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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 September 30, 2012

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)

    (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):

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 October 23, 2012, the registrant had 39,917,265 shares of Common Stock outstanding.

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PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands except per share amounts)

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; Amounts in thousands)

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

See accompanying notes.

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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.

In the opinion of management, the accompanying condensed consolidated balance sheets and related interim statements of operations, 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 2011 Annual Report on Form 10-K filed with the SEC.

SureWest Merger

On July 2, 2012, we completed the acquisition of SureWest Communications.  SureWest Communications results of operations have been consolidated with our results following the acquisition date.  For a more complete discussion of the transaction, refer to Note 2.

Reclassifications

Inventories have been reclassified from current assets to property, plant and equipment on the condensed consolidated balance sheets.  Inventories consist primarily of network construction materials and supplies that when issued are capitalized as part of new customer installations and the construction of the network. The proportion of the items included in inventories that are capitalized to property, plant and equipment continues to increase as a result of the growth in the broadband services offered by the Company.

Property, Plant and Equipment

Property, plant and equipment consisted of the following:

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Construction inventory, which is stated at weighted average cost, consists primarily of network construction materials and supplies that when issued are predominately capitalized as part of new customer installations and the construction of the network.

Recently Issued Accounting Pronouncements

In July 2012, Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update No. 2012-02 (“ASU 2012-02”), Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 permits an entity to perform an initial assessment of qualitative factors to determine whether it is more likely than not that a non-goodwill indefinite-lived intangible asset is impaired and thus whether it is necessary to calculate the asset’s fair value for the purpose of comparing it with the asset’s carrying amount. The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

Effective January 1, 2012, we adopted the FASB issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).  This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS.  ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements.  The adoption of this standard did not have a material impact on our consolidated financial statements.

Effective January 1, 2012, we adopted the FASB issued Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Presentation of Comprehensive Income.  ASU 2011-05 requires an entity to either present components of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. Accordingly, we have presented net income and other comprehensive income in two consecutive statements.

2.     MERGER WITH SUREWEST COMMUNICATIONS

On July 2, 2012, we completed the merger with SureWest Communications (“SureWest”), which resulted in the acquisition of 100% of all the outstanding shares of SureWest for $23.00 per share in a cash and stock transaction.  SureWest provides telecommunication services in Northern California, primarily in the greater Sacramento region, and in the greater Kansas City, Kansas and Missouri areas. The total purchase price of $550.8 million consisted of cash and assumed debt of $402.4 million and 9,965,983 shares of the Company’s common stock valued at the Company’s opening stock price on July 2, 2012 of $14.89, which totaled $148.4 million.

The results of SureWest operations since July 2, 2012 are included in the Company’s condensed consolidated statement of operations.  The financial results of SureWest are included in the Telephone Operations segment.  SureWest contributed $66.4 million in net revenues and recorded a net loss of $0.9 million for the period from July 2, 2012 through the period ended September 30, 2012, which includes $9.5 million in acquisition related costs. On July 2, 2012 as part of the purchase, the Company recorded accrued cash purchase price consideration of approximately $8.3 million to be paid during the quarter ending December 31, 2012, which represents a noncash investing activity in the condensed consolidated statements of cash flows for the nine months ended September 30, 2012. In addition, at September 30, 2012 the Company has accrued change-in-control payments to former members of the SureWest management team of $8.7 million which are expected to be paid during the six months ended June 30, 2013.  These payments were recognized in financing and other transaction costs in the condensed consolidated statement of operations during the quarter and nine months ended September 30, 2012 due to the close of the acquisition and the change or elimination of job duties.

The acquisition of SureWest has been accounted for using the acquisition method in accordance with the FASB’s Accounting Standards Codification Topic 805, Business Combinations.  Accordingly, the net assets acquired are recorded at their estimated fair values at July 2, 2012.  These values are derived from a preliminary purchase price allocation, which is subject to change based on the final valuation of the acquired real and intangible assets and liabilities assumed. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuing of real and personal property, intangible assets and the final determination of goodwill. The Company expects to continue to obtain information to assist it in determining the fair values of the net assets

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acquired at the acquisition date during the measurement period. The following table summarizes the preliminary purchase price allocation.

