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, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
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
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 No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
As of June 30, 2017, the aggregate market value of the shares held by non-affiliates of the registrant’s common stock was $1,035,944,934 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 26, 2018, the registrant had 70,776,044 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2018 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, 2017.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
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
PAGE
1
19
27
27
28
28
28
31
33
57
58
58
58
62
62
62
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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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
Item 16.
Form 10-K Summary
SIGNATURES
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63
67
68
Note About Forward-Looking Statements
PART I
The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that
investors can better understand a company’s future prospects and make informed investment decisions. Certain statements
in this Annual Report on Form 10-K, including those relating to the impact on future revenue sources, pending and future
regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our
revenue and cost structure resulting from our entrance into new communications markets, are forward-looking statements
and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-
looking statements reflect, among other things, our current expectations, plans, strategies and anticipated financial results.
There are a number of risks, uncertainties and conditions that may cause our actual results to differ materially from those
expressed or implied by these forward-looking statements. Many of these circumstances are beyond our ability to control
or predict. Moreover, forward-looking statements necessarily involve assumptions on our part. These forward-looking
statements generally are identified by the words “believe”, “expect”, “anticipate”, “estimate,” “project,” “intend,” “plan,”
“should,” “may,” “will,” “would,” “will be,” “will continue” or similar expressions. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or
achievements of Consolidated Communications Holdings, Inc. and its subsidiaries (“Consolidated,” the “Company,” “we”
or “our”) to be different from those expressed or implied in the forward-looking statements. All forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements that appear throughout this report. A detailed discussion of these and other risks and uncertainties that could
cause actual results and events to differ materially from such forward–looking statements is included in Part I – Item 1A
– “Risk Factors”. Furthermore, undue reliance should not be placed on forward-looking statements, which are based on
the information currently available to us and speak only as of the date they are made. Except as required under federal
securities laws or the rules and regulations of the SEC, we disclaim any intention or obligation to update or revise publicly
any forward-looking statements.
Item 1. Business.
Consolidated Communications Holdings, Inc. is a Delaware holding company with operating subsidiaries that provide a
wide range of communication solutions to consumer, commercial and carrier channels across a 24-state service area. 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 on April 10, 1924. We were incorporated under the laws of Delaware in 2002,
and through our predecessors, we have been providing communication services in many of the communities we serve for
more than a century.
In addition to our focus on organic growth in our commercial and carrier channels, we have achieved business growth and
a diversification of revenue and cash flow streams that have created a strong platform for future growth through our
acquisitions over the last decade. Our strategic approach to evaluating potential transactions includes analysis of the
market opportunity, the quality of the network, our ability to integrate the acquired company efficiently and the potential
for creating significant operating synergies and generating positive cash flow at the inception of each acquisition.
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. The acquisition of our Pennsylvania
properties in 2007 achieved synergies in excess of $12.0 million in annualized savings, which at the time, represented
approximately 20% of their operating expense. The acquisition of SureWest Communications in 2012 achieved synergies
of $29.5 million during the two years subsequent to the acquisition date. The acquisition of Enventis Corporation
(“Enventis”) in October 2014 generated annual operating synergies of approximately $17.0 million during the first two
years subsequent to the acquisition date. As a result of the acquisition of FairPoint Communications, Inc. (“FairPoint”) in
July 2017, as described below, we expect to generate annual operating synergies of approximately $55.0 million over the
first two years subsequent to the acquisition date. Through these acquisitions, we have positioned our business to provide
services in rural, suburban and metropolitan markets, with service territories spanning the country.
1
Recent Business Developments
On July 3, 2017, we completed the acquisition of FairPoint pursuant to the terms of a definitive agreement and plan of
merger (as amended, the “Merger Agreement”) and acquired all the issued and outstanding shares of FairPoint in exchange
for shares of our common stock. As a result, FairPoint became a wholly-owned subsidiary of the Company. FairPoint is
an advanced communications provider to business, wholesale and residential customers within its service territory, which
spans across 17 states. FairPoint owns and operates a robust fiber-based network with more than 22,000 route miles of
fiber, including 17,000 route miles of fiber in northern New England. The financial results for FairPoint have been
included in our consolidated financial statements as of the acquisition date. The acquisition reflects our strategy to diversify
revenue and cash flows among multiple products and to expand our network to new markets.
See Note 3 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and
Supplementary Data” for a more detailed discussion of this transaction.
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 website at www.consolidated.com, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. Copies are also available free of charge upon request to Consolidated
Communications, Attn: Vice President Investor Relations and Treasurer, 121 S. 17th Street, Mattoon, Illinois 61938. Our
website also contains copies of our Corporate Governance Principles, Code of Business Conduct and Ethics and charter
of each committee of our Board of Directors. The information found on our website is not part of this report 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 SEC maintains an Internet site that contains reports, proxy and information statements and other
information regarding our filings at www.sec.gov.
Description of Our Business
Consolidated is a broadband and business communications provider that provides a wide range of communication solutions
to consumer, commercial and carrier customers across a 24-state service area and an advanced fiber network spanning
approximately 36,000 fiber route miles. We offer residential Internet, video, phone and home security services as well as
multi-service residential and small business bundles. Our business product suite includes data and Internet solutions,
voice, data center services, security services, managed and IT Services, and an expanded suite of cloud services.
Consolidated is dedicated to turning technology into solutions, connecting people and enriching how our customers work
and live.
We generate the majority of our consolidated operating revenues primarily from subscriptions to our video, data and
transport services (collectively “broadband services”) to business and residential customers. Commercial and carrier
services represent the largest source of our operating revenues and are expected to be key growth areas in the future. We
continue to focus on broadband and commercial growth opportunities and are continually enhancing our broadband
services and expanding our commercial product offerings for both small and large businesses in order to capitalize on
technological advances in the industry. Our recent acquisition of FairPoint, as described above, provides us significantly
greater scale and an expanded fiber network which allows for additional growth opportunities and expansion. We leverage
our advanced fiber networks and tailor our services for business customers by developing solutions to fit their specific
needs. In addition, we are expanding our suite of cloud services, which increases efficiency and enables greater scalability
and reliability for businesses. We anticipate future momentum in commercial and carrier services as these products gain
traction as well as from the customer demand for additional bandwidth and data-based services.
We market our residential services by leading with broadband or bundled services. Our “triple play” bundle includes our
Internet, video and phone services. As consumer demands for bandwidth continue to increase, our focus is on enhancing
our broadband services, and progressively increasing consumer data speeds. We offer data speeds of up to 1 Gigabits per
second (“Gbps”) in select markets. Where 1 Gbps speeds are not yet offered, the maximum broadband speed is 100
Megabits per second (“Mbps”), depending on the geographic market availability. Our competitive consumer broadband
speeds allow us to continue to meet the needs of our customers and the demand for higher speeds driven by over-the-top
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(“OTT”) content viewing. The availability of higher broadband speed also complements our TV Everywhere service,
which allows our video subscribers to watch their favorite shows, movies and livestreams at home or on mobile and
connected devices. In addition, we offer other on-demand OTT content, such as fubo, HBO Now and other sports and
entertainment.
A discussion of factors potentially affecting our operations is set forth in Part I – Item 1A – “Risk Factors”, which is
incorporated herein by reference.
Sources of Revenue
The following tables summarize our sources of revenue and key operating statistics for the last three fiscal years:
(In millions, except for percentages)
Commercial and carrier:
Data and transport services (includes VoIP)
Voice services
Other
$
Consumer:
Broadband (VoIP, data and video)
Voice services
Equipment sales and service
Subsidies
Network access
Other products and services
Total operating revenues
Key Operating Statistics
Consumer customers
Voice connections
Data connections
Video connections
Total connections
2017
2016
2015
% of
Revenues
% of
Revenues
% of
Revenues
$
$
$
268.5
158.4
33.9
460.8
276.2
136.5
412.7
25.3 % $ 196.7
99.8
14.9
12.5
3.2
309.0
43.4
26.5 % $ 187.5
103.0
13.4
12.3
1.7
302.8
41.6
24.1 %
13.3
1.6
39.0
26.1
12.9
39.0
209.9
55.3
265.2
28.2
7.4
35.6
213.6
60.6
274.2
27.5
7.8
35.3
—
62.3
110.2
13.6
$ 1,059.6
—
5.9
10.4
1.3
43.1
48.3
63.8
13.8
100.0 % $ 743.2
5.8
6.5
8.6
1.9
55.0
56.3
69.7
17.7
100.0 % $ 775.7
7.1
7.3
9.0
2.3
100.0 %
2017
671,300
972,178
783,682
103,313
1,859,173
As of December 31,
2016
253,203
457,315
473,403
106,343
1,037,061
2015
268,934
482,735
456,100
117,882
1,056,717
The comparability of our consolidated results of operations and key operating statistics was impacted by the FairPoint
acquisition that closed on July 3, 2017, as described above. FairPoint’s results are included in our consolidated financial
statements as of the date of the acquisition.
All telecommunications providers continue to face increased competition as a result of technology changes and legislative
and regulatory developments in the industry. We continue to focus on commercial growth opportunities and are
continually expanding our commercial product offerings for both small and large businesses to capitalize on industry
technological advances. In addition, we expect our broadband services revenue to continue to grow as consumer and
commercial demands for data based services increase, which will offset, in part, the anticipated decline in traditional voice
services impacted by the ongoing industry-wide reduction in residential access lines.
3
Commercial and Carrier
Data and Transport Services
We provide a variety of business communication services to small, medium and large business customers, including many
services over our advanced fiber network. The services we offer include scalable high speed broadband Internet access
and Voice over Internet Protocol (“VoIP”) phone services, which range from basic service plans to virtual hosted
systems. Our hosted VoIP package utilizes soft switching technology and enables our customers to have the flexibility of
employing new telephone advances 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 and allows the customer to receive and listen to voice messages through email.
In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets
including private line, Wide Area Network (“WAN”) and Ethernet services to provide high bandwidth connectivity across
point-to-point and multiple site networks. Networking services are available at a variety of speeds up to 10 Gbps. Data
center and disaster recovery solutions also provide a reliable and local colocation option for commercial customers. We
offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer’s
on-site phone systems and data networks, managed network security services and data protection services.
We also offer wholesale services to regional and national interexchange and wireless carriers, including cellular backhaul,
dark fiber and other fiber transport solutions with speeds up to 100 Gbps. The demand for backhaul services continues to
grow as wireless carriers are faced with escalating consumer and commercial demands for wireless data.
Voice Services
Voice services include basic local phone and long-distance service packages for business customers. The plans include
options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller
ID, call forwarding, speed dialing and call waiting. Services can be charged at a fixed monthly rate, a measured rate or
can be bundled with selected services at a discounted rate. Through the acquisition of FairPoint, we are now a full service
9-1-1 provider and have installed and now maintain two turn-key, state of the art statewide next-generation emergency 9-
1-1 systems. These systems, located in Maine and Vermont, have processed over a million calls relying on the caller's
location information for routing. Next-generation emergency 9-1-1 systems are an improvement over traditional 9-1-1
and are expected to provide the foundation to handle future communication modes such as texting and video.
Other
Other services revenues include business equipment sales and related hardware and maintenance support, rental income
of customer premises equipment, video services and other miscellaneous revenues.
4
Consumer
Broadband Services
Broadband services include revenue from residential customers for subscriptions to our VoIP, data and video products. We
offer high speed Internet access at speeds of up to 1 Gbps, depending on the nature of the network facilities that are
available, the level of service selected and the location. Our data service plans also include wireless internet access, email
and internet security and protection. Our VoIP digital phone service is also available in certain markets as an alternative
to the traditional telephone line. We offer multiple voice service plans with customizable calling features and voicemail.
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 customers 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. Video subscribers also have access to our
TV Everywhere service in certain markets, which allows subscriber access to full episodes of available shows, movies and
live streams using a computer or mobile device.
Voice Services
We offer several different basic local phone service packages and long-distance calling plans, including unlimited flat-rate
calling plans. The plans include options for voicemail and other custom calling features such as caller ID, call forwarding
and call waiting. 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
erosion in voice connections due to competition from alternative technologies, including our own competing VoIP product.
Equipment Sales and Service
As an equipment integrator, we offered network design, implementation and support services, including maintenance
contracts, in order to provide integrated communication solutions for our customers. We sold telecommunications
equipment, such as key, Private Branch Exchange (“PBX”), IP-based telephone systems and other sophisticated hardware
solutions, and offered support services to medium and large business customers. Through our acquisition of Enventis in
2014, we obtained a leading market relationship with Cisco Systems, Inc. and, as a result, were an accredited Master Level
Unified Communications and Gold Certified Cisco Partner providing equipment solutions and support for business
customers. Our strategic relationship with Cisco as the supplier allowed us to deploy a wide range of collaboration, data
center and network technology solutions. We earned Cisco’s Master Cloud Builder Specialization and received the Data
Center Interconnect designation. We maintained numerous Cisco specializations and authorizations, as well as partner
relationships with EMC, NetApp, VMware and other industry-leading vendors in order to provide integrated
communication solutions that best fit our customers’ needs.
In December 2016, we completed the sale of our Enterprise Services equipment and IT Services business (“EIS”) to ePlus
Technology inc. (“ePlus”). As part of the transaction, we entered into a Co-Marketing Agreement with ePlus, a nationwide
systems integrator of technology solutions, to cross-sell both broadband network services and IT services. The strategic
partnership will provide our business customers access to a broader suite of IT solutions, and will also provide ePlus
customers access to Consolidated’s business network services.
Subsidies
Subsidies consist of both federal and state subsidies, which are designed to promote widely available, quality telephone
service at affordable prices in rural areas. Subsidies are funded by end user surcharges to which 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 – Risks Related to the Regulation of Our Business” for further discussion
regarding the subsidies we receive.
5
Network Access Services
Network access services include interstate and intrastate switched access revenue, network special access services and end
user access. Switched access revenue includes access services to other communications carriers to terminate or originate
long-distance calls on our network. Special access circuits provide dedicated lines and trunks to business customers and
interexchange carriers. 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.
Other Products and Services
Other products and services include revenues from telephone directory publishing, video advertising, billing and support
services and other miscellaneous revenue.
No customer accounted for more than 10% of our consolidated operating revenues during the years ended December 31,
2017, 2016 and 2015.
Wireless Partnerships
In addition to our core business, we also derive a 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 operations. Our wireless partnership investment consists of five cellular partnerships: GTE Mobilnet of
South Texas Limited Partnership (“Mobilnet South Partnership”), GTE Mobilnet of Texas RSA #17 Limited Partnership
(“RSA #17”), Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), Pennsylvania RSA No. 6(I) Limited
Partnership (“RSA 6(I)”) and Pennsylvania RSA No. 6(II) Limited Partnership (“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. We account for this investment using
the cost method. Income is recognized only upon cash distributions of our proportionate earnings in the partnership.
We own 20.51% of RSA #17, which serves areas in and around Conroe, Texas. This investment is accounted for under
the equity method. Income is recognized on our proportionate share of earnings and cash distributions are recorded as a
reduction in our investment.
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 RSA #17.
We own 3.60% of Pittsburgh SMSA, 16.67% of RSA 6(I) and 23.67% of RSA 6(II), 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 Incumbent Local Exchange Carrier (“ILEC”) and Competitive Local Exchange Carrier operations. Because
of our limited influence over Pittsburgh SMSA, we account for the investment using the cost method. RSA 6(I) and RSA
6(II) are accounted for under the equity method.
For the years ended December 31, 2017, 2016 and 2015, we recognized income of $31.4 million, $32.6 million and $37.0
million, respectively, and received cash distributions of $30.0 million, $32.1 million and $45.3 million, respectively, from
these wireless partnerships.
Employees
As of December 31, 2017, we employed approximately 3,930 employees, including part-time employees, compared to
1,676 employees as of December 31, 2016, as a result of the acquisition of FairPoint. We also use temporary employees
in the normal course of our business.
Approximately 48% of our employees were covered by collective bargaining agreements as of December 31, 2017
compared to 20% as of December 31, 2016, as a result of the acquisition of FairPoint. 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”.
6
Sales and Marketing
The key components of our overall marketing strategy include:
Organizing our sales and marketing activities around our three customer channels: consumer, commercial
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;
Identifying and broadening our commercial customer needs by developing solutions and providing integrated
service offerings;
Providing excellent customer service, including 24/7 centralized customer support to coordinate installation
of new services, repair and maintenance functions and creating more self-service tools through our online
customer portal;
Developing and delivering new services to meet evolving customer needs and market demands; and
Leveraging 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 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 and continue to
enhance and expand our network by deploying technologies to provide additional capacity to our customers. As a result,
we are able to deliver high-quality, reliable data, video and voice services in the 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 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 our customers’ homes and
businesses.
Our networks are supported by advanced 100% digital switches, with a fiber network connecting all remote exchanges.
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 service areas. In addition, this fiber infrastructure provides the
connectivity required to provide video service, Internet and long-distance services to our residential and commercial
customers. Our fiber network utilizes fiber-to-the-home (“FTTH”) and fiber-to-the-node (“FTTN”) networks to offer
bundled residential and commercial services.
We operate fiber networks which we own or have entered into long-term leases for fiber network access. At December
31, 2017, our fiber-optic network consisted of approximately 36,000 route-miles, which includes approximately 21,640
route miles of fiber from our acquisition of FairPoint of which 17,000 route miles of fiber are located in the northern New
England area. Our remaining network includes approximately 4,580 miles of fiber network in Minnesota and surrounding
7
areas, approximately 4,180 miles of fiber network in Texas, approximately 1,800 route-miles of fiber-optic facilities in the
Pittsburgh metropolitan area, approximately 1,840 miles of fiber network in Illinois, approximately 1,180 route-miles of
fiber optic facilities in California that cover large parts of the greater Sacramento metropolitan area and over 770 route-
miles of fiber optic facilities in Kansas City that service the greater Kansas City area, including both Kansas and Missouri.
In 2014, we expanded our commercial services into the greater Dallas/Fort Worth market, utilizing our existing carrier-
class fiber network in this area. This network previously was used to serve our wholesale and carrier customers. With the
expansion of the network, we began offering fiber based services including dedicated Internet access, wide area network
services and hosted private branch exchange (iPBX) to commercial customers in this market.
We intend to continue to make strategic enhancements to our network including improvements in overall network
reliability and increases to our broadband speeds. We offer data speeds of up to 1 Gbps in select markets, and up to 100
Mbps in markets where 1 Gbps is not yet available, depending on the geographical region. As of December 31, 2017,
approximately 42% of the homes we serve on our legacy network had availability to broadband speeds of up to 100 Mbps.
The majority of the homes in our recently acquired FairPoint service territories have availability to broadband speeds of
20 Mbps or less. As part of our integration initiatives of FairPoint, we plan to increase broadband speeds to more than
500,000 residents and small businesses across the Northern New England service area by the end of 2018. The upgrades
are expected to enable customers to receive broadband speeds up to three times the speeds currently available and provide
nearly 100,000 additional homes with access to data speeds of 1 Gbps.
Through our extensive fiber network, we are also able to support the increased demand on wireless carriers for data
bandwidth. In all the markets we serve, we have launched initiatives to support fiber backhaul services to cell sites. As
of December 31, 2017, we had 2,539 cell sites in service and an additional 138 scheduled for completion in 2018.
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 demand
for data services, we continue to reduce our reliance on subsidies and access revenue. Utilizing our existing network and
strategic network expansion initiatives, 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 will continue to focus on growing
our broadband and commercial services through the expansion and extension of our fiber network to communities and
corridors near our primary fiber routes where we believe we can offer competitive services and increase market share.
We also continue to focus on increasing our revenue per customer, primarily by improving our data market penetration,
increasing the sale of other value-added services and 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. 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 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 our commercial footprint, offer new service offerings and provide services in a cost-efficient manner
while maintaining our reputation as a high-quality service provider. We will continue to invest in strategic growth
initiatives to expand our fiber network to new markets and customers in order to optimize new business, backhaul and
wholesale opportunities.
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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;
Existence of significant potential operating synergies; and
Whether 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 FairPoint in 2017. In the long term,
we believe that this transaction will give us additional scale and will better position us financially, strategically and
competitively to pursue additional acquisitions.
Competition
The telecommunications industry is subject to extensive competition, which 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,
online video providers and in some cases new forms of providers who are able to offer a broad range of competitive
services. 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 in the future. See Part I - Item 1A – “Risk Factors – Risks Relating to Our
Business”.
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 commercial and consumer
markets. Google has also launched data and video services in a limited, but growing, number of service areas including
the Kansas City market. 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 competition from wireless and other fiber data 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. Wireless companies are
aggressively developing networks using next-generation data technologies in order to provide increasingly faster data
speeds to their customers. In addition, the expanded availability for free or lower cost services, such as video over the
Internet, complimentary Wi-Fi service and other streaming devices has increased competition among other providers
including online digital distributors for our video and data services. In order to meet the competition, we have responded
by continuing to invest in our network and business operations in order to offer new and enhanced services including faster
broadband speeds and providing additional OTT video content.
In our rural markets, services are more costly to provide than services 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 and video providers and, to a lesser extent, competitive telephone companies.
Our other lines of business are subject to substantial competition from local, regional and national competitors. In
particular, our wholesale and transport business serves other interexchange carriers and we compete with a variety of
service providers including incumbent and competitive local telephone companies and other fiber data companies. For
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our business systems products, we compete with other equipment providers or value added resellers, network providers,
incumbent and competitive local telephone companies, and with cloud and data hosting service providers.
We expect that competition in all of our businesses will continue to intensify as new technologies and changes in consumer
behavior continue to emerge.
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—Risks Related to the Regulation of Our Business”.
Overview
Our revenues, which include revenues from such telecommunications services as local telephone service, network access
service and toll service, are subject to broad federal and/or state regulation and are derived from various sources, including:
Business and residential subscribers of basic exchange services;
Surcharges mandated by state commissions and the Federal Communications Commission (“FCC”);
Long-distance carriers for network access service;
Competitive access providers and commercial customers for network access service; and
Support payments from federal or state programs.
telecommunications
The
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.
to extensive federal, state and
local regulation. Under
is subject
industry
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.
Federal Regulation
Our incumbent local exchange 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.
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Removal of Entry Barriers
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 the facilities and
equipment of other telecommunications carriers. All local exchange carriers, including our competitive and incumbent
local exchange 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 many of 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 unbundled network
elements (“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. See “FCC Access Charge and Universal Service Reform Order” below for detailed discussion on the FCC order.
A significant portion of our incumbent local exchange 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. The FCC order on intercarrier compensation and
universal service reform required terminating state access charges to mirror terminating interstate access charges, and as
of July 1, 2013, all terminating switched intrastate access charges mirror interstate access charges.
The FCC regulates the prices we may charge for the use of our local telephone facilities to originate or terminate interstate
and international calls. However, for purposes of the universal service funding they are regulated under the rules for price
cap carriers. 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.
