ** ** | **44** |   | 42 |   |
| Net amortization loss     | ** ** | **8**                                                |       | 8                                                   | ** ** | **23** |   | 24 |   |
| Net periodic pension cost | ** ** | **$**                                                | **22**     |                                                | $          | 22 | ** ** | **$** | **67** |   | $ | 66 |   |

 

*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 

 

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deferredcompensation agreements totaled approximately $0.1 million for the three monthperiods ended September 30, 2010 and 2009 and $0.4 million for the ninemonth periods ended September 30, 2010 and 2009.  The net present value of the remainingobligations was approximately $2.9 million at September 30, 2010 and $3.1million 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 nine month periodsended September 30, 2010 or 2009 due to the receipt of life insuranceproceeds.  The excess of the cashsurrender value of the remaining life insurance policies over the notes payablebalances related to these policies is determined by an independent consultant,and totaled $1.3 million at September 30, 2010 and $1.8 million at December 31,2009.  These amounts are included ininvestments in the accompanying balance sheets. Cash principal payments for the policies and any proceeds from thepolicies are classified as operating activities in the statements of cash flows.

 

**14.****         ****Postretirement BenefitObligation**

 

Wesponsor a healthcare plan and life insurance plan that provides postretirementmedical benefits and life insurance to certain groups of retiredemployees.  Retirees share in the cost ofhealthcare benefits, making contributions that are adjusted periodically—eitherbased upon collective bargaining agreements or because total costs of theprogram have changed.  We generally paythe covered expenses 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 nine months ended September 30:

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                  | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                     | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Service cost                             | ** ** | **$**                                                | **206**    |                                                | $          | 177 | ** ** | **$** | **618** |   | $ | 610 |   |
| Interest cost                            | ** ** | **530**                                              |       | 450                                                 | ** ** | **1,591** |   | 1,609 |   |
| Net prior service cost amortization      | ** ** | **(112**                                             | **)**      | (240                                                | )          | **(336** | **)** | (722 | ) |
| Net amortization gain                    | ** ** | **—**                                           |       | (5                                                  | )          | **—** |   | (16 | ) |
| Net periodic postretirement benefit cost | ** ** | **$**                                                | **624**    |                                                | $          | 382 | ** ** | **$** | **1,873** |   | $ | 1,481 |   |

 

In March 2010, PresidentObama signed into law comprehensive health care reform legislation under thePatient Protection and Affordable Care Act and the Health Care and EducationReconciliation Act of 2010 (the “Acts”). Based on our analyses to date, we do not currently believe theprovisions within the Acts will result in a material remeasurement of ourpostretirement health care liabilities. We will continue to assess the accounting implications of the Acts asrelated regulations and interpretations of the Acts become available.  The actual extent of impact cannot beactuarially determined until related regulations are promulgated under the Actsand additional interpretations of the Acts become available.  Provisions within the Acts which may causefinancial impacts to our postretirement health care liabilities that 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.

 

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**15.****         ****Other Long-Term Liabilities**

 

Otherlong-term liabilities are as follows:

 
| **(In thousands)**                     | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                        |       |                         |       |                        |       |
| Long-term derivative liabilities            | ** ** | **$**                        | **25,402** |                        | $          | 26,105 |   |
| Uncertain tax positions                     | ** ** | **1,475**                    |       | 5,638                       |       |
| Accrued interest on uncertain tax positions | ** ** | **38**                       |       | 1,061                       |       |
| Other long-term liabilities                 | ** ** | **577**                      |       | 635                         |       |
| Total                                       | ** ** | **$**                        | **27,492** |                        | $          | 33,439 |   |

 

**16.****         ****Stock-based CompensationPlans**

 

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

 
| ** **              | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)** | ** ** | **2010**                                                   | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                    |       |                                                       |       |                                                |       |   |   |   |   |
| Restricted stock        | ** ** | **$**                                                      | **338**    |                                                | $          | 275 | ** ** | **$** | **1,015** |   | $ | 826 |   |
| Performance shares      | ** ** | **283**                                                    |       | 226                                                 | ** ** | **725** |   | 608 |   |
| Total                   | ** ** | **$**                                                      | **621**    |                                                | $          | 501 | ** ** | **$** | **1,740** |   | $ | 1,434 |   |

 

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

 

Asof September 30, 2010, we had not yet recognized compensation expense onthe following non-vested awards.

 
| **(Dollars in thousands)** | ** ** | **Non-recognized  Compensation** | ** ** | **Average Remaining  Recognition Period  (years)** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------------|------------|
|                                 |       |                             |       |                                                         |       |
| Restricted stock                     |       | $                                | 2,072      |                                                         | 1.3        |   |
| Performance shares                   |       | 1,425                            |       | 1.0                                                          |       |
| Total                                |       | $                                | 3,497      |                                                         | 1.2        |   |

 

Thefollowing table summarizes unvested restricted stock awards outstanding andchanges during the nine month periods ended September 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 |   |
| Shares cancelled                                                  | ** ** | **(2,875**                  | **)**      | **14.24**    |       | (2,375 | ) | 13.04 |   |
| Non-vested restricted shares outstanding — September 30 | ** ** | **192,449**                 | ** ** | **$**        | **15.99**  |   | 162,463 |   | $ | 12.30 |   |

 

----

(1)    Represents the weighted—averagefair value on date of grant.

 

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Thefollowing table summarizes unvested performance share-based restricted stockawards outstanding and changes during the nine month periods ended September 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 |   |
| Shares cancelled                                                    | ** ** | **(3,070**                  | **)**      | **15.75**    |       | (864 | ) | 12.09 |   |
| Non-vested performance shares outstanding —  September 30 | ** ** | **141,510**                 | ** ** | **$**        | **16.43**  |   | 90,615 |   | $ | 11.24 |   |

 

----

(1)   Represents the weighted—averagefair value on date of grant.

 

**17.****         ****Income Taxes**

 

Duringthe nine months ended September 30, 2010, we recorded a net decrease of$4.6 million to our liability for uncertain tax positions which reduced our taxexpense for the year to date period.  Thenet decrease included a decrease of $5.4 million due to the expiration of thefederal statute of limitations and an increase of $0.8 million related to 2009state income tax filings.  As ofSeptember 30, 2010 and December 31, 2009, we had recorded $1.1million and $5.7 million, respectively, of uncertain tax positions.  The total amount of uncertain tax positionsthat, if recognized, would affect the effective tax rate is $1.1 million.  We do not expect any changes in our uncertaintax positions during the remainder of 2010.

 

Ourpractice is to recognize interest and penalties related to income tax mattersin interest expense and general and administrative expense, respectively.  During the nine months ended September 30,2010, we recorded a net decrease to interest expense of $1.0 million related touncertain tax positions.  This netdecrease included a decrease of $1.4 million in interest expense due to theexpiration of the federal statute of limitations in the third quarter of 2010and an increase to interest expense of $0.4 million during the year related tothe current year accrual of interest on our uncertain tax positions.  At September 30, 2010, we had recorded$38 thousand of interest and penalties relating to uncertain tax positions, ofwhich $15 thousand was recorded during the nine months ended September 30,2010.

 

Theonly periods subject to examination for our federal returns are years 2007through 2009.  The periods subject toexamination for our state returns are years 2006 through 2009.  We are currently under examination by statetax authorities.  We do not expect anysettlement or payment that may result from the audit to have a material effecton our results of operations or cash flows.

 

Oureffective tax rate was (9.61)% and 25.5% for the three months ended September 30,2010 and 2009, respectively and 21.1% and 35.1%, for the nine months ended September 30,2010 and 2009, respectively.  Oureffective tax rate is lower in 2010 due primarily to the reversal of the net$4.6 million in uncertain tax positions. Our effective tax rates differ 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.

 

Wefiled 2009 tax returns for the Consolidated Communications Holdings, Inc.consolidated filing group and East Texas Fiber Line during the third quarter of2010.  We filed 2008 tax returns for theConsolidated Communications Holding, Inc. consolidated filing group andEast Texas Fiber Line 

 

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duringthe third quarter of 2009.  We recognizedapproximately $0.3 million of tax benefit in the third quarter of 2010 toadjust our 2009 provision to match our 2009 returns, and $0.9 million oftax benefit in the third quarter of 2009 to adjust our 2008 provision to matchour 2008 returns.

 

**18.****                              ****Accumulated Other Comprehensive Loss,**

 

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

 
| **(In thousands)**                                       | ** ** | **2010**    | ** **  | **2009** | ** ** |
|---------------------------------------------------------------|------------|-------------|-------------|----------|------------|
|                                                          |       |        |        |     |       |
| Fair value of cash flow hedges                                | ** ** | **$**       | **(35,399** | **)**    | $          | (31,891 | ) |
| Prior service credits and net losses on  postretirement plans | ** ** | **(23,985** | **)**       | (24,229  | )          |
|                                                          | ** ** | **(59,384** | **)**       | (56,120  | )          |
| Deferred taxes                                                | ** ** | **21,776**  |        | 20,580   |       |
| Totals                                                        | ** ** | **$**       | **(37,608** | **)**    | $          | (35,540 | ) |

 

Thecomponents of comprehensive income are as follows:

 
| ** **                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                             | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Net income                                                          | ** ** | **$**                                                | **11,967** |                                                | $          | 7,283 | ** ** | **$** | **26,192** |   | $ | 18,639 |   |
| Other comprehensive loss:                                           | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Prior service cost and net loss, net of tax                         | ** ** | **61**                                               |       | 259                                                 | ** ** | **156** |   | 780 |   |
| Change in fair value of cash flow hedges, net of  tax               | ** ** | **(1,061**                                           | **)**      | (143                                                | )          | **(2,224** | **)** | 6,540 |   |
| Total comprehensive income                                          | ** ** | **10,967**                                           |       | 7,399                                               | ** ** | **24,124** |   | 25,959 |   |
| Less: comprehensive income attributable to  noncontrolling interest | ** ** | **130**                                              |       | 226                                                 | ** ** | **385** |   | 769 |   |
| Comprehensive income attributable to common  stockholders           | ** ** | **$**                                                | **10,837** |                                                | $          | 7,173 | ** ** | **$** | **23,739** |   | $ | 25,190 |   |

 

**19.****                              ****Environmental Remediation Liabilities**

 

Environmentalremediation liabilities were $0.3 million at September 30, 2010 and December 31,2009, and are included in other liabilities. These liabilities, which relate to anticipated remediation andmonitoring costs, are undiscounted.  TheCompany believes the amount accrued is adequate to cover the remaining anticipatedcosts of remediation.

 

**20.****                              ****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 anddeposition stage.  In addition, we haveasked the 

 

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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.

 

**21.****                              ****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 thecalculation of earnings per share which we utilize in the calculation of basicand diluted earnings per share.

 
| ** **                                                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per share amounts)**                                     | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Basic Earnings Per Share Using Two-class Method:                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                                                | ** ** | **$**                                                | **11,967** |                                                | $          | 7,283 | ** ** | **$** | **26,192** |   | $ | 18,639 |   |
| Less: net income attributable to noncontrolling  interest                                                 | ** ** | **130**                                              |       | 226                                                 | ** ** | **385** |   | 769 |   |
| Net income attributable to common shareholders before  allocation of earnings to participating securities | ** ** | **11,837**                                           |       | 7,057                                               | ** ** | **25,807** |   | 17,870 |   |
| Less: earnings allocated to participating  securities                                                     | ** ** | **124**                                              |       | 90                                                  | ** ** | **305** |   | 271 |   |
| Net income attributable to common stockholders                                                            | ** ** | **$**                                                | **11,713** |                                                | $          | 6,967 | ** ** | **$** | **25,502** |   | $ | 17,599 |   |
|                                                                                                      | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| 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                                  | ** ** | **$**                                                | **0.40**   |                                                | $          | 0.24 | ** ** | **$** | **0.86** |   | $ | 0.60 |   |
|                                                                                                      | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Diluted Earnings Per Share Using Two-class Method:                                                        | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Net income                                                                                                | ** ** | **$**                                                | **11,967** |                                                | $          | 7,283 | ** ** | **$** | **26,192** |   | $ | 18,639 |   |
| Less: net income attributable to noncontrolling  interest                                                 | ** ** | **130**                                              |       | 226                                                 | ** ** | **385** |   | 769 |   |
| Net income attributable to common shareholders  before allocation of earnings to participating securities | ** ** | **11,837**                                           |       | 7,057                                               | ** ** | **25,807** |   | 17,870 |   |
| Less: earnings allocated to participating  securities                                                     | ** ** | **124**                                              |       | 90                                                  | ** ** | **305** |   | 271 |   |
| Net income attributable to common stockholders                                                            | ** ** | **$**                                                | **11,713** |                                                | $          | 6,967 | ** ** | **$** | **25,502** |   | $ | 17,599 |   |
|                                                                                                      | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Weighted-average number of common shares outstanding                                                      | ** ** | **29,483**                                           |       | 29,389                                              | ** ** | **29,483** |   | 29,388 |   |
|                                                                                                      |       |                                                 |       |                                                | ** ** | ** ** |   |   |   |
| Net income per common share attributable to common  stockholders - diluted                                | ** ** | **$**                                                | **0.40**   |                                                | $          | 0.24 | ** ** | **$** | **0.86** |   | $ | 0.60 |   |

 

Wehad additional potential dilutive securities including unvested restrictedshares and performance shares outstanding representing 0.3 million commonshares that were not included in the computation of potentially dilutivesecurities at either September 30, 2010 and 2009, because they wereanti-dilutive or the achievement of performance conditions had not been met atthe end of the period.

 

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**22.****         ****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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                       | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Telephone operations                                       | ** ** | **$**                                                | **87,297** |                                                | $          | 91,279 | ** ** | **$** | **263,793** |   | $ | 274,117 |   |
| Other operations                                           | ** ** | **8,279**                                            |       | 10,311                                              | ** ** | **25,822** |   | 31,225 |   |
| Total net revenue                                          | ** ** | **95,576**                                           |       | 101,590                                             | ** ** | **289,615** |   | 305,342 |   |
|                                                       | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Operating expense — telephone operations              | ** ** | **50,293**                                           |       | 52,128                                              | ** ** | **150,057** |   | 158,538 |   |
| Operating expense — other operations                  | ** ** | **7,764**                                            |       | 9,623                                               | ** ** | **23,782** |   | 29,385 |   |
| Total operating expense                                    | ** ** | **58,057**                                           |       | 61,751                                              | ** ** | **173,839** |   | 187,923 |   |
|                                                       | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Depreciation and amortization — telephone  operations | ** ** | **21,687**                                           |       | 21,043                                              | ** ** | **64,260** |   | 63,071 |   |
| Depreciation and amortization — other operations      | ** ** | **231**                                              |       | 298                                                 | ** ** | **660** |   | 927 |   |
| Total depreciation expense                                 | ** ** | **21,918**                                           |       | 21,341                                              | ** ** | **64,920** |   | 63,998 |   |
|                                                       | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Operating income — telephone operations               | ** ** | **15,317**                                           |       | 18,108                                              | ** ** | **49,476** |   | 52,508 |   |
| Operating income - other operations                        | ** ** | **284**                                              |       | 390                                                 | ** ** | **1,380** |   | 913 |   |
| Total operating income                                     | ** ** | **15,601**                                           |       | 18,498                                              | ** ** | **50,856** |   | 53,421 |   |
|                                                       | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Interest expense, net                                      | ** ** | **(11,723**                                          | **)**      | (14,775                                             | )          | **(37,675** | **)** | (43,794 | ) |
| Investment income                                          | ** ** | **6,830**                                            |       | 6,237                                               | ** ** | **20,268** |   | 18,046 |   |
| Other, net                                                 | ** ** | **210**                                              |       | (183                                                | )          | **(242** | **)** | 1,032 |   |
| Income before income taxes                                 | ** ** | **$**                                                | **10,918** |                                                | $          | 9,777 | ** ** | **$** | **33,207** |   | $ | 28,705 |   |
|                                                       | ** ** | ** **                                           |       |                                                |       |   |   |   |   |
| Capital expenditures:                                      | ** ** | ** **                                           |       |                                                |       |   |   |   |   |
| Telephone operations                                       | ** ** | **$**                                                | **10,735** |                                                | $          | 10,497 | ** ** | **$** | **32,479** |   | $ | 30,802 |   |
| Other operations                                           | ** ** | **19**                                               |       | 80                                                  | ** ** | **95** |   | 150 |   |
| Total                                                      | ** ** | **$**                                                | **10,754** |                                                | $          | 10,577 | ** ** | **$** | **32,574** |   | $ | 30,952 |   |

 
| ** **               | ** ** | **September 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) | ** ** | **$**                  | **1,198,837** |                  | $          | 1,214,329 |   |
| Other operations         | ** ** | **9,223**              |          | 12,278                |       |
| Total                    | ** ** | **$**                  | **1,208,060** |                  | $          | 1,226,607 |   |

 

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(1) Included within the telephone operations segment assets are our equity methodinvestments totaling $49.3 million and $49.6 million at September 30, 2010and December 31, 2009, respectively.

 

**23.****         ****Subsequent Events**

 

On October 21, 2010, our employees belonging to the CommunicationsWorkers of America Local 6218 approved a new three year contract with theCompany, effective as of October 16, 2010 and expiring on October 15,2013, which covers 180 bargained for employees at our Lufkin, TX and Conroe, TXlocations.

 

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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 nine month periods ended September 30,2010 and 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-looking statementsand should be evaluated as such. The words “anticipates”, “believes”, “expects”,“intends”, “plans”, “estimates”, “targets”, “projects”, “should”, “may”, “will”and similar words and expressions are intended to identify forward-lookingstatements.  These forward-lookingstatements are contained throughout this Report, including, but not limited to,statements found in this Part I — Item 2 — “Management’s Discussionand Analysis of Financial Condition and Results of Operations”, Part I —Item 3 — “Quantitative and Qualitative Disclosures about Market Risk” andPart II — Item 1 — “Legal Proceedings”. Such forward-looking statements reflect, among other things, our currentexpectations, plans, strategies, and anticipated financial results and involvea number of known and unknown risks, uncertainties, and factors that may causeour actual results to differ materially from those expressed or implied bythese 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 Internet access(“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 $11.8 million, or$0.40 per diluted share in the third of quarter of 2010, as compared to netincome attributable to common stockholders of $7.1 million, or $0.24 perdiluted share, in the third quarter of 2009. Net income in the third quarter of 2010 benefited primarily from areduction in both income tax and interest expense due to the reversal of taxliabilities previously recorded on uncertain tax positions.  The statute of limitations for theseuncertain tax positions expired on September 30, 2010.  Interest expense in the third quarter of 2010was also lower as a result of the expiration of fixed interest rate swaps in2009.  We also benefited in the thirdquarter of 2010 from lower selling, general and administrative costs andimproved earnings from our wireless partnerships.  Higher depreciation expense in the thirdquarter of 2010 as compared to 2009 also impacted results.  Operating expenses declined principally dueto lower pension expense and professional fees, and lower integration and restructuringcosts.  The operating expense reductionswere offset somewhat by higher video equipment and programming costs.  Operating expenses in the third quarter of2009 included $1.4 million of integration and restructuring expense for whichwe are receiving cost savings on an ongoing basis.