Included in the current assets acquired are cash of $17.1 million and trade receivables fair valued at approximately $21.6 million with a gross value of approximately $23.4 million.  We believe that the estimated fair value of the trade receivables approximates the amount to be eventually collected.  The acquired other intangible assets of approximately $10.5 million consists of the estimated fair values assigned to customer lists of $9.6 million and tradenames of $0.9 million.  The customer list intangible asset is being amortized over the estimated useful life of 5 years.  During the quarter and nine months ended September 30, 2012, we recorded amortization expense of approximately $0.5 million relating to the customer lists. Goodwill of $109.4 million and the tradenames are indefinite lived assets which are not subject to amortization; however, they are tested annually for impairment or more frequently when events or changes in circumstances indicate that the asset might be impaired. Goodwill will be tested annually for impairment at November 30. Goodwill is not deductible for income tax purposes.

Unaudited Pro Forma Results

The following unaudited pro forma information presents the results of operations of the Company as if the acquisition of SureWest occurred on January 1, 2011.  The adjustments to arrive at the pro forma information below included additional depreciation and amortization expense for the fair value increases to property plant and equipment, software and customer relationships.  Interest expense was increased to reflect the additional debt entered into to finance a portion of the acquisition price.  Shares used to calculate the basic and diluted earnings per share were adjusted to reflect the additional shares of common stock issued to fund a portion of the acquisition price. The pro forma information below does not purport to present the actual results that would have resulted if the acquisition had in fact occurred at the beginning of the fiscal periods presented, nor does the information project results for any future period.

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3.     EARNINGS PER SHARE

The following illustrates the earnings allocation method as required by the FASB’s authoritative guidance on the treatment of participating securities in the calculation of earnings per share which we utilize in the calculation of basic and diluted earnings per share.

(1)To the extent that restricted shares are anti-dilutive, they have been excluded from the calculation of diluted earnings per share in accordance with the applicable accounting guidance.

An additional 0.2 million and 0.4 million shares were not included in the computation of potentially dilutive securities at September 30, 2012 and 2011, because they were anti-dilutive.

4.              INVESTMENTS

Our investments are as follows:

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 as no factors indicating impairment existed during the year.  For the three-month periods ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $3.7 million and $2.7 million, respectively.  For the nine months ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $9.3 million and $7.7 million, respectively.

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CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers.  Annually, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, 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 17.02% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”), 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 three months ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $4.0 million and $4.2 million, respectively.  For the nine months ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $10.5 million and $11.9 million, respectively.

We have a 13.61% 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.  During the quarter and nine months ended September 30, 2012, we did not receive any distributions from this partnership.

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

5.              FAIR VALUE MEASUREMENTS

The Company’s derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using an internal valuation model which relies on the expected 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.

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The Company’s interest rate swap assets and liabilities measured at fair value on a recurring basis subject to disclosure requirements at September 30, 2012 and December 31, 2011 were as follows:

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

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 September 30, 2012 and December 31, 2011.

The Company’s investments at September 30, 2012 and December 31, 2011 accounted for under both the equity and cost methods consists primarily of minority positions in various cellular telephone limited partnerships.  These investments are recorded using either the equity or cost methods. It is impracticable to determine fair value of these investments.

Our senior secured long-term debt of $908.4 million allows us to select a one month LIBOR repricing option, which we have elected.  As such, the fair value of this debt approximates its carrying value.  Based upon the inputs of the LIBOR based yield curve, which can be corroborated by observable market data, we have categorized the long-term debt as Level 2 within the fair value hierarchy.

In May 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% Senior Notes (“Senior Notes”).  The fair value of this debt approximates its carrying value of $298.1 million, net of discount, at September 30, 2012.  We have categorized the Senior Notes long-term debt as Level 2 within the fair value hierarchy. See Note 6 for a further discussion regarding our senior secured long-term debt.

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6.     LONG-TERM DEBT

Long-term debt consists of the following: