UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
(cid:95)
(cid:134)
Commission file number 000-51446
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
121 South 17th Street, Mattoon, Illinois
(Address of principal executive offices)
02-0636095
(I.R.S. Employer
Identification No.)
61938-3987
(Zip Code)
Registrant’s telephone number, including area code (217) 235-3311
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock—$0.01 par value
Name of each exchange on which registered
The NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes
No
(cid:134)
(cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
(cid:134)
No
(cid:95)
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
(cid:95)
No
(cid:134)
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
(cid:95)
No
(cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
(cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.
See definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
Accelerated filer
(cid:95)
(cid:134)
(cid:134)
Non-accelerated filer
(Do not check if a smaller
reporting company)
(cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
(cid:134)
No
(cid:95)
As of June 30, 2013, the aggregate market value of the shares held by non-affiliates of the registrant’s common stock was $653,300,709 based on
the closing price as reported on the NASDAQ Global Select Market. The market value calculations exclude shares held on the stated date by
registrant’s directors and officers on the assumption such shares may be shares owned by affiliates. Exclusion from these public market value
calculations does not necessarily conclude affiliate status for any other purpose.
On February 14, 2014, the registrant had 40,065,246 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2014 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this
Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within
120 days of the registrant’s fiscal year ended December 31, 2013.
TABLE OF CONTENTS
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Item 4.
PART II
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B.
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . .
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Note About Forward-Looking Statements
PART I
The 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 Annual Report on
Form 10-K, 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.
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 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 the
section entitled “Risk Factors” (refer to Part I, Item 1A). 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.
Item 1.
Business.
Consolidated Communications Holdings, Inc. (the “Company”, “we” or “our”) is a Delaware holding company with
operating subsidiaries (collectively “Consolidated”) providing a wide range of communications services to
residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri. We were
founded in 1894 as the Mattoon Telephone Company by the great-grandfather of one of the members of our Board
of Directors, Richard A. Lumpkin. After several acquisitions, the Mattoon Telephone Company was incorporated as
the Illinois Consolidated Telephone Company (“ICTC”) on April 10, 1924. We were incorporated under the laws of
Delaware in 2002, and through our predecessors we have provided telecommunications services for more than a
century. Through strategic acquisitions over the last decade, we have grown our business, diversified our revenue
and cash flow streams and created a strong platform for future growth. Our strategic approach in evaluating
potential transactions include analysis of the market, the quality of the network, our ability to integrate the acquired
company efficiently, the potential for creating significant operating synergies and a positive cash flow at the
inception of each acquisition. The operating synergies are created through the use of consistent platforms,
convergence of processes and functional management of the combined entities. We measure our synergies during
the first two years following an acquisition. For example, the acquisition of our Texas properties in 2004 tripled the
size of our business and gave us the requisite scale to make system and platform decisions that would facilitate
future acquisitions. For the acquisition of our Pennsylvania properties, we achieved synergies in excess of $12.0
million in annualized savings, which at the time, represented about 20% of their operating expense. During the first
full year following the acquisition of SureWest Communications, we achieved synergies in excess of $23.4 million
and we believe we will continue to achieve further operating synergies in the second year post acquisition. We have
positioned our business to provide services in both rural and suburban markets with service territories spanning the
country.
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 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.
1
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. During 2012, the prison services contract comprised 5% of consolidated operating revenues and
approximately 2% of consolidated operating income, excluding financing and other transaction fees.
Discontinued Operations
In September 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 consolidated financial statements for all periods presented. For a more complete
discussion of the transaction, refer to Note 3 to the Consolidated Financial Statements.
SureWest Merger
We completed the merger with SureWest Communications on July 2, 2012. SureWest Communications’ results of
operations are included within our results following the acquisition date. During the quarter ended June 30, 2013 we
finalized the purchase price allocation. For a more complete discussion of the transaction, refer to Note 3 to the
Consolidated Financial Statements.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, are available free of charge on our web site at www.consolidated.com, as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).
Copies are also available free of charge upon request to Consolidated Communications, 121 S. 17th St, Mattoon, IL
61938, Attn: Vice President Investor Relations and Treasurer. Our website also contains copies of our Corporate
Governance Guidelines, Code of Business Conduct and Ethics and charter of each committee of our Board of
Directors. The information found on our web site is not part of this or any other report we file with or furnish to the
SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100
F Street, NE, Washington, DC 20549 on official business days during the hours of 10:00 am to 3:00 pm. The public
may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
2
SEC maintains an Internet site that contains reports, proxy and information statements, and other information
regarding our filings at http://www.sec.gov.
Description of Our Business
We are an established telecommunications services company providing a wide range of telecommunications services
to residential and business customers in six states. We offer a wide range of telecommunications services, including
local and long-distance service, high-speed broadband Internet access, video services, VOIP, custom calling
features, private line services, carrier grade access services, network capacity services over our regional fiber optic
networks, directory publishing, 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 increased $123.7 million
during 2013 compared to 2012, primarily from the SureWest acquisition and growth in data, video and Internet
connections. 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 December 31, 2013, our video service was
available to approximately 531,000 homes in the markets we serve, with an approximate 21% penetration rate. As of
December 31, 2013, we had approximately 110,613 video subscribers, a 4% increase from 2012. 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 increase as a result of enhanced product
and service offerings, such as our consumer VOIP service and data speeds of up to 50 megabits per second,
depending on the geographic market availability. As of December 31, 2013, approximately 30% 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 are 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.
A discussion of factors potentially affecting our operations is set forth in “Risk Factors” in Item 1A, which is
incorporated herein by reference.
Key Operating Statistics
ILEC access lines
Residential
Business
Total
Voice connections (1)
Residential
Business
Total
Data and internet connections (2)
Video connections (2)
Total connections
As of December 31,
2012
2013
2011
147,247
109,558
256,805
73,219
50,214
123,433
255,239
110,613
746,090
153,855
114,742
268,597
78,811
50,918
129,729
247,633
106,137
752,096
137,179
90,813
227,992
2,388
52,424
54,812
134,129
34,356
451,289
(1)Voice connections include voice lines outside the Incumbent Local Exchange Carrier (“ILEC”) service areas and
Voice-over-IP inside the ILEC service areas.
(2)These connections include both residential and business (excluding SureWest business metrics) for services both
inside and outside the ILEC service areas.
The comparability of our consolidated results of operations and key operating statistics was impacted by the
SureWest acquisition, which closed on July 2, 2012, as described above. SureWest’s results are included in our
3
consolidated financial statements as of the date of the acquisition. The acquisition of SureWest provides additional
diversification of the Company’s revenues and cash flows both geographically and by service type.
Sources of Revenue
The following table summarizes our sources of revenue for the last three fiscal years:
(In millions, except for percentages)
Local calling services
Network access services
Video, data and Internet services
Subsidies
Long-distance services
Other services
Total operating revenue
2013
2012
2011
$
106.5
112.4
270.0
52.0
19.3
41.4
601.6
% of
Revenues
17.7
18.7
44.9
8.6
3.2
6.9
100.0
$
93.5
98.6
176.7
49.3
17.3
42.5
477.9
% of
Revenues
19.6
20.6
37.0
10.3
3.6
8.9
100.0
$
84.2
80.5
83.0
45.4
15.9
40.0
349.0
% of
Revenues
24.1
23.1
23.8
13.0
4.6
11.4
100.0
All telecommunications providers continue to face increased competition as a result of technology changes and
industry legislative and regulatory developments. In recent years, changes in consumer demand and our acquisition
of SureWest have provided us with significant growth opportunities for our video, data and Internet services. As
indicated by the table above, the percentage of operating revenues we receive from our video, data and Internet
services has nearly doubled since 2011. We anticipate that video, data and Internet revenues will continue to
increase as a total percentage of operating revenues and offset the anticipated decline in traditional telephone
services, which continue to be impacted by the industry-wide decline in access lines.
Local calling services
Local calling services include traditional wireline telephone service and other basic services. Our service plans
include options for voicemail and other enhanced custom calling features including caller ID, call forwarding and
call waiting. Services are charged at a fixed monthly rate or can be bundled with selected services at a discounted
rate.
We offer private lines that provide direct connections between two or more local locations at flat monthly rates. We
provide a hosted VOIP package, which utilizes a soft switch and allows the customer the flexibility of utilizing new
telephone technology and features without investing in a new telephone system. The package bundles local service,
calling features, Internet protocol (“IP”) business telephones and unified messaging, which integrates multiple
messaging technologies into a single system, which allows the customer to receive and listen to voice messages
through email.
Network access services
Network access service revenues include interstate and intrastate switched access revenue and network special
access services. Revenue from network access charges are received from long-distance and other carriers for
customers originating or terminating calls from/to our local exchanges. These services allow customers to make or
receive calls in our service area. Our long-distance customers typically pay a monthly flat-rate fee for this service.
In addition, other carriers pay network access charges for their originating or terminating calls within our service
areas. These charges also apply to private lines that connect a customer in one of our service areas to a location
outside of our service areas. Through these dedicated lines customers can transmit data and access external data
networks. We also provide cell site backhaul services to wireless carriers. The demand for backhaul services
continues to grow as wireless carriers are faced with escalating consumer and business demands for wireless data.
Certain of our network access revenues are based on rates set or approved by federal and state regulatory
commissions or as directed by law that are subject to change at any time.
Video, Data and Internet services
Video, data and Internet services include revenue from residential and business customers for subscriptions to our
video and data products. Our data service can provide high-speed Internet access at various symmetrical speeds of
up to 50 megabits per second (“Mbps”), depending on the nature of the network facilities that are available, the level
of service selected and the geographic market availability. We also offer a variety of data connectivity services in
4
select markets, including Ethernet services capable of connecting multiple connections over our copper and fiber-
based networks, virtual hosting services, Wi-Fi and colocation services.
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. Our Whole Home DVR allows customers the ability to watch recorded shows on any television
in the house, record multiple shows at one time and utilize an intuitive on-screen guide and user interface.
Our digital phone service, including VOIP, is also available in certain markets as an alternative to the traditional
telephone line. We offer multiple voice service plans that provide for either usage based or unlimited calling plans,
including options for long distance, voice mail and other calling features such as caller ID, call forwarding, call
blocking, abbreviated dialing and conferencing.
Although we expect our revenues from video, data and Internet services to grow substantially, these products
typically generate lower margins than our traditional wireline business. As a result, as we replace traditional
wireline revenue with revenue from video, data and Internet services, our margins may decline.
Subsidies
We receive federal and state subsidies which are designed to promote widely available, quality telephone service at
affordable prices in rural areas. Subsidies come from pools to which we and other telecommunications providers,
including local, long-distance and wireless carriers, contribute on a monthly basis. Subsidies are allocated and
distributed to participating carriers monthly based upon their respective costs for providing local service. Similar to
access charges, subsidies are regulated by federal and state regulatory commissions. See Part I – Item 1 -
“Regulatory Environment” below and Item 1A – “Risk Factors – Regulatory Risks” for additional information
regarding the subsidies we receive.
Long-distance services
Long-distance services include traditional domestic and international long distance which enables customers to
make calls that terminate outside their local calling area. These services also include calling cards, toll free calls and
conference calling. We offer a variety of long-distance plans, including unlimited flat-rate calling plans and offer a
combination of subscription and usage fees.
Other services
Other services include revenues from telephone directory publishing, wholesale transport services on our fiber-optic
network in Texas, billing and collection services, inside wiring service and maintenance and equipment sales
(“Business Systems”). Business Systems sells and supports telecommunications equipment, such as key, private
branch exchange (“PBX”) and IP-based telephone systems, to business customers. We are an Avaya and ShoreTel
distributor.
Wireless partnerships
In addition to our core business, we also derive a significant portion of our cash flow and earnings from investments
in five wireless partnerships. Wireless partnership investment income is included as a component of other income in
the consolidated statements of income. Our wireless partnership investment consisted of five cellular partnerships:
GTE Mobilnet of South Texas Limited Partnership (“Mobilnet South Partnership”), GTE Mobilnet of Texas RSA
#17, Pittsburgh SMSA, Pennsylvania RSA 6(I) and Pennsylvania RSA 6(II).
We own 2.34% of 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. Because we have a
minor ownership interest and cannot influence operations, we account for this investment using the cost basis.
Income is recognized only upon cash distributions of our proportionate earnings in the partnership.
We own 20.51% of GTE Mobilnet of Texas RSA #17, which serves areas in and around Conroe, Texas. In
December 2012, we purchased additional ownership interest for $6.7 million which increased our ownership from
17.02% to 20.51%. Because we have some influence over the operating and financial policies of this partnership,
we account for the investment under the equity method, recognizing income on our proportionate share of earnings.
Cash distributions are recorded as a reduction in our investment.
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San Antonio MTA, L.P., a wholly owned partnership of Cellco Partnership (doing business as Verizon Wireless), is
the general partner for both the Mobilnet South Partnership and GTE Mobilnet of Texas RSA #17.
We own 3.6% of Pittsburgh SMSA, 16.6725% of Pennsylvania RSA 6(I) and 23.67% of Pennsylvania RSA 6(II)
wireless partnerships, all of which are majority owned and operated by Verizon Wireless. These partnerships cover
territories that almost entirely overlap the markets served by our Pennsylvania ILEC and CLEC operations. Because
of our limited influence over Pittsburgh SMSA, we account for the investment using the cost basis. The
Pennsylvania RSA 6(I) and RSA 6(II) partnerships are accounted for under the equity method.
For the years ended December 31, 2013, 2012 and 2011, we recognized income of $37.5 million, $30.2 million and
$27.1 million, respectively, and received cash distributions of $34.8 million, $29.1 million and $28.3 million,
respectively, from these wireless partnerships.
Employees
At December 31, 2013, we employed approximately 1,521 employees, including part-time employees. We also use
temporary employees in the normal course of our business.
Approximately 28% of our employees were covered by collective bargaining agreements as of December 31, 2013.
For a more detailed discussion regarding how the collective bargaining agreements could affect our business, see
Part I - Item 1A – “Risk Factors – Risks Relating to Our Business”.
Customers and Markets
Our services are available to customers in six states: Illinois, Texas, Pennsylvania, California, Kansas and Missouri.
The geographic areas we serve are characterized by a balanced mix of growing suburban areas and stable, rural
territories. The acquisition of SureWest in 2012 further diversifies our operating revenues and cash flows across
multiple business lines and markets.
Our Illinois local telephone markets consist of 35 geographically contiguous exchanges serving predominantly small
towns and rural areas. We cover an area of 2,681 square miles, primarily in five central Illinois counties: Coles,
Christian, Montgomery, Effingham and Shelby. As of December 31, 2013, we had total connections of 103,717,
which included 56,757 local access lines (averaging 21.2 lines per square mile). Approximately 61.3% of our
Illinois local access lines serve residential customers, with the remainder serving business customers. Our Illinois
business customers are predominantly small retail, commercial, light manufacturing and service industry businesses,
as well as universities and hospitals.
Our 21 exchanges in Texas serve three principal geographic markets—Lufkin, Conroe and Katy—in a 2,054 square
mile area. This territory had 114,090 local access lines (averaging 55.5 lines per square mile) and 70,731 data
connections as of December 31, 2013. Approximately 67.0% of our Texas local access lines serve residential
customers, with the remainder serving business customers. Our Texas business customers predominately operate in
the manufacturing and retail industries; our largest business customers are hospitals, local governments and school
districts. In 2014, we will expand our commercial services into the greater Dallas/Fort Worth market utilizing our
existing 30,000 miles of carrier-class fiber network in this area. This network previously was used to serve our
wholesale and carrier customers. Beginning in 2014, we will begin offering fiber based services including dedicated
internet access, wide area networks and hosted iPBX to commercial customers in this market.
The Lufkin market is centered primarily in Angelina County in east Texas, approximately 120 miles northeast of
Houston, and extends into three neighboring counties. The Conroe market is located primarily in Montgomery
County and is centered approximately 40 miles north of Houston. Parts of the Conroe operating territory extend
south to within 28 miles of downtown Houston, including parts of the affluent suburb of The Woodlands. The Katy
market is located in parts of Fort Bend, Harris, Waller and Brazoria Counties and is centered approximately 30 miles
west of downtown Houston along the busy and expanding I-10 corridor. Most of the Katy market is considered part
of metropolitan Houston.
Our Lufkin, Texas and central Illinois markets have experienced only nominal population growth over the past
decade. These low growth, low customer density markets, along with the predominantly rural residential character
of these areas, have limited the number of product offerings from potential competitors in these areas. The Conroe
and Katy markets have experienced above-average population and business employment growth over the past
decade as compared to the remainder of Texas and the United States as a whole.
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The Pennsylvania ILEC territory consists of nine exchanges and covers 285 square miles, serving portions of
Allegheny, Armstrong, Butler and Westmoreland Counties in western Pennsylvania. The southernmost point of the
ILEC territory is 12 miles north of the city of Pittsburgh. As of December 31, 2013, we had 43,555 local access
lines in this territory (averaging 152.8 lines per square mile). The local access lines in this territory consist of
approximately 54.7% business customers and 45.3% residential customers. The western Pennsylvania area has
experienced below average population growth in the past decade as compared to the remainder of the United States
as a whole. The CLEC operations expand south to serve the city of Pittsburgh and north to serve the city of Butler
and surrounding areas. Business customers consist primarily of small to mid-sized businesses, educational
institutions, and healthcare facilities.
Our California ILEC territory consists of approximately 83 square miles, covering Roseville and Citrus Heights,
California and adjacent areas in Placer and Sacramento Counties. As of December 31, 2013, we had 42,403 local
access lines (averaging 510.9 lines per square mile), of which 61.6% consisted of business customers and 38.4%
residential customers. This territory also included 62,692 data connections and 30,271 video connections at
December 31, 2013. Our CLEC operations expand both north and south to serve primarily the greater Sacramento
region. The California territory has experienced rapid growth during the past two decades, but the pace of growth
has slowed in recent years as the area has become more developed. The rapid growth also attracted new competitors
to the area. In this market, our business customers primarily include financial institutions, healthcare, manufacturing,
local governments and school districts.
We also serve as a competitive provider to residential and business customers in the greater Kansas City, Kansas and
Missouri areas. A significant portion of the market area is in Johnson County, Kansas, which includes the cities of
Lenexa, Overland Park and Shawnee. The Kansas City market has favorable market demographics and has
experienced growth in its metropolitan and suburban communities in recent years which has resulted in tremendous
business opportunities in this market. Johnson County has the highest median household income and highest per-
capita income in Kansas and is among the most affluent in the United States. Business customers consist primarily
of small to medium sized businesses and government entities. As of December 31, 2013, the Kansas City territory
had 109,162 voice, video and data connections, or 15% of the Company’s total connections.
Sales and Marketing
The key components of our overall marketing strategy include:
• Organizing our sales and marketing activities around our consumer, enterprise, and carrier customers;
• Positioning ourselves as a single point of contact for our customers’ communications needs;
• Providing customers with a broad array of voice, data and video services and bundling these services
whenever possible;
• Providing excellent customer service, including 24/7 centralized customer support to coordinate
installation of new services, repair and maintenance functions;
• Developing and delivering new services to meet evolving customer needs and market demands; and
• Leveraging history and brand recognition across all market areas.
We currently offer our services through call centers, our website, communication centers and commissioned sales
representatives. Our customer service call centers and dedicated sales teams serve as the primary sales channels for
consumer, business enterprise customers and carrier services. Our sales efforts are supported by direct mail, bill
inserts, newspaper, radio and television advertising, public relations activities, community events and website
promotions.
We market our services both individually and as bundled services, including our triple-play offering of voice, data
and video services. By bundling our service offerings, we are able to offer and sell a more complete and
competitive package of services, which we believe simultaneously increases our average revenue per user (“ARPU”)
and adds value for the consumer. We also believe that bundling leads to increased customer loyalty and retention.
Network Architecture and Technology
We have made significant investments in our technologically advanced telecommunications networks. As a result,
we are able to deliver high-quality, reliable video, data and voice services in all markets we serve. Our wide-
ranging network and extensive use of fiber provide an easy reach into existing and new areas. By bringing the fiber
7
network closer to the customer premises, we can increase our service offerings, quality and bandwidth services. Our
existing network enables us to efficiently respond and adapt to changes in technology and is capable of supporting
the rising customer demand for bandwidth in order to support the growing amount of wireless data devices in the
home.
Our networks are supported by advanced 100% digital switches, with a fiber network connecting in all but one of
our exchanges. These switches provide all of our local telephone customers with access to custom calling features,
value-added services and dial-up Internet access. We continue to enhance our copper network to increase bandwidth
in order to provide additional products and services to our marketable homes. In addition to our copper plant
enhancements, we have deployed fiber-optic cable extensively throughout our network, resulting in a 100% fiber
backbone network that supports all of the inter-office and host-remote links, as well as the majority of business
parks within our ILEC and CLEC service areas. In addition, this fiber infrastructure provides the connectivity
required to provide video service, Internet and long-distance services to all Consolidated residential and enterprise
customers. Our fiber network utilizes fiber-to-the-home (“FTTH”) and fiber-to-the-node (“FTTN”) networks to
offer bundled residential and commercial services.
As a result of our advanced networks, we provide data and video service in the markets we serve. We leverage our
high definition head-end equipment to distribute content across our network allowing the Company to better manage
costs of future channel additions and upgrades. As of December 31, 2013, video service was available to
approximately 531,000 homes in our markets up from 524,019 at December 31, 2012. Our video subscriber base
continues to grow and now totals 110,613 connections at December 31, 2013 as compared to 106,137 at December
31, 2012. We do not anticipate having to make any material capital upgrades to our network infrastructure in
connection with the continued growth of our video product except for providing set-top boxes to future subscribers
and additional high definition channel equipment.
In our CLEC markets, we operate fiber networks which we own or have entered into long-term leases for fiber
network access. Our CLEC’s operate approximately 3,000 route-miles of fiber, which includes approximately 2,000
miles of fiber network in Texas, approximately 600 route-miles of fiber-optic facilities in the Pittsburgh
metropolitan area, approximately 350 route-miles of fiber optic facilities in California that cover large parts of the
greater Sacramento metropolitan area and over 60 route-miles of fiber optic facilities in Kansas City that service the
greater Kansas City area including both Kansas and Missouri. Our CLEC operations provide both residential and
commercial services. Residential service includes VOIP, data and video service. For commercial services, we sell
competitive wholesale capacity on our fiber network to other carriers, wireless providers, CLECs and large
commercial customers. We also provide carrier hotel space and data center space in the various markets we serve.
In all the markets we serve, we have launched initiatives to support fiber backhaul services to cell sites. As of
December 31, 2013, we had 788 cell sites under contract with 698 connected and 90 scheduled for completion in
2014.
Business Strategies
Diversify revenues and increase revenues per customer
We continue to transform our business and diversify our revenue streams as we adapt to changes in the regulatory
environment and advances in technology. As a result of acquisitions, our wireless partnerships and increases in the
consumer and commercial demand for data services, we continue to reduce our reliance on subsidies and access
revenue. Utilizing our existing network, we are able to acquire and serve a more diversified business customer base
and create new long-term revenue streams such as wireless carrier backhaul services.
We also continue to focus on increasing our revenue per customer, primarily by improving our data and video
market penetration, by increasing the sale of other value-added services and by encouraging customers to subscribe
to our service bundles.
Improve operating efficiency
We continue to seek to improve operating efficiency through technology, better practices and procedures and
through cost containment measures. Our current focus is on the further integration of SureWest into our existing
operations and creating operating synergies for the combined company. In recent years, we have made significant
operational improvements in our business through the centralization of work groups, processes and systems, which
has resulted in significant cost savings and reductions in headcount. Because of these efficiencies, we are better able
to deliver a consistent customer experience, service our customers in a more cost-effective manner and lower our
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cost structure. We continue to evaluate our operations in order to align our cost structure with operating revenues
while continuing to launch new products and improve the overall customer experience.
Maintain capital expenditure discipline
Across all of our service territories, we have successfully managed capital expenditures to optimize returns through
disciplined planning and targeted investment of capital. For example, investments in our networks allows
significant flexibility to expand new service offerings and provide services in a cost-efficient manner while
maintaining our reputation as a high-quality service provider.
Pursue selective acquisitions
We have in the past taken, and expect to continue to take in the future, a disciplined approach in pursuing company
acquisitions. When we evaluate potential transactions, important factors include:
• The market;
• The quality of the network;
• The ability to integrate the acquired company efficiently;
• Significant potential operating synergies exist; and
• The transaction will be cash flow accretive from day one.
We believe all of the above criteria were met in connection with our acquisition of SureWest Communications in
2012. In the long term, we believe that this transaction gives us additional scale and better positions us financially,
strategically and competitively to pursue additional acquisitions.
Competition
The telecommunications industry is subject to extensive competition and has increased significantly in recent years.
Technological advances have expanded the types and uses of services and products available. In addition,
differences in the regulatory environment applicable to comparable alternative services have lowered costs for these
competitors. As a result, we face heightened competition but also have new opportunities to grow our broadband
business. Our competitors vary by market and may include other incumbent and competitive local telephone
companies; cable operators offering video, data and VOIP products; wireless carriers; long distance providers;
satellite companies; Internet service providers and in some cases new forms of providers who are able to offer
competitive services through software applications, requiring a small initial investment. We expect competition to
remain a significant factor affecting our operating results and that the nature and extent of that competition will
continue to increase. See Part I - Item 1A – “Risk Factors – Risks Relating to Our Business”.
Voice, data and video service
In recent years, competition in our incumbent service areas has increased significantly. Except for the traditional
multichannel video delivery business, which requires significant capital investment to serve customers, the barriers
to entry are not high, and technology changes force rapid competitive adjustments. Depending on the market area,
we compete against AT&T and a number of other carriers, as well as Comcast, Time Warner, Mediacom,
Armstrong, Suddenlink and NewWave communications, in both the business and residential markets. Our
competitors offer traditional telecommunications services as well as IP-based services and other emerging data-
based services. Our competitors continue to add features and adopt aggressive pricing and packaging for services
comparable to the services we offer.
We continue to face significant competition from wireless providers as the demand for substitute communication
services, such as wireless phones and data devices, continues to increase. Customers are increasingly foregoing
traditional telephone services and land-based Internet service and relying exclusively on wireless service. In
addition, the expanded availability for free or lower cost services, such as video over the Internet and complimentary
Wi-Fi service in an increasing number of commercial venues has increased competition among other providers for
our video and data services.
In most cases, we have entered the cable television service markets as the operator of a second (or subsequent) cable
system. Therefore, we face the challenge of drawing customers away from the incumbent cable service provider.
Similarly, the possession of comparatively greater size and scale can give an incumbent cable competitor an
advantage in both access to and pricing of the program content needed to operate a cable television business. Our
competitors, in some cases, possess significantly greater size and scale than we do.
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In order to meet the competition, we have responded in part by introducing new services and service bundles,
offering services in convenient groupings with package discounts and billing advantages, providing excellent
customer service and by continuing to invest in our network and business operations.
In our rural markets, services are more costly to provide than service in urban areas as a lower customer density
necessitates higher capital expenditures on a per-customer basis. As a result, it generally is not economically viable
for new entrants to overlap existing networks in rural territories. Despite the barriers to entry, rural telephone
companies still face significant competition from wireless providers, cable providers and, to a lesser extent,
competitive telephone companies.
Other competition
Our other lines of business are subject to substantial competition from local, regional and national competitors. In
particular, our directory publishing and transport businesses operate in competitive markets. We expect that
competition in all of our businesses will continue to intensify as new technologies and new services are offered.
Regulatory Environment
The following summary does not describe all existing and proposed legislation and regulations affecting the
telecommunications industry. Regulation can change rapidly, and ongoing proceedings and hearings could alter
the manner in which the telecommunications industry operates. We cannot predict the outcome of any of these
developments, nor their potential impact on us. See Part I —Item 1A—“Risk Factors—Regulatory Risks”.
Overview
The telecommunications industry is subject to extensive federal, state and local regulation. Under the
Telecommunications Act of 1996 (the “Telecommunications Act”), 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.
At the federal level, the Federal Communications Commission (“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 our networks. State regulators can sanction our rural telephone companies or revoke our certifications if
we violate relevant laws or regulations.
Federal regulation
Our rural telephone companies and competitive local exchange companies must comply with the Communications
Act of 1934, which requires, among other things, that telecommunications carriers offer services at just and
reasonable rates and on non-discriminatory terms and conditions. The 1996 amendments to the Communications
Act (contained in the Telecommunications Act discussed below) dramatically changed, and likely will continue to
change the landscape of the industry.
Removal of Entry Barriers
The central aim of the Telecommunications Act is to open local telecommunications markets to competition while
enhancing universal service. Before the Telecommunications Act was enacted, many states limited the services that
could be offered by a company competing with an incumbent telephone company. The Telecommunications Act
preempts these state and local laws.
The Telecommunications Act imposes a number of interconnection and other requirements on all local
communications providers. All telecommunications carriers have a duty to interconnect directly or indirectly with
10
the facilities and equipment of other telecommunications carriers. Local exchange carriers, including our rural
telephone companies, are required to:
• Allow other carriers to resell their services;
• Provide number portability where feasible;
• Ensure dialing parity, meaning that consumers can choose their default local or long-distance
telephone company without having to dial additional digits;
• Ensure that competitors’ customers receive non-discriminatory access to telephone numbers, operator
service, directory assistance and directory listings;
• Afford competitors access to telephone poles, ducts, conduits, and rights-of-way; and
• Establish reciprocal compensation arrangements with other carriers for the transport and termination of
telecommunications traffic.
Furthermore, the Telecommunications Act imposes on incumbent telephone companies (other than rural telephone
companies that maintain their so-called “rural exemption” as our subsidiaries do) additional obligations to:
• Negotiate interconnection agreements with other carriers in good faith;
•
Interconnect their facilities and equipment with any requesting telecommunications carrier, at any
technically feasible point, at non-discriminatory rates and on non-discriminatory terms and conditions;
• Offer their retail services to other carriers for resale at discounted wholesale rates;
• Provide reasonable notice of changes in the information necessary for transmission and routing of
services over the incumbent telephone company’s facilities or in the information necessary for
interoperability; and
• Provide, at rates, terms, and conditions that are just, reasonable, and non-discriminatory, for the
physical collocation of other carriers’ equipment necessary for interconnection or access to UNEs at
the premises of the incumbent telephone company.
Access Charges
On November 18, 2011, the FCC released its comprehensive order on intercarrier compensation and universal
service reform. For detailed discussion on the FCC order, see Part 1 – Item 1 - Regulatory Environment – FCC
Access Charge and Universal Service Reform Order below.
A significant portion of our rural telephone companies’ revenues come from network access charges paid by long-
distance and other carriers for using our companies’ local telephone facilities for originating or terminating calls
within our service areas. The amount of network access revenues our rural telephone companies receive is based on
rates set or approved by federal and state regulatory commissions, and these rates are subject to change at any time.
Intrastate network access charges are regulated by state commissions. Network access charges in our Illinois market
currently mirror interstate charges for everything except local switching. Illinois law requires that our intrastate
access charges may not exceed our interstate access charges. Interstate and intrastate network access charges in our
Pennsylvania market are also very similar. In contrast, as required by Texas regulators, our Texas rural telephone
companies impose significantly higher network access charges for intrastate calls than for interstate calls.
The FCC regulates the prices we may charge for the use of our local telephone facilities to originate or terminate
interstate and international calls. The FCC has structured these prices as a combination of flat monthly charges paid
by customers and both usage-sensitive (per-minute) charges and flat monthly charges paid by long-distance or other
carriers.
The FCC regulates interstate network access charges by imposing price caps on Regional Bell Operating
Companies, referred to as RBOC’s, and other large incumbent telephone companies. These price caps can be
adjusted based on various formulas, such as inflation and productivity, and otherwise through regulatory
proceedings. Incumbent telephone companies, such as our local telephone companies, may elect to base network
access charges on price caps, but are not required to do so.
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Historically, all of our rural telephone companies had elected not to apply federal price caps. Instead, they
employed rate-of-return regulation for their network interstate access charges, whereby they earned a fixed return on
their investment over and above operating costs. In December 2007, we filed a petition with the FCC seeking to
permit our Illinois and Texas companies to convert to price cap regulation. Our petition was approved on May 6,
2008, and became effective on July 1, 2008. The conversion to price cap regulation gives us greater pricing
flexibility for interstate services, especially the increasingly competitive special access segment. It also provides us
with the potential to increase our net earnings by becoming more productive and introducing new services. On the
other hand, we were required to reduce our interstate access charges in Illinois significantly, and because our Illinois
intrastate access charges mirror interstate rates, this conversion also resulted in lower intrastate revenues in Illinois.
In addition, we now receive somewhat reduced subsidies from the interstate Universal Service Fund program.
Our Pennsylvania rural telephone company was an average schedule rate-of-return company. On March 1, 2012 we
filed a petition for waiver to exit the National Exchange Carrier Association (“NECA”) settlement pools and tariff
and become a price cap company. The FCC approved our waiver request on December 13, 2012. The exit from the
NECA settlement pools and tariff was retroactive to July 1, 2012 and the price cap waiver was effective January 1,
2013.
Our California rural telephone company was historically a cost based rate of return company. In March 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 eighteen months as a result of exiting the NECA pool, however we do not
anticipate that they will be material to our consolidated financial statements or results of operations.
Traditionally, regulators have allowed network access rates for rural areas to be set higher than the actual cost of
terminating or originating long-distance calls as an implicit means of subsidizing the high cost of providing local
service in rural areas. Following a series of federal court decisions ruling that subsidies must be explicit rather than
implicit, the FCC adopted reforms in 2001 that reduced per-minute network access charges and shifted a portion of
cost recovery, which historically was imposed on long-distance carriers, to flat-rate, monthly subscriber line charges
imposed on end-user customers. While the FCC also increased explicit subsidies to rural telephone companies
through the Universal Service Fund, the aggregate amount of interstate network access charges paid by long-
distance carriers to access providers, such as our rural telephone companies, has decreased and may continue to
decrease.
Unlike the federal system, California and Illinois do not provide an explicit subsidy in the form of a universal
service fund for companies of our size. Therefore, while subsidies from the Federal Universal Service Fund offset
the decrease in revenues resulting from the reduction in interstate network access rates, there was no corresponding
offset for the decrease in revenues from the reduction in California or Illinois intrastate network access rates. In
Pennsylvania and Texas, the intrastate network access rate regime applicable to our rural telephone companies does
not mirror the FCC regime, so the impact of the reforms was revenue neutral.