 

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Revenuein the third quarter of 2010 decreased to $95.6 million as compared to $101.6million in the third quarter of 2009. Decreased revenue in the third 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.  These were partially offset byincreases in DSL and IPTV subscriptions and increased revenue in our publicservices business.

 

Forthe first nine months of 2010, net income attributable to common stockholderstotaled $25.8 million, or $0.86 per diluted share, as compared to $17.9million, or $0.60 per diluted share, in the first nine months of 2009.  Net income in the first nine months of 2010benefited from lower tax and interest expense as a result of the reversal of liabilitiesfor uncertain tax positions, increased earnings from our wireless partnerships,significantly lower operating expenses and lower interest costs as a result ofinterest rate swaps expiring in the second half of 2009.  These were offset by higher depreciationexpense.  Operating expenses in the firstnine months of 2009 also included $5.4 million of integration and restructuringexpense.

 

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 wereceive, and most other revenue streams. We had 239,695, 247,235 and 250,370 local access lines, respectively, inservice as of September 30, 2010, December 31, 2009 and September 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:

 

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·                  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.

 

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 September 30, 2010, IPTV was available to approximately 203,000homes in our markets.  Our IPTVsubscriber base continues to grow and totaled 27,953, 23,127 and 21,518subscribers at September 30, 2010, December 31, 2009 and September 30,2009, respectively.

 

Wealso continue to experience growth in the number of DSL subscribers weserve.  We had 104,933, 100,122 and97,750 DSL lines in service as of September 30, 2010, December 31,2009 and September 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 ourcustomer base 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;

 

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·                  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.

 

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 $5.4 million of integration and restructuring expenses asexpected during the first nine months of 2009.

 

*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 on 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 September 30, 2010 is being amortized at aremaining weighted-average life of approximately 3.0 years.

 

**Resultsof Operations**

 

***Segments***

 

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

 

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

 

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

 
| ** **                                                    | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| **(In millions, except for percentages)** | ** ** | **$**      | ** ** | **%**      | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                                       |       |       |       |       |       |   |   |   |   |
| Telephone operations                                          |       |       |       |       |       |   |   |   |   |
| Local calling services                                        | ** ** | **$**      | **22.7**   | ** ** | **23.7**   |   | $ | 24.3 |   | 23.9 |   |
| Network access services                                       | ** ** | **19.9**   | ** ** | **20.8**   |       | 20.9 |   | 20.6 |   |
| Subsidies                                                     | ** ** | **12.7**   | ** ** | **13.3**   |       | 14.5 |   | 14.3 |   |
| Long-distance services                                        | ** ** | **4.4**    | ** ** | **4.6**    |       | 4.9 |   | 4.8 |   |
| Data and Internet services                                    | ** ** | **19.3**   | ** ** | **20.2**   |       | 17.4 |   | 17.1 |   |
| Other services                                                | ** ** | **8.3**    | ** ** | **8.7**    |       | 9.3 |   | 9.2 |   |
| Total telephone operations                                    | ** ** | **87.3**   | ** ** | **91.3**   |       | 91.3 |   | 89.9 |   |
| Other operations                                              | ** ** | **8.3**    | ** ** | **8.7**    |       | 10.3 |   | 10.1 |   |
|                                                          | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Total operating revenue                                       | ** ** | **95.6**   | ** ** | **100.0**  |       | 101.6 |   | 100.0 |   |
|                                                          | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Expenses                                                      | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Telephone operations                                          | ** ** | **50.3**   | ** ** | **52.6**   |       | 52.2 |   | 51.4 |   |
| Other operations                                              | ** ** | **7.8**    | ** ** | **8.2**    |       | 9.6 |   | 9.4 |   |
| Depreciation and amortization                                 | ** ** | **21.9**   | ** ** | **22.9**   |       | 21.3 |   | 21.0 |   |
| Total operating expense                                       | ** ** | **80.0**   | ** ** | **83.7**   |       | 83.1 |   | 81.8 |   |
|                                                          | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Income from operations                                        | ** ** | **15.6**   | ** ** | **16.3**   |       | 18.5 |   | 18.2 |   |
|                                                          | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Interest expense, net                                         | ** ** | **(11.7**  | **)**      | **(12.2**  | **)**      | (14.8 | ) | (14.6 | ) |
| Other income                                                  | ** ** | **7.0**    | ** ** | **7.4**    |       | 6.1 |   | 6.1 |   |
| Income tax benefit/(expense)                                  | ** ** | **1.0**    | ** ** | **1.0**    |       | (2.5 | ) | (2.5 | ) |
|                                                          | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Net income                                                    | ** ** | **11.9**   | ** ** | **12.4**   |       | 7.3 |   | 7.2 |   |
| Net income attributable to noncontrolling interest            | ** ** | **0.1**    | ** ** | **0.1**    |       | 0.2 |   | 0.2 |   |
|                                                          | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Net income attributable to common stockholders                | ** ** | **$**      | **11.8**   | ** ** | **12.3**   |   | $ | 7.1 |   | 7.0 |   |

 

*Revenue*

 

Revenuein the three month period ended September 30, 2010 declined by $6.0million, or 5.9%, to $95.6 million from $101.6 million in the three monthperiod ended September 30, 2009. Overall, the decline in revenue was principally the result of our exitof the telemarketing business in the first quarter of 2010 which had little tono impact on earnings, a decrease in subsidy revenue caused by a change to thenational average cost per loop component of the federal high cost fund, and bya reduction in the number of access lines which reduced revenue for localcalling services, network access services and long-distance, all partiallyoffset by revenue gains in our DSL and IPTV products.