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The FCC regulates interstate network access charges by imposing price caps on Regional Bell Operating Companies
(“RBOCs”) and other large incumbent telephone companies. Some of our recently acquired FairPoint properties operate
as RBOCs under rate-of-return regulation for interstate purposes. 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 incumbent local exchange companies, may elect to base network access charges on price caps, but
are not required to do so.
We believe that price cap regulation gives us greater pricing flexibility for interstate services, especially in 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. As we have acquired new properties, we have converted them to federal price
cap regulation.
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. We cannot predict what other actions other
long-distance carriers may take before the FCC or with their local exchange carriers, including our incumbent local
exchange 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 continue to increase.
Unbundled Network Element Rules
The Telecommunications Act of 1996 requires incumbent local exchange companies to provide Unbundled Network
Elements (UNEs) to competitive carriers, allowing such carriers entry into the local telecommunications market. 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. Competitive carriers continue to use
UNEs to provide competing local services to customers in our operating areas.
Each of the subsidiaries through which we operate our local telephone businesses is an incumbent local exchange company.
The Telecommunications Act exempts rural telephone companies from certain of the more burdensome interconnection
requirements. However, the rural exemption will cease to apply to competing cable companies if and when the rural carrier
introduces video services in a service area, in which case, a competing cable operator providing video programming and
seeking to provide telecommunications services in the area may interconnect. For our subsidiaries which provide 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 still have the rural exemption in place, with the exception of Northern New
England Telephone Operations and Telephone Operating Company of Vermont. We believe the benefits of providing
video services outweigh the loss of the rural exemptions to cable operators.
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,
Universal Service Fund (“USF”) subsidies promote widely available, quality telephone service at affordable prices in rural
areas. Revenues from federal and certain states’ USFs totaled $62.3 million, $48.3 million and $56.3 million in 2017,
2016 and 2015, respectively.
FCC Access Charge and Universal Service Reform Order
In November 2011, the FCC released a 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, rather than through intercarrier compensation. The
reductions apply to terminating access rates and usage, with originating access to 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
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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 end users. The universal service portion of the Order redirects support
from voice services to broadband services, and is now called the CAF.
The Order requires rate of return study areas associated with holding companies to be treated as price cap carriers for
universal service funding. For intercarrier compensation purposes, these rate of return carriers fall under the rate of return
intercarrier compensation transition plan. Price cap study areas fall under the price cap rules for both universal service
reform and intercarrier compensation reform.
In 2012, CAF Phase I was implemented, which froze USF support to price cap carriers until the FCC implemented a
broadband cost model to shift support from voice services to broadband services. The Order also modified 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 for price
cap carriers and a nine year period for rate of return carriers, and as a result, our network access revenue decreased
approximately $2.8 million, $1.7 million and $1.3 million during 2017, 2016 and 2015, respectively.
In December 2014, the FCC released a report and order that addressed, among other things, the transition to CAF Phase
II funding for price cap carriers and the acceptance criteria for CAF Phase II funding. For companies that accept the CAF
Phase II funding, there is a three year transition period in instances where their current CAF Phase I funding exceeds the
CAF Phase II funding. If CAF Phase II funding exceeds CAF Phase I funding, the transitional support is waived and CAF
Phase II funding begins immediately. Companies are required to commit to a statewide build out requirement to 10 Mbps
downstream and 1 Mbps upstream in funded locations.
We accepted the CAF Phase II funding in August 2015, which was effective as of January 1, 2015. The annual funding
under CAF Phase I of $36.6 million was replaced by annual funding under CAF Phase II of $13.9 million through 2020.
With the sale of our Iowa ILEC in 2016, this amount was further reduced to $11.5 million through 2020. Subsequently,
with the acquisition of FairPoint, this amount increased to $48.9 million through 2020. FairPoint accepted the annual CAF
Phase II funding of $37.4 million through 2020 in August 2015. This includes CAF Phase II support in all of FairPoint’s
operating states except Colorado and Kansas where the offered CAF Phase II support was declined. We continue to receive
frozen CAF Phase I support in Colorado and Kansas until such time as the FCC CAF Phase II auction assigns support to
another provider. The acceptance of CAF Phase II funding at a level lower than the frozen CAF Phase I support results in
CAF Phase II Transitional funding over a three year period based on the difference between the CAF Phase I funding and
the CAF Phase II funding at the rates of 75% in the first year, 50% in the second year and 25% in the third year.
The annual reporting requirements include (i) filings of annual certifications that the carrier is both meeting its public
interest obligations and is offering comparable broadband rates and (ii) the filing of a Service Quality Improvement plan.
The initial plan was required to be filed by July 1, 2016, with progress reports filed every year thereafter. The plan must
include, among other things, the total amount of CAF Phase II funding used to fund capital expenditures in the previous
year and certification that the carrier is meeting the required interim deployment milestones. The CAF Phase II build-out
milestone for the end of 2017 was 40%. This is measured separately by the Company’s operations in each state. The
Company met this milestone for all states where it operates.
Local Switching Support
In 2015, FairPoint filed a Petition with the FCC asking the FCC to direct the National Exchange Carrier Association
(“NECA”) to stop subtracting frozen Local Switching Support (“LSS”) from FairPoint’s ICC Eligible Recovery for
FairPoint’s rate of return ILECs that participate in the NECA pooling process. This issue is unique to rate of return
affiliates of price cap carriers because such companies are considered price cap carriers for the FCC’s CAF funding, but
remain rate of return for ICC purposes. Effective January 1, 2012, FairPoint rate of return ILECs were placed under the
price cap CAF Phase I interim support mechanism, whereby the ILECs continued to receive frozen USF support for all
forms of USF received during 2011, including LSS. The rate of return rules for ICC included LSS support in that
mechanism as well; therefore, NECA subtracted the frozen LSS support from the ICC Eligible Recovery amounts in
accordance with FCC rules prohibiting duplicate recovery. When FairPoint accepted CAF Phase II support effective
January 1, 2015, there was no longer any duplicate support and FairPoint requested NECA to stop subtracting LSS from
FairPoint’s ICC Eligible Recovery. NECA declined to make that change, which led to FairPoint filing a Petition with the
FCC asking the FCC to direct NECA to comply with FCC rules on ICC Eligible Recovery for rate of return ILECs. This
issue also applies to Consolidated’s operations in Minnesota, which are also rate of return ILECs associated with a price
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cap company. If the FCC Petition is successful, the combined LSS support for the period from January 1, 2015 through
December 31, 2017 would be approximately $11.5 million. Our ongoing ICC Eligible Recovery support for 2018 would
increase by approximately $4.0 million, and thereafter, decline by 5% per year through 2021. We cannot predict the
outcome or timing of the FCC’s decision.
FCC Rules for Business Data Services
On April 20, 2017, the FCC adopted new rules for Business Data Services (“BDS”), which went into effect on August 1,
2017. BDS services are high speed data services provided on a point to point basis. The rules apply to interstate BDS
services in areas served by price cap carriers. Under the new BDS rules, all packet-switched services and all transport
services, channel terminations connecting wholesale customers to our networks and end user channel terminations in
counties deemed competitive are competitive. End user channel terminations for DS0, DS1 and DS3 services are non-
competitive in counties deemed by the FCC to be non-competitive, but are eligible for Phase I price flexibility. The FCC
published a list of counties deemed competitive and non-competitive. Geographic areas previously under Phase II price
flexibility will not be rate regulated for any BDS services.
In our price cap operations, we can continue to offer competitive BDS services under tariff or we can remove the services
from tariff. All competitive services must be de-tariffed within three years of the effective date of the BDS rules. We
have complete price flexibility for BDS services deemed competitive.
BDS services are subject to vigorous competition. We cannot determine the impact of the BDS rules on our revenues or
operations.
State Regulation
We are subject to regulation by state governments in various states in which we operate. State regulatory commissions
generally exercise jurisdiction over intrastate matters and other requirements. The following narrative is a summary of
pending state specific regulatory matters. We may have pending matters in other states not listed below, however, those
matters are expected to have minimal impact on our consolidated financial statements and related disclosures.
California
The California Public Utilities Commission (“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. In December 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. 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.
New Hampshire
Effective August 10, 2012, the New Hampshire legislature enacted Chapter 177 (known as Senate Bill 48) (“SB 48”) in
its Session Laws of 2012. SB 48 created a new class of telecommunications carriers known as excepted local exchange
carriers (“ELECs”) and our Northern New England operations qualify as an ELEC in New Hampshire. SB 48 essentially
leveled the regulatory scheme imposed upon New Hampshire telecommunications carriers and states that the New
Hampshire Public Utilities Commission (“NHPUC”) has no authority to impose or enforce any obligation on a specific
ELEC that also is not applicable to all other ELECs in New Hampshire except with respect to wholesale obligations which
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arise from the Telecommunications Act, as well as certain obligations related to telephone poles and carrier of last resort
responsibilities. In New Hampshire, under SB 48, our exposure to annual service quality index penalties was eliminated
and we have pricing discretion with respect to existing and new retail telecommunications services other than basic local
exchange service and certain services provided to customers who qualify for the federal lifeline discount.
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 has also 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, CCES 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.
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, which could limit the amount of cash that is available to be transferred
from our rural telephone companies to the parent entities.
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.
Texas Universal Service
The Texas Universal Service Fund is administered by the 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 High Cost Fund (“HCF”) and the high cost
assistance fund (“HCAF”). The HCF is a line-based fund used to keep local rates low. The rate is applied on all residential
lines and up to five single business lines. The amount we receive from the HCAF is a frozen monthly amount that was
originally developed to offset high intrastate toll rates.
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In September 2011, the Texas state legislature passed Senate Bill No. 980/House Bill No. 2603 which, among other things,
mandated the PUCT to review the Universal Service Fund and issue recommendations by January 1, 2013 with the intent
to effectively reduce the size of the Universal Service Fund. This would be accomplished by implementing an urban floor
to offset state funding reductions with a phase-in period of four years. The PUCT recommended that (i) frozen line counts
be lifted effective September 1, 2013 and (ii) rural and urban local rate benchmarks be developed. The large company
fund review was completed in September 2012 and the PUCT addressed the small fund participants in Docket 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. As of January 1, 2014, our annual $1.4
million HCAF support was eliminated and the frozen HCF support returned to funding on a per line basis. In July 2013,
the Company entered into a settlement agreement with the PUCT on Docket 41097, which was approved by the PUCT in
August 2013. In accordance with the provisions of the settlement agreement, the HCF draw will be reduced by
approximately $1.2 million annually over a four year period beginning June 1, 2014 through 2018. However, we have the
ability to fully offset this reduction with increases to residential rates where market conditions allow.
In addition, the PUCT is required to develop a needs test for post-2017 funding and has held workshops on various
proposals. The PUCT issued its recommendation to the Texas state commissioners in May 2014, which was approved in
December 2014. The needs test allows for a one-time disaggregation of line rates from a per line flat rate, and then a
competitive test must be met to receive funding. The Company filed its submission for the needs test on December 28,
2016. The PUCT issued docket 46699 on January 4, 2017 to review the filing and a decision was granted in the second
quarter of 2017.
New York
With the acquisition of FairPoint, we assumed grants from the NY Broadband Program (the “NYBB”). In 2015, New
York established the $500.0 million NYBB to provide state grant funding to support projects that deliver high-speed
Internet access to unserved areas with a goal of achieving statewide broadband access in New York by the end of 2018.
FairPoint received and accepted award letters in March 2017 for grant awards totaling $36.7 million from the NYBB Phase
2 grants. These grants will support, in part, the extension and upgrading of high-speed broadband services to over 10,321
locations in our New York service territory. During the second quarter of 2017, a bid for Phase 3 grants, the final phase
of the NYBB grants, was submitted by FairPoint. On January 31, 2018, the state notified us that we were awarded a
portion of our Phase 3 bid, and we are currently reviewing the grant. We expect to treat the reimbursements as a
contribution in aid of construction given the nature of the arrangement.
To be eligible for the grant, the network must be capable of delivering speeds of 100 Mbps or greater in unserved and
underserved locations. As a condition of the grant, we are required to offer the NYBB’s Required Pricing Tier as a service
option to residential users for a period of five years from completion of construction of the network. This pricing
requirement will provide for broadband Internet service at minimum speeds of 25/4 Mbps (download/upload).
FairPoint Merger Requirements
As part of our acquisition of FairPoint, we have regulatory commitments that vary by state, some of which require capital
investments in our network over several years through 2020. The requirements include improved data speeds and other
service quality improvements in select locations primarily in our Northern New England, New York and Illinois markets.
In New Hampshire and Vermont, we are required to invest 13% and 14%, respectively, of total state revenues in capital
improvements per year for 2018, 2019 and 2020. For our service territory in Maine, we are required to make capital
expenditures of $16.4 million per year from 2018 through 2020. In addition, we are required to invest an incremental $1.0
million per year in each of these three states for service quality improvements. In New York, we are required to invest
$4.0 million over three years to expand the broadband network to over 300 locations. In Illinois, we are required to invest
an additional $1.0 million by December 31, 2018 to expand the availability and speeds of broadband services in areas
served by the FairPoint Illinois ILECs. As of December 31, 2017, we have met all of the regulatory commitments for
2017.
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Local Government Authorizations
In the various states we operate in, we operate under a structure in which each municipality or other regulatory agencies
may impose various fees, such as for the privilege of originating and terminating messages and placing facilities within
the municipality, for obtaining permits for street opening and construction, and/or for operating franchises to install and
expand fiber optic facilities.
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 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 has also 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, 2018. 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.
Federal law and regulations regulate access to certain programming content that is delivered by satellite. The FCC has
provisions in place that ban certain discriminatory practices and unfair acts, and include a presumption that the withholding
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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. This proceeding
remains pending before the FCC.
The FCC 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 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, but who are not
subject to any FCC or Department of Justice (“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 for 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 could lead cable television customers to terminate or reduce their level of services. At this time, OTT
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 OTT 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 a structure in place 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. Of the states we operate in, California, Maine, Massachusetts New Hampshire, New York, Ohio, Vermont
and Washington have elected to separately regulate pole attachments and pole attachment rates. All of the other states in
which we operate in follow the FCC regulations and federal formula. 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 OTT 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 continue to provide greater “on
demand” programming and offerings that maintain the value of their linear channels for customers.
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The outcome of pending matters cannot be determined at this time but could lead to increased costs for the Company in
connection with our provision of cable services and could 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. The
Federal Trade Commission (“FTC”) has authority to regulate Internet Service Providers with respect to privacy and
competitive practices. During 2017, the FCC adopted an order eliminating its previous classification of Internet service
as a telecommunications service regulated under Title II of the Telecommunications Act of 1996. This effectively limits
the FCC’s authority over Internet Service Providers. The FCC retained rules requiring Internet Service Providers to
disclose practices associated with blocking, throttling and paid prioritization of Internet traffic. The FCC order has been
challenged in court and the outcome of the challenge cannot be determined at this time.
The outcome of pending matters before the FCC and the FTC and any potential congressional action cannot be determined
at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and
could 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 Our Business
We expect to continue to face significant competition in all parts of our business and the level of competition could
intensify among our customer channels. The telecommunications industry is highly competitive. We face actual and
potential competition from many existing and emerging companies, including other incumbent and competitive local
telephone companies, long-distance carriers and resellers, wireless companies, Internet service providers, satellite
companies and cable television companies, and, in some cases, from new forms of providers who are able to offer
competitive services through software applications requiring a comparatively small initial investment. Due to
consolidations 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 with traditional telephone and land-
based Internet access services to give up those services and rely exclusively on wireless service. In addition, consumers’
options for viewing television shows have expanded as content becomes increasingly available through alternative devices.
Some providers, including television and cable television content owners, have initiated over-the-top (“OTT”) services
that deliver video content to televisions and computers over the Internet. OTT 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. 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 the 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-field advantages with a customer base that generates positive cash flow for its
operations. Our competitors continue to add features, increase data speeds and adopt aggressive pricing and packaging
for services comparable to the services we offer. Their success in selling services that are competitive with ours among
our various customer channels could lead to revenue erosion in other related areas. We face intense competition in our
markets for long-distance, Internet access, video service 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
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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 at a slower rate than our competitors, we may experience a decline in the demand for
our services. Our 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 and broadband 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 various customer channels. Our business and results of operations
could be adversely affected if we are unable to match the benefits offered by competing technologies on a timely basis or
at an acceptable cost, and 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.
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 behaviors 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 significant
new advantages to competitors. Technological developments could require us to make 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 not be able 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 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 customers, our results of operations could be
adversely impacted.
Shifts in our product mix may result in declines in operating profitability. Margins vary among our products and
services. Our profitability may be impacted by technological changes, customer demands, regulatory changes, the
competitive nature of our business and changes in the product mix of our sales. These shifts may also result in our long-
lived assets becoming impaired or our inventory becoming obsolete. We review long-lived assets for potential impairment
if certain events or changes in circumstances indicate that impairment may be present. We currently manage potential
inventory obsolescence through reserves, but future technology changes may cause inventory obsolescence to exceed
current reserves.
We receive cash distributions from our wireless partnership interests and the amounts of such future distributions and
our continued receipt of such future distributions are 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”); 16.67% 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.
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In 2017, 2016 and 2015, we received cash distributions from these partnerships of $30.0 million, $32.1 million and $45.3
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. If cash distributions from these partnerships decrease or end in the future, our results of operations
could be adversely affected, and as a result, we may be unable to fulfill our long-term obligations or our ability to pay cash
dividends to our shareholders may be restricted.
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.
A cyber-attack that bypasses our IT and/or network security systems causing an IT and/or network security breach may
lead to unauthorized use or disabling of our network, theft of customer data, unauthorized use or publication of our
intellectual property and/or confidential business information and could harm our competitive position or otherwise
adversely affect our business. Attempts by others to gain unauthorized access to organizations' IT systems or network
elements are becoming more sophisticated and are sometimes successful. These attempts may include covertly introducing
malware to companies' computers and networks, impersonating authorized users or "hacking" into systems. We seek to
prevent such security incidents and to detect and investigate all security incidents that do occur and to prevent their
recurrence, but in some cases, we might be unaware of an incident or its magnitude and effect. Significant IT or network
security failures could result in the theft, loss, damage, unauthorized use or publication of our intellectual property and/or
confidential business information, which could harm our competitive position, subject us to additional regulatory scrutiny,
expose us to litigation, reduce the value of our investment in research and development and other strategic initiatives or
otherwise adversely affect our business. To the extent that any security breach results in inappropriate disclosure of our
customers' or licensees' confidential information, we may incur liability as a result.
Our operations require substantial capital expenditures and our business, financial condition, results of operations and
liquidity may be impacted if funds for capital expenditures are not available when needed. We require significant capital
expenditures to maintain, upgrade and enhance our network facilities and operations. While we have historically been
able to fund capital expenditures from cash generated from operations and borrowings under our revolving credit facility,
the other risk factors described in this section could materially reduce cash available from operations or significantly
increase our capital expenditure requirements, and these outcomes may result in our inability to fund the necessary level
of capital expenditures to maintain, upgrade or enhance our network. This could adversely affect our business, financial
condition, results of operations and liquidity.
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 and 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, force us to find alternative rights-of-way and incur unexpected capital expenditures.
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, financial condition and results of operations may
be adversely affected.
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Video content costs are substantial and continue to increase. We expect video 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 cost of sports
programming and local broadcast station retransmission content. Programming costs are generally assessed on a per-
subscriber basis, and therefore, are directly related 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 can often 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 exceed 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 not be able to secure
license rights to that programming. As our programming contracts with content providers expire, there is no assurance
that they will be renewed on acceptable terms or that they will be renewed at all, in which case we may not be able to
provide such programming as part of our video services packages and our business and results of operations may be
adversely affected.
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. As of December 31, 2017, approximately 48% of our
employees were covered by collective bargaining agreements as compared to 20% as of December 31, 2016 as a result of
the acquisition of FairPoint. These employees are hourly workers throughout our service territories and are represented
by various unions and locals. All of the existing collective bargaining agreements expire between 2018 through 2020, of
which contracts covering 38% of our employees will expire in 2018.
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.
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.
Acquisitions present many risks and we may be unable to realize the anticipated benefits of recent acquisitions. From
time to time, we make acquisitions and investments or 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, financial condition, results of operations and cash
flows.
We may face significant challenges in combining the operations of an acquired business, such as FairPoint, into our
operations in a timely and efficient manner. The failure to successfully integrate an acquired business and to manage
successfully the challenges presented by the integration process may result in our not achieving the anticipated benefits of
the acquisition, including operational and financial synergies. Even if we are successful in integrating acquired businesses,
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we cannot be assured that the integration will result in the realization of the full benefit of anticipated financial synergies
or that these benefits will be realized within the expected time frames.
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 mortality tables and changes in participant demographics.
Unfavorable fluctuations or adverse changes in any of these factors, most of which are outside our control, could impact
the funded status of the plans and increase future funding requirements. 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 our 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.
Risks Relating to Our Common Stock and Payment of Dividends
Our Board of Directors could, at 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 any reason, shares of our
common stock could become less liquid and the market price of our common stock could decline.
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 an 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.
The price of our common stock may be volatile and may fluctuate substantially, which could negatively affect holders
of our common stock. The market price of our common stock may fluctuate widely as a result of various factors including,
but not limited to, period-to-period fluctuations in our operating results, the volume of sales of our common stock, the
limited number of holders of our common stock and the resulting limited liquidity in our common stock, dilution,
developments in the communications industry, the failure of securities analysts to cover our common stock, changes in
financial estimates by securities analysts, short interests in our common stock, competitive factors, regulatory
developments, labor disruptions, economic and other external factors, general market conditions and market conditions
affecting the stock of communications companies in general. Communications companies have, in the past, experienced
extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating
performance. High levels of market volatility may have a significant adverse effect on the market price of our common
stock. In addition, in the past, securities class action litigation has often been instituted against companies following periods
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of volatility in their stock prices. This type of litigation could result in substantial costs and divert management's attention
and resources, which could have a material adverse impact on our business, financial condition, results of operations,
liquidity and/or the market price of our common stock.
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 and certain state 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,
2017, we had $2.3 billion 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,
strategic initiatives and dividends;
We may have limited flexibility to react to changes in our business and our industry;
It may be more difficult for us to satisfy our other obligations;
We may have a limited ability to borrow additional funds or to sell assets to raise funds if needed for working
capital, capital expenditures, acquisitions or other purposes;
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.
24
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 indentures governing our 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 separate indentures governing the Senior Notes limit 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 separate
indentures 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.
We may not be able to refinance our existing debt if necessary, or we may only be able to do so at a higher interest
expense. We may be unable to refinance or renew our credit facilities and our failure to repay all amounts due on the
maturity dates would cause a default under the credit agreement. Alternatively, any renewal or refinancing may occur on
less favorable terms. If we refinance our credit facilities on terms that are less favorable to us than the terms of our existing
debt, our interest expense may increase significantly, which could impact our results of operations and impair our ability
to use our funds for other purposes, such as to pay dividends.
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. We utilize interest rate swap agreements to
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 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
resulted in changes in how the government addresses telecommunications, video programming and Internet services.
Many businesses that compete with our Incumbent Local Exchange Carrier (“ILEC”) and non-ILEC subsidiaries are
comparatively less regulated. Some of our competitors are either not subject to utilities regulation or are subject to
significantly fewer regulations. In contrast to our subsidiaries regulated as cable operators and satellite video providers,
competing on-demand and OTT providers and motion picture and DVD firms have almost no regulation of their video
activities. Recently, federal and state authorities have become 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 level, could require significant and costly adjustments that would adversely affect our business plans.
25
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
potentially create barriers to enter new markets or to acquire new lines of business. We face continued regulatory
uncertainty in 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 will ultimately 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 laws, 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”) significantly impacts the amount of support revenue we receive from the 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, established the CAF to replace support revenues provided by
the current USF and redirected support from voice services to broadband services. In 2012, CAF funding was
implemented, which froze USF support to price cap carriers until the FCC implemented a broadband cost model to shift
support from voice services to broadband services. See Part I – Item 1 – “Regulatory Environment” above for statistics of
current CAF funding levels.
We receive subsidy payments from various federal and state universal service support programs, including high-cost
support, Lifeline and E-Rate programs for schools and libraries. The total cost of the various federal universal service
programs has increased significantly in recent years, putting pressure on regulators to reform the programs and to limit
both eligibility and support. We cannot predict when or how such matters will be decided or the effect on the subsidy
payments we receive. However, future reductions in the subsidy payments we receive may directly affect our profitability
and cash flows.
Increased regulation of the Internet could increase our cost of doing business. Current laws and regulations governing
access to, or commerce on, the Internet are limited. As the Internet continues to become more significant, federal, state
and local governments may adopt new rules and regulations applicable to, or apply existing laws and regulations to, the
Internet. During 2017, the FCC adopted an order eliminating its previous classification of Internet service as a
telecommunications service regulated under Title II of the Telecommunications Act of 1996. This effectively limits the
FCC’s authority over Internet Service Providers. The FCC retained rules requiring Internet Service Providers to disclose
practices associated with blocking, throttling and paid prioritization of Internet traffic. The FCC order has been challenged
in court and the outcome of the challenge cannot be determined at this time.
The outcome of pending matters before the FCC and the FTC and any potential congressional action cannot be determined
at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and
could affect our ability to compete in the markets we serve.
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 the 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 are also subject to laws and regulations governing air emissions from our fleet 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 by our predecessors, of hazardous materials at third-
party disposal sites;
26
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 resources may increase the costs associated with
future business or expansion 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; and
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.
Our business may be impacted by new or changing tax laws or regulations and actions by federal, state, and/or local
agencies, or by how judicial authorities apply tax laws. Our operations are subject to various federal, state and local tax
laws and regulations. In connection with the products and services we sell, we calculate, collect, and remit various federal,
state, and local taxes, surcharges and regulatory fees (“tax” or “taxes”) to numerous federal, state and local governmental
authorities. In many cases, the application of tax laws are uncertain and subject to differing interpretations, especially
when evaluated against new technologies and telecommunications services, such as broadband Internet access and cloud
related services. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law
are issued or applied. Changes in tax laws, or changes in interpretations of existing laws, could materially affect our
financial position, results of operations and cash flows. For example, the U.S. recently enacted a major federal tax reform
that had a significant impact on our tax obligations and effective income tax rate in 2017.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located at 121 S. 17th Street, Mattoon, Illinois, a leased facility. We also own and lease
office facilities and related equipment for administrative personnel, central office buildings and operations in each of the
24 states in which we operate.
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 to the 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.
27
Item 3. Legal Proceedings.
From time to time we may be involved in litigation that we believe is of the type common to companies in our industry,
including regulatory issues. While the outcome of these claims cannot be predicted with certainty, we do not believe that
the outcome of any of these legal matters will have a material adverse impact on our business, results of operations,
financial condition or cash flows. See Note 11 to the consolidated financial statements included in this report in Part II –
Item 8 – “Financial Statements and Supplementary Data” for a discussion of recent developments related to these legal
proceedings.
Item 4. Mine Safety Disclosures.
Not Applicable.
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 26, 2018, there were approximately 4,603 stockholders of record of the Company’s common stock. The
following table indicates the high and low 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
Dividend Policy and Restrictions
2017
2016
Low
Low
High
High
$ 27.48 $ 22.06 $ 25.76 $ 18.48
$ 24.42 $ 19.47 $ 27.24 $ 23.53
$ 22.04 $ 17.46 $ 28.38 $ 23.41
$ 20.42 $ 12.19 $ 29.68 $ 22.28
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 2018. 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 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 Part II – Item 6, which
is incorporated herein by reference.
28
Share Repurchases
During the quarter ended December 31, 2017, we repurchased 41,920 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, 2017
November 1-November 30, 2017
December 1-December 31, 2017
Performance Graph
Total number of Average price announced plans
shares purchased paid per share
—
—
41,920
or programs
n/a
n/a
n/a
n/a
n/a
$ 12.63
Total number of Maximum number
shares purchased of shares that may
as part of publicly 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
reinvestment of dividends) 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, in addition to us: Alaska Communications Systems
Group, 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, 2012 in each index and in the peer group. The stock performance shown on the graphs below is not
necessarily indicative of future price performance.
29
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Consolidated Communications Holdings, the S&P 500 Index, the Dow Jones US
Fixed Line Telecommunications Subsector Index,
and a Peer Group
(In dollars)
Consolidated Communications Holdings, Inc.
S&P 500
Dow Jones US Fixed Line Telecommunications
2012
2013
2014
2015
2016
2017
$ 100.00 $ 134.71 $ 205.52 $ 166.49 $ 227.89 $ 110.97
$ 100.00 $ 132.39 $ 150.51 $ 152.59 $ 170.84 $ 208.14
Subsector
Peer Group
$ 100.00 $ 111.73 $ 115.37 $ 119.09 $ 147.06 $ 146.18
$ 100.00 $ 142.93 $ 193.03 $ 196.41 $ 255.60 $ 223.15
As of December 31,
Sale of Unregistered Securities
During the year ended December 31, 2017, we did not sell any equity securities of the Company which were not registered
under the Securities Act of 1933, as amended.
30
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in conjunction with Part II - 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)
2017 (1)
Year Ended December 31,
2015
2014 (2)
2016
2013
Operating revenues
$
1,059.6
$
743.2
$
775.7
$
635.7
$
601.6
Cost of products and services (exclusive of depreciation and
amortization)
Selling, general and administrative expense
Acquisition and other transaction costs (3)
Intangible asset impairment
Depreciation and amortization
Income from operations
Interest expense, net
Loss on extinguishment of debt
Other income, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Discontinued operations, net of tax (4)
Net income (loss)
Net income of noncontrolling interest
Net income (loss) attributable to common shareholders
Income (loss) per common share - basic and diluted:
Income (loss) from continuing operations
Discontinued operations, net of tax
Net income (loss) per common share - basic and diluted
446.1
249.3
33.7
—
291.8
38.7
(129.8)
—
31.5
(59.6)
(124.9)
65.3
—
65.3
0.4
64.9
1.07
—
1.07
$
$
$
$
$
$
322.8
157.1
1.2
0.6
174.0
87.5
(76.8)
(6.6)
34.1
38.2
23.0
15.2
—
15.2
0.3
14.9
0.29
—
0.29
$
$
$
328.4
178.2
1.4
—
179.9
87.8
(79.6)
(41.2)
35.1
2.1
2.8
(0.7)
—
(0.7)
0.2
(0.9)
(0.02)
—
(0.02)
$
$
$
242.7
140.6
11.8
—
149.4
91.2
(82.5)
(13.8)
33.5
28.4
13.0
15.4
—
15.4
0.3
15.1
0.35
—
0.35
$
$
$
222.5
135.4
0.8
—
139.3
103.6
(85.8)
(7.7)
37.3
47.4
17.5
29.9
1.2
31.1
0.3
30.8
0.73
0.03
0.76
Weighted-average number of shares - basic and diluted
60,373
50,301
50,176
41,998
39,764
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
$
210.0
(1,042.7)
821.3
181.2
$
218.2
(108.3)
(98.7)
125.2
$
219.2
(119.5)
(90.4)
133.9
$
187.8
(246.9)
60.2
109.0
$
168.5
(107.4)
(71.6)
107.4
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 (5)
$
15.7
213.7
2,037.6
3,719.1
2,341.2
573.9
$
27.1
133.2
1,055.2
2,092.8
1,391.7
176.3
$
15.9
126.4
1,093.3
2,138.5
1,388.8
250.7
$
6.7
134.1
1,137.5
2,211.8
1,351.2
330.8
$
5.6
87.7
885.4
1,733.8
1,208.3
152.3
$
414.1
$
305.8
$
328.9
$
288.4
$
286.5
(1) On July 3, 2017, we acquired 100% of the issued and outstanding shares of FairPoint in exchange for shares of our
common stock. The financial results for FairPoint have been included in our consolidated financial statements as of
the acquisition date.
(2) On October 16, 2014, we completed our acquisition of Enventis Corporation (“Enventis”) in which we acquired all
the issued and outstanding shares of Enventis in exchange for shares of our common stock. The financial results for
Enventis have been included in our consolidated financial statements as of the acquisition date.
31
(3) Acquisition and other transaction costs includes costs incurred related to acquisitions, including severance costs.
(4) 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.
(5) 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.
The following tables are a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA:
Year Ended December 31,
(In millions, unaudited)
Net income (loss) from continuing operations
Add (subtract):
Interest expense, net of interest income
Income tax expense (benefit)
Depreciation and amortization
EBITDA
Adjustments to EBITDA:
Other, net (a)
Investment distributions (b)
Loss on extinguishment of debt (c)
Intangible asset impairment (d)
Non-cash, stock-based compensation (e)
Adjusted EBITDA
2016
2017
65.3 $ 15.2 $ (0.7) $ 15.4 $ 29.9
2015
2013
2014
$
129.8
(124.9)
291.8
362.0
76.8
23.0
174.0
289.0
79.6
2.8
179.9
261.6
82.5
13.0
149.4
260.3
85.8
17.5
139.3
272.5
19.3
30.0
—
—
2.8
(31.5)
34.8
7.7
—
3.0
$ 414.1 $ 305.8 $ 328.9 $ 288.4 $ 286.5
(23.9)
34.6
13.8
—
3.6
(25.5)
32.1
6.6
0.6
3.0
(22.3)
45.3
41.2
—
3.1
(a) Other, net includes the equity earnings from our investments, dividend income, income attributable to noncontrolling
interests in subsidiaries, acquisition and transaction related costs including severance, non-cash pension and post-
retirement benefits and certain other miscellaneous items.
(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.
32
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 Part I – 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, 2017 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
accounting principles generally accepted in the United States (“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
Consolidated is a broadband and business communications provider that provides a wide range of communication solutions
to consumer, commercial and carrier customers across a 24-state service area and an advanced fiber network spanning
more than 36,000 fiber route miles. We offer residential Internet, video, phone and home security services as well as
multi-service residential and small business bundles. Our business product suite includes data and Internet solutions,
voice, data center services, security services, managed and IT Services, and an expanded suite of cloud services. We
provide wholesale solutions to carriers and other service providers including data, voice and network connections.
We generate the majority of our consolidated operating revenues primarily from subscriptions to our video, data and
transport services (collectively “broadband services”) to business and residential customers. Commercial and carrier
services represent the largest source of our operating revenues and are expected to be key growth areas in the future. We
continue to focus on broadband and commercial growth opportunities and are continually enhancing our broadband
services and expanding our commercial product offerings for both small and large businesses in order to capitalize on
technological advances in the industry. Our recent acquisition of FairPoint Communications, Inc. (“FairPoint”), as
described below, provides us significantly greater scale and an expanded fiber network which allows for additional growth
opportunities and expansion. We leverage our advanced fiber networks and tailor our services for business customers by
developing solutions to fit their specific needs. In addition, we are expanding our suite of cloud services, which increases
efficiency and enables greater scalability and reliability for businesses. We anticipate future momentum in commercial
and carrier services as these products gain traction as well as from the demand from customers for additional bandwidth
and data-based services.
We market our residential services by leading with broadband or bundled services. Our “triple play” bundle includes our
Internet, video and phone services. As consumer demands for bandwidth continue to increase, our focus is on enhancing
our broadband services, and progressively increasing consumer data speeds. We offer data speeds of up to 1 Gbps in select
markets, and up to 100 Mbps in markets where 1 Gbps is not yet available, depending on the geographical region. As of
December 31, 2017, approximately 42% of the homes we serve on our legacy network had availability to broadband speeds
of up to 100 Mbps. The majority of the homes in our recently acquired FairPoint service territories have availability to
broadband speeds of 20 mbps or less. As part of our integration initiatives of FairPoint, we plan to increase broadband
speeds to more than 500,000 residents and small businesses across the Northern New England service area by the end of
2018. The upgrades are expected to enable customers to receive broadband speeds up to three times the speeds currently
available and provide nearly 100,000 additional homes with access to data speeds of 1 Gbps.
Our competitive consumer broadband speeds allow us to continue to meet the needs of our customers and the demand for
higher speeds driven by over-the-top (“OTT”) content viewing. The availability of higher broadband speed also
complements our TV Everywhere service, which allows our video subscribers to watch their favorite shows, movies and
livestreams at home or on any device. In addition, we offer other in-demand OTT content, such as fubo, HBO Now and
other sports and entertainment.
33
The consumer demand for OTT video services either to augment their current video subscription viewing options or to
entirely replace their video subscription may impact our future video subscriber base, which could result in a decline in
video revenue as well as a reduction in video programing costs. Excluding FairPoint, total video connections decreased
9% as of December 31, 2017 compared to 2016. We believe the trend in changing consumer viewing habits will continue
to impact our business results and complement our strategy of providing consumers higher broadband speed to facilitate
OTT video and content viewing.
Operating revenues also continue to be impacted by the anticipated industry-wide trend of a decline in voice services,
access lines and related network access revenue. Many customers are choosing to subscribe to alternative communication
services and competition for these subscribers continues to increase. Excluding FairPoint, total voice connections
decreased 4% as of December 31, 2017 compared to 2016. Competition from wireless providers, Competitive Local
Exchange Carriers and 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 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 fully determine the impact of the regulatory changes on our operations.
Significant Recent Developments
Acquisitions
FairPoint Communications, Inc.
On July 3, 2017, we completed our merger with FairPoint (the “Merger”) and pursuant to the terms of a definitive
agreement and plan of merger (as amended, the “Merger Agreement”), acquired all the issued and outstanding shares of
FairPoint in exchange for shares of our common stock. As a result, FairPoint became a wholly-owned subsidiary of the
Company. FairPoint is an advanced communications provider to business, wholesale and residential customers within its
service territory, which spans across 17 states. FairPoint owns and operates a robust fiber-based network with more than
22,000 route miles of fiber, including 17,000 route miles of fiber in northern New England. The financial results for
FairPoint have been included in our consolidated financial statements as of the acquisition date. The acquisition reflects
our strategy to diversify revenue and cash flows among multiple products and to expand our network to new markets.
At the effective time of the Merger, each share of common stock, par value of $0.01 per share, of FairPoint issued and
outstanding immediately prior to the effective time of the Merger converted into and became the right to receive 0.7300
shares of common stock, par value $0.01 per share, of Consolidated and cash in lieu of fractional shares, as set forth in the
Merger Agreement. Based on the closing price of our common stock on the last complete trading day prior to the effective
date of the Merger, the total value of the consideration exchanged was approximately $431.0 million, exclusive of debt of
approximately $919.3 million. On the date of the Merger, we issued an approximate aggregate total of 20.1 million shares
of our common stock to the former FairPoint stockholders and we assumed approximately 2,615,153 outstanding warrants,
each eligible to purchase one share of the Company’s common stock at an exercise price of $66.86 per share, subject to
adjustment in accordance with the warrant agreement, and exercisable any time on or prior to January 24, 2018. On
January 24, 2018, all of the warrants expired in accordance with their terms without being exercised.
To finance the Merger, in December 2016, we secured committed debt financing through a $935.0 million incremental
term loan facility, as described in the “Liquidity and Capital Resources” section below, that, in addition to cash on hand
and other sources of liquidity, was used to repay and redeem certain existing indebtedness of FairPoint and pay the fees
and expenses in connection with the Merger.
34
Champaign Telephone Company, Inc.
On April 18, 2016, we entered into a definitive agreement to acquire substantially all of the assets of Champaign Telephone
Company, Inc. and its sister company, Big Broadband Services, LLC (collectively “CTC”), a private business
communications provider in the Champaign-Urbana, IL area. The acquisition was completed on July 1, 2016. The
aggregate purchase price, including customary working capital adjustments, consisted of cash consideration of $13.4
million, which was paid from our existing cash resources.
Divestitures
In connection with our acquisition of FairPoint, we committed to a formal plan to sell our subsidiaries Peoples Mutual
Telephone Company and Peoples Mutual Long Distance Company (collectively, “Peoples”), which were acquired as part
of the acquisition of FairPoint. Peoples operates as a local exchange carrier in Virginia and provides telecommunications
services to residential and business customers. In November 2017, the Company entered into an agreement to sell all of
the issued and outstanding stock of Peoples in exchange for cash of approximately $21.0 million, subject to certain
contractual adjustments. The closing of the transaction is subject to certain regulatory approvals, which are expected to
be completed in the first quarter of 2018.
On December 6, 2016, we completed the sale of substantially all of the assets of the Company’s Enterprise Services
equipment and IT Services business (“EIS”) to ePlus Technology inc. (“ePlus”) for cash proceeds of $9.2 million net of a
customary working capital adjustment. As part of the transaction, we entered into a Co-Marketing Agreement with ePlus,
a nationwide systems integrator of technology solutions, to cross-sell both broadband network services and IT services.
The strategic partnership provides our business customers access to a broader suite of IT solutions, and also provides ePlus
customers access to Consolidated’s business network services. During the year ended December 31, 2016, we recognized
a gain of $0.6 million on the sale, which is included in other, net in the consolidated statement of operations.
On May 3, 2016, we entered into a definitive agreement to sell all of the issued and outstanding stock of Consolidated
Communications of Iowa Company (“CCIC”), formerly Heartland Telecommunications Company of Iowa. CCIC
operates as an incumbent local exchange carrier providing telecommunications and data services to residential and business
customers in 11 rural communities in northwest Iowa and surrounding areas. The sale was completed on September 1,
2016 for total cash proceeds of approximately $21.0 million, net of certain contractual and customary working capital
adjustments. In May 2016, in connection with the expected sale, the carrying value of CCIC was reduced to its estimated
fair value and we recognized an impairment loss of $0.6 million during the year ended December 31, 2016. We recognized
an additional loss on the sale of $0.3 million during the year ended December 31, 2016, which is included in other, net in
the consolidated statement of operations, as a result of changes in estimated working capital. We recognized a taxable
gain on the transaction resulting in current income tax expense of $7.2 million during the year ended December 31, 2016
to reflect the tax impact of the divestiture.
35
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, 2017, 2016 and 2015.
(In millions, except for percentages)
Operating Revenues
Commercial and carrier:
Data and transport services (includes VoIP)
Voice services
Other
Consumer:
Broadband (VoIP, data and video)
Voice services
Equipment sales and service
Subsidies
Network access
Other products and services
Total operating revenues
Operating Expenses
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative costs
Acquisition and other transaction costs
Loss on impairment
Depreciation and amortization
Total operating expenses
Income from operations
Interest expense, net
Loss on extinguishment of debt
Other income
Income tax expense (benefit)
Net income (loss)
Net income attributable to noncontrolling interest
Net income (loss) attributable to common
shareholders
Financial Data
2017
2016
2015
% Change
2017 vs.
2016
2016 vs.
2015
$
268.5
158.4
33.9
460.8
$
196.7
99.8
12.5
309.0
$
187.5
103.0
12.3
302.8
37 %
59
171
49
5 %
(3)
2
2
276.2
136.5
412.7
—
62.3
110.2
13.6
1,059.6
446.1
249.3
33.7
—
291.8
1,020.9
38.7
(129.8)
—
31.5
(124.9)
65.3
0.4
209.9
55.3
265.2
43.1
48.3
63.8
13.8
743.2
322.8
157.1
1.2
0.6
174.0
655.7
87.5
(76.8)
(6.6)
34.1
23.0
15.2
0.3
213.6
60.6
274.2
55.0
56.3
69.7
17.7
775.7
328.4
178.2
1.4
—
179.9
687.9
87.8
(79.6)
(41.2)
35.1
2.8
(0.7)
0.2
32
147
56
(100)
29
73
(1)
43
38
59
2,708
(100)
68
56
(56)
69
(100)
(8)
(643)
330
33
(2)
(9)
(3)
(22)
(14)
(8)
(22)
(4)
(2)
(12)
(14)
100
(3)
(5)
(0)
(4)
(84)
(3)
721
2,271
50
$
64.9
$
14.9
$
(0.9)
336
1,756
Adjusted EBITDA
(1)
$
414.1
$
305.8
$
328.9
35 %
(7) %
(1) A non-GAAP measure. See the Non-GAAP Measures section below for additional information and reconciliation to
the most directly comparable GAAP measure.
36
Key Operating Statistics
2017
671,300
2016
253,203
% Change
2017
vs.
2016
2016
vs.
2015
165 %
(6) %
2015
268,934
972,178
783,682
103,313
457,315
473,403
106,343
482,735
456,100
117,882
113
66
(3)
(5)
4
(10)
Consumer customers
Voice connections
Data connections
Video connections
Total connections
1,859,173
1,037,061
1,056,717
79 %
(2) %
The comparability of our consolidated results of operations and key operating statistics was impacted by the FairPoint
acquisition that closed on July 3, 2017, as described above. FairPoint’s results are included in our consolidated financial
statements as of the date of the acquisition.
Operating Revenues
Commercial and Carrier
Data and Transport Services
We provide a variety of business communication services to small, medium and large business customers, including many
services over our advanced fiber network. The services we offer include scalable high speed broadband Internet access
and VoIP phone services, which range from basic service plans to virtual hosted systems. In addition to Internet and VoIP
services, we also offer private line data services to businesses that include dedicated Internet access through our Metro
Ethernet network. Wide Area Network (“WAN”) products include point-to-point and multi-point deployments from 2.5
Mbps to 10 Gbps to accommodate the growth patterns of our business customers. Data center and disaster recovery
solutions provide a reliable and local colocation option for commercial customers. We also offer wholesale services to
regional and national interexchange and wireless carriers, including cellular backhaul and other fiber transport solutions.
Data and transport services revenue increased $71.8 million during 2017 compared to 2016 and $9.2 million during 2016
compared to 2015 primarily due to the acquisition of CTC in 2016, an increase in data connections and a continued increase
in Internet access and Metro Ethernet revenues and the acquisition of FairPoint in July 2017, which accounted for $67.2
million of the annual increase in data and transport services revenue during 2017 compared to 2016. During the year
ended December 31, 2017, growth in data and transport services was hampered by increased competition and price
compression as customers are migrating from legacy products to Ethernet based products, which have a lower average
revenue per user. Future declines are expected to be partially offset with the increasing demand for bandwidth and other
Ethernet services.
Voice Services
Voice services include basic local phone and long-distance service packages for business customers. The plans include
options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller
ID, call forwarding, speed dialing and call waiting. Services can be charged at a fixed monthly rate, a measured rate or can
be bundled with selected services at a discounted rate. Through the acquisition of FairPoint, we are now a full service 9-
1-1 provider and have installed and now maintain two turn-key, state of the art statewide next-generation emergency 9-1-
1 systems. These systems, located in Maine and Vermont, have processed over a million calls relying on the caller's
location information for routing. Next-generation emergency 9-1-1 systems are an improvement over traditional 9-1-1
and are expected to provide the foundation to handle future communication modes such as texting and video.
Voice services revenue increased $58.6 million during 2017 compared to 2016 and decreased $3.2 million during 2016
compared to 2015. Excluding the additional revenue from FairPoint of $65.6 million in 2017, voice services revenue
decreased $7.0 million during 2017 compared to 2016. The decline in voice services revenue was primarily due to a 6%
decline in access lines during 2017 compared to 2016, and a 7% decline in access lines during 2016 compared to 2015 as
37
commercial customers are increasingly choosing alternative technologies, including our own VoIP product, and the broad
range of features that Internet-based voice services can offer.
Other
Other services revenue includes business equipment sales and related hardware and maintenance support, rental income
of customer premises equipment, video services and other miscellaneous revenue. Other services revenue increased $21.4
million during 2017 compared to 2016 and increased $0.2 million during 2016 compared to 2015. Excluding the additional
revenue from FairPoint of $15.9 million in 2017, other services revenue increased by $5.5 million during 2017 compared
to 2016, due to an increase in business equipment and structured cabling sales contributed by the acquisition of CTC in
2016 and additional revenue related to the Co-Marketing Agreement entered into with ePlus in connection with the sale
of EIS in 2016.
Consumer
Broadband Services
Broadband services include revenue from residential customers for subscriptions to our VoIP, data and video products. We
offer high speed Internet access at speeds of up to 1 Gbps, depending on the nature of the network facilities that are
available, the level of service selected and the location. 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 customers
may also subscribe to our advanced video services, which consist of high-definition television, digital video recorders
(“DVR”) and/or a whole home DVR.
Broadband services revenue increased $66.3 million during 2017 compared to 2016 and decreased $3.7 million during
2016 compared to 2015. Excluding the additional revenue from FairPoint of $74.2 million in 2017, broadband services
revenue decreased by $7.9 million during 2017 compared to 2016. The decline in broadband services revenue during 2017
compared to 2016 was primarily due to a decline in data and video connections of 5% and 10%, respectively. The decline
in broadband services revenue during 2016 compared to 2015 was also primarily due to a decline in data and video
connections of 5% and 11%, respectively. The decline in connections was primarily a result of increased competition as
consumers are choosing to subscribe to alternative communication services particularly for video services. VoIP revenue
also declined during the same period due to a 9% and 11% decline in connections, respectively, as more consumers
continue to rely exclusively on wireless service.
Voice Services
We offer several different basic local phone service packages and long-distance calling plans, including unlimited flat-rate
calling plans. The plans include options for voicemail and other custom calling features such as caller ID, call forwarding
and call waiting. Voice services revenue increased $81.2 million during 2017 compared to 2016 and decreased $5.3
million during 2016 compared to 2015. Excluding the additional revenue from FairPoint of $87.1 million in 2017, voice
services revenue decreased $5.9 million during 2017 compared to 2016. The decline in voice services revenue was
primarily due to an 8% decline in access lines during 2017 compared to 2016, and a 10% decline in access lines during
2016 compared to 2015. 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 erosion in voice connections due to competition from alternative technologies, including our own competing
VoIP product.
Equipment Sales and Service
Until the sale of EIS in December 2016, we were an accredited Master Level Unified Communications and Gold Certified
Cisco Partner providing equipment solutions and support for business customers. As an equipment integrator, we offered
network design, implementation and support services, including maintenance contracts, in order to provide integrated
communication solutions for our customers. When an equipment sale involved multiple deliverables, revenue was
allocated to each respective element based on relative selling price. Equipment sales and service revenues decreased
38
$43.1 million during 2017 compared to 2016 and decreased $11.9 million during 2016 compared to 2015 due to the sale
of EIS in December 2016.
Subsidies
Subsidies consist of both federal and state subsidies, which are designed to promote widely available, quality telephone
service at affordable prices in rural areas. Subsidies increased $14.0 million during 2017 compared to 2016 and decreased
$8.0 million during 2016 compared to 2015. Excluding the additional revenue from FairPoint of $23.4 million in 2017,
subsidies revenue decreased $9.4 million during 2017 compared to 2016 primarily due to the scheduled reduction in the
annual Connect America Fund (“CAF”) Phase II funding rate in August 2017, the sale of CCIC in September 2016 and a
decrease in state funding support for our Texas Incumbent Local Exchange Company (“ILEC”). See the “Regulatory
Matters” section below for further discussion of the subsidies we receive.
Network Access Services
Network access services include interstate and intrastate switched access revenue, network special access services and end
user access. Switched access revenue includes access services to other communications carriers to terminate or originate
long-distance calls on our network. Special access circuits provide dedicated lines and trunks to business customers and
interexchange carriers. Network access services revenue increased $46.4 million during 2017 compared to 2016 and
decreased $5.9 million during 2016 compared to 2015. Excluding the additional revenue from FairPoint of $55.5 million
in 2017, network access services revenue decreased $9.1 million during 2017 compared to 2016. The decline in network
access services revenue during 2017 compared to 2016 and during 2016 compared to 2015 was primarily a result of the
continuing decline in interstate rates, minutes of use, voice connections and carrier circuits; however, a portion of the
decrease can be attributed to carriers shifting to our fiber Metro Ethernet product, contributing to the growth in that area.
Other Products and Services
Other products and services include revenues from telephone directory publishing, video advertising, billing and support
services and miscellaneous revenue. Other products and services revenue decreased $0.2 million during 2017 compared
to 2016 and $3.9 million during 2016 compared to 2015. Excluding the additional revenue from FairPoint of $0.7 million
in 2017, other products and services revenue decreased $0.9 million during 2017 compared to 2016. The declines in other
products and services revenue was primarily due to a decline in telephone directory advertising revenues.
Operating Expenses
Cost of Services and Products
Cost of services and products increased $123.3 million during 2017 compared 2016 due to the acquisition of FairPoint
which accounted for $160.2 million of the increase. Excluding FairPoint, cost of services and products decreased $36.9
during 2017 primarily from a decline in cost of goods sold related to equipment sales of $29.8 million as a result of the
sale of EIS in 2016, as discussed above. Employee costs also decreased due to savings from a reduction in headcount as
part of cost saving initiatives. In addition, video programming costs decreased as a result of a 9% decline in video
connections, which was largely offset by an increase in programming costs per channel as costs continue to rise as a result
of annual rate increases. Video programming costs are impacted by license fees charged by cable networks, the amount
and quality of the content we provide and the number of video subscribers we serve.
In 2016, cost of services and products decreased $5.6 million compared to 2015. Cost of goods sold related to equipment
sales decreased $8.5 million in 2016 compared to 2015 as a result of changes in non-recurring equipment sales and the
sale of EIS in December. Video programming costs decreased as a result of a 10% decline in video connections, which
was largely offset by an increase in programming costs per channel. However, network access costs increased due to
growth in carrier and wireless backhaul services during 2016. The change in cost of services and products during 2016
was also impacted by an increase in pension expense, but was offset in part by a reduction in incentive compensation.
Selling, General and Administrative Costs
Selling, general and administrative costs increased $92.2 million during 2017 compared to 2016. The acquisition of
FairPoint contributed $98.6 million of the increase. Excluding FairPoint, selling, general and administrative costs
39
decreased $6.4 million during 2017 primarily due to a decline in employee costs of $8.2 million from a reduction in
headcount as well as a decrease in incentive compensation and pension expense in the current year. Professional fees
decreased due to declines in expenses related to legal, audit and tax services. Advertising expense also decreased due to
a reduction in radio advertising and marketing promotions in 2017. However, bad debt expense increased primarily as a
result of favorable adjustments in the prior year. The change in selling, general and administrative expense was also
impacted by integration costs incurred in 2017 related to the acquisition of FairPoint.
Selling, general and administrative costs decreased $21.1 million during 2016 compared to 2015 primarily due to a decline
in employee-related costs from a reduction in headcount as part of the Company’s cost saving initiatives implemented in
2015 as well as a decrease in incentive compensation. In addition, one-time severance costs of $7.2 million were incurred
in 2015 as a result of an early retirement program offered to a group of select employees. Bad debt expense also decreased
as a result of recoveries recognized in 2016 and increased reserves in the prior year periods. However, advertising expense
increased due to additional radio advertising and marketing promotions in 2016.
Acquisition and Other Transaction Costs
Acquisition and other transaction costs increased $32.5 million in 2017 compared to 2016 as a result of the acquisition of
FairPoint, which closed in July 2017. Transaction costs consist primarily of legal, finance and other professional fees
incurred in connection with the Merger as well as expenses related to change-in-control payments to former employees of
the acquired company.
Depreciation and Amortization
Depreciation and amortization expense increased $117.8 million during 2017 compared to 2016 primarily as a result of
the acquisition of FairPoint which accounted for $131.1 million of the increase. Excluding FairPoint, depreciation and
amortization expense decreased $13.3 million during 2017 due to the sale of EIS and CCIC in 2016 and certain intangibles
and software becoming fully amortized in 2017 and 2016, which was offset in part by ongoing capital expenditures related
to outside plant and success-based capital projects for consumer and commercial services as well as CAF Phase II funding
requirements.
Depreciation and amortization expense decreased $5.9 million during 2016 compared to 2015, primarily due certain circuit
equipment, outside plant and software becoming fully depreciated in 2016. This decline was offset in part by ongoing
capital expenditures related to network enhancements and success-based capital projects.
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 and the Federal Communications Commission (“FCC”);
Long distance carriers for network access service;
Competitive access providers and commercial customers for network access service; and
Support payments from federal or state programs.
telecommunications
the
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.
to extensive federal, state and
local regulation. Under
is subject
industry
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
40
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 incumbent local exchange 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,
Universal Service Fund (“USF”) subsidies promote widely available, quality telephone service at affordable prices in rural
areas. Revenues from the federal and certain states’ USFs increased $14.0 million in 2017 compared to 2016 primarily
due to additional revenue of $23.4 million from the acquisition of FairPoint. Excluding FairPoint, revenues from the
federal and certain states’ USFs decreased by $9.4 million primarily due to the scheduled reduction in the annual CAF
Phase II transition funding in August 2017, the sale of CCIC in September 2016 and a decrease in state funding support
for our Texas ILEC.
An order adopted by the FCC in 2011 (the “Order”) has significantly impacted the amount of support revenue we receive
from the USF, CAF and intercarrier compensation (“ICC”). The Order reformed core parts of the USF, broadly recast the
existing ICC scheme, established the CAF to replace support revenues provided by the current USF and redirected support
from voice services to broadband services. In 2012, CAF Phase I was implemented, which froze USF support to price cap
carriers until the FCC implemented a broadband cost model to shift support from voice services to broadband
services. The Order also modified 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 for our price cap study areas and nine years for our rate of return study areas, and as a result,
our network access revenue decreased approximately $2.8 million, $1.7 million and $1.3 million during 2017, 2016 and
2015, respectively.
In December 2014, the FCC released a report and order that addressed, among other things, the transition to CAF Phase
II funding for price cap carriers and the acceptance criteria for CAF Phase II funding. For companies that accept the CAF
Phase II funding, there is a three year transition period in instances in which their current CAF Phase I funding exceeds
the CAF Phase II funding. If CAF Phase II funding exceeds CAF Phase I funding, the transitional support is waived and
CAF Phase II funding begins immediately. Companies are required to commit to a statewide build out requirement to 10
Mbps downstream and 1 Mbps upstream in funded locations.
We accepted the CAF Phase II funding in August 2015, which was effective as of January 1, 2015. The annual funding
under CAF Phase I of $36.6 million was replaced by annual funding under CAF Phase II of $13.9 million through 2020.
With the sale of our Iowa ILEC in 2016, this amount was further reduced to $11.5 million through 2020. Subsequently,
with the acquisition of FairPoint, this amount increased to $48.9 million through 2020. FairPoint accepted the annual CAF
Phase II funding of $37.4 million through 2020 in August 2015. This includes CAF Phase II support in all of FairPoint’s
operating states except Colorado and Kansas where the offered CAF Phase II support was declined. We continue to receive
frozen CAF Phase I support in Colorado and Kansas until such time as the FCC CAF Phase II auction assigns support to
another provider. The acceptance of CAF Phase II funding at a level lower than the frozen CAF Phase I support results in
CAF Phase II Transitional funding over a three year period based on the difference between the CAF Phase I funding and
the CAF Phase II funding at the rates of 75% in the first year, 50% in the second year and 25% in the third year.
The specific obligations associated with CAF Phase II funding include the obligation to serve approximately 126,900
locations by December 31, 2020 (with interim milestones of 40%, 60% and 80% completion by December 2017, 2018 and
2019, respectively); to provide broadband service to those locations with speeds of 10 Mbps per second down and 1 Mbps
up; to achieve latency of less than 100 milliseconds; to provide data of at least 100 gigabytes per month; and to offer
pricing reasonably comparable to pricing in urban areas. As of December 31, 2017, we met the milestone for 2017 in all
states in which we operate.
41
Local Switching Support
In 2015, FairPoint filed a Petition with the FCC asking the FCC to direct National Exchange Carrier Association (“NECA”)
to stop subtracting frozen Local Switching Support (“LSS”) from FairPoint’s ICC Eligible Recovery for FairPoint’s rate
of return ILECs that participate in the NECA pooling process. This issue is unique to rate of return affiliates of price cap
carriers because such companies are considered price cap carriers for the FCC’s CAF funding, but remain rate of return
for ICC purposes. Effective January 1, 2012, FairPoint rate of return ILECs were placed under the price cap CAF Phase
I interim support mechanism, whereby the ILECs continued to receive frozen USF support for all forms of USF received
during 2011, including LSS. The rate of return rules for ICC included LSS support in that mechanism as well; therefore,
NECA subtracted the frozen LSS support from the ICC Eligible Recovery amounts in accordance with FCC rules
prohibiting duplicate recovery. When FairPoint accepted CAF Phase II support effective January 1, 2015, there was no
longer any duplicate support and FairPoint requested NECA to stop subtracting LSS from FairPoint’s ICC Eligible
Recovery. NECA declined to make that change, which led to FairPoint filing a Petition with the FCC asking the FCC to
direct NECA to comply with FCC rules on ICC Eligible Recovery for rate of return ILECs. This issue also applies to
Consolidated’s operations in Minnesota, which are also rate of return ILECs associated with a price cap company. If the
FCC Petition is successful, the combined LSS support for the period from January 1, 2015 through December 31, 2017
would be approximately $11.5 million. Our ongoing ICC Eligible Recovery support for 2018 would increase by
approximately $4.0 million, and thereafter, decline by 5% per year through 2021. We cannot predict the outcome or
timing of the FCC’s decision.
FCC Rules for Business Data Services
On April 20, 2017, the FCC adopted new rules for Business Data Services (“BDS”) which went into effect August 1, 2017.
BDS services are high speed data services provided on a point to point basis. The rules apply to interstate BDS services
in areas served by price cap carriers. Under the new BDS rules, all packet-switched services and all transport services,
channel terminations connecting wholesale customers to our networks and end user channel terminations in counties
deemed competitive are competitive. End user channel terminations for DS0, DS1 and DS3 services are non-competitive
in counties deemed by the FCC to be non-competitive, but are eligible for Phase I price flexibility. The FCC published a
list of counties deemed competitive and non-competitive. Geographic areas previously under Phase II price flexibility
will not be rate regulated for any BDS services.
In our price cap operations we can continue to offer competitive BDS services under tariff or we can remove the services
from tariff. All competitive services must be detariffed within three years of the effective date of the BDS rules. We have
complete price flexibility for BDS services deemed competitive.
BDS services are subject to vigorous competition. We cannot determine the impact of the BDS rules on our revenues or
operations.
State Matters
California
In an ongoing proceeding relating to the New Regulatory Framework, the California Public Utilities Commission
(“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. In December 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. 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.
42
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 have historically received support from two state funds, the small and rural incumbent local exchange
company plan High Cost Fund (“HCF”) and the High Cost Assistance Fund (“HCAF”). The HCF is a line-based fund
used to keep local rates low. The rate is applied on all residential lines and up to five single business lines. The amount
we receive from the HCAF is a frozen monthly amount that was originally developed to offset high intrastate toll rates.
In September 2011, the Texas state legislature passed Senate Bill No. 980/House Bill No. 2603 which, among other things,
mandated the PUCT to review the Universal Service Fund and issue recommendations by January 1, 2013 with the intent
to effectively reduce the size of the Universal Service Fund. This would be accomplished by implementing an urban floor
to offset state funding reductions with a phase-in period of four years. The PUCT recommended that (i) frozen line counts
be lifted effective September 1, 2013 and (ii) rural and urban local rate benchmarks be developed. The large company
fund review was completed in September 2012 and the PUCT addressed the small fund participants in Docket 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. As of January 1, 2014, our annual $1.4
million HCAF support was eliminated and the frozen HCF support returned to funding on a per line basis. In July 2013,
the Company entered into a settlement agreement with the PUCT on Docket 41097, which was approved by the PUCT in
August 2013. In accordance with the provisions of the settlement agreement, the HCF draw will be reduced by
approximately $1.2 million annually over a four year period beginning June 1, 2014 through 2018. However, we have the
ability to fully offset this reduction with increases to residential rates where market conditions allow, which the Company
filed for in April 2014 and implemented in June 2014.
In addition, the PUCT is required to develop a needs test for post-2017 funding and has held workshops on various
proposals. The PUCT issued its recommendation to the Texas state commissioners in May 2014, which was approved in
December 2014. The needs test allows for a one-time disaggregation of line rates from a per line flat rate, then a
competitive test must be met to receive funding. The Company filed its submission for the needs test on December 28,
2016. The PUCT issued docket 46699 on January 4, 2017 to review the filing and a decision was granted in the second
quarter of 2017.
New York
With the acquisition of FairPoint, we assumed grants from the NY Broadband Program (the "NYBB"). In 2015, New
York established the $500 million NYBB to provide state grant funding to support projects that deliver high-speed Internet
access to unserved and underserved areas with a goal of achieving statewide broadband access in New York by the end of
2018.
FairPoint received and accepted award letters in March 2017 for grant awards totaling $36.7 million from the NYBB Phase
2 grants. These grants will support, in part, the extension and upgrading of high-speed broadband services to over 10,321
locations in our New York service territory. During the second quarter of 2017, a bid for Phase 3 grants was submitted by
FairPoint, the final phase of the NYBB grants. On January 31, 2018, the state notified us that we were awarded a portion
of our Phase 3 bid, and are currently reviewing the grant. We expect to treat the reimbursements as a contribution in aid
of construction given the nature of the arrangement.
To be eligible for the grant, the network must be capable of delivering speeds of 100 Mbps or greater in unserved and
underserved locations. As a condition of the grant, we are required to offer the NYBB’s Required Pricing Tier as a service
option to residential users for a period of five years from completion of construction of the network. This pricing
requirement will provide for broadband Internet service at minimum speeds of 25/4 Mbps (download/upload).
43
FairPoint Merger Requirements
As part of our acquisition of FairPoint, we have regulatory commitments that vary by state, some of which require capital
investments in our network over several years through 2020. The requirements include improved data speeds and other
service quality improvements in select locations primarily in our Northern New England, New York and Illinois markets.
In New Hampshire and Vermont, we are required to invest 13% and 14%, respectively, of total state revenues in capital
improvements per year for 2018, 2019 and 2020. For our service territory in Maine, we are required to make capital
expenditures of $16.4 million per year from 2018 through 2020. In addition, we are required to invest an incremental $1.0
million per year in each of these three states for service quality improvements. In New York, we are required to invest
$4.0 million over three years to expand the broadband network to over 300 locations. In Illinois, we are required to invest
an additional $1.0 million by December 31, 2018 to increase broadband availability and speeds in areas we serve by the
FairPoint Illinois ILECs. As of December 31, 2017, we have met all of the merger requirements for 2017.
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 fully determine the impact of
the related FCC rules and regulations on our operations.
Non-Operating Items
Interest Expense, Net
Interest expense, net of interest income, increased $53.0 million during 2017 compared to 2016 primarily due to the
issuance of the $935.0 million incremental term loan in 2017. In addition, we incurred ticking fees of $18.0 million and
amortized commitment fees of $11.7 million in 2017 related to the committed financing secured for the acquisition of
FairPoint, as described in the “Liquidity and Capital Resources” section below. Interest expense also increased as a result
of ineffectiveness recognized on our interest rate swap agreements during 2017.
Interest expense, net of interest income, decreased $2.8 million during 2016 compared to 2015 primarily due to a reduction
in the interest rate for our outstanding senior notes. In June 2015, we issued an additional $300.0 million in 6.50% Senior
Notes due 2022, which were used, in part, to redeem the then-remaining amount of our outstanding 10.875% Senior Notes
due 2020. Interest expense was also reduced in 2016 from a decline in outstanding debt under our revolving credit facility
as well as a decrease in interest expense related to our interest rate swap agreements.
Loss on Extinguishment of Debt
In 2016, we amended our Credit Agreement to restate and amend our term loan credit facilities. In connection with
entering into the amended and restated credit agreement, we incurred a loss on the extinguishment of debt of $6.6 million
during the year ended December 31, 2016.
In 2014, we redeemed $72.8 million of the original aggregate principal amount of our 10.875% Senior Notes due 2020, as
described in the “Liquidity and Capital Resources” section below. In connection with the redemption of the 2020 Notes,
we paid $84.1 million and recognized a loss of $13.8 million on the partial extinguishment of debt during the year ended
December 31, 2014. In 2015, we redeemed the remaining $227.2 million of the 2020 Notes for $261.9 million and
recognized a loss on the extinguishment of debt of $41.2 million during 2015.
Other Income
Other income decreased $2.6 million during 2017 compared to 2016 primarily due to a decline in investment income from
our wireless partnership interests of $1.2 million. The remaining decrease was largely due to the reversal of a legal
contingency of $0.8 million in 2016.
44
Other income decreased $1.0 million during 2016 compared to 2015 primarily due to a decline in investment income of
$3.7 million due to lower earnings from our wireless partnership interests. In addition, we recognized an impairment loss
of $0.8 million as a result of the sale of our equity interest in Central Valley Independent Network, LLC in 2015. However,
this was offset in part by the reversal of a legal contingency of $0.8 million in 2016 while 2015 included additional reserves
related to disputed tax assessments.
Income Taxes
Income taxes decreased $147.9 million in 2017 compared to 2016. Our effective rate was 209.5% for 2017 compared to
60.2% for 2016. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law on December 22, 2017, making
significant changes to the U.S. tax law. The Company has calculated its best estimate of the impact of the Tax Act in its
year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date
of this filing and, as a result, has recorded a non-cash tax benefit estimate of $112.9 million as a reduction in income tax
expense in the fourth quarter of 2017, the period in which the legislation was enacted. This provisional income tax benefit
reflects the impact of re-measurement of the Company’s deferred tax assets and liabilities to the lower tax rate at which
they are expected to reverse. The corresponding federal and state impact is $(123.0) million and $10.1 million,
respectively. The acquisition of FairPoint on July 3, 2017 resulted in changes to our unitary state filings and
correspondingly the Company’s state deferred income taxes. These changes resulted in a net increase of $5.2 million to
our net state deferred tax liabilities and a corresponding increase to our state tax provision. The Company also incurred
non-deductible expenses in relation to the acquisition that resulted in an increase to our tax provision of $3.4 million. In
2017, we placed additional valuation allowances on state NOL and state tax credit carryforwards of $47.5 million and
related deferred tax assets of $2.6 million compared to $8.4 million and related deferred tax assets of $0.6 million in 2016.
In 2016, we recorded a net decrease of $1.5 million to our net state deferred tax liabilities and a corresponding decrease to
our state tax expense due to changes in state deferred income tax rates. On September 1, 2016, we completed the sale of
all the issued and outstanding stock of CCIC in a taxable transaction. As a result, we recorded an increase to our current
tax expense of $7.2 million to reflect the tax impact of the transaction. On December 5, 2016, we completed the sale of
substantially all of the assets of our EIS business. As a result, we recorded an increase to our current tax expense of $1.5
million related to the derecognition of $4.2 million of noncash goodwill allocated to the disposed business that is not
deductible for tax purposes. Exclusive of discrete adjustments, our effective tax rate for 2017 would have been
approximately 39.3% compared to 38.8% for 2016. The 2017 effective tax rate differed from the federal and state statutory
rates primarily due to differences in allocable income for the Company’s state tax filings.
Income taxes increased $20.2 million in 2016 compared to 2015. Our effective rate was 60.2% for 2016 compared to
131.9% for 2015. In 2016, we placed additional valuation allowances on state NOL and state tax credit carryforwards of
$8.4 million and related deferred tax assets of $0.6 million. We also recorded a net decrease of $1.5 million to our net state
deferred tax liabilities and a corresponding decrease to our state tax expense due to changes in state deferred income tax
rates. On September 1, 2016, we completed the sale of all the issued and outstanding stock of CCIC in a taxable
transaction. As a result, we recorded an increase to our current tax expense of $7.2 million to reflect the tax impact of the
transaction. On December 5, 2016, we completed the sale of substantially all of the assets of our EIS business. As a result,
we recorded an increase to our current tax expense of $1.5 million related to the derecognition of $4.2 million of noncash
goodwill allocated to the disposed business that is not deductible for tax purposes. In 2015, we placed additional valuation
allowances on state NOL and state tax credit carryforwards of $5.0 million and related deferred tax assets of $0.9 million.
We also recorded a net increase of $1.9 million to our net state deferred tax liabilities and a corresponding increase to our
state tax expense due to changes in state deferred income tax rates. Exclusive of these adjustments, our effective tax rate
for 2016 would have been approximately 38.8% compared to 7.9% for 2015. The 2016 effective tax rate differed from
the federal and state statutory rates primarily due to differences in allocable income for the Company’s state tax filings.
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.
45
EBITDA is defined as net earnings before interest expense, income taxes, and depreciation and amortization. Adjusted
EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described
in the reconciliations below. These measures are a common measure of operating performance in the telecommunications
industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash.
The following tables are a reconciliation of net income (loss) to adjusted EBITDA for the years ended December 31, 2017,
2016 and 2015:
(In thousands, unaudited)
Net income (loss)
Add (subtract):
Interest expense, net of interest income
Income tax expense (benefit)
Depreciation and amortization
EBITDA
Adjustments to EBITDA:
Other, net (1)
Investment distributions (2)
Loss on extinguishment of debt
Non-cash, stock-based compensation (3)
Adjusted EBITDA
Year Ended December 31,
2016
15,196
$
$
2017
65,299
$
2015
(671)
129,786
(124,927)
291,873
362,031
76,826
22,962
174,010
288,994
79,618
2,775
179,922
261,644
19,314
29,993
—
2,766
$ 414,104
(24,955)
32,144
6,559
3,017
$ 305,759
(22,360)
45,316
41,242
3,060
$ 328,902
(1) Other, net includes the equity earnings from our investments, dividend income, income attributable to noncontrolling
interests in subsidiaries, acquisition and transaction related costs including severance, non-cash pension and post-
retirement benefits and certain other miscellaneous items.
(2) Includes all cash dividends and other cash distributions received from our investments.
(3) Represents compensation expenses in connection with 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.
46
The following table summarizes our cash flows:
(In thousands)
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
Years Ended December 31,
2016
2017
2015
$
210,027 $
(1,042,711)
821,264
(11,420) $
$
218,233 $
(108,287)
(98,747)
11,199 $
219,179
(119,540)
(90,440)
9,199
Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $210.0 million in 2017, a decrease of $8.2 million compared to the same
period in 2016. Cash flows provided by operating activities decreased despite the additional cash flows provided by the
addition of the FairPoint operations of $83.2 million primarily as a result of a reduction in revenue and additional
transaction and interests costs paid in 2017 related to the acquisition of FairPoint. In addition, cash contributions to our
defined benefit pension plan increased $12.2 million in 2017 compared to 2016. Cash distributions received from our
wireless partnerships also decreased $2.1 million in 2017 compared to 2016.
Cash Flows Used In Investing Activities
Net cash used in investing activities was $1,042.7 million during 2017 and consisted primarily of cash used for the
acquisition of FairPoint and for capital expenditures.
Acquisition of FairPoint
In July 2017, we acquired all of the issued and outstanding shares of FairPoint in exchange for shares of our common stock
and cash in lieu of fractional shares. The purchase price consisted of the repayment of debt of $862.4 million, net of cash
acquired, and the issuance of shares of our common stock valued at $431.0 million. The funds required to repay FairPoint’s
outstanding debt was financed in part through a $935.0 million incremental term loan facility, as described below.
Capital Expenditures
Capital expenditures continue to be our primary recurring investing activity and were $181.2 million in 2017, an increase
of $56.0 million compared to 2016 driven by the acquisition of FairPoint in July 2017. Capital expenditures for 2018 are
expected to be $235.0 million to $245.0 million, of which approximately 50% is planned for success-based capital projects
for consumer, commercial and carrier initiatives. Capital expenditures in 2018 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 and the expansion of our fiber network in order
to retain and acquire more customers through a broader set of products and an expanded network footprint.
Other Acquisitions and Dispositions
On July 1, 2016, we acquired substantially all of the assets of CTC, a private business communications provider in the
Champaign-Urbana, IL area. The aggregate purchase price, including customary working capital adjustments, consisted
of cash consideration of $13.4 million, which was paid from our existing cash resources.
In 2016, we received cash proceeds of $30.1 million for the sale of CCIC, our rural ILEC business located in northwest
Iowa and the sale of EIS, our non-core equipment and IT services business.
Cash Flows Provided by (Used In) Financing Activities
Net cash used in financing activities consists primarily of our proceeds from and principal payments on long-term
borrowings and the payment of dividends.
47
Long-term Debt
The following table summarizes our indebtedness as of December 31, 2017:
(In thousands)
6.50% Senior Notes, net of discount
Term loans, net of discount
Revolving loan
Capital leases
Balance
496,331
$
1,813,069
22,000
23,890
2,355,290
$
Maturity Date
October 1, 2022
October 5, 2023
October 5, 2021
Rate(1)
6.50 %
LIBOR plus 3.00 %
LIBOR plus 3.00 %
6.46 % (2)
(1) At December 31, 2017, the 1-month LIBOR applicable to our borrowings was 1.57%. The term loans are subject to
a 1.00% LIBOR floor.
(2) Weighted-average rate.
Credit Agreement
In October 2016, the Company, through certain of its wholly owned subsidiaries, entered into a Third Amended and
Restated Credit Agreement with various financial institutions (as amended, the “Credit Agreement”). The Credit
Agreement consists of a $110.0 million revolving credit facility, an initial term loan in the aggregate amount of $900.0
million (the “Initial Term Loan”) and an incremental term loan in the aggregate amount of $935.0 million (the “Incremental
Term Loan”), collectively (the “Term Loans”). The Incremental Term Loan was issued on July 3, 2017 upon completion
of the FairPoint Merger, as described below. The Credit Agreement also includes an incremental loan facility which
provides the ability to borrow, subject to certain terms and conditions, incremental loans in an aggregate amount of up to
the greater of (a) $300.0 million and (b) an amount which would cause its senior secured leverage ratio not to exceed
3.00:1.00 (the “Incremental Facility”). Borrowings under the Credit Agreement are secured by substantially all of the
assets of the Company and its subsidiaries, including certain of the FairPoint subsidiaries acquired in the Merger, with the
exception of Consolidated Communications of Illinois Company and our majority-owned subsidiary, East Texas Fiber
Line Incorporated.
The Initial Term Loan was issued in an original aggregate principal amount of $900.0 million with a maturity date of
October 5, 2023, but is subject to earlier maturity on March 31, 2022 if the Company’s unsecured Senior Notes due in
October 2022 are not repaid in full or redeemed in full on or prior to March 31, 2022. The Initial Term Loan contains an
original issuance discount of 0.25% or $2.3 million, which is being amortized over the term of the loan. The Initial Term
Loan requires quarterly principal payments of $2.25 million and has an interest rate of 3.00% plus the London Interbank
Offered Rate (“LIBOR“) subject to a 1.00% LIBOR floor.
In connection with the execution of the Merger Agreement, in December 2016, the Company entered into two amendments
to the Credit Agreement to secure committed financing related to the acquisition of FairPoint. On December 14, 2016, we
entered into Amendment No. 1 to the Credit Agreement and on December 21, 2016, the Company entered into Amendment
No. 2 to the Credit Agreement, pursuant to which a syndicate of lenders agreed to provide the Incremental Term Loan,
subject to the satisfaction of certain conditions. The Incremental Term Loan was made pursuant to the Incremental Facility
set forth in the Credit Agreement. Fees of $2.5 million paid to the lenders in connection with Amendment No. 1 are
reflected as an additional discount on the Initial Term Loan and are being amortized over the term of the debt as interest
expense. Ticking fees accrued on the incremental term loan commitments from January 15, 2017 through the July 3, 2017
Merger closing date at a rate of 3.00% plus LIBOR subject to a 1.00% LIBOR floor and became due and payable on the
closing date. In connection with entering into the committed financing, commitment fees of $14.0 million were capitalized
in December 2016 and were amortized to interest expense over the term of the commitment period through July 2017.
On July 3, 2017, the Merger with FairPoint was completed and the net proceeds from the incurrence of the Incremental
Term Loan were used, in part, to repay and redeem certain existing indebtedness of FairPoint and to pay certain fees and
expenses in connection with the Merger and the related financing. The Incremental Term Loan included an original issue
discount of 0.50% and has the same maturity date and interest rate as the Initial Term Loan. The Incremental Term Loan
requires quarterly principal payments of $2.34 million, which began in December 2017.
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In addition, effective contemporaneously with the Merger, the Company entered into Amendment No. 3 to the Credit
Agreement, among other things, to increase the permitted amount of outstanding letters of credit from $15.0 million to
$20.0 million and to provide that certain existing letters of credit of FairPoint be deemed to be letters of credit under the
Credit Agreement.
The revolving credit facility has a maturity date of October 5, 2021 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, 2017, the borrowing margin for the next
three month period ending March 31, 2018 will be at a weighted-average margin of 3.00% for a LIBOR-based loan or
2.00% for an alternate base rate loan. The applicable borrowing margin for the revolving credit facility is adjusted
quarterly to reflect the leverage ratio from the prior quarter-end. As of December 31, 2017, borrowings of $22.0 million
were outstanding under the revolving credit facility, which consisted of LIBOR-based borrowings of $17.0 million and
alternate base rate borrowings of $5.0 million. At December 31 2016, there were no outstanding borrowings under the
revolving credit facility. Stand-by letters of credit of $18.3 million were outstanding under our revolving credit facility as
of December 31, 2017. The stand-by letters of credit are renewable annually and reduce the borrowing availability under
the revolving credit facility. As of December 31, 2017, $69.7 million was available for borrowing under the revolving
credit facility.
The weighted-average interest rate on outstanding borrowings under our credit facility was 4.58% and 4.00% at December
31, 2017 and 2016, respectively. Interest is payable at least quarterly.
2016 Amendment to the Credit Agreement
In connection with entering into the restated Credit Agreement in October 2016, fees of $3.9 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 operations. We also incurred a loss on the extinguishment
of debt of $6.6 million during the year ended December 31, 2016 related to the repayment of the outstanding term loan
under the previous credit agreement which was scheduled to mature in December 2020.
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, 2017, 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, 2017, and including the $27.4 million dividend declared in October 2017 and
paid on February 1, 2018, we had $257.7 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, 2017, our total net leverage ratio under
the Credit Agreement was 4.09:1.00, and our interest coverage ratio was 5.73:1.00.
Senior Notes
6.50% Senior Notes due 2022
In September 2014, we completed an offering of $200.0 million aggregate principal amount of 6.50% Senior Notes due in
October 2022 (the “Existing Notes”). The Existing Notes were priced at par, which resulted in total gross proceeds of
$200.0 million. On June 8, 2015, we completed an additional offering of $300.0 million in aggregate principal amount of
49
6.50% Senior Notes due 2022 (the “New Notes” and together with the Existing Notes, the “Senior Notes”). The New
Notes were issued as additional notes under the same indenture pursuant to which the Existing Notes were previously
issued on in September 2014. The New Notes were priced at 98.26% of par with a yield to maturity of 6.80% and resulted
in total gross proceeds of approximately $294.8 million, excluding accrued interest. The discount is being amortized using
the effective interest method over the term of the notes.
The Senior Notes mature on October 1, 2022 and interest is payable semi-annually on April 1 and October 1 of each year.
Consolidated Communications, Inc. (“CCI”) is the primary obligor under the Senior Notes, and we and certain of our
wholly-owned subsidiaries, including certain of the FairPoint subsidiaries, have fully and unconditionally guaranteed the
Senior Notes. The Senior Notes are senior unsecured obligations of the Company.
The net proceeds from the issuance of the Senior Notes, together with cash on hand, were used, in part, to finance the
acquisition of Enventis Corporation (“Enventis”) in 2014 including related fees and expenses, to repay the existing
indebtedness of Enventis and to redeem our then outstanding $300.0 million aggregate principal amount of 10.875% Senior
Notes due 2020 (the “2020 Notes”). In December 2014, we paid $84.1 million to redeem $72.8 million of the original
aggregate principal amount of the 2020 Notes and recognized a loss of $13.8 million on the partial extinguishment of debt
during the year ended December 31, 2014. In June 2015, we redeemed the remaining $227.2 million of the original
aggregate principal amount of the 2020 Notes. In connection with the redemption of the 2020 Notes, we paid $261.9
million and recognized a loss on extinguishment of debt of $41.2 million during the year ended December 31, 2015.
On October 16, 2015, we completed an exchange offer to register all of the Senior Notes under the Securities Act of 1933
(“Securities Act”). The terms of the registered Senior Notes are substantially identical to those of the Senior Notes prior
to the exchange, except that the Senior Notes are now registered under the Securities Act and the transfer restrictions and
registration rights previously applicable to the Senior Notes no longer apply to the registered Senior Notes. The exchange
offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.
Senior Notes Covenant Compliance
Subject to certain exceptions and qualifications, the indenture governing the Senior Notes contains customary covenants
that, among other things, limits CCI’s and its restricted subsidiaries’ ability to: incur additional 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. The indenture also contains customary
events of default.
Among other matters, the Senior Notes indenture provides that CCI may not pay dividends or make other restricted
payments, as defined in the indenture, if its total net leverage ratio is 4.75:1.00 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 certain acquisitions but not yet reflected in historical results. At December
31, 2017, this ratio was 4.22:1.00. If this ratio is met, dividends and other restricted payments may be made from
cumulative consolidated cash flow since April 1, 2012, less 1.75 times fixed charges, less dividends and other restricted
payments made since May 30, 2012. 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 indenture.
Since dividends of $433.6 million have been paid since May 30, 2012, including the quarterly dividend declared in October
2017 and paid on February 1, 2018, there was $888.3 million of the $1,321.9 million of cumulative consolidated cash flow
since May 30, 2012 available to pay dividends at December 31, 2017. At December 31, 2017, the Company was in
compliance with all terms, conditions and covenants under the indenture governing the 2022 Notes.
Capital Leases
We lease certain facilities and equipment under various capital leases which expire between 2018 and 2022. As of
December 31, 2017, the present value of the minimum remaining lease commitments was approximately $23.9 million, of
which $11.3 million was due and payable within the next twelve months. The leases require total remaining rental
payments of $26.0 million as of December 31, 2017, of which $2.8 million will be paid to LATEL LLC, a related party
entity.
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Dividends
We paid $94.1 million and $78.4 million in dividend payments to shareholders during 2017 and 2016, respectively. In
October 2017, our board of directors declared a quarterly dividend of $0.38738 per common share, which was paid on
February 1, 2018 to stockholders of record at the close of business on January 15, 2018. In addition, on February 23, 2018,
our board of directors declared its next quarterly dividend of $0.38738 per common share, which is payable on May 1,
2018 to stockholders of record at the close of business on April 15, 2018. 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,
2017
15,657
(42,281)
0.83
$
2016
27,077
(16,884)
0.89
Our net working capital position declined $25.4 million as of December 31, 2017 compared to December 31, 2016
primarily as a result of an increase in the current portion of long-term debt obligations and dividends payable as a result
of the FairPoint acquisition in 2017.
Our most significant use of funds in 2018 is expected to be for: (i) dividend payments of between $110.0 million and
$112.0 million; (ii) interest payments on our indebtedness of between $115.0 million and $120.0 million and principal
payments on debt of $18.3 million; and (iii) capital expenditures of between $235.0 million and $245.0 million. In the
future, our ability to use cash may be limited by our other expected uses of cash, including our dividend policy, and our
ability to incur additional debt will be limited by our existing and future debt agreements.
We believe that cash flows from operating activities, together with our existing cash and borrowings available under our
revolving credit facility, will be sufficient for at least the next twelve months to fund our current anticipated uses of cash.
After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt
agreements will depend on the results of future operations, performance and cash flow. Our ability to fund these expected
uses from the results of future operations will be subject to prevailing economic conditions and to financial, business,
regulatory, legislative and other factors, many of which are beyond our control.
We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other
borrowing agreements, or subject to statutory or regulatory restrictions, that restrict the payment of dividends or making
intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and
prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the
terms of indebtedness may restrict our subsidiaries’ ability to pay dividends or advance cash in any other manner to us.
To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing
or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank
borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of
51
equity and debt securities. There can be no assurance that we will be able to generate sufficient cash flows from operations
in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available
in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash. Failure to obtain adequate
financing, if necessary, could require us to significantly 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, 2017, we had approximately $5.0 million of these bonds outstanding.
Contractual Obligations
As of December 31, 2017, our contractual obligations were as follows:
(In thousands)
Long-term debt
Interest on long-term debt obligations (1)
Capital leases
Operating leases
Unconditional purchase obligations:
(2)
Unrecorded
Recorded (3)
Pension funding (4)
Less than
1 - 3
3 - 5
1 Year
$ 18,350
115,747
11,346
15,151
Years
$ 36,700
230,851
12,052
21,169
Years
$ 558,700
226,855
492
8,465
Thereafter
$ 1,729,663
59,127
—
8,641
Total
$ 2,343,413
632,580
23,890
53,426
58,913
64,853
36,880
62,132
—
73,288
16,898
—
66,481
6,273
—
—
144,216
64,853
176,649
(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, 2017 were used in determining our future interest obligations.
Expected settlements of interest rate swap agreements were estimated using yield curves in effect at December 31,
2017.
(2) 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 by the contractual terms of the contracts.
(3) Recorded obligations include amounts in accounts payable and accrued expenses for external goods and services
received as of December 31, 2017 and expected to be settled in cash.
(4) Expected contributions to our pension and post-retirement benefit plans for the next 5 years. Actual contributions
could differ from these estimates and extend beyond 5 years.
Defined Benefit Pension Plans
As required, we contribute to a qualified defined pension plan (the “Retirement Plan”) and non-qualified supplemental
retirement plans (the “Supplemental Plans”) and other post-retirement benefit plans, which provide retirement benefits to
certain eligible employees. In connection with the acquisition of FairPoint, we have assumed sponsorship of its two non-
contributory qualified defined benefit pension plans (collectively with the Retirement Plan and Supplemental Plans, the
“Pension Plans”) and a post-retirement benefit plan as of the date of acquisition. 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 Plans, changes in the discount rate used to calculate pension
expense and the amortization of unrecognized gains and losses. Returns generated on the Pension Plans assets have
historically funded a significant portion of the benefits paid under the Pension Plans. We used a weighted average expected
52
long-term rate of return of 7.23% and 7.75% in 2017 and 2016, respectively. As of January 1, 2018, we estimate the
weighted average long-term rate of return of Plan assets will be 7.03%. 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 material contributions to the Pension Plans, which could
adversely affect our cash flows from operations.
Net pension and post-retirement costs/(benefit) were $3.8 million, $2.9 million and $(2.2) million for the years ended
December 31, 2017, 2016 and 2015, respectively. We contributed $12.5 million, $0.3 million and $12.2 million in 2017,
2016 and 2015, respectively to our Pension Plans. For our other post-retirement plans, we contributed $6.5 million, $3.6
million and $3.0 million in 2017, 2016 and 2015, respectively. In 2018, we expect to make contributions totaling
approximately $26.9 million to our Pension Plans and $10.0 million to our other post-retirement benefit 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.
Related Party Transactions
A portion of the 2020 Notes were sold to accredited investors consisting of certain members of the Company’s Board of
Directors or a trust of which a director is the beneficiary (“related parties”). In May 2012, the related parties purchased
$10.8 million of the 2020 Notes on the same terms available to other investors, except that the related parties were not
entitled to registration rights. In 2015, the 2020 Notes were fully redeemed and we paid an early redemption premium of
$1.5 million and recognized interest expense of approximately $0.7 million in the aggregate for the 2020 Notes purchased
by related parties. In September 2014, $5.0 million of the 2022 Notes were sold to a trust, the beneficiary of which is a
member of the Company’s Board of Directors and we recognized approximately $0.3 million in each of 2017 and 2016 in
interest expense for the 2022 Notes purchased by the related party.
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 has a maturity date of May 31, 2021, and has been
accounted for as capital leases. Each of the three lease agreements has 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 had a
beneficial ownership interest of 68.5% in 2017 and 2016, of LATEL, directly or through Agracel, Inc. (“Agracel”).
Agracel is real estate investment company of which Mr. Lumpkin, together with his family, had a beneficial interest of
37.0% in 2017 and 2016. 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, 2017 and 2016 was approximately $2.2 million
and $2.7 million, respectively. We recognized $0.3 million in interest expense in 2017 and $0.4 million in interest expense
in each of 2016 and 2015 and amortization expense of $0.4 million in 2017, 2016 and 2015 related to the capitalized leases.
Mr. Lumpkin also has a minority ownership interest in First Mid-Illinois Bancshares, Inc. (“First Mid-Illinois”). We
provide telecommunication products and services to First Mid-Illinois and we received approximately $0.7 million in each
of 2017 and 2016 and $0.8 million in 2015 for these services.
Regulatory Matters
As discussed in the “Regulatory Matters” section above, in December 2014, the FCC released a report and order that
significantly impacts the amount of support revenue we receive from the USF, CAF and ICC by redirecting support from
voice services to broadband services. The annual funding under CAF Phase I of $36.6 million was replaced by annual
funding under CAF Phase II of $13.9 million through 2020. With the sale of our Iowa ILEC in 2016, this amount was
further reduced to $11.5 million through 2020. Subsequently, with the acquisition of FairPoint, this amount increased to
53
$48.9 million through 2020. FairPoint accepted the annual CAF Phase II funding of $37.4 million through 2020 in August
2015. This includes CAF Phase II support in all of FairPoint’s operating states except Colorado and Kansas where the
offered CAF Phase II support was declined. We continue to receive frozen CAF Phase I support in Colorado and Kansas
until such time as the FCC CAF Phase II auction assigns support to another provider. The acceptance of CAF Phase II
funding at a level lower than the frozen CAF Phase I support results in CAF Phase II Transitional funding over a three
year period based on the difference between the CAF Phase I funding and the CAF Phase II funding at the rates of 75% in
the first year, 50% in the second year and 25% in the third year.
The Order also modifies the methodology used for ICC traffic exchanged between carriers. As a result of implementing
the provisions of the Order, our network access revenue decreased approximately $2.8 million, $1.7 million and $1.3
million during 2017, 2016 and 2015, respectively. We anticipate that network access revenue will continue to decline as
a result of the Order through 2018 by as much as $3.0 million.
In accordance with the provisions of SB 583, as discussed in the “Regulatory Matters” section above, our annual $1.4
million Texas HCAF support was eliminated effective January 1, 2014. In addition, in accordance with the provisions of
the settlement agreement reached with the PUCT, the HCF draw will be reduced by approximately $1.2 million annually
over a four year period beginning June 1, 2014 through 2018. However, we have the ability to fully offset this reduction
with increases to residential rates where market conditions 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
Our indefinite-lived intangible assets 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 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
for impairment annually, or more frequently if an event occurs or circumstances change that would indicate potential
impairment. At December 31, 2017 and 2016, the carrying value of our goodwill was $1,038.0 million and $756.9 million,
respectively. Goodwill increased $281.2 million during 2017 as a result of the acquisition of FairPoint, as described in
Note 3 to the consolidated financial statements. The evaluation of goodwill may first include a qualitative assessment to
determine whether it is more likely than not 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. Following the acquisition of FairPoint, we performed a quantitative assessment
of the carrying value of goodwill as of November 30, 2017.
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. All of the properties are managed at a functional level. As a result, we evaluate the operations for all our service
territories as a single reporting unit.
54
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 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);
6.0% 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, 2017, the fair value of the single reporting unit’s total equity on a control basis was estimated at
approximately $1,275.0 million, and the associated carrying value of its equity was $496.2 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 100 basis points from 6.0% to 7.0%, the fair value would decrease from approximately $1,275.0
million to approximately $1,122.0 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 our market capitalization control based value
decreased by 25%, the discount rate in our DCF model was increased 200 basis points, the DCF 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 $1,275.0 million would decrease by approximately $497.0 million to approximately $778.2
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 a 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.
Trade Names
As discussed more fully in Note 1 to the consolidated financial statements, trade names are generally not amortized but
instead evaluated annually, or more frequently if an event occurs or circumstances change that would indicate potential
impairment using a preliminary qualitative assessment and two-step process quantitative process, if deemed necessary.
The carrying value of our trade names, excluding any finite lived trade names, was $10.6 million at December 31, 2017
and 2016.
For the 2017 assessment, we used the quantitative approach to evaluate the fair value compared to the carrying value of
the trade names. Based on our assessment, we concluded that the trade names were not impaired. When we use the
quantitative approach to estimate the fair value of our trade names, we use DCFs based on a relief from royalty method.
If the fair value of our trade names 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 trade name. 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 trade names as single units of
accounting based on their use in our business.
55
Revenue Recognition
We recognize certain revenues pursuant to various cost recovery programs from federal and state USF. 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 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.
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.
The Tax Act was signed into law on December 22, 2017, making significant changes to the U.S. tax law. The new tax
legislation contains several key tax provisions including, but not limited to, a reduction of the corporate income tax rate
from 35% to 21% effective for tax years beginning after December 31, 2017, as well as a variety of other changes including
acceleration of expensing of certain business assets acquired and placed in service after September 27, 2017, limitation of
the tax deductibility of interest expense, and reductions in the amount of executive pay that could qualify as a tax deduction.
The Company has calculated the provisional amount of the impact of the Tax Act in its year end income tax provision in
accordance with its understanding of the Tax Act and guidance available as of the date of this filing. Accounting Standard
Codification 740, Income Taxes requires us to recognize the effect of the tax law changes in the period of enactment.
However, on December 22, 2017, SAB 118 was issued to address the application of US GAAP in situations when a
registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable
detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 will allow us to record provisional
amounts during a measurement period which is similar to the measurement period used when accounting for business
combinations. SAB 118 would allow for a measurement period of up to one year after the enactment date of the Tax Act
to finalize the recording of the related tax impacts. Any subsequent adjustment to these amounts will be recorded to tax
expense in the quarter of 2018 when the analysis is complete.
Pension and Post-retirement Benefits
The amounts recognized in our financial statements for pension and post-retirement benefits are determined on an actuarial
basis utilizing several critical assumptions. We make significant assumptions in regards to our pension and post-retirement
plans, including the expected long-term rate of return on plan assets, the discount rate used to value the periodic pension
expense and liabilities, future salary increases and actuarial assumptions relating to mortality rates and healthcare trend
rates. Changes in these estimates and other factors could significantly impact our benefit cost and obligations to maintain
pension and post-retirement plans.
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 approximately 66% 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 7.23% and 7.75% in 2017 and 2016, respectively. As of January 1,
2018, we estimate that the weighted average expected long-term rate of return of pension plan assets will be 7.03%.
56
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 post-retirement benefit plan
obligations. For our 2017 and 2016 projected benefit obligations, we used a discount rate of 3.75% and 4.27%,
respectively, for our pension plans and 3.67% and 4.12%, respectively, for our other post-retirement plans.
Our Pension Plans are sensitive to changes in the discount rate and the expected long-term rate of return on plan assets. A
one percentage-point increase or decrease in the discount rate and expected long-term rate of return would have the
following effects on net periodic pension cost of the Pension Plans:
(In thousands)
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Discount rate
Expected long-term rate of return on plan assets
$
$
(2,661)
(3,758)
$
$
2,897
3,758
Our post-retirement benefit plans are sensitive to the healthcare cost trend rate assumption. For purposes of determining
the cost and obligation for post-retirement medical benefits, a 7.50% healthcare cost trend rate was assumed for 2017,
declining to the ultimate trend rate of 5.00% in 2022. A 1.00% increase in the assumed healthcare cost trend rate would
result in increases of approximately $4.0 million and $0.2 million in the post-retirement benefit obligation and total service
and interest cost, respectively. A 1.00% decrease in the assumed healthcare cost trend would result in decreases of
approximately $3.9 million and $0.2 million in the post-retirement benefit obligation and in the total service and interest
cost, respectively.
Acquisitions
Acquired businesses are accounted for using the acquisition method of accounting. The acquisition method requires that
the tangible and intangible assets acquired and liabilities assumed be recognized at their estimated fair value as of the date
of the acquisition, with the excess of the purchase price over the net assets acquired being recorded as goodwill. Valuations
to determine the fair value of the net assets acquired requires management to make significant estimates and assumptions.
We believe these estimates and assumptions are reasonable; however, such assumptions are inherently uncertain and actual
results could differ from those estimates.
At December 31, 2017, the fair values of the assets acquired and liabilities assumed in the FairPoint acquisition are based
on a preliminary valuation, which is subject to change within the measurement period as additional information is obtained.
Upon completion of the final fair value assessment, the fair values of the net assets acquired may differ from the
preliminary assessment. We are in the process of finalizing the valuation of the net assets acquired, most notably, the
valuation of property, plant and equipment, intangible assets, pension and other post-retirement obligations and deferred
income taxes. Any changes to the initial estimates of the fair value of the assets acquired and liabilities assumed will be
recorded to those assets and liabilities and residual amounts will be allocated to goodwill. We expect to complete the
valuation of the net assets acquired during the second quarter of 2018.
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 Part II -
Item 8 “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.
57
At December 31, 2017, the majority of our variable rate debt was subject to a 1.00% London Interbank Offered Rate
(“LIBOR”) floor thereby reducing the impact of fluctuations in interest rates. Based on our variable rate debt outstanding
as of December 31, 2017, a 1.00% change in market interest rates would increase or decrease annual interest expense by
approximately $10.9 million and $6.3 million, respectively.
As of December 31, 2017, the fair value of our interest rate swap agreements amounted to a net liability of $0.5 million.
Pre-tax deferred gains related to our interest rate swap agreements included in accumulated other comprehensive loss
(“AOCI”) was $0.6 million at December 31, 2017.
Item 8. Financial Statements and Supplementary Data
For information pertaining to our Financial Statements and Supplementary Data, refer to pages F-1 to F-54 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 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, 2017. 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, 2017.
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,
2017. In making this assessment, management used the framework set forth in Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment,
our management concluded that, as of December 31, 2017, our internal control over financial reporting was effective to
provide reasonable assurance that the desired control objectives were achieved.
Our annual assessment of our internal control over financial reporting excludes FairPoint Communications, Inc.
(“FairPoint”), which was acquired on July 3, 2017. FairPoint’s operating revenues, net income and total assets constitute
approximately 37%, 35% and 45%, respectively, of the amounts reflected in the accompanying consolidated financial
statements of the Company as of and for the year ended December 31, 2017. Under guidance issued by the SEC, companies
58
are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year
of an acquisition while integrating the acquired company.
The effectiveness of internal control over 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, 2017, except for changes resulting from the acquisition of FairPoint, that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As of
December 31, 2017, management is in the process of integrating FairPoint’s internal controls over financial reporting.
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Consolidated Communications Holdings, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Consolidated Communications Holdings, Inc. and subsidiaries’ internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our
opinion, Consolidated Communications Holdings, Inc. and subsidiaries (the Company) maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of FairPoint Communications, Inc., which is included in the 2017 consolidated financial statements of the
Company and constituted 45% of total assets as of December 31, 2017 and 37% and 35% of revenues and net income,
respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not
include an evaluation of the internal control over financial reporting of FairPoint Communications, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of Consolidated Communications Holdings, Inc. and subsidiaries as of
December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss),
shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017 and the related
notes of the Company and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
60
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.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 1, 2018
61
Item 9B. Other Information
None.
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 our 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 is 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, 2017.
Item 11. Executive Compensation
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, 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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, 2017.
Item 13. Certain Relationships and Related Transactions, and Director Independence
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, 2017.
Item 14. Principal Accountant Fees and Services
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, 2017.
62
Item 15. Exhibits and Financial Statement Schedules
PART IV
a) (1) All Financial Statements
Location
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”:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2017
Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the
period ended December 31, 2017
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Shareholders’ Equity for each of the three years in the period
ended December 31, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2017
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
(2) Financial Statement Schedules
Location
Independent Auditors’ Report –Ernst & Young LLP
Pennsylvania RSA No. 6 (II) Limited Partnership Balance Sheets - As of December 31, 2017
(unaudited) and 2016 (unaudited)
Pennsylvania RSA No. 6 (II) Limited Partnership Statements of Income and Comprehensive
Income – For the Years Ended December 31, 2017 (unaudited), 2016 (unaudited) and 2015
Pennsylvania RSA No. 6 (II) Limited Partnership Statements of Changes in Partners’ Capital
– For the Years Ended December 31, 2017 (unaudited), 2016 (unaudited) and 2015
Pennsylvania RSA No. 6 (II) Limited Partnership Statements of Cash Flows – For the Years
Ended December 31, 2017 (unaudited), 2016 (unaudited) and 2015
Pennsylvania RSA No. 6 (II) Limited Partnership - Notes to Financial Statements
Independent Auditors’ Report –Ernst & Young LLP
GTE Mobilnet of Texas RSA #17 Limited Partnership Balance Sheets - As of December 31, 2017
(unaudited) and 2016
GTE Mobilnet of Texas RSA #17 Limited Partnership Statements of Income and
Comprehensive Income – For the Years Ended December 31, 2017 (unaudited), 2016 and
2015
GTE Mobilnet of Texas RSA #17 Limited Partnership Statements of Changes in Partners’
Capital – For the Years Ended December 31, 2017 (unaudited), 2016 and 2015
GTE Mobilnet of Texas RSA #17 Limited Partnership Statements of Cash Flows – For the
Years Ended December 31, 2017 (unaudited), 2016 and 2015
GTE Mobilnet of Texas RSA #17 Limited Partnership - Notes to Financial Statements
All other financial statement schedules have been omitted because they are not required, not
applicable, or the information is otherwise included in the notes to the financial statements.
S-1
S-2
S-3
S-4
S-5
S-6
S-23
S-24
S-25
S-26
S-27
S-28
63
(3) Exhibits
The exhibits listed below on the accompanying Index to Exhibits are filed or furnished as part
of this report.
Exhibit
No.
2.1*
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
Description
Agreement and Plan of Merger, dated as of December 3, 2016, by and among the Company, FairPoint
Communications, Inc. and Falcon Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to our Current
Report on Form 8-K dated December 3, 2016), as amended by the First Amendment thereto, dated as of
January 20, 2017 (incorporated by reference to Annex I to our Registration Statement on Form S-4/A, as
filed on February 24, 2017)
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)
Amended and Restated Bylaws of Consolidated Communications Holdings Inc., as amended as of June 29,
2014 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K dated June 29, 2014)
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)
Indenture, dated as of September 18, 2014, between Consolidated Communications, Inc. (“CCI”) (as
successor to Consolidated Communications Finance II Co. (“CCFII Co.”) and Wells Fargo Bank, National
Association, as trustee (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated
September 18, 2014)
First Supplemental Indenture, dated as of October 16, 2014, among the Company, CCI, Consolidated
Communications Enterprise Services, Inc. (“CCES”), Consolidated Communications of Fort Bend
Company (“CCFBC”) Consolidated Communications of Pennsylvania Company, LLC (“CCPC”),
Consolidated Communications Services Company (“CCSC”), Consolidated Communications of Texas
Company (“CCTC”), SureWest Communications (“SW Communications”), SureWest Fiber Ventures,
LLC (“SW Fiber Ventures”), SureWest Kansas, Inc. (“SW Kansas”), SureWest Long Distance (“SW Long
Distance”), SureWest Telephone (“SW Telephone”), SureWest TeleVideo (“SW TeleVideo”), and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to our Current Report on
Form 8-K dated October 16, 2014)
Second Supplemental Indenture, dated as of November 14, 2014, among Enventis Corporation, Cable
Network, Inc., Crystal Communications, Inc., Enventis Telecom, Inc., Heartland Telecommunications
Company of Iowa, Inc., Mankato Citizens Telephone Company, Mid-Communications, Inc., National
Independent Billing, Inc., IdeaOne Telecom Inc. and Enterprise Integration Services, Inc. (collectively, the
“Enventis Subsidiaries”), CCI and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K dated November 14, 2014)
Third Supplemental Indenture, dated as of June 8, 2015, among CCES, CCFBC, CCPC, CCSC, CCTC, SW
Fiber Ventures, SW Kansas, SW Telephone, SW TeleVideo, each of the Enventis Subsidiaries; the
Company; CCI; and Wells Fargo Bank, National Association, as trustee (incorporated by reference to
Exhibit 4.1 to our Current Report on Form 8-K dated June 8, 2015)
64
4.6
4.7**
4.8**
4.9
4.10**
4.11
4.12
10.1
Fourth Supplemental Indenture, dated as of January 1, 2016, among CCTC; Consolidated Communications
of Fort Bend Company; CCSC; Consolidated Communications Enterprise Services, Inc.; Consolidated
Communications of Pennsylvania Company, LLC; Consolidated Communications of California Company;
Crystal Communications, Inc.; Enventis Telecom, Inc.; Consolidated Communications of Iowa Company;
Consolidated Communications of Minnesota Company; Consolidated Communications of Mid-Comm.
Company, IdeaOne Telecom, Inc.; SureWest TeleVideo.; the Company; Consolidated Communications,
Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to
our Current Report on Form 8-K dated January 1, 2016)
Joinder Agreement (to Guaranty Agreement and Collateral Agreement), dated as of November 14, 2014,
among each of the Enventis Subsidiaries, the Company, CCI, and Wells Fargo Bank, National Association,
a national banking association, as Administrative Agent for the Lenders under the Second Amended and
Restated Credit Agreement dated December 23, 2013 (incorporated by reference to Exhibit 4.1 to our
Current Report on Form 8-K dated November 14, 2014)
Joinder Agreement, dated as of July 3, 2017, among CCI, the subsidiaries of the Company party thereto
and Wells Fargo Bank, National Association, as Administrative Agent for the Lenders under the Credit
Agreement (incorporated by reference to exhibit 4.2 to our Current Report on Form 8-K dated July 3, 2017)
Fifth Supplemental Indenture, dated as of July 3, 2017, among the Company, CCI, the subsidiaries of the
Company party thereto and Well Fargo Bank, National Association, as Trustee (incorporated by reference
to exhibit 4.3 to our Current Report on Form 8-K dated July 3, 2017)
Joinder Agreement, dated as of August 4, 2017, among CCI, the subsidiaries of the Company party thereto
and Wells Fargo Bank, National Association, as Administrative Agent for the Lenders under the Credit
Agreement (incorporated by reference to exhibit 4.1 to our Current Report on Form 8-K dated August 4,
2017)
Sixth Supplemental Indenture, dated as of August 4, 2017, among the Company, CCI, the subsidiaries of
the Company party thereto and Well Fargo Bank, National Association, as Trustee (incorporated by
reference to exhibit 4.2 to our Current Report on Form 8-K dated August 4, 2017)
Form of 6.50% Senior Note due 2022 (incorporated by reference to Exhibit A to Exhibit 4.1 to our Current
Report on Form 8-K dated September 18, 2014)
Restatement Agreement, dated as of October 5, 2016, by and among the Company, CCI, the lenders referred
to therein, and Wells Fargo Bank, National Association, as administrative agent, including the Third
Amended and Restated Credit Agreement attached as Annex A to the Restatement Agreement, by and
among the Company, CCI, the lenders referred to therein, and Wells Fargo Bank, National Association, as
Administrative Agent, attached as Annex A to such Restatement Agreement (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K dated October 5, 2016), as amended by Amendment No.
1 to Third Amended and Restated Credit Agreement, dated as of December 14, 2016, by and among the
Company, CCI, the lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent
and other agents party thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-
K dated December 14, 2016) Amendment No. 2 to Third Amended and Restated Credit Agreement, dated
as of December 21, 2016, by and among the Company, CCI, certain other subsidiaries of the Company, the
lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent and other agents
party thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated December
21, 2016) and Amendment No. 3 to Third Amended and Restated Credit Agreement, dated as of July 3,
2017, by and among the Company, CCI, the lenders party thereto, Wells Fargo Bank, National Association,
as Administrative Agent and other agents party thereto (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated July 3, 2017)
65
10.2
10.3
10.4
10.5
10.6
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)
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)
10.7***
10.8***
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)
Consolidated Communications Holdings, Inc. 2005 Long-Term Incentive Plan (as amended and restated
effective May 4, 2015) (incorporated by reference to Exhibit A to our definitive proxy statement on
Schedule 14A filed with the SEC on March 27, 2015)
10.9***
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 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017)
10.15***
Form of 2005 Long-Term Incentive Plan Restricted Stock Grant Certificate (incorporated by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-K for the quarter ended March 31, 2017)
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)
66
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
10.19
21
23.1
23.2
31.1
31.2
32.1
101
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)
Commitment Letter, dated as of December 3, 2016, from (i) Morgan Stanley Senior Funding, Inc., (ii) The
Bank of Tokyo-Mitsubishi UFJ, Ltd., MUFG Union Bank, N.A., MUFG Securities Americas Inc.
(collectively, “MUFG”) and/or any other affiliates or subsidiaries as MUFG collectively deems appropriate
to provide the services referred to therein, (iii) TD Securities (USA) LLC, (iv) The Toronto-Dominion
Bank, New York Branch, and (v) Mizuho Bank, Ltd. and agreed to and accepted by Consolidated
Communications, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated
December 3, 2016)
List of subsidiaries of the Registrant
Consent of Ernst & Young LLP
Consent of Ernst & Young 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, 2017, formatted in XBRL (eXtensible Business Reporting
Language): (i) Consolidated Statements of Operations, (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.
