10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

[     ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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	(IRS Employer
of incorporation or organization)	Identification No.)
121 South 17th Street, Mattoon, Illinois	61938-3987
(Address of principal executive offices)	(Zip Code)

  (217) 235-3311   

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X            No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    X             No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ____   Accelerated filer    X  

Non-accelerated filer___ (Do not check if a smaller reporting company)               Smaller reporting company ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                  No   X

On April 23, 2014, the registrant had 40,287,654 shares of Common Stock outstanding.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 6.	Exhibits	40
SIGNATURES		41

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; Amounts in thousands except per share amounts)

	Quarter Ended March 31,
	2014			2013
Net revenues	$	149,648		$	151,528
Operating expense:
Cost of services and products (exclusive of depreciation and amortization)	55,300			55,052
Selling, general and administrative expenses	32,864			33,305
Depreciation and amortization	35,542			34,841
Income from operations	25,942			28,330
Other income (expense):
Interest expense, net of interest income	(19,831		)	(24,600		)
Investment income	8,336			8,784
Other, net	(903		)	(107		)
Income from continuing operations before income taxes	13,544			12,407
Income tax expense	5,122			5,549
Income from continuing operations	8,422			6,858
Income from discontinued operations, net of tax	-			24
Net income	8,422			6,882
Less: net income attributable to noncontrolling interest	98			99
Net income attributable to common shareholders	$	8,324		$	6,783
Net income per common share - basic and diluted
Income from continuing operations	$	0.20		$	0.17
Income from discontinued operations	-			-
Net income per basic and diluted common share attributable to common shareholders	$	0.20		$	0.17
Dividends declared per common share	$	0.39		$	0.39

See accompanying notes.

1

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; Amounts in thousands)

	Quarter Ended March 31,
	2014		2013
Net income	$	8,422	$	6,882
Pension and post-retirement obligations:
Amortization of actuarial (gains) losses and prior service credit to earnings, net of tax	(136)		474
Derivative instruments designated as cash flow hedges:
Change in fair value of derivatives, net of tax	-		(32)
Reclassification of realized loss to earnings, net of tax	408		2,290
Comprehensive income	8,694		9,614
Less: comprehensive income attributable to noncontrolling interest	98		99
Total comprehensive income attributable to common shareholders	$	8,596	$	9,515

See accompanying notes.

2

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands except share and per share amounts)

	March 31,		December 31,
	2014		2013
ASSETS
Current assets:
Cash and cash equivalents	$	6,829	$	5,551
Accounts receivable, net	52,368		52,033
Income tax receivable	4,689		9,796
Deferred income taxes	7,960		7,960
Prepaid expenses and other current assets	14,151		12,380
Total current assets	85,997		87,720
Property, plant and equipment, net	875,467		885,362
Investments	112,585		113,099
Goodwill	603,446		603,446
Other intangible assets	37,628		40,084
Deferred debt issuance costs, net and other assets	17,891		17,667
Total assets	$	1,733,014	$	1,747,378
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,775	$	4,885
Advance billings and customer deposits	26,527		25,934
Dividends payable	15,607		15,520
Accrued compensation	17,333		22,252
Accrued interest	12,124		3,524
Accrued expense	31,008		35,173
Current portion of long-term debt and capital lease obligations	9,773		9,751
Current portion of derivative liability	694		660
Total current liabilities	120,841		117,699
Long-term debt and capital lease obligations	1,204,873		1,212,134
Deferred income taxes	180,023		179,859
Pension and other postretirement obligations	71,066		75,754
Other long-term liabilities	10,000		9,593
Total liabilities	1,586,803		1,595,039
Commitments and contingencies
Shareholders’ equity:
Common stock, par value $0.01 per share; 100,000,000 shares authorized, 40,287,654 and 40,065,246 shares outstanding as of March 31, 2014 and December 31, 2013, respectively	403		401
Additional paid-in capital	141,933		148,433
Retained earnings	-		-
Accumulated other comprehensive loss, net	(728)		(1,000)
Noncontrolling interest	4,603		4,505
Total shareholders’ equity	146,211		152,339
Total liabilities and shareholders’ equity	$	1,733,014	$	1,747,378

See accompanying notes.

3

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

	Three Months Ended March 31,
	2014		2013
Net cash provided by continuing operations	$	48,394	$	37,723
Net cash used in discontinued operations	-		(1,531)
Net cash provided by operating activities	48,394		36,192
Cash flows from investing activities:
Purchases of property, plant and equipment, net	(25,405)		(27,506)
Proceeds from sale of assets	1,241		21
Other	-		(84)
Net cash used in continuing operations	(24,164)		(27,569)
Net cash used in discontinued operations	-		(11)
Net cash used in investing activities	(24,164)		(27,580)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt	10,000		13,000
Payment of capital lease obligation	(157)		(85)
Payment on long-term debt	(17,275)		(15,310)
Dividends on common stock	(15,520)		(15,447)
Net cash used in financing activities	(22,952)		(17,842)
Increase (decrease) in cash and cash equivalents	1,278		(9,230)
Cash and cash equivalents at beginning of period	5,551		17,854
Cash and cash equivalents at end of period	$	6,829	$	8,624

See accompanying notes.

4

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Accounting

Consolidated Communications Holdings, Inc. (the “Company”, “we” or “our”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communications services to residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri.

We offer a wide range of telecommunications services to residential and business customers in the areas we serve. Our telecommunications services include local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, directory publishing, Competitive Local Exchange Carrier (“CLEC”) services and equipment sales.  As of March 31, 2014, we had approximately 254 thousand access lines, 122 thousand voice connections, 258 thousand data and Internet connections and 111 thousand video connections.

We historically operated our business as two separate reportable segments: Telephone Operations and Other Operations.  Based on changes in our business structure, during the quarter ended June 30, 2013 we concluded that we operate our business as one reportable segment. See the “Recent Business Developments” section below for a more detailed discussion regarding the circumstances that resulted in the change to our segment reporting.

In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of income, comprehensive income and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2013 Annual Report on Form 10-K filed with the SEC.

Recent Business Developments

Segment Reporting

Historically, we classified our operations into two separate reportable business segments: Telephone Operations and Other Operations.  Our Telephone Operations consisted of a wide range of telecommunications services to residential and business customers, including local and long-distance service, high-speed broadband Internet access, video services, VOIP services, custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  Our Other Operations segment operated two complementary non-core businesses including telephone services to state and county correctional facilities (“Prison Services”) and equipment sales.  As discussed below, our contract to provide telephone services to correctional facilities operated by the Illinois Department of Corrections was not renewed and the process of transitioning those services to another service provider was completed during the quarter ended March 31, 2013.  The remaining Prison Services assets and operations were classified as discontinued operations during the quarter ended June 30, 2013 and subsequently sold during the quarter ended September 30, 2013.  Prison Services comprised nearly all of the Other Operations segment revenue and results of operations.  Consequently, with the cessation of our Prison Services business and based on the segment accounting guidance, we concluded that we operate as one segment as of the quarter ended June 30, 2013. As required by the authoritative guidance for segment presentation, segment results of operations have been retrospectively adjusted to reflect this change for all periods presented.

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Prison Services Contract

We previously provided telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections and to certain county jails.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace us as the provider of those services with a competitor. Although we challenged our competitor’s bid and the State’s decision to accept that bid in a variety of different forums, during the quarter ended March 31, 2013, the process of transitioning these services to another service provider was completed. All related assets have been assessed for recoverability in light of this change and we determined that no impairment was necessary.

Discontinued Operations

On September 13, 2013, we completed the sale of the assets and contractual rights used to provide communications services to inmates in thirteen county jails located in Illinois for a total purchase price of $2.5 million.  In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations”, the financial results of the Prison Services business have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented. For a more complete discussion of the transaction, refer to Note 2.

Reclassifications

Certain amounts in our 2013 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2014 condensed consolidated financial statements, which consists of the effects of reclassifications from the presentation of Prison Services as a discontinued operation.

Recent Accounting Pronouncements

In April 2014, FASB issued the Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 revises the definition of a discontinued operation to limit the circumstances under which a disposal or classification as held for sale qualifies for presentation as a discontinued operation. Amendments in this ASU require expanded disclosures concerning a discontinued operation and the disposal of an individually-material component of an entity not qualifying as a discontinued operation. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014 and should be applied prospectively, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

Effective January 1, 2014, we adopted Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance concerning the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is present. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

2.  DISCONTINUED OPERATIONS

In September 2013, we completed the sale of the assets and contractual rights of our Prison Services business for a total cash purchase price of $2.5 million, which included the settlement of any pending legal matters.  The financial results of the operations for Prison Services, which were previously reported in the Other Operations segment, have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented.

The following table summarizes the financial information for the Prison Services operations for the quarter ended March 31, 2013:

6

	Quarter Ended March 31,
(In thousands)	2013
Operating revenues	$	4,767
Operating expenses including depreciation and amortization	4,699
Income from operations	68
Income tax expense	44
Income from discontinued operations	$	24

3. EARNINGS PER SHARE

The computation of basic and diluted earnings per share attributable to common shareholders computed using the two-class method is as follows:

	Quarter Ended
	March 31,
(In thousands, except per share amounts)	2014		2013
Income from continuing operations	$	8,422	$	6,858
Less: net income attributable to noncontrolling interest	98		99
Income attributable to common shareholders before allocation of earnings to participating securities	8,324		6,759
Less: earnings allocated to participating securities	153		132
Income from continuing operations attributable to common shareholders	8,171		6,627
Net income from discontinued operations	-		24
Net income attributable to common shareholders	$	8,171	$	6,651
Weighted-average number of common shares outstanding	39,877		39,755
Basic and diluted earnings per common share:
Income from continuing operations	$	0.20	$	0.17
Income from discontinued operations, net of tax	0.00		0.00
Net income per common share attributable to common shareholders	$	0.20	$	0.17

Diluted earnings per common share attributable to common shareholders for the quarters ended March 31, 2014 and 2013, excludes 0.2 million shares of potential common shares that could be issued under our share-based compensation plan, because the inclusion of the potential common shares would have had an antidilutive effect.

4. INVESTMENTS

Our investments are as follows:

	March 31,		December 31,
(In thousands)	2014		2013
Cash surrender value of life insurance policies	$	2,362	$	2,183
Cost method investments:
GTE Mobilnet of South Texas Limited Partnership (2.34% interest)	21,450		21,450
Pittsburgh SMSA Limited Partnership (3.60% interest)	22,950		22,950
CoBank, ACB Stock	5,147		5,112
Other	200		200
Equity method investments:
GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)	27,141		27,467
Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest)	7,533		7,696
Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)	23,866		24,105
CVIN, LLC (13.455% interest)	1,936		1,936
Totals	$	112,585	$	113,099

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Cost Method

We own 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”).  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas.  We also own 3.60% of Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we use the cost method to account for both of these investments.  It is not practicable to estimate fair value of these investments.  We did not evaluate any of the investments for impairment during the quarters ended March 31, 2014 or 2013 as no factors indicating impairment existed.  For the three-month periods ended March 31, 2014 and 2013, we received cash distributions from these partnerships totaling $3.5 million and $4.0 million, respectively.

CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers.  On an annual basis, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which has traditionally been a significant lender in the Company’s credit facility.  The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.

Equity Method

We own 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6 (I) and RSA 6 (II) provide cellular service in and around our Pennsylvania service territory.  Because we have significant influence over the operating and financial policies of these three entities, we account for the investments using the equity method.  For the quarters ended March 31, 2014 and 2013, we received cash distributions from these partnerships totaling $5.6 million and $4.1 million, respectively.

We have a 13.455% interest in Central Valley Independent Network, LLC (“CVIN”), a joint enterprise comprised of affiliates of several independent telephone companies located in central and northern California. CVIN provides network services and oversees a broadband infrastructure project designed to expand and improve the availability of network services to counties in central California.  Because we have significant influence over the operating and financial policies of this entity, we account for this investment using the equity method.  During the quarter ended March 31, 2013, we made an additional capital investment of $0.1 million in this partnership.  We did not receive any distributions from this partnership during the quarters ended March 31, 2014 and 2013.

The combined unaudited results of operations and financial position of our three equity investments in the cellular limited partnerships are summarized below:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Total revenues	$	80,816	$	76,719
Income from operations	25,562		23,973
Net income before taxes	25,585		23,985
Net income	25,585		23,985
	March 31,		December 31,
(In thousands)	2014		2013
Current assets	$	52,843	$	54,837
Non-current assets	88,635		87,968
Current liabilities	14,584		15,221
Non-current liabilities	2,166		1,786
Partnership equity	124,731		125,799

5.FAIR VALUE MEASUREMENTS

Our derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using valuation models which rely on the expected London Interbank Offered Rate (“LIBOR”) based yield curve and estimates of counterparty and Consolidated’s non-performance risk as the most significant inputs.  Because each of these inputs are directly observable or can be corroborated by observable market data, we have categorized these interest rate swaps as

8

Level 2 within the fair value hierarchy. See Note 7 for further discussion regarding our interest rate swap agreements.

Our interest rate swap liabilities measured at fair value on a recurring basis and subject to disclosure requirements at March 31, 2014 and December 31, 2013 were as follows:

			As of March 31, 2014
			Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Current interest rate swap liabilities	$	(694)	$	–	$	(694)	$	–
Long-term interest rate swap liabilities		(1,727)		–		(1,727)		–
Total	$	(2,421)	$	–	$	(2,421)	$	–

			As of December 31, 2013
			Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Current interest rate swap liabilities	$	(660)	$	–	$	(660)	$	–
Long-term interest rate swap liabilities	(1,959)		–		(1,959)		–
Total	$	(2,619)	$	–	$	(2,619)	$	–

We have not elected the fair value option for any of our financial assets or liabilities.  The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.  The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of March 31, 2014 and December 31, 2013.

	As of March 31, 2014				As of December 31, 2013
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investments, equity basis	$	60,476	n/a		$	61,204	n/a
Investments, at cost	$	49,747	n/a		$	49,712	n/a
Long-term debt	$	1,209,681	$	1,265,299	$	1,216,764	$	1,261,508

Cost & Equity Method Investments

Our investments at March 31, 2014 and December 31, 2013 accounted for under both the equity and cost methods consisted primarily of minority positions in various cellular telephone limited partnerships and our investment in CoBank.  These investments are recorded using either the equity or cost methods. It is impracticable to determine fair value of these investments.

Long-term Debt

The fair value of our long-term debt was estimated using a discounted cash flow analyses based on incremental borrowing rates for similar types of borrowing arrangements.  We have categorized the long-term debt as Level 2 within the fair value hierarchy.

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6.LONG-TERM DEBT

Long-term debt, presented net of unamortized discounts, consisted of the following:

	March 31,		December 31,
(In thousands)	2014		2013
Senior secured credit facility:
Term Loan 4, net of discount of $4,391 and $4,537 at March 31, 2014 and December 31, 2013, respectively	$	903,334	$	905,463
Revolving loan	8,000		13,000
Senior notes, net of discount of $1,653 and $1,699 at March 31, 2014 and December 31, 2013, respectively	298,347		298,301
Capital leases	4,965		5,121
	1,214,646		1,221,885
Less: current portion of long-term debt and capital leases	(9,773)		(9,751)
Total long-term debt	$	1,204,873	$	1,212,134

Credit Agreement

In December 2013, the Company, through certain of its wholly owned subsidiaries, entered into a Second Amended and Restated Credit Agreement with various financial institutions (the “Credit Agreement”) to replace the Company’s previously amended credit agreement.  The Credit Agreement consists of a $75.0 million revolving credit facility and initial term loans in the aggregate amount of $910.0 million (“Term 4”).  The proceeds from the Credit Agreement were used to repay the outstanding term loans from the previous agreement in its entirety.  The Credit Agreement also includes an incremental term loan facility which provides the ability to borrow up to $300.0 million of incremental term loans subject to certain terms and conditions.  Borrowings under the senior secured credit facility are secured by substantially all of the assets of the Company and its subsidiaries, with the exception of Illinois Consolidated Telephone Company and our majority-owned subsidiary, East Texas Fiber Line Incorporated.

The Term 4 loan was issued in an original aggregate principal amount of $910.0 million with a maturity date of December 23, 2020, but is subject to earlier maturity on December 31, 2019 if the Company’s unsecured Senior Notes due in 2020 (“Senior Notes”) are not repaid or redeemed in full by December 31, 2019.  The Term 4 loan contains an original issuance discount of $4.6 million, which is being amortized over the term of the loan.  The Term 4 loan requires quarterly principal payments of $2.3 million, which commenced March 31, 2014, and has an interest rate of LIBOR plus 3.25% subject to a 1.00% LIBOR floor.

Our revolving credit facility has a maturity date of December 23, 2018 and an applicable margin (at our election) of between 2.50% and 3.25% for LIBOR-based borrowings or between 1.50% and 2.25% for alternate base rate borrowings, depending on our leverage ratio.  Based on our leverage ratio at March 31, 2014, the borrowing margin for the next three month period ending June 30, 2014 will be at a weighted-average margin of 3.00% for a LIBOR-based loan or 2.00% for an alternate base rate loan.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.  As of March 31, 2014 and December 31, 2013, borrowings of $8.0 million and $13.0 million were outstanding under the revolving credit facility, respectively.  A stand-by letter of credit of $0.9 million, issued in connection with the Company’s insurance coverage, was outstanding under our revolving credit facility as of March 31, 2014.  The stand-by letter of credit is renewable annually and reduces the borrowing availability under the revolving credit facility.

The weighted-average interest rate on outstanding borrowings under our credit facility was 4.24% and 4.23% at March 31, 2014 and December 31, 2013, respectively.  Interest is payable at least quarterly.

Net proceeds from asset sales exceeding certain thresholds, to the extent not reinvested, are required to be used to repay loans outstanding under the Credit Agreement.

Credit Agreement Covenant Compliance

The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue capital stock.  We have agreed to maintain

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certain financial ratios, including interest coverage and total net leverage ratios, all as defined in the Credit Agreement.  As of March 31, 2014, we were in compliance with the Credit Agreement covenants.

In general, our Credit Agreement restricts our ability to pay dividends to the amount of our Available Cash as defined in our Credit Agreement.  As of March 31, 2014, and including the $15.6 million dividend declared in February 2014 and paid on May 1, 2014, we had $215.6 million in dividend availability under the credit facility covenant.

Under our Credit Agreement, if our total net leverage ratio (as 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 our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to fund acquisitions, or make other investments.  During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in Available Cash, among other things.  In addition, we will not be permitted to pay dividends if an event of default under the Credit Agreement has occurred and is continuing.  Among other things, it will be an event of default if our total net leverage ratio and interest coverage ratio as of the end of any fiscal quarter is greater than 5.25:1.00 and less than 2.25:1.00, respectively.  As of March 31, 2014, our total net leverage ratio under the Credit Agreement was 4.27:1.00, and our interest coverage ratio was 3.52:1.00.

Senior Notes

On May 30, 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% unsecured Senior Notes, due 2020 through our wholly-owned subsidiary, Consolidated Communications Finance Co. (“Finance Co.”) for the acquisition of SureWest Communications (“SureWest”).  The Senior Notes will mature on June 1, 2020 and earn interest at a rate of 10.875% per year, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2012.  The Senior Notes were sold in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) and outside the United States in compliance with Regulation S under the Securities Act.  In addition, some of the Senior Notes were sold to certain “accredited investors” (as defined in Rule 501 under the Securities Act).  The Senior Notes were sold to investors at a price equal to 99.345% of the principal amount thereof, for a yield to maturity of 11.00%.  This discount is being amortized over the term of the Senior Notes.  Upon closing of the SureWest acquisition on July 2, 2012, Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., (“CCI”) which assumed the Senior Notes, and we and certain of our subsidiaries fully and unconditionally guaranteed the Senior Notes.  On August 3, 2012, SureWest and its subsidiaries guaranteed the Senior Notes.

In 2013, we completed an exchange offer to issue registered notes (“Exchange Notes”) for $287.3 million of the original Senior Notes.  The terms of the Exchange Notes are substantially identical to the Senior Notes, except that the Exchange Notes are registered under the Securities Act and the transfer restrictions and registration rights applicable to the Senior Notes do not apply to the Exchange Notes.  The exchange offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.

Senior Notes Covenant Compliance

The indenture governing the Senior Notes contains customary covenants for high yield notes, which limits CCI’s and its restricted subsidiaries’ ability to: incur debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions.

Among other matters, the Senior Notes indenture provides that CCI may not pay dividends or make other “restricted payments” to the Company if its total net leverage ratio is 4.25:1.00 or greater.  This ratio is calculated differently than the comparable ratio under the Credit Agreement; among other differences, it takes into account on a pro forma basis synergies expected to be achieved as a result of the SureWest acquisition but not yet reflected in historical results.  At March 31, 2014, this ratio was 4.23:1.00.  If this ratio is met, dividends and other restricted payments may be made from cumulative consolidated cash flow since the date the Senior Notes were issued, less 1.75 times fixed charges, less dividends and other restricted payments made since the date the Senior Notes were issued.  Dividends may be paid and other restricted payments may also be made from a “basket” of $50.0 million, none of which has been used to date, and pursuant to other exceptions identified in the Senior

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Notes indenture.  Since dividends of $124.1 million have been paid since May 30, 2012, at March 31, 2014 there was $178.6 million of the $302.7 million of cumulative consolidated cash flow since May 30, 2012 available to pay dividends.

On March 19, 2014, CCI commenced a solicitation of consents from the eligible holders of the Senior Notes in order to amend the indenture governing the Senior Notes to (i) modify CCI’s Consolidated Leverage Ratio (as defined in the indenture governing the Senior Notes) level required before CCI (subject to certain other conditions specified in the indenture) can make Restricted Payments (as defined in the indenture) otherwise available under the consolidated cash flow builder basket from 4.25:1.00 to 4.50:1.00 and (ii) modify the size of a permitted lien basket for liens securing Indebtedness (as defined in the indenture) by amending the multiplier for CCI’s Consolidated Cash Flow (as defined in the indenture) in the calculation of such permitted lien basket from 2.50 to 2.75.  On April 1, 2014, the required consent of the holders of the Senior Notes was obtained and the consent solicitation expired, and we entered into a supplemental indenture effecting the proposed amendments as provided in the consent solicitation.  The amendment to the indenture with respect to modifying the size of a permitted lien basket for liens securing Indebtedness modified such provision in the indenture so that it would be the same as the equivalent provision in our Credit Agreement.  In connection with entering into the supplemental indenture, we paid consent fees of approximately $2.5 million, during the second quarter ended June 30, 2014, to the holders of the Senior Notes who validly consented to the proposed amendment.  The consent fees will be capitalized as deferred debt issuance costs and amortized over the term of the Senior Notes.

Capital Leases

As of March 31, 2014, we had seven capital leases which expire between 2015 and 2021.  As of March 31, 2014, the present value of the minimum remaining lease commitments was approximately $5.0 million, of which $0.7 million was due and payable within the next twelve months.  The leases require total remaining rental payments of $7.5 million as of March 31, 2014, of which $5.6 million will be paid to LATEL LLC, a related party entity.

7.DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative financial instruments to manage our exposure to the risks associated with fluctuations in interest rates. Our interest rate swap agreements effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  Derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet.  We may designate certain of our interest rate swaps as cash flow hedges of our expected future interest payments.  For derivative instruments designated as a cash flow hedge, the effective portion of the change in the fair value is recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and is recognized as an adjustment to earnings over the period in which the hedged item impacts earnings. When an interest rate swap agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt obligation.  If a derivative instrument is de-designated, the remaining gain or loss in AOCI on the date of de-designation is amortized to earnings over the remaining term of the hedging instrument. For derivative financial instruments that are not designated as a hedge, including those that have been de-designated, changes in fair value are recognized on a current basis in earnings.  The ineffective portion of the change in fair value of any hedging derivative is recognized immediately in earnings.  Cash flows from hedging activities are classified under the same category as the cash flows from the hedged items in our condensed consolidated statement of cash flows.

The following interest rate swaps were outstanding at March 31, 2014:

(In thousands)	Notional  Amount		2014 Balance Sheet Location	Fair Value
De-designated Hedges:
Fixed to 1-month floating LIBOR	$	150,000	Other long-term liabilities	$	(1,581)
Fixed to 1-month floating LIBOR	125,000		Current portion of derivative liability	(694)
Fixed to 1-month floating LIBOR (with floor)	50,000		Other long-term liabilities	(146)
Total Fair Values				$	(2,421)

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The following interest rate swaps were outstanding at December 31, 2013:

(In thousands)	Notional  Amount		2013 Balance Sheet Location	Fair Value
De-designated Hedges:
Fixed to 1-month floating LIBOR	$	175,000	Other long-term liabilities	$	(1,897)
Fixed to 1-month floating LIBOR	100,000		Current portion of derivative liability	(660)
Fixed to 1-month floating LIBOR (with floor)	50,000		Other long-term liabilities	(62)
Total Fair Values				$	(2,619)

As of March 31, 2014, the counterparties to our various swaps are four major U.S. and European banks.  None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties.  The swaps of any counterparty that is a “Lender” as defined in our credit facility are secured along with the other creditors under the credit facility.  Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties.  This provision allows us to partially mitigate the risk of non-performance by a counterparty.

In December 2013, $325.0 million notional interest rate swaps previously designated as cash flow hedges were de-designated as a result of the amendment to our Credit Agreement on December 23, 2013 as discussed in Note 6.  The interest rate swap agreements mature on various dates through September 2016.  In December 2012, interest rate swaps with an aggregate notional value of $660.0 million were de-designated as cash flow hedges in connection with the amendment to our previous credit agreement on December 4, 2012.  Of these agreements, $200.0 million notional interest rate swap agreements expired on December 31, 2012 and the remainder expired on March 31, 2013.  Prior to de-designation, the effective portion of the change in fair value of the interest rate swaps were recognized in AOCI.  The balance of the unrealized loss included in AOCI as of the date the swaps were de-designated is amortized to earnings over the remaining term of the swap agreements.  Changes in fair value of the de-designated swaps are immediately recognized in earnings as interest expense.  During the quarters ended March 31, 2014 and 2013, a gain of $0.2 million and $2.1 million, respectively, was recognized as a reduction to interest expense for the change in fair value of the de-designated swaps.

At March 31, 2014 and December 31, 2013, the pre-tax deferred losses related to our interest rate swap agreements included in AOCI were $2.0 million and $2.6 million, respectively.  The estimated amount of losses included in AOCI as of March 31, 2014 that will be recognized in earnings in the next twelve months is approximately $1.6 million.

Information regarding our cash flow hedge transactions is as follows:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Loss recognized in AOCI, pretax	$	-	$	(52)
Deferred losses reclassed from AOCI to interest expense	$	(659)	$	(3,641)

8.EQUITY

Share-Based Compensation

The following table summarizes total compensation costs recognized for share-based payments during the quarters ended March 31, 2014 and 2013:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Restricted stock	$	517	$	456
Performance shares	267		200
Total	$	784	$	656

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Stock-based compensation expense is included in “selling, general and administrative expenses” in the accompanying statements of income.

As of March 31, 2014, total unrecognized compensation costs related to nonvested Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”) was $7.0 million and will be recognized over a weighted-average period of approximately 1.7 years.

The following table summarizes the RSA and PSA activity for the quarter ended March 31, 2014:

	RSAs			PSAs
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Non-vested shares outstanding - January 1, 2014	123,501	$	17.32	64,266	$	17.96
Shares granted	131,281	$	19.74	91,127	$	17.13
Non-vested shares outstanding - March 31, 2014	254,782			155,393

Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component for the quarter ended March 31, 2014:

	Pension and
	Post-Retirement		Derivative
(In thousands)	Obligations		Instruments		Total
Balance at December 31, 2013	$	643	$	(1,643)	$	(1,000)
Amounts reclassified from accumulated other comprehensive income	(136)		408		272
Net current period other comprehensive income	(136)		408		272
Balance at March 31, 2014	$	507	$	(1,235)	$	(728)

The following table summarizes reclassifications from accumulated other comprehensive loss for the quarters ended March 31, 2014 and 2013:

	Amount Reclassified from AOCI
	Quarter Ended March 31,				Affected Line Item in the
(In thousands)	2014		2013		Statement of Income
Amortization of pension and post-retirement items:
Prior service credit	$	80	$	116	(a)
Actuarial gain (loss)	142		(891)		(a)
	222		(775)		Total before tax
	(86)		301		Tax (expense) benefit
	$	136	$	(474)	Net of tax
Loss on cash flow hedges:
Interest rate derivatives	$	(659)	$	(3,641)	Interest expense
	251		1,351		Tax benefit
	$	(408)	$	(2,290)	Net of tax

(a)  These items are included in the components of net periodic benefit cost for our pension and post-retirement benefit plans.  See Note 9 for additional details.

9.PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

Defined Benefit Plans

We sponsor a qualified defined benefit pension plan (“Retirement Plan”) that is non-contributory covering certain of our hourly employees who fulfill minimum age and service requirements.  Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.  In April 2013, the

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Retirement Plan was amended for certain employees under collective bargaining agreements to among other things: (i) change the benefit formula to a cash balance account as of May 1, 2013 and (ii) freeze entrance into the Retirement Plan so that no person is eligible to become a participant on or following May 1, 2013.  As of May 2013, all employees under collective bargaining agreements that include a defined benefit plan are on a cash balance plan.

In connection with our acquisition of SureWest, we assumed sponsorship in 2012 of a frozen non-contributory defined benefit pension plan (the “SureWest Plan”).  The SureWest Plan covers certain eligible employees and benefits are based on years of service and the employee’s average compensation during the five highest consecutive years of the last ten years of credited service.  This plan has previously been frozen so that no person is eligible to become a new participant and all future benefit accruals for existing participants have ceased.   As of January 1, 2014, the SureWest Plan was merged into and consolidated with the Retirement Plan.

We also have two non-qualified supplemental retirement plans (“Supplemental Plans”): the Restoration Plan, which we acquired as part of our North Pittsburgh Systems, Inc. (“North Pittsburgh”) and TXU Communications Venture Company (“TXUCV”) acquisitions, and a Supplemental Executive Retirement Plan (“SERP”), which we acquired as part of our acquisition of SureWest.  The Supplemental Plans provide supplemental retirement benefits to certain former employees by providing for incremental pension payments to partially offset the reduction that would have been payable under the qualified defined benefit pension plans if it were not for limitations imposed by federal income tax regulations. Both plans have previously been frozen so that no person is eligible to become a new participant in the Supplemental Plans.  These plans are unfunded and have no assets.  The benefits paid under the Supplemental Plans are paid from the general operating funds of the Company.

The following table summarizes the components of net periodic pension cost for our defined benefit plans for the quarters ended March 31, 2014 and 2013:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Service cost	$	140	$	304
Interest cost	4,073		3,862
Expected return on plan assets	(5,777)		(5,151)
Net amortization loss	5		891
Prior service credit amortization	(115)		(71)
Net periodic pension benefit	$	(1,674)	$	(165)

Other Non-qualified Deferred Compensation Agreements

We also are liable for deferred compensation agreements with former members of the board of directors and certain other former employees of a subsidiary of TXUCV, which was acquired in 2004.  The benefits are payable for up to the life of the participant or to the beneficiary upon the death of the participant and may begin as early as age 55.  Participants accrue no new benefits as these plans had previously been frozen by TXUCV’s predecessor company prior to our acquisition of TXUCV.  Payments related to the deferred compensation agreements totaled approximately $0.1 million for each of the quarters ended March 31, 2014 and 2013.  The net present value of the remaining obligations was approximately $1.7 million and $1.8 million at March 31, 2014 and December 31, 2013, respectively, and is included in pension and post-retirement benefit obligations in the accompanying condensed consolidated balance sheets.

We also maintain 34 life insurance policies on certain of the participating former directors and employees.  The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $2.4 million at March 31, 2014 and $2.2 million at December 31, 2013.  These amounts are included in investments in the accompanying condensed consolidated balance sheets.  Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the condensed consolidated statements of cash flows.  We did not recognize any life insurance proceeds during the quarters ended March 31, 2014 and 2013.

Post-retirement Benefit Obligations

We sponsor a healthcare and life insurance plan (“Post-retirement Plan”) that provides post-retirement medical benefits and life insurance to certain groups of retired employees.  Retirees share in the cost of healthcare benefits,

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making contributions that are adjusted periodically—either based upon collective bargaining agreements or because total costs of the program have changed.  Covered expenses for retiree health benefits are paid as they are incurred.  Post-retirement life insurance benefits are fully insured.  The Post-retirement Plan is unfunded and has no assets, and benefits are paid from the general operating funds of the Company.

In connection with the acquisition of SureWest in 2012, we acquired its post-retirement benefit plan which provides life insurance benefits and a stated reimbursement for Medicare supplemental insurance to certain eligible retired participants.  This plan has previously been frozen so that no person is eligible to become a new participant.  Employer contributions for retiree medical benefits are separately designated within the SureWest Plan pension trust for the sole purpose of providing payments of retiree medical benefits.  The nature of the assets used to provide payment of retiree medical benefits is the same as that of the SureWest Plan.

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Service cost	$	90	$	232
Interest cost	355		391
Expected return on plan assets	(55)		(58)
Net amortization (gain) loss	(147)		-
Net prior service cost (credit) amortization	35		(45)
Net periodic postretirement benefit cost	$	278	$	520

Contributions

We expect to contribute approximately $15.5 million to our pension plans and $2.5 million to our other post-retirement plans in 2014.  As of March 31, 2014, we have contributed $2.7 million and $0.7 million of the annual contribution to the pension plans and other post-retirement plans, respectively.

10.  INCOME TAXES

We did not have any unrecognized tax benefits as of March 31, 2014 and December 31, 2013.

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At March 31, 2014, we did not have a material liability for interest or penalties and had no material interest or penalty expense.

The periods subject to examination for our federal return are years 2010 through 2012.  The periods subject to examination for our state returns are years 2005 through 2012.  We are currently under examination by federal and state taxing authorities.  We have received proposed assessments in connection with our federal examination for tax years ended December 31, 2010 and 2011.  We are in the process of responding to the IRS and providing support for our tax position.  We believe that our tax position will more likely than not be upheld based on the technical merits of our position.  Accordingly, we have not made any adjustments to our unrecognized tax benefits for the proposed assessments.  We do not expect any settlement or payment that may result from the audits to have a material effect on our results of operations or cash flows.

Our effective tax rate was 37.8% and 44.7% for the quarters ended March 31, 2014 and 2013, respectively. For the quarter ended March 31, 2013, the effective tax rate differed from the federal and state statutory rates primarily due to non-deductible compensation in relation to the acquisition of SureWest.  Exclusive of this adjustment, our effective tax rate for the three months ended March 31, 2013 would have been approximately 37.0%.

On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014.  We have evaluated these regulations and we do not expect they will have a material adverse impact on our consolidated results of operations, cash flows or financial position.

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11. COMMITMENTS AND CONTINGENCIES

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates (“Salsgiver”) filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs.  Salsgiver originally claimed to have sustained losses of approximately $125 million.  We believe that these claims are without merit and that the alleged damages are completely unfounded.  Discovery concluded and Consolidated filed a motion for summary judgment on June 18, 2012 and the court heard oral arguments on August 30, 2012.  On February 12, 2013, the court, in part, granted our motion.  The court ruled that Salsgiver could not recover prejudgment interest and could not use as a basis of liability any actions prior to April 14, 2006. In September 2013, in order to avoid the distraction and uncertainty of further litigation, we reached an agreement in principle (the “Agreement”) with Salsgiver, Inc.  In accordance with the terms of the Agreement, we will pay Salsgiver approximately $0.9 million in cash and grant approximately $0.3 million in credits that may be used for make-ready charges (the “Credits”).  The Credits will be available for services performed in connection with the pole attachment applications within five years of the execution of the agreement. We had previously recorded approximately $0.4 million in 2011 in anticipation of the settlement of this case.  During the quarter ended September 30, 2013, per the terms of the agreement we recorded an additional $0.9 million, which included estimated legal fees.  The agreement is contingent on appropriate documentation and there is no assurance that the agreement will be finalized.

Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), have, at various times, received assessment notices from the Commonwealth of Pennsylvania Department of Revenue (“DOR”) increasing the amounts owed for Pennsylvania Gross Receipt Taxes, and/or have had audits performed for the tax years of 2008, 2009, and 2010.  For the calendar years for which we received both additional assessment notices and audit actions, those issues have been combined by the DOR into a single Docket for each year.  For the CCES subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $1.9 million.  As of March 2013, all three of these cases have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  For the CCPA subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $2.0 million.  As of December 2013, the cases for calendar years 2009 and 2010 have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  The calendar year 2008 audit result was appealed to the Board of Finance and Revenue on March 19, 2014.  We anticipate that the 2008 case will be continued pending the outcome of the Verizon litigation as well.  The Gross Receipts Tax issues in the Verizon Pennsylvania case are substantially the same as those presently facing CCPA and CCES.  In addition, there are numerous telecommunications carriers with Gross Receipts Tax matters dealing with the same issues that are in various stages of appeal before the Board of Finance and Revenue and the Commonwealth Court.  Those appeals by other similarly situated telecommunications carriers have been continued until resolution of the Verizon Pennsylvania case.  We believe that these assessments and the positions taken by the Commonwealth of Pennsylvania are without substantial merit.  We do not believe that the outcome of these claims will have a material adverse impact on our financial results.

On January 18, 2012, we filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit to review the Federal Communications Commission’s (“FCC”) Order issued November 18, 2011 that reformed intercarrier compensation (“ICC”) and core parts of the Universal Service Fund (“USF”).  We are appealing five core issues in the November 18, 2011 FCC Order. This matter was heard by the U.S. Court of Appeals for the Tenth Circuit on November 19, 2013; however a decision is not expected before the third quarter of 2014.

In order for eligible telecommunications carriers (“ETCs”) to receive high-cost support, the USF/ICC Transformation Order requires states to certify on an annual basis that federal universal service high-cost support is used “only for the provision, maintenance, and upgrading of facilities and services for which the support is intended”.  States, in turn, require that ETCs file certifications with them as the basis for the state filings with the FCC. Failure to meet the annual data and certification deadlines can result in reduced support to the ETC based on the length of the delay in certification.  For the calendar year 2013, the California state certification was due to be filed with the FCC on or before October 1, 2012. We were notified in January 2013 that SureWest did not submit the required certification to the California Public Utilities Commission (“CPUC”) in time to be

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included in its October 1, 2012, submission to the FCC.  On January 24, 2013, we filed a certification with the CPUC and filed a petition with the FCC for a waiver of the filing deadline for the annual state certification. On February 19, 2013, the CPUC filed a certification with the FCC with respect to SureWest. On October 29, 2013, the Wireline Competition Bureau of the FCC denied our petition for a waiver of the annual certification deadline.  On November 26, 2013, we applied for a review of the decision made by the FCC staff by the full Commission.  Management believes, based on the change in SureWest Telephone’s USF filing status caused by the change in the ownership of SureWest Telephone, the lack of formal notice by the FCC regarding this change in filing status, the fact that SureWest Telephone had a previously-filed certification of compliance in effect with the FCC for the two quarters for which USF was withheld, and the FCC’s past practice of granting waivers to accept late filings in similar situations, that the Company should prevail in its application to the Commission and receive USF funding for the period January 1, 2013, through June 30, 2013. However, due to the denial of our petition by the Wireline Competition Bureau and the uncertainty of the collectability of the previously recognized revenues, in December 2013, we reversed the $3.0 million of previously recognized revenues of which $1.1 million was recognized in the three months ended March 31, 2013, until such time that the Commission has the opportunity to reach a decision on our application for review.

We are from time to time involved in various other legal proceedings and regulatory 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 our business, operating results or financial condition.

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Consolidated Communications, Inc. is the primary obligor under the unsecured Senior Notes it issued on May 30, 2012. We and the following of our subsidiaries: Consolidated Communications Enterprise Services, Inc., Consolidated Communications Services Company, Consolidated Communications of Fort Bend Company, Consolidated Communications of Texas Company, Consolidated Communications of Pennsylvania Company, LLC, SureWest Communications, SureWest Long Distance, SureWest Telephone, SureWest TeleVideo, SureWest Kansas, Inc., SureWest Fiber Ventures, LLC, have jointly and severally guaranteed the Senior Notes.  All of the subsidiary guarantors are our 100% direct or indirect wholly owned subsidiaries, and all guarantees are full, unconditional and joint and several with respect to principal, interest and liquidated damages, if any.  As such, we present condensed consolidating balance sheets as of March 31, 2014 and December 31, 2013, and condensed consolidating statements of operations and cash flows for the quarters ended March 31, 2014 and 2013 for each of the Company (Parent), Consolidated Communications, Inc. (Subsidiary Issuer), guarantor subsidiaries and other non-guarantor subsidiaries with any consolidating adjustments.  See Note 6 for more information regarding our Senior Notes.

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Condensed Consolidating Balance Sheet

(amounts in thousands)

	March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	1,851	$	2,250	$	2,728	$	-	$	6,829
Accounts receivable, net	-		122		44,039		8,207		-		52,368
Income taxes receivable	19,308		-		-		-		(14,619)		4,689
Deferred income taxes	(61)		(7)		7,533		495				7,960
Prepaid expenses and other current assets	-		-		13,621		530		-		14,151
Total current assets	19,247		1,966		67,443		11,960		(14,619)		85,997
Property, plant and equipment, net	-		-		825,064		50,403		-		875,467
Intangibles and other assets:
Investments	-		3,765		108,820		-		-		112,585
Investments in subsidiaries	1,126,932		353,737		12,393		-		(1,493,062)		-
Goodwill	-		-		537,265		66,181		-		603,446
Other intangible assets	-		-		28,541		9,087		-		37,628
Deferred debt issuance costs, net and other assets	-		13,181		4,710		-		-		17,891
Total assets	$	1,146,179	$	372,649	$	1,584,236	$	137,631	$	(1,507,681)	$	1,733,014
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	-	$	-	$	7,775	$	-	$	-	$	7,775
Advance billings and customer deposits	-		-		24,168		2,359		-		26,527
Dividends payable	15,607		-		-		-		-		15,607
Accrued compensation	-		-		15,606		1,727		-		17,333
Accrued interest	-		12,114		6		4		-		12,124
Accrued expense	43		-		29,292		1,673		-		31,008
Income tax payable	-		4,265		7,681		2,673		(14,619)		-
Current portion of long term debt and capital
lease obligations	-		9,100		605		68		-		9,773
Current portion of derivative liability	-		694		-		-		-		694
Total current liabilities	15,650		26,173		85,133		8,504		(14,619)		120,841
Long-term debt and capital lease obligations	-		1,200,580		3,499		794		-		1,204,873
Advances due to/from affiliates, net	1,010,493		(1,981,985)		1,013,048		(41,556)		-		-
Deferred income taxes	(21,598)		(778)		184,143		18,256				180,023
Pension and postretirement benefit obligations	-		-		58,604		12,462		-		71,066
Other long-term liabilities	26		1,727		7,970		277		-		10,000
Total liabilities	1,004,571		(754,283)		1,352,397		(1,263)		(14,619)		1,586,803
Shareholders’ equity:
Common Stock	403		-		17,411		30,000		(47,411)		403
Other shareholders’ equity	141,205		1,126,932		209,825		108,894		(1,445,651)		141,205
Total Consolidated Communications Holdings, Inc. shareholders’ equity	141,608		1,126,932		227,236		138,894		(1,493,062)		141,608
Noncontrolling interest	-		-		4,603		-		-		4,603
Total shareholders’ equity	141,608		1,126,932		231,839		138,894		(1,493,062)		146,211
Total liabilities and shareholders’ equity	$	1,146,179	$	372,649	$	1,584,236	$	137,631	$	(1,507,681)	$	1,733,014

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Condensed Consolidating Balance Sheet

(amounts in thousands)

	December 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	86	$	2,366	$	3,099	$			-	$	5,551
Accounts receivable, net	-		502		44,521		7,010		-				52,033
Income taxes receivable	9,346		-		370		80		-				9,796
Deferred income taxes	(61)		(7)		7,533		495		-				7,960
Prepaid expenses and other current assets	-		-		11,862		518		-				12,380
Total current assets	9,285		581		66,652		11,202		-				87,720
Property, plant and equipment, net	-		-		834,199		51,163		-				885,362
Intangibles and other assets:
Investments	-		3,729		109,370		-		-				113,099
Investments in subsidiaries	1,101,039		335,659		12,130		-		(1,448,828)				-
Goodwill	-		-		537,265		66,181		-				603,446
Other intangible assets	-		-		30,997		9,087		-				40,084
Deferred debt issuance costs, net and other assets	-		13,620		4,047		-		-				17,667
Total assets	$	1,110,324	$	353,589	$	1,594,660	$	137,633	$		(1,448,828)		$	1,747,378
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	-	$	-	$	4,885	$	-	$			-	$	4,885
Advance billings and customer deposits	-		-		23,699		2,235		-				25,934
Dividends payable	15,520		-		-		-		-				15,520
Accrued compensation	-		-		20,447		1,805		-				22,252
Accrued interest	-		3,514		6		4		-				3,524
Accrued expense	224		875		32,703		1,371		-				35,173
Current portion of long term debt and capital
lease obligations	-		9,100		586		65		-				9,751
Current portion of derivative liability	-		660		-		-		-				660
Total current liabilities	15,744		14,149		82,326		5,480		-				117,699
Long-term debt and capital lease obligations	-		1,207,663		3,659		812		-				1,212,134
Advances due to/from affiliates, net	968,319		(1,970,192)		1,037,969		(36,096)		-				-
Deferred income taxes	(21,598)		(1,029)		184,209		18,277		-				179,859
Pension and postretirement benefit obligations	-		-		61,053		14,701		-				75,754
Other long-term liabilities	25		1,960		7,328		280		-				9,593
Total liabilities	962,490		(747,449)		1,376,544		3,454		-				1,595,039
Shareholders’ equity:
Common Stock	401		-		17,411		30,000		(47,411)				401
Other shareholders’ equity	147,433		1,101,038		196,200		104,179		(1,401,417)				147,433
Total Consolidated Communications Holdings, Inc. shareholders’ equity	147,834		1,101,038		213,611		134,179		(1,448,828)				147,834
Noncontrolling interest	-		-		4,505		-		-				4,505
Total shareholders’ equity	147,834		1,101,038		218,116		134,179		(1,448,828)				152,339
Total liabilities and shareholders’ equity	$	1,110,324	$	353,589	$	1,594,660	$	137,633	$	(1,448,828)			$	1,747,378

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Condensed Consolidating Statements of Operations

(amounts in thousands)

	Quarter Ended March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
Net revenues	$	-	$	69	$	136,255	$	16,758	$	(3,434)	$	149,648
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	-		-		55,252		3,304		(3,256)		55,300
Selling, general and administrative expenses	877		39		27,631		4,495		(178)		32,864
Depreciation and amortization	-		-		33,647		1,895		-		35,542
Operating income (loss)	(877)		30		19,725		7,064		-		25,942
Other income (expense):
Interest expense, net of interest income	(2)		(19,820)		(2)		(7)		-		(19,831)
Intercompany interest income (expense)	(26,380)		31,425		(5,496)		451		-		-
Investment income	-		36		8,300		-		-		8,336
Equity in earnings of subsidiaries, net	25,621		18,215		263		-		(44,099)		-
Other, net	-		-		(899)		(4)		-		(903)
Income (loss) from continuing operations before income taxes	(1,638)		29,886		21,891		7,504		(44,099)		13,544
Income tax expense (benefit)	(9,962)		4,265		8,066		2,753		-		5,122
Income (loss) from continuing operations	8,324		25,621		13,825		4,751		(44,099)		8,422
Discontinued operations, net of tax	-		-				-		-		-
Net income (loss)	8,324		25,621		13,825		4,751		(44,099)		8,422
Less: net income attributable to noncontrolling interest	-		-		98		-		-		98
Net income (loss) attributable to Consolidated Communications Holdings, Inc.	$	8,324	$	25,621	$	13,727	$	4,751	$	(44,099)	$	8,324
Total comprehensive income (loss) attributable to common shareholders	$	8,324	$	26,029	$	13,653	$	4,689	$	(44,099)	$	8,596

	Quarter Ended March 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
Net revenues	$	-	$	(7)	$	138,055	$	17,028	$	(3,548)	$	151,528
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	-		-		54,861		3,444		(3,253)		55,052
Selling, general and administrative expenses	1,127		31		27,713		4,729		(295)		33,305
Depreciation and amortization	-		-		32,582		2,259		-		34,841
Operating income (loss)	(1,127)		(38)		22,899		6,596		-		28,330
Other income (expense):
Interest expense, net of interest income	6		(24,497)		(110)		1		-		(24,600)
Intercompany interest income (expense)	(20,433)		27,608		(7,329)		154		-		-
Investment income	-		(37)		8,821		-		-		8,784
Equity in earnings of subsidiaries, net	20,300		18,393		276		-		(38,969)		-
Other, net	-		-		(98)		(9)		-		(107)
Income (loss) from continuing operations before income taxes	(1,254)		21,429		24,459		6,742		(38,969)		12,407
Income tax expense (benefit)	(8,037)		1,129		9,943		2,514		-		5,549
Income (loss) from continuing operations	6,783		20,300		14,516		4,228		(38,969)		6,858
Discontinued operations, net of tax	-		-		24		-		-		24
Net income (loss)	6,783		20,300		14,540		4,228		(38,969)		6,882
Less: net income attributable to noncontrolling interest	-		-		99		-		-		99
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.	$	6,783	$	20,300	$	14,441	$	4,228	$	(38,969)	$	6,783
Total comprehensive income (loss) attributable to common shareholders	$	6,783	$	22,558	$	14,759	$	4,384	$	(38,969)	$	9,515

21

Condensed Consolidating Statements of Cash Flows

(amounts in thousands)

	Three Months Ended March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Consolidated
Net cash (used in) provided by continuing operations	$	(26,654)	$	20,833	$	48,063	$	6,152	$	48,394
Net cash used in discontinued operations	-		-		-		-		-
Net cash (used in) provided by operating activities	(26,654)		20,833		48,063		6,152		48,394
Cash flows from investing activities:
Purchases of property, plant and equipment	-		-		(24,316)		(1,089)		(25,405)
Proceeds from sale of assets	-		-		1,200		41		1,241
Other	-		-		-		-		-
Net cash used in continuing operations	-		-		(23,116)		(1,048)		(24,164)
Net cash provided by discontinued operations			-		-		-		-
Net cash used in investing activities	-		-		(23,116)		(1,048)		(24,164)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	-		10,000		-		-		10,000
Payment of capital lease obligation	-		-		(142)		(15)		(157)
Payment on long-term debt	-		(17,275)		-		-		(17,275)
Dividends on common stock	(15,520)		-		-		-		(15,520)
Transactions with affiliates, net	42,174		(11,793)		(24,921)		(5,460)		-
Net cash provided by (used in) financing activities	26,654		(19,068)		(25,063)		(5,475)		(22,952)
Increase (decrease) in cash and cash equivalents	-		1,765		(116)		(371)		1,278
Cash and cash equivalents at beginning of period	-		86		2,366		3,099		5,551
Cash and cash equivalents at end of period	$	-	$	1,851	$	2,250	$	2,728	$	6,829

	Three Months Ended March 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Consolidated
Net cash (used in) provided by continuing operations	$	(20,835)	$	14,062	$	37,499	$	6,997	$	37,723
Net cash provided by discontinued operations	-		-		(1,531)		-		(1,531)
Net cash (used in) provided by operating activities	(20,835)		14,062		35,968		6,997		36,192
Cash flows from investing activities:
Purchases of property, plant and equipment	-		-		(25,371)		(2,135)		(27,506)
Proceeds from sale of assets	-		-		4		17		21
Other	-		-		(84)		-		(84)
Net cash used in continuing operations	-		-		(25,451)		(2,118)		(27,569)
Net cash used in discontinued operations	-		-		(11)		-		(11)
Net cash used in investing activities	-		-		(25,462)		(2,118)		(27,580)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	-		13,000		-		-		13,000
Payment of capital lease obligation	-		-		(73)		(12)		(85)
Payment on long-term debt	-		(15,310)		-		-		(15,310)
Dividends on common stock	(15,447)		-		-		-		(15,447)
Transactions with affiliates, net	36,282		(14,935)		(15,748)		(5,599)		-
Net cash provided by (used in) financing activities	20,835		(17,245)		(15,821)		(5,611)		(17,842)
(Decrease) increase in cash and cash equivalents	-		(3,183)		(5,315)		(732)		(9,230)
Cash and cash equivalents at beginning of period	-		6,577		8,530		2,747		17,854
Cash and cash equivalents at end of period	$	-	$	3,394	$	3,215	$	2,015	$	8,624

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions.  Certain statements in this Quarterly Report on Form 10-Q, including that which relates to the impact on future revenue sources, pending and future regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new communications markets, are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-looking statements reflect, among other things, our current expectations, plans, strategies, and anticipated financial results. There are a number of risks, uncertainties, and conditions that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Many of these circumstances are beyond our ability to control or predict. Moreover, forward-looking statements necessarily involve assumptions on our part. These forward-looking statements generally are identified by the words “believe”, “expect”, “anticipate”, “estimate”, “project”, “intend”, “plan”, “should”, “may”, “will”, “would”, “will be”, “will continue” or similar expressions.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Consolidated Communications Holdings, Inc. and its subsidiaries (“Consolidated”, the “Company”, “we”, or “our”) to be different from those expressed or implied in the forward-looking statements.  All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements that appear throughout this report. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our 2013 Annual Report on Form 10-K filed with the SEC. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we disclaim any intention or obligation to update or revise publicly any forward-looking statements. You should not place undue reliance on forward-looking statements.  Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes to the financial statements (“Notes”) as of and for the three months ended March 31, 2014 included in Item 1 of this Quarterly Report on Form 10-Q.

Throughout this MD&A, we refer to measures that are not a measure of financial performance in accordance with United States generally accepted accounting principles (“US GAAP” or “GAAP”).  We believe the use of these non-GAAP measures on a consolidated and segment basis provides the reader with additional information that is useful in understanding our operating results and trends. These measures should be viewed in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. See the “Non-GAAP Measures” section below for a more detailed discussion on the use and calculation of these measures.

Overview

We are an established telecommunications services company providing a wide range of telecommunications services to residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri.  We offer a wide range of telecommunications services, including local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, directory publishing, Competitive Local Exchange Carrier (“CLEC”) services and equipment sales.

We generate the majority of our consolidated operating revenues primarily from subscriptions to our voice, video and data services (“broadband services”) to residential and business customers.  Revenues decreased $1.9 million during the quarter ended March 31, 2014 compared to the same period in 2013, primarily driven by a $2.9 million decrease in network access revenues and $0.4 million in local calling services, partially offset by an increase of $1.9 million in broadband revenues. We expect our broadband service revenues to continue to grow as consumer and business demands for data based services increase.

We market our services to residential and business customers, either individually or as a bundled package.  Our “triple play” bundle includes our voice, video and data services. As of March 31, 2014, our video service was available to approximately 533 thousand homes in the markets we serve, with an approximate 21% penetration rate. As of March 31, 2014, we had approximately 111 thousand video subscribers, a 3% increase from the same period in 2013. During 2013, we launched TV Everywhere which allows our subscribers to watch their favorite programs at home or away on a computer, smartphone or tablet.  Data and Internet connections continue to

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increase as a result of enhanced product and service offerings, such as our consumer VOIP service and data speeds of up to 50 Mbps, depending on the geographic market availability. As of March 31, 2014, approximately 31% of the homes in the areas we serve subscribe to our data service. Our voice services provide local and long-distance calling and other features, such as hosted voice services using cloud network servers, a business directory listing and the added capacity for multiple phone lines to be made available to our business voice customers. For our small to medium sized business customers, we also offer Metro Ethernet network services and wireless backhaul services.

The decrease in local calling services revenue during the quarter ended March 31, 2014 was due in part to an anticipated industry-wide trend of a decline in access lines and related use of services.  Many consumers are choosing to subscribe to alternative communications services and competition for these subscribers continues to increase. Progressively, consumers are utilizing over-the-top services to download and watch television shows of interest to them on their computers. Competition from wireless providers, CLECs and in some cases cable television providers has increased in recent years in the markets we serve.  We have been able to mitigate some of the access line losses through marketing initiatives and product offerings, such as our VOIP service.

As discussed in the “Regulatory Matters” section below, our operating revenues are also impacted by legislative or regulatory changes at the federal and state levels, which could reduce or eliminate the current subsidies revenue we receive.  A number of proceedings and recent orders relate to universal service reform, intercarrier compensation and network access charges.  There are various ongoing legal challenges to the orders that have been issued.  As a result, it is not yet possible to determine fully the impact of the regulatory changes on our operations.

Significant Recent Developments

Segment Reporting

Historically, we have classified our operations into two separate reportable business segments: Telephone Operations and Other Operations.  Our Telephone Operations consisted of a wide range of telecommunications services to residential and business customers, including local and long-distance service, high-speed broadband Internet access, video services, VOIP services, custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  Our Other Operations segment operated two complementary non-core businesses including telephone services to state and county correctional facilities (“Prison Services”) and equipment sales.  As discussed below, our contract to provide telephone services to correctional facilities operated by the Illinois Department of Corrections was not renewed and the process of transitioning these services to another service provider was completed during the quarter ended March 31, 2013.  The remaining Prison Services assets and operations were classified as discontinued operations during the quarter ended June 30, 2013 and subsequently sold during the quarter ended September 30, 2013, as discussed below.  Prison Services comprised nearly all of the Other Operations segment revenue and results of operations.  Consequently, with the cessation of our Prison Services business and based on the segment accounting guidance, we concluded that we operate as one segment as of the quarter ended June 30, 2013.  As required by the authoritative guidance for segment presentation, segment results of operations have been retrospectively adjusted to reflect this change for all periods presented.

Prison Services Contract

We previously provided telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace us as the provider of those services with a competitor. Although we challenged our competitor’s bid and the State’s decision to accept that bid in a variety of different forums, during the quarter ended March 31, 2013, the process of transitioning these services to another service provider was completed. All related assets have been assessed for recoverability in light of this change and we determined that no impairment was necessary.

Discontinued Operations

On September 13, 2013, we completed the sale of the assets and contractual rights used to provide communications services to thirteen county jails located in Illinois.  The sale was completed for an aggregate purchase price of $2.5 million, resulting in a gain of $1.3 million, net of tax.  The financial results of the operations for Prison Services, which were previously reported in the Other Operations segment, have been reported as discontinued operations in our condensed consolidated financial statements for all periods presented.

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Results of Operations

The following tables reflect our financial results on a consolidated basis and key operating metrics as of and for the quarters ended March 31, 2014 and 2013.

Financial Data

	Quarter Ended March 31,
							$			%
(In millions, except for percentages)	2014			2013			Change			Change
Operating Revenues
Local calling services	$	26.2		$	26.6		$	(0.4	)	(2	) %
Network access services	26.8			29.7			(2.9		)	(10	)
Video, Data and Internet services	68.2			66.3			1.9			3
Subsidies	13.1			13.4			(0.3		)	(2	)
Long-distance services	4.8			4.9			(0.1		)	(2	)
Other services	10.5			10.6			(0.1		)	(1	)
Total operating revenue	149.6			151.5			(1.9		)	(1	)
Expenses
Cost of services and products	55.3			55.0			0.3			1
Selling, general and administrative costs	32.9			33.4			(0.5		)	(1	)
Depreciation and amortization	35.5			34.8			0.7			2
Total operating expenses	123.7			123.2			0.5			0
Income from operations	25.9			28.3			(2.4		)	(8	)
Interest expense, net	(19.8		)	(24.6		)	4.8			20
Other income	7.4			8.7			(1.3		)	(15	)
Income tax expense	5.1			5.5			(0.4		)	(7	)
Income from continuing operations	8.4			6.9			1.5			22
Income from discontinued operations, net of tax	-			-			-			0
Net income attributable to noncontrolling interest	0.1			0.1			-			0
Net income attributable to common shareholders	$	8.3		$	6.8		$	1.5		22
Adjusted EBITDA(1)	$	71.1		$	73.5		$	(2.4	)	(3	) %

(1)A non-GAAP measure.  See the “Non-GAAP Measures” section below for additional information and reconciliation to the most directly comparable GAAP measure.

Key Operating Statistics

	As of March 31,
	2014	2013	Change	% Change
ILEC access lines
Residential	145,814	152,644	(6,830)	(4	) %
Business	108,247	113,211	(4,964)	(4	)
Total	254,061	265,855	(11,794)	(4	)
Voice connections (1)
Residential	72,080	77,515	(5,435)	(7	)
Business	50,092	50,351	(259)	(1	)
Total	122,172	127,866	(5,694)	(4	)
Data and internet connections (2)	258,244	250,334	7,910	3
Video connections (2)	110,805	107,492	3,313	3
Total connections	745,282	751,547	(6,265)	(1	)

(1)Voice connections include voice lines outside the Incumbent Local Exchange Carrier (“ILEC”) service areas and Voice-over-IP inside the ILEC service areas.

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(2)These connections include both residential and business (excluding SureWest business metrics) for services both inside and outside the ILEC service areas.

Operating Revenues

Local Calling Services

We offer several different basic local phone service packages for residential and business customers.  The plans include options for voicemail and other custom calling features such as caller ID, call forwarding and call waiting.  Local calling services revenue decreased $0.4 million during the quarter ended March 31, 2014, compared to the same period in 2013 primarily due to a 4% decline in local access lines.  The number of local access lines in service directly affects the recurring revenue we generate from end users and continues to be impacted by the industry-wide decline in access lines.  We expect to continue to experience modest erosion in access lines due to competition from alternative technologies and through our own competing VOIP product.

Network Access Services

Network access service revenues include interstate and intrastate switched access revenue, network special access services and wireless backhaul services.  Network access services revenue decreased $2.9 million during the quarter ended March 31, 2014, compared to the same period in 2013.  Network access revenues decreased due to a reduction in residential federal subscriber line charges in Texas effective in July 2013, which was mitigated in part by an increase in end user rates within local calling services above.  As described in the “Regulatory Matters” section below, network access revenues were also impacted by a decline in intrastate rates resulting from the intercarrier compensation (“ICC”) reform implemented by the Federal Communications Commission (“FCC”).  Certain of our network access revenues are based on rates set or approved by federal and state regulatory commissions which may be subject to change at any time.  Switched and special access revenue also decreased as a result of the decline in local access lines and minutes of use.  However, these declines were partially offset by the continued growth in wireless backhaul services as the demand for wireless data continued to escalate.

Video, Data and Internet Services

Video, data and Internet services include revenue from residential and business customers for subscriptions to our voice, video and data products.  We offer high speed Internet access at speeds for residential consumers of up to 50 Mbps, depending on the nature of the network facilities that are available, the level of service selected and the location.  We also offer a variety of data connectivity services in select markets, including Ethernet services over our copper and fiber-based networks, virtual hosting services and collocation services.  Our VOIP digital phone service is also available in certain markets as an alternative to the traditional telephone line.  Depending on geographic market availability, our video services range from limited basic service to advanced digital television, which includes several plans each with hundreds of local, national and music channels including premium and pay-per-view channels as well as video on demand service.  Certain subscribers may also subscribe to our advanced video services, which consist of high-definition television, digital video recorders (“DVR”) and/or a whole home DVR.

Video, data and Internet revenue increased $1.9 million during the quarter ended March 31, 2014, compared to the same period in 2013, primarily due to the continued growth in data and Internet connections and video connections, which each increased 3% as of March 31, 2014.  We expect video, data and Internet service revenue to continue to grow and comprise a greater percentage of consolidated operating revenues as a result of growth in commercial services and Metro Ethernet revenue and as a result of the rising consumer demand for data based services.  However, the revenue growth was tempered by a decrease in voice revenue primarily for residential digital phone services due to a 4% decline in voice connections as more consumers begin to rely exclusively on wireless service.

Subsidies

We receive federal and state subsidies, which are designed to promote widely available, quality telephone service at affordable prices in rural areas.  Subsidy revenues decreased $0.3 million during the quarter ended March 31, 2014, compared to the same period in 2013 primarily as a result of the reduction in state funding support for our Texas ILEC effective January 1, 2014.  See the “Regulatory Matters” section below for a further discussion of the subsidies we receive.

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Long-Distance Services

We offer a variety of long-distance calling plans, including unlimited flat-rate calling plans, to residential and business customers.  Long-distance services revenue decreased $0.1 million during the quarter ended March 31, 2014, compared to the same period in 2013 primarily due to the decline in access lines as described above and the shift in customers moving to unlimited long-distance plans.

Other Services

Other services includes revenues from telephone directory publishing, wholesale transport services, billing and collection services, inside wiring service and maintenance and equipment sales.  Other services revenue decreased $0.1 million during the quarter ended March 31, 2014, compared to the same period in 2013.  The changes in other services revenue was primarily due to a decline in directory publishing revenues, which was offset in part by an increase in transport services and equipment sales.

Operating Expenses

Cost of Services and Products

Cost of services and products increased $0.3 million during the quarter ended March 31, 2014, compared to the same period in 2013 primarily due to higher costs associated with providing video programming.  Video programming costs continued to increase due to the growth in video connections and an increase in costs per program channel.  However, the increase in video programming costs was partially offset by a reduction in federal universal service fund (“USF”) expense in the current quarter due to the recovery of USF fees related to the 2013 service period as a result of a reduction in the estimated revenue base. Employee costs also decreased due to a reduction in headcount as a result of integration and cost reduction efforts in 2013 as well as a reduction in pension expense in the current year.

Selling, General and Administrative Costs

Selling, general and administrative costs decreased $0.5 million during the quarter ended March 31, 2014, compared to the same period in 2013 primarily due to a decrease in professional fees for audit and legal services and a decline in pension costs in the current year.  These savings were offset in part by changes in bad debt expense due to a reduction in expense in the prior year period.

Depreciation and Amortization

Depreciation and amortization expense increased $0.7 million during the quarter ended March 31, 2014, compared to the same period in 2013, which was primarily associated with ongoing capital expenditures related to network enhancements and success based capital projects for consumer and commercial services.

Reclassifications

Certain amounts in our 2013 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2014 condensed consolidated financial statements, which consists of the effects of reclassifications of Prison Services as a discontinued operation and the retrospective adjustments to report operating results as a single segment.

Regulatory Matters

Our revenues are subject to broad Federal and/or state regulation, which include such telecommunications services as local telephone service, network access service and toll service and are derived from various sources, including:

•business and residential subscribers of basic exchange services;

•surcharges mandated by state commissions;

•long distance carriers, for network access service;

•competitive access providers and commercial enterprises for network access service; and

•support payments from federal or state programs.

The telecommunications industry is subject to extensive federal, state and local regulation.  Under the Telecommunications Act of 1996, federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices.

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At the federal level, the FCC generally exercises jurisdiction over facilities and services of local exchange carriers, such as our rural telephone companies, to the extent they are used to provide, originate, or terminate interstate or international communications.  The FCC has the authority to condition, modify, cancel, terminate, or revoke our operating authority for failure to comply with applicable federal laws or FCC rules, regulations and policies.  Fines or penalties also may be imposed for any of these violations.

State regulatory commissions generally exercise jurisdiction over carriers’ facilities and services to the extent they are used to provide, originate, or terminate intrastate communications.  In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies.  In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks.  State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations.

FCC Matters

In general, telecommunications service in rural areas is more costly to provide than service in urban areas.  The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain.  By supporting the high cost of operations in rural markets, Federal Universal Service Fund subsidies promote widely available, quality telephone service at affordable prices in rural areas.  Revenues from the Universal Service Funds decreased $0.4 million during the quarter ended March 31, 2014, compared to the same period in 2013. The decrease in the Universal Service subsidies received during the quarter ended March 31, 2014 was primarily due to the impact of Senate Bill 583 (“SB 583”) discussed in the “State Matters” section below, which resulted in a $0.6 million decrease in the Texas Universal Service Fund subsidies.  This decrease is offset in part by a $0.3 million increase in federal high-cost support subsidies, from which we received $8.5 million in the quarter ended March 31, 2014 as compared to $8.2 million recognized in the same period in 2013.  Included in the $8.2 million in federal subsidies recorded in the prior year was $1.1 million in revenue that was recognized in anticipation of FCC approval of our petition for a waiver of the filing deadline for the annual state certification required for eligible telecommunications carriers (“ETC”) who receive high-cost support.  As discussed below, the petition was denied and the $1.1 million was included in the reversal of previously recognized revenues in December 2013.

In order for ETCs to receive high-cost support, the USF/ICC Transformation Order requires states to certify on an annual basis that USF support is used “only for the provision, maintenance, and upgrading of facilities and services for which the support is intended”.  States, in turn, require that ETCs file certifications with them as the basis for the state filings with the FCC. Failure to meet the annual data and certification deadlines can result in reduced support to the ETC based on the length of the delay in certification.  For the calendar year 2013, the California state certification was due to be filed with the FCC on or before October 1, 2012. We were notified in January 2013 that SureWest Communications (“SureWest”) did not submit the required certification to the California Public Utilities Commission (“CPUC”) in time to be included in its October 1, 2012, submission to the FCC.  On January 24, 2013, we filed a certification with the CPUC and filed a petition with the FCC for a waiver of the filing deadline for the annual state certification. On February 19, 2013, the CPUC filed a certification with the FCC with respect to SureWest. On October 29, 2013, the Wireline Competition Bureau of the FCC denied our petition for a waiver of the annual certification deadline.  On November 26, 2013, we applied for a review of the decision made by the FCC staff by the full Commission.  Management believes, based on  the change in SureWest Telephone’s USF filing status caused by the change in the ownership of SureWest Telephone, the lack of formal notice by the FCC regarding this change in filing status, the fact that SureWest Telephone had a previously-filed certification of compliance in effect with the FCC for the two quarters for which USF was withheld, and the FCC’s past practice of granting waivers to accept late filings in similar situations, that the Company should prevail in its application to the Commission and receive USF funding for the period January 1, 2013, through June 30, 2013. However, due to the denial of our petition by the Wireline Competition Bureau and the uncertainty of the collectability of the previously recognized revenues, in December 2013 we reversed the $3.0 million of previously recognized revenues until such time that the Commission has the opportunity to reach a decision on our application for review.

Historically, under FCC rules governing rate making, our California ILEC was required to establish rates for its interstate telecommunications services based on projected demand usage for the various services.  We projected our earnings through the use of annual cost separation studies, which utilized estimated total cost information and projected demand usage. Carriers were required to follow FCC rules in the preparation of these annual studies.  We determined actual earnings from our interstate rates as actual volumes and costs became known.  In March

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2013, we filed a waiver with the FCC to convert our California ILEC from a rate of return to a price cap company.  The FCC granted the waiver with an effective date of our annual interstate access tariff filing of July 2, 2013.  We expect certain adjustments to take place over the next twenty-four months as a result of exiting the National Exchange Carrier Association (“NECA”) pool; however, we do not anticipate that they will be material to our condensed consolidated financial statements or results of operations.

An order adopted by the FCC in 2011 (the “Order”) may significantly impact the amount of support revenue we receive from the USF/Connect America Fund (“CAF”) and ICC. The Order reformed core parts of the USF, broadly recast the existing ICC scheme and established the CAF to replace support revenues provided by the current USF and redirected support from voice services to broadband services.  In 2012, the first phase of the CAF was implemented, freezing USF support to a price cap holding company until the FCC implements a broadband cost model to shift support from voice service to broadband.  Initially, the second phase was anticipated to be implemented July 1, 2013.  It is now anticipated that implementation will likely occur no sooner than January 2015. We anticipate that our revenues will be significantly impacted when the broadband cost model is implemented.  The Order also modifies the methodology used for ICC for traffic exchanged between carriers.  The initial phase of ICC reform was effective on July 1, 2012, beginning the transition of our terminating switched access rates to bill-and-keep over a seven year period.  As a result of implementing the provisions of the Order, our network access revenues decreased approximately $0.5 million in the quarter ended March 31, 2014 compared to the same period in 2013.

On April 23, 2014, the FCC approved a report and order addressing the implementation of the CAF Phase 2, transition and auction processes for price cap companies and the local rate benchmark.  They also issued a Further Notice of Proposed Rulemaking proposing to increase the download speed requirement from 4 Mbps to 10 Mbps as well as the transition for companies that receive CAF Phase 1 frozen funding but do not elect CAF Phase 2 funding.  The details of the order have not been published at the date of this filing and it is not yet possible to determine fully the impact of the order on our operations.  We will continue to monitor this matter.

State Matters

California

In an ongoing proceeding relating to the New Regulatory Framework, the CPUC adopted Decision 06-08-030 in 2006, which grants carriers broader pricing freedom in the provision of telecommunications services, bundling of services, promotions and customer contracts.  This decision adopted a new regulatory framework, the Uniform Regulatory Framework (“URF”), which among other things (i) eliminates price regulation and allows full pricing flexibility for all new and retail services, (ii) allows new forms of bundles and promotional packages of telecommunication services, (iii) allocates all gains and losses from the sale of assets to shareholders and (iv) eliminates almost all elements of rate of return regulation, including the calculation of shareable earnings.  On December 31, 2010, the CPUC issued a ruling to initiate a new proceeding to assess whether, or to what extent, the level of competition in the telecommunications industry is sufficient to control prices for the four largest ILECs in the state.  Subsequently, the CPUC issued a ruling temporarily deferring the proceeding.  The status on when the CPUC may open this proceeding is unclear and on hold at this time. The CPUC’s actions in this and future proceedings could lead to new rules and an increase in government regulation.  We will continue to monitor this matter.

Pennsylvania

In 2011, the Pennsylvania Public Utilities Commission (“PAPUC”) issued an intrastate access reform order reducing intrastate access rates to interstate levels in a three-step process, which began in March 2012.  With the release of the FCC order in November 2011, the PAPUC temporarily issued a stay.  A final stay was issued in 2012 to implement the FCC ordered intrastate access rate changes.  The PAPUC had indicated that it would address state universal funding in 2013, but delayed conducting a proceeding pending any state legislative activity that may occur in the 2014 legislative session.  We will continue to monitor this matter.

Texas

The Texas Public Utilities Regulatory Act (“PURA”) directs the Public Utilities Commission of Texas (“PUCT”) to adopt and enforce rules requiring local exchange carriers to contribute to a state universal service fund that helps telecommunications providers offer basic local telecommunications service at reasonable rates in high cost rural areas.  The Texas Universal Service Fund is also used to reimburse telecommunications providers for revenues lost by providing lifeline service.  Our Texas rural telephone companies receive disbursements from this

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fund.

Our Texas ILECs receive two state funds, the small and rural incumbent local exchange company plan high cost fund (“HCF”) and the high cost assistance Fund (“HCAF”).  The HCF is a line-based fund used to keep local rates low.  The rate is applied on all residential lines and up to five single business lines.  The amount we receive from the HCAF is a frozen monthly amount that was originally developed to offset high intrastate toll rates.

In September 2011, the Texas state legislature passed Senate Bill No. 980/House Bill No. 2603 which, among other things, mandated the PUCT to review the Universal Service Fund and issue recommendations by January 1, 2013 with the intent to effectively reduce the size of the Universal Service Fund.  This would be accomplished by implementing an urban floor to offset state funding reductions with a phase-in period of four years.  The PUCT recommended that (i) frozen line counts be lifted effective September 1, 2013 and (ii) rural and urban local rate benchmarks be developed.  The large company fund was completed in September 2012 and the PUCT addressed the small fund participants in Docket 41097 Rate Rebalancing (“Docket 41097”), as discussed below. The elimination of the frozen line counts was effective January 1, 2014.  The potential impact on funding related to the urban benchmark is pending the docketed proceeding as well as potential legislative action.  We will continue to monitor this matter.

In June 2013, the Texas state legislature passed SB 583.  The provisions of SB 583 were effective September 1, 2013 and froze HCF and HCAF support for the remainder of 2013 and eliminated our annual $1.4 million HCAF support, effective January 1, 2014.  In July 2013, the Company entered into a settlement agreement with the PUCT on Docket 41097, which was approved by the PUCT on August 30, 2013.  In accordance with the provisions of the settlement agreement, our HCF support returned to funding on a per line basis as of January 1, 2014. The HCF draw will be reduced by approximately $1.2 million annually, or approximately $4.8 million in total, over a 4 year period beginning June 1, 2014 through 2017.  However, where market conditions allow, we have the ability to offset this reduction with increases to residential rates, for which the Company initiated a filing in April 2014.

In addition, the PUCT is required to develop a needs test for post-2017 funding and has held workshops on various proposals.  The PUCT is expected to issue its recommendation to the Texas state Commissioners in May 2014.  We will continue to monitor this matter.

Other Regulatory Matters

We are also subject to a number of regulatory proceedings occurring at the federal and state levels that may have a material impact on our operations. The FCC and state commissions have authority to issue rules and regulations related to our business.  A number of proceedings are pending or anticipated that are related to such telecommunications issues as competition, interconnection, access charges, intercarrier compensation, broadband deployment, consumer protection and universal service reform.  Some proceedings may authorize new services to compete with our existing services.  Proceedings that relate to our cable television operations include rulemakings on set top boxes, carriage of programming, industry consolidation and ways to promote additional competition.  There are various on-going legal challenges to the scope or validity of FCC orders that have been issued.  As a result, it is not yet possible to determine fully the impact of the related FCC rules and regulations on our operations.

Non-Operating Items

Other Income and Expense, Net

Interest expense, net of interest income, decreased $4.8 million during the quarter ended March 31, 2014, compared to the same period in 2013 primarily due to a reduction in interest expense related to our interest rate swap agreements as a result of the maturity of several agreements during 2013.  Interest rates on outstanding borrowings under our Credit Agreement also declined due to the amendment of our Credit Agreement in December 2013, as described in the Liquidity and Capital Resources section below.

Investment income decreased $0.5 million during the quarter ended March 31, 2014, compared to the same period in 2013, primarily due to lower earnings from our wireless partnership interests.  Other, net decreased $0.8 million during the quarter ended March 31, 2014, compared to the same period in 2013, primarily due to the sale of an office facility and other related assets in Pennsylvania.

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Income Taxes

Income taxes decreased $0.4 million during the quarter ended March 31, 2014, compared to the same period in 2013. Our effective rate was 37.8% and 44.7% for the quarters ended March 31, 2014 and 2013, respectively.  For the quarter ended March 31, 2013, the effective tax rate differed from the federal and state statutory rates primarily due to non-deductible compensation in relation to the acquisition of SureWest. Exclusive of this adjustment, our effective tax rate for the three months ended March 31, 2013 would have been approximately 37.0%.

Non-GAAP Measures

In addition to the results reported in accordance with US GAAP, we also use certain non-GAAP measures such as EBITDA and adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends. These financial measures are not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance and net cash provided by operating activities as a measure of liquidity. They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies. Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below.

EBITDA is defined as net earnings before interest expense, income taxes, and depreciation and amortization.  Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below.  These measures are a common measure of operating performance in the telecommunications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash.

The following table is a reconciliation of net cash provided by operating activities to adjusted EBITDA for the quarters ended March 31, 2014 and 2013:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Net cash provided by operating activities from continuing operations	$	48,394	$	37,723
Adjustments:
Non-cash, stock-based compensation	(784)		(656)
Other adjustments, net	(2,750)		(2,169)
Changes in operating assets and liabilities	(896)		6,801
Interest expense, net	19,831		24,600
Income taxes	5,122		5,549
EBITDA	68,917		71,848
Adjustments to EBITDA:
Other, net (1)	(7,717)		(7,084)
Investment distributions (2)	9,086		8,101
Non-cash, stock-based compensation (3)	784		656
Adjusted EBITDA	$	71,070	$	73,521

(1)Other, net includes the equity earnings from our investments, dividend income, income attributable to noncontrolling interests in subsidiaries, transaction related costs including severance and certain other miscellaneous items.

(2)Includes all cash dividends and other cash distributions received from our investments.

(3)Represents compensation expenses in connection with the issuance of stock awards, which, because of the non-cash nature of these expenses, are excluded from adjusted EBITDA.

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Liquidity and Capital Resources

Outlook and Overview

Our operating requirements have historically been funded from cash flows generated from our business and borrowings under our credit facilities.  We expect that our future operating requirements will continue to be funded from cash flows from operating activities, existing cash and cash equivalents, and, if needed, from borrowings under our revolving credit facility and our ability to obtain future external financing.  We anticipate that we will continue to use a substantial portion of our cash flow to fund capital expenditures, meet scheduled payments of long-term debt, make dividend payments and to invest in future business opportunities.

The following table summarizes our cash flows:

	Three Months Ended March 31,
(In thousands)	2014		2013
Cash flows provided by (used in):
Operating activities:
Continuing operations	$	48,394	$	37,723
Discontinued operations	-		(1,531)
Investing activities:
Continuing operations	(24,164)		(27,569)
Discontinued operations	-		(11)
Financing activities:
Continuing operations	(22,952)		(17,842)
Increase (decrease) in cash and cash equivalents	$	1,278	$	(9,230)

Cash Flows Provided by Operating Activities

Net cash provided by operating activities from continuing operations was $48.4 million during the three-month period ended March 31, 2014, an increase of $10.7 million compared to the same period in 2013.  Cash provided by operating activities increased primarily as a result of the timing in payments to suppliers and the payment of accrued transaction costs in 2013.  We also received additional cash distributions from our wireless partnerships in 2014.  These increases were offset in part by an increase in accounts receivable and an increase in contributions to our pension plans in 2014.

Cash Flows Used In Investing Activities

Net cash used in investing activities was $24.2 million during the three-month period ended March 31, 2014, a decrease of $3.4 million compared to the same period in 2013 and consisted primarily of cash used for capital expenditures.

Capital Expenditures

Capital expenditures continue to be our primary recurring investing activity and were $25.4 million during the three-month period ended March 31, 2014, a decrease of $2.1 million compared to the same period in 2013.  Capital expenditures for the remainder of 2014 are expected to be $72.0 million to $78.0 million of which approximately 60% is planned for success-based capital projects for residential and commercial initiatives. Capital expenditures for the remainder of 2014 and subsequent years will depend on various factors, including competition, changes in technology, regulatory changes and the timing in the deployment of new services.  We expect to continue to invest in existing and new services in order to retain and acquire more customers through a broader set of products.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities consists primarily of our proceeds and principal payments on long-term borrowings and the payment of dividends.

Long-term Debt

Credit Agreement

In December 2013, the Company, through certain of its wholly owned subsidiaries, entered into a Second Amended and Restated Credit Agreement with various financial institutions (the “Credit Agreement”) to replace

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the Company’s previously amended credit agreement.  The Credit Agreement consists of a $75.0 million revolving credit facility and initial term loans in the aggregate amount of $910.0 million (“Term 4”).  The proceeds from the Credit Agreement were used to repay the outstanding term loans from the previous agreement in its entirety.  The Credit Agreement also includes an incremental term loan facility which provides the ability to borrow up to $300.0 million of incremental term loans subject to certain terms and conditions.  Borrowings under the senior secured credit facility are secured by substantially all of the assets of the Company and its subsidiaries, with the exception of Illinois Consolidated Telephone Company and our majority-owned subsidiary, East Texas Fiber Line Incorporated.

The Term 4 loan was issued in an original aggregate principal amount of $910.0 million with a maturity date of December 23, 2020, but is subject to earlier maturity on December 31, 2019 if the Company’s unsecured Senior Notes due in 2020 (“Senior Notes”) are not repaid or redeemed in full by December 31, 2019.  The Term 4 loan contains an original issuance discount of $4.6 million, which is being amortized over the term of the loan.  The Term 4 loan requires quarterly principal payments of $2.3 million, which commenced March 31, 2014, and has an interest rate of the London Interbank Offered Rate (“LIBOR”) plus 3.25% subject to a 1.00% LIBOR floor.

Our revolving credit facility has a maturity date of December 23, 2018 and an applicable margin (at our election) of between 2.50% and 3.25% for LIBOR-based borrowings or between 1.50% and 2.25% for alternate base rate borrowings, depending on our leverage ratio.  Based on our leverage ratio at March 31, 2014, the borrowing margin for the next three month period ending June 30, 2014 will be at a weighted-average margin of 3.00% for a LIBOR-based loan or 2.00% for an alternate base rate loan.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.  As of March 31, 2014 and December 31, 2013, borrowings of $8.0 million and $13.0 million were outstanding under the revolving credit facility, respectively.  A stand-by letter of credit of $0.9 million, issued in connection with the Company’s insurance coverage, was outstanding under our revolving credit facility as of March 31, 2014.  The stand-by letter of credit is renewable annually and reduces the borrowing availability under the revolving credit facility.

The weighted-average interest rate on outstanding borrowings under our credit facility was 4.24% and 4.23% at March 31, 2014 and December 31, 2013, respectively.  Interest is payable at least quarterly.

Net proceeds from asset sales exceeding certain thresholds, to the extent not reinvested, are required to be used to repay loans outstanding under the Credit Agreement.

Credit Agreement Covenant Compliance

The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue capital stock.  We have agreed to maintain certain financial ratios, including interest coverage and total net leverage ratios, all as defined in the Credit Agreement.  As of March 31, 2014, we were in compliance with the Credit Agreement covenants.

In general, our Credit Agreement restricts our ability to pay dividends to the amount of our Available Cash as defined in our Credit Agreement.  As of March 31, 2014, and including the $15.6 million dividend declared in February 2014 and paid on May 1, 2014, we had $215.6 million in dividend availability under the credit facility covenant.

Under our Credit Agreement, if our total net leverage ratio (as 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 our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to fund acquisitions, or make other investments.  During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in Available Cash, among other things.  In addition, we will not be permitted to pay dividends if an event of default under the Credit Agreement has occurred and is continuing.  Among other things, it will be an event of default if our total net leverage ratio and interest coverage ratio as of the end of any fiscal quarter is greater than 5.25:1.00 and less than 2.25:1.00, respectively.  As of March 31, 2014, our total net leverage ratio under the Credit Agreement was 4.27:1.00, and our interest coverage ratio was 3.52:1.00.

Senior Notes

On May 30, 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% unsecured Senior Notes, due 2020 through our wholly-owned subsidiary, Consolidated Communications Finance Co. (“Finance Co.”) for the acquisition of SureWest.  The Senior Notes will mature on

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June 1, 2020 and earn interest at a rate of 10.875% per year, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2012.  The Senior Notes were sold in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) and outside the United States in compliance with Regulation S under the Securities Act.  In addition, some of the Senior Notes were sold to certain “accredited investors” (as defined in Rule 501 under the Securities Act).  The Senior Notes were sold to investors at a price equal to 99.345% of the principal amount thereof, for a yield to maturity of 11.00%.  This discount is being amortized over the term of the Senior Notes.  Upon closing of the SureWest acquisition on July 2, 2012, Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., (“CCI”) which assumed the Senior Notes, and we and certain of our subsidiaries fully and unconditionally guaranteed the Senior Notes.  On August 3, 2012, SureWest and its subsidiaries guaranteed the Senior Notes.

In 2013, we completed an exchange offer to issue registered notes (“Exchange Notes”) for $287.3 million of the original Senior Notes.  The terms of the Exchange Notes are substantially identical to the Senior Notes, except that the Exchange Notes are registered under the Securities Act and the transfer restrictions and registration rights applicable to the Senior Notes do not apply to the Exchange Notes.  The exchange offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.

Senior Notes Covenant Compliance

The indenture governing the Senior Notes contains customary covenants for high yield notes, which limits CCI’s and its restricted subsidiaries’ ability to: incur debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions.

Among other matters, the Senior Notes indenture provides that CCI may not pay dividends or make other “restricted payments” to the Company if its total net leverage ratio is 4.25:1.00 or greater.  This ratio is calculated differently than the comparable ratio under the Credit Agreement; among other differences, it takes into account on a pro forma basis synergies expected to be achieved as a result of the SureWest acquisition but not yet reflected in historical results.  At March 31, 2014, this ratio was 4.23:1.00.  If this ratio is met, dividends and other restricted payments may be made from cumulative consolidated cash flow since the date the Senior Notes were issued, less 1.75 times fixed charges, less dividends and other restricted payments made since the date the Senior Notes were issued.  Dividends may be paid and other restricted payments may also be made from a “basket” of $50.0 million, none of which has been used to date, and pursuant to other exceptions identified in the Senior Notes indenture.  Since dividends of $124.1 million have been paid since May 30, 2012, at March 31, 2014 there was $178.6 million of the $302.7 million of cumulative consolidated cash flow since May 30, 2012 available to pay dividends.

On March 19, 2014, CCI commenced a solicitation of consents from the eligible holders of the Senior Notes in order to amend the indenture governing the Senior Notes to (i) modify CCI’s Consolidated Leverage Ratio (as defined in the indenture governing the Senior Notes) level required before CCI (subject to certain other conditions specified in the indenture) can make Restricted Payments (as defined in the indenture) otherwise available under the consolidated cash flow builder basket from 4.25:1.00 to 4.50:1.00 and (ii) modify the size of a permitted lien basket for liens securing Indebtedness (as defined in the indenture) by amending the multiplier for CCI’s Consolidated Cash Flow (as defined in the indenture) in the calculation of such permitted lien basket from 2.50 to 2.75.  On April 1, 2014, the required consent of the holders of the Senior Notes was obtained and the consent solicitation expired, and we entered into a supplemental indenture effecting the proposed amendments as provided in the consent solicitation.  The amendment to the indenture with respect to modifying the size of a permitted lien basket for liens securing Indebtedness modified such provision in the indenture so that it would be the same as the equivalent provision in our Credit Agreement.  In connection with entering into the supplemental indenture, we paid consent fees of approximately $2.5 million, during the second quarter ended June 30, 2014, to the holders of the Senior Notes who validly consented to the proposed amendment.  The consent fees will be capitalized as deferred debt issuance costs and amortized over the term of the Senior Notes.

Capital Leases

As of March 31, 2014, we had seven capital leases which expire between 2015 and 2021.  As of March 31, 2014, the present value of the minimum remaining lease commitments was approximately $5.0 million, of which $0.7

34

million was due and payable within the next twelve months.  The leases require total remaining rental payments of $7.5 million as of March 31, 2014, of which $5.6 million will be paid to LATEL LLC, a related party entity.

Dividends

We paid $15.5 million and $15.4 million in dividend payments to shareholders during the quarters ended March 31, 2014 and 2013, respectively.  In February 2014, our board of directors declared its next quarterly dividend of $0.38738 per common share, which is payable on May 1, 2014 to stockholders of record at the close of business on April 15, 2014.  Our current annual dividend rate is approximately $1.55 per share.

The cash required to fund dividend payments is in addition to our other expected cash needs, which we expect to fund with cash flows from our operations.  In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any expected fluctuations in working capital and other cash needs, although we do not intend to borrow under this facility to pay dividends.

We believe that our dividend policy will limit, but not preclude, our ability to grow.  If we continue paying dividends at the level currently anticipated under our dividend policy, we may not retain a sufficient amount of cash, and may need to seek refinancing to fund a material expansion of our business, including any significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current expectations.  In addition, because we expect a significant portion of cash available will be distributed to holders of common stock under our dividend policy, our ability to pursue any material expansion of our business will depend more than it otherwise would on our ability to obtain third-party financing.

Sufficiency of Cash Resources

The following table sets forth selected information regarding our financial condition.

	March 31,		December 31,
(In thousands, except for ratio)	2014		2013
Cash and cash equivalents	$	6,829	$	5,551
Working capital (deficit)	(34,844)		(29,979)
Current ratio	0.71		0.75

Our most significant uses of funds in the remainder of 2014 are expected to be for: (i) dividend payments of approximately $47.0 million; (ii) interest payments on our indebtedness of between $62.0 million and $65.0 million and principal payments on debt of $6.8 million; (iii) capital expenditures of between $72.0 million and $78.0 million and (iv) pension and other post-retirement obligations of $14.6 million.  However, in the future our ability to use cash may be limited by our other expected uses of cash, including our dividend policy, and our ability to incur additional debt will be limited by our existing and future debt agreements.

We believe that cash flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility will be sufficient for at least the next twelve months to fund our current anticipated uses of cash.  After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance and cash flow.  Our ability to fund these expected uses from the results of future operations will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control.

We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future.  In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries’ ability to pay dividends or advance cash in any other manner to us.

To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate.  Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities.  There can be no assurance that we will be able to generate sufficient cash flows from operations in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash.  Failure to obtain adequate financing, if necessary, could require us to significantly

35

reduce our operations or level of capital expenditures which could have a material adverse effect on our financial condition and the results of operations.

Surety Bonds

In the ordinary course of business, we enter into surety, performance, and similar bonds as required by certain jurisdictions in which we provide services.  As of March 31, 2014, we had approximately $2.8 million of these bonds outstanding.

Defined Benefit Pension Plans

As required, we contribute to qualified defined pension plans and non-qualified supplemental retirement plans (collectively the “Pension Plans”) and other post-retirement benefit plans, which provide retirement benefits to certain eligible employees. Contributions are intended to provide for benefits attributed to service to date. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations.

The costs of maintaining our Pension Plans and future funding requirements are affected by several factors including the expected return on investment of the assets held by the Pension Plan, changes in the discount rate used to calculate pension expense and the amortization of unrecognized gains and losses. Returns generated on Plan assets have historically funded a significant portion of the benefits paid under the Pension Plans.  We estimate the long-term rate of return of Plan assets will be 8.0%.  The Pension Plans invest in marketable equity securities which are exposed to changes in the financial markets.  If the financial markets experience a downturn and returns fall below our estimate, we could be required to make a material contribution to the Pension Plan, which could adversely affect our cash flows from operations.

In 2014, we expect to make contributions totaling approximately $15.5 million to our pension plans and $2.5 million to our other post-retirement plans.  As of March 31, 2014, we have contributed $2.7 million and $0.7 million to our pension plans and our other post-retirement plans, respectively.  Our contribution amounts meet the minimum funding requirements as set forth in employee benefit and tax laws. See Note 9 for a more detailed discussion regarding our pension and other post-retirement plans.

Income Taxes

The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. For example, tax laws in effect regarding accelerated or “bonus” depreciation for tax reporting resulted in less cash payments than the GAAP tax expense. Acceleration of tax deductions could eventually result in situations where cash payments will exceed GAAP tax expense.

It is more likely than not that the benefit from approximately $1.5 million in federal NOL carryforwards that are subject to separate return limitation year restrictions will not be realized.  This loss carryover can only be used against consolidated taxable income to the extent of a single member’s contribution to consolidated taxable income.  The amount considered realizable, however, could be adjusted if estimates of future taxable income for the single member during the carryforward period are increased. The amount of estimated future taxable income is expected to allow for the full utilization of the remaining net operating loss carryforwards.

Historically, pre-tax earnings for financial reporting purposes have exceeded the amount of taxable income reported for income tax purposes. This has primarily occurred due to the acceleration of depreciation deductions for income tax reporting purposes.

Regulatory Matters

As discussed in the “Regulatory Matters” section above, an order adopted by the FCC may significantly impact the amount of support revenue we receive from USF/CAF and ICC.  The Order seeks to reform the current USF system by redirecting support from voice services to broadband services. Although the broadband cost model for this reform is still being developed, we anticipate that our revenues will be significantly impacted when it is implemented.  The initial phase of ICC reform decreased our network access revenues $0.5 million during the quarter ended March 31, 2014 compared to the same period in 2013.  We anticipate network access revenues will continue to decline as a result of the Order through 2018 by as much as $1.2 million in the remainder of 2014 and $1.0 million, $1.1 million, $2.4 million and $1.8 million in 2015, 2016, 2017 and 2018, respectively.

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In accordance with the provisions of SB 583, as discussed above in the “Regulatory Matters” section, our annual $1.4 million Texas HCAF was eliminated, effective January 1, 2014.  In addition, the terms of the settlement agreement reached with the PUCT in August 2013 returned our HCF support funding to a per line basis as of January 2014, and will reduce our HCF draw by approximately $1.2 million annually, or approximately $4.8 million in total, over a 4 year period beginning June 1, 2014 through 2017.  However, where market conditions allow, we have the ability to offset this reduction with increases to residential rates, for which the Company initiated a filing in April 2014.

Critical Accounting Estimates

Our condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Our judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our condensed consolidated financial statements, refer to our 2013 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  ASU 2014-08 revises the definition of a discontinued operation to limit the circumstances under which a disposal or classification as held for sale qualifies for presentation as a discontinued operation. Amendments in this ASU require expanded disclosures concerning a discontinued operation and the disposal of an individually-material component of an entity not qualifying as a discontinued operation. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014 and should be applied prospectively, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

Effective January 1, 2014, we adopted Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance concerning the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is present. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk is primarily related to the impact of interest rate fluctuations on our debt obligations.  Market risk is the potential loss arising from adverse changes in market interest rates on our variable rate obligations.  In order to manage the volatility relating to changes in interest rates, we utilize derivative financial instruments such as interest rate swaps to maintain a mix of fixed and variable rate debt.  We do not use derivatives for trading or speculative purposes.  Our interest rate swap agreements effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  We calculate the potential change in interest expense caused by changes in market interest rates by determining the effect of the hypothetical rate increase on the portion of our variable rate debt that is not subject to a variable rate floor or hedged through the interest rate swap agreements.

At March 31, 2014, the majority of our variable rate debt was subject to a 1.00% London Interbank Offered Rate (“LIBOR”) floor thereby reducing the impact of fluctuations in interest rates.  As of March 31, 2014, LIBOR was well below the 1.00% floor.  Based on our variable rate debt outstanding at March 31, 2014 that is not subject to a variable rate floor, a 1.0% change in market interest rates would not have a significant impact to annual interest expense.

As of March 31, 2014, the fair value of our interest rate swap agreements amounted to a net liability of $2.4 million.  Pretax deferred losses related to our interest rate swap agreements included in accumulated other comprehensive loss (“AOCI”) was $2.0 million at March 31, 2014.

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Item 4.  Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. In connection with the filing of this Form 10-Q, management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design to provide reasonable assurance of achieving their objectives and operation of our disclosure controls and procedures as of March 31, 2014.  Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of March 31, 2014.

Change in internal control over financial reporting

Based upon the evaluation performed by our management, which was conducted with the participation of our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In connection with management’s annual assessment of the overall effectiveness of our internal controls over financial reporting included in our Form 10-K for the year ended December 31, 2013, management based its assessment on the framework set forth in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. On May 14, 2013, COSO issued an updated framework, referred to as the 2013 COSO framework. COSO has indicated that after December 15, 2014, it will consider the 1992 framework to have been superseded.  We have reviewed the COSO 2013 framework and will integrate the changes into the Company’s internal controls over financial reporting during 2014. We expect that management’s assessment of the overall effectiveness of our internal controls over financial reporting for the year ending December 31, 2014 will be based on the 2013 COSO framework and that the change will not be significant to our overall control structure over financial reporting.

Limitations on the effectiveness of controls

We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control systems are designed to provide reasonable assurance to the Company’s management, Board of Directors and Audit Committee regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates (“Salsgiver”) filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs.  Salsgiver originally claimed to have sustained losses of approximately $125 million.  We believe that these claims are without merit and that the alleged damages are completely unfounded.  Discovery concluded and Consolidated filed a motion for summary judgment on June 18, 2012 and the court heard oral arguments on August 30, 2012.  On February 12, 2013, the court, in part, granted our motion.  The court ruled that Salsgiver could not recover prejudgment interest and could not use as a basis of liability any actions prior to April 14, 2006. In September 2013, in order to avoid the distraction and uncertainty of further litigation, we reached an agreement in principle (the “Agreement”) with Salsgiver, Inc.  In accordance with the terms of the Agreement, we will pay Salsgiver approximately $0.9 million in cash and grant approximately $0.3 million in credits that may be used for make-ready charges (the “Credits”).  The Credits will be available for services performed in connection with the pole attachment applications within five years of the execution of the agreement. We had previously recorded approximately $0.4 million in 2011 in anticipation of the settlement of this case.  During the quarter ended September 30, 2013, per the terms of the agreement we recorded an additional $0.9 million, which included estimated legal fees.  The agreement is contingent on appropriate documentation and there is no assurance that the agreement will be finalized.

Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), have, at various times, received assessment notices from the Commonwealth of Pennsylvania Department of Revenue (“DOR”) increasing the amounts owed for Pennsylvania Gross Receipt Taxes, and/or have had audits performed for the tax years of 2008, 2009, and 2010.  For the calendar years for which we received both additional assessment notices and audit actions, those issues have been combined by the DOR into a single Docket for each year.  For the CCES subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $1.9 million.  As of March 2013, all three of these cases have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  For the CCPA subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $2.0 million.  As of December 2013 the cases for calendar years 2009 and 2010 have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  The calendar year 2008 audit result was appealed to the Board of Finance and Revenue on March 19, 2014.  We anticipate that the 2008 case will be continued pending the outcome of the Verizon litigation as well.  The Gross Receipts Tax issues in the Verizon Pennsylvania case are substantially the same as those presently facing CCPA and CCES.  In addition, there are numerous telecommunications carriers with Gross Receipts Tax matters dealing with the same issues that are in various stages of appeal before the Board of Finance and Revenue and the Commonwealth Court.  Those appeals by other similarly situated telecommunications carriers have been continued until resolution of the Verizon Pennsylvania case.  We believe that these assessments and the positions taken by the Commonwealth of Pennsylvania are without substantial merit.  We do not believe that the outcome of these claims will have a material adverse impact on our financial results

On January 18, 2012, we filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit to review the Federal Communications Commission’s (“FCC”) Order issued November 18, 2011 that reformed intercarrier compensation and core parts of the Universal Service Fund.  We are appealing five core issues in the November 18, 2011 FCC Order. This matter was heard by the U.S. Court of Appeals for the Tenth Circuit on November 19, 2013; however a decision is not expected before the third quarter of 2014.

We are from time to time involved in various other legal proceedings and regulatory 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 our business, operating results or financial condition.

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Item 6. Exhibits

(a) Exhibits

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial information from Consolidated Communications Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Registrant)

May 2, 2014	By:	/s/ Robert J. Currey
		Robert J. Currey,
		Chairman and Chief Executive Officer
		(Principal Executive Officer)
May 2, 2014	By:	/s/ Steven L. Childers
		Steven L. Childers,
		Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)

41

EX-31.1

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Robert J. Currey, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Consolidated Communications Holdings, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d) – 15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 2, 2014	/s/ Robert J. Currey
	Robert J. Currey
	Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Steven L. Childers, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Consolidated Communications Holdings, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d) – 15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 2, 2014	/s/ Steven L. Childers
	Steven L. Childers
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), Robert J. Currey and Steven L. Childers, Chairman and Chief Executive Officer and Chief Financial Officer, respectively, of Consolidated Communications Holdings, Inc., each certify that to his knowledge (i) the Quarterly Report on Form 10-Q for the period ended March 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Consolidated Communications Holdings, Inc.

/s/ Robert J. Currey

Robert J. Currey

Chairman and Chief Executive Officer

(Principal Executive Officer)

May 2, 2014

/s/ Steven L. Childers

Steven L. Childers

Senior Vice President and Chief Financial Officer

(Principal Financial Officer and Chief Accounting Officer)

May 2, 2014

XML

EQUITY (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Stock-based compensation plans
Pretax stock-based compensation expense	$ 784,000	$ 656,000
Unrecognized share-based compensation
Unrecognized compensation costs	7,000,000
Weighted-average period of recognition	1 year 8 months 12 days
Restricted stock
Stock-based compensation plans
Pretax stock-based compensation expense	517,000	456,000
Number of shares
Non-vested shares outstanding at the beginning of the period	123,501
Shares granted	131,281
Non-vested shares outstanding at the end of the period	254,782
Price
Non-vested shares outstanding at the beginning of the period (in dollars per share)	$ 17.32
Shares granted (in dollars per share)	$ 19.74
Performance shares
Stock-based compensation plans
Pretax stock-based compensation expense	$ 267,000	$ 200,000
Number of shares
Non-vested shares outstanding at the beginning of the period	64,266
Shares granted	91,127
Non-vested shares outstanding at the end of the period	155,393
Price
Non-vested shares outstanding at the beginning of the period (in dollars per share)	$ 17.96
Shares granted (in dollars per share)	$ 17.13

XML

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net cash (used in) provided by continuing operations	$ 48,394	$ 37,723
Net cash used in discontinued operations		(1,531)
Net cash provided by operating activities	48,394	36,192
Cash flows from investing activities:
Purchases of property, plant and equipment	(25,405)	(27,506)
Proceeds from sale of assets	1,241	21
Other		(84)
Net cash used in continuing operations	(24,164)	(27,569)
Net cash provided by discontinued operations		(11)
Net cash used in investing activities	(24,164)	(27,580)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	10,000	13,000
Payment of capital lease obligation	(157)	(85)
Payment on long-term debt	(17,275)	(15,310)
Dividends on common stock	(15,520)	(15,447)
Net cash used in financing activities	(22,952)	(17,842)
Increase (decrease) in cash and cash equivalents	1,278	(9,230)
Cash and cash equivalents at beginning of period	5,551	17,854
Cash and cash equivalents at end of period	6,829	8,624
Parent
Cash flows from operating activities:
Net cash (used in) provided by continuing operations	(26,654)	(20,835)
Net cash provided by operating activities	(26,654)	(20,835)
Cash flows from financing activities:
Dividends on common stock	(15,520)	(15,447)
Transactions with affiliates, net	42,174	36,282
Net cash used in financing activities	26,654	20,835
Subsidiary Issuer
Cash flows from operating activities:
Net cash (used in) provided by continuing operations	20,833	14,062
Net cash provided by operating activities	20,833	14,062
Cash flows from financing activities:
Proceeds from issuance of long-term debt	10,000	13,000
Payment on long-term debt	(17,275)	(15,310)
Transactions with affiliates, net	(11,793)	(14,935)
Net cash used in financing activities	(19,068)	(17,245)
Increase (decrease) in cash and cash equivalents	1,765	(3,183)
Cash and cash equivalents at beginning of period	86	6,577
Cash and cash equivalents at end of period	1,851	3,394
Guarantor Subsidiaries
Cash flows from operating activities:
Net cash (used in) provided by continuing operations	48,063	37,499
Net cash used in discontinued operations		(1,531)
Net cash provided by operating activities	48,063	35,968
Cash flows from investing activities:
Purchases of property, plant and equipment	(24,316)	(25,371)
Proceeds from sale of assets	1,200	4
Other		(84)
Net cash used in continuing operations	(23,116)	(25,451)
Net cash provided by discontinued operations		(11)
Net cash used in investing activities	(23,116)	(25,462)
Cash flows from financing activities:
Payment of capital lease obligation	(142)	(73)
Transactions with affiliates, net	(24,921)	(15,748)
Net cash used in financing activities	(25,063)	(15,821)
Increase (decrease) in cash and cash equivalents	(116)	(5,315)
Cash and cash equivalents at beginning of period	2,366	8,530
Cash and cash equivalents at end of period	2,250	3,215
Non-Guarantors
Cash flows from operating activities:
Net cash (used in) provided by continuing operations	6,152	6,997
Net cash provided by operating activities	6,152	6,997
Cash flows from investing activities:
Purchases of property, plant and equipment	(1,089)	(2,135)
Proceeds from sale of assets	41	17
Net cash used in continuing operations	(1,048)	(2,118)
Net cash used in investing activities	(1,048)	(2,118)
Cash flows from financing activities:
Payment of capital lease obligation	(15)	(12)
Transactions with affiliates, net	(5,460)	(5,599)
Net cash used in financing activities	(5,475)	(5,611)
Increase (decrease) in cash and cash equivalents	(371)	(732)
Cash and cash equivalents at beginning of period	3,099	2,747
Cash and cash equivalents at end of period	$ 2,728	$ 2,015

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 6,829	$ 5,551	$ 8,624	$ 17,854
Accounts receivable, net	52,368	52,033
Income taxes receivable	4,689	9,796
Deferred income taxes	7,960	7,960
Prepaid expenses and other current assets	14,151	12,380
Total current assets	85,997	87,720
Property, plant and equipment, net	875,467	885,362
Intangibles and other assets:
Investments	112,585	113,099
Goodwill	603,446	603,446
Other intangible assets	37,628	40,084
Deferred debt issuance costs, net and other assets	17,891	17,667
Total assets	1,733,014	1,747,378
Current liabilities:
Accounts payable	7,775	4,885
Advance billings and customer deposits	26,527	25,934
Dividends payable	15,607	15,520
Accrued compensation	17,333	22,252
Accrued interest	12,124	3,524
Accrued expense	31,008	35,173
Current portion of long term debt and capital lease obligations	9,773	9,751
Current portion of derivative liability	694	660
Total current liabilities	120,841	117,699
Long-term debt and capital lease obligations	1,204,873	1,212,134
Deferred income taxes	180,023	179,859
Pension and postretirement benefit obligations	71,066	75,754
Other long-term liabilities	10,000	9,593
Total liabilities	1,586,803	1,595,039
Shareholders' equity:
Common Stock	403	401
Other shareholders' equity	141,205	147,433
Total Consolidated Communications Holdings, Inc. shareholders' equity	141,608	147,834
Noncontrolling interest	4,603	4,505
Total shareholders' equity	146,211	152,339
Total liabilities and shareholders' equity	1,733,014	1,747,378
Eliminations
Current assets:
Income taxes receivable	(14,619)
Total current assets	(14,619)
Intangibles and other assets:
Investments in subsidiaries	(1,493,062)	(1,448,828)
Total assets	(1,507,681)	(1,448,828)
Current liabilities:
Income tax payable	(14,619)
Total current liabilities	(14,619)
Total liabilities	(14,619)
Shareholders' equity:
Common Stock	(47,411)	(47,411)
Other shareholders' equity	(1,445,651)	(1,401,417)
Total Consolidated Communications Holdings, Inc. shareholders' equity	(1,493,062)	(1,448,828)
Total shareholders' equity	(1,493,062)	(1,448,828)
Total liabilities and shareholders' equity	(1,507,681)	(1,448,828)
Parent | Reportable legal entity
Current assets:
Income taxes receivable	19,308	9,346
Deferred income taxes	(61)	(61)
Total current assets	19,247	9,285
Intangibles and other assets:
Investments in subsidiaries	1,126,932	1,101,039
Total assets	1,146,179	1,110,324
Current liabilities:
Dividends payable	15,607	15,520
Accrued expense	43	224
Total current liabilities	15,650	15,744
Advances due to/from affiliates, net	1,010,493	968,319
Deferred income taxes	(21,598)	(21,598)
Other long-term liabilities	26	25
Total liabilities	1,004,571	962,490
Shareholders' equity:
Common Stock	403	401
Other shareholders' equity	141,205	147,433
Total Consolidated Communications Holdings, Inc. shareholders' equity	141,608	147,834
Total shareholders' equity	141,608	147,834
Total liabilities and shareholders' equity	1,146,179	1,110,324
Subsidiary Issuer
Current assets:
Cash and cash equivalents	1,851	86	3,394	6,577
Subsidiary Issuer | Reportable legal entity
Current assets:
Cash and cash equivalents	1,851	86
Accounts receivable, net	122	502
Deferred income taxes	(7)	(7)
Total current assets	1,966	581
Intangibles and other assets:
Investments	3,765	3,729
Investments in subsidiaries	353,737	335,659
Deferred debt issuance costs, net and other assets	13,181	13,620
Total assets	372,649	353,589
Current liabilities:
Accrued interest	12,114	3,514
Accrued expense		875
Income tax payable	4,265
Current portion of long term debt and capital lease obligations	9,100	9,100
Current portion of derivative liability	694	660
Total current liabilities	26,173	14,149
Long-term debt and capital lease obligations	1,200,580	1,207,663
Advances due to/from affiliates, net	(1,981,985)	(1,970,192)
Deferred income taxes	(778)	(1,029)
Other long-term liabilities	1,727	1,960
Total liabilities	(754,283)	(747,449)
Shareholders' equity:
Other shareholders' equity	1,126,932	1,101,038
Total Consolidated Communications Holdings, Inc. shareholders' equity	1,126,932	1,101,038
Total shareholders' equity	1,126,932	1,101,038
Total liabilities and shareholders' equity	372,649	353,589
Guarantors
Condensed Consolidating Balance Sheet
Ownership interest (as a percent)	100.00%
Current assets:
Cash and cash equivalents	2,250	2,366	3,215	8,530
Guarantors | Reportable legal entity
Current assets:
Cash and cash equivalents	2,250	2,366
Accounts receivable, net	44,039	44,521
Income taxes receivable		370
Deferred income taxes	7,533	7,533
Prepaid expenses and other current assets	13,621	11,862
Total current assets	67,443	66,652
Property, plant and equipment, net	825,064	834,199
Intangibles and other assets:
Investments	108,820	109,370
Investments in subsidiaries	12,393	12,130
Goodwill	537,265	537,265
Other intangible assets	28,541	30,997
Deferred debt issuance costs, net and other assets	4,710	4,047
Total assets	1,584,236	1,594,660
Current liabilities:
Accounts payable	7,775	4,885
Advance billings and customer deposits	24,168	23,699
Accrued compensation	15,606	20,447
Accrued interest	6	6
Accrued expense	29,292	32,703
Income tax payable	7,681
Current portion of long term debt and capital lease obligations	605	586
Total current liabilities	85,133	82,326
Long-term debt and capital lease obligations	3,499	3,659
Advances due to/from affiliates, net	1,013,048	1,037,969
Deferred income taxes	184,143	184,209
Pension and postretirement benefit obligations	58,604	61,053
Other long-term liabilities	7,970	7,328
Total liabilities	1,352,397	1,376,544
Shareholders' equity:
Common Stock	17,411	17,411
Other shareholders' equity	209,825	196,200
Total Consolidated Communications Holdings, Inc. shareholders' equity	227,236	213,611
Noncontrolling interest	4,603	4,505
Total shareholders' equity	231,839	218,116
Total liabilities and shareholders' equity	1,584,236	1,594,660
Non-Guarantors
Current assets:
Cash and cash equivalents	2,728	3,099	2,015	2,747
Non-Guarantors | Reportable legal entity
Current assets:
Cash and cash equivalents	2,728	3,099
Accounts receivable, net	8,207	7,010
Income taxes receivable		80
Deferred income taxes	495	495
Prepaid expenses and other current assets	530	518
Total current assets	11,960	11,202
Property, plant and equipment, net	50,403	51,163
Intangibles and other assets:
Goodwill	66,181	66,181
Other intangible assets	9,087	9,087
Total assets	137,631	137,633
Current liabilities:
Advance billings and customer deposits	2,359	2,235
Accrued compensation	1,727	1,805
Accrued interest	4	4
Accrued expense	1,673	1,371
Income tax payable	2,673
Current portion of long term debt and capital lease obligations	68	65
Total current liabilities	8,504	5,480
Long-term debt and capital lease obligations	794	812
Advances due to/from affiliates, net	(41,556)	(36,096)
Deferred income taxes	18,256	18,277
Pension and postretirement benefit obligations	12,462	14,701
Other long-term liabilities	277	280
Total liabilities	(1,263)	3,454
Shareholders' equity:
Common Stock	30,000	30,000
Other shareholders' equity	108,894	104,179
Total Consolidated Communications Holdings, Inc. shareholders' equity	138,894	134,179
Total shareholders' equity	138,894	134,179
Total liabilities and shareholders' equity	$ 137,631	$ 137,633

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FAIR VALUE MEASUREMENTS (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Fair Value Measurements
Current interest rate swap liabilities	$ (694)	$ (660)
Recurring | Fair Value
Fair Value Measurements
Current interest rate swap liabilities	(694)	(660)
Long-term interest rate swap liabilities	(1,727)	(1,959)
Total	(2,421)	(2,619)
Recurring | Significant Other Observable Inputs (Level 2)
Fair Value Measurements
Current interest rate swap liabilities	(694)	(660)
Long-term interest rate swap liabilities	(1,727)	(1,959)
Total	$ (2,421)	$ (2,619)

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DERIVATIVE FINANCIAL INSTRUMENTS (Tables)

3 Months Ended

Mar. 31, 2014

DERIVATIVE FINANCIAL INSTRUMENTS

Schedule of outstanding interest rate swaps

The following interest rate swaps were outstanding at March 31, 2014:

(In thousands)	Notional  Amount		2014 Balance Sheet Location	Fair Value
De-designated Hedges:
Fixed to 1-month floating LIBOR	$	150,000	Other long-term liabilities	$	(1,581)
Fixed to 1-month floating LIBOR	125,000		Current portion of derivative liability	(694)
Fixed to 1-month floating LIBOR (with floor)	50,000		Other long-term liabilities	(146)
Total Fair Values				$	(2,421)

The following interest rate swaps were outstanding at December 31, 2013:

(In thousands)	Notional  Amount		2013 Balance Sheet Location	Fair Value
De-designated Hedges:
Fixed to 1-month floating LIBOR	$	175,000	Other long-term liabilities	$	(1,897)
Fixed to 1-month floating LIBOR	100,000		Current portion of derivative liability	(660)
Fixed to 1-month floating LIBOR (with floor)	50,000		Other long-term liabilities	(62)
Total Fair Values				$	(2,619)

Schedule of gains and losses on cash flow hedge transactions

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Loss recognized in AOCI, pretax	$	-	$	(52)
Deferred losses reclassed from AOCI to interest expense	$	(659)	$	(3,641)

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PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Details) (USD $)	3 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013
Defined Benefit Plans
Defined benefit plans
Number of persons eligible to become a new participant	0
Components of net periodic pension costs
Service costs	$ 140,000	$ 304,000
Interest costs	4,073,000	3,862,000
Expected return on plan assets	(5,777,000)	(5,151,000)
Net amortization (gain) loss	5,000	891,000
Prior service cost (credit) amortization	(115,000)	(71,000)
Net periodic pension benefit	(1,674,000)	(165,000)
Expected contribution to pension plan	15,500,000
Contribution to the plans	2,700,000
Supplemental Plans
Defined benefit plans
Number of persons eligible to become a new participant	0
Number of non-qualified plans	2
SureWest Plan
Defined benefit plans
Number of highest consecutive years for computing employee's average compensation	5 years
Number of persons eligible to become a new participant	0
Period of credit service for computing employee's average compensation	10 years
Post-retirement Benefit Obligations
Defined benefit plans
Number of persons eligible to become a new participant	0
Post-retirement Plan unfunded assets	0
Components of net periodic pension costs
Service costs	90,000	232,000
Interest costs	355,000	391,000
Expected return on plan assets	(55,000)	(58,000)
Net amortization (gain) loss	(147,000)
Prior service cost (credit) amortization	35,000	(45,000)
Net periodic pension benefit	278,000	520,000
Expected contribution to pension plan	2,500,000
Contribution to the plans	700,000
Pension and SERP Plans
Defined benefit plans
Post-retirement Plan unfunded assets	$ 0

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DERIVATIVE FINANCIAL INSTRUMENTS (Details) (USD $)			3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended		12 Months Ended
	Mar. 31, 2014 item bank	Dec. 31, 2013	Mar. 31, 2014 De-designated Hedges Fixed to 1-month floating LIBOR, one	Dec. 31, 2013 De-designated Hedges Fixed to 1-month floating LIBOR, one	Mar. 31, 2014 De-designated Hedges Fixed to 1-month floating LIBOR, two	Dec. 31, 2013 De-designated Hedges Fixed to 1-month floating LIBOR, two	Mar. 31, 2014 De-designated Hedges Fixed to 1-month floating LIBOR (with floor)	Dec. 31, 2013 De-designated Hedges Fixed to 1-month floating LIBOR (with floor)	Mar. 31, 2014 De-designated Hedges Interest rate swaps	Mar. 31, 2013 De-designated Hedges Interest rate swaps	Dec. 31, 2012 De-designated Hedges Interest rate swaps	Dec. 23, 2013 De-designated Hedges Interest rate swaps	Dec. 04, 2012 De-designated Hedges Interest rate swaps	Mar. 31, 2014 Cash flow hedges Interest rate swaps	Dec. 31, 2013 Cash flow hedges Interest rate swaps
Derivatives
Reference rate for receiving interest			1-month floating LIBOR	1-month floating LIBOR	1-month floating LIBOR	1-month floating LIBOR	1-month floating LIBOR	1-month floating LIBOR
Notional amount			$ 150,000,000	$ 175,000,000	$ 125,000,000	$ 100,000,000	$ 50,000,000	$ 50,000,000				$ 325,000,000	$ 660,000,000
Fair Value, Current portion of long-term liabilities	(694,000)	(660,000)			(694,000)	(660,000)
Fair Value, Other long-term liabilities			(1,581,000)	(1,897,000)			(146,000)	(62,000)
Total Fair Value														(2,421,000)	(2,619,000)
Number of U.S. and European banks which are counterparties	4
Number of swap agreements that provide for the entity or the counterparties to post collateral	0
Notional amount of derivatives expired											200,000,000
Gain recognized as a reduction to interest expense									$ 200,000	$ 2,100,000

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Net revenues	$ 149,648	$ 151,528
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	55,300	55,052
Selling, general and administrative expenses	32,864	33,305
Depreciation and amortization	35,542	34,841
Income from operations	25,942	28,330
Other income (expense):
Interest expense, net of interest income	(19,831)	(24,600)
Investment income	8,336	8,784
Other, net	(903)	(107)
Income from continuing operations before income taxes	13,544	12,407
Income tax expense (benefit)	5,122	5,549
Income from continuing operations	8,422	6,858
Discontinued operations, net of tax		24
Net income	8,422	6,882
Less: net income attributable to noncontrolling interest	98	99
Net income attributable to common shareholders	8,324	6,783
Total comprehensive income attributable to common shareholders	8,596	9,515
Eliminations
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Net revenues	(3,434)	(3,548)
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	(3,256)	(3,253)
Selling, general and administrative expenses	(178)	(295)
Other income (expense):
Equity in earnings of subsidiaries, net	(44,099)	(38,969)
Income from continuing operations before income taxes	(44,099)	(38,969)
Income from continuing operations	(44,099)	(38,969)
Net income	(44,099)	(38,969)
Net income attributable to common shareholders	(44,099)	(38,969)
Total comprehensive income attributable to common shareholders	(44,099)	(38,969)
Parent | Reportable legal entity
Operating expenses:
Selling, general and administrative expenses	877	1,127
Income from operations	(877)	(1,127)
Other income (expense):
Interest expense, net of interest income	(2)	6
Intercompany interest income (expense)	(26,380)	(20,433)
Equity in earnings of subsidiaries, net	25,621	20,300
Income from continuing operations before income taxes	(1,638)	(1,254)
Income tax expense (benefit)	(9,962)	(8,037)
Income from continuing operations	8,324	6,783
Net income	8,324	6,783
Net income attributable to common shareholders	8,324	6,783
Total comprehensive income attributable to common shareholders	8,324	6,783
Subsidiary Issuer | Reportable legal entity
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Net revenues	69	(7)
Operating expenses:
Selling, general and administrative expenses	39	31
Income from operations	30	(38)
Other income (expense):
Interest expense, net of interest income	(19,820)	(24,497)
Intercompany interest income (expense)	31,425	27,608
Investment income	36	(37)
Equity in earnings of subsidiaries, net	18,215	18,393
Income from continuing operations before income taxes	29,886	21,429
Income tax expense (benefit)	4,265	1,129
Income from continuing operations	25,621	20,300
Net income	25,621	20,300
Net income attributable to common shareholders	25,621	20,300
Total comprehensive income attributable to common shareholders	26,029	22,558
Guarantors | Reportable legal entity
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Net revenues	136,255	138,055
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	55,252	54,861
Selling, general and administrative expenses	27,631	27,713
Depreciation and amortization	33,647	32,582
Income from operations	19,725	22,899
Other income (expense):
Interest expense, net of interest income	(2)	(110)
Intercompany interest income (expense)	(5,496)	(7,329)
Investment income	8,300	8,821
Equity in earnings of subsidiaries, net	263	276
Other, net	(899)	(98)
Income from continuing operations before income taxes	21,891	24,459
Income tax expense (benefit)	8,066	9,943
Income from continuing operations	13,825	14,516
Discontinued operations, net of tax		24
Net income	13,825	14,540
Less: net income attributable to noncontrolling interest	98	99
Net income attributable to common shareholders	13,727	14,441
Total comprehensive income attributable to common shareholders	13,653	14,759
Non-Guarantors | Reportable legal entity
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Net revenues	16,758	17,028
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	3,304	3,444
Selling, general and administrative expenses	4,495	4,729
Depreciation and amortization	1,895	2,259
Income from operations	7,064	6,596
Other income (expense):
Interest expense, net of interest income	(7)	1
Intercompany interest income (expense)	451	154
Other, net	(4)	(9)
Income from continuing operations before income taxes	7,504	6,742
Income tax expense (benefit)	2,753	2,514
Income from continuing operations	4,751	4,228
Net income	4,751	4,228
Net income attributable to common shareholders	4,751	4,228
Total comprehensive income attributable to common shareholders	$ 4,689	$ 4,384

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EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2014

EARNINGS PER SHARE

EARNINGS PER SHARE

3. EARNINGS PER SHARE

The computation of basic and diluted earnings per share attributable to common shareholders computed using the two-class method is as follows:

	Quarter Ended
	March 31,
(In thousands, except per share amounts)	2014		2013
Income from continuing operations	$	8,422	$	6,858
Less: net income attributable to noncontrolling interest	98		99
Income attributable to common shareholders before allocation of earnings to participating securities	8,324		6,759
Less: earnings allocated to participating securities	153		132
Income from continuing operations attributable to common shareholders	8,171		6,627
Net income from discontinued operations	-		24
Net income attributable to common shareholders	$	8,171	$	6,651
Weighted-average number of common shares outstanding	39,877		39,755
Basic and diluted earnings per common share:
Income from continuing operations	$	0.20	$	0.17
Income from discontinued operations, net of tax	0.00		0.00
Net income per common share attributable to common shareholders	$	0.20	$	0.17

Diluted earnings per common share attributable to common shareholders for the quarters ended March 31, 2014 and 2013, excludes 0.2 million shares of potential common shares that could be issued under our share-based compensation plan, because the inclusion of the potential common shares would have had an antidilutive effect.

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PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013	Dec. 31, 2013
Other Non-qualified Deferred Compensation Agreements
Minimum age at which payments under deferred compensation agreements may begin	55 years
Payment related to deferred compensation agreements	$ 0.1	$ 0.1
Net present value of the remaining obligations	1.7		1.8
Number of life insurance policies	34
Excess of cash surrender value of remaining life insurance policies over notes payable	$ 2.4		$ 2.2

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 item	Jun. 30, 2013 segment	Mar. 31, 2013 segment	Sep. 30, 2013	Sep. 13, 2013 item
Business and Basis of Accounting
Number of access lines	254,000
Number of voice connections	122,000
Number of data and internet connections	258,000
Number of video connections	111,000
Segment Reporting
Number of reportable business segments		1	2
Number of non-core businesses	2
Discontinued Operations
Number of county jails where communication services for inmates were provided					13
Total purchase price for the sale of the assets and contractual rights related to prison services				$ 2.5	$ 2.5

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Tables)

3 Months Ended

Mar. 31, 2014

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Schedule of condensed consolidating balance sheets

Condensed Consolidating Balance Sheet

(amounts in thousands)

	March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	1,851	$	2,250	$	2,728	$	-	$	6,829
Accounts receivable, net	-		122		44,039		8,207		-		52,368
Income taxes receivable	19,308		-		-		-		(14,619)		4,689
Deferred income taxes	(61)		(7)		7,533		495				7,960
Prepaid expenses and other current assets	-		-		13,621		530		-		14,151
Total current assets	19,247		1,966		67,443		11,960		(14,619)		85,997
Property, plant and equipment, net	-		-		825,064		50,403		-		875,467
Intangibles and other assets:
Investments	-		3,765		108,820		-		-		112,585
Investments in subsidiaries	1,126,932		353,737		12,393		-		(1,493,062)		-
Goodwill	-		-		537,265		66,181		-		603,446
Other intangible assets	-		-		28,541		9,087		-		37,628
Deferred debt issuance costs, net and other assets	-		13,181		4,710		-		-		17,891
Total assets	$	1,146,179	$	372,649	$	1,584,236	$	137,631	$	(1,507,681)	$	1,733,014
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	-	$	-	$	7,775	$	-	$	-	$	7,775
Advance billings and customer deposits	-		-		24,168		2,359		-		26,527
Dividends payable	15,607		-		-		-		-		15,607
Accrued compensation	-		-		15,606		1,727		-		17,333
Accrued interest	-		12,114		6		4		-		12,124
Accrued expense	43		-		29,292		1,673		-		31,008
Income tax payable	-		4,265		7,681		2,673		(14,619)		-
Current portion of long term debt and capital
lease obligations	-		9,100		605		68		-		9,773
Current portion of derivative liability	-		694		-		-		-		694
Total current liabilities	15,650		26,173		85,133		8,504		(14,619)		120,841
Long-term debt and capital lease obligations	-		1,200,580		3,499		794		-		1,204,873
Advances due to/from affiliates, net	1,010,493		(1,981,985)		1,013,048		(41,556)		-		-
Deferred income taxes	(21,598)		(778)		184,143		18,256				180,023
Pension and postretirement benefit obligations	-		-		58,604		12,462		-		71,066
Other long-term liabilities	26		1,727		7,970		277		-		10,000
Total liabilities	1,004,571		(754,283)		1,352,397		(1,263)		(14,619)		1,586,803
Shareholders’ equity:
Common Stock	403		-		17,411		30,000		(47,411)		403
Other shareholders’ equity	141,205		1,126,932		209,825		108,894		(1,445,651)		141,205
Total Consolidated Communications Holdings, Inc. shareholders’ equity	141,608		1,126,932		227,236		138,894		(1,493,062)		141,608
Noncontrolling interest	-		-		4,603		-		-		4,603
Total shareholders’ equity	141,608		1,126,932		231,839		138,894		(1,493,062)		146,211
Total liabilities and shareholders’ equity	$	1,146,179	$	372,649	$	1,584,236	$	137,631	$	(1,507,681)	$	1,733,014

	December 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	86	$	2,366	$	3,099	$			-	$	5,551
Accounts receivable, net	-		502		44,521		7,010		-				52,033
Income taxes receivable	9,346		-		370		80		-				9,796
Deferred income taxes	(61)		(7)		7,533		495		-				7,960
Prepaid expenses and other current assets	-		-		11,862		518		-				12,380
Total current assets	9,285		581		66,652		11,202		-				87,720
Property, plant and equipment, net	-		-		834,199		51,163		-				885,362
Intangibles and other assets:
Investments	-		3,729		109,370		-		-				113,099
Investments in subsidiaries	1,101,039		335,659		12,130		-		(1,448,828)				-
Goodwill	-		-		537,265		66,181		-				603,446
Other intangible assets	-		-		30,997		9,087		-				40,084
Deferred debt issuance costs, net and other assets	-		13,620		4,047		-		-				17,667
Total assets	$	1,110,324	$	353,589	$	1,594,660	$	137,633	$		(1,448,828)		$	1,747,378
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	-	$	-	$	4,885	$	-	$			-	$	4,885
Advance billings and customer deposits	-		-		23,699		2,235		-				25,934
Dividends payable	15,520		-		-		-		-				15,520
Accrued compensation	-		-		20,447		1,805		-				22,252
Accrued interest	-		3,514		6		4		-				3,524
Accrued expense	224		875		32,703		1,371		-				35,173
Current portion of long term debt and capital
lease obligations	-		9,100		586		65		-				9,751
Current portion of derivative liability	-		660		-		-		-				660
Total current liabilities	15,744		14,149		82,326		5,480		-				117,699
Long-term debt and capital lease obligations	-		1,207,663		3,659		812		-				1,212,134
Advances due to/from affiliates, net	968,319		(1,970,192)		1,037,969		(36,096)		-				-
Deferred income taxes	(21,598)		(1,029)		184,209		18,277		-				179,859
Pension and postretirement benefit obligations	-		-		61,053		14,701		-				75,754
Other long-term liabilities	25		1,960		7,328		280		-				9,593
Total liabilities	962,490		(747,449)		1,376,544		3,454		-				1,595,039
Shareholders’ equity:
Common Stock	401		-		17,411		30,000		(47,411)				401
Other shareholders’ equity	147,433		1,101,038		196,200		104,179		(1,401,417)				147,433
Total Consolidated Communications Holdings, Inc. shareholders’ equity	147,834		1,101,038		213,611		134,179		(1,448,828)				147,834
Noncontrolling interest	-		-		4,505		-		-				4,505
Total shareholders’ equity	147,834		1,101,038		218,116		134,179		(1,448,828)				152,339
Total liabilities and shareholders’ equity	$	1,110,324	$	353,589	$	1,594,660	$	137,633	$	(1,448,828)			$	1,747,378

Schedule of condensed consolidating statements of operations

Condensed Consolidating Statements of Operations

(amounts in thousands)

	Quarter Ended March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
Net revenues	$	-	$	69	$	136,255	$	16,758	$	(3,434)	$	149,648
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	-		-		55,252		3,304		(3,256)		55,300
Selling, general and administrative expenses	877		39		27,631		4,495		(178)		32,864
Depreciation and amortization	-		-		33,647		1,895		-		35,542
Operating income (loss)	(877)		30		19,725		7,064		-		25,942
Other income (expense):
Interest expense, net of interest income	(2)		(19,820)		(2)		(7)		-		(19,831)
Intercompany interest income (expense)	(26,380)		31,425		(5,496)		451		-		-
Investment income	-		36		8,300		-		-		8,336
Equity in earnings of subsidiaries, net	25,621		18,215		263		-		(44,099)		-
Other, net	-		-		(899)		(4)		-		(903)
Income (loss) from continuing operations before income taxes	(1,638)		29,886		21,891		7,504		(44,099)		13,544
Income tax expense (benefit)	(9,962)		4,265		8,066		2,753		-		5,122
Income (loss) from continuing operations	8,324		25,621		13,825		4,751		(44,099)		8,422
Discontinued operations, net of tax	-		-				-		-		-
Net income (loss)	8,324		25,621		13,825		4,751		(44,099)		8,422
Less: net income attributable to noncontrolling interest	-		-		98		-		-		98
Net income (loss) attributable to Consolidated Communications Holdings, Inc.	$	8,324	$	25,621	$	13,727	$	4,751	$	(44,099)	$	8,324
Total comprehensive income (loss) attributable to common shareholders	$	8,324	$	26,029	$	13,653	$	4,689	$	(44,099)	$	8,596

	Quarter Ended March 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
Net revenues	$	-	$	(7)	$	138,055	$	17,028	$	(3,548)	$	151,528
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	-		-		54,861		3,444		(3,253)		55,052
Selling, general and administrative expenses	1,127		31		27,713		4,729		(295)		33,305
Depreciation and amortization	-		-		32,582		2,259		-		34,841
Operating income (loss)	(1,127)		(38)		22,899		6,596		-		28,330
Other income (expense):
Interest expense, net of interest income	6		(24,497)		(110)		1		-		(24,600)
Intercompany interest income (expense)	(20,433)		27,608		(7,329)		154		-		-
Investment income	-		(37)		8,821		-		-		8,784
Equity in earnings of subsidiaries, net	20,300		18,393		276		-		(38,969)		-
Other, net	-		-		(98)		(9)		-		(107)
Income (loss) from continuing operations before income taxes	(1,254)		21,429		24,459		6,742		(38,969)		12,407
Income tax expense (benefit)	(8,037)		1,129		9,943		2,514		-		5,549
Income (loss) from continuing operations	6,783		20,300		14,516		4,228		(38,969)		6,858
Discontinued operations, net of tax	-		-		24		-		-		24
Net income (loss)	6,783		20,300		14,540		4,228		(38,969)		6,882
Less: net income attributable to noncontrolling interest	-		-		99		-		-		99
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.	$	6,783	$	20,300	$	14,441	$	4,228	$	(38,969)	$	6,783
Total comprehensive income (loss) attributable to common shareholders	$	6,783	$	22,558	$	14,759	$	4,384	$	(38,969)	$	9,515

Schedule of condensed consolidating statements of cash flows

Condensed Consolidating Statements of Cash Flows

(amounts in thousands)

	Three Months Ended March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Consolidated
Net cash (used in) provided by continuing operations	$	(26,654)	$	20,833	$	48,063	$	6,152	$	48,394
Net cash used in discontinued operations	-		-		-		-		-
Net cash (used in) provided by operating activities	(26,654)		20,833		48,063		6,152		48,394
Cash flows from investing activities:
Purchases of property, plant and equipment	-		-		(24,316)		(1,089)		(25,405)
Proceeds from sale of assets	-		-		1,200		41		1,241
Other	-		-		-		-		-
Net cash used in continuing operations	-		-		(23,116)		(1,048)		(24,164)
Net cash provided by discontinued operations			-		-		-		-
Net cash used in investing activities	-		-		(23,116)		(1,048)		(24,164)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	-		10,000		-		-		10,000
Payment of capital lease obligation	-		-		(142)		(15)		(157)
Payment on long-term debt	-		(17,275)		-		-		(17,275)
Dividends on common stock	(15,520)		-		-		-		(15,520)
Transactions with affiliates, net	42,174		(11,793)		(24,921)		(5,460)		-
Net cash provided by (used in) financing activities	26,654		(19,068)		(25,063)		(5,475)		(22,952)
Increase (decrease) in cash and cash equivalents	-		1,765		(116)		(371)		1,278
Cash and cash equivalents at beginning of period	-		86		2,366		3,099		5,551
Cash and cash equivalents at end of period	$	-	$	1,851	$	2,250	$	2,728	$	6,829

	Three Months Ended March 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Consolidated
Net cash (used in) provided by continuing operations	$	(20,835)	$	14,062	$	37,499	$	6,997	$	37,723
Net cash provided by discontinued operations	-		-		(1,531)		-		(1,531)
Net cash (used in) provided by operating activities	(20,835)		14,062		35,968		6,997		36,192
Cash flows from investing activities:
Purchases of property, plant and equipment	-		-		(25,371)		(2,135)		(27,506)
Proceeds from sale of assets	-		-		4		17		21
Other	-		-		(84)		-		(84)
Net cash used in continuing operations	-		-		(25,451)		(2,118)		(27,569)
Net cash used in discontinued operations	-		-		(11)		-		(11)
Net cash used in investing activities	-		-		(25,462)		(2,118)		(27,580)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	-		13,000		-		-		13,000
Payment of capital lease obligation	-		-		(73)		(12)		(85)
Payment on long-term debt	-		(15,310)		-		-		(15,310)
Dividends on common stock	(15,447)		-		-		-		(15,447)
Transactions with affiliates, net	36,282		(14,935)		(15,748)		(5,599)		-
Net cash provided by (used in) financing activities	20,835		(17,245)		(15,821)		(5,611)		(17,842)
(Decrease) increase in cash and cash equivalents	-		(3,183)		(5,315)		(732)		(9,230)
Cash and cash equivalents at beginning of period	-		6,577		8,530		2,747		17,854
Cash and cash equivalents at end of period	$	-	$	3,394	$	3,215	$	2,015	$	8,624

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INCOME TAXES (Details)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Reconciliation of the provision for income taxes computed at federal statutory rates to the effective rates
Effective tax rate (as a percent)	37.80%	44.70%
Effective tax rate exclusive of non-deductible compensation adjustment (as a percent)		37.00%

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DISCONTINUED OPERATIONS (Details) (USD $)	3 Months Ended
	Mar. 31, 2013	Sep. 30, 2013	Sep. 13, 2013
DISCONTINUED OPERATIONS
Total purchase price for the sale of the assets and contractual rights related to prison services		$ 2,500,000	$ 2,500,000
Summary of the financial information for the prison services operations
Operating revenues	4,767,000
Operating expenses including depreciation and amortization	4,699,000
Income from operations	68,000
Income tax expense	44,000
Income from discontinued operations	$ 24,000

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EARNINGS PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Basic and Diluted Earnings Per Share Using Two-class Method:
Income from continuing operations	$ 8,422	$ 6,858
Less: net income attributable to noncontrolling interest	98	99
Income attributable to common shareholders before allocation of earnings to participating securities	8,324	6,759
Less: earnings allocated to participating securities	153	132
Income from continuing operations attributable to common shareholders	8,171	6,627
Net income from discontinued operations		24
Net income attributable to common shareholders	$ 8,171	$ 6,651
Weighted-average number of common shares outstanding	39,877,000	39,755,000
Basic and diluted earnings per common share:
Income from continuing operations (in dollars per share)	$ 0.20	$ 0.17
Income from discontinued operations, net of tax (in dollars per share)	$ 0.00	$ 0.00
Net income per basic and diluted common share attributable to common shareholders (in dollars per share)	$ 0.20	$ 0.17
Common shares excluded from computation of potentially dilutive shares because of anti-dilutive effect	200,000	200,000

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DISCONTINUED OPERATIONS

3 Months Ended

Mar. 31, 2014

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

2.  DISCONTINUED OPERATIONS

In September 2013, we completed the sale of the assets and contractual rights of our Prison Services business for a total cash purchase price of $2.5 million, which included the settlement of any pending legal matters.  The financial results of the operations for Prison Services, which were previously reported in the Other Operations segment, have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented.

The following table summarizes the financial information for the Prison Services operations for the quarter ended March 31, 2013:

	Quarter Ended March 31,
(In thousands)	2013
Operating revenues	$	4,767
Operating expenses including depreciation and amortization	4,699
Income from operations	68
Income tax expense	44
Income from discontinued operations	$	24

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INVESTMENTS (Details) (USD $)	3 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013	Dec. 31, 2013
Investments
Cash distributions received from partnerships treated as cost method investees	$ 3,500,000	$ 4,000,000
Cash distributions received from partnerships treated as equity method investees	5,600,000	4,100,000
Purchase of additional ownership interest		100,000
Number of entity's investments which is accounted for using equity method	3
Investments
Cash surrender value of life insurance policies	2,362,000		2,183,000
Total	112,585,000		113,099,000
Summary of unaudited summarized income statement information
Total revenues	80,816,000	76,719,000
Income from operations	25,562,000	23,973,000
Net income before taxes	25,585,000	23,985,000
Net income	25,585,000	23,985,000
Summary of unaudited summarized balance sheet information
Current assets	52,843,000		54,837,000
Non-current assets	88,635,000		87,968,000
Current liabilities	14,584,000		15,221,000
Non-current liabilities	2,166,000		1,786,000
Partnership equity	124,731,000		125,799,000
GTE Mobilnet of South Texas Limited Partnership
Investments
Ownership percentage of cost method investee	2.34%
Investments
Cost method investments:	21,450,000		21,450,000
Pittsburgh SMSA Limited Partnership
Investments
Ownership percentage of cost method investee	3.60%
Investments
Cost method investments:	22,950,000		22,950,000
CoBank, ACB Stock
Investments
Cost method investments:	5,147,000		5,112,000
Other
Investments
Cost method investments:	200,000		200,000
GTE Mobilnet of Texas RSA #17 Limited Partnership
Investments
Ownership percentage of equity method investee	20.51%
Investments
Equity method investments:	27,141,000		27,467,000
Pennsylvania RSA 6(I) Limited Partnership
Investments
Ownership percentage of equity method investee	16.6725%
Investments
Equity method investments:	7,533,000		7,696,000
Pennsylvania RSA 6(II) Limited Partnership
Investments
Ownership percentage of equity method investee	23.67%
Investments
Equity method investments:	23,866,000		24,105,000
CVIN, LLC
Investments
Ownership percentage of equity method investee	13.455%
Investments
Equity method investments:	$ 1,936,000		$ 1,936,000

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EQUITY (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014
Changes in accumulated other comprehensive loss, net of tax, by component
Balance at the beginning of the period	$ (1,000)
Amounts reclassified from accumulated other comprehensive income	272
Net current period other comprehensive income	272
Balance at the end of the period	(728)
Pension and Post-Retirement Obligations
Changes in accumulated other comprehensive loss, net of tax, by component
Balance at the beginning of the period	643
Amounts reclassified from accumulated other comprehensive income	(136)
Net current period other comprehensive income	(136)
Balance at the end of the period	507
Derivative Instruments
Changes in accumulated other comprehensive loss, net of tax, by component
Balance at the beginning of the period	(1,643)
Amounts reclassified from accumulated other comprehensive income	408
Net current period other comprehensive income	408
Balance at the end of the period	$ (1,235)

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Net revenues	$ 149,648	$ 151,528
Operating expense:
Cost of services and products (exclusive of depreciation and amortization)	55,300	55,052
Selling, general and administrative expenses	32,864	33,305
Depreciation and amortization	35,542	34,841
Income from operations	25,942	28,330
Other income (expense):
Interest expense, net of interest income	(19,831)	(24,600)
Investment income	8,336	8,784
Other, net	(903)	(107)
Income from continuing operations before income taxes	13,544	12,407
Income tax expense	5,122	5,549
Income from continuing operations	8,422	6,858
Income from discontinued operations, net of tax		24
Net income	8,422	6,882
Less: net income attributable to noncontrolling interest	98	99
Net income attributable to common shareholders	$ 8,324	$ 6,783
Net income per common share - basic and diluted
Income from continuing operations (in dollars per share)	$ 0.20	$ 0.17
Net income per basic and diluted common share attributable to common shareholders (in dollars per share)	$ 0.20	$ 0.17
Dividends declared per common share (in dollars per share)	$ 0.39	$ 0.39

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COMMITMENTS AND CONTINGENCIES (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended	3 Months Ended		0 Months Ended	3 Months Ended			12 Months Ended	3 Months Ended
	Dec. 31, 2013	Mar. 31, 2013	Jan. 18, 2012 item	Apr. 15, 2008 Salsgiver Inc.	Mar. 31, 2014 Salsgiver Inc.	Sep. 30, 2013 Salsgiver Inc.	Dec. 31, 2011 Salsgiver Inc.	Dec. 31, 2009 Assessment by Commonwealth of Pennsylvania Department of Revenue item	Mar. 31, 2014 Assessment by Commonwealth of Pennsylvania Department of Revenue Consolidated Communications Enterprise Services Inc. (CCES)	Mar. 31, 2014 Assessment by Commonwealth of Pennsylvania Department of Revenue Consolidated Communications of Pennsylvania Company LLC (CCPA)
Litigation and Contingencies
Original amount of sustained losses claimed by plaintiff				$ 125
Amount agreed to be paid in cash as per agreement					0.9
Credits granted as per agreement					0.3
Term of credits utilization for make ready work performed					5 years
Settlement amount previously accrued							0.4
Additional accrual per agreement						0.9
Number of subsidiaries that received assessment notice								2
Total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010									1.9	2.0
Number of core issues appealed			5
Reversal of previously recognized revenues	3.0
Revenue recognized that was later reversed		$ 1.1

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net cash provided by continuing operations	$ 48,394	$ 37,723
Net cash used in discontinued operations		(1,531)
Net cash provided by operating activities	48,394	36,192
Cash flows from investing activities:
Purchases of property, plant and equipment, net	(25,405)	(27,506)
Proceeds from sale of assets	1,241	21
Other		(84)
Net cash used in continuing operations	(24,164)	(27,569)
Net cash used in discontinued operations		(11)
Net cash used in investing activities	(24,164)	(27,580)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt	10,000	13,000
Payment of capital lease obligation	(157)	(85)
Payment on long-term debt	(17,275)	(15,310)
Dividends on common stock	(15,520)	(15,447)
Net cash used in financing activities	(22,952)	(17,842)
Increase (decrease) in cash and cash equivalents	1,278	(9,230)
Cash and cash equivalents at beginning of period	5,551	17,854
Cash and cash equivalents at end of period	$ 6,829	$ 8,624

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LONG-TERM DEBT (Details) (USD $)	1 Months Ended	3 Months Ended		0 Months Ended			3 Months Ended	12 Months Ended	3 Months Ended		3 Months Ended			3 Months Ended						0 Months Ended	3 Months Ended	12 Months Ended	22 Months Ended	0 Months Ended	1 Months Ended
	Feb. 28, 2014	Mar. 31, 2014	Dec. 31, 2013	May 01, 2014 Subsequent event	Mar. 31, 2014 Minimum	Mar. 31, 2014 Maximum	Mar. 31, 2014 Senior Secured Credit Facility Weighted average	Dec. 31, 2013 Senior Secured Credit Facility Weighted average	Mar. 31, 2014 Term loan 4	Dec. 31, 2013 Term loan 4	Mar. 31, 2014 Term loan 4 LIBOR	Mar. 31, 2014 Senior secured credit facility - revolving loan	Dec. 31, 2013 Senior secured credit facility - revolving loan	Mar. 31, 2014 Senior secured credit facility - revolving loan LIBOR Minimum	Mar. 31, 2014 Senior secured credit facility - revolving loan LIBOR Maximum	Mar. 31, 2014 Senior secured credit facility - revolving loan LIBOR Weighted average	Mar. 31, 2014 Senior secured credit facility - revolving loan Alternate base rate Minimum	Mar. 31, 2014 Senior secured credit facility - revolving loan Alternate base rate Maximum	Mar. 31, 2014 Senior secured credit facility - revolving loan Alternate base rate Weighted average	May 30, 2012 Senior Notes due 2020	Mar. 31, 2014 Senior Notes due 2020	Dec. 31, 2013 Senior Notes due 2020	Mar. 31, 2014 Senior Notes due 2020	Apr. 02, 2014 Senior Notes due 2020 Subsequent event	May 02, 2014 Senior Notes due 2020 Subsequent event	Mar. 31, 2014 Senior Notes due 2020 Maximum	Apr. 02, 2014 Senior Notes due 2020 Maximum Subsequent event	Mar. 31, 2014 Capital leases	Dec. 31, 2013 Capital leases
Debt
Total long-term debt and capital leases		$ 1,214,646,000	$ 1,221,885,000						$ 903,334,000	$ 905,463,000		$ 8,000,000	$ 13,000,000								$ 298,347,000	$ 298,301,000	$ 298,347,000					$ 4,965,000	$ 5,121,000
Less: current portion of long-term debt and capital leases		(9,773,000)	(9,751,000)
Total long-term debt		1,204,873,000	1,212,134,000
Maximum borrowing capacity of credit facility													75,000,000
Aggregate principal amount									910,000,000	910,000,000										300,000,000
Amounts outstanding												8,000,000	13,000,000
Stand-by letter of credit outstanding												900,000
Margin (as a percent)											3.25%			2.50%	3.25%	3.00%	1.50%	2.25%	2.00%
Reference rate											LIBOR			LIBOR	LIBOR	LIBOR	Alternative base rate	Alternative base rate	Alternative base rate
Variable rate basis, floor (as a percent)											1.00%
Quarterly principal payments required									2,300,000
Weighted average interest rate (as a percent)							4.24%	4.23%
Dividend declared	15,600,000
Dividend paid				15,600,000																			124,100,000
Remaining consolidated cash available for dividends and other restricted payments																					178,600,000		178,600,000
Dividends available for distribution		215,600,000
Net leverage ratio																					4.23		4.23
Leverage ratio		4.27				5.10
Leverage ratio for an event of default						5.25
Interest coverage ratio		3.52			2.25
Percentage of increase in available cash used in repayment of debt during dividend suspension period		50.00%
Interest rate (as a percent)																				10.875%
Issue price as a percentage of principal amount																				99.345%
Yield to maturity (as a percent)																				11.00%
Debt issued																						287,300,000
Leverage ratio covenant for dividend and other restricted payments																										4.25	4.50
Multiplier used in the calculation of permitted lien basket for liens securing indebtedness																					2.50			2.75
Consent fees																									2,500,000
Number of times to be applied to fixed charges for calculating the deduction from cumulative consolidated net cash																					1.75		1.75
Cumulative consolidated cash available to pay dividends and other restricted payments																					302,700,000		302,700,000
Dividends and other restricted payments available for distribution																					50,000,000		50,000,000
Unamortized discount									$ (4,391,000)	$ (4,537,000)											$ (1,653,000)	$ (1,699,000)	$ (1,653,000)

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INVESTMENTS (Tables)

3 Months Ended

Mar. 31, 2014

INVESTMENTS

Schedule of investments

	March 31,		December 31,
(In thousands)	2014		2013
Cash surrender value of life insurance policies	$	2,362	$	2,183
Cost method investments:
GTE Mobilnet of South Texas Limited Partnership (2.34% interest)	21,450		21,450
Pittsburgh SMSA Limited Partnership (3.60% interest)	22,950		22,950
CoBank, ACB Stock	5,147		5,112
Other	200		200
Equity method investments:
GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)	27,141		27,467
Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest)	7,533		7,696
Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)	23,866		24,105
CVIN, LLC (13.455% interest)	1,936		1,936
Totals	$	112,585	$	113,099

Summary of combined unaudited results of operations and financial position of our three equity investments in the cellular limited partnerships

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Total revenues	$	80,816	$	76,719
Income from operations	25,562		23,973
Net income before taxes	25,585		23,985
Net income	25,585		23,985
	March 31,		December 31,
(In thousands)	2014		2013
Current assets	$	52,843	$	54,837
Non-current assets	88,635		87,968
Current liabilities	14,584		15,221
Non-current liabilities	2,166		1,786
Partnership equity	124,731		125,799

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LONG-TERM DEBT (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 item
Capital leases
Number of capital leases which expire between 2015 and 2021	7
Present value of the minimum remaining lease commitments	$ 5.0
Capital lease commitments due and payable within the next 12 months	0.7
Total remaining rental payments	7.5
LATEL LLC
Capital leases
Total remaining rental payments	$ 5.6

XML

LONG-TERM DEBT (Tables)

3 Months Ended

Mar. 31, 2014

LONG-TERM DEBT

Schedule of components of long-term debt outstanding, presented net of unamortized discounts

	March 31,		December 31,
(In thousands)	2014		2013
Senior secured credit facility:
Term Loan 4, net of discount of $4,391 and $4,537 at March 31, 2014 and December 31, 2013, respectively	$	903,334	$	905,463
Revolving loan	8,000		13,000
Senior notes, net of discount of $1,653 and $1,699 at March 31, 2014 and December 31, 2013, respectively	298,347		298,301
Capital leases	4,965		5,121
	1,214,646		1,221,885
Less: current portion of long-term debt and capital leases	(9,773)		(9,751)
Total long-term debt	$	1,204,873	$	1,212,134

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Accounting

Consolidated Communications Holdings, Inc. (the “Company”, “we” or “our”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communications services to residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri.

We offer a wide range of telecommunications services to residential and business customers in the areas we serve. Our telecommunications services include local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, directory publishing, Competitive Local Exchange Carrier (“CLEC”) services and equipment sales.  As of March 31, 2014, we had approximately 254 thousand access lines, 122 thousand voice connections, 258 thousand data and Internet connections and 111 thousand video connections.

We historically operated our business as two separate reportable segments: Telephone Operations and Other Operations.  Based on changes in our business structure, during the quarter ended June 30, 2013 we concluded that we operate our business as one reportable segment. See the “Recent Business Developments” section below for a more detailed discussion regarding the circumstances that resulted in the change to our segment reporting.

In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of income, comprehensive income and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2013 Annual Report on Form 10-K filed with the SEC.

Recent Business Developments

Segment Reporting

Historically, we classified our operations into two separate reportable business segments: Telephone Operations and Other Operations.  Our Telephone Operations consisted of a wide range of telecommunications services to residential and business customers, including local and long-distance service, high-speed broadband Internet access, video services, VOIP services, custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  Our Other Operations segment operated two complementary non-core businesses including telephone services to state and county correctional facilities (“Prison Services”) and equipment sales.  As discussed below, our contract to provide telephone services to correctional facilities operated by the Illinois Department of Corrections was not renewed and the process of transitioning those services to another service provider was completed during the quarter ended March 31, 2013.  The remaining Prison Services assets and operations were classified as discontinued operations during the quarter ended June 30, 2013 and subsequently sold during the quarter ended September 30, 2013.  Prison Services comprised nearly all of the Other Operations segment revenue and results of operations.  Consequently, with the cessation of our Prison Services business and based on the segment accounting guidance, we concluded that we operate as one segment as of the quarter ended June 30, 2013. As required by the authoritative guidance for segment presentation, segment results of operations have been retrospectively adjusted to reflect this change for all periods presented.

Prison Services Contract

We previously provided telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections and to certain county jails.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace us as the provider of those services with a competitor. Although we challenged our competitor’s bid and the State’s decision to accept that bid in a variety of different forums, during the quarter ended March 31, 2013, the process of transitioning these services to another service provider was completed. All related assets have been assessed for recoverability in light of this change and we determined that no impairment was necessary.

Discontinued Operations

On September 13, 2013, we completed the sale of the assets and contractual rights used to provide communications services to inmates in thirteen county jails located in Illinois for a total purchase price of $2.5 million.  In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations”, the financial results of the Prison Services business have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented. For a more complete discussion of the transaction, refer to Note 2.

Reclassifications

Certain amounts in our 2013 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2014 condensed consolidated financial statements, which consists of the effects of reclassifications from the presentation of Prison Services as a discontinued operation.

Recent Accounting Pronouncements

In April 2014, FASB issued the Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 revises the definition of a discontinued operation to limit the circumstances under which a disposal or classification as held for sale qualifies for presentation as a discontinued operation. Amendments in this ASU require expanded disclosures concerning a discontinued operation and the disposal of an individually-material component of an entity not qualifying as a discontinued operation. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014 and should be applied prospectively, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

Effective January 1, 2014, we adopted Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance concerning the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is present. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 8,422	$ 6,882
Pension and post-retirement obligations:
Amortization of actuarial (gains) losses and prior service credit to earnings, net of tax	(136)	474
Derivative instruments designated as cash flow hedges:
Change in fair value of derivatives, net of tax		(32)
Reclassification of realized loss to earnings, net of tax	408	2,290
Comprehensive income	8,694	9,614
Less: comprehensive income attributable to noncontrolling interest	98	99
Total comprehensive income attributable to common shareholders	$ 8,596	$ 9,515

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COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2014

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

11. COMMITMENTS AND CONTINGENCIES

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates (“Salsgiver”) filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs.  Salsgiver originally claimed to have sustained losses of approximately $125 million.  We believe that these claims are without merit and that the alleged damages are completely unfounded.  Discovery concluded and Consolidated filed a motion for summary judgment on June 18, 2012 and the court heard oral arguments on August 30, 2012.  On February 12, 2013, the court, in part, granted our motion.  The court ruled that Salsgiver could not recover prejudgment interest and could not use as a basis of liability any actions prior to April 14, 2006. In September 2013, in order to avoid the distraction and uncertainty of further litigation, we reached an agreement in principle (the “Agreement”) with Salsgiver, Inc.  In accordance with the terms of the Agreement, we will pay Salsgiver approximately $0.9 million in cash and grant approximately $0.3 million in credits that may be used for make-ready charges (the “Credits”).  The Credits will be available for services performed in connection with the pole attachment applications within five years of the execution of the agreement. We had previously recorded approximately $0.4 million in 2011 in anticipation of the settlement of this case.  During the quarter ended September 30, 2013, per the terms of the agreement we recorded an additional $0.9 million, which included estimated legal fees.  The agreement is contingent on appropriate documentation and there is no assurance that the agreement will be finalized.

Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), have, at various times, received assessment notices from the Commonwealth of Pennsylvania Department of Revenue (“DOR”) increasing the amounts owed for Pennsylvania Gross Receipt Taxes, and/or have had audits performed for the tax years of 2008, 2009, and 2010.  For the calendar years for which we received both additional assessment notices and audit actions, those issues have been combined by the DOR into a single Docket for each year.  For the CCES subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $1.9 million.  As of March 2013, all three of these cases have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  For the CCPA subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $2.0 million.  As of December 2013, the cases for calendar years 2009 and 2010 have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  The calendar year 2008 audit result was appealed to the Board of Finance and Revenue on March 19, 2014.  We anticipate that the 2008 case will be continued pending the outcome of the Verizon litigation as well.  The Gross Receipts Tax issues in the Verizon Pennsylvania case are substantially the same as those presently facing CCPA and CCES.  In addition, there are numerous telecommunications carriers with Gross Receipts Tax matters dealing with the same issues that are in various stages of appeal before the Board of Finance and Revenue and the Commonwealth Court.  Those appeals by other similarly situated telecommunications carriers have been continued until resolution of the Verizon Pennsylvania case.  We believe that these assessments and the positions taken by the Commonwealth of Pennsylvania are without substantial merit.  We do not believe that the outcome of these claims will have a material adverse impact on our financial results.

On January 18, 2012, we filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit to review the Federal Communications Commission’s (“FCC”) Order issued November 18, 2011 that reformed intercarrier compensation (“ICC”) and core parts of the Universal Service Fund (“USF”).  We are appealing five core issues in the November 18, 2011 FCC Order. This matter was heard by the U.S. Court of Appeals for the Tenth Circuit on November 19, 2013; however a decision is not expected before the third quarter of 2014.

In order for eligible telecommunications carriers (“ETCs”) to receive high-cost support, the USF/ICC Transformation Order requires states to certify on an annual basis that federal universal service high-cost support is used “only for the provision, maintenance, and upgrading of facilities and services for which the support is intended”.  States, in turn, require that ETCs file certifications with them as the basis for the state filings with the FCC. Failure to meet the annual data and certification deadlines can result in reduced support to the ETC based on the length of the delay in certification.  For the calendar year 2013, the California state certification was due to be filed with the FCC on or before October 1, 2012. We were notified in January 2013 that SureWest did not submit the required certification to the California Public Utilities Commission (“CPUC”) in time to be included in its October 1, 2012, submission to the FCC.  On January 24, 2013, we filed a certification with the CPUC and filed a petition with the FCC for a waiver of the filing deadline for the annual state certification. On February 19, 2013, the CPUC filed a certification with the FCC with respect to SureWest. On October 29, 2013, the Wireline Competition Bureau of the FCC denied our petition for a waiver of the annual certification deadline.  On November 26, 2013, we applied for a review of the decision made by the FCC staff by the full Commission.  Management believes, based on the change in SureWest Telephone’s USF filing status caused by the change in the ownership of SureWest Telephone, the lack of formal notice by the FCC regarding this change in filing status, the fact that SureWest Telephone had a previously-filed certification of compliance in effect with the FCC for the two quarters for which USF was withheld, and the FCC’s past practice of granting waivers to accept late filings in similar situations, that the Company should prevail in its application to the Commission and receive USF funding for the period January 1, 2013, through June 30, 2013. However, due to the denial of our petition by the Wireline Competition Bureau and the uncertainty of the collectability of the previously recognized revenues, in December 2013, we reversed the $3.0 million of previously recognized revenues of which $1.1 million was recognized in the three months ended March 31, 2013, until such time that the Commission has the opportunity to reach a decision on our application for review.

We are from time to time involved in various other legal proceedings and regulatory 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 our business, operating results or financial condition.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2014	Apr. 23, 2014
Document and Entity Information
Entity Registrant Name	Consolidated Communications Holdings, Inc.
Entity Central Index Key	0001304421
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		40,287,654
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

XML

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

3 Months Ended

Mar. 31, 2014

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

12.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Consolidated Communications, Inc. is the primary obligor under the unsecured Senior Notes it issued on May 30, 2012. We and the following of our subsidiaries: Consolidated Communications Enterprise Services, Inc., Consolidated Communications Services Company, Consolidated Communications of Fort Bend Company, Consolidated Communications of Texas Company, Consolidated Communications of Pennsylvania Company, LLC, SureWest Communications, SureWest Long Distance, SureWest Telephone, SureWest TeleVideo, SureWest Kansas, Inc., SureWest Fiber Ventures, LLC, have jointly and severally guaranteed the Senior Notes.  All of the subsidiary guarantors are our 100% direct or indirect wholly owned subsidiaries, and all guarantees are full, unconditional and joint and several with respect to principal, interest and liquidated damages, if any.  As such, we present condensed consolidating balance sheets as of March 31, 2014 and December 31, 2013, and condensed consolidating statements of operations and cash flows for the quarters ended March 31, 2014 and 2013 for each of the Company (Parent), Consolidated Communications, Inc. (Subsidiary Issuer), guarantor subsidiaries and other non-guarantor subsidiaries with any consolidating adjustments.  See Note 6 for more information regarding our Senior Notes.

Condensed Consolidating Balance Sheet

(amounts in thousands)

	March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	1,851	$	2,250	$	2,728	$	-	$	6,829
Accounts receivable, net	-		122		44,039		8,207		-		52,368
Income taxes receivable	19,308		-		-		-		(14,619)		4,689
Deferred income taxes	(61)		(7)		7,533		495				7,960
Prepaid expenses and other current assets	-		-		13,621		530		-		14,151
Total current assets	19,247		1,966		67,443		11,960		(14,619)		85,997
Property, plant and equipment, net	-		-		825,064		50,403		-		875,467
Intangibles and other assets:
Investments	-		3,765		108,820		-		-		112,585
Investments in subsidiaries	1,126,932		353,737		12,393		-		(1,493,062)		-
Goodwill	-		-		537,265		66,181		-		603,446
Other intangible assets	-		-		28,541		9,087		-		37,628
Deferred debt issuance costs, net and other assets	-		13,181		4,710		-		-		17,891
Total assets	$	1,146,179	$	372,649	$	1,584,236	$	137,631	$	(1,507,681)	$	1,733,014
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	-	$	-	$	7,775	$	-	$	-	$	7,775
Advance billings and customer deposits	-		-		24,168		2,359		-		26,527
Dividends payable	15,607		-		-		-		-		15,607
Accrued compensation	-		-		15,606		1,727		-		17,333
Accrued interest	-		12,114		6		4		-		12,124
Accrued expense	43		-		29,292		1,673		-		31,008
Income tax payable	-		4,265		7,681		2,673		(14,619)		-
Current portion of long term debt and capital
lease obligations	-		9,100		605		68		-		9,773
Current portion of derivative liability	-		694		-		-		-		694
Total current liabilities	15,650		26,173		85,133		8,504		(14,619)		120,841
Long-term debt and capital lease obligations	-		1,200,580		3,499		794		-		1,204,873
Advances due to/from affiliates, net	1,010,493		(1,981,985)		1,013,048		(41,556)		-		-
Deferred income taxes	(21,598)		(778)		184,143		18,256				180,023
Pension and postretirement benefit obligations	-		-		58,604		12,462		-		71,066
Other long-term liabilities	26		1,727		7,970		277		-		10,000
Total liabilities	1,004,571		(754,283)		1,352,397		(1,263)		(14,619)		1,586,803
Shareholders’ equity:
Common Stock	403		-		17,411		30,000		(47,411)		403
Other shareholders’ equity	141,205		1,126,932		209,825		108,894		(1,445,651)		141,205
Total Consolidated Communications Holdings, Inc. shareholders’ equity	141,608		1,126,932		227,236		138,894		(1,493,062)		141,608
Noncontrolling interest	-		-		4,603		-		-		4,603
Total shareholders’ equity	141,608		1,126,932		231,839		138,894		(1,493,062)		146,211
Total liabilities and shareholders’ equity	$	1,146,179	$	372,649	$	1,584,236	$	137,631	$	(1,507,681)	$	1,733,014

Condensed Consolidating Balance Sheet

(amounts in thousands)

	December 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	86	$	2,366	$	3,099	$			-	$	5,551
Accounts receivable, net	-		502		44,521		7,010		-				52,033
Income taxes receivable	9,346		-		370		80		-				9,796
Deferred income taxes	(61)		(7)		7,533		495		-				7,960
Prepaid expenses and other current assets	-		-		11,862		518		-				12,380
Total current assets	9,285		581		66,652		11,202		-				87,720
Property, plant and equipment, net	-		-		834,199		51,163		-				885,362
Intangibles and other assets:
Investments	-		3,729		109,370		-		-				113,099
Investments in subsidiaries	1,101,039		335,659		12,130		-		(1,448,828)				-
Goodwill	-		-		537,265		66,181		-				603,446
Other intangible assets	-		-		30,997		9,087		-				40,084
Deferred debt issuance costs, net and other assets	-		13,620		4,047		-		-				17,667
Total assets	$	1,110,324	$	353,589	$	1,594,660	$	137,633	$		(1,448,828)		$	1,747,378
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	-	$	-	$	4,885	$	-	$			-	$	4,885
Advance billings and customer deposits	-		-		23,699		2,235		-				25,934
Dividends payable	15,520		-		-		-		-				15,520
Accrued compensation	-		-		20,447		1,805		-				22,252
Accrued interest	-		3,514		6		4		-				3,524
Accrued expense	224		875		32,703		1,371		-				35,173
Current portion of long term debt and capital
lease obligations	-		9,100		586		65		-				9,751
Current portion of derivative liability	-		660		-		-		-				660
Total current liabilities	15,744		14,149		82,326		5,480		-				117,699
Long-term debt and capital lease obligations	-		1,207,663		3,659		812		-				1,212,134
Advances due to/from affiliates, net	968,319		(1,970,192)		1,037,969		(36,096)		-				-
Deferred income taxes	(21,598)		(1,029)		184,209		18,277		-				179,859
Pension and postretirement benefit obligations	-		-		61,053		14,701		-				75,754
Other long-term liabilities	25		1,960		7,328		280		-				9,593
Total liabilities	962,490		(747,449)		1,376,544		3,454		-				1,595,039
Shareholders’ equity:
Common Stock	401		-		17,411		30,000		(47,411)				401
Other shareholders’ equity	147,433		1,101,038		196,200		104,179		(1,401,417)				147,433
Total Consolidated Communications Holdings, Inc. shareholders’ equity	147,834		1,101,038		213,611		134,179		(1,448,828)				147,834
Noncontrolling interest	-		-		4,505		-		-				4,505
Total shareholders’ equity	147,834		1,101,038		218,116		134,179		(1,448,828)				152,339
Total liabilities and shareholders’ equity	$	1,110,324	$	353,589	$	1,594,660	$	137,633	$	(1,448,828)			$	1,747,378

Condensed Consolidating Statements of Operations

(amounts in thousands)

	Quarter Ended March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
Net revenues	$	-	$	69	$	136,255	$	16,758	$	(3,434)	$	149,648
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	-		-		55,252		3,304		(3,256)		55,300
Selling, general and administrative expenses	877		39		27,631		4,495		(178)		32,864
Depreciation and amortization	-		-		33,647		1,895		-		35,542
Operating income (loss)	(877)		30		19,725		7,064		-		25,942
Other income (expense):
Interest expense, net of interest income	(2)		(19,820)		(2)		(7)		-		(19,831)
Intercompany interest income (expense)	(26,380)		31,425		(5,496)		451		-		-
Investment income	-		36		8,300		-		-		8,336
Equity in earnings of subsidiaries, net	25,621		18,215		263		-		(44,099)		-
Other, net	-		-		(899)		(4)		-		(903)
Income (loss) from continuing operations before income taxes	(1,638)		29,886		21,891		7,504		(44,099)		13,544
Income tax expense (benefit)	(9,962)		4,265		8,066		2,753		-		5,122
Income (loss) from continuing operations	8,324		25,621		13,825		4,751		(44,099)		8,422
Discontinued operations, net of tax	-		-				-		-		-
Net income (loss)	8,324		25,621		13,825		4,751		(44,099)		8,422
Less: net income attributable to noncontrolling interest	-		-		98		-		-		98
Net income (loss) attributable to Consolidated Communications Holdings, Inc.	$	8,324	$	25,621	$	13,727	$	4,751	$	(44,099)	$	8,324
Total comprehensive income (loss) attributable to common shareholders	$	8,324	$	26,029	$	13,653	$	4,689	$	(44,099)	$	8,596

	Quarter Ended March 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Eliminations		Consolidated
Net revenues	$	-	$	(7)	$	138,055	$	17,028	$	(3,548)	$	151,528
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization)	-		-		54,861		3,444		(3,253)		55,052
Selling, general and administrative expenses	1,127		31		27,713		4,729		(295)		33,305
Depreciation and amortization	-		-		32,582		2,259		-		34,841
Operating income (loss)	(1,127)		(38)		22,899		6,596		-		28,330
Other income (expense):
Interest expense, net of interest income	6		(24,497)		(110)		1		-		(24,600)
Intercompany interest income (expense)	(20,433)		27,608		(7,329)		154		-		-
Investment income	-		(37)		8,821		-		-		8,784
Equity in earnings of subsidiaries, net	20,300		18,393		276		-		(38,969)		-
Other, net	-		-		(98)		(9)		-		(107)
Income (loss) from continuing operations before income taxes	(1,254)		21,429		24,459		6,742		(38,969)		12,407
Income tax expense (benefit)	(8,037)		1,129		9,943		2,514		-		5,549
Income (loss) from continuing operations	6,783		20,300		14,516		4,228		(38,969)		6,858
Discontinued operations, net of tax	-		-		24		-		-		24
Net income (loss)	6,783		20,300		14,540		4,228		(38,969)		6,882
Less: net income attributable to noncontrolling interest	-		-		99		-		-		99
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.	$	6,783	$	20,300	$	14,441	$	4,228	$	(38,969)	$	6,783
Total comprehensive income (loss) attributable to common shareholders	$	6,783	$	22,558	$	14,759	$	4,384	$	(38,969)	$	9,515

Condensed Consolidating Statements of Cash Flows

(amounts in thousands)

	Three Months Ended March 31, 2014
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Consolidated
Net cash (used in) provided by continuing operations	$	(26,654)	$	20,833	$	48,063	$	6,152	$	48,394
Net cash used in discontinued operations	-		-		-		-		-
Net cash (used in) provided by operating activities	(26,654)		20,833		48,063		6,152		48,394
Cash flows from investing activities:
Purchases of property, plant and equipment	-		-		(24,316)		(1,089)		(25,405)
Proceeds from sale of assets	-		-		1,200		41		1,241
Other	-		-		-		-		-
Net cash used in continuing operations	-		-		(23,116)		(1,048)		(24,164)
Net cash provided by discontinued operations			-		-		-		-
Net cash used in investing activities	-		-		(23,116)		(1,048)		(24,164)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	-		10,000		-		-		10,000
Payment of capital lease obligation	-		-		(142)		(15)		(157)
Payment on long-term debt	-		(17,275)		-		-		(17,275)
Dividends on common stock	(15,520)		-		-		-		(15,520)
Transactions with affiliates, net	42,174		(11,793)		(24,921)		(5,460)		-
Net cash provided by (used in) financing activities	26,654		(19,068)		(25,063)		(5,475)		(22,952)
Increase (decrease) in cash and cash equivalents	-		1,765		(116)		(371)		1,278
Cash and cash equivalents at beginning of period	-		86		2,366		3,099		5,551
Cash and cash equivalents at end of period	$	-	$	1,851	$	2,250	$	2,728	$	6,829

	Three Months Ended March 31, 2013
	Parent		Subsidiary Issuer		Guarantors		Non-Guarantors		Consolidated
Net cash (used in) provided by continuing operations	$	(20,835)	$	14,062	$	37,499	$	6,997	$	37,723
Net cash provided by discontinued operations	-		-		(1,531)		-		(1,531)
Net cash (used in) provided by operating activities	(20,835)		14,062		35,968		6,997		36,192
Cash flows from investing activities:
Purchases of property, plant and equipment	-		-		(25,371)		(2,135)		(27,506)
Proceeds from sale of assets	-		-		4		17		21
Other	-		-		(84)		-		(84)
Net cash used in continuing operations	-		-		(25,451)		(2,118)		(27,569)
Net cash used in discontinued operations	-		-		(11)		-		(11)
Net cash used in investing activities	-		-		(25,462)		(2,118)		(27,580)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	-		13,000		-		-		13,000
Payment of capital lease obligation	-		-		(73)		(12)		(85)
Payment on long-term debt	-		(15,310)		-		-		(15,310)
Dividends on common stock	(15,447)		-		-		-		(15,447)
Transactions with affiliates, net	36,282		(14,935)		(15,748)		(5,599)		-
Net cash provided by (used in) financing activities	20,835		(17,245)		(15,821)		(5,611)		(17,842)
(Decrease) increase in cash and cash equivalents	-		(3,183)		(5,315)		(732)		(9,230)
Cash and cash equivalents at beginning of period	-		6,577		8,530		2,747		17,854
Cash and cash equivalents at end of period	$	-	$	3,394	$	3,215	$	2,015	$	8,624

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 6,829	$ 5,551
Accounts receivable, net	52,368	52,033
Income tax receivable	4,689	9,796
Deferred income taxes	7,960	7,960
Prepaid expenses and other current assets	14,151	12,380
Total current assets	85,997	87,720
Property, plant and equipment, net	875,467	885,362
Investments	112,585	113,099
Goodwill	603,446	603,446
Other intangible assets	37,628	40,084
Deferred debt issuance costs, net and other assets	17,891	17,667
Total assets	1,733,014	1,747,378
Current liabilities:
Accounts payable	7,775	4,885
Advance billings and customer deposits	26,527	25,934
Dividends payable	15,607	15,520
Accrued compensation	17,333	22,252
Accrued interest	12,124	3,524
Accrued expense	31,008	35,173
Current portion of long-term debt and capital lease obligations	9,773	9,751
Current portion of derivative liability	694	660
Total current liabilities	120,841	117,699
Long-term debt and capital lease obligations	1,204,873	1,212,134
Deferred income taxes	180,023	179,859
Pension and other postretirement obligations	71,066	75,754
Other long-term liabilities	10,000	9,593
Total liabilities	1,586,803	1,595,039
Commitments and contingencies
Shareholders' equity:
Common stock, par value $0.01 per share; 100,000,000 shares authorized, 40,287,654 and 40,065,246 shares outstanding as of March 31, 2014 and December 31, 2013, respectively	403	401
Additional paid-in capital	141,933	148,433
Accumulated other comprehensive loss, net	(728)	(1,000)
Noncontrolling interest	4,603	4,505
Total shareholders' equity	146,211	152,339
Total liabilities and shareholders' equity	$ 1,733,014	$ 1,747,378

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LONG-TERM DEBT

3 Months Ended

Mar. 31, 2014

LONG-TERM DEBT

LONG-TERM DEBT

6. LONG-TERM DEBT

Long-term debt, presented net of unamortized discounts, consisted of the following:

	March 31,		December 31,
(In thousands)	2014		2013
Senior secured credit facility:
Term Loan 4, net of discount of $4,391 and $4,537 at March 31, 2014 and December 31, 2013, respectively	$	903,334	$	905,463
Revolving loan	8,000		13,000
Senior notes, net of discount of $1,653 and $1,699 at March 31, 2014 and December 31, 2013, respectively	298,347		298,301
Capital leases	4,965		5,121
	1,214,646		1,221,885
Less: current portion of long-term debt and capital leases	(9,773)		(9,751)
Total long-term debt	$	1,204,873	$	1,212,134

Credit Agreement

In December 2013, the Company, through certain of its wholly owned subsidiaries, entered into a Second Amended and Restated Credit Agreement with various financial institutions (the “Credit Agreement”) to replace the Company’s previously amended credit agreement.  The Credit Agreement consists of a $75.0 million revolving credit facility and initial term loans in the aggregate amount of $910.0 million (“Term 4”).  The proceeds from the Credit Agreement were used to repay the outstanding term loans from the previous agreement in its entirety.  The Credit Agreement also includes an incremental term loan facility which provides the ability to borrow up to $300.0 million of incremental term loans subject to certain terms and conditions.  Borrowings under the senior secured credit facility are secured by substantially all of the assets of the Company and its subsidiaries, with the exception of Illinois Consolidated Telephone Company and our majority-owned subsidiary, East Texas Fiber Line Incorporated.

The Term 4 loan was issued in an original aggregate principal amount of $910.0 million with a maturity date of December 23, 2020, but is subject to earlier maturity on December 31, 2019 if the Company’s unsecured Senior Notes due in 2020 (“Senior Notes”) are not repaid or redeemed in full by December 31, 2019.  The Term 4 loan contains an original issuance discount of $4.6 million, which is being amortized over the term of the loan.  The Term 4 loan requires quarterly principal payments of $2.3 million, which commenced March 31, 2014, and has an interest rate of LIBOR plus 3.25% subject to a 1.00% LIBOR floor.

Our revolving credit facility has a maturity date of December 23, 2018 and an applicable margin (at our election) of between 2.50% and 3.25% for LIBOR-based borrowings or between 1.50% and 2.25% for alternate base rate borrowings, depending on our leverage ratio.  Based on our leverage ratio at March 31, 2014, the borrowing margin for the next three month period ending June 30, 2014 will be at a weighted-average margin of 3.00% for a LIBOR-based loan or 2.00% for an alternate base rate loan.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.  As of March 31, 2014 and December 31, 2013, borrowings of $8.0 million and $13.0 million were outstanding under the revolving credit facility, respectively.  A stand-by letter of credit of $0.9 million, issued in connection with the Company’s insurance coverage, was outstanding under our revolving credit facility as of March 31, 2014.  The stand-by letter of credit is renewable annually and reduces the borrowing availability under the revolving credit facility.

The weighted-average interest rate on outstanding borrowings under our credit facility was 4.24% and 4.23% at March 31, 2014 and December 31, 2013, respectively.  Interest is payable at least quarterly.

Net proceeds from asset sales exceeding certain thresholds, to the extent not reinvested, are required to be used to repay loans outstanding under the Credit Agreement.

Credit Agreement Covenant Compliance

The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue capital stock.  We have agreed to maintain certain financial ratios, including interest coverage and total net leverage ratios, all as defined in the Credit Agreement.  As of March 31, 2014, we were in compliance with the Credit Agreement covenants.

In general, our Credit Agreement restricts our ability to pay dividends to the amount of our Available Cash as defined in our Credit Agreement.  As of March 31, 2014, and including the $15.6 million dividend declared in February 2014 and paid on May 1, 2014, we had $215.6 million in dividend availability under the credit facility covenant.

Under our Credit Agreement, if our total net leverage ratio (as 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 our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to fund acquisitions, or make other investments.  During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in Available Cash, among other things.  In addition, we will not be permitted to pay dividends if an event of default under the Credit Agreement has occurred and is continuing.  Among other things, it will be an event of default if our total net leverage ratio and interest coverage ratio as of the end of any fiscal quarter is greater than 5.25:1.00 and less than 2.25:1.00, respectively.  As of March 31, 2014, our total net leverage ratio under the Credit Agreement was 4.27:1.00, and our interest coverage ratio was 3.52:1.00.

Senior Notes

On May 30, 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% unsecured Senior Notes, due 2020 through our wholly-owned subsidiary, Consolidated Communications Finance Co. (“Finance Co.”) for the acquisition of SureWest Communications (“SureWest”).  The Senior Notes will mature on June 1, 2020 and earn interest at a rate of 10.875% per year, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2012.  The Senior Notes were sold in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) and outside the United States in compliance with Regulation S under the Securities Act.  In addition, some of the Senior Notes were sold to certain “accredited investors” (as defined in Rule 501 under the Securities Act).  The Senior Notes were sold to investors at a price equal to 99.345% of the principal amount thereof, for a yield to maturity of 11.00%.  This discount is being amortized over the term of the Senior Notes.  Upon closing of the SureWest acquisition on July 2, 2012, Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., (“CCI”) which assumed the Senior Notes, and we and certain of our subsidiaries fully and unconditionally guaranteed the Senior Notes.  On August 3, 2012, SureWest and its subsidiaries guaranteed the Senior Notes.

In 2013, we completed an exchange offer to issue registered notes (“Exchange Notes”) for $287.3 million of the original Senior Notes.  The terms of the Exchange Notes are substantially identical to the Senior Notes, except that the Exchange Notes are registered under the Securities Act and the transfer restrictions and registration rights applicable to the Senior Notes do not apply to the Exchange Notes.  The exchange offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.

Senior Notes Covenant Compliance

The indenture governing the Senior Notes contains customary covenants for high yield notes, which limits CCI’s and its restricted subsidiaries’ ability to: incur debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions.

Among other matters, the Senior Notes indenture provides that CCI may not pay dividends or make other “restricted payments” to the Company if its total net leverage ratio is 4.25:1.00 or greater.  This ratio is calculated differently than the comparable ratio under the Credit Agreement; among other differences, it takes into account on a pro forma basis synergies expected to be achieved as a result of the SureWest acquisition but not yet reflected in historical results.  At March 31, 2014, this ratio was 4.23:1.00.  If this ratio is met, dividends and other restricted payments may be made from cumulative consolidated cash flow since the date the Senior Notes were issued, less 1.75 times fixed charges, less dividends and other restricted payments made since the date the Senior Notes were issued.  Dividends may be paid and other restricted payments may also be made from a “basket” of $50.0 million, none of which has been used to date, and pursuant to other exceptions identified in the Senior Notes indenture.  Since dividends of $124.1 million have been paid since May 30, 2012, at March 31, 2014 there was $178.6 million of the $302.7 million of cumulative consolidated cash flow since May 30, 2012 available to pay dividends.

On March 19, 2014, CCI commenced a solicitation of consents from the eligible holders of the Senior Notes in order to amend the indenture governing the Senior Notes to (i) modify CCI’s Consolidated Leverage Ratio (as defined in the indenture governing the Senior Notes) level required before CCI (subject to certain other conditions specified in the indenture) can make Restricted Payments (as defined in the indenture) otherwise available under the consolidated cash flow builder basket from 4.25:1.00 to 4.50:1.00 and (ii) modify the size of a permitted lien basket for liens securing Indebtedness (as defined in the indenture) by amending the multiplier for CCI’s Consolidated Cash Flow (as defined in the indenture) in the calculation of such permitted lien basket from 2.50 to 2.75.  On April 1, 2014, the required consent of the holders of the Senior Notes was obtained and the consent solicitation expired, and we entered into a supplemental indenture effecting the proposed amendments as provided in the consent solicitation.  The amendment to the indenture with respect to modifying the size of a permitted lien basket for liens securing Indebtedness modified such provision in the indenture so that it would be the same as the equivalent provision in our Credit Agreement.  In connection with entering into the supplemental indenture, we paid consent fees of approximately $2.5 million, during the second quarter ended June 30, 2014, to the holders of the Senior Notes who validly consented to the proposed amendment.  The consent fees will be capitalized as deferred debt issuance costs and amortized over the term of the Senior Notes.

Capital Leases

As of March 31, 2014, we had seven capital leases which expire between 2015 and 2021.  As of March 31, 2014, the present value of the minimum remaining lease commitments was approximately $5.0 million, of which $0.7 million was due and payable within the next twelve months.  The leases require total remaining rental payments of $7.5 million as of March 31, 2014, of which $5.6 million will be paid to LATEL LLC, a related party entity.

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FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2014

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

5. FAIR VALUE MEASUREMENTS

Our derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using valuation models which rely on the expected London Interbank Offered Rate (“LIBOR”) based yield curve and estimates of counterparty and Consolidated’s non-performance risk as the most significant inputs.  Because each of these inputs are directly observable or can be corroborated by observable market data, we have categorized these interest rate swaps as Level 2 within the fair value hierarchy. See Note 7 for further discussion regarding our interest rate swap agreements.

Our interest rate swap liabilities measured at fair value on a recurring basis and subject to disclosure requirements at March 31, 2014 and December 31, 2013 were as follows:

			As of March 31, 2014
			Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Current interest rate swap liabilities	$	(694)	$	–	$	(694)	$	–
Long-term interest rate swap liabilities		(1,727)		–		(1,727)		–
Total	$	(2,421)	$	–	$	(2,421)	$	–

			As of December 31, 2013
			Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Current interest rate swap liabilities	$	(660)	$	–	$	(660)	$	–
Long-term interest rate swap liabilities	(1,959)		–		(1,959)		–
Total	$	(2,619)	$	–	$	(2,619)	$	–

We have not elected the fair value option for any of our financial assets or liabilities.  The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.  The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of March 31, 2014 and December 31, 2013.

	As of March 31, 2014				As of December 31, 2013
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investments, equity basis	$	60,476	n/a		$	61,204	n/a
Investments, at cost	$	49,747	n/a		$	49,712	n/a
Long-term debt	$	1,209,681	$	1,265,299	$	1,216,764	$	1,261,508

Cost & Equity Method Investments

Our investments at March 31, 2014 and December 31, 2013 accounted for under both the equity and cost methods consisted primarily of minority positions in various cellular telephone limited partnerships and our investment in CoBank.  These investments are recorded using either the equity or cost methods. It is impracticable to determine fair value of these investments.

Long-term Debt

The fair value of our long-term debt was estimated using a discounted cash flow analyses based on incremental borrowing rates for similar types of borrowing arrangements.  We have categorized the long-term debt as Level 2 within the fair value hierarchy.

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FAIR VALUE MEASUREMENTS (Tables)

3 Months Ended

Mar. 31, 2014

FAIR VALUE MEASUREMENTS

Schedule of interest rate swap liabilities measured at fair value on a recurring basis

			As of March 31, 2014
			Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Current interest rate swap liabilities	$	(694)	$	–	$	(694)	$	–
Long-term interest rate swap liabilities		(1,727)		–		(1,727)		–
Total	$	(2,421)	$	–	$	(2,421)	$	–

			As of December 31, 2013
			Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Current interest rate swap liabilities	$	(660)	$	–	$	(660)	$	–
Long-term interest rate swap liabilities	(1,959)		–		(1,959)		–
Total	$	(2,619)	$	–	$	(2,619)	$	–

Schedule of other financial instruments that are not carried at fair value but which require fair value disclosure

	As of March 31, 2014				As of December 31, 2013
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investments, equity basis	$	60,476	n/a		$	61,204	n/a
Investments, at cost	$	49,747	n/a		$	49,712	n/a
Long-term debt	$	1,209,681	$	1,265,299	$	1,216,764	$	1,261,508

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Accounting

Business and Basis of Accounting

Consolidated Communications Holdings, Inc. (the “Company”, “we” or “our”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communications services to residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri.

We offer a wide range of telecommunications services to residential and business customers in the areas we serve. Our telecommunications services include local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, directory publishing, Competitive Local Exchange Carrier (“CLEC”) services and equipment sales.  As of March 31, 2014, we had approximately 254 thousand access lines, 122 thousand voice connections, 258 thousand data and Internet connections and 111 thousand video connections.

We historically operated our business as two separate reportable segments: Telephone Operations and Other Operations.  Based on changes in our business structure, during the quarter ended June 30, 2013 we concluded that we operate our business as one reportable segment. See the “Recent Business Developments” section below for a more detailed discussion regarding the circumstances that resulted in the change to our segment reporting.

In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of income, comprehensive income and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2013 Annual Report on Form 10-K filed with the SEC.

Segment Reporting

Segment Reporting

Historically, we classified our operations into two separate reportable business segments: Telephone Operations and Other Operations.  Our Telephone Operations consisted of a wide range of telecommunications services to residential and business customers, including local and long-distance service, high-speed broadband Internet access, video services, VOIP services, custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  Our Other Operations segment operated two complementary non-core businesses including telephone services to state and county correctional facilities (“Prison Services”) and equipment sales.  As discussed below, our contract to provide telephone services to correctional facilities operated by the Illinois Department of Corrections was not renewed and the process of transitioning those services to another service provider was completed during the quarter ended March 31, 2013.  The remaining Prison Services assets and operations were classified as discontinued operations during the quarter ended June 30, 2013 and subsequently sold during the quarter ended September 30, 2013.  Prison Services comprised nearly all of the Other Operations segment revenue and results of operations.  Consequently, with the cessation of our Prison Services business and based on the segment accounting guidance, we concluded that we operate as one segment as of the quarter ended June 30, 2013. As required by the authoritative guidance for segment presentation, segment results of operations have been retrospectively adjusted to reflect this change for all periods presented.

Prison Services Contract

Prison Services Contract

We previously provided telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections and to certain county jails.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace us as the provider of those services with a competitor. Although we challenged our competitor’s bid and the State’s decision to accept that bid in a variety of different forums, during the quarter ended March 31, 2013, the process of transitioning these services to another service provider was completed. All related assets have been assessed for recoverability in light of this change and we determined that no impairment was necessary.

Discontinued Operations

Discontinued Operations

On September 13, 2013, we completed the sale of the assets and contractual rights used to provide communications services to inmates in thirteen county jails located in Illinois for a total purchase price of $2.5 million.  In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations”, the financial results of the Prison Services business have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented. For a more complete discussion of the transaction, refer to Note 2.

Reclassifications

Reclassifications

Certain amounts in our 2013 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2014 condensed consolidated financial statements, which consists of the effects of reclassifications from the presentation of Prison Services as a discontinued operation.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In April 2014, FASB issued the Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 revises the definition of a discontinued operation to limit the circumstances under which a disposal or classification as held for sale qualifies for presentation as a discontinued operation. Amendments in this ASU require expanded disclosures concerning a discontinued operation and the disposal of an individually-material component of an entity not qualifying as a discontinued operation. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014 and should be applied prospectively, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

Effective January 1, 2014, we adopted Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance concerning the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is present. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

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PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

3 Months Ended

Mar. 31, 2014

PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

9. PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

Defined Benefit Plans

We sponsor a qualified defined benefit pension plan (“Retirement Plan”) that is non-contributory covering certain of our hourly employees who fulfill minimum age and service requirements.  Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.  In April 2013, the Retirement Plan was amended for certain employees under collective bargaining agreements to among other things: (i) change the benefit formula to a cash balance account as of May 1, 2013 and (ii) freeze entrance into the Retirement Plan so that no person is eligible to become a participant on or following May 1, 2013.  As of May 2013, all employees under collective bargaining agreements that include a defined benefit plan are on a cash balance plan.

In connection with our acquisition of SureWest, we assumed sponsorship in 2012 of a frozen non-contributory defined benefit pension plan (the “SureWest Plan”).  The SureWest Plan covers certain eligible employees and benefits are based on years of service and the employee’s average compensation during the five highest consecutive years of the last ten years of credited service.  This plan has previously been frozen so that no person is eligible to become a new participant and all future benefit accruals for existing participants have ceased.   As of January 1, 2014, the SureWest Plan was merged into and consolidated with the Retirement Plan.

We also have two non-qualified supplemental retirement plans (“Supplemental Plans”): the Restoration Plan, which we acquired as part of our North Pittsburgh Systems, Inc. (“North Pittsburgh”) and TXU Communications Venture Company (“TXUCV”) acquisitions, and a Supplemental Executive Retirement Plan (“SERP”), which we acquired as part of our acquisition of SureWest.  The Supplemental Plans provide supplemental retirement benefits to certain former employees by providing for incremental pension payments to partially offset the reduction that would have been payable under the qualified defined benefit pension plans if it were not for limitations imposed by federal income tax regulations. Both plans have previously been frozen so that no person is eligible to become a new participant in the Supplemental Plans.  These plans are unfunded and have no assets.  The benefits paid under the Supplemental Plans are paid from the general operating funds of the Company.

The following table summarizes the components of net periodic pension cost for our defined benefit plans for the quarters ended March 31, 2014 and 2013:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Service cost	$	140	$	304
Interest cost	4,073		3,862
Expected return on plan assets	(5,777)		(5,151)
Net amortization loss	5		891
Prior service credit amortization	(115)		(71)
Net periodic pension benefit	$	(1,674)	$	(165)

Other Non-qualified Deferred Compensation Agreements

We also are liable for deferred compensation agreements with former members of the board of directors and certain other former employees of a subsidiary of TXUCV, which was acquired in 2004.  The benefits are payable for up to the life of the participant or to the beneficiary upon the death of the participant and may begin as early as age 55.  Participants accrue no new benefits as these plans had previously been frozen by TXUCV’s predecessor company prior to our acquisition of TXUCV.  Payments related to the deferred compensation agreements totaled approximately $0.1 million for each of the quarters ended March 31, 2014 and 2013.  The net present value of the remaining obligations was approximately $1.7 million and $1.8 million at March 31, 2014 and December 31, 2013, respectively, and is included in pension and post-retirement benefit obligations in the accompanying condensed consolidated balance sheets.

We also maintain 34 life insurance policies on certain of the participating former directors and employees.  The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $2.4 million at March 31, 2014 and $2.2 million at December 31, 2013.  These amounts are included in investments in the accompanying condensed consolidated balance sheets.  Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the condensed consolidated statements of cash flows.  We did not recognize any life insurance proceeds during the quarters ended March 31, 2014 and 2013.

Post-retirement Benefit Obligations

We sponsor a healthcare and life insurance plan (“Post-retirement Plan”) that provides post-retirement medical benefits and life insurance to certain groups of retired employees.  Retirees share in the cost of healthcare benefits, making contributions that are adjusted periodically—either based upon collective bargaining agreements or because total costs of the program have changed.  Covered expenses for retiree health benefits are paid as they are incurred.  Post-retirement life insurance benefits are fully insured.  The Post-retirement Plan is unfunded and has no assets, and benefits are paid from the general operating funds of the Company.

In connection with the acquisition of SureWest in 2012, we acquired its post-retirement benefit plan which provides life insurance benefits and a stated reimbursement for Medicare supplemental insurance to certain eligible retired participants.  This plan has previously been frozen so that no person is eligible to become a new participant.  Employer contributions for retiree medical benefits are separately designated within the SureWest Plan pension trust for the sole purpose of providing payments of retiree medical benefits.  The nature of the assets used to provide payment of retiree medical benefits is the same as that of the SureWest Plan.

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Service cost	$	90	$	232
Interest cost	355		391
Expected return on plan assets	(55)		(58)
Net amortization (gain) loss	(147)		-
Net prior service cost (credit) amortization	35		(45)
Net periodic postretirement benefit cost	$	278	$	520

Contributions

We expect to contribute approximately $15.5 million to our pension plans and $2.5 million to our other post-retirement plans in 2014.  As of March 31, 2014, we have contributed $2.7 million and $0.7 million of the annual contribution to the pension plans and other post-retirement plans, respectively.

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DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2014

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

7. DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative financial instruments to manage our exposure to the risks associated with fluctuations in interest rates. Our interest rate swap agreements effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  Derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet.  We may designate certain of our interest rate swaps as cash flow hedges of our expected future interest payments.  For derivative instruments designated as a cash flow hedge, the effective portion of the change in the fair value is recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and is recognized as an adjustment to earnings over the period in which the hedged item impacts earnings. When an interest rate swap agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt obligation.  If a derivative instrument is de-designated, the remaining gain or loss in AOCI on the date of de-designation is amortized to earnings over the remaining term of the hedging instrument. For derivative financial instruments that are not designated as a hedge, including those that have been de-designated, changes in fair value are recognized on a current basis in earnings.  The ineffective portion of the change in fair value of any hedging derivative is recognized immediately in earnings.  Cash flows from hedging activities are classified under the same category as the cash flows from the hedged items in our condensed consolidated statement of cash flows.

The following interest rate swaps were outstanding at March 31, 2014:

(In thousands)	Notional  Amount		2014 Balance Sheet Location	Fair Value
De-designated Hedges:
Fixed to 1-month floating LIBOR	$	150,000	Other long-term liabilities	$	(1,581)
Fixed to 1-month floating LIBOR	125,000		Current portion of derivative liability	(694)
Fixed to 1-month floating LIBOR (with floor)	50,000		Other long-term liabilities	(146)
Total Fair Values				$	(2,421)

The following interest rate swaps were outstanding at December 31, 2013:

(In thousands)	Notional  Amount		2013 Balance Sheet Location	Fair Value
De-designated Hedges:
Fixed to 1-month floating LIBOR	$	175,000	Other long-term liabilities	$	(1,897)
Fixed to 1-month floating LIBOR	100,000		Current portion of derivative liability	(660)
Fixed to 1-month floating LIBOR (with floor)	50,000		Other long-term liabilities	(62)
Total Fair Values				$	(2,619)

As of March 31, 2014, the counterparties to our various swaps are four major U.S. and European banks.  None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties.  The swaps of any counterparty that is a “Lender” as defined in our credit facility are secured along with the other creditors under the credit facility.  Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties.  This provision allows us to partially mitigate the risk of non-performance by a counterparty.

In December 2013, $325.0 million notional interest rate swaps previously designated as cash flow hedges were de-designated as a result of the amendment to our Credit Agreement on December 23, 2013 as discussed in Note 6.  The interest rate swap agreements mature on various dates through September 2016.  In December 2012, interest rate swaps with an aggregate notional value of $660.0 million were de-designated as cash flow hedges in connection with the amendment to our previous credit agreement on December 4, 2012.  Of these agreements, $200.0 million notional interest rate swap agreements expired on December 31, 2012 and the remainder expired on March 31, 2013.  Prior to de-designation, the effective portion of the change in fair value of the interest rate swaps were recognized in AOCI.  The balance of the unrealized loss included in AOCI as of the date the swaps were de-designated is amortized to earnings over the remaining term of the swap agreements.  Changes in fair value of the de-designated swaps are immediately recognized in earnings as interest expense.  During the quarters ended March 31, 2014 and 2013, a gain of $0.2 million and $2.1 million, respectively, was recognized as a reduction to interest expense for the change in fair value of the de-designated swaps.

At March 31, 2014 and December 31, 2013, the pre-tax deferred losses related to our interest rate swap agreements included in AOCI were $2.0 million and $2.6 million, respectively.  The estimated amount of losses included in AOCI as of March 31, 2014 that will be recognized in earnings in the next twelve months is approximately $1.6 million.

Information regarding our cash flow hedge transactions is as follows:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Loss recognized in AOCI, pretax	$	-	$	(52)
Deferred losses reclassed from AOCI to interest expense	$	(659)	$	(3,641)

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EQUITY

3 Months Ended

Mar. 31, 2014

EQUITY

EQUITY

8. EQUITY

Share-Based Compensation

The following table summarizes total compensation costs recognized for share-based payments during the quarters ended March 31, 2014 and 2013:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Restricted stock	$	517	$	456
Performance shares	267		200
Total	$	784	$	656

Stock-based compensation expense is included in “selling, general and administrative expenses” in the accompanying statements of income.

As of March 31, 2014, total unrecognized compensation costs related to nonvested Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”) was $7.0 million and will be recognized over a weighted-average period of approximately 1.7 years.

The following table summarizes the RSA and PSA activity for the quarter ended March 31, 2014:

	RSAs			PSAs
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Non-vested shares outstanding - January 1, 2014	123,501	$	17.32	64,266	$	17.96
Shares granted	131,281	$	19.74	91,127	$	17.13
Non-vested shares outstanding - March 31, 2014	254,782			155,393

Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component for the quarter ended March 31, 2014:

	Pension and
	Post-Retirement		Derivative
(In thousands)	Obligations		Instruments		Total
Balance at December 31, 2013	$	643	$	(1,643)	$	(1,000)
Amounts reclassified from accumulated other comprehensive income	(136)		408		272
Net current period other comprehensive income	(136)		408		272
Balance at March 31, 2014	$	507	$	(1,235)	$	(728)

The following table summarizes reclassifications from accumulated other comprehensive loss for the quarters ended March 31, 2014 and 2013:

	Amount Reclassified from AOCI
	Quarter Ended March 31,				Affected Line Item in the
(In thousands)	2014		2013		Statement of Income
Amortization of pension and post-retirement items:
Prior service credit	$	80	$	116	(a)
Actuarial gain (loss)	142		(891)		(a)
	222		(775)		Total before tax
	(86)		301		Tax (expense) benefit
	$	136	$	(474)	Net of tax
Loss on cash flow hedges:
Interest rate derivatives	$	(659)	$	(3,641)	Interest expense
	251		1,351		Tax benefit
	$	(408)	$	(2,290)	Net of tax

(a)  These items are included in the components of net periodic benefit cost for our pension and post-retirement benefit plans.  See Note 9 for additional details.

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INCOME TAXES

3 Months Ended

Mar. 31, 2014

INCOME TAXES

INCOME TAXES

10.  INCOME TAXES

We did not have any unrecognized tax benefits as of March 31, 2014 and December 31, 2013.

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At March 31, 2014, we did not have a material liability for interest or penalties and had no material interest or penalty expense.

The periods subject to examination for our federal return are years 2010 through 2012.  The periods subject to examination for our state returns are years 2005 through 2012.  We are currently under examination by federal and state taxing authorities.  We have received proposed assessments in connection with our federal examination for tax years ended December 31, 2010 and 2011.  We are in the process of responding to the IRS and providing support for our tax position.  We believe that our tax position will more likely than not be upheld based on the technical merits of our position.  Accordingly, we have not made any adjustments to our unrecognized tax benefits for the proposed assessments.  We do not expect any settlement or payment that may result from the audits to have a material effect on our results of operations or cash flows.

Our effective tax rate was 37.8% and 44.7% for the quarters ended March 31, 2014 and 2013, respectively. For the quarter ended March 31, 2013, the effective tax rate differed from the federal and state statutory rates primarily due to non-deductible compensation in relation to the acquisition of SureWest.  Exclusive of this adjustment, our effective tax rate for the three months ended March 31, 2013 would have been approximately 37.0%.

On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014.  We have evaluated these regulations and we do not expect they will have a material adverse impact on our consolidated results of operations, cash flows or financial position.

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FAIR VALUE MEASUREMENTS (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Carrying Value
Fair Value Measurements
Investments, equity basis	$ 60,476	$ 61,204
Investments, at cost	49,747	49,712
Long-term debt	1,209,681	1,216,764
Fair Value
Fair Value Measurements
Long-term debt	$ 1,265,299	$ 1,261,508

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EARNINGS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2014

EARNINGS PER SHARE

Schedule of basic and diluted earnings per share

	Quarter Ended
	March 31,
(In thousands, except per share amounts)	2014		2013
Income from continuing operations	$	8,422	$	6,858
Less: net income attributable to noncontrolling interest	98		99
Income attributable to common shareholders before allocation of earnings to participating securities	8,324		6,759
Less: earnings allocated to participating securities	153		132
Income from continuing operations attributable to common shareholders	8,171		6,627
Net income from discontinued operations	-		24
Net income attributable to common shareholders	$	8,171	$	6,651
Weighted-average number of common shares outstanding	39,877		39,755
Basic and diluted earnings per common share:
Income from continuing operations	$	0.20	$	0.17
Income from discontinued operations, net of tax	0.00		0.00
Net income per common share attributable to common shareholders	$	0.20	$	0.17

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EQUITY (Tables)

3 Months Ended

Mar. 31, 2014

EQUITY

Summary of total compensation costs recognized for share-based payments

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Restricted stock	$	517	$	456
Performance shares	267		200
Total	$	784	$	656

Summary of RSA and PSA activity

	RSAs			PSAs
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Non-vested shares outstanding - January 1, 2014	123,501	$	17.32	64,266	$	17.96
Shares granted	131,281	$	19.74	91,127	$	17.13
Non-vested shares outstanding - March 31, 2014	254,782			155,393

Schedule of changes in accumulated other comprehensive loss, net of tax, by component

	Pension and
	Post-Retirement		Derivative
(In thousands)	Obligations		Instruments		Total
Balance at December 31, 2013	$	643	$	(1,643)	$	(1,000)
Amounts reclassified from accumulated other comprehensive income	(136)		408		272
Net current period other comprehensive income	(136)		408		272
Balance at March 31, 2014	$	507	$	(1,235)	$	(728)

Summary of reclassifications from accumulated other comprehensive loss

	Amount Reclassified from AOCI
	Quarter Ended March 31,				Affected Line Item in the
(In thousands)	2014		2013		Statement of Income
Amortization of pension and post-retirement items:
Prior service credit	$	80	$	116	(a)
Actuarial gain (loss)	142		(891)		(a)
	222		(775)		Total before tax
	(86)		301		Tax (expense) benefit
	$	136	$	(474)	Net of tax
Loss on cash flow hedges:
Interest rate derivatives	$	(659)	$	(3,641)	Interest expense
	251		1,351		Tax benefit
	$	(408)	$	(2,290)	Net of tax

(a)  These items are included in the components of net periodic benefit cost for our pension and post-retirement benefit plans.  See Note 9 for additional details.

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EQUITY (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
EQUITY
Income from continuing operations before income taxes	$ 13,544	$ 12,407
Interest expense	(19,831)	(24,600)
Tax (expense) benefit	(5,122)	(5,549)
Net income	8,422	6,882
Amortization of pension and post-retirement items | Amount Reclassified from AOCI
EQUITY
Prior service credit	80	116
Actuarial gain (loss)	142	(891)
Income from continuing operations before income taxes	222	(775)
Tax (expense) benefit	(86)	301
Net income	136	(474)
Loss on cash flow hedges | Amount Reclassified from AOCI
EQUITY
Interest expense	(659)	(3,641)
Tax (expense) benefit	251	1,351
Net income	$ (408)	$ (2,290)

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
CONDENSED CONSOLIDATED BALANCE SHEETS
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares outstanding	40,287,654	40,065,246

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INVESTMENTS

3 Months Ended

Mar. 31, 2014

INVESTMENTS

INVESTMENTS

4. INVESTMENTS

Our investments are as follows:

	March 31,		December 31,
(In thousands)	2014		2013
Cash surrender value of life insurance policies	$	2,362	$	2,183
Cost method investments:
GTE Mobilnet of South Texas Limited Partnership (2.34% interest)	21,450		21,450
Pittsburgh SMSA Limited Partnership (3.60% interest)	22,950		22,950
CoBank, ACB Stock	5,147		5,112
Other	200		200
Equity method investments:
GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)	27,141		27,467
Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest)	7,533		7,696
Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)	23,866		24,105
CVIN, LLC (13.455% interest)	1,936		1,936
Totals	$	112,585	$	113,099

Cost Method

We own 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”).  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas.  We also own 3.60% of Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we use the cost method to account for both of these investments.  It is not practicable to estimate fair value of these investments.  We did not evaluate any of the investments for impairment during the quarters ended March 31, 2014 or 2013 as no factors indicating impairment existed.  For the three-month periods ended March 31, 2014 and 2013, we received cash distributions from these partnerships totaling $3.5 million and $4.0 million, respectively.

CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers.  On an annual basis, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which has traditionally been a significant lender in the Company’s credit facility.  The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.

Equity Method

We own 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6 (I) and RSA 6 (II) provide cellular service in and around our Pennsylvania service territory.  Because we have significant influence over the operating and financial policies of these three entities, we account for the investments using the equity method.  For the quarters ended March 31, 2014 and 2013, we received cash distributions from these partnerships totaling $5.6 million and $4.1 million, respectively.

We have a 13.455% interest in Central Valley Independent Network, LLC (“CVIN”), a joint enterprise comprised of affiliates of several independent telephone companies located in central and northern California. CVIN provides network services and oversees a broadband infrastructure project designed to expand and improve the availability of network services to counties in central California.  Because we have significant influence over the operating and financial policies of this entity, we account for this investment using the equity method.  During the quarter ended March 31, 2013, we made an additional capital investment of $0.1 million in this partnership.  We did not receive any distributions from this partnership during the quarters ended March 31, 2014 and 2013.

The combined unaudited results of operations and financial position of our three equity investments in the cellular limited partnerships are summarized below:

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Total revenues	$	80,816	$	76,719
Income from operations	25,562		23,973
Net income before taxes	25,585		23,985
Net income	25,585		23,985
	March 31,		December 31,
(In thousands)	2014		2013
Current assets	$	52,843	$	54,837
Non-current assets	88,635		87,968
Current liabilities	14,584		15,221
Non-current liabilities	2,166		1,786
Partnership equity	124,731		125,799

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PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS (Tables)

3 Months Ended

Mar. 31, 2014

Defined Benefit Plans

Pension Plans and Other Post-retirement Benefits

Schedule of the components of net periodic pension cost recognized in the consolidated statements of income

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Service cost	$	140	$	304
Interest cost	4,073		3,862
Expected return on plan assets	(5,777)		(5,151)
Net amortization loss	5		891
Prior service credit amortization	(115)		(71)
Net periodic pension benefit	$	(1,674)	$	(165)

Post-retirement Benefit Obligations

Pension Plans and Other Post-retirement Benefits

Schedule of the components of net periodic pension cost recognized in the consolidated statements of income

	Quarter Ended
	March 31,
(In thousands)	2014		2013
Service cost	$	90	$	232
Interest cost	355		391
Expected return on plan assets	(55)		(58)
Net amortization (gain) loss	(147)		-
Net prior service cost (credit) amortization	35		(45)
Net periodic postretirement benefit cost	$	278	$	520

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DERIVATIVE FINANCIAL INSTRUMENTS (Details 2) (Interest rate swaps, USD $)	3 Months Ended		3 Months Ended
	Mar. 31, 2014 Loss on cash flow hedges	Dec. 31, 2013 Loss on cash flow hedges	Mar. 31, 2014 Cash flow hedges	Mar. 31, 2013 Cash flow hedges
Derivatives
Deferred losses included in AOCI (pretax)	$ 2,000,000	$ 2,600,000
Losses included in AOCI to be recognized in the next 12 months	1,600,000
Loss recognized in AOCI, pretax				(52,000)
Deferred losses reclassified from AOCI to interest expense			$ (659,000)	$ (3,641,000)

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DISCONTINUED OPERATIONS (Tables)

3 Months Ended

Mar. 31, 2014

DISCONTINUED OPERATIONS

Summary of the financial information for the prison services operations

	Quarter Ended March 31,
(In thousands)	2013
Operating revenues	$	4,767
Operating expenses including depreciation and amortization	4,699
Income from operations	68
Income tax expense	44
Income from discontinued operations	$	24