In recent years, carriers have become more aggressive in disputing the FCC’s interstate access charge rates and the
application of access charges to their telecommunications traffic. We believe these disputes have increased in part
because advances in technology have made it more difficult to determine the identity and jurisdiction of traffic,
giving carriers an increased opportunity to challenge access costs for their traffic. For example, in September 2003,
Vonage Holdings Corporation filed a petition with the FCC to preempt an order of the Minnesota Public Utilities
Commission asserting jurisdiction over Vonage. The FCC determined that it was impossible to divide Vonage’s
VOIP service into interstate and intrastate components without negating federal rules and policies. Accordingly, the
FCC found it was an interstate service not subject to traditional state telephone regulation. While the FCC order did
not specifically address whether intrastate access charges were applicable to Vonage’s VOIP service, the fact that
the service was found to be solely interstate raises that concern. We cannot predict what other actions other long-
distance carriers may take before the FCC or with their local exchange carriers, including our rural telephone
companies, to challenge the applicability of access charges. Due to the increasing deployment of VOIP services and
other technological changes, we believe these types of disputes and claims are likely to increase.
Unbundled Network Element Rules
The unbundling requirements have been some of the most controversial provisions of the Telecommunications Act.
In its initial implementation of the law, the FCC generally required incumbent telephone companies to lease a wide
range of UNE’s to CLECs. Those rules were designed to enable competitors to deliver services to their customers in
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combination with their existing networks or as recombined service offerings on an unbundled network element
platform, commonly known as UNE-P, which allowed competitors with no facilities of their own to purchase all the
elements of local telephone service from the incumbent and resell them to customers. These unbundling
requirements, and the duty to offer UNEs to competitors, imposed substantial costs on the incumbent telephone
companies and made it easier for customers to shift their business to other carriers. After a court challenge and a
decision vacating portions of the UNE rules, the FCC issued revised rules in February 2005 that reinstated some
unbundling requirements for incumbent telephone companies that are not protected by the rural exemption, but
eliminated the UNE-P option and certain other unbundling requirements.
Each of the subsidiaries through which we operate our local telephone businesses is an incumbent telephone
company and provides service in rural areas. As discussed above, the Telecommunications Act exempts rural
telephone companies from certain of the more burdensome interconnection requirements. However, the
Telecommunications Act provides that the rural exemption will cease to apply as to competing cable companies if
and when the rural carrier introduces video services in a service area. In that event, a competing cable operator
providing video programming and seeking to provide telecommunications services in the area may interconnect.
Since each of our subsidiaries now provides video services in their major service areas, the rural exemption no
longer applies to cable company competitors in those service areas. Additionally, in Texas, the Public Utilities
Commission of Texas (“PUCT”) has removed the rural exemption for our Texas subsidiaries with respect to
telecommunications services furnished by Sprint Communications, L.P. on behalf of cable companies. Our ILEC
subsidiaries in California, Illinois and Pennsylvania still have the rural exemption in place. We believe the benefits
of providing video services outweigh the loss of the rural exemptions to cable operators.
Under its current rules, the FCC has eliminated unbundling requirements for ILECs providing broadband services
over fiber facilities, but continues to require unbundled access to mass-market narrowband loops. ILECs are no
longer required to unbundle packet switching services. In addition, the FCC found that CLECs generally are not at a
disadvantage at certain wire center locations in regard to high bandwidth (DS-1 and DS-3) loops, dark fiber loops
and dedicated interoffice transport facilities. However, where a disadvantage persists, ILECs continue to be
required to unbundle loops and transport facilities.
The FCC rules regarding the unbundling of network elements did not have an impact on our Illinois and
Pennsylvania ILEC operations because these ILECs have rural exemptions. Our CLEC operations were not
significantly affected by the 2005 changes to the UNE rules because they use their own switching for business
customers that are served by high capacity loops. In July 2011, our Pennsylvania CLEC renewed, for a three-year
term, a commercial agreement with Verizon that sets the terms of the pricing and provisioning of lines previously
served utilizing UNE-P, including Verizon switching service. Less than 5% of our Pennsylvania CLEC access lines
are provisioned utilizing this commercial arrangement. Although the costs for this arrangement will increase over
time pursuant to the terms of the agreement, our relatively low use of Verizon’s switching and our ability to migrate
some of the lines to alternative provisioning sources will limit the overall impact on our current cost structure. The
CLEC has experienced moderate increases in the overall cost to provision high-capacity loops, interoffice transport
facilities and dark fiber as a result of the FCC’s changes to unbundling requirements for those facilities. In
December 2012, our subsidiary Consolidated Communications Enterprise Services Inc. (“CCES”), entered into a 5-
year wholesale special access agreement with AT&T, which moved us off the UNE platform, reduced cost and gave
us greater flexibility. This agreement applies to our CLEC operations in California, Illinois, Kansas, Missouri and
Texas.
In 2006, Verizon filed a petition requesting that the FCC refrain from applying a number of regulations to the
Verizon operations in six major metropolitan markets, including the Pittsburgh market area. Among other things,
Verizon urged the FCC to forbear from applying loop and transport unbundling regulations, claiming there was
sufficient competition in the Pittsburgh market to mitigate the need for these rules. The FCC denied Verizon’s
petition in December 2007, but a federal court of appeals remanded this decision to the FCC for further analysis in
2009. If the FCC grants this remanded petition or any similar forbearance petitions in markets in which our CLEC
operates, our cost to obtain access to loop and transport facilities would increase substantially for the 5%, or less, of
the lines provisioned under the commercial agreement discussed above. In 2013, AT&T filed to amend its interstate
access tariff with the FCC to eliminate the 5-year term discounts on its special access services. We filed a petition
to reject AT&T’s filing and on December 9, 2013 the FCC suspended AT&T’s filing for five months for
investigation.
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Promotion of Universal Service
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. We received $52.0 million and $49.3 million from the Federal Universal Service
Fund, the Pennsylvania Universal Service Fund and the Texas Universal Service Fund in 2013 and 2012,
respectively.
Federal Universal Service Fund subsidies are paid only to carriers that are designated eligible telecommunications
carriers (“ETCs”), by a state commission. Each of our rural telephone companies have been designated an ETC.
However, under FCC rules prior to 2008, competitors could obtain the same level of Federal Universal Service Fund
subsidies as we do, per line served, if the applicable state regulator determined that granting such Federal Universal
Service Fund subsidies to competitors would be in the public interest and the competitors offered and advertised
certain services as required by the Telecommunications Act and the FCC. The Illinois Commerce Commission
(“ILCC”) has granted several petitions for ETC designations, but to date no other ETCs are operating in our Illinois
service area. We are not aware that any carriers have filed petitions to be designated an ETC in our Pennsylvania or
Texas service areas. In May 2008, the FCC adopted an interim cap on payments to ETCs that are not incumbent
telephone companies, based on the payments received by such companies in March 2008, which reduces (but does
not eliminate) the incentive for ETCs to seek to compete against our rural telephone companies.
In order for ETCs to receive high-cost support, the USF/Inter Carrier Compensation Transformation Order requires
states to certify on an annual basis that federal universal service high-cost support (“USF”) 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 until such time that the Commission has the opportunity to reach a decision on our application
for review.
FCC Access Charge and Universal Service Reform Order
In November 2011, the FCC released its comprehensive order on Access Charge and Universal Service Reform (the
“Order”). The access charge portion of the Order systematically reduces minute of use based interstate access,
intrastate access and reciprocal compensation rates over a six to nine year period to an end state of Bill and Keep, in
which each carrier recovers the costs of its network through charges to its own subscribers, not through intercarrier
compensation. The reductions apply to terminating access rates and usage, while originating access will be
addressed by the FCC in a later proceeding. To help with the transition to Bill and Keep, the FCC created two
mechanisms. The first is an Access Recovery Mechanism (“ARM”) which is funded from the Connect America
Fund (“CAF”), and the second is an Access Recovery Charge (“ARC”) which is recovered from the end users. The
universal service portion of the Order shifts the national policy goal from voice service to broadband and is now
called the CAF. In order to receive CAF funding, carriers must agree to provide broadband capability to 100% of
their customer base at a minimum speed of 4 Mbps downstream and 1Mbps upstream. The current high cost
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funding program is frozen at 2011 levels and will be eliminated upon development and implementation of a CAF
census block model.
The Order has already been appealed by state commissions and carriers, including Consolidated. We filed our
petition for review on January 18, 2012 and raised issues with the Order pertaining to access rates, universal service
and transition provisions. In addition, several other carriers and associations have filed petitions for reconsideration
at the FCC. 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 the Order, holding companies with price cap study areas and rate of return study areas are mandated to move all
their interstate rate of return study areas to price cap for universal service purposes only. The intercarrier
compensation rules will keep rate of return study areas under the rate of return intercarrier compensation transitions
plan and the price cap study areas under the price cap intercarrier compensation transition.
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 July 2014. We anticipate that our revenues will be significantly impacted when the broadband cost
model is implemented. The Order also modifies the methodology used for intercarrier compensation (“ICC”) 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, during 2013 our network access revenues decreased approximately $1.8 million compared
to 2012.
State Regulation
California
The CPUC has the power, among other things, to establish rates, terms and conditions for intrastate service, to
prescribe uniform systems of accounts and to regulate the mortgaging or disposition of public utility properties.
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. The Company will continue to
monitor this matter.
Illinois
Our Illinois rural telephone company holds the necessary certifications in Illinois to provide long-distance and
payphone services. We are required to file tariffs with the ILCC or post written service offerings on its website, but
generally can change the prices, terms, and conditions stated in its tariffs on one day’s notice, with prior notice of
price increases to affected customers. Our CLEC services are not subject to any significant state regulations in
Illinois.
Our Illinois rural telephone company is certified by the ILCC to provide local telephone services. This entity
operates as a distinct company from a regulatory standpoint and is regulated under a rate of return system for
intrastate revenues. Although, as explained above, the FCC has preempted certain state regulations pursuant to the
Telecommunications Act, Illinois retains the authority to impose requirements on our Illinois rural telephone
company to preserve universal service, protect public safety and welfare, ensure quality of service and protect
consumers. For instance, our Illinois rural telephone company must file tariffs setting forth the terms, conditions,
and prices for its intrastate services; these tariffs may be challenged by third parties. Our Illinois rural telephone
company has not had a general rate proceeding before the ILCC since 1983.
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The ILCC has broad authority to impose service quality and service offering requirements on our Illinois rural
telephone company, including credit and collection policies and practices, and can require our Illinois rural
telephone company to take actions to ensure that it meets its statutory obligation to provide reliable local exchange
service. For example, as part of its approval of the reorganization we implemented in connection with our 2005
initial public offering, the ILCC imposed various conditions, including (1) prohibitions on payment of dividends or
other cash transfers from ICTC to us if ICTC fails to meet or exceed agreed benchmarks for a majority of seven
service quality metrics, and (2) the requirement that ICTC have access to $5.0 million or its currently approved
capital expenditure budget (whichever is higher) for each calendar year through a combination of available cash and
credit facilities. During 2013, we satisfied each of the applicable Illinois regulatory requirements necessary to
permit ICTC to pay dividends to us.
The Illinois General Assembly has made major revisions and added significant new provisions to the portions of the
Illinois Public Utilities Act governing the regulation and obligations of telecommunications carriers on a number of
occasions since 1985. In 2007, the Illinois legislature addressed competition for cable and video services and
authorized statewide licensing by the ILCC to replace the existing system of individual town franchises. This
legislation also imposed substantial state-mandated consumer service and consumer protection requirements on
providers of cable and video services. The requirements generally became applicable to us on January 1, 2008, and
we are operating in compliance with the new law. Although we have franchise agreements for cable and video
services in all the towns we serve, this statewide franchising authority will simplify the process in the future. In
2010, the Illinois General Assembly passed Public Act 96-0927, which updates the telecommunications statute,
allowing ILECs, beginning January 1, 2011, to elect deregulation of local services. To date, ICTC has not made an
election to deregulate its local services. Under this option, an ILEC’s rates for local services would become
“competitive” and no longer subject to rate of return regulation, and certain other service quality obligations would
be reduced. The electing ILECs would have obligations to make certain basic local exchange service packages
available to customers. Public Act 96-0927 also specified that local exchange carriers may not charge intrastate
access rates at levels higher than their interstate access rates. The Governor of Illinois signed the bill into law on
June 15, 2010. In June 2013, the Illinois legislature approved amendments to the telecommunications statute. The
new telecommunications legislation made minor changes to the telecommunications statute. The current
telecommunications statute is currently scheduled to sunset July 1, 2015.
Texas
Our Texas rural telephone companies are each certified by the PUCT to provide local telephone services in their
respective territories. In addition, our Texas long-distance and transport subsidiaries are registered with the PUCT
as interexchange carriers. The transport subsidiary also has obtained a service provider certificate of operating
authority (“SPCOA”) to better assist the transport subsidiary with its operations in municipal areas. Recently, to
assist with expanding services offerings, Consolidated Communications Enterprise Services, Inc. also obtained a
SPCOA from the PUCT. While our Texas rural telephone company services are extensively regulated, our other
services, such as long-distance and transport services, are not subject to any significant state regulation.
Our Texas rural telephone companies operate as distinct companies from a regulatory standpoint. Each is separately
regulated by the PUCT in order to preserve universal service, protect public safety and welfare, ensure quality of
service and protect consumers. Each Texas rural telephone company must file and maintain tariffs setting forth the
terms, conditions and prices for its intrastate services.
Currently, both of our Texas rural telephone companies have immunity from adjustments to their rates, including
their intrastate network access rates, because they elected “incentive regulation” under the Texas Public Utilities
Regulatory Act (“PURA”). In order to qualify for incentive regulation, our rural telephone companies agreed to
fulfill certain infrastructure requirements. In exchange, they are not subject to challenge by the PUCT regarding
their rates, overall revenues, return on invested capital, or net income.
PURA prescribes two different forms of incentive regulation in Chapter 58 and Chapter 59. Under either election,
the rates, including network access rates, an incumbent telephone company may charge for basic local services
generally cannot be increased from the amount(s) on the date of election without PUCT approval. Even with PUCT
approval, increases can only occur in very specific situations. Pricing flexibility under Chapter 59 is extremely
limited. In contrast, Chapter 58 allows greater pricing flexibility on non-basic network services, customer-specific
contracts and new services.
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Initially, both of our Texas rural telephone companies elected incentive regulation under Chapter 59 and fulfilled the
applicable infrastructure requirements, but they changed their election status to Chapter 58 in 2003, which gives
them some pricing flexibility for basic services, subject to PUCT approval. The PUCT could impose additional
infrastructure requirements or other restrictions in the future. Any requirements or restrictions could limit the
amount of cash that is available to be transferred from our rural telephone companies to the parent entities, and
could adversely affect our ability to meet our debt service requirements and repayment obligations.
In September 2005, the Texas legislature adopted significant additional telecommunications legislation. Among
other things, this legislation created a statewide video franchise for telecommunications carriers, established a
framework to deregulate the retail telecommunications services offered by incumbent local telecommunications
carriers, imposed concurrent requirements to reduce intrastate access charges and directed the PUCT to initiate a
study of the Texas Universal Service Fund. The PUCT study submitted to the legislature in 2007 recommended that
the Small Company Area High-Cost Program, which covers our Texas telephone companies, should be reviewed by
the PUCT from a policy perspective regarding basic local telephone service rates and lines eligible for support. The
PUCT has only addressed the large company fund and has no immediate plans to conduct a small company review.
Texas Universal Service
The Texas Universal Service Fund is administered by NECA. PURA, the governing law, directs the 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
for providing lifeline service. Our Texas rural telephone companies receive disbursements from this fund. Our
Texas ILECs receive two state funds, the small and rural incumbent local exchange company plan (“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 2011, the Texas legislature passed Senate Bill 985 which requires the PUCT to review the large and small
company Texas Universal Service Funds in 2012 and report back to the legislature by January 2013. The PUCT
began a series of dockets in 2012 reviewing the Texas universal service high cost fund programs, for both large and
small companies. The large company dockets were settled in late 2012. The small company dockets will not be
reviewed until after the 2013 legislative session has been completed. We expect that any impact from these
proceedings will most likely occur in 2014.
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 eliminate the HCF. 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 company fund participants in
Docket No. 41097, Rate Rebalancing (“Docket 41097”), as discussed below.
In June 2013, the Texas state legislature passed Senate Bill No. 583 (“SB 583”). The provisions of SB 583 were
effective September 1, 2013 and froze HCF and HCAF support for the remainder of 2013 and will eliminate 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 settlement agreement, our 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, we
have the ability to offset this reduction with increases to residential rates, where market conditions will allow.
Pennsylvania
The Pennsylvania Public Utilities Commission (“PAPUC”) regulates the rates, the system of financial accounts for
reporting purposes, and certain aspects of service quality, billing procedures and universal service funding, among
other things, related to our rural telephone company and CLEC’s provision of intrastate services. In addition, the
PAPUC sets the rates and terms for interconnection between carriers within the guidelines ordered by the FCC.
Pennsylvania intrastate rates are regulated under a statutory framework referred to as Act 183. Under this statute,
rates for non-competitive intrastate services are allowed to increase based on an index that measures economy-wide
price increases. In return, we committed to continue to upgrade our network to ensure that all our customers would
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have access to broadband services, and to deploy a ubiquitous broadband (defined as 1.544 mbps) network
throughout our entire service area by December 31, 2008, which we did.
Pennsylvania Universal Service and Access Charges
In 2011, the 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 will address state universal funding in 2013 but delayed conducting a
proceeding pending any state legislative activity that may occur in the 2014 legislative session.
Local Government Authorizations
In Illinois, we historically have been required to obtain franchises from each incorporated municipality in which our
rural telephone company operates. An Illinois state statute prescribes the fees that a municipality may impose for
the privilege of originating and terminating messages and placing facilities within the municipality. Our Illinois
telephone operations may also be required to obtain permits for street opening and construction, or for operating
franchises to install and expand fiber optic facilities. These permits or other licenses or agreements typically require
the payment of fees.
Similarly, Texas incumbent telephone companies had historically been required to obtain franchises from each
incorporated municipality in which they operated. Texas law now provides that incumbent telephone companies do
not need to obtain franchises or other licenses to use municipal rights-of-way for delivering services. Instead,
payments to municipalities for rights-of-way are administered through the PUCT and through a reporting process by
each telecommunications provider. Incumbent telephone companies are still required to obtain permits from
municipal authorities for street opening and construction, but most burdens of obtaining municipal authorizations for
access to rights-of-way have been streamlined or removed.
Our Texas rural telephone companies still operate pursuant to the terms of municipal franchise agreements in some
territories served by Consolidated Communications of Fort Bend Company. As the franchises expire, they are not
being renewed.
Like Illinois, California and Pennsylvania operates under a structure in which each municipality may impose various
fees.
Regulation of Broadband and Internet Services
Video Services
Our cable television subsidiaries each require a state or local franchise or other authorization in order to provide
cable service to customers. Each of these subsidiaries is subject to regulation under a framework that exists in Title
VI of the Communications Act.
Under this framework, the responsibilities and obligations of franchising bodies and cable operators have been
carefully defined. The law addresses such issues as the use of local streets and rights of way; the carriage of public,
educational and governmental channels; the provision of channel space for leased commercial access; the amount
and payment of franchise fees; consumer protection; and similar issues. In addition, Federal laws place limits on the
common ownership of cable systems and competing multichannel video distribution systems, and on the common
ownership of cable systems and local telephone systems in the same geographic area. Many provisions of the
Federal law have been implemented through FCC regulations. The FCC has expanded its oversight and regulation
of the cable television-related matters recently. In some cases, it has acted to assure that new competitors in the
cable television business are able to gain access to potential customers and can also obtain licenses to carry certain
types of video programming.
The Communications Act also authorizes the licensing and operation of open video systems (“OVS”). An OVS is a
form of multichannel video delivery that was initially intended to accommodate unaffiliated providers of video
programming on the same network. The OVS regulatory structure also offered a means for a single provider to
serve less than an entire community. Our Kansas City operations in Missouri utilize an OVS that allows us to
operate in only a part of Kansas City.
A number of state and local provisions also affect the operation of our cable systems. The California legislature
adopted the Digital Infrastructure and Video Competition Act of 2006 (“DIVCA”) to encourage further entrance of
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telephone companies and other new cable operators to compete against the large incumbent cable operators. DIVCA
changed preexisting California law to require new franchise applicants to obtain franchise authorizations on the state
level. In addition, DIVCA established a general set of state-defined terms and conditions to replace numerous terms
and conditions that had applied uniquely in local municipalities, and it repealed a state law that had prohibited local
governments from adopting terms for new competitive franchises that differed in any material way from the
incumbent’s franchise, even if competitive circumstances were very different. Some portions of this law are also
available to incumbent cable operators with existing local franchises who compete against us.
A state franchising law also has been enacted in Kansas. While these laws have reduced franchise burdens on our
subsidiaries and have made it easier for them to seek out and enter new markets, they also have reduced the entry
barriers for others who may want to enter our cable television markets.
Federal law and regulation also affects numerous issues related to video programming and other content.
Under Federal law, certain local television broadcast stations (both commercial and non-commercial) can elect,
every three years, to take advantage of rules that require a cable operator to distribute the station’s content to the
cable system’s customers without charge, or to forego this “must-carry” obligation and to negotiate for carriage on
an arm’s length contractual basis, which typically involves the payment of a fee by the cable operator, and
sometimes involves other consideration as well. The current three year cycle began on January 1, 2012. The
company has successfully negotiated agreements with all of the local television broadcast stations that would have
been eligible for “must carry” treatment in each of its markets. As anticipated, fees under retransmission consent
agreements generally underwent marked increases for the 2012-2014 period.
Federal law and regulation regulate access to certain programming content that is delivered by satellite. The FCC
has provisions in place to ban certain discriminatory practices and unfair acts, and include a presumption that the
withholding of regional sports programming by content affiliates of incumbent cable operators is presumptively
unlawful. The existing FCC complaint process for program access for both satellite and terrestrially-delivered
content is governed on a case-by-case basis. The FCC currently is considering adopting rules that could make it less
burdensome for competing multichannel video programming providers who are denied access to cable-affiliated
satellite programming on reasonable terms and conditions to pursue and meet evidentiary standards with respect to
program access complaints. That proceeding remains pending before the FCC.
The FCC recently adopted an order banning exclusive contracts between affiliates where the programming is sent
via terrestrial media, and banning certain other unfair acts, making it clear that the withholding of regional sports
programming and high definition television programming by content affiliates of incumbent cable operators would
receive special attention. Unlike the satellite provisions, the new rules will not expire. The FCC’s order was upheld
in an appeals court decision issued on March 12, 2010.
In connection with the FCC’s approval of a cable transaction involving Comcast and Time Warner in July 2006, the
parties’ regional sports networks were subject to certain program access rules until July 2012. The FCC did not
extend these obligations beyond July 2012. This does not change the existing Comcast/NBC Universal merger
conditions which expire in 2018, as described below. It is unknown what, if any, impact this decision will have on
us.
In early 2010, Comcast proposed to enter into a joint venture with NBC Universal, through which it would acquire
control of numerous NBC properties, including both broadcast and cable television programming operations of
NBC. In early 2011, the FCC and the Department of Justice (“DOJ”) approved the transaction, with a significant
number of conditions designed to promote programming diversity, to limit the ability of the combined entity to
affect competition adversely, and to protect newly emerging markets such as independent on-line (“over-the-top”)
video. These conditions include requirements for program access and carriage, non-discrimination in making
programming available, limits on bundling that would affect competition, and the relationship of the joint venture to
emerging on-line competition. In addition, conditions were imposed to maintain independence within the NBC unit
in dealing with competing cable operators. The parties agreed to the conditions and the transaction was completed
during 2011. Most of the conditions will have a duration of seven years.
The contractual relationships between cable operators and most providers of content who are not television
broadcast stations generally are not subject to FCC oversight or other regulation. The majority of providers of
content to our subsidiaries, including content providers affiliated with incumbent cable operators such as Comcast,
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but who are not subject to any FCC or DOJ conditions, do so through arm’s length contracts where the parties have
mutually agreed upon the terms of carriage and the applicable fees.
The transition to digital television (“DTV”) has led the FCC to adopt and implement new rules designed to ease the
shift. These rules also can be expected to make broadcast content more accessible over the air to smartphones,
personal computers and other non-television devices. Local television broadcast stations will also be able to offer
more content over their assigned digital spectrum after the DTV transition, including additional channels.
The Company continues to monitor the emergence of video content options for customers that have become
available over the Internet, and that may be made available free, by individual subscription or in conjunction with a
separate cable service agreement. In some cases, this involves the ability to watch episodes of desirable network
television programming and to procure additional content related to programs carried on linear cable channels.
These options have increased significantly, and can lead cable television customers to terminate or reduce their level
of services. At this time, “over-the-top” programming options cannot duplicate the nature or extent of desirable
programming carried by cable systems, and the market is still comparatively nascent, but in light of changing
technology and events such as the Comcast-NBC transaction, the “over-the-top” market will continue to grow and
evolve rapidly.
Cable operators depend to some degree upon their ability to utilize the poles (and conduit) of electric and telephone
utilities. The terms and conditions under which such attachments can be made were established in the Federal Pole
Attachment Act of 1978, as amended. The Pole Attachment Act outlined the formula for calculating the fee to be
charged for the use of utility poles, a formula that assesses fees based on the proportionate amount of space assigned
for use and an allocation of certain qualified costs of the pole owner. The FCC has put in place a structure for pole
attachment regulation that has covered cable operators and other types of providers. The FCC has adopted new rules
that apply a single rate to all providers who use poles, whether they are cable operators, telecommunications
providers, or Internet providers, even if they use the attachment to offer more than one service. These rules only
affect attachments in states where the Federal rules apply. States have the option to opt out of the Federal formula
and to regulate pole attachments independently. Kansas, Missouri, Texas, Pennsylvania and Illinois follow the FCC
pole attachment framework. California has elected to separately regulate pole attachments and pole attachment
rates. The FCC decision has been appealed, and the ultimate outcome of the appeal cannot be predicted.
Cable operators are subject to longstanding cable copyright obligations where they pay copyright fees for some
types of programming that are considered secondary retransmissions. The copyright fees are updated from time to
time, and are paid into a pool administered by the United States Copyright Office for distribution to qualifying
recipients.
The FCC has so far declined to require that cable operators allow unaffiliated Internet service providers to gain
access to customers by using the network of the operator’s cable system. The FCC also has considered the benefits
of a requirement that cable operators offer programming on their systems on an a la carte or themed basis, but to
date has not adopted regulations requiring such action. These matters may resurface in the future, particularly as the
“over-the-top” market grows. In light of the fact that programming is increasingly being made available through
Internet connections, some cable operators have considered their own a la carte alternatives. Content owners with
linear channels also are moving toward greater “on demand” programming, offerings that maintain the value of their
linear channels for customers.
The outcome of pending matters cannot be determined at this time but can lead to increased costs for the Company
in connection with our provision of cable services, and can affect our ability to compete in the markets we serve.
Internet Services
The provision of Internet access services is not significantly regulated by either the FCC or the state commissions.
However, the FCC has been moving toward the imposition of some controls on the provision of Internet access. In
2002, in part to place cable modem service and Digital Subscriber Line (“DSL”) service on an equal competitive
footing, the FCC asserted jurisdiction over these services as “information services” under Title I of the
Communications Act, and removed them from treatment under Title II of the Act, but to date it has not determined
what regulatory framework, if any, is appropriate for Internet services under Title I.
The FCC has also adopted policy principles to signal its objectives with respect to high speed Internet and related
services. These principles are intended to encourage broad customer access to the content and applications of their
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choice, to promote the unrestricted use of lawful equipment by users of Internet services and to promote competition
among providers.
In 2009, the FCC proposed to enact rules related to Internet access services, relying in part on the policy principles
that it had earlier adopted, but expanding their reach and adding additional provisions. The adoption of the rules as
they have been proposed would prohibit discrimination with respect to applications providers, among other things,
subject to reasonable network management by an Internet access service provider.
While this initiative was getting underway, a Federal appeals court decision in April 2010 assessed the FCC’s
authority over Internet services under the Communications Act, and invalidated action taken by the FCC that was
based on authority that the FCC thought it possessed. The FCC continues to assert that it has jurisdictional authority
in some areas related to the promotion of an open Internet. Notwithstanding the court setback, the FCC elected to
adopt rules in this regard in December 2010. That action also has been appealed to a Federal appeals court. The
extent of the FCC’s jurisdiction in connection with the Internet will not be resolved for some time. We are unable to
predict the outcome of current proceedings.
The Federal Trade Commission (“FTC”) is currently assessing certain advertising and marketing practices of
Internet-related companies, as well as the use of the Internet in connection with other businesses. FTC action can
affect the manner of operation of some of our businesses. The outcome of pending matters cannot be determined at
this time but can lead to increased costs for the Company in connection with our provision of Internet services, and
can affect our ability to compete in the markets we serve.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including but not limited to those
described below, that could adversely affect our business, financial condition, results of operations, cash flows and
the trading price of our common stock.
Risks Relating to Current Economic Conditions
Unfavorable changes in financial markets could adversely affect pension plan investments resulting in material
funding requirements to meet our pension obligations. We expect that we will continue to make future cash
contributions to our pension plans, the amount and timing of which will depend on various factors including funding
regulations, future investment performance, changes in future discount rates and changes in participant
demographics. Our pension plans have investments in marketable securities, including marketable debt and equity
securities, whose values are exposed to changes in the financial markets. Returns generated on plan assets have
historically funded a large portion of the benefits paid under these plans. If the financial markets experience a
downturn and returns fall below the estimated long-term rate of return, our future funding requirements could
increase significantly, which could adversely affect cash flows from operations.
Weak economic conditions may have a negative impact on our business, results of operations and financial
condition. Downturns in the economic conditions in the markets and industries we serve could adversely affect
demand for our products and services and have a negative impact on our results of operations. Economic weakness
or uncertainty may make it difficult for us to obtain new customers and may cause our existing customers to reduce
or discontinue their services to which they subscribe. This risk may be worsened by the expanded availability of
free or lower cost services, such as video over the Internet, or substitute services, such as wireless phones and data
devices. Weak economic conditions may also impact the ability of third parties to satisfy their obligations to us. If
weak economic conditions were to continue or further deteriorate, the growth of our business, results of operations
and financial condition may be adversely affected.
Risks Relating to Our Common Stock and Payment of Dividends
Our Board of Directors could, in its discretion, depart from or change our dividend policy at any time. Our Board
of Directors maintains a current dividend practice for the payment of quarterly dividends at an annual rate of
approximately $1.55 per share of common stock. We are not required to pay dividends and our stockholders do not
have contractual or other legal rights to receive them. Our Board of Directors may decide at any time, in its
discretion, to decrease the amount of dividends, change or revoke the dividend policy, or discontinue paying
dividends entirely. Our ability to pay dividends is dependent on our earnings, capital requirements, financial
condition, expected cash needs, debt covenant compliance and other factors considered relevant by our Board of
Directors. If we do not pay dividends, for whatever reason, shares of our common stock could become less liquid
and the market price of our common stock could decline.
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We might not have sufficient cash to maintain current dividend levels. Our debt agreements, applicable state, legal
and corporate law, regulatory requirements and other risk factors described in this section, could materially reduce
the cash available from operations or significantly increase our capital expenditure requirements, and these
outcomes could cause funds not to be available when needed in amount sufficient to support our current dividend
practice.
If we continue to pay dividends at the level currently anticipated under our dividend policy, our ability to pursue
growth opportunities may be limited. Our dividend practice could limit, but not preclude, our ability to grow. If we
continue paying dividends at the level currently anticipated, we may not retain a sufficient amount of cash to fund a
material expansion of our business, including any acquisitions or growth opportunities requiring significant and
unexpected capital expenditures. For that reason, our ability to pursue any material expansion of our business may
depend on our ability to obtain third-party financing. We cannot guarantee that such financing will be available to
us on reasonable terms or at all.
Our organizational documents could limit or delay another party’s ability to acquire us and, therefore, could
deprive our investors of a possible takeover premium for their shares. A number of provisions in our amended and
restated certificate of incorporation and bylaws will make it difficult for another company to acquire us. Among
other things, these provisions:
• Divide our Board of Directors into three classes, which results in roughly one-third of our directors
being elected each year;
• Provide that directors may only be removed for cause and then only upon the affirmative vote of
holders of two-thirds or more of the voting power of our outstanding common stock;
• Require the affirmative vote of holders of two-thirds or more of the voting power of our outstanding
common stock to amend, alter, change, or repeal specified provisions of our amended and restated
certificate of incorporation and bylaws;
• Require stockholders to provide us with advance notice if they wish to nominate any candidates for
election to our Board of Directors or if they intend to propose any matters for consideration at an
annual stockholders meeting; and
• Authorize the issuance of so-called “blank check” preferred stock without stockholder approval upon
such terms as the Board of Directors may determine.
We also are subject to laws that may have a similar effect. For example, federal, Illinois, and Pennsylvania
telecommunications laws and regulations generally prohibit a direct or indirect transfer of control over our business
without prior regulatory approval. Similarly, Section 203 of the Delaware General Corporation Law restricts our
ability to engage in a business combination with an “interested stockholder”. These laws and regulations make it
difficult for another company to acquire us, and therefore could limit the price that investors might be willing to pay
in the future for shares of our common stock. In addition, the rights of our common stockholders will be subject to,
and may be adversely affected by, the rights of holders of any class or series of preferred stock that we may issue in
the future.
Risks Relating to Our Indebtedness and Our Capital Structure
We have a substantial amount of debt outstanding and may incur additional indebtedness in the future, which
could restrict our ability to pay dividends and fund working capital and planned capital expenditures. As of
December 31, 2013, we had $1,216.8 million of debt outstanding. Our substantial level of indebtedness could
adversely impact our business, including:
• We may be required to use a substantial portion of our cash flow from operations to make principal
and interest payments on our debt, which will reduce funds available for operations, future business
opportunities and dividends;
• We may have limited flexibility to react to changes in our business and our industry;
•
• We may have a limited ability to borrow additional funds or to sell assets to raise funds if needed for
It may be more difficult for us to satisfy our other obligations;
working capital, capital expenditures, acquisitions, or other purposes;
22
• We may become more vulnerable to general adverse economic and industry conditions, including
changes in interest rates; and
• We may be at a disadvantage compared to our competitors that have less debt.
We cannot guarantee that we will generate sufficient revenues to service our debt and have adequate funds left over
to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs, compete
successfully in our markets, or pay dividends to our stockholders.
Our credit agreement and the indenture governing the Senior Notes contain covenants that limit management’s
discretion in operating our business and could prevent us from capitalizing on opportunities and taking other
corporate actions. Among other things, our credit agreement limits or restricts our ability (and the ability of certain
of our subsidiaries), and the indenture governing the Senior Notes limits the ability of our subsidiary, Consolidated
Communications, Inc., and its restricted subsidiaries, to:
Incur additional debt and issue preferred stock;
•
• Make restricted payments, including paying dividends on, redeeming, repurchasing, or retiring our
capital stock;
• Make investments and prepay or redeem debt;
• Enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans, or transfer
assets to us;
• Create liens;
• Sell or otherwise dispose of assets, including capital stock of, or other ownership interests in,
subsidiaries;
• Engage in transactions with affiliates;
• Engage in sale and leaseback transactions;
• Engage in a business other than telecommunications; and
• Consolidate or merge.
In addition, our credit agreement requires us to comply with specified financial ratios, including ratios regarding
total leverage and interest coverage. Our ability to comply with these ratios may be affected by events beyond our
control. These restrictions limit our ability to plan for or react to market conditions, meet capital needs, or otherwise
constrain our activities or business plans. They also may adversely affect our ability to finance our operations, enter
into acquisitions, or engage in other business activities that would be in our interest.
A breach of any of the covenants contained in our credit agreement, in any future credit agreement, or in the
indenture governing the Senior Notes, or our inability to comply with the financial ratios could result in an event of
default, which would allow the lenders to declare all borrowings outstanding to be due and payable. If the amounts
outstanding under our credit facilities were to be accelerated, we cannot assure that our assets would be sufficient to
repay in full the money owed. In such a situation, the lenders could foreclose on the assets and capital stock pledged
to them.
Our variable-rate debt subjects us to interest rate risk, which could impact our cost of borrowing and operating
results. Certain of our debt obligations are at variable rates of interest and expose us to interest rate risk. Increases
in interest rates could negatively impact our results of operations and operating cash flows. To mitigate the risk of
rising interest rates, we have entered into interest rate swap agreements that convert a portion of our variable-rate
debt to a fixed-rate basis. However, we do not maintain interest rate hedging agreements for all of our variable-rate
debt and our existing hedging agreements may not fully mitigate our interest rate risk, may prove disadvantageous
or may create additional risks. Changes in fair value of cash flow hedges that have been de-designated or
determined to be ineffective are recognized in earnings. Significant increases or decreases in the fair value of these
cash flow hedges could cause favorable or adverse fluctuations in our results of operations.
Risks Relating to Our Business
We expect to continue to face significant competition in all parts of our business and the level of competition
could intensify. The telecommunications, Internet and digital video businesses are highly competitive. We face
actual or potential competition from many existing and emerging companies, including other incumbent and
23
competitive local telephone companies, long-distance carriers and resellers, wireless companies, Internet service
providers, satellite companies, cable television companies and in some cases by new forms of providers who are
able to offer competitive services through software applications, requiring a comparatively small initial investment.
Due to consolidation and strategic alliances within the industry, we cannot predict the number of competitors we
will face at any given time.
The wireless business has expanded significantly and has caused many subscribers to traditional telephone services
and land-based Internet access services to give up those services and to rely exclusively on wireless service.
Consumers are finding individual television shows of interest to them through the Internet and are watching content
that is downloaded to their computers. Some providers, including television and cable television content owners,
have initiated what are called “over-the-top” services that deliver video content to televisions and computers over
the Internet. Over-the-top services can include episodes of highly-rated television series in their current broadcast
seasons. They also can include content that is related to broadcast or sports content that we carry, but that is distinct
and may be available only through the alternative source. Finally, the transition to digital broadcast television has
allowed many consumers to obtain high definition local broadcast television signals (including many network
affiliates) over-the-air, using a simple antenna. Consumers can pursue each of these options without foregoing any
of the other options. We may not be able to successfully anticipate and respond to many of these various
competitive factors affecting the industry, including regulatory changes that may affect our competitors and us
differently, new technologies, services and applications that may be introduced, changes in consumer preferences,
demographic trends and discount or bundled pricing strategies by competitors. The incumbent telephone carrier in
the markets we serve enjoys certain business advantages, including size, financial resources, favorable regulatory
position, a more diverse product mix, brand recognition and connection to virtually all of our customers and
potential customers. The largest cable operators also enjoy certain business advantages, including size, financial
resources, ownership of or superior access to desirable programming and other content, a more diverse product mix,
brand recognition and first-in-the-field advantages with a customer base that generates positive cash flow for its
operations. Our competitors continue to add features and adopt aggressive pricing and packaging for services
comparable to the services we offer. Their success in selling some services competitive with ours can lead to
revenue erosion in other related areas. We face intense competition in our markets for long-distance, Internet access
and other ancillary services that are important to our business and to our growth strategy. If we do not compete
effectively we could lose customers, revenue and market share; customers may reduce their usage of our services or
switch to a less profitable service; and we may need to lower our prices or increase our marketing efforts to remain
competitive.
We must adapt to rapid technological change. If we are unable to take advantage of technological developments,
or if we adopt and implement them more slowly than our competitors, we may experience a decline in the demand
for our services. The telecommunications industry operates in a technologically complex environment. New
technologies are continually developed and products and services undergo constant improvement. Emerging
technologies offer consumers a variety of choices for their communication needs. To remain competitive, we will
need to adapt to future changes in technology to enhance our existing offerings and to introduce new or improved
offerings that anticipate and respond to the varied and continually changing demands of our customers. If we are
unable to match the benefits offered by competing technologies on a timely basis or at an acceptable cost, if we fail
to employ technologies desired by our customers before our competitors do so, or if we do not successfully execute
on our technology initiatives, our business and results of operations could be adversely affected.
New technologies, particularly alternative methods for the distribution, access and viewing of content, have been
and will likely continue to be developed that will further increase the number of competitors that we face and drive
changes in consumer behavior. Consumers seek more control over when, where and how they consume content and
are increasingly interested in communication services outside of the home and in newer services in wireless Internet
technology and devices such as tablets, smartphones and mobile wireless routers that connect to such devices.
These new technologies, distribution platforms and consumer behavior may have a negative impact on our business.
In addition, evolving technologies can reduce the costs of entry for others, resulting in greater competition and give
competitors significant new advantages. Technological developments could require us to make a significant new
capital investment in order to remain competitive with other service providers. If we do not replace or upgrade our
network and its technology once it becomes obsolete, we will be unable to compete effectively and will likely lose
customers. We also may be placed at a cost disadvantage in offering our services. Technology changes are also
allowing individuals to bypass telephone companies and cable operators entirely to make and receive calls, and to
provide for the distribution and viewing of video programming without the need to subscribe to traditional voice and
24
video products and services. Increasingly, this can be done over wireless facilities and other emerging mobile
technologies as well as traditional wired networks. Wireless companies are aggressively developing networks using
next-generation data technologies, which are capable of delivering high-speed Internet service via wireless
technology to a large geographic footprint. As these technologies continue to expand in availability and reliability,
they could become an effective alternative to our high-speed Internet services. Although we use fiber optics in parts
of our networks, including in some residential areas, we continue to rely on coaxial cable and copper transport
media to serve customers in many areas. The facilities we use to offer our video services, including the interfaces
with customers, are undergoing a rapid evolution, and depend in part on the products, expertise and capabilities of
third parties. If we cannot develop new services and products to keep pace with technological advances, or if such
services and products are not widely embraced by our customer, our results of operations could be adversely
impacted.
Transport and content costs are substantial and continue to increase. We expect the cost of video transport and
content costs to continue to be one of our largest operating costs associated with providing video service. Video
programming content includes cable-oriented programming designed to be shown in linear channels, as well as the
programming of local over-the-air television stations that we retransmit. In addition, on-demand programming is
being made available in response to customer demand. In recent years, the cable industry has experienced rapid
increases in the cost of programming, especially the costs for sports programming and for local broadcast station
retransmission consent. Programming costs are generally assessed on a per-subscriber basis, and therefore are
related directly to the number of subscribers to which the programming is provided. Our relatively small base of
subscribers limits our ability to negotiate lower per-subscriber programming costs. Larger providers often can
qualify for discounts based on the number of their subscribers. This cost difference can cause us to experience
reduced operating margins, while our competitors with a larger subscriber base may not experience similar margin
compression. In addition, escalators in existing content agreements cause cost increases that are out of line with
general inflation. While we expect these increases to continue we may not be able to pass our programming cost
increases on to our customers, particularly as an increasing amount of programming content becomes available via
the Internet at little or no cost. Also, some competitors (or their affiliates) own programming in their own right and
we may be unable to secure license rights to that programming. As our programming contracts with content
providers expire, there can be no assurance that they will be renewed on acceptable terms or that they will be
renewed at all, in which case we may be unable to provide such programming as part of our video services packages
and our business and results of operations may be adversely affected.
We receive cash distributions from our wireless partnership interests and the continued receipt of future
distributions is not guaranteed. We own five wireless partnership interests consisting of 2.34% of GTE Mobilnet
of South Texas Limited Partnership, which provides cellular service in the Houston, Galveston, and Beaumont,
Texas metropolitan areas; 3.60% of Pittsburgh SMSA Limited Partnership, which provides cellular service in and
around the Pittsburgh metropolitan area; 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.
In 2013, 2012 and 2011, we received cash distributions from these partnerships of $34.8 million, $29.1 million and
$28.3 million, respectively. The cash distributions we receive from these partnerships are based on our percentage
of ownership and the partnerships’ operating results, cash availability and financing needs, as determined by the
General Partner at the date of the distribution. We cannot control the timing, dollar amount or certainty of any
future cash distributions from these partnerships. In the absence of the receipt of cash distributions from these
partnerships, we may be unable to fulfill our long-term obligations or our ability to pay cash dividends to our
shareholders may be restricted. If we do not receive cash distributions from these partnerships in the future, or if the
cash distributions decrease in amount, our results of operations could be adversely affected.
A disruption in our networks and infrastructure could cause delays or interruptions of service, which could cause
us to lose customers and incur additional expenses. Our customers depend on reliable service over our network.
The primary risks to our network infrastructure include physical damage to lines, security breaches, capacity
limitations, power surges or outages, software defects and disruptions beyond our control, such as natural disasters
and acts of terrorism. From time to time in the ordinary course of business, we will experience short disruptions in
our service due to factors such as physical damage, inclement weather and service failures of our third party service
providers. We could experience more significant disruptions in the future. Disruptions may cause interruptions in
service or reduced capacity for customers, either of which could cause us to lose customers and incur unexpected
expenses.
25
We have employees who are covered by collective bargaining agreements. If we are unable to enter into new
agreements or renew existing agreements before they expire, we could have a work stoppage or other labor
actions that could materially disrupt our ability to provide services to our customers. At December 31, 2013,
approximately 28% of our employees were covered by collective bargaining agreements. These employees are
hourly workers located in Texas, Pennsylvania and Illinois service territories and are represented by various unions
and locals. Our relationship with these unions generally has been satisfactory, but occasional work stoppages can
occur, including a four day work stoppage that did occur in December 2012. All of the existing collective bargaining
agreements expire between 2014 through 2016, of which two contracts covering 6% of our employees will expire in
2014.
We cannot predict the outcome of negotiations of the collective bargaining agreements covering our employees. If
we are unable to reach new agreements or renew existing agreements, employees subject to collective bargaining
agreements may engage in strikes, work stoppages or slowdowns, or other labor actions, which could materially
disrupt our ability to provide services. New labor agreements or the renewal of existing agreements may impose
significant new costs on us, which could adversely affect our financial condition and result of operations. While we
believe our relations with the unions representing these employees are good, any protracted labor disputes or labor
disruptions by any of our employees could have a significant negative effect on our financial results and operations.
We may be unable to obtain necessary hardware, software and operational support from third party vendors. We
depend on third party vendors to supply us with a significant amount of hardware, software and operational support
necessary to provide certain of our services and to maintain, upgrade and enhance our network facilities and
operations and to support our information and billing systems. Some of our third-party vendors are our primary
source of supply for products and services for which there are few substitutes. If any of these vendors should
experience financial difficulties, have demand that exceeds their capacity or they cannot otherwise meet our
specifications, our ability to provide some services may be materially adversely affected in which case our business,
results of operations and financial condition may be adversely affected.
If we cannot obtain and maintain necessary rights-of-way for our network, our operations may be interrupted
and we would likely face increased costs. We are dependent on easements, franchises and licenses from various
private parties such as established telephone companies and other utilities, railroads, long-distance companies and
from state highway authorities, local governments and transit authorities for access to aerial pole space, underground
conduits and other rights-of-way in order to construct and operate our networks. Some agreements relating to rights-
of-way may be short-term or revocable at will, and we cannot be certain that we will continue to have access to
existing rights-of-way after the governing agreements are terminated or expire. If any of our right-of-way
agreements were terminated or could not be renewed, we may be forced to remove our network facilities from the
affected areas, relocate or abandon our networks which would interrupt our operations and force us to find
alternative rights-of-way and make unexpected capital expenditures.
Our ability to retain certain key management personnel and attract and retain highly qualified management and
other personnel in the future could have an adverse effect on our business. We rely on the talents and efforts of
key management personnel, many of whom have been with our company and in our industry for decades. While we
maintain long-term and emergency transition plans for key management personnel and believe we could either
identify internal candidates or attract outside candidates to fill any vacancy created by the loss of any key
management personnel, the loss of one or more of our key management personnel and the ability to attract and retain
highly qualified technical and management personnel in the future could have a negative impact on our business,
financial condition and results of operations.
Future acquisitions could be expensive and may not be successful. From time to time we make acquisitions and
investments and enter into other strategic transactions. In connection with these types of transactions, we may incur
unanticipated expenses, fail to realize anticipated benefits, have difficulty incorporating the acquired businesses,
disrupt relationships with current and new employees, customers and vendors, incur significant indebtedness, or
have to delay or not proceed with announced transactions. The occurrence of any of the foregoing events could
have a material adverse effect on our business, results of operations, cash flows and financial condition.
26
Risks Related to the Regulation of Our Business
We are subject to a complex and uncertain regulatory environment, and we face compliance costs and
restrictions greater than those of many of our competitors. Our businesses are subject to regulation by the Federal
Communications Commission (“FCC”) and other Federal, state and local entities. Rapid changes in technology and
market conditions have required corresponding changes in how government addresses telecommunications, video
programming and Internet services. Many businesses that compete with our ILEC and Non-ILEC subsidiaries are
comparatively less regulated. Some of our competitors are either completely free from utilities regulation, or are
regulated on a significantly less burdensome basis. Further, in comparison to our subsidiaries regulated as cable
operators, satellite video providers, on-demand and over-the-top video providers, and motion picture and DVD firms
have almost no regulation of their video activities. Recently, Federal and state authorities have become far more
active in seeking to address critical issues in each of our product and service markets. The adoption of new laws or
regulations or changes to the existing regulatory framework at the federal or state levels could require significant
and costly adjustments, and adversely affect our business plans. New regulations could impose additional costs or
capital requirements, require new reporting, impair revenue opportunities, potentially impede our ability to provide
services in a manner that would be attractive to our customers and us and potentially create barriers to enter new
markets or acquire new lines of business. We face continued uncertainty in the regulatory area for the immediate
future. Not only are these governmental entities continuing to move forward on these matters, their actions remain
subject to reconsideration, appeal and legislative modification over an extended period of time, and it is unclear how
their actions ultimately will impact our markets. We cannot predict future developments or changes to the regulatory
environment or the impact such developments or changes may have on us.
We receive support from various funds established under federal and state law and the continued receipt of that
support is not assured. A significant portion of our revenues come from network access and subsidies. An order
adopted by the FCC in 2011 (the “Order”) may significantly impact the amount of support revenue we receive from
Universal Service Fund (“USF”)/Connect America Fund (“CAF”) and intercarrier compensation (“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 redirects 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 the implementation will occur no sooner
than July 1, 2014. 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 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 $1.8 million during 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, $1.0 million, $1.1 million,
$2.4 million and $1.8 million in 2014, 2015, 2016, 2017 and 2018, respectively.
The Order is currently subject to both reconsideration and appeal. Further regulatory actions on these issues may
have a material impact on our consolidated financial position and our results of operations in future periods. The
impact cannot be fully determined at this time.
We receive subsidy payments from various federal or state universal service support programs. These include high
cost support, Lifeline, Schools and Libraries programs within the Federal universal service program. In addition,
our Pennsylvania and Texas ILEC’s receive state universal service funding. The Pennsylvania PUC (“PAPUC”)
issued an order in 2012 addressing state IC and USF, but rescinded the order in early 2012 due to the FCC order
usurping the PAPUC rules. In the future the PAPUC may reintroduce a universal service proceeding. In Texas, the
Public Utilities Commission of Texas (“PUCT”) initiated a proceeding to review the large company and small
company high cost funds. The proceedings undertook a comprehensive review of high cost funds and provided
recommended changes to the legislature. In June 2013, the Texas state legislature passed Senate Bill No. 583 (“SB
583”). The provisions of SB 583 were effective September 1, 2013 and froze the small and rural incumbent local
exchange company plan (“HCF”) and high cost assistance fund (“HCAF”) support for the remainder of 2013 and
will eliminate 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 settlement agreement, our 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.
27
The total cost of all of the various Federal universal service programs has increased greatly in recent years, putting
pressure on regulators to reform them, and to limit both eligibility and support flows. We cannot predict when or
how these matters will be decided or the effect on our subsidy revenues. However, future reductions in the subsidies
we receive may directly affect our profitability and cash flows.
We are subject to extensive laws and regulations relating to the protection of the environment, natural resources,
and worker health and safety. Our operations and properties are subject to federal, state, and local laws and
regulations relating to protection of the environment, natural resources, and worker health and safety, including laws
and regulations governing and creating liability in connection with the management, storage, and disposal of
hazardous materials, asbestos and petroleum products. We also are subject to laws and regulations governing air
emissions from our fleets of vehicles. As a result, we face several risks, including:
• Hazardous materials may have been released at properties that we currently own or formerly owned
(perhaps through our predecessors). Under certain environmental laws, we could be held liable,
without regard to fault, for the costs of investigating and remediating any actual or threatened
contamination at these properties and for contamination associated with disposal by us or our
predecessors of hazardous materials at third-party disposal sites.
• We could incur substantial costs in the future if we acquire businesses or properties subject to
environmental requirements or affected by environmental contamination. In particular, environmental
laws regulating wetlands, endangered species, and other land use and natural resource issues may
increase costs associated with future business or expansion opportunities or delay, alter, or interfere
with such plans.
• The presence of contamination can adversely affect the value of our properties and make it difficult to
sell any affected property or to use it as collateral.
• We could be held responsible for third-party property damage claims, personal injury claims, or natural
resource damage claims relating to contamination found at any of our current or past properties.
The cost of complying with environmental requirements could be significant. Similarly, the adoption of new
environmental laws or regulations or changes in existing laws or regulations or their interpretations could result in
significant compliance costs or unanticipated environmental liabilities.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located at 121 S. 17th St., Mattoon, Illinois, a leased facility. We also own and lease
office facilities and related equipment for administrative personnel, central office buildings, and operations in
Illinois, Pennsylvania, Texas, California, Kansas and Missouri. We own approximately 21 acres of undeveloped
land in Roseville, California.
In addition to land and structures, our property consists of equipment necessary for the provision of communication
services including central office equipment, customer premises equipment and connections, pole lines, video head-
end, remote terminals, aerial and underground cable and wire facilities, vehicles, furniture and fixtures, computers
and other equipment. We also own certain other communications equipment held as inventory for sale or lease.
In addition to plant and equipment that we wholly-own, we utilize poles, towers and cable and conduit systems
jointly-owned with other entities, and lease space on facilities to other entities. These arrangements are in
accordance with written agreements customary in the industry.
We have appropriate easements, rights of way and other arrangements for the accommodation of our pole lines,
underground conduits, aerial and underground cables and wires. See Note 11 in the Notes to Consolidated Financial
Statements and Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for information regarding our lease obligations.
As a result of efficiencies realized through cost controls and efficiencies gained through our acquisition of SureWest
Communications in July 2012, certain of our owned and leased facilities are not being utilized to their full capacity.
We are actively reviewing all of our holdings to determine if we have excess properties. As of December 31, 2013,
28
we are actively marketing 21 acres of undeveloped land, an office campus in Roseville, California and an office
building in Cranbury, Pennsylvania.
Item 3. Legal Proceedings.
On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates
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 is ongoing and we anticipate based on previous results that we will appeal the result to the
Pennsylvania Board of Finance and Revenue on or before 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 FCC’s 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.
29
Item 4. Mine Safety Disclosures.
Not Applicable.
30
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock is traded on The NASDAQ Global Select Market (“NASDAQ”) under the symbol “CNSL”. As
of February 21, 2014, there were approximately 4,008 stockholders of record of the Company’s common stock. The
following table indicates the range of stock closing prices of the Company’s common stock as reported on the
NASDAQ, for each of the quarters ending on the dates indicated:
Period
First quarter
Second quarter
Third quarter
Fourth quarter
2013
2012
High
Low
High
Low
17.86
18.95
18.50
19.75
16.37
16.58
16.67
17.32
19.80
19.63
17.79
17.40
18.08
13.95
15.21
13.48
Dividend Policy and Restrictions
Our Board of Directors declared dividends of approximately $0.38738 per share in each of the periods listed above.
We expect to continue to pay quarterly dividends at an annual rate of approximately $1.55 per share during 2014.
Future dividend payments are at the discretion of our Board of Directors. Changes in our dividend program will
depend on our earnings, capital requirements, financial condition, debt covenant compliance, expected cash needs
and other factors considered relevant by our Board of Directors. Dividends on our common stock are not
cumulative.
See Part II, Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources” for a discussion regarding restrictions on the payment of dividends. See Part I –
Item 1A – “Risk Factors” of this report, which sets forth several factors that could prevent stockholders from
receiving dividends in the future. Additional information concerning dividends may be found in “Selected Financial
Data” in Item 6, which is incorporated herein by reference.
Share Repurchases
During the quarter ended December 31, 2013, we repurchased 46,272 common shares surrendered by employees in
the administration of employee share-based compensation plans. The following table summarizes the share
repurchase activity:
Purchase period
October 1-October 31, 2013
November 1-Novermber 30, 2013
December 1-December 31, 2013
Performance Graph
Total number of
shares purchased
-
-
46,272
Average price
paid per share
n/a
n/a
$
19.18
Total number of
shares purchased
as part of publicly
announced plans
or programs
n/a
n/a
n/a
Maximum number
of shares that may
yet be purchased
under the plans
or programs
n/a
n/a
n/a
The following graph shows a five-year comparison of cumulative total shareholder return of our common stock
(assuming dividend reinvestment) with the S&P 500 index, the Dow Jones US Fixed-Line Telecommunications
Subsector index and a customized peer group of four companies that includes: Alaska Communications Systems
Group, Inc., Consolidated Communications Holdings, Inc., Otelco, Inc. and Shenandoah Telecommunications
Company. The comparison of total return on investment (change in year-end stock price plus reinvested dividends)
for each of the periods assumes that $100 was invested on December 31, 2008 respectively in each index, and in the
peer group. The stock performance shown on the graphs below is not necessarily indicative of future price
performance.
31
(In dollars)
Consolidated Communications Holdings, Inc.
S&P 500
Dow Jones US Fixed-Line Telecommunications Subsector
Peer group
2008
$
100
$
100
$
100
$
100
2009
$
166
$
126
$
109
$
110
Sale of Unregistered Securities
At December 31,
2010
$
200
$
146
$
129
$
132
2011
$
214
$
149
$
138
$
91
2012
$
195
$
172
$
159
$
81
2013
$
263
$
228
$
177
$
126
During the year ended December 31, 2013, we did not sell any equity securities of the Company, which were not
registered under the Securities Act of 1933, as amended.
32
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in conjunction with Item 7—“Management’s Discussion
and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the
related notes, and other financial data included elsewhere in this annual report. Historical results are not necessarily
indicative of the results to be expected in future periods.
(In millions, except per share amounts)
2013
2012 (1)
2011
2010
2009
Year Ended December 31,
Operating revenues
$
601.6
$
477.9
$
349.0
$
360.3
$
385.5
Cost of products and services (exclusive of depreciation
and amortization)
Selling, general and administrative expense
Financing and other transaction costs (2)
Intangible asset impairment
Depreciation and amortization
Income from operations
Interest expense, net and loss on extinguishment of debt (3)(4)
Other income, net
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Discontinued operations, net of tax
Net income
Net income of noncontrolling interest
222.5
135.4
0.8
-
139.3
103.6
(93.5)
37.3
47.4
17.5
29.9
1.2
31.1
0.3
175.9
108.3
20.8
1.2
120.3
51.4
(77.1)
31.2
5.5
0.6
4.9
1.2
6.1
0.5
121.7
77.8
2.6
-
88.0
58.9
(49.4)
27.9
37.4
13.1
24.3
2.7
27.0
0.6
127.0
84.2
-
-
86.5
62.6
(50.7)
26.1
38.0
7.4
30.6
2.5
33.1
0.6
132.7
100.5
-
-
84.5
67.8
(57.9)
25.1
35.0
11.1
23.9
2.0
25.9
1.0
Net income attributable to common shareholders
$
30.8
$
5.6
$
26.4
$
32.5
$
24.9
Income per common share - basic and diluted:
Income from continuing operations
Discontinued operations, net of tax(5)
Net income per common share - basic and diluted
$
$
$
$
$
0.73
0.03
0.76
0.12
0.03
0.15
0.79
0.09
0.88
1.00
0.09
1.09
0.77
0.07
0.84
$
$
$
$
$
Weighted-average number of shares - basic and diluted
39,764
34,652
29,600
29,490
29,396
Cash dividends per common share
$
1.55
$
1.55
$
1.55
$
1.55
$
1.55
Consolidated cash flow data from continuing operations:
Cash flows from operating activities
Cash flows used for investing activities
Cash flows (used for) provided by financing activities
Capital expenditures
$
168.5
(107.4)
(71.6)
107.4
$
119.7
(468.5)
257.5
77.0
$
124.3
(40.7)
(50.7)
41.8
$
111.9
(41.6)
(49.4)
(42.7)
$
112.6
(40.6)
(47.4)
41.3
Consolidated Balance Sheet:
Cash and cash equivalents
Total current assets
Net property, plant and equipment
Total assets
Total debt (including current portion)
Stockholders' equity
Other financial data (unaudited):
Adjusted EBITDA (6)
$
5.6
87.7
885.4
1,747.4
1,221.9
152.3
$
17.9
109.3
907.7
1,793.5
1,217.8
136.1
$
105.7
164.7
337.6
1,194.1
884.7
47.8
$
67.7
132.6
362.0
1,209.5
884.1
71.9
$
42.8
105.8
381.9
1,226.6
880.3
80.7
$
286.5
$
231.9
$
185.0
$
181.7
$
185.2
33
(1) In July 2012, we acquired 100% of the outstanding shares of SureWest Communications (“SureWest”) in a cash
and stock transaction. SureWest results of operations have been included in our consolidated financial
statements as of the acquisition date of July 2, 2012.
(2) Financing and other transaction costs includes costs incurred related to the acquisition of SureWest including
severance costs.
(3) In 2013, we entered into a Second Amended and Restated Credit Agreement to restate our term loan credit
facility. In connection with entering into the restated credit agreement, we incurred a loss on the extinguishment
of debt of $7.7 million during the year ended December 31, 2013.
(4) In 2012, we entered into a $350.0 million Senior Unsecured Bridge Loan Facility (“Bridge Facility”) to fund the
SureWest acquisition. During 2012, we incurred $4.2 million of amortization related to the financing costs and
$1.5 million of interest related to ticking fees associated with the Bridge Facility. In addition, in 2012 we
entered into a Second Amendment and Incremental Facility Agreement to amend our term loan facility. As a
result, we incurred a loss on the extinguishment of debt of $4.5 million related to the repayment of our
outstanding term loan.
(5) In September 2013, we completed the sale of the assets and contractual rights of our prison services business for
a total cash price of $2.5 million, resulting in a gain of $1.3 million, net of tax. The financial results and net gain
from the sale of the prison services business are included in income from discontinued operations for the years
ended on or before December 31, 2013.
(6) In addition to the results reported in accordance with accounting principles generally accepted in the United
States (“US GAAP” or “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 (loss) 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.
34
The following tables are a reconciliation of net cash provided by operating activities to Adjusted EBITDA:
(In millions, unaudited)
Net cash provided by operating activities from
continuing operations
Adjustments:
Non-cash, stock-based compensation
Other adjustments, net
Changes in operating assets and liabilities
Interest expense, net
Income taxes
EBITDA
Adjustments to EBITDA:
(a)
Other, net
Investment distributions
(b)
Loss on extinguishment of debt
(c)
Intangible asset impairment
(d)
Non-cash, stock-based compensation
(e)
2013
Year Ended December 31,
2011
2010
2012
2009
$
168.5
$
119.7
$
124.3
$
111.9
$
112.6
(3.0)
(24.8)
28.5
85.8
17.5
272.5
(31.5)
34.8
7.7
-
3.0
(2.3)
(9.7)
17.6
72.6
0.7
198.6
(3.9)
29.2
4.5
1.2
2.3
(2.1)
(10.9)
1.1
49.4
13.1
174.9
(20.4)
28.4
–
–
2.1
(2.4)
4.1
3.5
50.7
7.4
(1.9)
(0.7)
(1.5)
57.9
11.1
175.2
177.5
(23.4)
27.5
–
–
2.4
(16.6)
22.4
–
–
1.9
Adjusted EBITDA
$
286.5
$
231.9
$
185.0
$
181.7
$
185.2
(a) 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 related to the acquisition of SureWest. 2009 also includes expenses associated with
Sarbanes-Oxley maintenance costs, costs to integrate our technology, administrative and customer service
functions and billing systems in connection with the acquisition of North Pittsburgh.
(b) Includes all cash dividends and other cash distributions received from our investments.
(c) Represents the redemption premium and write-off of unamortized debt issuance costs in connection with the
redemption or retirement of our debt obligations.
(d) Represents intangible asset impairment charges recognized during the period.
(e) Represents compensation expenses in connection with the issuance of stock awards, which because of their non-
cash nature, these expenses are excluded from Adjusted EBITDA.
35
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Reference is made to Part I, Item 1 “Note About Forward-Looking Statements” and Item 1A “Risk Factors” which
describes important factors that could cause actual results to differ from expectations and non-historical information
contained herein. In addition, the following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial
condition of Consolidated Communications Holdings, Inc. (“Consolidated”, “the Company”, “we” or “our”).
MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to
the consolidated financial statements (“Notes”) as of and for each of the three years in the period ended December
31, 2013 included elsewhere in this Annual Report on Form 10-K.
Throughout MD&A, we refer to certain 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 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 increased $123.7 million
during 2013 compared to 2012, primarily from our acquisition of SureWest Communications (“SureWest”) and
growth in data, video and Internet connections. 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 December 31, 2013, our video service was
available to approximately 531 thousand homes in the markets we serve, with an approximate 21% penetration rate.
As of December 31, 2013, we had approximately 111 thousand video subscribers, a 4% increase from 2012. 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 increase as a result of enhanced
product and service offerings, such as our consumer VOIP service and data speeds of up to 50 megabits per second,
depending on the geographic market availability. As of December 31, 2013, approximately 30% 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 are 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 increase in our operating revenues during 2013 was offset in part by 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, competitive local exchange carriers 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.
36
Significant Recent Developments
Merger With SureWest Communications
On July 2, 2012, we completed the merger with 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. The acquisition of SureWest
provides additional diversification of the Company’s revenues and cash flows both geographically and by service
type, which offers a platform for future growth and is expected to generate operational and capital cost synergies.
SureWest provides a wide range of telecommunications, digital video, Internet, data and other facilities-based
communications services in Northern California, primarily in the greater Sacramento region, and in the greater
Kansas City, Kansas and Missouri areas. For the year ended December 31, 2011, SureWest reported $248.1 million
in total operating revenues. For the six months ended June 30, 2012, SureWest generated $127.9 million in
operating revenues. 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 cash portion of the merger consideration and the funds
required to repay SureWest outstanding debt was financed with the sale of $300.0 million in aggregate principal
amount of 10.875% Senior Notes due 2020 (“Senior Notes”). The Company also used cash on hand and
approximately $35.0 million in borrowings from its revolving credit facility. Because the acquisition closed on July
2, 2012, the Company’s financial information does not include any of the results of operations from SureWest prior
to the acquisition date.
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. During
2012, the prison services contract comprised 5% of consolidated operating revenues and approximately 2% of
consolidated operating income, excluding financing and other transaction fees.
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 consolidated financial statements for all periods presented.
37
Results of Operations
The following tables reflect our financial results on a consolidated basis and key operating statistics as of and for the
years ended December 31, 2013, 2012 and 2011.
Financial Data
(In millions, except for percentages)
Operating Revenues
Local calling services
Network access services
Video, Data and Internet services
Subsidies
Long-distance services
Other services
Total operating revenue
Expenses
Cost of services and products
Selling, general and administrative costs
Financing and other transaction costs
Impairment of intangible assets
Depreciation and amortization
Total operating expenses
Income from operations
Interest expense, net
Loss on extinguishment of debt
Other income
Income tax expense
Income from continuing operations
Income from discontinued operations, net of tax
Net income attributable to noncontrolling interest
Net income attributable to common shareholders
2013
2012
2011
$
106.5
112.4
270.0
52.0
19.3
41.4
601.6
$
93.5
98.6
176.7
49.3
17.3
42.5
477.9
$
84.2
80.5
83.0
45.4
15.9
40.0
349.0
222.5
135.4
0.8
-
139.3
498.0
103.6
175.9
108.2
20.8
1.2
120.3
426.4
51.5
121.7
77.8
2.6
-
88.0
290.1
58.9
(85.8)
(72.6)
(49.4)
(7.7)
37.3
17.5
29.9
1.2
0.3
30.8
$
(4.5)
31.2
0.7
4.9
1.2
0.5
5.6
$
-
27.9
13.1
24.3
2.7
0.6
26.4
$
% Change
2013 vs.