 

Accessline loss has slowed in 2010 while the growth in the number of broadbandconnections continues to outpace the decline in access lines.  VOIP, DSL and IPTV connections all increasedduring the third quarter 2010 as compared to 2009.  Connections by type are as follows:

 

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| ** **                          | ** ** | **September 30,** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                | ** ** | ** **             |       |   |   |
| Residential access lines in service | ** ** | **141,980**            |       | 148,857 |   |
| Business access lines in service    | ** ** | **97,715**             |       | 101,513 |   |
| Total local access lines in service | ** ** | **239,695**            |       | 250,370 |   |
|                                | ** ** | ** **             |       |   |   |
| IPTV subscribers                    | ** ** | **27,953**             |       | 21,518 |   |
| ILEC DSL subscribers                | ** ** | **104,933**            |       | 97,750 |   |
| Total broadband connections         | ** ** | **132,886**            |       | 119,268 |   |
|                                | ** ** | ** **             |       |   |   |
| VOIP subscribers                    | ** ** | **8,770**              |       | 8,562 |   |
| CLEC access line equivalents (1)    | ** ** | **73,313**             |       | 71,723 |   |
|                                | ** ** | ** **             |       |   |   |
| Total connections                   | ** ** | **454,664**            |       | 449,923 |   |
|                                | ** ** | ** **             |       |   |   |
| Long-distance lines (2)             | ** ** | **172,030**            |       | 166,859 |   |
| Dial-up subscribers                 | ** ** | **1,559**              |       | 3,017 |   |

 

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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 $1.6 million, or 6.6%, to $22.7 million in the third quarter of2010 compared to $24.3 million in the third quarter of 2009.  The decrease is primarily due to a decline inlocal line revenue caused by lower access lines.  We continue to see access line lossmoderating.

 

*Network access services* revenuedecreased by $1.0 million, or 4.8%, to $19.9 million in the third quarter of2010 compared to $20.9 million in the third quarter of 2009.  The decrease is primarily due to a decline inswitched access minutes of use, and to a lesser extent, a decline in subscriberline charge revenue as a result of access line loss.

 

*Subsidy* revenuedecreased by $1.8 million, or 12.4%, to $12.7 million in the third quarter of2010 compared to $14.5 million in the third quarter of 2009.  The decrease is principally the result of achange to the national average cost per loop component of the federal high costfund along with a decline in interstate common line revenue.

 

*Long-distance services* revenuedecreased by $0.5 million, or 10.2%, to $4.4 million in the third quarter of2010 as compared to $4.9 million in the third quarter of 2009.  The decrease is primarily due to a decline inbillable minutes as a result of unlimited long-distance plans.

 

*Data and Internet* revenueincreased by $1.9 million, or 10.9%, to $19.3 million in the third quarter of2010 as compared to $17.4 million in the third quarter of 2009.  The increase is primarily due to an increasein the number of DSL and IPTV subscribers.

 

*Other services* revenuedeclined by $1.0 million, or 10.8%, to $8.3 million in the third quarter of2010 as compared to $9.3 million in the third quarter of 2009.  The decrease is primarily due to a decreasein transport revenues.

 

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Other Operations Revenue

 

OtherOperations revenue decreased by $2.0 million, or 19.4%, to $8.3 million in thethird quarter of 2010 as compared to $10.3 million in the third 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 and from our equipment sales and installation business.

 

*Operating Expenses*

 

Operatingexpenses decreased in the third quarter of 2010 by $3.7 million, or 6.0%, to$58.1 million as compared to $61.8 million in the third quarter of 2009 as aresult of management’s continued focus on cost control.  Reductions in operating expenses by segmentare discussed below.

 

Telephone Operations Operating Expenses

 

Operatingexpenses for Telephone Operations decreased by $1.9 million, or 3.6%, to $50.3million in the third quarter of 2010 as compared to $52.2 million in the thirdquarter of 2009.  The decrease inTelephone Operations operating expenses was principally driven by reducedprofessional fees and lower SG&A taxes, along with lower integration andrestructuring costs.  These were offsetsomewhat by higher video equipment and programming fees, higher interconnectioncosts and an increase in our provision for bad debt.  In 2009, we incurred $1.4 million inintegration and restructuring charges during the third quarter.

 

Other Operations Operating Expenses

 

Operatingexpenses for Other Operations decreased by $1.8 million, or 18.8%, to $7.8million in the third quarter of 2010 as compared to $9.6 million in the thirdquarter of 2009.  Operating expenses inour Other Operations Segment declined as a result of lower costs (includinglower salaries and benefits) related to the disposition of our telemarketingbusiness during the first quarter of 2010 offset somewhat by higher commissionsin our public services business and higher cost of sales in our equipment andinstallation business as a result of higher sales.

 

*Depreciation and Amortization*

 

Depreciationand amortization expense totaled $21.9 million during the third quarter of2010, as compared to $21.3 million in the third quarter of 2009.  Depreciation and amortization expenseincreased period over period primarily due to increased spending on videoequipment which has a relatively shorter depreciation life.

 

*Interest Expense, Net*

 

Interestexpense, net of interest income, declined by $3.1 million, or 20.9%, to $11.7million for the third quarter of 2010 as compared to $14.8 million in the thirdquarter of 2009.  Interest expense in thethird quarter of 2010 declined primarily as a result of the reversal of a net$1.3 million of interest expense related to uncertain tax positions for whichthe statute of limitations expired on September 30, 2010.  Interest expense during the third quarter of2010 also benefited from the expiration of $135 million of floating to fixedinterest rate swaps during the second half of 2009, as the fixed rates paid onthe swaps were at a significantly higher rate than the LIBOR rates we receivedin return.

 

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*Other Income (Expense)*

 

Otherincome increased $0.9 million to $7.0 million in the third quarter of 2010compared to $6.1 million in the third quarter of 2009.  The increase was principally the result ofimproved earnings from our wireless partnership interests.

 

*Income Taxes*

 

Ourprovision for income taxes was a $1.0 million benefit in 2010 as comparedto $2.5 million in income tax expense in 2009.  Our effective rate was (9.6)% for the thirdquarter of 2010 as compared to 25.5% for the third quarter of 2009.  During the third quarter of 2010, werecognized a net decrease of $4.6 million to our liability for uncertain taxpositions which reduced our tax expense for the period by a correspondingamount.  The net decrease included adecrease of $5.4 million due to the expiration of the federal statute oflimitations and an increase of $0.8 million related to 2009 state income taxfilings.  We also recognized approximately$0.3 million as a tax benefit in the third quarter of 2010 to adjust our 2009provision to match our 2009 returns versus $0.9 million of tax benefit inthe third quarter of 2009 to adjust our 2008 provision to match our 2008returns.  Exclusive of these adjustments,our effective tax rate for the third quarter of 2010 and 2009 would have beenapproximately 35.3% and 34.6%, respectively. Our effective tax rates differ 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.

 

*NetIncome Attributable to Noncontrolling Interest*

 

Thenet income attributable to noncontrolling interest was $0.1 million in thethird quarter of 2010 versus $0.2 million in the third quarter of 2009.

 

***For the Nine Months Ended September 30,2010 Compared to September 30, 2009***

 

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

 

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| ** **                                                    | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| **(In millions, except for percentages)** | ** ** | **$**      | ** ** | **%**      | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                                       |       |       |       |       |       |   |   |   |   |
| Telephone operations                                          |       |       |       |       |       |   |   |   |   |
| Local calling services                                        | ** ** | **$**      | **69.7**   | ** ** | **24.1**   |   | $ | 73.3 |   | 24.0 |   |
| Network access services                                       | ** ** | **62.0**   | ** ** | **21.4**   |       | 65.0 |   | 21.3 |   |
| Subsidies                                                     | ** ** | **36.7**   | ** ** | **12.7**   |       | 42.0 |   | 13.8 |   |
| Long-distance services                                        | ** ** | **13.8**   | ** ** | **4.8**    |       | 15.8 |   | 5.2 |   |
| Data and Internet services                                    | ** ** | **56.0**   | ** ** | **19.3**   |       | 50.5 |   | 16.5 |   |
| Other services                                                | ** ** | **25.6**   | ** ** | **8.8**    |       | 27.5 |   | 9.0 |   |
| Total telephone operations                                    | ** ** | **263.8**  | ** ** | **91.1**   |       | 274.1 |   | 89.8 |   |
| Other operations                                              | ** ** | **25.8**   | ** ** | **8.9**    |       | 31.2 |   | 10.2 |   |
|                                                          |       |       |       |       |       |   |   |   |   |
| Total operating revenue                                       | ** ** | **289.6**  | ** ** | **100.0**  |       | 305.3 |   | 100.0 |   |
|                                                          |       |       |       |       |       |   |   |   |   |
| Expenses                                                      | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Telephone operations                                          | ** ** | **150.1**  | ** ** | **51.8**   |       | 158.5 |   | 51.9 |   |
| Other operations                                              | ** ** | **23.8**   | ** ** | **8.2**    |       | 29.4 |   | 9.6 |   |
| Depreciation and amortization                                 | ** ** | **64.9**   | ** ** | **22.4**   |       | 64.0 |   | 21.0 |   |
| Total operating expense                                       | ** ** | **238.8**  | ** ** | **82.5**   |       | 251.9 |   | 82.5 |   |
|                                                          |       |       |       |       |       |   |   |   |   |
| Income from operations                                        | ** ** | **50.8**   | ** ** | **17.5**   |       | 53.4 |   | 17.5 |   |
|                                                          |       |       |       |       |       |   |   |   |   |
| Interest expense, net                                         | ** ** | **(37.6**  | **)**      | **(13.0**  | **)**      | (43.7 | ) | (14.3 | ) |
| Other income                                                  | ** ** | **20.0**   | ** ** | **6.9**    |       | 19.1 |   | 6.3 |   |
| Income tax expense                                            | ** ** | **(7.0**   | **)**      | **(2.4**   | **)**      | (10.1 | ) | (3.4 | ) |
|                                                          |       |       |       |       |       |   |   |   |   |
| Net income                                                    | ** ** | **26.2**   | ** ** | **9.0**    |       | 18.7 |   | 6.1 |   |
| Net income attributable to noncontrolling interest            | ** ** | **0.4**    | ** ** | **0.1**    |       | 0.8 |   | 0.2 |   |
|                                                          |       |       |       |       |       |   |   |   |   |
| Net income attributable to common stockholders                | ** ** | **$**      | **25.8**   | ** ** | **8.9**    |   | $ | 17.9 |   | 5.9 |   |

 

*Revenue*

 

Revenuein the first nine months of 2010 declined by $15.7 million, or 5.1%, to $289.6million from $305.3 million in the first nine months of 2009.  Overall, the decline in revenue was theresult of our exit from the telemarketing business which occurred during thefirst quarter of 2010, and from declines in revenue associated with our traditionalwireline telephone business including: local calling services, network access,subsidy payments and long-distance services. Declines in local access lines are being replaced by increases inbroadband connections.  VOIP, DSL andIPTV connections all increased during the first nine months of 2010 as comparedto 2009.

 

Telephone Operations Revenue

 

*Local calling services* revenuedecreased by $3.6 million, or 4.9%, to $69.7 million in the first nine monthsof 2010 compared to $73.3 million in the first nine months of 2009.  The decrease is primarily due a decline inlocal line revenues as a result of the decline in local access lines.  We continue to see lower line losses in 2010as compared to 2009.

 

*Network access services* revenuedecreased by $3.0 million, or 4.6%, to $62.0 million in the first nine monthsof 2010 compared to $65.0 million in the first nine months of 2009.  The decrease is primarily due to a decline inswitched access minutes of use, and to a lesser extent, a decline in special accessrevenue.  These decreases were partiallyoffset by higher universal service charge revenues billed to customers.

 

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*Subsidy* revenuedecreased by $5.3 million, or 12.6%, to $36.7 million in the first nine monthsof 2010 compared to $42.0 million in the first nine months of 2009.  The decrease is principally the result of achange in the national average cost per loop component of the federal high costfund, along with a decline in interstate common line revenue.

 

*Long-distance services* revenuedecreased by $2.0 million, or 12.7%, to $13.8 million in the first nine monthsof 2010 as compared to $15.8 million in the first nine months of 2009.  The decrease is primarily due to a decline inbillable minutes, primarily due to unlimited long-distance plans.

 

*Data and Internet* revenueincreased by $5.5 million, or 10.9%, to $56.0 million in the first nine monthsof 2010 as compared to $50.5 million in the first nine months of 2009.  The increase is primarily due to an increasein the number of DSL and IPTV subscribers.

 

*Other services* revenuedecreased $1.9 million, or 6.9%, to $25.6 million in the first nine months of2010 as compared to $27.5 million in the first nine months of 2009.  The decrease was primarily the result ofdecreases in transport and directory service revenues.

 

Other Operations Revenue

 

OtherOperations revenue decreased by $5.4 million, or 17.3%, to $25.8 million in thefirst nine months of 2010 as compared to $31.2 million in the first nine monthsof 2009.  The decline in revenueprincipally resulted from the sale of our telemarketing business in the firstquarter of 2010.  This decline waspartially offset by increases in revenue from our public services and equipmentsales and installation businesses.