*Schedules and other attachments to the Agreement and Plan of Merger, which are listed in the exhibit, are omitted. The
Company agrees to furnish a supplemental copy of any schedule or other attachment to the Securities and Exchange
Commission upon request.
**Annexes to the Joinder Agreement, which are listed in the exhibit, are omitted. The Company agrees to furnish a
supplemental copy of any annex to the Securities and Exchange Commission upon request.
***Compensatory plan or arrangement.
Item 16. Form 10-K Summary
Not Applicable.
67
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
1, 2018.
SIGNATURES
CONSOLIDATED COMMUNICATIONS
HOLDINGS, INC.
By: /s/ C. ROBERT UDELL JR.
C. Robert Udell Jr.
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
By: /s/ C. ROBERT UDELL JR.
President and
C. Robert Udell Jr.
Chief Executive Officer, Director
(Principal Executive Officer)
Date
March 1, 2018
By: /s/ STEVEN L. CHILDERS
Steven L. Childers
Chief Financial Officer (Principal
Financial and Accounting Officer)
March 1, 2018
By: /s/ ROBERT J. CURREY
Chairman of the Board
March 1, 2018
Robert J. Currey
By: /s/ RICHARD A. LUMPKIN
Director
Richard A. Lumpkin
By: /s/ ROGER H. MOORE
Roger H. Moore
Director
By: /s/ MARIBETH S. RAHE
Director
Maribeth S. Rahe
By: /s/ TIMOTHY D. TARON
Director
Timothy D. Taron
By: /s/ THOMAS A. GERKE
Thomas A. Gerke
Director
By: /s/ DALE E. PARKER
Director
Dale E. Parker
By: /s/ WAYNE L. WILSON
Wayne L. Wilson
Director
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Consolidated Communications Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Consolidated Communications Holdings, Inc. and
subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations,
comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December
31, 2017 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
St. Louis, Missouri
March 1, 2018
F-1
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per share amounts)
Net revenues
Operating expense:
Cost of services and products (exclusive of depreciation and amortization)
Selling, general and administrative expenses
Acquisition and other transaction costs
Loss on impairment
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 (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Less: net income attributable to noncontrolling interest
Net income (loss) attributable to common shareholders
Year Ended December 31,
2016
2017
2015
$ 1,059,574 $ 743,177 $ 775,737
446,065
249,332
33,650
—
291,873
38,654
322,792
157,111
1,214
610
174,010
87,440
328,400
178,227
1,413
—
179,922
87,775
(129,786)
—
31,749
(245)
(59,628)
(76,826)
(6,559)
32,972
1,131
38,158
(79,618)
(41,242)
36,690
(1,501)
2,104
(124,927)
22,962
2,775
65,299
354
64,945 $
15,196
265
14,931 $
(671)
210
(881)
$
Net income (loss) per basic and diluted common shares attributable to
common shareholders
$
1.07 $
0.29 $
(0.02)
Dividends declared per common share
$
1.55 $
1.55 $
1.55
See accompanying notes.
F-2
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
Year Ended December 31,
2016
2017
2015
Net income (loss)
Pension and post-retirement obligations:
Change in net actuarial loss and prior service credit, net of tax (benefit) of
$(2,833), $(9,534) and $(3,533) in 2017, 2016 and 2015, respectively
Amortization of actuarial losses and prior service credit to earnings, net of
tax expense of $2,081, $1,738 and $1,098 in 2017, 2016 and 2015,
respectively
Derivative instruments designated as cash flow hedges:
Change in fair value of derivatives, net of tax (benefit) of $(161), $(180)
and $(672) in 2017, 2016 and 2015, respectively
Reclassification of realized loss to earnings, net of tax expense of $488,
$516 and $518 in 2017, 2016 and 2015, respectively
Comprehensive income (loss)
Less: comprehensive income attributable to noncontrolling interest
Total comprehensive income (loss) attributable to common shareholders
$ 65,299 $ 15,196 $
(671)
(4,467)
(14,831)
(5,547)
3,153
2,706
1,707
(250)
(289)
(1,072)
758
64,493
354
$ 64,139 $
836
3,618
265
853
(4,730)
210
3,353 $ (4,940)
See accompanying notes.
F-3
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
Income tax receivable
Prepaid expenses and other current assets
Assets held for sale
Total current assets
Property, plant and equipment, net
Investments
Goodwill
Other intangible assets
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Advance billings and customer deposits
Dividends payable
Accrued compensation
Accrued interest
Accrued expense
Current portion of long-term debt and capital lease obligations
Liabilities held for sale
Total current liabilities
Long-term debt and capital lease obligations
Deferred income taxes
Pension and other post-retirement obligations
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Shareholders’ equity:
December 31,
2017
2016
$
15,657
121,528
21,846
33,318
21,310
213,659
$
27,077
56,216
21,616
28,292
—
133,201
2,037,606
108,858
1,038,032
306,783
14,188
$ 3,719,126
1,055,186
106,221
756,877
31,612
9,661
$ 2,092,758
$
24,143
42,526
27,418
49,770
9,343
72,041
29,696
1,003
255,940
$
6,766
26,438
19,605
16,971
11,260
54,123
14,922
—
150,085
2,311,514
209,720
334,193
33,817
3,145,184
1,376,754
244,298
130,793
14,573
1,916,503
Common stock, par value $0.01 per share; 100,000,000 shares authorized, 70,777,354
and 50,612,362 shares outstanding as of December 31, 2017 and December 31, 2016,
respectively
Additional paid-in capital
Accumulated other comprehensive loss, net
Noncontrolling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
708
615,662
(48,083)
5,655
573,942
506
217,725
(47,277)
5,301
176,255
$ 3,719,126 $ 2,092,758
See accompanying notes.
F-4
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(amounts in thousands)
Accumulated
Common Stock
Shares
Additional Retained
Paid-in
Amount Capital
Earnings
(Deficit)
Other
Non-
Comprehensive controlling
Loss, net
Interest
Total
Balance at December 31, 2014
Cash dividends on common stock
Shares issued under employee plan, net of
forfeitures
Non-cash, share-based compensation
Purchase and retirement of common stock
Tax on restricted stock vesting
Other comprehensive income (loss)
Net income (loss)
Balance at December 31, 2015
Cash dividends on common stock
Shares issued under employee plan, net of
forfeitures
Non-cash, share-based compensation
Purchase and retirement of common stock
Tax on restricted stock vesting
Other comprehensive income (loss)
Net income
Balance at December 31, 2016
Cash dividends on common stock
Shares issued upon acquisition of
FairPoint
Shares issued under employee plan, net of
forfeitures
Non-cash, share-based compensation
Purchase and retirement of common stock
Other comprehensive income (loss)
Cumulative adjustment: unrecognized
excess tax benefits
Other
Net income
Balance at December 31, 2017
50,365 $ 504 $ 357,139 $
(78,250)
—
—
— $
—
(31,640) $
—
4,826 $ 330,829
(78,250)
—
161
—
(56)
—
—
—
770
1
2,994
—
(1,125)
—
210
—
—
—
—
—
50,470 $ 505 $ 281,738 $
—
—
—
—
—
—
—
(881)
(881) $
(64,423) (14,050)
188
—
(46)
—
—
—
1
—
—
—
—
—
50,612 $ 506 $ 217,725 $
—
94
—
2,980
—
(1,231)
—
(1,433)
—
—
—
— 14,931
(34,764) (67,187)
—
— $
—
—
—
—
(4,059)
—
(35,699) $
—
—
—
—
—
(11,578)
—
(47,277) $
—
—
—
—
—
—
210
771
2,994
(1,125)
210
(4,059)
(671)
5,036 $ 250,699
(78,473)
—
—
—
—
—
—
265
95
2,980
(1,231)
(1,433)
(11,578)
15,196
5,301 $ 176,255
(101,951)
—
20,104
201
430,752
—
—
—
430,953
121
—
(60)
—
1
—
—
—
104
2,766
(571)
—
—
—
—
—
—
—
—
(806)
—
—
—
—
105
2,766
(571)
(806)
—
—
—
—
—
—
70,777 $ 708 $ 615,662 $
—
(350)
2,242
—
— 64,945
— $
—
—
—
(48,083) $
—
—
354
2,242
(350)
65,299
5,655 $ 573,942
See accompanying notes.
F-5
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
2017
Year Ended December 31,
2016
2015
$
65,299 $
15,196 $
(671)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
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, net of acquired businesses:
Accounts receivable, net
Income tax receivable
Prepaids and other assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Business acquisition, net of cash acquired
Purchases of property, plant and equipment, net
Proceeds from sale of assets
Proceeds from business dispositions
Proceeds from sale of investments
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from bond offering
Proceeds from issuance of long-term debt
Payment of capital lease obligations
Payment on long-term debt
Redemption of senior notes
Payment of financing costs
Share repurchases for minimum tax withholding
Dividends on common stock
Other
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
291,873
(126,127)
(1,411)
2,766
17,076
—
3,208
(2,607)
180
1,059
4,968
(46,257)
210,027
(862,385)
(181,185)
859
—
—
(1,042,711)
174,010
20,863
(504)
3,017
3,223
6,559
(920)
5,353
2,251
(14,282)
(1,067)
4,534
218,233
(13,422)
(125,192)
208
30,119
—
(108,287)
179,922
5,828
8,585
3,060
3,378
41,242
506
8,688
(4,927)
163
(2,701)
(23,894)
219,179
—
(133,934)
13,548
—
846
(119,540)
294,780
69,000
(1,107)
(107,100)
(261,874)
(4,805)
(1,125)
(78,209)
—
(90,440)
9,199
6,679
15,878
—
1,052,325
(7,933)
(111,337)
—
(16,732)
(571)
(94,138)
(350)
821,264
(11,420)
27,077
15,657 $
—
936,750
(2,885)
(943,050)
—
(9,912)
(1,231)
(78,419)
—
(98,747)
11,199
15,878
27,077 $
$
See accompanying notes.
F-6
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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 communication solutions to consumer, commercial and carrier
customers across a 24-state service area.
Leveraging our advanced fiber network spanning more than 36,000 fiber route miles, we offer residential Internet, video,
phone and home security services as well as multi-service residential and small business bundles. Our business product
suite includes data and Internet solutions, voice, data center services, security services, managed and IT Services, and an
expanded suite of cloud services. As of December 31, 2017, we had approximately 972 thousand voice connections, 784
thousand data connections and 103 thousand video connections.
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 effect the reported amounts of assets and liabilities as of 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) the determination of deferred tax asset
and liability balances (Notes 1 and 10), (iv) pension plan and other post-retirement costs and obligations (Notes 1 and 9)
and (v) business combinations (Note 3).
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
On December 3, 2016, we entered into a definitive agreement and plan of merger (the “Merger Agreement”) with FairPoint
Communications, Inc. (“FairPoint”) to acquire all the issued and outstanding shares of FairPoint in exchange for shares of
our common stock. On July 3, 2017, the merger (the “Merger”) was completed and FairPoint became a wholly owned
subsidiary of the Company. The financial results for FairPoint have been included in our consolidated financial statements
as of the acquisition date. For a more complete discussion of the transaction, refer to Note 3.
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 consists primarily of amounts due to the Company from normal business activities. We maintain an
allowance for doubtful accounts for estimated losses that result from the inability of our customers to make required
payments. The allowance for doubtful accounts is maintained based on customer payment levels, historical experience
and management’s views on trends in the overall receivable agings. In addition, for larger accounts, we perform analyses
of risks on a customer-specific basis. We perform ongoing credit evaluations of our customers’ financial condition and
management believes that an adequate allowance for doubtful accounts has been provided. Uncollectible accounts are
F-7
removed from accounts receivable and are charged against the allowance for doubtful accounts when internal collection
efforts have been unsuccessful. The following table summarizes the activity in allowance for doubtful accounts for the
years ended December 31, 2017, 2016 and 2015:
(In thousands)
Balance at beginning of year
Provision charged to expense
Write-offs, less recoveries
Acquired allowance for doubtful accounts
Balance at end of year
Investments
Year Ended December 31,
2015
2017
2016
$ 2,813 $ 3,235 $ 2,752
3,525
2,798
(3,042)
(3,220)
—
—
$ 6,667 $ 2,813 $ 3,235
7,072
(6,516)
3,298
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 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.
F-8
Property, plant and equipment consisted of the following as of December 31, 2017 and 2016:
December 31, December 31, Estimated
(In thousands)
Land and buildings
Central office switching and transmission
Outside plant cable, wire and fiber 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
2017
Useful Lives
2016
$ 252,369 $ 105,923 18 - 40 years
861,608 3 - 25 years
1,201,042 3 - 50 years
167,125 3 - 15 years
28,355 3 - 11 years
1,099,948
1,843,896
265,045
45,135
3,506,393
(1,598,093)
1,908,300
89,144
40,162
2,364,053
(1,345,551)
1,018,502
21,956
14,728
$ 2,037,606 $ 1,055,186
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.
In addition, the ranges of estimated useful lives presented above are impacted by the accounting for business combinations
as the lives assigned to these acquired assets are generally much shorter than that of a newly acquired asset. The group
method is used for depreciable assets dedicated to providing regulated telecommunication services, including the majority
of the network, outside plant facilities and certain support assets. 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 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 related to property, plant and equipment was $263.8 million, $161.1 million and
$167.1 million in 2017, 2016 and 2015, respectively. Amortization of assets under capital leases is included in the
depreciation and amortization expense in the consolidated statements of operations.
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 goodwill and tradenames as of
November 30 of each year.
Goodwill
Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired.
Goodwill is not amortized but instead evaluated annually for impairment. The evaluation of goodwill may first include a
F-9
qualitative assessment to determine whether it is more likely than not 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.
For the 2017 assessment, we evaluated the fair value of goodwill compared to the carrying value using the quantitative
approach. When we use the quantitative approach to assess the goodwill carrying value and the fair value of our single
reporting unit, 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 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 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. For the November 30, 2017 assessment, using the quantitative approach, we concluded that the fair
value of the reporting unit exceeded the carrying value at November 30, 2017 and that there was no impairment of goodwill.
In measuring the fair value of our reporting unit as previously described, we consider the fair value 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.
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. 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. We did not recognize any
goodwill impairment in 2017, 2016 or 2015 as a result of the impairment test.
At December 31, 2017 and 2016, the carrying value of goodwill was $1,038.0 million and $756.9 million, respectively.
Goodwill increased $281.2 million during 2017 as a result of the acquisition of FairPoint, as described in Note 3.
Trade Names
Our most valuable trade name 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. All of the Company’s business units and several of our products and services
incorporate the CONSOLIDATED name. Trade names with indefinite useful lives are not amortized but are tested for
impairment at least annually. If facts and circumstances change relating to a trade name’s 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. The carrying value of our trade names, excluding any finite lived trade names, was $10.6 million at December 31,
2017 and 2016.
For the 2017 assessment, we used the quantitative approach to evaluate the fair value compared to the carrying value of
the trade names. Based on our assessment, we concluded that the fair value of the trade names continued to exceed the
carrying value. When we use the quantitative approach to estimate the fair value of our trade names, we use DCFs based
on a relief from royalty method. If the fair value of our trade names 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 trade names as single units of accounting based on their use in our single reporting unit.
Finite-Lived Intangible Assets
Finite-lived intangible assets subject to amortization consist primarily of our customer lists of an established base of
customers that subscribe to our services, trade names of acquired companies and other intangible assets. Finite-lived
intangible assets are amortized using an accelerated amortization method or on a straight-line basis over their estimated
F-10
useful lives. 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. We did not recognize
any intangible impairment charges in the years ended December 31, 2017, 2016 or 2015.
The components of finite-lived intangible assets are as follows:
December 31, 2017
December 31, 2016
(In thousands)
Useful Lives
Gross Carrying Accumulated Gross Carrying Accumulated
Amortization
Amortization
Amount
Amount
Customer relationships
Trade names
Other intangible assets
Total
3 - 13 years
<1 - 2 years
1 - 5 years
$
$
516,561 $
3,390
7,380
527,331 $
(223,261) $
(3,390)
(4,454)
(231,105) $
216,261 $
2,290
5,600
224,151 $
(198,353)
(2,290)
(2,453)
(203,096)
Amortization expense related to the finite-lived intangible assets for the years ended December 31, 2017, 2016 and 2015
was $28.0 million, $12.9 million and $12.8 million, respectively. Expected future amortization expense of finite-lived
intangible assets is as follows:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$ 66,341
66,131
50,441
39,373
30,850
43,090
$ 296,226
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 projected 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.
F-11
Share-based Compensation
We recognize share-based compensation expense for all restricted stock awards (“RSAs”) and performance share awards
(“PSAs”) (collectively, “stock awards”) based on the estimated fair value of the stock awards on the date of grant. We
recognize the expense associated with RSAs and PSAs on a straight-line basis over the requisite service period, which
generally ranges from immediate vesting to a four-year vesting period. See Note 8 for additional information regarding
share-based compensation.
Pension Plan and Other Post-Retirement Benefits
We maintain noncontributory defined benefit pension plans and provide certain post-retirement health care and life
insurance benefits to certain eligible employees. We also maintain two unfunded supplemental retirement plans to provide
incremental pension payments to certain former employees. See Note 9 for a more detailed discussion regarding our
pension and other post-retirement benefits.
We recognize pension and post-retirement benefits expense during the current period in the consolidated statement of
operations using certain assumptions, including the expected long-term rate of return on plan assets, interest cost implied
by the discount rate, expected health care cost trend rate and the amortization of unrecognized gains and losses. We
determine expected long-term rate of return on plan assets by considering historical investment performance, plan asset
allocation strategies and return forecasts for each asset class and input from its advisors. Projected returns by such advisors
were based on broad equity and fixed income indices. The expected long-term rate of return is reviewed annually in
conjunction with other plan assumptions, if considered necessary, revised to reflect changes in the financial markets and
the investment strategy. Our plan assets are valued at fair value as of the measurement date.
Our discount rate assumption is determined annually to reflect the rate at which the benefits could be effectively settled
and approximate the timing of expected future payments based on current market determined interest rates for similar
obligations. We use bond matching model BOND:Link comprising of high quality corporate bonds to match cash flows to
the expected benefit payments.
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. Actuarial gains and losses that arise during the year are recognized as
a component of comprehensive income (loss), net of applicable income taxes, and included in accumulated other
comprehensive income (loss). These gains and losses are amortized over future years as a component of the net periodic
benefit cost.
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 operating 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.
F-12
We record unrecognized tax benefits as liabilities in accordance with Accounting Standard Codification (“ASC”) 740,
Income Taxes, 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 further discussion on income taxes.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product to the customer has
occurred or services have been rendered, the price to the customer is fixed or determinable and collectability of the sales
price is reasonably assured.
Services
Revenue based on a flat fee, dedicated network access, data communications, digital TV, Internet access service and
broadband service, or revenue derived principally from local telephone, is billed in advance and is recognized in subsequent
periods when the services have been provided, with the exception of certain governmental accounts which are billed in
arrears.
Certain of our bundled service packages may include multiple deliverables. We offer a base service bundle which consists
of voice services, including a phone line, calling features and long-distance. Customers may choose to add additional
services, including high-speed Internet and digital/IP television services, to the base service bundle. Separate units of
accounting within the bundled service package include voice services, high-speed Internet and digital/IP television
services. Revenue for all services included in our bundled service package is recognized over the same period in which
service is provided to the customer. Bundled service package discounts are recognized concurrently with the associated
revenue and are allocated to the various services in the bundled service package based on the relative selling price of the
services included in each bundle.
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 in our network, are billed in arrears. We recognize revenue from these
services in the period in which service is provided to the customer.
Revenue related to nonrefundable, upfront service activation and setup fees is deferred and recognized over the estimated
customer life. Incremental direct costs of telecommunications service activation are expensed in the period 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.
Print advertising and publishing revenue is recognized ratably over the life of the related directory, which is generally 12
months.
Equipment
Revenue is generated from the sale of voice and data communications equipment; design, configuration and installation
services related to voice and data equipment; and the sale of professional support services for customer voice and data
systems. Equipment revenue generated from retail channels is recognized when the equipment is sold. Equipment revenue
generated from telecommunications systems and structured cabling projects is recognized when the project is completed.
Maintenance services are provided on both a contract and time and material basis and are recognized in the period in which
the service is provided.
Equipment revenue generated from support services includes “24x7” support of a customer’s voice and data networks.
The majority of these contracts are billed on a time and materials basis and revenue is recognized either in the period in
which the services are provided or over the term of the contract. Support services also include professional support
services, which are typically sold on a time and materials basis, but may be sold as a prepaid block of time, and the revenue
is recognized in the period in which the services are provided.
F-13
Multiple Deliverable Arrangements
We often enter into arrangements which include multiple deliverables primarily relating to the sale of communications
equipment, associated support contracts and professional services, which include design, configuration and installation
consulting. When an equipment sale involves multiple deliverables, revenue is allocated to each respective deliverable if
they are separately identifiable. Each separately identified deliverable is considered a separate unit of account. The
arrangement consideration is allocated to the identified units of account based on their relative selling price on a stand-
alone basis. We utilize best estimate of selling price for stand-alone value for our equipment and maintenance contracts,
taking into consideration market conditions and entity-specific factors. We evaluate best estimate of selling price by
reviewing historical data related to sales of our deliverables.
Subsidies and Surcharges
Subsidies consist of both federal and state subsidies, which are designed to promote widely available, quality telephone
service at affordable prices in rural areas. These revenues are calculated by the administering government agency based
on information we provide. There is a reasonable possibility that out-of-period subsidy adjustments may be recorded in
the future, but they are expected to be immaterial to our results of operations, financial position and cash flows.
We collect and remit Federal Universal Service contributions on a gross basis, which resulted in recorded revenue of
approximately $11.7 million, $12.7 million and $13.2 million during the years ended December 31, 2017, 2016 and 2015,
respectively. 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 $10.9 million, $8.7 million and $8.3 million in 2017,
2016 and 2015, respectively.
Statement of Cash Flows Information
During 2017, 2016 and 2015, we made payments for interest and income taxes as follows:
(In thousands)
Interest, net of amounts capitalized ($1,246, $1,152 and $1,373 in
2017
2016
2015
2017, 2016 and 2015, respectively)
Income taxes (received) paid, net
Noncash investing and financing activities:
$ 106,499 $ 69,536 $ 76,823
(183) $ 1,835
$
953 $
In 2017, 2016 and 2015, we acquired equipment of $12.8 million, $12.2 million and $4.1 million, respectively, through
capital lease agreements.
In 2017, we issued 20.1 million shares of the Company’s common stock with a market value of $431.0 million in
connection with the acquisition of FairPoint as described in Note 3.