2012
2012 vs.
2011
14 %
14
53
5
12
(3)
26
11 %
22
113
9
9
6
37
26
25
(96)
(100)
16
17
101
18
71
20
2,400
510
0
(40)
450
45
39
700
100
37
47
(13)
47
100
12
(95)
(80)
(56)
(17)
(79)
Adjusted EBITDA (1)
$
286.5
$
231.9
$
185.0
24 %
25 %
(1)A non-GAAP measure. See the Non-GAAP Measures section below for additional information and reconciliation
to the most directly comparable GAAP measure.
38
Key Operating Statistics
2013
2012
2011
147,247
109,558
256,805
73,219
50,214
123,433
255,239
110,613
746,090
153,855
114,742
268,597
78,811
50,918
129,729
247,633
106,137
752,096
137,179
90,813
227,992
2,388
52,424
54,812
134,129
34,356
451,289
% Change
2013 vs.
2012
2012 vs.
2011
(4) %
(5)
(4)
12 %
26
18
(7)
(1)
(5)
3
4
(1)
3200
(3)
137
85
209
67
ILEC access lines
Residential
Business
Total
Voice connections (1)
Residential
Business
Total
Data and Internet connections (2)
Video connections (2)
Total connections
(1)Voice connections include voice lines outside the Incumbent Local Exchange Carrier (“ILEC”) service areas and
Voice-over-IP inside the ILEC service areas.
(2)These connections include both residential and business (excluding SureWest business metrics) for services both
inside and outside the ILEC service areas.
The comparability of our consolidated results of operations and key operating statistics was impacted by the
SureWest acquisition, which closed on July 2, 2012, as described above. SureWest’s results are included in our
consolidated financial statements as of the date of the acquisition. The acquisition of SureWest provides additional
diversification of the Company’s revenues and cash flows both geographically and by service type. The SureWest
operations accounted for $133.1 million of the 2012 consolidated operating revenues and for 296,459 of the total
connections at December 31, 2012.
2013 versus 2012
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 increased $13.0 million during 2013 compared to 2012 primarily due to the
acquisition of SureWest. Excluding the addition of SureWest revenues, local calling services decreased $4.8 million
during 2013 compared to 2012 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 including 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 increased $13.8 million during 2013
compared to 2012 primarily as a result of the acquisition of SureWest, which accounted for a $21.2 million annual
increase in network access services revenue. Excluding the additional six months of revenue for SureWest, network
access services decreased $7.4 million during 2013 compared to 2012 primarily due to a decline in switched and
special access revenue. As described in the “Regulatory Matters” section below, network access revenues were also
impacted by a decline in intrastate rates as a result of the intercarrier compensation (“ICC”) reform which became,
effective in July 2012.
39
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 $93.3 million during 2013 compared to 2012 primarily as a result of the
acquisition of SureWest, which accounted for $85.2 million of the annual increase. The remaining increase in
revenue was primarily due to the continued growth in data and Internet connections and video connections, which
increased 3% and 4%, respectively, as of December 31, 2013. Video, data and Internet revenue comprised 45% of
our consolidated revenues in 2013 compared to 37% in 2012. We expect video, data and Internet service revenue to
continue to grow as the consumer and business demand for data based services continues to increase.
Subsidies
Subsidies consist of federal and state subsidies designed to promote widely available, quality telephone service at
affordable prices in rural areas. Subsidy revenues increased $2.7 million during 2013 compared to 2012 primarily as
a result of the addition of revenue from the acquisition of SureWest and the addition of revenues from the Connect
America Fund (“CAF”), which was implemented by the Federal Communications Commission (“FCC”) in July
2012. See the “Regulatory Matters” section below for a further discussion of the subsidies we receive.
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 increased $2.0 million during 2013 compared to 2012 primarily
due to the acquisition of SureWest. Excluding the addition of SureWest revenues, long distance services decreased
approximately $1.7 million during 2013 compared to 2012 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 include revenues from telephone directory publishing, wholesale transport services, billing and
collection services, inside wiring service and maintenance and equipment sales. Other services revenue decreased
$1.1 million during 2013 compared to 2012. The decrease in other services revenue was primarily due to a decline
in directory publishing revenues and equipment sales, which was offset in part by the acquisition of SureWest and
an increase in transport services.
Operating Expenses
Cost of Services and Products
Cost of services and products increased $46.6 million during 2013 compared to 2012. The addition of the
operations for SureWest during the first six months of 2013 accounted for $50.0 million of the increase. Video
programming costs continue 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 offset in part by a reduction in access costs due to
the decline in access lines and usage.
Selling, General and Administrative Costs
Selling, general and administrative costs increased $27.2 million during 2013 compared to 2012 primarily as a result
of the addition of the operations for SureWest for the first six months of 2013, which accounted for $27.0 million of
the annual increase. The remaining increase in selling, general and administrative costs was due to an increase in
professional fees for audit and legal services, which was offset in part by a reduction in bad debt expense.
40
Transaction/Debt refinancing costs
In connection with the acquisition of SureWest, we incurred $20.8 million of transaction related fees, which were
recognized as financing and other transaction costs during 2012. The transaction costs consisted primarily of legal
and professional fees and change-in-control payments to former members of the SureWest management team.
Depreciation and Amortization
Depreciation and amortization expense increased $19.0 million during 2013 compared to 2012, primarily as a result
of the acquisition of SureWest. Excluding the addition of the operations for SureWest for the first six months of
2013, which accounted for $38.5 million of the current year increase, depreciation and amortization expense
decreased $19.5 million in 2013 as a result of certain intangible assets and network and outside plant equipment
becoming fully amortized or depreciated during 2012.
Reclassifications
Certain amounts in our 2012 and 2011 consolidated financial statements have been reclassified to conform to the
presentation of our 2013 consolidated financial statements. The reclassifications consist of the effects of reporting
prison services as a discontinued operation, the retrospective adjustments to report operating results as a single
segment and the finalization of purchase accounting for the SureWest acquisition. These reclassifications had no
effect on total shareholders’ equity, total revenue or net income.
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;
interstate pool settlements from the National Exchange Carrier Association (“NECA”); 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.
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 Federal Universal Service Fund, the Pennsylvania Universal
Service Fund, and the Texas Universal Service Fund increased $2.7 million in 2013 compared to 2012. The increase
in the Universal Service subsidies received during the current year was primarily due to the acquisition of SureWest
and the new subsidies received from the CAF, as described below.
41
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 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 NECA pool, however
we do not anticipate that they will be material to our 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 Universal Service Fund (“USF”)/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 redirects 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 July 2014. 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 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, during 2013 our network
access revenues decreased approximately $1.8 million compared to 2012.
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
(“USF”) 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 until such time that the Commission has the opportunity to reach a decision on our application
for review.
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
42
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. The Company 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. The Company 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 fund.
Our Texas ILECs receive two state funds, the small and rural incumbent local exchange company plan (“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 eliminate the HCF. 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 is not
expected to impact funding until the first quarter of 2014. The potential impact on funding related to the urban
benchmark is pending the docketed proceeding as well as potential legislative action. The Company will continue to
monitor this matter.
In June 2013, the Texas state legislature passed Senate Bill No. 583 (“SB 583”). The provisions of SB 583 were
effective September 1, 2013 and froze HCF and HCAF support for the remainder of 2013 and will eliminate 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 settlement agreement, our 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, we
have the ability to offset this reduction with increases to residential rates, where market conditions will allow.
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.
43
Non-Operating Items
Other Income and Expense, Net
Interest expense, net of interest income, increased $13.2 million during 2013 compared to 2012. The increase in
interest expense was due primarily to an increase in total debt outstanding as a result of the acquisition of SureWest
in 2012, which included the issuance of a $300.0 million Senior Note offering in May 2012 and the issuance of
incremental term loans under our credit facility in December 2012, as described in the Liquidity and Capital
Resources section below. An increase in interest rates on outstanding borrowings under our credit facility, which
was amended in December 2012, also contributed to the increase in interest expense during 2013. The increase in
the current year was offset in part by amortized financing costs of $4.2 million for the temporary bridge loan facility
obtained to fund the SureWest acquisition in 2012. In addition, interest expense related to our interest rate swap
agreements has declined due to the maturity of several agreements during 2013.
In December 2012, we entered into a Second Amendment and Incremental Facility Agreement (the “Second
Amendment”) to amend our term loan credit facility. Under the terms of the Second Amendment, we issued
incremental term loans in the aggregate amount of $515.0 million and used the proceeds in part to pay off the
outstanding term loan debt that was due to mature December 31, 2014. In December 2013, we entered into a
Second Amended and Restated Credit Agreement (the “Restated Agreement”) to restate the existing credit
agreement. Under the terms of the Restated Agreement, we issued term loans in the aggregate amount of $910.0
million and used the proceeds to pay off the outstanding term loans that were scheduled to mature in 2017 and 2018.
As a result, we incurred a loss on the extinguishment of debt of $7.7 million and $4.5 million during the years ended
December 31, 2013 and 2012, respectively, related to the repayment of our outstanding term loans.
Investment income increased $7.0 in 2013 compared to 2012, primarily due to higher earnings from our wireless
partnership interests. Other, net decreased $1.1 million in 2013 compared to 2012, primarily due to an agreement in
principle reached in legal dispute during the current year. See Note 11 to the Consolidated Financial Statements for
a more detailed discussion regarding the agreement in principle.
Income Taxes
Income taxes increased $16.9 million in 2013 compared to 2012. Our effective rate was 36.9% for 2013 compared
to 11.7% for 2012. During 2013, we recognized $1.2 million of our previously unrecognized tax benefits, which
resulted in a decrease to our tax expense of $0.8 million, due to the expiration of a state statute of limitations. We
also recognized approximately $0.7 million of tax expense during 2013 to adjust our 2012 provision to match our
2012 returns. The acquisition of SureWest on July 2, 2012 resulted in changes to our unitary state filings and
correspondingly our state deferred income taxes. These changes resulted in a net decrease of $1.1 million to our net
state deferred tax liabilities and a corresponding decrease to our state tax. In addition, we incurred non-deductible
transaction costs in relation to the acquisition that resulted in an increase to our tax provision of $0.8 million.
Exclusive of these adjustments, our effective tax rate for 2013 would have been approximately 37.1% compared to
16.6% for 2012. The adjusted effective tax rate for 2012 is lower primarily due to state taxable income differences
and state tax credits.
2012 versus 2011
Operating Revenues
Local Calling Services
Local calling services revenue increased $9.3 million during 2012 compared to 2011 primarily due to the acquisition
of SureWest. Excluding the addition of SureWest revenues, local calling services decreased $8.1 million during
2012 compared to 2011 primarily due to a 3% 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.
Network Access Services
Network access services revenue increased $18.1 million during 2012 compared to 2011 primarily as a result of the
acquisition of SureWest, which accounted for $21.3 million of the annual increase. Excluding the addition of the
SureWest revenues, network access services decreased $3.2 million during 2012 compared to 2011 primarily due to
a decline in switched access minutes of use and special access revenue. These decreases were partially offset by an
increase in end user and access recovery revenues.
44
Video, Data and Internet Services
Video, data and Internet revenue increased $93.7 million during 2012 compared to 2011 primarily as a result of the
acquisition of SureWest, which accounted for $84.9 million of the annual increase. The increase in revenue was
also due to the continued growth in data and video connections, which increased 7% and 9%, respectively, as of
December 31, 2012. Video, data and Internet revenue comprised 37% of our consolidated revenues in 2012
compared to 24% in 2011. We expect video, data and Internet service revenue to continue to grow as the consumer
and business demand for data based services continues to increase.
Subsidies
Subsidy revenues increased $3.9 million during 2012 compared to 2011 primarily as a result of the acquisition of
SureWest, an increase in high cost fund support and the addition of revenues from the Connect America Fund in
2012.
Long-Distance Services
Long-distance services revenue increased $1.4 million during 2012 compared to 2011 primarily due to the
acquisition of SureWest. Excluding the addition of SureWest revenues, long distance services decreased $2.4
million during 2012 compared to 2011 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 revenue increased $2.5 million during 2012 compared to 2011. The increase in other services
revenue was primarily due to the acquisition of SureWest and an increase in transport services, which was offset in
part by a decline in directory publishing revenues and equipment system sales.
Operating Expenses
Cost of Services and Products
Cost of services and products increased $54.2 million during 2012 compared to 2011 primarily as a result of the
addition of the SureWest operations of $53.0 million as well as higher costs associated with video programming.
Video programming costs continue to increase due to the growth in video connections and an increase in costs per
program channel. During 2012, the increase in video programming costs was offset in part by a reduction in access
costs due to the decline in access lines and usage.
Selling, General and Administrative Costs
Selling, general and administrative costs increased $30.4 million during 2012 compared to 2011 primarily as a result
of the addition of the operations for SureWest, which accounted for $30.1 million of the annual increase. The
remaining increase in selling, general and administrative costs was due to an increase in insurance costs and stock
compensation expense, which were largely offset by a reduction in bad debt expense, utility costs and legal
expenses.
Transaction/Debt refinancing costs
In connection with the acquisition of SureWest, we incurred $20.8 million of transaction related fees which were
recognized as a financing and other transaction costs during 2012. In 2011, we amended our credit agreement and
incurred fees of $2.6 million, which were recognized as a financing cost during 2011.
Depreciation and Amortization
Depreciation and amortization expense increased $32.3 million during 2012 compared to 2011, primarily as a result
of the acquisition of SureWest. Excluding the addition of the operations for SureWest, which accounted for $36.4
million of the current year increase, depreciation and amortization expense decreased $4.1 million in 2012 as a result
of circuit equipment and other assets becoming fully depreciated during the year.
Non-Operating Items
Other Income and Expense, Net
Interest expense, net of interest income, increased $23.2 million during 2012 compared to 2011. In February 2012,
we entered into a temporary $350.0 million Senior Unsecured Bridge Loan Facility (“Bridge Facility”) to fund the
45
SureWest acquisition. During 2012, we incurred $4.2 million of amortization related to the financing costs and $1.5
million of interest related to ticking fees associated with the Bridge Facility. In May 2012, we finalized the
financing for the SureWest acquisition and entered into a Senior Note offering (“Senior Notes”), effectively
replacing our Bridge Facility. Interest expense in 2012 included $19.2 million of interest expense related to the
Senior Notes.
In December 2012, we entered into a Second Amendment and Incremental Facility Agreement (the “Second
Amendment”) to amend our term loan facility. Under the terms of the Second Amendment, we issued incremental
term loans in the aggregate amount of $515.0 million and used the proceeds in part to pay off the outstanding term
loan debt that was due to mature December 31, 2014. As a result, we incurred a loss on the extinguishment of debt
of $4.5 million related to the repayment of our outstanding term loan.
Investment income increased by $2.8 million during 2012 compared to 2011 primarily due to higher earnings from
our wireless partnership interests.
Income Taxes
Income taxes decreased $12.5 million in 2012 compared to 2011. Our effective rate was 11.7% for 2012 compared
to 35.1% for 2011. The acquisition of SureWest on July 2, 2012 resulted in changes to our unitary state filings and
correspondingly our state deferred income taxes. These changes resulted in a net decrease of $1.1 million to our net
state deferred tax liabilities and a corresponding decrease to our state tax. In addition, we incurred non-deductible
transaction costs in relation to the acquisition that resulted in an increase to our tax provision of $0.8 million.
Exclusive of these adjustments our effective tax rate for 2012 would have been approximately 16.6%. The adjusted
effective tax rate for 2012 was lower primarily due to state taxable income differences and state tax credits.
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.
46
The following tables are a reconciliation of net cash provided by operating activities to adjusted EBITDA for the
years ended December 31, 2013, 2012 and 2011:
(In thousands, unaudited)
Net cash provided by operating activities from
continuing operations
Adjustments:
Non-cash, stock-based compensation
Other adjustments, net
Changes in operating assets and liabilities
Interest expense, net
Income taxes
EBITDA
Adjustments to EBITDA:
(1)
Other, net
Investment distributions (2)
Loss on extinguishment of debt
Impairment of intangible assets
Non-cash, stock-based compensation
(3)
Year Ended December 31,
2012
2013
2011
$
168,530
$
119,732
$
124,302
(3,028)
(24,750)
28,486
85,767
17,512
272,517
(31,529)
34,833
7,657
-
3,028
(2,348)
(9,653)
17,566
72,604
661
198,562
(3,894)
29,217
4,455
1,236
2,348
(2,132)
(10,914)
1,122
49,391
13,141
174,910
(20,400)
28,410
-
-
2,132
Adjusted EBITDA
$
286,506
$
231,924
$
185,052
(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.
Includes all cash dividends and other cash distributions received from our investments.
(2)
(3) Represents compensation expenses in connection with issuance of stock awards, which because of the non-
cash nature of these expenses are excluded from adjusted EBITDA.
Outlook and Overview
Liquidity and Capital Resources
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:
Cash flows provided by (used in):
Operating activities:
Continuing operations
Discontinued operations
Investing activities
Continuing operations
Discontinued operations
Financing activities
Continuing operations
Increase (decrease) in cash and cash equivalents
Years Ended December 31,
2012
2013
2011
$
$
168,530
(4,174)
$
119,732
3,483
$
124,302
5,202
(107,436)
2,331
(468,462)
(97)
(40,682)
(119)
(71,554)
(12,303)
$
257,494
(87,850)
$
(50,653)
38,050
47
Cash Flows Provided by Operating Activities
Net cash provided by operating activities from continuing operations was $168.5 million in 2013, an increase of
$48.8 million as compared to 2012. Cash provided by operating activities increased as a result of the additional cash
flows provided by the addition of the SureWest operations and a decrease in accounts receivable. These increases
were offset in part by a decrease in accounts payable and accrued expenses related to the timing in payments to
suppliers and the payment of accrued transaction costs during 2013.
Cash Flows Used In Investing Activities
Net cash used in investing activities from continuing operations was $107.4 million during 2013 and consisted
primarily of cash used for capital expenditures.
Capital Expenditures
Capital expenditures continue to be our primary recurring investing activity and were $107.4 million in 2013, an
increase of $30.4 million compared to 2012. The increase in capital expenditures was due to the addition and
integration of the SureWest operations and increased investment in commercial and residential services. Capital
expenditures for 2014 are expected to be $95.0 million to $105.0 million of which 61% is planned for success-based
capital projects for residential and commercial initiatives. Capital expenditures in 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 from continuing operations consists primarily of our proceeds and
principal payments on long-term borrowings and the payment of dividends.
Long-term Debt
The following table summarizes our indebtedness as of December 31, 2013:
(In thousands)
Senior Notes, net of discount
Term loan 4, net of discount
Revolving loan
Capital leases
Balance
$ 298,301
905,463
13,000
Maturity Date
June 1, 2020
December 23, 2020
December 23, 2018
5,121 May 31, 2021
$ 1,221,885
Rate(1)
10.875%
LIBOR plus 3.25%
LIBOR plus 3.00%
(2)
12.73%
(1) At December 31, 2013, the 1-month London Interbank Offered Rate (“LIBOR”) applicable to our
borrowings was 0.17%. The Term 4 loan is subject to a 1.00% LIBOR floor.
(2) Weighted-average rate.
Credit Agreement
The Company, through certain of its wholly owned subsidiaries, has an outstanding credit agreement with several
financial institutions. In December 2013, we entered into a Second Amended and Restated Credit Agreement to
restate the Company’s previously amended credit agreement. The restated 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 restated 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 facility consists of 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 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
48
requires quarterly principal payments of $2.3 million commencing 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 and between 1.50% and 2.25% for alternate base rate
borrowings, depending on our leverage ratio. Based on our leverage ratio at December 31, 2013, the borrowing
margin for the next three month period ending March 31, 2014 will be at a weighted-average margin of 3.00% for a
LIBOR-based loan or 2.00% for an alternative 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 December 31, 2013,
$13.0 million was outstanding under the revolving credit facility. There were no borrowings or letters of credit
outstanding under the revolving credit facility at December 31, 2012.
The weighted-average interest rate on outstanding borrowings under our credit facility was 4.23% and 4.79% at
December 31, 2013 and 2012, 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.
Financing Costs
In connection with entering into the restated credit agreement in December 2013, fees of $6.6 million were
capitalized as deferred debt issuance costs. These capitalized costs are amortized over the term of the debt and are
included as a component of interest expense in the consolidated statements of income. We also incurred a loss on
the extinguishment of debt of $7.7 million during the year ended December 31, 2013 related to the repayment of
outstanding term loans under the previous credit agreement which were scheduled to mature in December 2017 and
2018.
The credit agreement was previously amended in December 2012, to issue incremental term loans (Term 3) which
were used to repay outstanding term loans scheduled to mature in December 2014, to extend the maturity dates of
outstanding term loans (Term 2) from December 2014 to December 2017 and to extend the termination date of the
revolving loan facility. In connection with entering into the December 2012 amendment, fees of $4.2 million were
capitalized as deferred debt issuance costs and we recognized a loss on the extinguishment of debt of $4.5 million
during the year ended December 31, 2012.
In February 2012, the terms of our credit facility were amended to provide us with the ability to incur indebtedness
necessary to finance the acquisition of SureWest, which enabled us to issue the Senior Notes as described below. In
connection with the amendment, fees of $3.5 million were recognized as financing and other transaction costs
during the year ended December 31, 2012.
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 December 31, 2013, 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 December 31, 2013, and including the $15.5 million dividend declared in November
2013 and paid on February 1, 2014, we had $202.4 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 December 31, 2013, our total net leverage ratio under the credit agreement was 4.26:1.00, and our interest
coverage ratio was 3.41:1.00.
49
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 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. The proceeds of the sale of the Senior Notes were held in an escrow
account prior to the closing of the SureWest transaction. Upon closing of the SureWest acquisition on July 2, 2012,
Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., 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
Consolidated Communications, Inc.’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 Consolidated Communications, Inc. 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 December 31, 2013, this ratio was 4.20:1.00. 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 $108.5 million have been paid since May 30, 2012, at December 31, 2013 there
was $156.6 million of the $265.1 million of cumulative consolidated cash flow since May 30, 2012 available to pay
dividends.
Bridge Loan Facility
In connection with the acquisition of SureWest, in February 2012 the Company received committed financing for a
total of $350.0 million to fund the cash portion of the anticipated transaction, to refinance SureWest’s debt and to
pay for certain transaction costs. The financing package included a $350.0 million Senior Unsecured Bridge Loan
Facility (“Bridge Facility”). As anticipated, permanent financing for the SureWest acquisition was funded by our
Senior Note offering, as described above. As a result, the $4.2 million commitment fee incurred for the Bridge
Facility was capitalized as deferred debt issuance costs in February 2012 and was amortized over the expected life
of the Bridge Facility, which was four months.
Capital Leases
As of December 31, 2013, we had seven capital leases, all of which expire between 2015 and 2021. As of
December 31, 2013, the present value of the minimum remaining lease commitments was approximately $5.1
million, of which $0.7 million was due and payable within the next twelve months. The leases require total
remaining rental payments of approximately $7.8 million over the remaining term of the leases.
50
In 2013, we acquired equipment of $0.8 million through capital lease agreements, which represents a noncash
investing activity.
Dividends
We paid $62.1 million and $54.1 million in dividend payments to shareholders during 2013 and 2012, respectively.
On February 21, 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.
(In thousands, except for ratio)
Cash and cash equivalents
Working capital (deficit)
Current ratio
December 31,
2013
2012
$
$
5,551
(29,979)
0.75
17,854
(34,888)
0.76
Our most significant use of funds in 2014 is expected to be for: (i) dividend payments of between $62.0 million and
$64.0 million; (ii) interest payments on our indebtedness of between $75.0 million and $78.0 million and principal
payments on debt of $9.1 million; (iii) capital expenditures of between $95.0 million and $105.0 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.
With the acquisition of SureWest, we took on additional debt to fund the transaction. 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
51
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 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 December 31, 2013, we had approximately $2.8 million of these
bonds outstanding.
Contractual Obligations
As of December 31, 2013, our contractual obligations were as follows:
(In thousands)
Long-term debt
Interest on long-term debt (1)
Interest rate swaps (2)
Capital leases
Operating leases
Unconditional purchase obligations:
Unrecorded (3)
Recorded (4)
Pension funding
Less than
1 Year
1 - 3
Years
3 - 5
Years
$
9,100
$
18,200
$
31,200
Thereafter
$
1,164,500
Total
1,223,000
$
71,240
141,319
139,772
121,822
474,153
2,342
1,272
2,133
24,705
27,897
14,621
1,220
2,303
2,275
–
1,921
679
28,669
10,123
–
–
–
–
–
2,362
793
–
–
–
3,562
7,858
5,880
63,497
27,897
14,621
(1)Interest on long-term debt includes amounts due on fixed and variable rate debt. As the rates on our variable
debt are subject to change, the rates in effect at December 31, 2013 were used in determining our future
interest obligations.
(2)Expected settlements estimated using yield curves in effect at December 31, 2013.
(3) Unrecorded purchase obligations include binding commitments for future capital expenditures and service
and maintenance agreements to support various computer hardware and software applications and certain
equipment. If we terminate any of the contracts prior to their expiration date, we would be liable for
minimum commitment payments as defined in by the contractual terms of the contracts.
(4) Recorded obligations include amounts in accounts payable and accrued expenses for external goods and
services received as of December 31, 2013 and expected to be settled in cash.
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 cost to maintain 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.
Net pension and post-retirement costs were $0.7 million, $4.6 million and $4.0 million for the years ended
December 31, 2013, 2012 and 2011, respectively. We contributed $11.5 million, $15.2 million and $9.5 in 2013,
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2012 and 2011, respectively to our pension plans. For our other post-retirement plans, we contributed $2.8 million,
$3.2 million and $3.6 million in 2013, 2012 and 2011, respectively. In 2014, we expect to make contributions
totaling approximately $12.1 million to our pension plans and $2.5 million to our other post-retirement plans. Our
contribution amounts meet the minimum funding requirements as set forth in employee benefit and tax laws. See
Note 9 to the Consolidated Financial Statements 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.
Related Party Transactions
In May 2012, a portion of the Senior Notes was sold to certain accredited investors consisting of certain members of
the Company’s Board of Directors, including the Company’s Chief Executive Officer (collectively “related
parties”). The related parties purchased $10.8 million of the Senior Notes on the same terms available to other
investors, except that the related parties were not entitled to registration rights. During 2013 and 2012, the Company
paid $1.2 million and $0.6 million, respectively, in interest in the aggregate to the related parties for the Senior
Notes.
In December 2010, we entered into new lease agreements with LATEL LLC (“LATEL”) for the occupancy of three
buildings on a triple net lease basis. Each of the three lease agreements have a maturity date of May 31, 2021, and
have been accounted for as capital leases. Each of the three lease agreements have two five-year options to extend
the terms of the lease after the expiration date. Our Board of Directors member, Richard A. Lumpkin, and his
immediate family have a beneficial ownership interest of 70.7% in 2013 and 2012 of LATEL, directly or through
Agracel, Inc. (“Agracel”). Agracel is real estate investment company of which Mr. Lumpkin, together with his
family, have a beneficial interest of 41.3% in 2013 and 2012. Agracel is the sole managing member and 50% owner
of LATEL. In addition, Mr. Lumpkin is a director of Agracel. The three leases require total rental payments to
LATEL of approximately $7.9 million over the term of the leases. The carrying value of the capital leases at
December 31, 2013 and 2012 was approximately $3.6 million and $3.8 million, respectively. In 2013 and 2012, we
recognized $0.5 million in interest expense and $0.4 million in amortization expense, respectively, related to the
capitalized leases.
Regulatory Matters
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 $1.8 million during the 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,
$1.0 million, $1.1 million, $2.4 million and $1.8 million in 2014, 2015, 2016, 2017 and 2018, respectively.
53
In accordance with the provisions of SB 583, as discussed above in the Regulatory Matters Section, our annual $1.4
million Texas HCAF will be eliminated, effective January 1, 2014. In addition, the terms of the settlement
agreement reached with the PUCT in August 2013 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, we have the ability to offset this reduction with increases to residential rates, where market conditions will
allow.
Critical Accounting Estimates
Our significant accounting policies and estimates are discussed in the Notes to our Consolidated Financial
Statements. We prepare our consolidated financial statements in accordance with generally accepted accounting
principles in the United States. The preparation of financial statements requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues and expenses. These estimates and
assumptions are affected by management’s application of our accounting policies. Our judgments are based on
historical experience and 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. However, because future events and the related effects cannot be determined
with certainty, actual results may differ from our estimates and assumptions and such differences could be material.
Management believes that the following accounting estimates are the most critical to understanding and evaluating
our reported financial results.
Indefinite-Lived Intangible Assets
Goodwill and tradenames are intangible assets that are not subject to amortization and are tested for impairment
annually or more frequently when events or changes in circumstances indicate that the asset might be impaired. We
evaluate the carrying value of our indefinite-lived assets, tradenames and goodwill, as of November 30 of each year.
Goodwill
As discussed more fully in Note 1 to the Consolidated Financial Statements, goodwill is not amortized but instead
evaluated annually, or more frequently if an event occurs or circumstances change that would indicate potential
impairment, for impairment using a preliminary qualitative assessment and two-step process, if deemed necessary.
In 2012, we adopted Accounting Standards Update No. 2011-08 – Intangibles-Goodwill and Other (Topic 350)
Testing Goodwill for Impairment, that allows an entity to consider qualitative indicators to determine if the current
two-step test is necessary. Under the provisions of the amended guidance, the step-one test of estimating the fair
value of a reporting unit is not required unless, as a result of the qualitative assessment, it is more likely than not (a
likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying amount. Events and
circumstances integrated into the qualitative assessment process include a combination of macroeconomic
conditions affecting equity and credit markets, significant changes to the cost structure, overall financial
performance and other relevant events affecting the reporting unit. A company is permitted to skip the qualitative
assessment at its election, and proceed to Step 1 of the quantitative test, which we chose to do in 2013.
Functional management within the organization evaluates the operations of our single reporting unit on a
consolidated basis rather than at a geographic level or on any other component basis. In general, product managers
and cost managers are responsible for managing costs and services across territories rather than treating the
territories as separate business units. The operations of our Illinois, Texas, Pennsylvania, California, Kansas and
Missouri properties share network operations monitoring call routing and research and development costs. The
operations of our Illinois, Texas and Pennsylvania properties share remittance, customer service and billing
systems. We are in the process of integrating the California, Kansas and Missouri cash remittance, customer service
and billing system into the systems and process used by the Illinois, Texas and Pennsylvania properties, which is
expected to be completed during the third quarter of 2014. All of the properties are managed at a functional level.
In addition, the Pennsylvania territories receive their video programming from a video head-end located in the
Illinois territory, and all of the networks provide redundancy. As a result, we evaluate the operations for all our
service territories as a single reporting unit.
At our November 30, 2013 assessment date, the carrying value of goodwill was $603.4 million.
The estimated fair value of our single reporting unit is determined using a combination of market-based approaches
and a discounted cash flow (“DCF”) model. The assumptions used in the estimate of fair value are based upon a
combination of historical results and trends, new industry developments, future cash flow projections, as well as
relevant comparable company earnings multiples for the market-based approaches. Such assumptions are subject to
54
change as a result of changing economic and competitive conditions. The market-based approaches used in the
valuation effort includes the publicly-traded market capitalization, guideline public companies, and guideline
transaction methods. We use a weighting of the results derived from the valuation approaches to estimate the fair
value of the single reporting unit. Key assumptions used in the DCF model include the following:
• cash flow assumptions regarding investment in network facilities, distribution channels and customer
base (the assumptions underlying these inputs are based upon a combination of historical results and
trends, new industry developments and the Company’s business plans);
• 7.1% weighted average cost of capital based on comparable public companies and adjusting for risks
unique to our business and the cash flow assumptions utilized in the analysis; and
• 1.0% terminal growth rate.
At November 30, 2013, the fair value of the single reporting unit’s total equity was estimated at approximately
$976.0 million on a control basis, and the associated carrying value of its equity was $130.5 million. For all
valuation methods used, the fair value of equity exceeds its carrying value. The use of different estimates or
assumptions in the DCF model could result in a different fair value conclusion. As a sensitivity calculation, if the
discount rate in our DCF model was increased 1.0 percentage point from 7.1% to 8.1%, the fair value would
decrease from approximately $976.0 million to approximately $883.0 million, which would not result in an
impairment of goodwill, assuming there are no changes to the market-based approaches used in the valuation.
Assuming the discount rate in our DCF model was increased 2.0 percentage points, the terminal growth rate
decreased by 0.05 percentage point, and each of the market-based valuation approaches decreased in value by 5%,
the fair value of approximately $976.0 million would decrease by approximately $213.4 million to approximately
$762.6 million, which would not result in an impairment of goodwill. As discussed above, the other market-based
approaches are subject to change as a result of changing economic and competitive conditions. Negative changes
relating to the Company’s operations could result in potential impairment of goodwill. Changes in the overall
weighting of the DCF model and the market-based approach valuation models may also impact the resulting fair
value and could result in potential impairment of goodwill.
Tradenames
As discussed more fully in Note 1 to the Consolidated Financial Statements, tradenames are not amortized but
instead evaluated annually, or more frequently if an event occurs or circumstances change that would indicate
potential impairment, for impairment using a preliminary qualitative assessment and two-step process, if deemed
necessary. We estimate the fair value of our tradenames using DCFs based on a relief from royalty method. If the
fair value of our tradenames was less than the carrying amount, we would recognize an impairment charge for the
difference between the estimated fair value and the carrying value of the tradename. In accordance with Accounting
Codification Standard 350 Intangibles – Goodwill and Other (“ASC 350”) separately recorded indefinite-lived
intangible assets, whether acquired or internally developed, shall be combined into a single unit of accounting for
purposes of testing impairment if they are operated as a single asset and, as such, are essentially inseparable from
one another. An indefinite-lived intangible asset may need to be removed from the accounting unit if it is disposed
of, the accounting unit is reconsidered or one or more of the separate indefinite-lived intangible asset(s) within the
accounting unit is now considered finite-lived rather than indefinite-lived. We perform our impairment testing of
our tradenames as single units of accounting based on their use in our business.
The carrying value of our tradenames, excluding any amounts assigned to the SureWest tradename, was $10.6
million at December 31, 2013 and 2012. For the years ended December 31, 2013 and 2012, we completed our
annual impairment test using a DCF methodology based on a relief from royalty method and determined that there
was no impairment of our tradename. During the year ending December 31, 2013, a formal one-year plan to
transition from the SureWest tradename to the CONSOLIDATED tradename was adopted. We began to amortize
the $0.9 million assigned to the SureWest tradename over its estimated one-year useful life. During 2013, we
recognized $0.5 million in amortization expense associated with the SureWest tradename. At December 31, 2013,
the unamortized amount related to the SureWest tradename was $0.4 million.
Revenue recognition
We recognize certain revenues pursuant to various cost recovery programs from federal and state USF and from
revenue sharing arrangements with other local exchange carriers administered by the National Exchange Carrier
Association. Revenues are calculated based on our estimates and assumptions regarding various financial data
including operating expenses, taxes and investment in property, plant and equipment. Non-financial data estimates
55
are also utilized including projected demand usage and detailed network information. We must also make estimates
of the jurisdictional separation of this data to assign current financial and operating data to the interstate or intrastate
jurisdiction. These estimates are finalized in future periods as actual data becomes available to complete the
separation studies. We have historically collected revenues recognized through these programs; however,
adjustments to estimated revenues in future periods are possible. These adjustments could be necessitated by
adverse regulatory developments with respect to these subsidies and revenue sharing arrangements, changes in
allowable rates of return and the determination of recoverable costs, or decreases in the availability of funds in the
programs due to increased participation by other carriers.
Derivatives
We use derivative financial instruments primarily to manage the risks associated with fluctuations in interest rates
and to convert a portion of future cash flows associated with the interest to be paid on our credit facility from a
floating rate to a fixed rate. All derivative financial statements are recognized in the consolidated balance sheet at
fair value. For the derivative financial instruments designated as a cash flow hedge, the effective portion of the
changes in the fair value of the derivative contracts are deferred in other comprehensive income, net of applicable
income taxes, and recognized as a component of interest expense in the period in which the hedged item affects
earnings. Any ineffectiveness is recognized immediately in earnings. For derivative financial instruments not
designated as a cash flow hedge or have been determined to no longer be effective at offsetting changes in the price
of the hedged item and have been de-designated, then the changes in the market value of these instruments are
recorded in the statement of operations as a component of interest expense.
Our interest rate swaps are measured using valuation models which rely on quoted market prices and observable
market data of similar instruments. The valuation models require estimates of future interest rates and judgments
about the future credit worthiness of the Company and each counterparty over the terms of the contracts.
Income taxes
Our current and deferred income taxes and associated valuation allowances are impacted by events and transactions
arising in the normal course of business as well as in connection with the adoption of new accounting standards,
acquisitions of businesses and non-recurring items. Assessment of the appropriate amount and classification of
income taxes is dependent on several factors, including estimates of the timing and realization of deferred income
tax assets and the timing of income tax payments. Actual amounts may materially differ from these estimates as a
result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances. We
account for tax benefits taken or expected to be taken in our tax returns in accordance with the accounting guidance
applicable for uncertainty in income taxes, which requires the use of a two-step approach for recognizing and
measuring tax benefits taken or expected to be taken in a tax return.
Pension and postretirement benefits
The amounts recognized in our financial statements for pension and postretirement benefits are determined on an
actuarial basis utilizing several critical assumptions.
We make significant assumptions in regards to our pension and postretirement plans, including the expected long-
term rate of return on plan assets and the discount rate used to value the periodic pension expense and liabilities.
Our pension investment strategy is to maximize long-term returns on invested plan assets while minimizing the risk
of volatility. Accordingly, we target our allocation percentage at 50% - 60% in equity funds, with the remainder in
fixed income and cash equivalents. Our assumed rate considers this investment mix as well as past trends. We used
a weighted-average expected long-term rate of return of 8.0% and 7.7% in 2013 and 2012, respectively. As of
January 1, 2014, we estimate the long-term rate of return of pension plan assets will be 8.0%.
In determining the appropriate discount rate, we consider the current yields on high-quality corporate fixed-income
investments with maturities that correspond to the expected duration of our pension and postretirement benefit plan
obligations. For our 2013 and 2012 projected benefit obligations, we used a weighted-average discount rate of
4.97% and 4.20%, respectively, for our pension plans and 4.40% and 3.90%, respectively, for our other
postretirement plans. A one percentage-point increase or decrease in the discount rate would have the following
effects on net periodic benefit cost:
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
$ (691)
$ 735
56
Recent Accounting Pronouncements
For information regarding the impact of certain recent accounting pronouncements, see Note 1 “Business
Description & Summary of Significant Accounting Policies” to the Consolidated Financial Statements, included in
this report in Item 8, Part II “Financial Statements and Supplementary Data”.
Item 7A. 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 December 31, 2013, the majority of our variable rate debt was subject to a 1.00% LIBOR floor thereby reducing
the impact of fluctuations in interest rates. As of December 31, 2013, LIBOR was well below the 1.00% floor.
Based on our variable rate debt outstanding at December 31, 2013 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 December 31, 2013, the fair value of our interest rate swap agreements amounted to a net liability of $2.6
million. Pretax deferred losses related to our interest rate swap agreements included in accumulated other
comprehensive loss (“AOCI”) was $2.6 million at December 31, 2013.
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. 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 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 years ended December 31, 2013 and 2012, a
gain of $2.2 million and $2.8 million, respectively, was recognized as a reduction to interest expense for the change
in fair value of the de-designated swaps.
Item 8. Financial Statements and Supplementary Data
For information pertaining to our Financial Statements and Supplementary Data, refer to pages F-1 to F-61 of this
report, which are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of disclosure 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-K, management evaluated, under
57
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 December 31, 2013. 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 December 31, 2013.
Inherent Limitation of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance
that the objectives of the internal control system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company
have been detected.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
such term is defined in Exchange Act Rule 13a–15(f). Management, with the participation of our Chief Executive
Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of
December 31, 2013. In making this assessment, management used the framework set forth in Internal Control-
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based upon this assessment, our management concluded that, as of December 31, 2013, our internal control over
financial reporting was effective to provide reasonable assurance that the desired control objectives were achieved.
The effectiveness of internal control on financial reporting has been audited by Ernst & Young LLP, independent
registered public accounting firm, as stated in their report which is included elsewhere in this Annual Report on
Form 10-K.
Changes 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 December 31, 2013 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Consolidated Communications Holdings, Inc.
We have audited Consolidated Communications Holdings, Inc. and subsidiaries’ (the Company’s) internal control
over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework)
(the COSO criteria). The Company’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Consolidated Communications Holdings Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Consolidated Communications Holdings, Inc. and subsidiaries as of
December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in
Shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013, and our
report dated March 5, 2014, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 5, 2014
59
Item 9B. Other Information
None.
60
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Our Board of Directors adopted a Code of Business Conduct and Ethics (“the code”) that applies to all of our
employees, officers, and directors, including its principal executive officer, principal financial officer, and principal
accounting officer. A copy of the code is posted on our investor relations website at www.Consolidated.com.
Information contained on the website in not incorporated by reference in, or considered to be a part of, this
document.
Additional information required by this Item is incorporated herein by reference to our proxy statement for the
annual meeting of our shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year-end
of December 31, 2013.
Item 11. Executive Compensation
Incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed
pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2013.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed
pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2013.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed
pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2013.
Item 14. Principal Accountant Fees and Services
Incorporated herein by reference from the proxy statement for the annual meeting of our shareholders to be filed
pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2013.
61
Item 15. Exhibits and Financial Statement Schedules.
(a)
(1) All Financial Statements
PART IV
The following consolidating financial statements and independent auditors’ reports are filed as part of this
report on Form 10-K in Item 8–“Financial Statements and Supplementary Data”:
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income for each of the three years in the period ended December 31, 2013
Consolidated Statements of Comprehensive Income for each of the three years in the period ended
December 31, 2013
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2013
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2013
Notes to Consolidated Financial Statements
Independent Auditors’ Report
Pennsylvania RSA No. 6 (II) Limited Partnership Balance Sheets - As of December 31, 2013 and
2012
Pennsylvania RSA No. 6 (II) Limited Partnership Statements of Operations – Years Ended December
31, 2013, 2012 and 2011
Pennsylvania RSA No. 6 (II) Limited Partnership Statements of Changes in Partners’ Capital – Years
Ended December 31, 2013, 2012 and 2011
Pennsylvania RSA No. 6 (II) Limited Partnership Statements of Cash Flows – Years Ended December
31, 2013, 2012 and 2011
Pennsylvania RSA No. 6 (II) Limited Partnership - Notes to Financial Statements
(2) Financial Statement Schedules
Financial statement schedules have been omitted because they are not required, not applicable or the
information is otherwise included in the notes to the consolidated financial statements.
(3) Exhibits
The exhibits listed below on the accompanying Index to Exhibits are filed or furnished as part of this
report.
Exhibit
No.
3.1
3.2
3.3
4.1
Description
Form of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to
Amendment No. 7 to Form S-1 dated July 19, 2005, file no. 333-121086)
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Consolidated
Communications Holdings, Inc., as filed with the Secretary of State of the State of Delaware on May 3,
2011 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated May 4, 2011)
Form of Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to Current
Report on Form 8-K dated November 4, 2013)
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 7 to
Form S-1 dated July 19, 2005, file no. 333-121086)
62
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.1
10.2
10.3
10.4
10.5
Indenture, dated as of May 30, 2012, between Consolidated Communications, Inc. (“CCI”) (as successor
to Consolidated Communications Finance Co. (“CCFC”)) and Wells Fargo Bank, National Association,
as trustee (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated May 30,
2012)
First Supplemental Indenture, dated as of July 2, 2012, among the Company, CCI, Consolidated
Communications Enterprise Services, Inc. (“CCES”), Consolidated Communications Services Company
(“CCSC”), Consolidated Communications of Fort Bend Company (“CCFBC”), Consolidated
Communications of Texas Company (“CCTC”), and Consolidated Communications of Pennsylvania
Company, LLC (“CCPC”), and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 4.1 to our Current Report on Form 8-K dated June 29, 2012)
Second Supplemental Indenture, dated as of August 3, 2012, among SureWest Communications,
SureWest Long Distance, SureWest Communications, Inc., SureWest Broadband, SureWest TeleVideo,
SureWest Kansas, Inc., SureWest Telephone, SureWest Kansas Holdings, Inc., SureWest Kansas
Connections, LLC, SureWest Kansas Licenses, LLC, SureWest Kansas Operations, LLC, SureWest
Kansas Purchasing, LLC and SureWest Fiber Ventures LLC (collectively, the “SureWest Subsidiaries”),
CCI, and Wells Fargo Bank, National Association (incorporated by reference to our Current Report on
Form 8-K dated August 3, 2012)
Form of 10.875% Senior Note due 2020 (incorporated by reference to Exhibit A to Exhibit 4.1 to our
Current Report on Form 8-K dated June 29, 2012)
Registration Rights Agreement, dated as of May 30, 2012, between CCFC and Morgan Stanley & Co.
LLC (incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K dated May 30, 2012)
Joinder to Registration Rights Agreement, dated as of July 2, 2012, by the Company, CCI, CCES, CCSC,
CCFBC, CCTC, and CCPC (incorporated by reference to our Current Report on Form 8-K dated June 29,
2012)
Joinder to Registration Rights Agreement, dated as of August 3, 2012, by each of the SureWest
Subsidiaries (incorporated by reference to our Current Report on Form 8-K dated August 3, 2012)
Joinder Agreement, dated as of August 3, 2012, among each of the SureWest Subsidiaries, the Company,
CCI, and Wells Fargo Bank, National Association, a national banking association, as Administrative
Agent for the Lenders under the Credit Agreement (incorporated by reference to our Current Report on
Form 8-K dated August 3, 2012)
Second Amended and Restated Credit Agreement dated December 23, 2013 by and among the Company,
the lenders named therein, and Wells Fargo Bank, National Association, as administrative agent
(incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated December 23, 2013)
Form of Collateral Agreement, dated December 31, 2007, by and among the Company, CCI,
Consolidated Communications Acquisition Texas, Inc., Fort Pitt Acquisition Sub Inc., certain
subsidiaries of the Company identified on the signature pages thereto, in favor of Wells Fargo Bank,
National Association (successor by merger to Wachovia Bank, National Association), as Administrative
Agent (incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K for the period
ended December 31, 2007, file no. 000-51446)
Form of Guaranty Agreement, dated December 31, 2007, made by the Company and certain subsidiaries
of the Company identified on the signature pages thereto, in favor of Wells Fargo Bank, National
Association (successor by merger to Wachovia Bank, National Association), as Administrative Agent
(incorporated by reference to Exhibit 10.3 to our Annual Report on Form 10-K for the period ended
December 31, 2007, file no. 000-51446)
Lease Agreement, dated December 22, 2010, between LATEL, LLC and Consolidated Communications
Services Company (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated
December 22, 2010)
Lease Agreement, dated December 22, 2010, between LATEL, LLC and Illinois Consolidated
Telephone Company (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K
dated December 22, 2010)
63
10.6
10.7
10.8**
10.9**
Lease Agreement, dated December 22, 2010, between LATEL, LLC and Illinois Consolidated
Telephone Company (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K
dated December 22, 2010)
Amended and Restated Consolidated Communications Holdings, Inc. Restricted Share Plan
(incorporated by reference to Exhibit 10.11 to Amendment No. 7 to Form S-1 dated July 19, 2005, file
no. 333-121086)
Amended and Restated Consolidated Communications Holdings, Inc. 2005 Long-Term Incentive Plan
(As Amended and Restated Effective May 4, 2010) (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated May 10, 2010)
Form of Employment Security Agreement with certain of the Company’s employees (incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30,
2012)
10.10** Form of Employment Security Agreement with Robert J. Currey (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K dated December 4, 2009)
10.11** Form of Employment Security Agreement with certain of the Company’s other executive officers
(incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated December 4, 2009)
10.12** Form of Employment Security Agreement with the Company’s and its subsidiaries vice president and
director level employees (incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-
K for the period ended December 31, 2007, file no. 000-51446)
10.13** Executive Long-Term Incentive Program, as revised March 12, 2007 (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K dated March 12, 2007, file no. 000-51446)
10.14** Form of 2005 Long-Term Incentive Plan Performance Stock Grant Certificate (incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K dated March 12, 2007, file no. 000-51446)
10.15** Form of 2005 Long-Term Incentive Plan Restricted Stock Grant Certificate (incorporated by reference
to Exhibit 10.3 to our Current Report on Form 8-K dated March 12, 2007, file no. 000-51446)
10.16** Form of 2005 Long-Term Incentive Plan Restricted Stock Grant Certificate for Directors (incorporated
by reference to Exhibit 10.4 to our Current Report on Form 8-K dated March 12, 2007, file no. 000-
51446)
10.17** Description of the Consolidated Communications Holdings, Inc. Bonus Plan (incorporated by reference
to Exhibit 10.5 to our Current Report on Form 8-K dated March 12, 2007, file no. 000-51446)
10.18
Form of Indemnification Agreement with Directors and Executive Officers (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K dated May 7, 2013)
21.1
23.1
23.2
31.1
31.2
32.1
101
List of subsidiaries of the Registrant
Consent of Ernst & Young LLP
Consent of Deloitte & Touche LLP
Certificate of Chief Executive Officer of Consolidated Communications Holdings, Inc. pursuant to Rule
13(a)-14(a) under the Securities Exchange Act of 1934
Certificate of Chief Financial Officer of Consolidated Communications Holdings, Inc. pursuant to Rule
13(a)-14(a) under the Securities Exchange Act of 1934
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.
The following financial information from Consolidated Communications Holdings, Inc. Annual Report
on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of
Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Changes in
Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated
Financial Statements.
**Compensatory plan or arrangement.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Mattoon, Illinois on
March 5, 2014.
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
By: /s/ ROBERT J. CURREY
Robert J. Currey
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
By: /s/ ROBERT J. CURREY
Robert J. Currey
Chief Executive Officer,
Chairman of the Board
(Principal Executive Officer)
March 5, 2014
By: /s/ C. ROBERT UDELL
C. Robert Udell
President and
Chief Operating Officer, Director
March 5, 2014
By: /s/ STEVEN L. CHILDERS
Steven L. Childers
By: /s/ RICHARD A. LUMPKIN
Richard A. Lumpkin
By: /s/ ROGER H. MOORE
Roger H. Moore
By: /s/ MARIBETH S. RAHE
Maribeth S. Rahe
By: /s/ TIMOTHY D. TARON
Timothy D. Taron
By: /s/ THOMAS A. GERKE
Thomas A. Gerke
March 5, 2014
March 5, 2014
March 5, 2014
March 5, 2014
March 5, 2014
March 5, 2014
Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Director
Director
Director
Director
Director
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Consolidated Communications Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Consolidated Communications Holdings, Inc. and
subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income,
comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Consolidated Communications Holdings, Inc. at December 31, 2013 and 2012, and
the consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Consolidated Communications Holdings, Inc.’s internal control over financial reporting as of December 31,
2013, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (1992 framework), and our report dated March 5, 2014,
expressed an unqualified opinion thereon.
St. Louis, Missouri
March 5, 2014
/s/ Ernst & Young LLP
F-1
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands except per share amounts)
Year Ended December 31,
2012
2011
2013
Net revenues
$
601,577
$
477,877
$
349,003
Operating expense:
Cost of services and products (exclusive of depreciation
and amortization)
Selling, general and administrative expenses
Financing and other transaction costs
Impairment of intangible assets
Depreciation and amortization
Income from operations
Other income (expense):
Interest expense, net of interest income
Loss on extinguishment of debt
Investment income
Other, net
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Discontinued operations, net of tax:
Income (loss) from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Total discontinued operations
Net income
Less: net income attributable to noncontrolling interest
Net income attributable to common shareholders
Net income per common share - basic and diluted
Income from continuing operations
Discontinued operations, net of tax
Net income per basic and diluted common shares
attributable to common shareholders
Dividends declared per common share
222,452
135,414
776
-
139,274
103,661
(85,767)
(7,657)
37,695
(456)
47,476
17,512
29,964
(156)
1,333
1,177
31,141
330
30,811
0.73
0.03
0.76
1.55
$
$
$
$
175,929
108,163
20,800
1,236
120,332
51,417
(72,604)
(4,455)
30,667
601
5,626
661
4,965
1,206
-
1,206
6,171
531
5,640
0.12
0.03
0.15
1.55
$
$
$
$
121,711
77,724
2,649
-
88,090
58,829
(49,391)
-
27,843
148
37,429
13,141
24,288
2,694
-
2,694
26,982
572
26,410
0.79
0.09
0.88
1.55
$
$
$
$
See accompanying notes.
F-2
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
Net income
Pension and post-retirement obligations:
Year Ended December 31,
2012
2013
2011
$
31,141
$
6,171
$
26,982
Change in net actuarial loss and prior service credit, net of tax expense (benefit)
of $24,604, $(8,932) and $(8,516) in 2013, 2012 and 2011, respectively
39,381
(14,205)
(14,095)
Amortization of actuarial losses and prior service credit to earnings, net of tax
expense of $1,172, $771 and $83 in 2013, 2012 and 2011, respectively
1,843
1,276
136
Derivative instruments designated as cash flow hedges:
Change in fair value of derivatives, net of tax benefit of $233, $2,074
and $2,807 in 2013, 2012 and 2011, respectively
(381)
(3,557)
(4,810)
Reclassification of realized loss to earnings, net of tax expense of $1,934,
$5,129 and $7,242 in 2013, 2012 and 2011, respectively
Comprehensive income (loss)
Less: comprehensive income attributable to
noncontrolling interest
3,941
75,925
8,535
(1,780)
12,407
20,620
330
531
572
Total comprehensive income (loss) attributable to common shareholders
$
75,595
$
(2,311)
$
20,048
See accompanying notes.
F-3
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
December 31,
2013
2012
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
Income tax receivable
Deferred income taxes
Prepaid expenses and other current assets
Assets of discontinued operations
Total current assets
Property, plant and equipment, net
Investments
Goodwill
Other intangible assets
Deferred debt issuance costs, net and other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Advance billings and customer deposits
Dividends payable
Accrued compensation
Accrued expense
Current portion of long-term debt and capital lease obligations
Current portion of derivative liability
Liabilities of discontinued operations
Total current liabilities
Long-term debt and capital lease obligations
Deferred income taxes
Pension and other postretirement obligations
Other long-term liabilities
Total liabilities
Commitments and contingencies
Shareholders' equity:
Common stock, par value $0.01 per share; 100,000,000 shares
authorized, 40,065,246 and 39,877,998 shares outstanding as of
December 31, 2013 and 2012, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Noncontrolling interest
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes.
F-4
$
$
$
$
5,551
52,033
9,796
7,960
12,380
-
87,720
885,362
113,099
603,446
40,084
17,667
1,747,378
4,885
25,934
15,520
22,252
38,697
9,751
660
-
117,699
1,212,134
179,859
75,754
9,593
1,595,039
401
148,433
–
(1,000)
4,505
152,339
1,747,378
$
$
$
$
17,854
57,957
12,020
9,000
11,269
1,189
109,289
907,672
109,750
603,446
49,530
13,800
1,793,487
14,954
27,654
15,463
21,912
47,225
9,596
3,164
4,209
144,177
1,208,248
137,501
156,710
10,746
1,657,382
399
177,315
–
(45,784)
4,175
136,105
1,793,487
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(amounts in thousands)
Balance at December 31, 2010
Cash dividends on common stock
Shares issued under employee plan,
net of forfeitures
Non-cash, stock-based compensation
Purchase and retirement of common stock
Tax on restricted stock vesting
Other comprehensive income (loss)
Net income
Balance at December 31, 2011
Cash dividends on common stock
Shares issued upon acquisition of SureWest
Shares issued under employee plan,
net of forfeitures
Non-cash, stock-based compensation
Purchase and retirement of common stock
Tax on restricted stock vesting
Distributions to non-controlling interests
Other comprehensive income (loss)
Other
Net income
Balance at December 31, 2012
Cash dividends on common stock
Shares issued under employee plan,
net of forfeitures
Non-cash, stock-based compensation
Purchase and retirement of common stock
Tax on restricted stock vesting
Other comprehensive income (loss)
Net income
Balance at December 31, 2013
Common Stock
Share s
Amount
Additional
Paid-in
C apital
Re taine d
Earnings
Accumulate d
O the r
Compre he nsive
Loss, ne t
Non-
controlling
Inte re st
Total
29,763
–
$
298
–
$
98,126
(19,938)
$
-
(26,410)
$
(31,471)
–
$
4,922
–
$
71,875
(46,348)
145
–
(38)
–
–
–
29,870
–
9,966
79
–
(37)
–
–
–
–
–
39,878
–
234
–
(46)
–
–
–
40,066
1
–
–
–
–
–
299
–
100
$
–
–
–
–
–
–
–
–
399
–
$
2
–
–
–
–
–
401
$
–
2,132
(726)
258
–
–
79,852
(52,352)
148,293
$
–
2,348
(559)
47
–
–
(314)
–
177,315
(31,310)
$
–
3,028
(889)
289
–
–
148,433
$
–
–
–
–
–
26,410
-
$
(5,640)
–
–
–
–
–
–
–
–
5,640
-
$
(30,811)
–
–
–
–
–
30,811
$
-
–
–
–
–
(6,362)
–
(37,833)
–
–
$
–
–
–
–
–
(7,951)
–
–
(45,784)
–
$
–
–
–
–
44,784
–
(1,000)
$
–
–
–
–
–
572
5,494
–
–
$
–
–
–
–
(1,850)
–
–
531
4,175
–
$
–
–
–
–
–
330
4,505
$
1
2,132
(726)
258
(6,362)
26,982
47,812
(57,992)
148,393
$
-
2,348
(559)
47
(1,850)
(7,951)
(314)
6,171
136,105
(62,121)
$
2
3,028
(889)
289
44,784
31,141
152,339
$
See accompanying notes.
F-5
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Cash flows from operating activities:
Net income
Income from discontinued operations, net of tax
Net income from continuing operations
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Impairment of intangible assets
Deferred income taxes
Cash distributions from wireless partnerships
in excess of/(less than) current earnings
Stock-based compensation expense
Amortization of deferred financing costs
Loss on extinguishment of debt
Other, net
Changes in operating assets and liabilities:
Accounts receivable, net
Income tax receivable
Other assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by continuing operations
Net cash provided by (used in) discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Business acquisition, net of cash acquired
Purchases of property, plant and equipment, net
Purchase of investments
Proceeds from sale of assets
Other
Net cash used in continuing operations
Net cash provided by (used in) discontinued operations
Net cash used in investing activities
Cash flows from financing activities:
Proceeds on bond offering
Proceeds from issuance of long-term debt
Payment of capital lease obligation
Payment on long-term debt
Payment of financing costs
Distributions to noncontrolling interest
Repurchase and retirement of common stock
Dividends on common stock
Net cash provided by (used in) financing activities
(Decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Year Ended December 31,
2012
2011
2013
$
31,141
(1,177)
29,964
$
6,171
(1,206)
4,965
$
26,982
(2,694)
24,288
139,274
-
16,045
(2,949)
3,028
2,209
7,657
1,788
5,937
2,224
(1,111)
(10,069)
(25,467)
168,530
(4,174)
164,356
-
(107,363)
(403)
330
-
(107,436)
2,331
(105,105)
-
989,450
(516)
(990,961)
(6,576)
-
(887)
(62,064)
(71,554)
(12,303)
17,854
120,332
1,236
(757)
(1,309)
2,348
6,360
4,455
(332)
(1,797)
(2,846)
(803)
4,496
(16,616)
119,732
3,483
123,215
(385,346)
(76,998)
(6,728)
924
(314)
(468,462)
(97)
(468,559)
298,035
544,850
(228)
(510,038)
(18,616)
(1,850)
(559)
(54,100)
257,494
(87,850)
105,704
88,090
-
8,546
945
2,132
1,411
-
12
6,037
(2,498)
421
2,175
(7,257)
124,302
5,202
129,504
-
(41,794)
-
840
272
(40,682)
(119)
(40,801)
-
-
(149)
-
(3,471)
-
(726)
(46,307)
(50,653)
38,050
67,654
Cash and cash equivalents at end of period
$
5,551
$
17,854
$
105,704
See accompanying notes.
F-6
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
1. BUSINESS DESCRIPTION & 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 December 31, 2013, we had approximately 257
thousand access lines, 123 thousand voice connections, 255 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.
Use of Estimates
Preparation of the financial statements in conformity with accounting principles generally accepted in the United
States and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results may differ materially from those estimates. Our critical accounting estimates include (i) impairment
evaluations associated with indefinite-lived intangible assets (Note 1), (ii) revenue recognition (Note 1),
(iii) derivatives (Notes 1 and 7), (iv) the determination of deferred tax asset and liability balances (Notes 1 and 10)
and (v) pension plan and other post-retirement costs and obligations (Notes 1 and 9). Events subsequent to the
balance sheet date have been evaluated for inclusion in the accompanying consolidated financial statements through
the date of issuance.
Principles of Consolidation
Our consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries and
subsidiaries in which we have a controlling financial interest. All significant intercompany transactions have been
eliminated.
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.
F-7
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
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. During 2012, the prison services contract comprised 5% of consolidated operating revenues and
approximately 2% of consolidated operating income, excluding financing and other transaction fees.
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 consolidated financial statements for all periods presented. For a more complete
discussion of the transaction, refer to Note 3.
SureWest Merger
We completed the acquisition of SureWest Communications on July 2, 2012. SureWest Communications’ results of
operations are included within our results following the acquisition date. For a more complete discussion of the
transaction, refer to Note 2.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Our cash equivalents consist primarily of money market funds. The carrying amounts of our cash equivalents
approximate their fair value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due to the Company from normal activities. We maintain an
allowance for doubtful accounts for estimated losses, which result from the inability of our customers to make
required payments. Such allowance is based on the likelihood of recoverability of accounts receivable based on past
experience and management’s best estimates of current bad debt exposures. We perform ongoing credit evaluations
of our customers’ financial condition and management believes that adequate allowances for doubtful accounts have
been provided. Accounts are determined to be past due if customer payments have not been received in accordance
with the payment terms. Uncollectible accounts are charged against the allowance for doubtful accounts and
removed from the accounts receivable balances when internal collection efforts have been unsuccessful in collecting
the amount due. The following table summarizes the activity in our accounts receivable allowance account for the
years ended December 31, 2013, 2012 and 2011:
(In thousands)
Balance at beginning of year
Provision charged to expense
Write-offs, less recoveries
Balance at end of year
Year Ended December 31,
2012
2011
2013
$
$
$
4,025
515
(2,942)
1,598
2,547
5,615
(4,137)
4,025
$
$
$
2,694
4,104
(4,251)
2,547
Investments
Our investments are primarily accounted for under either the equity or cost method. If we have the ability to
exercise significant influence over the operations and financial policies of an affiliated company, the investment in
the affiliated company is accounted for using the equity method. If we do not have control and also cannot exercise
significant influence, the investment in the affiliated company is accounted for using the cost method.
We review our investment portfolio periodically to determine whether there are identified events or circumstances
that would indicate there is a decline in the fair value that is considered to be other than temporary. If we believe the
decline is other than temporary, we evaluate the financial performance of the business and compare the carrying
F-8
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
value of the investment to quoted market prices (if available) or the fair value of similar investments. If an
investment is deemed to have experienced an impairment that is considered other-than temporary, the carrying
amount of the investment is reduced to its quoted or estimated fair value, as applicable, and an impairment loss is
recognized in other income (expense).
Fair Value of Financial Instruments
We account for certain assets and liabilities at fair value. Fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. A financial asset or liability’s classification within a three-
tiered value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The hierarchy prioritizes the inputs to valuation techniques into three broad levels in order to maximize the use of
observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are as follows:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level 2 – Inputs that reflect quoted prices in active markets for similar assets or liabilities, quoted prices for
identical or similar assets or liabilities in inactive markets and inputs other than quoted prices that
are directly or indirectly observable in the marketplace.
Level 3 – Unobservable inputs which are supported by little or no market activity.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We capitalize additions and substantial improvements and
expense repairs and maintenance costs as incurred.
We capitalize the cost of internal-use network and non-network software which has a useful life in excess of one
year. Subsequent additions, modifications or upgrades to internal-use network and non-network software are
capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software
maintenance and training costs are expensed in the period in which they are incurred. Also, we capitalize interest
associated with the development of internal-use network and non-network software.
Property, plant and equipment consisted of the following as of December 31, 2013 and 2012:
December 31,
2013
December 31,
2012
Estimated
Useful Lives
$
$
18-40 years
3-50 years
3-15 years
3-11 years
(In thousands)
Land and buildings
Network and outside plant facilities
Furniture, fixtures and equipment
Assets under capital lease
Total plant in service
Less: accumulated depreciation and amortization
Plant in service
Construction in progress
Construction inventory
Totals
98,663
1,543,190
99,578
11,169
1,752,600
(899,926)
852,674
23,586
9,102
885,362
94,929
1,462,875
95,671
10,375
1,663,850
(779,461)
884,389
12,899
10,384
907,672
$
$
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.
We record depreciation using the straight line method over estimated useful lives using either the group or unit
method. The useful lives are estimated at the time the assets are acquired and are based on historical experience with
similar assets, anticipated technological changes and the expected impact of our strategic operating plan on our
network infrastructure. The group method is used for depreciable assets dedicated to providing regulated
telecommunication services, including the majority of the network and outside plant facilities. A depreciation rate
for each asset group is developed based on the average useful life of the group. The group method requires periodic
revision of depreciation rates. When an individual asset is sold or retired, the difference between the proceeds, if
F-9
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
any, and the cost of the asset is charged or credited to accumulated depreciation, without recognition of a gain or
loss.
The unit method is primarily used for buildings, furniture, fixtures and other support assets. Each asset is
depreciated on the straight-line basis over its estimated useful life. When an individual asset is sold or retired, the
cost basis of the asset and related accumulated depreciation are removed from the accounts and any associated gain
or loss is recognized.
Depreciation and amortization expense was $129.9 million, $98.3 million and $66.3 million in 2013, 2012 and 2011,
respectively. Amortization of assets under capital leases is included in depreciation and amortization expense.
We evaluate the recoverability of our property, plant and equipment whenever events or substantive changes in
circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is
measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows
expected to be generated by the asset group. If the total of the expected future undiscounted cash flows were less
than the carrying amount of the asset group, we would recognize an impairment charge for the difference between
the estimated fair value and the carrying value of the asset group.
Intangible Assets
Indefinite-Lived Intangibles
Goodwill and tradenames are evaluated for impairment annually or more frequently when events or changes in
circumstances indicate that the asset might be impaired. We evaluate the carrying value of our indefinite-lived
assets, tradenames and goodwill, as of November 30 of each year. As noted above, during the quarter ended June
30, 2013, we became a single reporting segment. As such we now evaluate our intangibles based on the single
reporting segment.
Tradenames
Our most valuable tradename is the federally registered mark CONSOLIDATED, a design of interlocking circles,
which is used in association with our telephone communication services. The Company’s corporate branding
strategy leverages a CONSOLIDATED naming structure. With the acquisition of SureWest on July 2, 2012, we
also own the tradenames associated with SureWest. All of the Company’s business units and several of our products
and services incorporate the CONSOLIDATED name, except for the SureWest business units. We do not amortize
our tradenames, as we have determined that they have an indefinite life. If facts and circumstances change relating
to a tradenames continued use in the branding of our products and services, it may be treated as a finite-lived asset
and begin to be amortized over its estimated remaining life. We estimate the fair value of our tradenames using
discounted cash flows (“DCF”) based on a relief from royalty method. If the fair value of our tradenames was less
than the carrying amount, we would recognize an impairment charge for the difference between the estimated fair
value and the carrying value of the assets. We perform our impairment testing of our tradenames as single units of
accounting based on their use in our single reporting unit. During the year ending December 31, 2013, a formal one-
year plan to transition from the SureWest tradename to the CONSOLIDATED tradename was adopted. We began to
amortize the $0.9 million assigned to the SureWest tradename over its estimated one-year useful life. During 2013,
we recognized $0.5 million in amortization expense associated with the SureWest tradename. At December 31,
2013, the unamortized amount related to the SureWest tradename was $0.4 million.
The carrying value of the reporting unit tradename, excluding any amounts assigned to the SureWest tradename,
was $10.6 million at December 31, 2013 and 2012. For the years ended December 31, 2013 and 2012, we
completed our annual impairment test using a DCF methodology based on a relief from royalty method and
determined that there was no impairment of our tradename. During our annual assessment of carrying value of our
tradenames in 2012, we determined that the carrying value of the tradename associated with the Business Systems
reporting unit, which was previously included in our Other Operations segment, exceeded the estimated fair value
and was impaired. During the quarter ended December 31, 2012, we recorded an impairment charge of $0.3 million
to write off the carrying value of the tradename associated with the Business Systems reporting unit.
Goodwill
Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired.
As noted above, goodwill is not amortized but instead evaluated annually for impairment using a preliminary
qualitative assessment and two-step process, if deemed necessary. In 2012, we adopted an Accounting Standards
Update No. 2011-08 – Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, that allows an
F-10
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
entity to consider qualitative indicators to determine if the current two-step test is necessary. Under the provisions
of the amended guidance, the step-one test of a reporting unit’s fair value is not required unless, as a result of the
qualitative assessment, it is more likely than not (a likelihood of more than 50%) that fair value of the reporting unit
is less than its carrying amount. Events and circumstances integrated into the qualitative assessment process include
a combination of macroeconomic conditions affecting equity and credit markets, significant changes to the cost
structure, overall financial performance and other relevant events affecting the reporting unit. A company is
permitted to skip the qualitative assessment at its election, and proceed to Step 1 of the quantitative test, which we
chose to do in 2013. In the first step of the impairment test, the fair value of our reporting unit is compared to its
carrying amount, including goodwill.
The estimated fair value of the reporting unit is determined using a combination of market-based approaches and a
DCF model. The assumptions used in the estimate of fair value are based upon a combination of historical results
and trends, new industry developments and future cash flow projections, as well as relevant comparable company
earnings multiples for the market-based approaches. Such assumptions are subject to change as a result of changing
economic and competitive conditions. We use a weighting of the results derived from the valuation approaches to
estimate the fair value of the reporting unit. The fair value of the reporting unit exceeded the carrying value at
December 31, 2013.
If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed
to measure the amount of impairment loss. In measuring the fair value of our reporting unit as previously described,
we consider the combined carrying and fair values of our reporting unit in relation to our overall enterprise value,
measured as the publicly traded stock price multiplied by the fully diluted shares outstanding plus the value of
outstanding debt. Our reporting unit fair value models are consistent with a range in value indicated by both the
preceding three month average stock price and the stock price on the valuation date, plus an estimated acquisition
premium which is based on observable transactions of comparable companies, if applicable.
The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that
goodwill. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets
and liabilities other than goodwill in a manner similar to a purchase price allocation. The excess of the fair value of a
reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the
carrying amount of goodwill is greater than the implied fair value of that goodwill, then an impairment charge would
be recorded equal to the difference between the implied fair value and the carrying value. At December 31, 2013
and 2012, the carrying value of goodwill was $603.4 million.
For the 2012 evaluation, we used a DCF model to estimate the fair value of the Business Systems reporting unit,
which was previously included in the Other Operations reporting segment. For the Business Systems reporting unit,
the carrying value exceeded the fair value indicating a potential impairment existed. In the 2012 evaluation, we
determined that based on the allocation of the fair value of the reporting unit to assets and liabilities in the second
step of the impairment testing that the goodwill recorded for the Business Systems reporting unit was impaired and
recorded an impairment charge of $0.8 million during the year ended December 31, 2012.
Finite-Lived Intangible Assets
Customer Lists
Finite lived intangible assets subject to amortization consist primarily of our customer lists of an established base of
customers that subscribe to our services. Customer lists are amortized on a straight-line basis over their estimated
useful lives (ranging from 3 to 13 years) based upon our historical experience with customer attrition. In accordance
with the applicable guidance relating to the impairment or disposal of long-lived assets, we evaluate the potential
impairment of finite-lived intangible assets when impairment indicators exist. If the carrying value is no longer
recoverable based upon the undiscounted future cash flows of the asset, an impairment equal to the difference
between the carrying amount and the fair value of the asset is recognized.
The net carrying amount of our customer lists as of December 31, 2013 and 2012 were as follows:
(In thousands)
Gross carrying amount
Less: accumulated amortization
Net carrying amount
2013
$
195,651
(166,500)
29,151
$
2012
195,651
(157,579)
38,072
$
$
F-11
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Amortization expense for the years ended December 31, 2013, 2012 and 2011 was $8.9 million, $22.1 million and
$21.8 million, respectively. The weighted-average remaining period over which customer lists are being amortized
is 2.13 years. Expected amortization expense for the years 2014 through 2017 is as follows:
(In thousands)
2014
2015
2016
2017
Total
$
8,921
8,849
8,776
2,605
29,151
$
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. At the inception of a hedge
transaction, we formally document the relationship between the hedging instruments including our objective and
strategy for establishing the hedge. In addition, the effectiveness of the derivative instrument is assessed at
inception and on an ongoing basis throughout the hedging period. Counterparties to derivative instruments expose
us to credit-related losses in the event of nonperformance. We execute agreements only with financial institutions
we believe to be creditworthy and regularly assess the credit worthiness of each of the counterparties. We do not
use derivative instruments for trading or speculative purposes.
Derivative financial instruments are recorded at fair value in our consolidated balance sheet. Fair value is
determined based on publicly available interest rate yield curves and an estimate of our nonperformance risk or our
counterparty’s nonperformance credit risk, as applicable. We do not anticipate any nonperformance by any
counterparty.
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. The ineffective portion of the change in
fair value of any hedging derivative is recognized immediately in earnings. 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,
changes in fair value are recognized on a current basis in earnings. Cash flows from hedging activities are classified
under the same category as the cash flows from the hedged items in our consolidated statement of cash flows. See
Note 7 for further discussion of our derivative financial instruments.
Share-based Compensation
Our share-based compensation consists of the issuance of restricted stock awards (“RSAs”) and performance share
awards (“PSAs”) (collectively “stock awards”). Associated costs are based on a stock award’s estimated fair value
at the date of the grant and are recognized over a period in which any related services are provided. We recognize
the cost of RSAs and PSAs on a straight-line basis over the requisite service period, generally from immediate vest
to a four-year vesting period. See Note 8 for further details regarding share-based compensation.
Pension Plan and Other Post-Retirement Benefits
We maintain noncontributory defined benefit pension plans and provide certain post-retirement benefits other than
pensions to certain eligible employees. We also maintain two unfunded supplemental retirement plans to provide
incremental pension payments to certain former employees.
We recognize pension expense during the current period in the consolidated income statement using certain
assumptions, including the expected long-term rate of return on plan assets, interest cost implied by the discount rate
and the amortization of unrecognized gains and losses. Refer to Note 9 for further details regarding the
determination of these assumptions.
We recognize the overfunded or underfunded status of our defined benefit pension and post-retirement plans as
either an asset or liability in the consolidated balance sheet. We recognize changes in the funded status in the year
F-12
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
in which the changes occur through comprehensive income, net of applicable income taxes, including unrecognized
actuarial gains and losses and prior service costs and credits.
Income Taxes
Our estimates of income taxes and the significant items resulting in the recognition of deferred tax assets and
liabilities are disclosed in Note 10 and reflect our assessment of future tax consequences of transactions that have
been reflected in our financial statements or tax returns for each taxing jurisdiction in which we operate. We base
our provision for income taxes on our current period income, changes in our deferred income tax assets and
liabilities, income tax rates, changes in estimates of our uncertain tax positions and tax planning opportunities
available in the jurisdictions in which we operate. We recognize deferred tax assets and liabilities when there are
temporary differences between the financial reporting basis and tax basis of our assets and liabilities and for the
expected benefits of using net operating loss and tax credit loss carryforwards. We establish valuation allowances
when necessary to reduce the carrying amount of deferred income tax assets to the amounts that we believe are more
likely than not to be realized. We evaluate the need to retain all or a portion of the valuation allowance on our
deferred tax assets. When a change in the tax rate or tax law has an impact on deferred taxes, we apply the change
based on the years in which the temporary differences are expected to reverse. As we operate in more than one
state, changes in our state apportionment factors, based on operational results, may affect our future effective tax
rates and the value of our deferred tax assets and liabilities. We record a change in tax rates in our consolidated
financial statements in the period of enactment.
Income tax consequences that arise in connection with a business combination include identifying the tax basis of
assets and liabilities acquired and any contingencies associated with uncertain tax positions assumed or resulting
from the business combination. Deferred tax assets and liabilities related to temporary differences of an acquired
entity are recorded as of the date of the business combination and are based on our estimate of the appropriate tax
basis that will be accepted by the various taxing authorities.
We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities in the
appropriate period when our judgment changes as a result of the evaluation of new information. In certain instances,
the ultimate resolution may result in a payment that is materially different from our current estimate of the
unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax
expense in the period in which new information is available. We classify interest and penalties, if any, associated
with our uncertain tax positions as a component of interest expense and general and administrative expense,
respectively. See Note 10 for additional information on income taxes.
Revenue Recognition
We recognize revenue when (i) persuasive evidence of an arrangement exists between us and the customer,
(ii) delivery of the product to the customer has occurred or service has been provided to the customer, (iii) the price
to the customer is fixed or determinable and (iv) collectability of the sales price is reasonably assured. Revenues
based on a flat fee, derived principally from local telephone, dedicated network access, data communications,
Internet access service and residential/business broadband service are billed in advance and recognized in
subsequent periods when the services are provided, with the exception of certain governmental accounts which are
billed in arrears. Revenues for usage-based services, such as per-minute long-distance service and access charges
billed to other telephone carriers for originating and terminating long-distance calls on our network, are billed in
arrears. We recognize revenue from these services in the period the services are rendered rather than billed. Earned
but unbilled usage-based services are recorded in accounts receivable.
When required as part of providing service, revenues related to nonrefundable, upfront service activation and setup
fees are deferred and recognized over the estimated customer life.
Incremental direct costs of telecommunications service activation are charged to expense in the period in which they
are incurred, except when we maintain ownership of wiring installed during the activation process. In such cases the
cost is capitalized and depreciated over the estimated useful life of the asset.
revenues generated
the point of sale.
Telephone equipment
Telecommunications systems and structured cabling project revenues are recognized when the project is completed.
Maintenance services are provided on both a contract and time and material basis and are recorded when the service
is provided. Print advertising and publishing revenues are recognized ratably over the life of the related directory,
generally 12 months.
retail channels are
recorded at
from
F-13
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Subsidies, including universal service revenues, are government-sponsored support mechanisms to assist in funding
services in mostly rural, high-cost areas. These revenues typically are based on information we provide and are
calculated by the administering government agency. Subsidies are recognized in the period the service is provided.
There is a reasonable possibility that out of period subsidy adjustments may be recorded in the future, but they are
anticipated to be immaterial to our results of operation, financial position and cash flow.
We collect and remit Federal Universal Service contributions on a gross basis, which resulted in recorded revenue of
approximately $12.0 million for the year ended December 31, 2013. We account for all other taxes collected from
customers and remitted to the respective government agencies on a net basis.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $7.6 million, $5.1 million and $2.4 million in
2013, 2012 and 2011, respectively.
Statement of Cash Flows Information
During 2013, 2012 and 2011, we made payments for interest and income taxes as follows:
(In thousands)
Interest, net of amounts capitalized ($1,215, $515 and $144
in 2013, 2012 and 2011, respectively)
Income taxes paid, net
2013
2012
2011
$
$
80,693
960
$
$
63,541
4,991
$
$
47,071
8,788
Noncash investing and financing activities:
As described in Note 3, we issued $148.4 million in shares of the Company’s common stock in connection with the
acquisition of SureWest in 2012.
In 2013 and 2012, we acquired equipment of $0.8 million and $0.4 million, respectively, through capital lease
agreements.
Noncontrolling Interest
We have a majority-owned subsidiary, East Texas Fiber Line Incorporated (“ETFL”) which is a joint venture owned
63% by the Company and 37% by Eastex Telecom Investments, LLC. ETFL provides connectivity over a fiber
optic transport network to certain customers residing in Texas.
Recent Accounting Pronouncements
In July 2013, the FASB issued the 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
amended guidance is effective for fiscal years and interim periods beginning after December 15, 2013, with early
adoption permitted. We are currently evaluating the impact this update will have on our consolidated financial
statements.
Effective January 1, 2013, we adopted 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 adoption of this standard did not have a material impact on our consolidated
financial statements.
Effective January 1, 2013, we adopted Accounting Standards Update No. 2013-02 (“ASU 2013-02”),
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income, which establishes new requirements for disclosing reclassifications of items out of accumulated other
comprehensive income (“OCI”). ASU 2013-2 requires disclosures for the (i) changes in components of accumulated
OCI, (ii) effects on individual line items in net income for each item of accumulated OCI that is reclassified in its
entirety to net income, and (iii) cross references to other disclosures that provide additional details for OCI items
that are not reclassified in their entirety to net income. For public companies, amendments were effective
prospectively for reporting periods beginning after December 15, 2012, with early adoption permitted. In accordance
with the provisions of this guidance, disclosures related to accumulated OCI can be found in Note 8.
F-14
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Reclassifications
Certain amounts in our 2012 and 2011 consolidated financial statements have been reclassified to conform to the
presentation of our 2013 consolidated financial statements which consists of the effects of reclassifications from the
presentation of prison services as a discontinued operation and the finalization of purchase accounting for the
SureWest acquisition. These reclassifications had no effect on total shareholders’ equity, total revenue or net
income.
2. EARNINGS PER SHARE
We compute net income per share using the two-class method. The two-class method is an earnings allocation
formula that determines income per share for each class of common stock and participating security according to
dividends declared and participation rights in undistributed earnings. Basic net income per share is computed using
the weighted-average number of common shares outstanding during the period. Diluted net income attributable to
our shareholders is computed using the weighted-average number of common shares and the effect of potentially
dilutive securities outstanding during the period. Potentially dilutive shares consist of restricted shares.
The computation of basic and diluted earnings per share attributable to common shareholders is as follows:
(In thousands, except per share amounts)
Income from continuing operations
Less: net income attributable to noncontrolling interest
Income attributable to common shareholders before
allocation of earnings to participating securities
Less: earnings allocated to participating securities
Income from continuing operations attributable to
common shareholders
Net income from discontinued operations
Net income attributable to common shareholders
Weighted-average number of common shares outstanding
Basic and diluted earnings per common share:
Income from continuing operations
Income from discontinued operations, net of tax
Net income per common share attributable to
common shareholders
2013
2012
$
$
29,964
330
$
4,965
531
2011
24,288
572
29,634
466
29,168
1,177
30,345
39,764
0.73
0.03
$
$
4,434
351
4,083
1,206
5,289
34,652
0.12
0.03
$
$
23,716
429
23,287
2,694
25,981
29,600
0.79
0.09
0.76
$
0.15
$
0.88
$
$
$
Diluted earnings per common share attributable to common shareholders excludes 0.3 million shares at December
31, 2013, 2012 and 2011, respectively, of potential common shares related to our share-based compensation plan,
because the inclusion of the potential common shares would have had an antidilutive effect.
3. ACQUISITION AND DISPOSITIONS
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 telecommunications 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. We acquired SureWest to
provide additional diversification of our revenues and cash flows.
Subsequent to the merger, the financial results of SureWest operations have been included in our consolidated
statements of income. SureWest contributed $133.1 million in net revenues and recorded net income of $2.5 million
for the period of July 2, 2012 through December 31, 2012, which includes $9.5 million in acquisition related costs.
F-15
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The acquisition of SureWest has been accounted for using the acquisition method in accordance with the FASB’s
ASC Topic 805, Business Combinations. Accordingly, the net assets acquired were recorded at their estimated fair
values at July 2, 2012. These values were derived from a purchase price allocation, which was finalized during the
quarter ended June 30, 2013. During the quarter ended June 30, 2013, the Company recorded tax related
adjustments to the preliminary purchase price allocation which decreased deferred income taxes by $1.3 million,
increased current assets by $0.2 million and decreased goodwill by $1.5 million. These final adjustments were
retrospectively applied on the balance sheet to reflect the appropriate balances as of July 2, 2012. There was no
impact to the income statement for the twelve months ended December 31, 2012.
The following table summarizes the final purchase price allocation:
Current assets
Property, plant and equipment
Goodwill
Other intangible assets
Other long-term assets
Total assets acquired
Current liabilities
Pension and other post-retirement obligations
Deferred income taxes
Other long-term liabilities
Total liabilities assumed
Net assets acquired
(In thousands)
$ 47,073
591,818
84,016
3,600
4,861
731,368
53,566
55,916
66,976
4,114
180,572
$ 550,796
The acquired current assets included cash of $17.1 million and trade receivables with a fair value of approximately
$21.6 million and 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 $3.6 million consisted of the estimated fair values assigned to customer lists of $2.7 million and
tradenames of $0.9 million. The customer list intangible asset is being amortized over the estimated useful life of 3
or 5 years, depending on customer type. During the years ending December 31, 2013 and 2012, we recorded
amortization expense of approximately $0.6 million and $0.3 million, respectively, relating to the customer lists.
Goodwill of $84.0 million and the tradenames of $0.9 million are indefinite-lived assets which are not subject to
amortization. During the year ending December 31, 2013, a formal one-year plan to transition from the SureWest
tradename to the CONSOLIDATED tradename was adopted. We began to amortize the assigned value of the
SureWest tradename over its estimated one-year useful life. We evaluate our goodwill for impairment annually as
of November 30, as described in Note 1 above. Goodwill recognized from the acquisition primarily relates to the
expected contributions of the entity to the overall corporate strategy in addition to synergies and acquired workforce,
which are not separable from goodwill. Goodwill is not deductible for income tax purposes.
Unaudited Pro Forma Results
The following unaudited pro forma information presents our results of operations 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.
F-16
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(Unaudited; in thousands, except share amounts)
Operating revenues
Income from operations
Income from continuing operations
Discontinued operations, net of tax
Net income
Less: income attributable to noncontrolling interest
Net income attributable to common stockholders
Net income per common share - basic and diluted
Year Ended
December 31,
2012
$
$
$
$
605,779
69,881
9,259
1,206
$
$
10,465
531
9,934
Income from continuing operations
Discontinued operations, net of tax
Net income per basic and diluted common share
attributable to common shareholders
$
0.27
0.03
$
0.30
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 fo r prison services, which were previously reported in the Other Operations segment, have
been reported as a discontinued operation in our consolidated financial statements for all periods presented.
As of December 31, 2012, the major classes of the prison services assets and liabilities included in discontinued
operations were as follows:
(In thousands)
Accounts receivable, net
Property, plant and equipment, net
Total assets
December 31, 2012
625
$
564
1,189
$
$
13
938
3,258
4,209
$
Accounts payable
Advance billings and customer deposits
Accrued expense
Total liabilities
F-17
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The following table summarizes the financial information for the prison services operations:
(In thousands)
2013
2012
2011
Operating revenues
Operating expenses including depreciation and amortization
$
5,622
5,883
$
25,580
23,599
$
25,260
21,534
Income (loss) from operations
Other income (expense)
Income tax expense (benefit)
(261)
-
(105)
1,981
-
775
3,726
672
1,704
Income (loss) from discontinued operations
$
(156)
$
1,206
$
2,694
Gain on sale of discontinued operations, net of tax of $887
$
1,333
$
-
$
-
4. INVESTMENTS
Our investments are as follows:
(In thousands)
Cash surrender value of life insurance policies
Cost method investments:
GTE Mobilnet of South Texas Limited Partnership (2.34% interest)
Pittsburgh SMSA Limited Partnership (3.60% interest)
CoBank, ACB Stock
Other
Equity method investments:
GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)
Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest)
Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)
CVIN, LLC (13.455% interest)
Totals
2013
2012
$
2,183
$
2,045
21,450
22,950
5,112
200
27,467
7,696
24,105
1,936
113,099
$
21,450
22,950
5,023
430
25,695
7,286
23,338
1,533
109,750
$
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. In 2013, 2012 and 2011, we received cash distributions
from these partnerships totaling $16.9 million, $14.1 million and $11.1 million, respectively.
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 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. In December 2012, we purchased
additional ownership interest in RSA #17 for $6.7 million which increased our ownership from 17.02% to 20.51%.
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. In 2013, 2012 and 2011, we received cash distributions from these partnerships totaling
$17.9 million, $15.0 million and $17.2 million, respectively. The carrying value of the investments exceeds the
underlying equity in net assets of the partnerships by $33.2 million.
F-18
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
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. In 2013, we made additional capital investments of $0.4 million
in this partnership. We did not receive any distributions from this partnership in 2013 or 2012.
The combined unaudited results of operations and financial position of our three equity investments in the cellular
limited partnerships are summarized below:
(In thousands)
Total revenues
Income from operations
Net income before taxes
Net income
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Partnership equity
$
$
2013
2012
$
$
321,555
98,962
99,024
99,024
54,837
87,968
15,221
1,786
125,799
299,389
83,577
83,633
83,283
49,982
79,529
15,417
1,351
112,734
$
$
2011
305,965
84,803
84,844
84,483
44,739
79,432
14,523
1,096
108,552
5. FAIR VALUE MEASUREMENTS
Financial Instruments
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 and are categorized
within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and observable market
data of similar instruments. 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 at December 31, 2013 and 2012 were as
follows:
(In thousands)
Current interest rate swap liabilities
Long-term interest rate swap liabilities
Total
Total
$ (660)
(1,959)
(2,619)
$
(In thousands)
Current interest rate swap liabilities
Long-term interest rate swap liabilities
Total
Total
$ (3,164)
(3,919)
(7,083)
$
As of December 31, 2013
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
S ignificant
Other
Observable
Inputs
(Level 2)
S ignificant
Unobservable
Inputs
(Level 3)
–
–
–
$
$
(660)
(1,959)
(2,619)
$
–
–
–
$
As of December 31, 2012
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
S ignificant
Other
Observable
Inputs
(Level 2)
S ignificant
Unobservable
Inputs
(Level 3)
–
–
–
$
$
(3,164)
(3,919)
(7,083)
$
–
–
–
$
The change in the fair value of the derivatives is primarily a result of a change in market expectations for future
interest rates and the expiration of certain instruments during 2013.
F-19
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
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 December
31, 2013 and 2012.
(In thousands)
Investments, equity basis
Investments, at cost
Long-term debt, excluding capital leases
Carrying Value
$
61,204
$
49,712
$
1,216,764
Fair Value
n/a
n/a
1,261,508
$
Carrying Value
$
57,852
$
49,853
$
1,213,000
Fair Value
n/a
n/a
1,231,355
$
As of December 31, 2013
As of December 31, 2012
Cost & Equity Method Investments
Our investments at December 31, 2013 and 2012 accounted for under both the equity and cost methods consists
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.
6. LONG-TERM DEBT
Long-term debt outstanding, presented net of unamortized discounts, consisted of the following as of December 31,
2013 and 2012:
(In thousands)
Senior secured credit facility:
2013
2012
Term loan 2
Term loan 3, net of discount of $5,088 at December 31, 2012
Term loan 4, net of discount of $4,537 at December 31, 2013
Revolving loan
$ -
-
905,463
13,000
$ 404,961
509,912
-
-
Senior notes, net of discount of $1,699 and $1,873 at
December 31, 2013 and 2012, respectively
Capital leases
Less: current portion of long-term debt and capital leases
Total long-term debt
298,301
5,121
1,221,885
(9,751)
$ 1,212,134
298,127
4,844
1,217,844
(9,596)
$ 1,208,248
Credit Agreement
The Company, through certain of its wholly owned subsidiaries, has an outstanding credit agreement with several
financial institutions. In December 2013, we entered into a Second Amended and Restated Credit Agreement to
restate the Company’s previously amended credit agreement. The restated 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 restated 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 facility consists of 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 repaid or redeemed in full by December 31, 2019. The Term 4 loan contains
F-20
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
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 commencing 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 December 31, 2013, the borrowing
margin for the next three month period ending March 31, 2014 will be at a weighted-average margin of 3.00% for a
LIBOR-based loan or 2.00% for an alternative 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 December 31, 2013,
$13.0 million was outstanding under the revolving credit facility. There were no borrowings or letters of credit
outstanding under the revolving credit facility at December 31, 2012.
The weighted-average interest rate on outstanding borrowings under our credit facility was 4.23% and 4.79% at
December 31, 2013 and 2012, 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.
Financing Costs
In connection with entering into the restated credit agreement in December 2013, fees of $6.6 million were
capitalized as deferred debt issuance costs. These capitalized costs are amortized over the term of the debt and are
included as a component of interest expense in the consolidated statements of income. We also incurred a loss on
the extinguishment of debt of $7.7 million during the year ended December 31, 2013 related to the repayment of
outstanding term loans under the previous credit agreement which were scheduled to mature in December 2017 and
2018.
The credit agreement was previously amended in December 2012, to issue incremental term loans (Term 3) which
were used to repay outstanding term loans scheduled to mature in December 2014, to extend the maturity dates of
outstanding term loans (Term 2) from December 2014 to December 2017 and to extend the termination date of the
revolving loan facility. In connection with entering into the December 2012 amendment, fees of $4.2 million were
capitalized as deferred debt issuance costs and we recognized a loss on the extinguishment of debt of $4.5 million
during the year ended December 31, 2012.
In February 2012, the terms of our credit facility were amended to provide us with the ability to incur indebtedness
necessary to finance the acquisition of SureWest, which enabled us to issue the Senior Notes, as described below. In
connection with the amendment, fees of $3.5 million were recognized as financing and other transaction costs
during the year ended December 31, 2012.
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 December 31, 2013, 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 December 31, 2013, and including the $15.5 million dividend declared in November
2013 and paid on February 1, 2014, we had $202.4 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 December 31, 2013, our total net leverage ratio under the credit agreement was 4.26:1.00, and our interest
coverage ratio was 3.41:1.00.
F-21
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
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 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. The proceeds of the sale of the Senior Notes were held in an escrow
account prior to the closing of the SureWest transaction. Upon closing of the SureWest acquisition on July 2, 2012,
Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., 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
Consolidated Communications, Inc.’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 Consolidated Communications, Inc. 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 December 31, 2013, this ratio was 4.20:1.00. 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 $108.5 million have been paid since May 30, 2012, at December 31, 2013 there
was $156.6 million of the $265.1 million of cumulative consolidated cash flow since May 30, 2012 available to pay
dividends.
Bridge Loan Facility
In connection with the acquisition of SureWest, in February 2012 the Company received committed financing for a
total of $350.0 million to fund the cash portion of the anticipated transaction, to refinance SureWest’s debt and to
pay for certain transaction costs. The financing package included a $350.0 million Senior Unsecured Bridge Loan
Facility (“Bridge Facility”). As anticipated, permanent financing for the SureWest acquisition was funded by our
Senior Note offering, as described above. As a result, the $4.2 million commitment fee incurred for the Bridge
Facility was capitalized as deferred debt issuance costs in February 2012 and was amortized over the expected life
of the Bridge Facility, which was four months.
F-22
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Future Maturities of Debt
At December 31, 2013, the aggregate maturities of our long-term debt excluding capital leases were as follows:
(In thousands)
2014
2015
2016
2017
2018
Thereafter
Total maturities
Less: Unamortized discount
$ 9,100
9,100
9,100
9,100
22,100
1,164,500
1,223,000
(6,236)
$ 1,216,764
As of December 31, 2013, we had seven capital leases with maturities ranging from 2015 to 2021. See Note 11
regarding the future maturities of our obligations for capital leases.
7. DERIVATIVE FINANCIAL INSTRUMENTS
The following interest rate swaps were outstanding at December 31, 2013:
(In thousands)
De-designated Hedges:
Fixed to 1-month floating LIBOR
Fixed to 1-month floating LIBOR
Fixed to 1-month floating LIBOR (with floor)
Total Fair Values
Notional
Amount
2013 Balance S heet Location
Fair Value
$
175,000
100,000
50,000
Other long-term liabilities
Current portion of derivative liability
Other long-term liabilities
$
$
(1,897)
(660)
(62)
(2,619)
The following interest rate swaps were outstanding at December 31, 2012:
(In thousands)
Cash Flow Hedges:
Fixed to 1-month floating LIBOR
Fixed to 1-month floating LIBOR
Forward starting fixed to
1-month floating LIBOR
De-designated Hedges:
Fixed to 3-month floating LIBOR
3-month floating LIBOR minus
spread to 1-month floating LIBOR
Fixed to 1-month floating LIBOR
Total Fair Values
Notional
Amount
2012 Balance S heet Location
Fair Value
$
200,000
100,000
Other long-term liabilities
Current portion of derivative liability
$
(2,758)
(1,069)
75,000
Other long-term liabilities
(1,161)
130,000
Current portion of derivative liability
(1,300)
130,000
200,000
Current portion of derivative liability
Current portion of derivative liability
(16)
(779)
(7,083)
$
As of December 31, 2013, 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
F-23
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
swaps with an aggregate notional value of $660.0 million were de-designated as cash flow hedges in connection
with the amendment to our 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 years ended December 31, 2013 and 2012, a
gain of $2.2 million and $2.8 million, respectively, was recognized as a reduction to interest expense for the change
in fair value of the de-designated swaps.
At December 31, 2013 and 2012, the pre-tax deferred losses related to our interest rate swap agreements included in
AOCI was $2.6 million and $7.9 million, respectively. The estimated amount of losses included in AOCI as of
December 31, 2013 that will be recognized in earnings in the next twelve months is approximately $2.0 million.
The following table presents the effect of interest rate derivatives designated as cash flow hedges on AOCI and on
the consolidated statements of income for the years ended December 31, 2013, 2012 and 2011:
(In thousands)
Loss recognized in AOCI, pretax
Loss reclassified from AOCI to interest expense
Gain arising from ineffectiveness reducing interest expense
2013
(614)
$
$
(5,875)
$
-
2012
2011
$
$
$
(5,631)
(13,664)
47
$
$
$
(7,617)
(19,649)
93
8. EQUITY
Share-Based Compensation
Our Board of Directors may grant share-based awards from our shareholder approved Amended and Restated
Consolidated Communications Holdings, Inc. 2005 Long-term Incentive Plan (the “Plan”). The Plan permits the
issuance of awards in the form of stock options, stock appreciation rights, stock grants, stock unit grants and other
equity-based awards to eligible directors and employees at the discretion of the Compensation Committee of the
Board of Directors. Under the Plan, approximately 1,650,000 shares of our common stock are authorized for
issuance, provided that no more than 300,000 shares may be granted in the form of stock options or stock
appreciation rights to any eligible employee or director in any calendar year. Unless terminated sooner, the Plan
will continue in effect until May 5, 2019.
We measure the fair value of time-based RSAs based on the market price of the underlying common stock as of the
date of the grant. RSAs are amortized over their respective vesting periods, generally from immediate vest up to a
four year vesting period using the straight line method.
We implemented an ongoing performance-based incentive program under the Plan. The performance-based
incentive program provides for annual grants of PSAs. PSAs are restricted stock that is issued, to the extent earned,
at the end of each performance cycle. Under the performance-based incentive program, each participant is given a
target award expressed as a number of shares, with a payout opportunity ranging from 0% to 120% of the target,
depending on performance relative to predetermined goals. In accordance with the applicable accounting guidance,
an accounting estimate of the number of these shares that are expected to vest is made, and these shares are then
expensed utilizing the grant-date fair value of the shares from the grant date through the end of the vesting period.
The following table summarizes the grants of RSAs and PSAs under the Plan during the years ended December 31,
2013, 2012 and 2011:
Years Ended December 31,
Grant Date
Fair Value
$
$
17.13
17.13
2013
168,516
66,504
235,020
Grant Date
Fair Value
$
$
19.30
19.30
2012
14,732
68,540
83,272
Grant Date
Fair Value
$
$
17.92
17.92
2011
127,377
50,440
177,817
RSAs Granted
PSAs Granted
Total
The total fair value of the RSAs and PSAs that vested during the years ended December 31, 2013, 2012 and 2011
was $3.0 million, $2.4 million and $1.6 million, respectively.
F-24
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The following table summarizes the RSA and PSA activity during the year ended December 31, 2013:
Non-vested shares outstanding - January 1, 2013
Shares granted
Shares vested
Shares forfeited, cancelled or retired
Non-vested shares outstanding - December 31, 2013
Share-Based Compensation Expense
RS As
PS As
Weighted
Average Grant
Date Fair Value
$
18.33
$
17.13
$
17.61
$
17.13
$
17.32
S hares
64,318
168,516
(107,833)
(1,500)
123,501
Weighted
Average Grant
Date Fair Value
$
18.85
$
17.13
$
17.90
$
-
$
17.96
S hares
58,221
66,504
(60,459)
–
64,266
The following table summarizes total compensation costs recognized for share-based payments during the years
ended December 31, 2013, 2012 and 2011:
(In millions)
Restricted stock
Performance shares
Total
$
$
Year Ended December 31,
2012
2013
2011
1.8
1.2
3.0
$
$
1.3
1.0
2.3
$
$
1.3
0.8
2.1
Income tax benefits related to stock-based compensation of approximately $1.1 million, $0.4 million and $0.8
million was recorded for the years ended December 31, 2013, 2012 and 2011, respectively. Stock-based
compensation expense is included in “selling, general and administrative expenses” in the accompanying statements
of operations.
As of December 31, 2013, total unrecognized compensation costs related to nonvested RSAs and PSAs was $3.5
million and will be recognized over a weighted-average period of approximately 0.8 years.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component
during 2013:
(In thousands)
Balance at December 31, 2012
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Net current period other comprehensive income
Balance at December 31, 2013
Pension and
Post-Retirement
Obligations
$
(40,581)
39,381
Derivative
Instruments
$
(5,203)
(381)
Total
$
(45,784)
39,000
1,843
41,224
643
$
3,941
3,560
(1,643)
$
5,784
44,784
(1,000)
$
F-25
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The following table summarizes reclassifications from accumulated other comprehensive loss during 2013:
(In thousands)
Amortization of pension and post-retirement items:
Prior service credit
Actuarial loss
Loss on cash flow hedges:
Interest rate derivatives
Amount
Reclassified from
AOCI
Year Ended
December 31, 2013
Affected Line Item in the
S tatement of Income
$
(637)
3,652
3,015
(1,172)
1,843
5,875
(1,934)
3,941
(a)
(a)
Total before tax
Tax benefit
Net of tax
Interest expense
Tax benefit
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 PLANS 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 the 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.
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 tables summarize the change in benefit obligation, plan assets and funded status of the Retirement
Plan, SureWest Plan and Supplemental Plans (collectively the “Pension Plans”) as of December 31, 2013 and 2012.
F-26
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands)
Change in benefit obligation
Benefit obligation at the beginning of the year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Acquisition of SureWest Plans
Plan change
Benefit obligation at the end of the year
(In thousands)
Change in plan assets
Fair value of plan assets at the beginning of the year
Employer contributions
Actual return on plan assets
Benefits paid
Acquisition of SureWest Plans
Fair value of plan assets at the end of the year
Funded status at year end
2013
2012
$
$
$
$
$
379,528
743
15,307
(34,315)
(21,559)
-
(2,361)
337,343
2013
262,778
11,480
39,489
(21,559)
-
292,188
(45,155)
$
$
$
$
$
203,413
1,184
13,620
32,274
(16,529)
146,688
(1,122)
379,528
2012
142,736
15,222
27,935
(16,529)
93,414
262,778
(116,750)
Amounts recognized in the consolidated balance sheets at December 31, 2013 and 2012 consisted of:
(In thousands)
Current liabilities
Long-term liabilities
2013
$
$
(254)
(44,901)
$
$
2012
(254)
(116,496)
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2013 and 2012
consisted of:
(In thousands)
Unamortized prior service credit
Unamortized net actuarial loss
2013
2012
$
$
(4,426)
10,302
5,876
$
$
(2,523)
67,104
64,581
The following table summarizes the components of net periodic pension cost recognized in the consolidated
statements of income for the plans for the years ended December 31, 2013, 2012 and 2011:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Net actuarial loss
Prior service credit
Net periodic pension cost
2013
2012
2011
$
$
743
15,307
(20,654)
3,652
(457)
(1,409)
$
$
1,184
13,620
(14,728)
2,518
(282)
2,312
$
$
1,277
10,960
(10,893)
786
(166)
1,964
F-27
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The following table summarizes other changes in plan assets and benefit obligations recognized in other
comprehensive loss, before tax effects, during 2013 and 2012.
(In thousands)
Actuarial loss (gain), net
Recognized actuarial loss
Prior service credit
Recognized prior service credit
Total amount recognized in other comprehensive
loss, before tax effects
$
2013
2012
$
(53,149)
(3,652)
(2,361)
457
19,066
(2,518)
(1,122)
282
$
(58,705)
$
15,708
The estimated net loss and net prior service credit for the defined benefit pension plans that will be amortized from
accumulated other comprehensive loss in net periodic benefit cost in 2014 are $0.2 million and $(0.5) million,
respectively.
The weighted-average assumptions used to determine the projected benefit obligations and net periodic benefit cost
for the years ended December 31, 2013, 2012 and 2011 were as follows:
Discount rate - net periodic benefit cost
Discount rate - benefit obligation
Expected long-term rate of return on plan assets
Rate of compensation/salary increase
Other Non-qualified Deferred Compensation Agreements
2013
2012
2011
4.20%
4.97%
8.00%
1.75%
5.00%
4.20%
7.70%
1.50%
5.86%
5.35%
7.50%
3.06%
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 $0.6 million for the years ended December 31, 2013 and 2012, respectively. The net present value of
the remaining obligations was approximately $1.8 million and $2.2 million at December 31, 2013 and 2012,
respectively, and is included in pension and post-retirement benefit obligations in the accompanying balance sheets.
We also maintain 34 life insurance policies on certain of the participating former directors and employees. We
recognized $0.3 million and $0.4 million in life insurance proceeds as other non-operating income in 2013 and 2012.
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 $2.2 million and $2.0 million at
December 31, 2013 and 2012, respectively. These amounts are included in investments in the accompanying
consolidated balance sheets. Cash principal payments for the policies and any proceeds from the policies are
classified as operating activities in the consolidated statements of cash flows. The aggregate death benefit payment
payable under these policies totaled $7.3 million and $7.5 million as of December 31, 2013 and 2012, respectively.
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.
F-28
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
In connection with the acquisition of SureWest, 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.
The following tables summarize the change in benefit obligation, plan assets and funded status of the post-retirement
benefit obligations as of December 31, 2013 and 2012.
(In thousands)
Change in benefit obligation
Benefit obligation at the beginning of the year
Service cost
Interest cost
Plan participant contributions
Actuarial loss (gain)
Benefits paid
Amendments
Acquisition
Benefit obligation at the end of the year
(In thousands)
Change in plan assets
Fair value of plan assets at the beginning of the year
Employer contributions
Plan participant's contributions
Actual return on plan assets
Benefits paid
Acquisition
Fair value of plan assets at the end of the year
Funded status at year end
2013
2012
$
$
$
$
$
43,906
925
1,575
757
(9,552)
(3,966)
1,448
-
35,093
2013
3,410
2,772
757
602
(3,966)
–
3,575
(31,518)
$
$
$
$
$
33,184
811
1,756
614
5,282
(4,011)
-
6,270
43,906
2012
–
3,189
614
197
(4,011)
3,421
3,410
(40,496)
Amounts recognized in the consolidated balance sheets at December 31, 2013 and 2012 consist of:
(In thousands)
Current liabilities
Long-term liabilities
2013
2012
$
$
(2,429)
(29,089)
$
$
(2,467)
(38,029)
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2013 and 2012
consist of:
(In thousands)
Unamortized prior service cost (credit)
Unamortized net actuarial loss (gain)
2013
2012
$
$
183
(7,868)
(7,685)
$
$
(1,446)
2,055
609
F-29
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The following table summarizes the components of the net periodic costs for post-retirement benefits for the years
ended December 31, 2013, 2012 and 2011:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Net actuarial loss (gain)
Prior service credit
Net periodic postretirement benefit cost
2013
2012
2011
$
$
925
1,575
(233)
–
(180)
2,087
$
$
811
1,756
(105)
–
(189)
2,273
$
$
749
1,690
–
(212)
(189)
2,038
The following table summarizes other changes in plan assets and benefit obligations recognized in other
comprehensive loss, before tax effects, during 2013 and 2012:
(In thousands)
Actuarial loss (gain), net
Prior service cost
Recognized prior service credit
Total amount recognized in other comprehensive
loss, before tax effects
2013
2012
$
(9,922)
1,448
180
5,191
–
189
(8,294)
$
5,380
$
$
The estimated net actuarial gain and net prior service credit that will be amortized from accumulated other
comprehensive loss in net periodic postretirement cost in 2014 is approximately $(0.5) million and $(0.2) million,
respectively.
The weighted-average discount rate assumptions utilized for the years ended December 31 were as follows:
Net periodic benefit cost
Benefit obligation
2013
2012
2011
4.00%
4.40%
5.00%
3.90%
5.58%
5.22%
For purposes of determining the cost and obligation for pre-Medicare postretirement medical benefits, a 7.50%
annual rate of increase in the per capita cost of covered benefits (i.e., healthcare trend rate) was assumed for the plan
in 2014, declining to a rate of 5.00% in 2020. Assumed healthcare cost trend rates have a significant effect on the
amounts reported for healthcare plans. A one percent change in the assumed healthcare cost trend rate would have
had the following effects:
(In thousands)
Effect on total of service and interest cost
Effect on postretirement benefit obligation
1% Increase
277
2,063
$
$
$
$
1% Decrease
(230)
(1,852)
Plan Assets
Our investment strategy is designed to provide a stable environment to earn a rate of return over time to satisfy the
benefit obligations and minimize the reliance on contributions as a source of benefit security. The objectives are
based on a long-term (5 to 15 year) investment horizon, so that interim fluctuations should be viewed with
appropriate perspective. The assets of the fund are to be invested to achieve the greatest return for the pension plans
consistent with a prudent level of risk.
The asset return objective is to achieve, as a minimum over time, the passively managed return earned by managed
index funds, weighted in the proportions outlined by the asset class exposures identified in the pension plan’s
strategic allocation. We update our long-term, strategic asset allocations every few years to ensure they are in line
with our fund objectives. The target allocation of the Pension Plan assets is approximately 50% - 60% equities with
the remainder in fixed income funds and cash equivalents. Currently, we believe that there are no significant
concentrations of risk associated with the pension plan assets.
The following is a description of the valuation methodologies for assets measured at fair value utilizing the fair
value hierarchy discussed in Note 1, which prioritizes the inputs used in the valuation methodologies in measuring
fair value. The fair value measurements used to value our plan assets as of December 31, 2013 were generated by
F-30
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
using market transactions involving identical or comparable assets. There were no changes in the valuation
techniques used during 2013.
Equity securities include investments in common and preferred stocks, mutual funds, common collective trusts and
other commingled investment funds.
Common and Preferred Stocks: Includes domestic and international common and preferred stocks and are valued at
the closing price as of the measurement date as reported on the active market on which the individual securities are
traded multiplied by the number of shares owned.
Mutual Funds: Valued at the closing net asset value as of the measurement date as reported on the active market on
which the funds are traded multiplied by the number of shares owned or the percentage of ownership in the fund.
Common Collective Trusts and Commingled Funds: Valued as determined by the fund manager based on the
underlying net asset values and supported by the value of the underlying securities as of the financial statement date.
Fixed income funds include U.S. Treasury and Government Agency securities, corporate and municipal bonds, and
mortgage-backed securities.
U.S. Treasury and Government Agency Securities: Valued at the closing net asset value as of the measurement date
as reported on the active market on which the funds are traded multiplied by the number of shares owned or the
percentage of ownership in the fund.
Corporate and municipal bonds and mortgage-backed securities: Valued based on yields currently available on
comparable securities of issuers with similar credit ratings.
The fair values of our assets for our defined benefit pension plans at December 31, 2013 and 2012, by asset category
were as follows:
(In thousands)
Total
As of December 31, 2013
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
S ignificant
Other
Observable
Inputs
(Level 2)
S ignificant
Unobservable
Inputs
(Level 3)
$ 4,708 $
2,835
$
1,873
$
Cash equivalents:
Short-term investments (1)
Equities:
Stocks:
U.S. common stocks
International stocks
Funds:
U.S. small cap
U.S. mid cap
U.S. large cap
Emerging markets
International
38,463
10,198
15,181
9,215
34,535
20,225
60,416
38,463
10,198
–
9,215
11,101
12,855
44,132
Fixed Income:
U.S. treasury and government agency securities
Corporate and municipal bonds
Mortgage/asset-backed securities
Common Collective Trust
Mutual funds
Total
19,012
8,624
8,116
17,398
46,097
292,188
$
$
19,012
–
–
–
46,097
193,908
$
F-31
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15,181
–
23,434
7,370
16,284
–
8,624
8,116
17,398
–
98,280
$
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands)
Total
As of December 31, 2012
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
S ignificant
Other
Observable
Inputs
(Level 2)
S ignificant
Unobservable
Inputs
(Level 3)
Cash equivalents:
Short-term investments (1)
Equities:
Stocks:
U.S. common stocks
International stocks
Funds:
U.S. small cap
U.S. mid cap
U.S. large cap
Emerging markets
International
$ 4,262 $
1,036
$
3,226
$
36,620
9,589
17,110
7,477
35,130
7,807
43,100
36,620
9,589
–
7,477
12,932
7,807
34,602
22,937
–
–
51,493
184,493
$
$
–
–
17,110
–
22,198
–
8,498
–
9,238
10,669
7,346
–
78,285
$
–
–
–
–
–
–
–
–
–
–
–
–
–
Fixed Income:
U.S. treasury and government agency securities
Corporate and municipal bonds
Mortgage/asset-backed securities
Common Collective Trust
Mutual funds
Total
22,937
9,238
10,669
7,346
51,493
262,778
$
(1) Short-term investments includes cash and cash equivalents and an investment in a common collective trust which is
principally comprised of certificates of deposit, commercial paper and U.S. Treasury bills with maturities less than one year.
F-32
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The fair values of our assets for our post-retirement benefit plans at December 31, 2013 and 2012 were as follows:
(In thousands)
Cash equivalents:
Quoted Prices
(Level 1)
As of December 31, 2013
S ignificant
(Level 2)
S ignificant
(Level 3)
Total
Short-term investments (1)
$ 89
$
89
$
–
$
Equities:
U.S. common stocks
Funds:
U.S. small cap
U.S. large cap
Emerging markets
International
592
215
638
263
938
592
–
–
–
357
–
215
638
263
581
Fixed Income:
U.S. treasury and government agency securities
Corporate and municipal bonds
Mortgage/asset-backed securities
Total investments
Benefit payments payable
Net plan assets
678
308
289
4,010
(434)
3,576
$
$
$
678
–
–
1,716
$
–
308
289
2,294
$
–
–
–
–
–
–
–
–
–
–
(In thousands)
Cash equivalents:
Total
Quoted Prices
(Level 1)
As of December 31, 2012
S ignificant
(Level 2)
S ignificant
(Level 3)
Short-term investments (1)
$ 30
$
30
$
–
$
Equities:
U.S. common stocks
Funds:
U.S. small cap
U.S. large cap
International
545
238
572
576
545
–
–
289
–
238
572
287
Fixed Income:
U.S. treasury and government agency securities
Corporate and municipal bonds
Mortgage/asset-backed securities
Total
776
312
361
3,410
$
$
776
–
–
1,640
$
–
312
361
1,770
$
–
–
–
–
–
–
–
–
–
(1) Short-term investments includes cash and cash equivalents and an investment in a common collective trust which is principally
comprised of certificates of deposit, commercial paper and U.S. Treasury bills with maturities less than one year.
Cash Flows
Contributions
Our funding policy is to contribute annually an actuarially determined amount necessary to meet the minimum
funding requirements as set forth in employee benefit and tax laws. We expect to contribute approximately $12.1
million to our pension plans and $2.5 million to our other post-retirement plans in 2014.
F-33
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Estimated Future Benefit Payments
As of December 31, 2013, benefit payments expected to be paid over the next ten years are outlined in the following
table:
(In thousands)
2014
2015
2016
2017
2018
2019 - 2023
Pension
Plans
Other
Post-retirement
Plans
$
$
22,413
22,827
23,164
23,274
23,245
116,421
3,495
3,574
3,615
2,806
2,820
12,867
Defined Contribution Plans
We offer defined contribution 401(k) plans to substantially all of our employees. Contributions made under the
defined contribution plans include a match, at the Company’s discretion, of employee contributions to the plans. We
recognized expense with respect to these plans of $5.2 million, $3.9 million and $2.5 million in 2013, 2012 and
2011, respectively. The increase in expense in 2013 and 2012 was attributable to the acquisition of SureWest in
2012.
10. INCOME TAXES
Income tax expense consists of the following components:
(In thousands)
Current:
Federal
State
Total current expense (benefit)
Deferred:
Federal
State
Total deferred expense (benefit)
Total income tax expense
2013
For the Year Ended
2012
2011
$
$
1,381
86
1,467
15,929
116
16,045
17,512
$
$
340
1,078
1,418
1,998
(2,755)
(757)
661
$
$
4,118
477
4,595
8,209
337
8,546
13,141
The following is a reconciliation of the federal statutory tax rate to the effective tax rate for the years ended
December 31, 2013, 2012 and 2011:
(In percentages)
Year Ended December 31,
2012
2013
2011
Statutory federal income tax rate
State income taxes, net of federal benefit
Transaction costs
Other permanent differences
Change in uncertain tax positions
Change in deferred tax rate
Provision to return
Other
35.0
1.7
–
–
(1.7)
–
1.3
0.6
36.9
35.0
(12.8)
14.9
(1.1)
–
(19.7)
(4.2)
(0.4)
11.7
35.0
0.5
–
(0.9)
(0.7)
1.1
–
0.1
35.1
F-34
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Deferred Taxes
The components of the net deferred tax liability are as follows:
(In thousands)
Current deferred tax assets:
Reserve for uncollectible accounts
Accrued vacation pay deducted when paid
Accrued expenses and deferred revenue
Non-current deferred tax assets:
Net operating loss carryforwards
Pension and postretirement obligations
Stock-based compensation
Derivative instruments
Financing costs
Tax credit carryforwards
Other
Valuation allowance
Net non-current deferred tax assets
Non-current deferred tax liabilities:
Goodwill and other intangibles
Basis in investment
Partnership investments
Property, plant and equipment
Net non-current deferred taxes
Net deferred income tax liabilities
Year Ended December 31,
2013
2012
$
$
615
2,196
5,149
7,960
18,809
28,072
495
1,004
1,503
3,143
-
53,026
(535)
52,491
(28,515)
(38)
(25,523)
(178,274)
(232,350)
(179,859)
(171,899)
$
$
1,815
1,727
5,458
9,000
32,506
60,252
450
3,004
567
2,437
305
99,521
(535)
98,986
(27,376)
(120)
(26,413)
(182,578)
(236,487)
(137,501)
(128,501)
Deferred income taxes are provided for the temporary differences between assets and liabilities recognized for
financial reporting purposes and assets and liabilities recognized for tax purposes. The ultimate realization of
deferred tax assets depends upon taxable income during the future periods in which those temporary differences
become deductible. To determine whether deferred tax assets can be realized, management assesses whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized, taking into consideration
the scheduled reversal of deferred tax liabilities, projected future taxable income and tax-planning strategies.
Based upon historical taxable income, taxable temporary differences, available and prudent tax planning strategies
and projections for future pre-tax book income over the periods that the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the benefits of these temporary
differences. However, management may reduce the amount of deferred tax assets it considers realizable in the near
term if estimates of future taxable income during the carryforward period are reduced. Estimates of future taxable
income are based on the estimated recognition of taxable temporary differences, available and prudent tax planning
strategies, and projections of future pre-tax book income. The amount of estimated future taxable income is
expected to allow for the full utilization of the net operating loss (“NOL”) carryforwards, as described below.
Consolidated and its wholly owned subsidiaries, which file a consolidated federal income tax return, estimates it has
available federal NOL carryforwards at December 31, 2013, of $43.0 million and related deferred tax assets of
$15.0 million. The federal NOL carryforwards expire from 2026 to 2032. Management believes that the future
utilization of $1.5 million and related deferred tax asset of $0.5 million subject to Separate Return Limitation Year is
uncertain and has placed a full valuation allowance on this amount of the available federal NOL carryforwards. The
related NOL carryforward expires in 2026. The valuation allowance was recorded as a result of the acquisition of
F-35
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
SureWest during 2012. If or when recognized, the tax benefits related to any reversal of the valuation allowance
will be accounted for as a reduction of income tax expense.
ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL
carryforwards at December 31, 2013, of $2.3 million and related deferred tax assets of $0.8 million. ETFL’s federal
NOL carryforwards expire from 2020 to 2024.
We estimate that we have available state NOL carryforwards at December 31, 2013, of $85.8 million and related
deferred tax assets of $2.9 million. The state NOL carryforwards expire from 2016 to 2033.
We estimate that we have available federal alternative minimum tax (“AMT”) credit carryforwards at December 31,
2013, of $0.5 million and related deferred tax assets of $0.5 million. The AMT credits are available to offset future
tax liabilities only to the extent that the Company has regular tax liabilities in excess of AMT tax liabilities. The
federal AMT credit carryforward does not expire.
We estimate that we have available state tax credit carryforwards at December 31, 2013, of $4.1 million and related
deferred tax assets of $2.7 million. The state tax credit carryforward are limited annually and expire from 2016 to
2027.
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 impact on our consolidated results
of operations, cash flows or financial position.
Unrecognized Tax Benefits
Under the accounting guidance applicable to uncertainty in income taxes we have analyzed filing positions in all of
the federal and state jurisdictions where we are required to file income tax returns as well as all open tax years in
these jurisdictions. This accounting guidance clarifies the accounting for uncertainty in income taxes recognized in
a company’s financial statements; prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and provides
guidance on description, classification, interest and penalties, accounting in interim periods, disclosure, and
transition.
Our unrecognized tax benefits as of December 31, 2013 and 2012 were $0 and $1.2 million, respectively. Due to
the expiration of a state statute of limitations, during 2013 we recognized $1.2 million of our previously
unrecognized tax benefits, which resulted in a decrease to our tax expense of approximately $0.8 million. The tax
benefit attributable to the decrease in unrecognized tax benefits did not have a significant effect on our effective tax
rate.
Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and
administrative expense, respectively. During 2013 and 2012 we did not record any material interest or penalty
expense and have no material remaining liability for interest or penalties.
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 be upheld based on the technical merits of our position.
Accordingly, the Company has not made any adjustments to its 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.
F-36
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The following is a reconciliation of the unrecognized tax benefits for the years ended December 31, 2013 and 2012:
(In thousands)
Liability for
Unrecognized
Tax Benefits
2013
2012
Balance at January 1
Additions for tax positions in the current year
Additions for tax positions of prior years
Settlements with taxing authorities
Reduction for lapse of federal statute of limitations
Reduction for lapse of state statute of limitations
Balance at December 31
$
$
1,224
–
–
–
–
(1,224)
-
$
$
1,224
–
–
–
–
–
1,224
11. COMMITMENTS AND CONTINGENCIES
We have certain other obligations for various contractual agreements to secure future rights to goods and services to
be used in the normal course of our operations. These include purchase commitments for planned capital
expenditures, agreements securing dedicated access and transport services, and service and support agreements.
Additionally, we have procured transport resale arrangements with several interexchange carriers for our long
distance services.
As of December 31, 2013, future minimum contractual obligations, including capital and operating leases, and the
estimated timing and effect the obligations will have on our liquidity and cash flows in future periods are as follows:
Minimum Annual Contractual Obligations
(in thousands)
Operating lease agreements
Capital lease agreements
Capital expenditures
(1)
Service and support agreements
Transport and data connectivity
(2)
Total
2014
2015
2016
$
1,272
2,133
$
1,249
1,712
$
1,054
563
2017
$
961
392
2018
$
960
287
Thereafter
2,362
$
793
Total
$
7,858
5,880
8,384
7,221
9,100
28,110
$
–
–
–
–
–
8,384
5,796
9,000
17,757
$
4,873
9,000
15,490
$
890
9,000
11,243
$
233
–
1,480
$
–
–
3,155
$
19,013
36,100
77,235
$
(1) We have binding commitments with numerous suppliers for future capital expenditures.
(2) We have entered into service and maintenance agreements to support various computer hardware and software
applications and certain equipment. If we terminate any of the contracts prior to their expiration date, we would
be liable for minimum commitment payments as defined in by the contractual terms of the contracts.
Leases
Operating
We have entered into various non-cancelable operating leases with terms greater than one year for certain facilities
and equipment used in our operations. The facility leases generally require us to pay operating costs: including
property taxes, insurance and maintenance, and certain of them contain scheduled rent increases and renewal
options. Leasehold improvements are amortized over their estimated useful lives or lease period, whichever is
shorter. We recognize rent expense on a straight-line basis over the term of each lease.
We incurred rent expense of $2.3 million, $2.9 million and $2.1 million for the years ended December 31, 2013,
2012, and 2011, respectively.
Capital Leases
As of December 31, 2013, we had seven capital leases, all of which expire between 2015 and 2021. As of
December 31, 2013, the present value of the minimum remaining lease commitments was approximately $5.1
million, of which $0.7 million was due and payable within the next twelve months. The carrying amount of our
F-37
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
capital lease obligations, net of imputed interest of $2.7 million, was $5.1 million as of December 31, 2013. See
Note 12 for information regarding the capital leases we have entered into with related parties.
Litigation, Regulatory Proceedings and Other Contingencies
On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates
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 is ongoing and we anticipate based on previous results that we will appeal the result to the
Pennsylvania Board of Finance and Revenue on or before 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 FCC’s 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.
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
(“USF”) 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
F-38
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
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 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. RELATED PARTY TRANSACTIONS
Capital Leases
Richard A. Lumpkin, a member of our Board of Directors, together with his family, beneficially owned 41.3% of
Agracel, Inc. (“Agracel”), a real estate investment company, at December 31, 2013 and 2012. Mr. Lumpkin also is
a director of Agracel. Agracel is the sole managing member and 50% owner of LATEL LLC (“LATEL”). Mr.
Lumpkin and his immediate family had a 70.7% beneficial ownership of LATEL at December 31, 2013 and 2012.
As of December 31, 2013, we had three capital lease agreements with LATEL for the occupancy of three buildings
on a triple net lease basis. In accordance with the Company’s related person transactions policy, these leases were
approved by our Audit Committee and Board of Directors (“BOD”).We have accounted for these leases as capital
leases in accordance with ASC Topic 840, Leases, and have capitalized the lower of the present value of the future
minimum lease payments or their fair value. The capital lease agreements require us to pay substantially all
expenses associated with general maintenance and repair, utilities, insurance, and taxes. Each of the three lease
agreements have a maturity date of May 31, 2021 and each have two five-year options to extend the terms of the
lease after the initial expiration date. We are required to pay LATEL approximately $7.9 million over the terms of
the lease agreements. The carrying value of the capital leases at December 31, 2013 and 2012 was approximately
$3.6 million and $3.8 million, respectively. We recognized $0.5 million in interest expense in 2013, 2012 and 2011
and amortization expense of $0.4 million in 2013 and 2012 and $0.1 in 2011, respectively, related to the capitalized
leases.
Long-Term Debt
A portion of the Senior Notes was sold to certain accredited investors consisting of certain members of the
Company’s Board of Directors, including the Company’s Chief Executive Officer (collectively “related parties”). In
May 2012, the related parties purchased $10.8 million of the Senior Notes on the same terms available to other
investors, except that the related parties were not entitled to registration rights. During 2013 and 2012, the Company
paid $1.2 million and $0.6 million, respectively, in interest in the aggregate to the related parties for the Senior
Notes.
F-39
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2013
Net revenues
Operating income
Income from continuing operations
Discontinued operations, net of tax
Net income attributable to common stockholders
Basic and diluted earnings (loss) per share
Income from continuing operations
Discontinued operations, net of tax
Net income per basic and diluted common share
attributable to common shareholders
2012
Quarter Ended
March 31
June 30
S eptember 30
December 31
(In thousands, except per share amounts)
$
$
$
$
$
151,528
28,330
6,858
24
6,783
$
$
$
$
$
151,320
26,947
9,560
(272)
9,194
$
$
$
$
$
150,773
26,167
10,330
1,425
11,694
$
147,956
$
22,217
$
3,216
$
-
$
3,140
$
0.17
-
$
0.23
(0.01)
$
0.26
0.03
$
0.08
-
$
0.17
$
0.22
$
0.29
$
0.08
Quarter Ended
March 31
June 30
S eptember 30
December 31
(In thousands, except per share amounts)
Net revenues
Operating income
Income (loss) from continuing operations
Discontinued operations, net of tax
Net income (loss) attributable to common stockholders
$
$
$
$
$
86,451
9,918
1,177
707
1,759
$
$
$
$
$
86,557
13,147
2,321
585
2,786
$
$
$
$
$
151,025
8,185
(1,311)
467
(965)
$
$
$
$
$
153,844
20,167
2,778
(553)
2,060
Basic and diluted earnings (loss) per share:
Income from continuing operations
Discontinued operations, net of tax
Net income per basic and diluted common share
attributable to common shareholders
$
0.03
0.03
$
0.07
0.02
$
(0.03)
0.01
$
0.07
(0.02)
$
0.06
$
0.09
$
(0.02)
$
0.05
As described in Note 3, in September 2013, we completed the sale of the assets and contractual rights of our prison
services business for a total cash 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 have been reported as a discontinued operation in our consolidated
financial statements for all periods presented.
During the third quarter of 2012, we acquired 100% of the outstanding shares of SureWest in a cash and stock
transaction. SureWest results of operations have been included in our consolidated financial statements as of the
acquisition date of July 2, 2012.
14. 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 Kansas Holdings, Inc., SureWest Fiber Ventures, LLC, SureWest Kansas Connections, LLC,
SureWest Kansas Licenses, LLC, SureWest Kansas Operations, LLC and SureWest Kansas Purchasing, LLC, have
jointly and severally guaranteed the Senior Notes. All of the subsidiary guarantors are 100% direct or indirect
wholly owned subsidiaries of the parent, 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 December 31, 2013 and 2012, and condensed consolidating statements of operations and cash flows for the years
ended December 31, 2013, 2012 and 2011 for each of Consolidated Communications Holdings, Inc. (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.
F-40
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Condensed Consolidating Balance Sheets
(amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Income taxes receivable
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Parent
Subsidiary
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
December 31, 2013
-
$
-
9,346
(61)
-
9,285
$
86
502
-
(7)
-
581
$
2,366
44,521
370
7,533
11,862
66,652
$
3,099
7,010
80
495
518
11,202
-
$
-
-
-
-
-
$
5,551
52,033
9,796
7,960
12,380
87,720
Property, plant and equipment, net
-
-
834,199
51,163
-
885,362
Intangibles and other assets:
Investments
Investments in subsidiaries
Goodwill
Other intangible assets
Deferred debt issuance costs, net and other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Advance billings and customer deposits
Dividends payable
Accrued compensation
Accrued expense
Current portion of long term debt and capital
lease obligations
Current portion of derivative liability
Total current liabilities
Long-term debt and capital lease obligations
Advances due to/from affiliates, net
Deferred income taxes
Pension and postretirement benefit obligations
Other long-term liabilities
Total liabilities
Shareholders' equity:
Common Stock
Other shareholders' equity
Total Consolidated Communications Holdings, Inc.
shareholders' equity
Noncontrolling interest
Total shareholders' equity
Total liabilities and shareholders' equity
-
1,101,039
-
-
-
1,110,324
$
3,729
335,659
-
-
13,620
353,589
$
109,370
12,130
537,265
30,997
4,047
1,594,660
$
-
-
66,181
9,087
-
137,633
$
-
(1,448,828)
-
-
-
(1,448,828)
$
113,099
-
603,446
40,084
17,667
1,747,378
$
-
$
-
15,520
-
224
$
-
-
-
-
4,389
$
4,885
23,699
-
20,447
32,709
-
$
2,235
-
1,805
1,375
$
-
-
15,744
-
968,319
(21,598)
-
25
962,490
401
147,433
9,100
660
14,149
1,207,663
(1,970,192)
(1,029)
-
1,960
(747,449)
-
1,101,038
586
-
82,326
3,659
1,037,969
184,209
61,053
7,328
1,376,544
17,411
196,200
-
-
-
-
-
-
-
-
-
-
-
-
-
$
4,885
25,934
15,520
22,252
38,697
9,751
660
117,699
1,212,134
-
179,859
75,754
9,593
1,595,039
401
147,433
65
-
5,480
812
(36,096)
18,277
14,701
280
3,454
30,000
104,179
(47,411)
(1,401,417)
147,834
-
147,834
1,110,324
$
1,101,038
-
1,101,038
353,589
$
213,611
4,505
218,116
1,594,660
$
134,179
-
134,179
137,633
$
(1,448,828)
-
(1,448,828)
(1,448,828)
$
147,834
4,505
152,339
1,747,378
$
F-41
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Income taxes receivable
Deferred income taxes
Prepaid expenses and other current assets
Assets of discontinued operations
Total current assets
Parent
Subsidiary
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
December 31, 2012
$
-
19
4,258
(51)
-
-
4,226
$
6,577
457
-
(310)
-
-
6,724
$
8,530
49,483
7,886
8,985
10,855
1,189
86,928
$
2,747
7,998
(124)
376
414
-
11,411
$
-
-
-
-
-
-
-
$
17,854
57,957
12,020
9,000
11,269
1,189
109,289
Property, plant and equipment, net
-
-
855,158
52,514
-
907,672
Intangibles and other assets:
Investments
Investments in subsidiaries
Goodwill
Other intangible assets
Deferred debt issuance costs, net and other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Advance billings and customer deposits
Dividends payable
Accrued compensation
Accrued expense
Current portion of long term debt and capital
lease obligations
Current portion of derivative liability
Liabilities of discontinued operations
Total current liabilities
Long-term debt and capital lease obligations
Advances due to/from affiliates, net
Deferred income taxes
Pension and postretirement benefit obligations
Other long-term liabilities
Total liabilities
Shareholders' equity:
Common Stock
Other shareholders' equity
Total Consolidated Communications Holdings, Inc.
shareholders' equity
Noncontrolling interest
Total shareholders' equity
Total liabilities and shareholders' equity
-
958,199
-
-
-
962,425
$
3,641
219,955
-
-
12,788
243,108
$
106,094
11,234
537,265
40,443
1,012
1,638,134
$
15
-
66,181
9,087
-
139,208
$
-
(1,189,388)
-
-
-
(1,189,388)
$
109,750
-
603,446
49,530
13,800
1,793,487
$
-
$
-
15,463
36
235
$
-
-
-
-
3,373
$
14,954
25,131
-
19,863
39,673
-
$
2,523
-
2,013
3,944
$
-
-
-
15,734
-
817,118
(2,357)
-
-
830,495
399
131,531
9,242
3,164
-
15,779
1,203,760
(1,934,978)
(3,571)
-
3,919
(715,091)
-
958,199
300
-
4,209
104,130
3,611
1,137,159
134,550
125,706
6,587
1,511,743
17,411
104,805
54
-
-
8,534
877
(19,299)
8,879
31,004
240
30,235
30,000
78,973
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
14,954
27,654
15,463
21,912
47,225
9,596
3,164
4,209
144,177
1,208,248
-
137,501
156,710
10,746
1,657,382
399
131,531
(47,411)
(1,141,977)
131,930
-
131,930
962,425
$
958,199
-
958,199
243,108
$
122,216
4,175
126,391
1,638,134
$
108,973
-
108,973
139,208
$
(1,189,388)
-
(1,189,388)
(1,189,388)
$
131,930
4,175
136,105
1,793,487
$
F-42
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Condensed Consolidating Statements of Operations
(amounts in thousands)
Year Ended December 31, 2013
Net revenues
Operating expenses:
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative expenses
Financing and other transaction costs
Depreciation and amortization
Operating income (loss)
Other income (expense):
Interest expense, net of interest income
Intercompany interest income (expense)
Loss on extinguishment of debt
Investment income
Equity in earnings of subsidiaries, net
Other, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Discontinued operations, net of tax
Net income (loss)
Less: net income attributable to noncontrolling interest
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.
Total comprehensive income (loss) attributable to
common shareholders
Net revenues
Operating expenses:
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative expenses
Financing and other transaction costs
Intangible assets impairment
Depreciation and amortization
Operating income (loss)
Other income (expense):
Interest expense, net of interest income
Intercompany interest income (expense)
Loss on extinguishment of debt
Investment income
Equity in earnings of subsidiaries, net
Other, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Discontinued operations, net of tax
Net income (loss)
Less: net income attributable to noncontrolling interest
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.
Total comprehensive income (loss) attributable to
common shareholders
Parent
$
-
Subsidiary
Issuer
$
(60)
Guarantors Non-Guarantors
68,128
$
$
547,635
Eliminations
$
(14,126)
Consolidated
$
601,577
-
3,608
457
-
(4,065)
100
(103,588)
-
-
98,055
(18)
(9,516)
(40,327)
30,811
-
30,811
-
-
167
-
-
(227)
(86,090)
126,918
(7,657)
89
74,479
-
107,512
9,457
98,055
-
98,055
-
220,764
113,942
319
130,455
82,155
181
(24,662)
-
37,606
896
(448)
95,728
38,038
57,690
1,177
58,867
330
14,635
18,876
-
8,819
25,798
42
1,332
-
-
-
10
27,182
10,344
16,838
-
16,838
-
(12,947)
(1,179)
-
-
-
-
-
-
-
(173,430)
-
(173,430)
-
(173,430)
-
(173,430)
-
222,452
135,414
776
139,274
103,661
(85,767)
-
(7,657)
37,695
-
(456)
47,476
17,512
29,964
1,177
31,141
330
$
30,811
$
98,055
$
58,537
$
16,838
$
(173,430)
$
30,811
$
30,811
$
101,616
$
91,395
$
25,203
$
(173,430)
$
75,595
Year Ended December 31, 2012
Parent
$
-
Subsidiary
Issuer
$
(15)
Guarantors Non-Guarantors
68,774
$
$
423,303
Eliminations
$
(14,185)
Consolidated
$
477,877
-
2,530
11,269
-
-
(13,799)
(20)
(50,126)
-
-
48,942
-
(15,003)
(20,643)
5,640
-
5,640
-
-
385
9,531
-
-
(9,931)
(71,704)
87,717
(4,455)
246
48,272
1
50,146
1,204
48,942
-
48,942
-
175,759
88,664
-
1,236
107,064
50,580
(816)
(37,509)
-
30,421
1,435
617
44,728
11,239
33,489
1,206
34,695
531
14,355
16,584
-
-
13,268
24,567
(64)
(82)
-
-
-
(17)
24,404
8,861
15,543
-
15,543
-
(14,185)
-
-
-
-
-
-
-
-
-
(98,649)
-
(98,649)
-
(98,649)
-
(98,649)
-
175,929
108,163
20,800
1,236
120,332
51,417
(72,604)
-
(4,455)
30,667
-
601
5,626
661
4,965
1,206
6,171
531
$
5,640
$
48,942
$
34,164
$
15,543
$
(98,649)
$
5,640
$
5,640
$
53,920
$
24,816
$
11,962
$
(98,649)
$
(2,311)
F-43
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Year Ended December 31, 2011
Net revenues
Operating expenses:
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative expenses
Financing and other transaction costs
Depreciation and amortization
Operating income (loss)
Other income (expense):
Interest expense, net of interest income
Intercompany interest income (expense)
Investment income
Equity in earnings of subsidiaries, net
Other, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Discontinued operations, net of tax
Net income (loss)
Less: net income attributable to noncontrolling interest
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.
Total comprehensive income (loss) attributable to
common shareholders
Parent
$
-
Subsidiary
Issuer
$
25
Guarantors Non-Guarantors
71,249
$
$
291,500
Eliminations
$
(13,771)
Consolidated
$
349,003
-
2,249
-
-
(2,249)
-
(40,283)
-
53,217
-
10,685
(15,725)
26,410
-
26,410
-
-
2,724
-
-
(2,699)
(48,095)
80,142
246
34,399
-
63,993
10,776
53,217
-
53,217
-
120,750
56,677
2,649
72,999
38,425
(1,130)
(39,407)
27,597
1,542
1,422
28,449
9,219
19,230
2,694
21,924
572
14,732
16,074
-
15,091
25,352
(166)
(452)
-
-
(1,274)
23,460
8,871
14,589
-
14,589
-
(13,771)
-
-
-
-
-
-
-
(89,158)
-
(89,158)
-
(89,158)
-
(89,158)
-
121,711
77,724
2,649
88,090
58,829
(49,391)
-
27,843
-
148
37,429
13,141
24,288
2,694
26,982
572
$
26,410
$
53,217
$
21,352
$
14,589
$
(89,158)
$
26,410
$
26,410
$
60,814
$
11,830
$
10,152
$
(89,158)
$
20,048
Condensed Consolidating Statements of Cash Flows
(amounts in thousands)
Net cash (used in) provided by continuing operations
Net cash used in discontinued operations
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Purchase of investments
Proceeds from sale of assets
Net cash used in continuing operations
Net cash provided by discontinued operations
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt
Payment of capital lease obligation
Payment on long-term debt
Payment of financing costs
Dividends on common stock
Purchase and retirement of common stock
Transactions with affiliates, net
Net cash provided by (used in) financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31, 2013
Parent
$
(88,251)
-
(88,251)
Subsidiary
Issuer
$
36,811
-
36,811
Guarantors
195,591
$
(4,174)
191,417
Non-Guarantors
24,379
$
-
24,379
Consolidated
168,530
$
(4,174)
164,356
-
-
-
-
-
-
-
-
-
-
-
-
(100,139)
(403)
282
(100,260)
2,331
(97,929)
(7,224)
-
48
(7,176)
-
(7,176)
(107,363)
(403)
330
(107,436)
2,331
(105,105)
-
-
-
-
(62,064)
(887)
151,202
88,251
-
-
$
-
989,450
-
(990,961)
(6,576)
-
-
(35,215)
(43,302)
(6,491)
6,577
86
$
-
(462)
-
-
-
-
(99,190)
(99,652)
(6,164)
8,530
2,366
$
-
(54)
-
-
-
-
(16,797)
(16,851)
352
2,747
3,099
$
989,450
(516)
(990,961)
(6,576)
(62,064)
(887)
-
(71,554)
(12,303)
17,854
5,551
$
F-44
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Net cash (used in) provided by continuing operations
Net cash provided by discontinued operations
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Business acquisition, net of cash acquired
Purchases of property, plant and equipment
Purchase of investments
Proceeds from sale of assets
Other
Net cash used in continuing operations
Net cash used in discontinued operations
Net cash used in investing activities
Cash flows from financing activities:
Proceeds on bond offering
Proceeds from issuance of long-term debt
Payment of capital lease obligation
Payment on long-term debt
Payment of financing costs
Distributions to noncontrolling interest
Dividends on common stock
Purchase and retirement of common stock
Transactions with affiliates, net
Net cash provided by (used in) financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31, 2012
Parent
$
(52,318)
-
(52,318)
Subsidiary
Issuer
$
13,106
-
13,106
Guarantors
$
137,386
3,483
140,869
Non-Guarantors
$
21,558
-
21,558
Consolidated
$
119,732
3,483
123,215
(385,346)
-
-
-
(314)
(385,660)
-
(385,660)
-
-
-
-
-
-
(54,100)
(559)
492,637
437,978
-
-
$
-
-
-
-
-
-
-
-
-
-
(70,948)
(6,728)
882
-
(76,794)
(97)
(76,891)
-
(6,050)
-
42
-
(6,008)
-
(6,008)
298,035
544,850
-
(510,038)
(18,616)
-
-
-
(424,129)
(109,898)
(96,792)
103,369
6,577
$
-
-
(183)
-
-
3,150
-
-
(58,495)
(55,528)
8,450
80
8,530
$
-
-
(45)
-
-
(5,000)
-
-
(10,013)
(15,058)
492
2,255
2,747
$
(385,346)
(76,998)
(6,728)
924
(314)
(468,462)
(97)
(468,559)
298,035
544,850
(228)
(510,038)
(18,616)
(1,850)
(54,100)
(559)
-
257,494
(87,850)
105,704
17,854
$
F-45
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Net cash (used in) provided by continuing operations
Net cash provided by discontinued operations
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Proceeds from sale of assets
Other
Net cash used in continuing operations
Net cash used in discontinued operations
Net cash used in investing activities
Cash flows from financing activities:
Payment of capital lease obligation
Payment of financing costs
Dividends on common stock
Purchase and retirement of common stock
Transactions with affiliates, net
Net cash provided by (used in) financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31, 2011
Parent
$
(27,033)
-
(27,033)
Subsidiary
Issuer
$
22,335
-
22,335
Guarantors
$
98,764
5,202
103,966
Non-Guarantors
$
30,236
-
30,236
Consolidated
$
124,302
5,202
129,504
-
-
-
-
-
-
-
-
-
-
-
-
(35,212)
511
272
(34,429)
(119)
(34,548)
(6,582)
329
-
(6,253)
-
(6,253)
(41,794)
840
272
(40,682)
(119)
(40,801)
-
-
(46,307)
(726)
74,066
27,033
-
-
$
-
-
(3,471)
-
-
19,107
15,636
37,971
65,398
103,369
$
(113)
-
-
-
(69,277)
(69,390)
28
52
80
$
(36)
-
-
-
(23,896)
(23,932)
51
2,204
2,255
$
(149)
(3,471)
(46,307)
(726)
-
(50,653)
38,050
67,654
105,704
$
F-46
INDEPENDENT AUDITORS REPORT
To the Partners of Pennsylvania RSA No. 6 (II) Limited Partnership:
We have audited the accompanying financial statements of Pennsylvania RSA No. 6 (II) Limited Partnership (the
"Partnership") which comprise the balance sheets as of December 31, 2012, and the related statements of operations,
changes in partners’ capital, and cash flows for each of the two years in the period ended December 31, 2012, and
the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with
accounting principles generally accepted in the United States of America; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are
free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments,
the auditor considers internal control relevant to the Partnership's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership's internal control. Accordingly, we express no such
opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of Pennsylvania RSA No. 6 (II) Limited Partnership as of December 31, 2012, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2012 in accordance with accounting
principles generally accepted in the United States of America.
Other Matters
The accompanying balance sheet of the Partnership as of December 31, 2013, and the related statement of
operations, change in partner’s capital and cash flows for the year then ended were not audited, reviewed, or
compiled by us and, accordingly, we do not express an opinion or any other form of assurance on them.
/s/ Deloitte & Touche LLP
Atlanta, GA
March 12, 2013
F-47
Pennsylvania RSA No. 6 (II) Limited Partnership
Balance Sheets - As of December 31, 2013 (unaudited) and 2012
(Dollars in Thousands)
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance of $225 and $143
Unbilled revenue
Due from affiliate
Total current assets
PROPERTY, PLANT AND EQUIPMENT(cid:650)Net
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities
Advance billings and customer deposits
Total current liabilities
LONG TERM LIABILITIES
Total liabilities
PARTNERS' CAPITAL
2013
(unaudited)
2012
$
12,176
919
12,113
$
14,750
890
7,374
25,208
12,651
190
23,014
12,412
27
$
38,049
$
35,453
$
3,329
3,857
$
3,804
3,648
7,186
627
7,813
7,452
411
7,863
30,236
27,590
TOTAL LIABILITIES AND PARTNERS' CAPITAL
$
38,049
$
35,453
See Notes to the financial statements.
F-48
Pennsylvania RSA No. 6 (II) Limited Partnership
Statements of Operations - Years Ended December 31, 2013 (unaudited), 2012 and 2011
(Dollars in Thousands)
OPERATING REVENUE:
Service revenue
Equipment and other
2013
(unaudited)
2012
2011
$
120,364
23,360
$
112,987
22,699
$
112,822
22,758
Total operating revenue
143,724
135,686
135,580
OPERATING COSTS AND EXPENSES:
Cost of service (exclusive of depreciation and amortization)
Cost of equipment
Selling, general and administrative
Depreciation and amortization
41,062
25,150
37,387
2,500
38,665
25,416
35,758
2,446
45,726
25,347
33,139
2,619
Total operating costs and expenses
106,099
102,285
106,831
OPERATING INCOME
37,625
33,401
28,749
INTEREST INCOME, NET
21
15
26
NET INCOME
$
37,646
$
33,416
$
28,775
Allocation of Net Income
Limited Partners
General Partner
See notes to financial statements.
$
$
18,398
19,248
$
$
16,330
17,086
$
$
14,062
14,713
F-49
Pennsylvania RSA No. 6 (II) Limited Partnership
Statements of Changes in Partners’ Capital - Years Ended December 31, 2013 (unaudited), 2012 and 2011
(Dollars in Thousands)
General
Partner
Cellco
Partnership
Cellco
Partnership
BALANCE(cid:650)January 1, 2011
$
13,242
$
2,210
Distributions
Net Income
(17,384)
14,713
BALANCE(cid:650)December 31, 2011
$
10,571
(2,900)
2,453
1,763
Distributions
Net Income
BALANCE(cid:650)December 31, 2012
Distributions
Net Income
BALANCE(cid:650)December 31, 2013
(unaudited)
See notes to financial statements.
(13,549)
(2,260)
17,086
14,108
(17,895)
19,248
2,850
2,353
(2,986)
3,212
Limited Partners
Consolidated
Communications
Enterprise
Services, Inc.
$
6,130
Venus
Cellular
Telephone
Company, Inc.
$
4,317
Total
Partners'
Capital
$
25,899
(8,048)
6,812
4,894
(6,273)
7,909
6,530
(8,284)
8,911
(5,668)
(34,000)
4,797
3,446
28,775
20,674
(4,418)
(26,500)
5,571
4,599
33,416
27,590
(5,835)
(35,000)
6,275
37,646
$
15,461
$
2,579
$
7,157
$
5,039
$
30,236
F-50
Pennsylvania RSA No. 6 (II) Limited Partnership
Statements of Cash Flows - Years Ended December 31, 2013 (unaudited), 2012 and 2011
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Provision for losses on accounts receivable
Changes in certain assets and liabilities:
Accounts receivable
Unbilled revenue
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued liabilities
Advance billings and customer deposits
Long term liabilites
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net
Change in due from affiliate, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners
2013
(unaudited)
$
37,646
2012
2011
$
33,416
$
28,775
2,500
531
2,043
(29)
-
(163)
(177)
209
216
42,776
(3,037)
(4,739)
(7,776)
2,446
270
(6,015)
201
22
-
85
266
56
30,747
(2,990)
(1,257)
(4,247)
2,619
722
(1,644)
(53)
-
-
564
263
81
31,327
(2,151)
4,824
2,673
(35,000)
(26,500)
(34,000)
Net cash used in financing activities
(35,000)
(26,500)
(34,000)
CHANGE IN CASH
CASH(cid:650)Beginning of year
-
-
-
-
-
-
CASH(cid:650)End of year
$
-
$
-
$
-
CASH PAID FOR INTEREST
$
-
$
-
$
-
NONCASH TRANSACTIONS FROM INVESTING ACTIVITIES:
Accruals for Capital Expenditures
$
102
$
400
$
7
See notes to financial statements.
F-51
Pennsylvania RSA No. 6 (II) Limited Partnership
Notes to Financial Statements - Years Ended December 31, 2013 (unaudited), 2012 and
2011
(Dollars in Thousands)
1. ORGANIZATION AND MANAGEMENT
Pennsylvania RSA No. 6 (II) Limited Partnership – Pennsylvania RSA No. 6 (II)
Limited Partnership (the “Partnership”) was formed in 1991. The principal activity of the
Partnership is providing cellular service in the Pennsylvania 6 (II) rural service area.
Under the terms of the partnership agreement, the partnership expires on January 1, 2091.
The partners and their respective ownership percentages as of December 31, 2013
(unaudited), 2012 and 2011 are as follows:
General Partner:
Cellco Partnership* ("General Partner")
51.13 %
Limited Partners:
8.53 %
Cellco Partnership*
Consolidated Communications Enterprise Services, Inc. ** 23.67 %
16.67 %
Venus Cellular Telephone Company, Inc.
*Cellco Partnership (“Cellco”) doing business as Verizon Wireless.
**Consolidated Communications Enterprise Services, Inc. (CCES) is a wholly-owned
subsidiary of Consolidated Communications Holdings, Inc.
In accordance with the partnership agreement, Cellco is responsible for managing the
operations of the partnership (See Note 5).
2.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates – The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect reported amounts and disclosures. Actual
results could differ from those estimates. Estimates are used for, but are not limited to, the
accounting for: revenue and expense, allocations, allowance for uncollectible accounts
receivable, unbilled revenue, depreciation and amortization, useful lives and impairment
of assets, accrued expenses, and contingencies.
Revenue Recognition – The Partnership offers products and services to our customers
through bundled arrangements. These arrangements involve multiple deliverables which
may include products, services, or a combination of products and services.
F-52
The Partnership earns revenue by providing access to its network (access revenue) and
usage of its network (usage revenue), which includes voice and data revenue. Customers
are associated with the Partnership based upon mobile identification number. In general,
access revenue is billed one month in advance and is recognized when earned; the
unearned portion is classified in Advance billings in the balance sheet. Usage revenue is
recognized when service is rendered and included in unbilled revenue until billed.
Equipment sales revenue associated with the sale of wireless devices and related
equipment costs are recognized when the products are delivered to and accepted by the
customer, as this is considered to be a separate earnings process from the sale of wireless
services. Customer activation fees charged to customers are considered additional
consideration and are recorded in Equipment and other revenue, generally, at the time of
customer acceptance. For agreements involving the resale of third-party services in which
the Partnership is considered the primary obligor in the arrangements, the Partnership
records revenue gross at the time of sale. For equipment sales, the Partnership currently
subsidizes the cost of wireless devices. The amount of this subsidy is generally contingent
on the arrangement and terms selected by the customer. In multiple deliverable
arrangements which involve the sale of equipment and a service contract, the equipment
revenue is recognized up to the amount collected when the wireless device is sold.
The roaming rates charged by the Partnership to Cellco do not necessarily reflect current
market rates. The Partnership will continue to re-evaluate the rates on a periodic basis
(See Note 5).
The Partnership reports taxes imposed by governmental authorities on revenue-producing
transactions between us and our customers on a net basis.
Cellular service revenues resulting from a cellsite agreement with Cellco are recognized
based upon a rate per minute of use (See Note 5).
Operating Costs and Expenses – Operating expenses include expenses incurred directly
by the Partnership, as well as an allocation of selling, general and administrative, and
operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees
of Cellco provide services performed on behalf of the Partnership. These employees are
not employees of the Partnership, therefore operating expenses include direct and
allocated charges of salary and employee benefit costs for the services provided to the
Partnership. Cellco believes such allocations, principally based on the Partnership’s
percentage of total customers, customer gross additions or minutes-of-use, are in
accordance with the Partnership Agreement and are a reasonable method of allocating
such costs. The roaming rates charged to the Partnership by Cellco do not necessarily
reflect current market rates. The Partnership will continue to re-evaluate the rates on a
periodic basis (see Note 5).
Retail Stores– The daily operations of all retail stores owned by the Partnership are
managed by Cellco. All fixed assets, liabilities, income and expenses related to these
retail stores are recorded in the financial statements of the Partnership.
F-53
Comprehensive Income– Comprehensive income is the same as net income as presented
in the accompanying statements of operations.
Income Taxes – The Partnership is not a taxable entity for federal and state income tax
purposes. Any taxable income or loss is apportioned to the partners based on their
respective partnership interests and is reported by them individually.
Inventory – Inventory is owned by Cellco and is not recorded on the Partnership’s
financial statements. Upon sale, the related cost of the inventory is transferred to the
Partnership at Cellco’s cost basis and included in the accompanying statements of
operations.
Allowance for Doubtful Accounts – The Partnership maintains allowances for
uncollectible accounts receivable for estimated losses resulting from the inability of
customers to make required payments. Estimates are based on the aging of the accounts
receivable balances and the historical write-off experience, net of recoveries.
Property, Plant and Equipment – Property, plant and equipment primarily represents
costs incurred to construct and expand capacity and network coverage on mobile
telephone switching offices and cell sites. The cost of property, plant and equipment is
depreciated over its estimated useful life using the straight-line method of depreciation.
Leasehold improvements are amortized over the shorter of their estimated useful lives or
the term of the related lease. Major improvements to existing plant and equipment that
extend the useful lives are capitalized. Routine maintenance and repairs that do not
extend the life of the plant and equipment are charged to expense as incurred.
Upon the sale or retirement of property, plant and equipment, the cost and related
accumulated depreciation or amortization are eliminated and any related gain or loss is
reflected in the statements of operations. All property, plant and equipment purchases are
made through an affiliate of Cellco. Transfers of property, plant and equipment between
Cellco and affiliates are recorded at net book value and included in due from affiliate
until settled.
Network engineering costs incurred during the construction phase of the Partnership’s
network and real estate properties under development are capitalized as part of the
property, plant and equipment and recorded as construction in progress until the projects
are completed and placed into service.
FCC Licenses – The Federal Communications Commission (“FCC”) issues licenses that
authorize cellular carriers to provide service in specific cellular geographic service areas.
The FCC grants licenses for terms of up to ten years. In 1993 the FCC adopted specific
standards to apply to cellular renewals, concluding it will award a license renewal to a
cellular licensee that meets certain standards of past performance. Historically, the FCC
has granted license renewals routinely and at nominal costs, which are expensed as
incurred. All wireless licenses issued by the FCC that authorize the Partnership to
provide cellular services are recorded on the books of Cellco. The current terms of the
F-54
Partnership’s FCC license expires in October 2020. Cellco and the Partnership believe
they will be able to meet all requirements necessary to secure renewal of the Partnership’s
cellular license.
Valuation of Assets – Long-lived assets, including property, plant and equipment and
intangible assets with finite lives, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. The impairment loss would be measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset.
Cellco and the Partnership test their wireless licenses for potential impairment annually,
and more frequently if indications of impairment exist. In 2013, Cellco and the
Partnership performed a qualitative assessment to determine whether it is more likely
than not that the fair value of its wireless licenses was less than the carrying amount. As
part of the assessment Cellco and the Partnership considered several qualitative factors
including the business enterprise value and other industry and market considerations.
Based on our assessment in 2013 (unaudited), Cellco and the Partnership qualitatively
concluded that it was more likely than not that the fair value of their wireless licenses
significantly exceeded their carrying value and therefore did not result in any impairment.
In 2012 and 2011 Cellco and the Partnership evaluated their licenses on an aggregate
basis, using a direct income-based value approach. This approach estimates fair value
using a discounted cash flow analysis to estimate what a marketplace participant would
be willing to pay to purchase the aggregated wireless licenses as of the valuation date. If
the fair value of the aggregated wireless licenses is less than the aggregated carrying
amount of the wireless licenses, an impairment is recognized.
In addition, Cellco believes that under the Partnership agreement it has the right to
allocate, based on a reasonable methodology, any impairment loss recognized by Cellco
for all licenses included in Cellco’s national footprint. Cellco does not charge the
Partnership for the use of any FCC license recorded on its books (except for the annual
cost of $318 (unaudited) related to the spectrum leases). Cellco and the Partnership
evaluated their wireless licenses for potential impairment as of December 15, 2013
(unaudited) and December 15, 2012. These evaluations resulted in no impairment of
wireless licenses.
Concentrations – The Partnership maintains allowances for uncollectible accounts
receivable for estimated losses resulting from the inability of customers to make required
payments. Estimates are based on historical net write-off experience. No single customer
receivable is large enough to present a significant financial risk to the partnership.
Cellco and the Partnership rely on local and long-distance telephone companies, some of
which are related parties (See Note 5), and other companies to provide certain
communication services. Although management believes alternative telecommunications
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facilities could be found in a timely manner, any disruption of these services could
potentially have a material adverse impact on the Partnership’s operating results.
Although Cellco attempts to maintain multiple vendors for its network assets and
inventory, which are important components of its operations, they are currently acquired
from only a few sources. Certain of these products are in turn utilized by the Partnership
and are important components of the Partnership’s operations. If the suppliers are unable
to meet Cellco’s needs as it builds out its network infrastructure and sells service and
equipment, delays and increased costs in the expansion of the Partnership’s network
infrastructure or losses of potential customers could result, which would adversely affect
operating results.
Financial Instruments – The Partnership’s trade receivables and payables are short-term
in nature, and accordingly, their carrying value approximates fair value.
Due from affiliate – Due from affiliate principally represents the Partnership’s cash
position with Cellco. Cellco manages, on behalf of the Partnership, all cash, inventory,
investing and financing activities of the Partnership. As such, the change in due from
affiliate is reflected as an investing activity or a financing activity in the statements of
cash flows depending on whether it represents a net asset or net liability for the
Partnership.
Additionally, administrative and operating costs incurred by Cellco on behalf of the
Partnership, as well as property, plant and equipment transactions with affiliates, are
charged to the Partnership through this account. Starting in 2011, interest income is based
on the Applicable Federal Rate which was approximately .2% (unaudited), .2% and .4%
for the years ended December 31, 2013 (unaudited), 2012 and 2011, respectively.
Interest expense is calculated by applying Cellco’s average cost of borrowing from
Verizon Communications, Inc, which was approximately 7.4% (unaudited), 7.3%, 6.8%
for the years ended December 31, 2013 (unaudited), 2012, and 2011 respectively.
Included in net interest income is interest income of $18 (unaudited), $15 and $31 for the
years ended December 31, 2013 (unaudited), 2012 and 2011, respectively, related to due
from affiliate.
Distributions - The Partnership is required to make distributions to its partners based
upon the Partnership’s operating results, due to/from affiliate status and financing needs
as determined by the General Partner at the date of the distribution.
Recently Adopted Accounting Standards - During the first quarter of 2013, we adopted
the accounting standard update regarding testing of intangible assets for impairment. This
standard update allows companies the option to perform a qualitative assessment to
determine whether it is more likely than not that an indefinite-lived intangible asset is
impaired. An entity is not required to calculate the fair value of an indefinite-lived
intangible asset and perform the quantitative impairment test unless the entity determines
that it is more likely than not the asset is impaired. The adoption of this standard did not
have a significant impact on the financial statements.
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Subsequent Events – Events subsequent to December 31, 2012 have been evaluated
through March 5, 2014, the date the financial statements were issued.
3.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of the following as of December 31, 2013
(unaudited) and 2012:
Buildings and improvements (15-40 years)
Wireless plant and equipment (3-15 years)
Furniture, fixtures and equipment (3-10 years)
Leasehold improvements (5 years)
Less: accumulated depreciation
2013
(unaudited)
2012
8,501
22,682
563
1,210
32,956
20,305
7,807
21,421
509
1,138
30,875
18,463
Property, plant and equipment, net
$
12,651
$
12,412
Depreciation expense
$
2,473
$
2,419
Capitalized network engineering costs of $201 (unaudited) and $224 were recorded
during the years ended December 31, 2013 (unaudited) and 2012, respectively.
Construction in progress included in certain classifications shown above, principally
wireless plant and equipment, amounted to $1,478 (unaudited) and $556 as of December
31, 2013 (unaudited) and 2012, respectively.
4. CURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following as of December 31,
2013 (unaudited) and 2012:
Accounts payable
Accrued liabilities
2013
(unaudited)
2012
$
3,117
212
$
3,578
226
Accounts payable and accrued libilities
$
3,329
$
3,804
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Advance billings and customer deposits consist of the following as of December 31, 2013
(unaudited) and 2012:
Advance billings
Customer deposits
Advance billings and customer deposits
2013
(unaudited)
2012
$
3,764
93
$
3,565
83
$
3,857
$
3,648
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
In addition to fixed asset purchases (see Note 2), substantially all of service revenues,
equipment and other revenues, cost of service, cost of equipment, and selling, general and
administrative expenses represent transactions processed by affiliates (Cellco and its
related parties) on behalf of the Partnership or represent transactions with affiliates.
These transactions consist of revenues and expenses that pertain to the Partnership which
are processed by Cellco and directly attributed to or directly charged to the Partnership.
They also include certain revenues and expenses that are processed or incurred by Cellco
which are allocated to the Partnership based on factors such as the Partnership’s
percentage of customers, gross customer additions, or minutes of use. These transactions
do not necessarily represent arm’s length transactions and may not represent all revenues
and costs if the Partnership operated on a standalone basis.
Service revenues - Service revenues include monthly customer billings processed by
Cellco on behalf of the Partnership and roaming revenues relating to customers of other
affiliated markets that are specifically identified to the Partnership. Service revenue also
includes long distance, data, and certain revenue reductions including revenue
concessions that are processed by Cellco and allocated to the Partnership based on certain
factors deemed appropriate by Cellco.
Equipment and other revenues - Equipment revenue includes equipment sales processed
by Cellco and specifically identified to the Partnership, as well as certain handset and
accessory revenues, contra-revenues including equipment concessions, and coupon
rebates that are processed by Cellco and allocated to the Partnership based on certain
factors deemed appropriate by Cellco. Other revenues include cell sharing revenue, and
other fees and surcharges charged to the customer that are specifically identified to the
Partnership.
Cost of Service - Cost of service includes roaming costs relating to customers roaming in
other affiliated markets, cell sharing costs that are specifically identified to the
Partnership. Cost of service also includes cost of telecom, long distance and application
content that are incurred by Cellco and allocated to the Partnership based on certain
factors deemed appropriate by Cellco. The Partnership has also entered into a lease
agreement for the right to use additional spectrum owned by Cellco. See Note 6 for
further information regarding this arrangement.
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Cost of equipment - Cost of equipment includes the cost of inventory specifically
identified and transferred to the Partnership (see Note 2). Cost of equipment also includes
certain costs related to handsets, accessories and other costs incurred by Cellco and
allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Selling, general and administrative - Selling, general and administrative expenses include
commissions, customer billing, office telecom, customer care, salaries, sales and
marketing and advertising expenses that are specifically identified to the Partnership as
well as incurred by Cellco and allocated to the Partnership based on certain factors
deemed appropriate by Cellco.
6. COMMITMENTS
Cellco, on behalf of the Partnership, and the Partnership itself have entered into operating
leases for facilities, equipment and spectrum used in its operations. Lease contracts
include renewal options that include rent expense adjustments based on the Consumer
Price Index as well as annual and end-of-lease term adjustments. Rent expense is
recorded on a straight-line basis. The noncancellable lease term used to calculate the
amount of the straight-line rent expense is generally determined to be the initial lease
term, including any optional renewal terms that are reasonably assured. Leasehold
improvements related to these operating leases are amortized over the shorter of their
estimated useful lives or the noncancellable lease term. For the years ended December 31,
2013 (unaudited), 2012 and 2011, the Partnership incurred a total of $1,706 (unaudited),
$1,604 and $1,562 respectively, as rent expense related to these operating leases, which
was included in cost of service and general and administrative expenses in the
accompanying statements of operations. Aggregate future minimum rental commitments
under noncancellable operating leases, excluding renewal options that are not reasonably
assured, for the years shown are as follows:
Years
2014
2015
2016
2017
2018
2019 and thereafter
Amount
(unaudited)
$
1,288
1,242
1,199
1,074
963
4,931
Total minimum payments
$
10,697
On January 1, 2011, the Partnership entered into a 700 MHz upper band spectrum lease
with Cellco. The lease includes an initial term extending through June 13, 2019 and a
renewal option through June 13, 2029. The license, held by Cellco, is considered an
indefinite-lived intangible as Cellco believes it will be able to meet all requirements
necessary to secure renewal of this license. The Partnership accounts for this spectrum
lease as an executory contract which is similar to an operating lease.
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Based on the terms of the spectrum license lease as of December 31, 2013 (unaudited),
future spectrum lease obligations, including the renewal period, are expected to be as
follows:
Years
2014
2015
2016
2017
2018
2019 and thereafter
Amount
(unaudited)
$
285
285
285
285
285
2,971
Total minimum payments
$
4,396
The General Partner currently expects that the renewal option in the lease will be
exercised.
From time to time Cellco enters into purchase commitments, primarily for network
equipment, on behalf of the Partnership. These represent legal obligations of Cellco.
7. CONTINGENCIES
Cellco and the Partnership are subject to lawsuits and other claims including class
actions, product liability, patent infringement, intellectual property, antitrust, partnership
disputes, and claims involving relations with resellers and agents. Cellco is also currently
defending lawsuits filed against it and other participants in the wireless industry alleging
various adverse effects as a result of wireless phone usage. Various consumer class action
lawsuits allege that Cellco violated certain state consumer protection laws and other
statutes and defrauded customers through misleading billing practices or statements.
These matters may involve indemnification obligations by third parties and/or affiliated
parties covering all or part of any potential damage awards against Cellco and the
Partnership and/or insurance coverage. All of the above matters are subject to many
uncertainties, and the outcomes are not currently predictable.
The Partnership may be allocated a portion of the damages that may result upon
adjudication of these matters if the claimants prevail in their actions. In none of the
currently pending matters is the amount of accrual material. An estimate of the
reasonably possible loss or range of loss in excess of the amounts already accrued to
either Cellco or the Partnership with respect to these matters as of December 31, 2013
cannot be made at this time due to various factors typical in contested proceedings,
including (1) uncertain damage theories and demands; (2) a less than complete factual
record; (3) uncertainty concerning legal theories and their resolution by courts or
regulators; and (4) the unpredictable nature of the opposing party and its demands. We
continuously monitor these proceedings as they develop and adjust any accrual or
disclosure as needed. We do not expect that the ultimate resolution of any pending
F-60
regulatory or legal matter in future periods will have a material effect on the financial
condition of the Partnership, but it could have a material effect on our results of
operations for a given reporting period.
8. RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
Beginning
of the Year
Charged to
Operations
Net of
Recoveries
End
of the Year
Accounts Receivable Allowances:
2013 (unaudited)
2012
2011
$
143
366
245
$
531
270
722
$
(449)
(493)
(601)
$
225
143
366
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