 

*Operating Expenses*

 

Operatingexpenses decreased in the first nine months of 2010 by $14.0 million, or 7.5%,to $173.9 million as compared to $187.9 million in the first nine months of2009 as a result of management’s continued focus on cost control..  Reductions in operating expenses by segmentare discussed below.

 

Telephone Operations Operating Expenses

 

Operatingexpenses for Telephone Operations decreased by $8.4 million, or 5.3%, to $150.1million in the first nine months of 2010 as compared to $158.5 million in thefirst nine months of 2009.  The decreasein Telephone Operations operating expenses was principally driven by lowersalary and benefit expense, 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.  Duringthe first nine months of 2009, we incurred $5.4 million in integration and restructuringcharges that has resulted in ongoing cost savings.

 

Other Operations Operating Expenses

 

Operatingexpenses for Other Operations decreased by $5.6 million, or 19.0%, to $23.8million in the first nine months of 2010 as compared to $29.4 million in thefirst nine months of 2009.  Operatingexpenses in our Other Operations segment declined primarily as a result oflower costs related to the disposition of our telemarketing business during thefirst quarter of 2010 offset somewhat by higher commissions for our publicservices business as a result of higher sales.

 

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* *

*Depreciation and Amortization*

 

Depreciationand amortization expense totaled $64.9 million for the first nine months of2010 as compared to $64.0 million for the first nine months 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 $6.1 million, or 14.0%, to $37.6million in the first nine months of 2010 as compared to $43.7 million in thefirst nine months of 2009.  Interestexpense in the first nine months of 2010 benefited from a net $1.0 millionreversal of previously accrued interest related to uncertain tax positions andfrom the expiration of $135 million of floating to fixed interest rate swapsduring the second half of 2009, as the fixed rates paid on the swaps were at asignificantly higher rate than the LIBOR rates we received in return.

 

*Other Income (Expense)*

 

Otherincome was $20.0 million during the first nine months of 2010 as compared to$19.1 million during the first nine months of 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 $7.0 million for the first nine months of2010 compared to $10.1 million for the first nine months of 2009.  Our effective tax rate was 21.1% for the ninemonths ended September 30, 2010 compared to 35.1% for the nine monthsended September 30, 2009.  Duringthe nine months ended September 30, 2010, we recognized a net decrease of$4.6 million to our liability for uncertain tax positions which reduced our taxexpense for the year to date period by a corresponding amount.  The net decrease included a decrease of $5.4million due to the expiration of the federal statute of limitations and anincrease of $0.8 million related to 2009 state income tax filings.  We also recognized approximately $0.3 millionof tax benefit during the nine months ended September 30, 2010 to adjustour 2009 provision to match our 2009 returns versus $0.9 million of taxbenefit in the nine months ended September 30, 2009 to adjust our 2008provision to match our 2008 returns. Exclusive of these adjustments, our effective tax rate for the ninemonths ended September 30, 2010 and 2009 would have been approximately35.9% and 38.2%, 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.

 

*NetIncome Attributable to Noncontrolling Interest*

 

Thenet income attributable to noncontrolling interest totaled $0.4 million in thefirst nine months of 2010 versus $0.8 million in the first nine months of2009.  The income for our East TexasFiber Line, Inc. subsidiary (a joint venture owned 63% by the Company and37% by Eastex Celco) declined period over period.

 

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** **

**Liquidityand Capital Resources**

 

*Outlook and Overview*

 

Thefollowing table sets forth selected information concerning our financialcondition.

 
| **(Dollars in thousands)** | ** ** | **September 30,  2010** | ** ** | **December 31,   2009** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| Cash and cash equivalents            | ** ** | **$**                        | **55,961** |                              | $          | 42,758 |   |
| Working capital                      | ** ** | **49,113**                   |       | 30,488                            |       |
| Total debt                           | ** ** | **880,000**                  |       | 880,344                           |       |
| Current ratio                        | ** ** | **1.65**                     |       | 1.39                              |       |
|                                      |            |                              |            |                                   |            |  |  |

 

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 fourth quarter of2010 will arise primarily from: (i) dividend payments of between $11.5million and $12.0 million; (ii) interest payments on our indebtedness ofbetween $12.0 million and $13.0 million; (iii) capital expenditures ofbetween $8.5 million and $9.5 million; (iv) cash income tax payments; (v) pension,401(k) and other post retirement contributions of approximately $1.2million; and (vi) certain other costs. In addition, we may use cash and incur additional debt to fund selectiveacquisitions.  However, our ability touse cash may be limited by our other expected uses of cash, including ourdividend policy, and our ability to incur additional debt will be limited byour existing 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 nonstrategic assets, vendor financing or the privateor public sales of equity and debt securities. There can be no assurance that we will be able to generate sufficientcash flows from operations in the future, that anticipated revenue growth willbe realized, or that future borrowings or equity issuances will be available inamounts sufficient to provide adequate sources of cash to fund our expecteduses of cash.  Failure to obtain adequatefinancing, if necessary, could require us to significantly reduce ouroperations or level of capital expenditures which could have a material adverseeffect on our financial condition and the results of operations.

 

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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 be availableunder the revolving credit facility if necessary.

 

*Sourcesof Liquidity*

 

Ourcurrent principal sources of liquidity are cash and cash equivalents, cashavailable under our secured revolving credit facility, and cash provided byoperations.

 

*Cash and cash equivalents*.  For the first nine months of 2010, cash andcash equivalents increased by $13.2 million.

 

*Cash provided by operations*.  Net cash provided by operating activities inthe first nine months of 2010 was $79.7 million, as compared to cash providedby operating activities of $82.2 million in the first nine months of 2009.  Cash provided by operations in 2010 decreasedprimarily as a result of month end timing of accounts payable payments fromyear to year and from an increase in tax payments, offset partially by reducedpayments to our pension plans.

 

*Cash available under our secured revolving credit facility*.  At September 30, 2010, we had noborrowings outstanding under our secured revolving credit facility and $50million of availability.

 

*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 $11.5 million of cash to make dividend payments toshareholders during the third quarter of 2010 and 2009, respectively.  We used $34.7 million and $34.5 million ofcash to make dividend payments to shareholders during the first nine 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 third quarter of 2010, we used$12.7 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 nine months of 2010, we used$37.5 million of cash to make required interest payments on our outstandingdebt and $0.3 million of cash on our capital lease obligations.

 

*Pension and postretirement obligations*.  In the first nine months of 2010, we used$4.2 million of cash to fund pension, 401(k) and other postretirementobligations.

 

*Capital expenditures*.  We spent approximately $10.8 million in thethird quarter of 2010 on capital projects, and $32.6 million for the first ninemonths of 2010.

 

*Debt*

 

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

 

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| **(In thousands)**   | ** ** | **Balance** | ** ** | **Maturity Date** | ** **              | **Rate (1)** | ** **        |
|---------------------------|------------|-------------|------------|------------------------|-------------------------|-------------------|-------------------|
|                      |       |        |       |                   |                    |              |              |
| Revolving credit facility |       | $           | —     |                   | December 31,  2013 |              | LIBOR  plus 2.75% |   |
| Term loan                 |       | $           | 880,000    |                   | December 31,  2014 |              | LIBOR  plus 2.50% |   |

 

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(1)          As of September 30,2010, the 1-month LIBOR rate in effect on our borrowings was 0.26%.

 

*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 covenantswhich restrict our and our subsidiaries’ ability to incur additional debt andissue capital stock, create liens, repay other debt, sell assets, makeinvestments, loans, guarantees or advances, pay dividends, repurchase equityinterests or make other restricted payments, engage in affiliate transactions,make capital expenditures, engage in mergers, acquisitions or consolidations,enter into sale-leaseback transactions, amend specified documents, enter intoagreements that 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 September 30, 2010, we had no borrowings outstanding under therevolving credit facility.  Borrowingsunder our credit facilities bear interest at a rate equal to an applicable marginplus, at the borrowers’ election, either a “base rate” or LIBOR.  As of September 30, 2010, the applicablemargin for interest rates is 2.50% per year for the LIBOR-based term loan and2.75% for the revolving credit facility. The applicable margin for alternative base rate loans is 1.50% per yearfor the term loan and 1.75% for the revolving credit facility.  For the quarter ended September 30,2010, the weighted-average interest rate incurred on our term loan facility,including payments made under our interest rate swap agreement, was 5.58% perannum.  For the nine months ended September 30,2010, the weighted-average interest rate incurred on our term loan facility,including payments made under our interest rate swap agreement, was 5.59% perannum.

 

*DerivativeInstruments*

 

Asof September 30, 2010, we had $605 million notional amount of floating tofixed interest rate swap agreements outstanding and $605 million notionalamount of basis swaps outstanding.  Underthe floating 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 swaps are inplace to hedge the change in overall cash flows related to our term loan, thedriver of which is changes in the underlying variable interest rate.

 

Wealso have in place $200 million notional amount of forward floating to fixedinterest rate swap agreements that will become effective on December 31,2010 and a $100 million notional amount forward fixed to floating interest rateswap agreement that becomes effective on September 30, 2011.  Under the forward swap agreements that becomeeffective on December 31, 2010, we will make fixed payments to the swapcounterparties at a weighted-average fixed rate of 1.83% and receive 1-monthLIBOR.  The December 2010 forwardswap agreements have a maturity date of March 31, 2013.  For 

 

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theswap agreement that becomes effective on September 30, 2011, we will makefixed payments to the swap counterparty at a weighted-average fixed rate of1.65% and receive 1-month LIBOR.  The September 2011forward swap agreement has a maturity date of September 30, 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 September 30, 2010, and after taking into considerationdividend payments (including the $11.6 million dividend declared in August 2010and paid on November 1, 2010), we continue to have $125.9 million individend availability 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 2.25:1.00.  As of September 30, 2010, our total netleverage ratio was 4.79:1.00 and our interest coverage ratio was 3.59:1.00.

 

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.

 

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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 expect to seek refinancing, to fund a material expansion ofour 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 our abilityto obtain third-party financing.

 

*SuretyBonds*

 

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

 

**Subsequent Events**

 

On October 21, 2010, our employees belonging to the CommunicationsWorkers of America Local 6218 approved a new three year contract with theCompany, effective as of October 16, 2010 and expiring on October 15,2013, which covers 180 bargained for employees at our Lufkin, TX and Conroe, TXlocations.

 

**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 nine months of 2010, the interest rate on approximately $275.0million of our floating rate debt was not fixed through the use of interestrate swaps, thereby subjecting this portion of our debt to potential changes ininterest rates.   If market interestrates changed by 1.0% from the average rates that prevailed during the firstnine months of this year, interest expense would have increased or decreased byapproximately $2.1 million for this nine month period.

 

Asof September 30, 2010, the fair value of our interest rate swap agreementsamounted to a liability of $22.5 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 September 30, 

 

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2010.  Based upon that evaluation and subject to theforegoing, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures are effective.  No change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under the ExchangeAct) occurred during our fiscal quarter ended September 30, 2010 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol 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 claimsvigorously. In the third quarter of 2008, we filed preliminary objections andresponses to Salsgiver’s complaint. However, the court ruled against our preliminary objections.  On November 3, 2008, we responded toSalsgiver’s amended complaint and filed a counter-claim for trespass, allegingthat Salsgiver attached cables to our poles without an authorized agreement andin an unsafe manner.  We are currently inthe discovery and deposition stage.  Inaddition, we have asked the FCC Enforcement Bureau to address Salsgiver’sunauthorized pole attachments 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.         Risk Factors**

 

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.            Unregistered Sales of Equity Securities and Use ofProceeds**

 

**None**

 

**Item 3.            Defaults Upon Senior Securities**

 

**None**

 

**Item 4.           ****[Removed and Reserved]**

 

**Item 5.            Other Information**

 

**None**

 

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** **

**Item 6. Exhibits**

 

(a)   Exhibits

 

31.1         Certification of the Chief Executive Officerpursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

 

31.2         Certification of the Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1         Certification of the Chief Executive Officer andChief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant 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. |
|------------------------|--------------------------------------------------|
|                   |                                             |   |
| November 5,  2010 | By:                                              | /s/  Robert J. Currey |
|                   |                                             | Robert  J. Currey |
|                   |                                             | President  and Chief Executive Officer |
|                   |                                             | (Principal  Executive Officer) |
|                   |                                             |   |
| November 5,  2010 | By:                                              | /s/  Steven L. Childers |
|                   |                                             | Steven  L. Childers |
|                   |                                             | Chief  Financial Officer |
|                   |                                             | (Principal  Financial Officer and Chief Accounting Officer) |
|                        |                                                  |  |  |

 

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