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
Effective January 1, 2017, we adopted the Accounting Standards Update (“ASU”) No. 2016-09 (“ASU 2016-09”),
Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 amends several aspects of the accounting for
share-based payment transactions including the income tax consequences, classification of awards as either equity or
liabilities, calculation of compensation expense and classification on the statement of cash flows. ASU 2016-09 requires
F-14
excess tax benefits and deficiencies resulting from stock-based compensation awards vesting to be recognized as income
tax expense or benefit in the income statement on a prospective basis. Previously, these amounts were recognized in
additional paid-in capital (“APIC”). The impact of this change was not material for the year ended December 31, 2017. In
addition, ASU 2016-09 requires excess tax benefits and deficiencies to be excluded from the assumed proceeds in the
calculation of diluted shares when using the treasury stock method. This requirement did not have a material impact on
diluted earnings per share for the year ended December 31, 2017.
ASU 2016-09 removed the requirement to delay recognition of excess tax benefits until it reduces current income taxes
payable. This update is required to be applied on a modified retrospective basis, which resulted in a cumulative effect
adjustment of $2.2 million as of January 1, 2017 to increase opening retained earnings for the cumulative impact of excess
tax benefits related to our net operating loss (“NOL”) carryforwards. This amount was subsequently transferred into APIC
at March 31, 2017.
ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards, either to
recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. We have elected to
recognize forfeitures as they occur and the cumulative impact of this change was not material to our consolidated financial
statements and related disclosures.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued the ASU No. 2014-09 (“ASU 2014-09”),
Revenue from Contracts with Customers (Topic 606), which replaces the current revenue recognition requirements in US
GAAP. The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. In addition, ASU 2014-09 requires disclosures about the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with customers. Two transition methods are permitted under
ASU 2014-09, the full retrospective method, in which case the standard would be applied to each prior reporting period
presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the
modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the
date of initial application. In August 2015, the FASB issued the ASU No. 2015-14 (“ASU 2015-14”), Deferral of the
Effective Date, which deferred the effective date of ASU 2014-09 for all entities by one year. Accordingly, ASU 2014-09
is effective for annual and interim periods beginning after December 15, 2017.
We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective method for open contracts. Under this
transition method, the accounting change is applied to the current period with a cumulative effect adjustment recorded to
opening retained earnings. Previously reported results will not be restated under this transition method. The adoption of
this new standard will result in the deferral of contract acquisition costs over the contract performance period instead of
expensed as incurred. The adoption will also result in additional disclosures around the nature and timing of the Company’s
performance obligations, deferred revenue contract liabilities, deferred contract cost assets, as well as significant judgments
and practical expedients used by the Company in applying the new five-step revenue model. The Company has
implemented new processes and internal controls to enable the preparation of financial information upon adoption.
During the first quarter of 2018, we will record a cumulative effect adjustment to opening retained earnings related to the
adoption. Based on information currently available to us, we estimate the adoption will result in an increase to opening
retained earnings of approximately $2.0 million to $4.0 million.
In May 2017, the FASB issued the ASU No. 2017-09 (“ASU 2017-09”), Scope of Modification Accounting. ASU 2017-
09 clarifies the modification accounting guidance for stock compensation included in Topic 718, Compensation – Stock
Compensation. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment
award must be accounted for as a modification under Topic 718. The new guidance is effective prospectively for annual
and interim periods beginning after December 15, 2017. We adopted this update as of January 1, 2018 and will apply this
guidance to applicable transactions after the adoption date.
In March 2017, the FASB issued the ASU No. 2017-07 (“ASU 2017-07”), Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires presentation of the service cost
component of net periodic benefit cost within the same income statement line item as other compensation costs arising
from services rendered by relevant employees during the period, and presentation of the other cost components of net
periodic benefit cost separately and outside of the income from operations subtotal. In addition, only the service cost
component is eligible for capitalization. The new guidance is effective for annual and interim periods beginning after
F-15
December 15, 2017 and should be applied retrospectively for the presentation of the service cost and prospectively for the
capitalization of the service cost component in assets. We adopted ASU 2017-07 as of January 1, 2018 and will present
other cost components of net periodic benefit cost separately within non-operating income (expense) on the statement of
operations beginning in the first quarter of 2018. We do not expect a change in the capitalization requirement to have a
material impact on our consolidated financial statements. See Note 9 for the amount of each component of net periodic
pension and post-retirement benefit costs.
In February 2017, the FASB issued the ASU No. 2017-05 (“ASU 2017-05”), Clarifying the Scope of Asset Derecognition
Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 provides additional guidance to (i) clarify
the scope for recognizing gains and losses from the transfer of nonfinancial assets and in substance nonfinancial assets in
contracts with non-customers, and (ii) clarify the accounting for partial sales of nonfinancial assets. ASU 2017-05 is
effective for annual and interim periods beginning after December 15, 2017 and can be applied using the retrospective or
modified retrospective method. We adopted ASU 2017-05 as of January 1, 2018 and do not expect it to have a material
impact on our consolidated financial statements and related disclosures.
In January 2017, FASB issued the ASU No. 2017-04 (“ASU 2017-04”), Simplifying the Accounting for Goodwill
Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the updated guidance, the goodwill
impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount and an
impairment charge will be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
The new guidance is effective for annual and interim goodwill tests in fiscal years beginning after December 15, 2019 and
should be applied prospectively. Early adoption is permitted for annual and interim goodwill impairment testing performed
after January 1, 2017. We adopted ASU 2017-04 as of January 1, 2018 and do not expect it to have a material impact on
our testing of goodwill.
In January 2017, the FASB issued the ASU No. 2017-01 (“ASU 2017-01”), Clarifying the Definition of a Business. ASU
2017-01 clarifies the definition of a business and establishes a screening process to determine whether an integrated set of
assets and activities acquired is deemed the acquisition of a business or the acquisition of assets. ASU 2017-01 is effective
for annual and interim periods beginning after December 15, 2017 and should be applied prospectively. We adopted this
update as of January 1, 2018 and do not expect it to have a material impact on our consolidated financial statements and
related disclosures.
In October 2016, the FASB issued the ASU No. 2016-16 (“ASU 2016-16”), Intra-Entity Transfers of Assets Other Than
Inventory. ASU 2016-16 eliminates the existing exception prohibiting the recognition of the income tax consequences for
intra-entity asset transfers until the asset has been sold to an outside party. Under ASU 2016-16, entities will be required
to recognize the income tax consequences of intra-entity asset transfers other than inventory when the transfer occurs. ASU
2016-16 is effective on a modified retrospective basis for annual and interim periods beginning after December 15, 2017,
with early adoption permitted. We adopted this update as of January 1, 2018 and do not expect it to have a material impact
on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued the ASU No. 2016-15 (“ASU 2016-15”), Classification of Certain Cash Receipts and
Cash Payments. ASU 2016-15 provides guidance concerning the classification of certain cash receipts and cash payments
in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15,
2017 and should be applied retrospectively. We adopted this update as of January 1, 2018 and do not expect it to have a
material impact on our consolidated financial statements and related disclosures.
In February 2018, the FASB issued the ASU No. 2018-02 (“ASU 2018-02”), Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income. ASU 2018-02 provides an option to allow reclassification from accumulated
other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017.
The new guidance is effective for annual and interim periods beginning after December 15, 2018 with early adoption
permitted. We are currently evaluating the impact this update will have on our consolidated financial statements and related
disclosures.
In August 2017, the FASB issued the ASU Update No. 2017-12 (“ASU 2017-12”), Targeted Improvements to Accounting
for Hedging Activities. ASU 2017-12 amends current guidance on accounting for hedges mainly to align more closely an
entity’s risk management activities and financial reporting relationships through changes to both the designation and
measurement guidance for qualifying hedging relationships and the presentation of hedge results. In addition, amendments
in ASU 2017-12 simplify the application of hedge accounting by allowing more time to prepare hedge documentation and
F-16
allowing effectiveness assessments to be performed on a qualitative basis after hedge inception. The new guidance is
effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. We are currently
evaluating the impact this update will have on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued the ASU No. 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 establishes the new “current expected credit loss” model for measuring and recognizing credit
losses on financial assets based on relevant information about past events, including historical experience, current
conditions and reasonable and supportable forecasts. The new guidance is effective on a modified retrospective basis for
annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim
periods beginning after December 15, 2018. We have not yet made a decision on the timing of adoption and are currently
evaluating the impact this update will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued the ASU No. 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 establishes a new lease
accounting model for leases. Lessees will be required to recognize most leases on their balance sheets but lease expense
will be recognized on the income statement in a manner similar to existing requirements. ASU 2016-02 is effective on a
modified retrospective basis for annual and interim periods beginning after December 15, 2018, with early adoption
permitted. We are currently evaluating the population of our leases and anticipate that most of our operating lease
commitments will be recognized on our consolidated balance sheets. We plan to adopt this update effective January 1,
2019 and are continuing to assess the potential impact of this update on our consolidated financial statements and related
disclosures.
2. EARNINGS PER SHARE
Basic and diluted earnings (loss) per share (“EPS”) are computed using the two-class method, which is an earnings
allocation that determines EPS for each class of common stock and participating securities according to dividends declared
and participation rights in undistributed earnings. The Company’s restricted stock awards are considered participating
securities because holders are entitled to receive non-forfeitable dividends during the vesting term. Diluted EPS includes
securities that could potentially dilute basic EPS during a reporting period. Dilutive securities are not included in the
computation of loss per share when a company reports a net loss from continuing operations as the impact would be anti-
dilutive.
The potentially dilutive impact of the Company’s restricted stock awards is determined using the treasury stock method.
Under the treasury stock method, awards are treated as if they had been exercised with the proceeds of exercise used to
repurchase common stock at the average market price for the period. Any incremental difference between the assumed
number of shares issued and repurchased is included in the diluted share computation.
The computation of basic and diluted earnings per share attributable to common shareholders computed using the two-
class method is as follows:
(In thousands, except per share amounts)
Net income (loss)
Less: net income attributable to noncontrolling interest
Income (loss) attributable to common shareholders before allocation of earnings
to participating securities
Less: earnings allocated to participating securities
Net income (loss) attributable to common shareholders, after earnings allocated
to participating securities
2017
2016
$ 65,299 $ 15,196 $
354
265
64,945
362
14,931
524
2015
(671)
210
(881)
—
$ 64,583 $ 14,407 $
(881)
Weighted-average number of common shares outstanding
60,373
50,301
50,176
Net income (loss) per common share attributable to common shareholders -
basic and diluted
$
1.07 $
0.29 $
(0.02)
F-17
Diluted earnings (loss) per common share attributable to common shareholders for each of the years ended December 31,
2017, 2016 and 2015 excludes 0.3 million shares that could be issued under our share-based compensation plan because
the inclusion of the potential common shares would have an antidilutive effect.
3. ACQUISITIONS AND DIVESTITURES
Acquisitions
FairPoint Communications, Inc.
On July 3, 2017, we completed our merger with FairPoint and pursuant to the terms of a definitive agreement and the
Merger Agreement acquired all the issued and outstanding shares of FairPoint in exchange for shares of our common stock.
As a result, FairPoint became a wholly-owned subsidiary of the Company. FairPoint is an advanced communications
provider to business, wholesale and residential customers within its service territory which spans across 17 states.
FairPoint owns and operates a robust fiber-based network with more than 22,000 route miles of fiber, including 17,000
route miles of fiber in northern New England. The acquisition reflects our strategy to diversify revenue and cash flows
amongst multiple products and to expand our network to new markets.
At the effective time of the Merger, each share of common stock, par value of $0.01 per share, of FairPoint issued and
outstanding immediately prior to the effective time of the Merger converted into and became the right to receive 0.7300
shares of common stock, par value $0.01 per share, of Consolidated and cash in lieu of fractional shares, as set forth in the
Merger Agreement. Based on the closing price of our common stock on the last complete trading day prior to the effective
date of the Merger Agreement, the total value of the consideration to be exchanged was $431.0 million, exclusive of debt
of approximately $919.3 million. On the date of the Merger, we issued an approximate aggregate total of 20.1 million
shares of our common stock to the former FairPoint stockholders and we assumed approximately 2,615,153 outstanding
warrants, each eligible to purchase one share of the Company’s common stock at an exercise price of $66.86 per share,
subject to adjustment in accordance with the warrant agreement, and exercisable any time on or prior to January 24, 2018.
On January 24, 2018, all of the warrants expired in accordance with their terms without being exercised.
In connection with the Merger, we secured committed debt financing through a $935.0 million incremental term loan
facility, as described in Note 6, that, in addition to cash on hand and other sources of liquidity, was used to repay the
existing indebtedness of FairPoint and pay the fees and expenses in connection with the Merger.
The acquisition was accounted for in accordance with the acquisition method of accounting for business combinations.
The tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair values as of the
date of the acquisition.
The preliminary estimated fair value of the tangible and intangible assets acquired and liabilities assumed are as follows:
(In thousands)
Cash and cash equivalents
Accounts receivable
Other current assets
Assets held for sale
Property, plant and equipment
Intangible assets
Other long-term assets
Total assets acquired
Current liabilities
Liabilities held for sale
Pension and other post-retirement obligations
Deferred income taxes
Other long-term liabilities
Total liabilities assumed
Net fair value of assets acquired
Goodwill
Total consideration transferred
F-18
$
$
56,980
62,805
22,012
21,417
1,053,562
303,180
2,685
1,522,641
123,034
1,016
219,298
94,214
15,916
453,478
1,069,163
281,155
1,350,318
The fair values of the assets acquired and liabilities assumed are based on a preliminary valuation, which is subject to
change within the measurement period. Upon completion of the final fair value assessment, the fair values of the net assets
acquired may differ materially from the preliminary assessment. We are in the process of finalizing the valuation of the
net assets acquired, most notably, the valuation of property, plant and equipment, intangible assets, pension and other post-
retirement obligations and deferred income taxes. The preliminary assessment does not include the fair value of potential
contingent assets arising from a pre-acquisition gain contingency as we are in the process of assessing the outcome and
value of the contingency as of the date of the acquisition. Any changes to the initial estimates of the fair value of the assets
acquired and liabilities assumed will be recorded to those assets and liabilities and residual amounts will be allocated to
goodwill.
Goodwill recognized from the acquisition primarily relates to the expected contributions of the entity to the overall
corporate strategy and the synergies expected to be realized from the acquisition. Amortization of goodwill is not
deductible for income tax purposes.
Based on the preliminary valuation analysis, the identifiable intangible assets acquired consisted of customer relationships
of $300.3 million, tradenames of $1.1 million and non-compete agreements of $1.8 million. The customer relationships
are being amortized using an accelerated amortization method over their preliminary estimated useful lives of seven to
eleven years depending on the nature of the customer. The tradenames and non-compete agreements are amortized using
the straight-line method over their preliminary estimated useful lives of six months and one year, respectively.
During the quarter ended December 31, 2017, we made certain adjustments to the fair value of the identifiable assets
acquired and liabilities assumed which resulted in an increase in property, plant and equipment of $8.1 million, intangible
assets of $0.1 million, other long-term liabilities of $1.7 million and deferred income taxes of $5.1 million and a decrease
in pension and other post-retirement obligations of $2.9 million. The net impact of the adjustments increased net assets
acquired and reduced goodwill by $4.3 million.
As discussed in the “Divestitures” section below, we have committed to a formal plan to sell certain assets of FairPoint
and these assets have been classified as held for sale at the acquisition date. In connection with the classification as assets
held for sale at the acquisition date, the carrying value of these assets was recorded at their estimated fair value of
approximately $20.4 million, which was determined based on the estimated selling price less costs to sell.
The results of operations of FairPoint have been reported in our consolidated financial statements as of the effective date
of the acquisition. For the year ended December 31, 2017, FairPoint contributed operating revenues of $389.5 million and
net income of $22.7 million, which included $12.3 million in acquisition related costs. Upon closing of the FairPoint
acquisition or shortly thereafter, various triggering events occurred which resulted in payment of obligations arising with
respect to various change in control agreements and other contingent payments to certain FairPoint employees. The
estimated aggregate cash payments due in connection with these agreements is approximately $10.0 million of which $9.6
million was recognized in operating expenses during the year ended December 31, 2017 and $0.2 million is expected to
be paid during 2018 with the remainder due in 2019.
Unaudited Pro Forma Results
The following unaudited pro forma information presents our results of operations as if the acquisition of FairPoint occurred
on January 1, 2016. The adjustments to arrive at the pro forma information below included adjustments for depreciation
and amortization on the acquired tangible and intangible assets acquired, interest expense on the debt incurred to finance
the acquisition and to repay certain existing indebtedness of FairPoint, and the exclusion of certain acquisition related
costs. Shares used to calculate the basic and diluted earnings per share were adjusted to reflect the additional shares of
common stock issued to fund the acquisition.
(Unaudited; in thousands, except per share amounts)
Operating revenues
Income from operations
Net income
Less: net income attributable to noncontrolling interest
Net income attributable to common stockholders
Net income per common share-basic and diluted
$
$
$
$
$
2017
2016
1,460,620
57,980
91,131
354
90,777
1.29
$
$
$
$
$
1,567,620
288,482
111,723
265
111,458
1.58
F-19
Transaction costs related to the acquisition of FairPoint were $33.0 million during the year ended December 31, 2017,
which are included in acquisition and other transaction costs in the consolidated statements of operations. These costs are
considered to be non-recurring in nature and therefore pro forma adjustments have been made to exclude these costs from
the pro forma results of operations.
The pro forma information 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.
The pro forma information does not include the impact of any future cost savings or synergies that may be achieved as a
result of the acquisition.
Champaign Telephone Company, Inc.
On July 1, 2016, we acquired substantially all of the assets of Champaign Telephone Company, Inc. and its sister company,
Big Broadband Services, LLC, a private business communications provider in the Champaign-Urbana, IL area. The
aggregate purchase price, including customary working capital adjustments, consisted of cash consideration of $13.4
million, which was paid from our existing cash resources. The fair value of the acquired assets and liabilities assumed
consisted primarily of property, plant and equipment of $6.9 million, intangible assets of $1.0 million, working capital of
$0.8 million and goodwill of $4.7 million. Goodwill and other intangible assets are expected to be amortizable and
deductible for income tax purposes.
Divestitures
In August 2017, we committed to a formal plan to sell our subsidiaries Peoples Mutual Telephone Company and Peoples
Mutual Long Distance Company, collectively (“Peoples”), which were acquired as part of the acquisition of FairPoint.
Peoples operates as a local exchange carrier in Virginia and provides telecommunications services to residential and
business customers. In November 2017, the Company entered into an agreement to sell all of the issued and outstanding
stock of Peoples in exchange for cash of approximately $21.0 million, subject to certain contractual adjustments. The
closing of the transaction is subject to certain regulatory approvals, which are expected to be completed in the first quarter
of 2018.
As of the acquisition date, the net assets to be sold have been classified as held for sale in the consolidated balance sheet.
The expected sale of these assets has not been reported as discontinued operations in the consolidated statements of
operations as the annual revenues of these operations is less than 1% of the consolidated operating revenues. The estimated
fair value of the net assets held for sale was determined based on the estimated selling price less costs to sell and was
classified as Level 2 within the fair value hierarchy at December 31, 2017.
At December 31, 2017, the major classes of assets and liabilities to be sold consisted of the following:
(In thousands)
Current assets
Property, plant and equipment
Goodwill
Total assets
Current liabilities
Deferred taxes
Total liabilities
$
$
$
$
227
4,254
16,829
21,310
701
302
1,003
On December 6, 2016, we completed the sale of substantially all of the assets of the Company’s Enterprise Services
equipment and IT Services business (“EIS”) to ePlus Technology inc. (“ePlus”) for cash proceeds of $9.2 million net of a
customary working capital adjustment. As part of the transaction, we entered into a Co-Marketing Agreement with ePlus,
a nationwide systems integrator of technology solutions, to cross-sell both broadband network services and IT services.
The strategic partnership provides our business customers access to a broader suite of IT solutions, and also provides ePlus
customers access to Consolidated’s business network services. During the year ended December 31, 2016, we recognized
a gain of $0.6 million on the sale, net of selling costs, which is included in other, net in the consolidated statement of
operations.
F-20
On May 3, 2016, we entered into a definitive agreement to sell all of the issued and outstanding stock of our non-core,
rural local exchange carrier business located in northwest Iowa, Consolidated Communications of Iowa Company
(“CCIC”), formerly Heartland Telecommunications Company of Iowa. CCIC provides telecommunications and data
services to residential and business customers in 11 rural communities in northwest Iowa and surrounding areas. The sale
was completed on September 1, 2016 for total cash proceeds of approximately $21.0 million, net of certain contractual and
customary working capital adjustments. In May 2016, in connection with the expected sale, the carrying value of CCIC
was reduced to its estimated fair value and we recognized an impairment loss of $0.6 million during the year ended
December 31, 2016. We recognized an additional loss on the sale of $0.3 million during the year ended December 31,
2016, which is included in other, net in the consolidated statement of operations, as a result of changes in estimated working
capital. We recognized a taxable gain on the transaction resulting in current income tax expense of $7.2 million during
the year ended December 31, 2016 to reflect the tax impact of the divestiture. See Note 10 for additional income tax
related information regarding this transaction.
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 (16.67% interest)
Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)
Totals
Cost Method
2017
2016
$
2,272
$
2,156
21,450
22,950
9,105
343
17,375
7,300
28,063
108,858
$
21,450
22,950
8,138
200
17,160
6,540
27,627
106,221
$
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 2017, 2016 and 2015, we received cash distributions from these partnerships totaling $12.8 million, $12.9
million and $14.6 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”), 16.67% of Pennsylvania RSA
6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”). RSA
#17 provides cellular service to a limited rural area in Texas. RSA 6(I) and RSA 6(II) provide cellular service in and around
our Pennsylvania service territory. Because we have significant influence over the operating and financial policies of these
three entities, we account for the investments using the equity method. In 2017, 2016 and 2015, we received cash
distributions from these partnerships totaling $17.2 million, $19.2 million and $30.7 million, respectively. The carrying
value of the investments exceeds the underlying equity in net assets of the partnerships by $32.8 million as of December
31, 2017 and 2016.
F-21
In 2015, we sold our 6.96% 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. As a result of the sale, we recognized an other-than-temporary
impairment loss of $0.8 million during the year ended December 31, 2015 to reduce the investment to its estimated fair
value. The impairment charge is included in investment income within other income (expense) in the consolidated
statements of operations. We did not receive any distributions from this partnership in 2015.
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
5. FAIR VALUE MEASUREMENTS
Financial Instruments
2015
2017
2016
$ 350,611 $ 334,421 $ 348,595
105,495
104,973
104,568
103,497
104,568
103,497
97,075
95,473
95,473
$ 78,782 $ 64,083 $ 57,716
96,197
20,576
52,414
80,923
95,959
22,472
51,463
100,806
89,651
21,985
51,836
79,913
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, 2017 and 2016 were as
follows:
As of December 31, 2017
Quoted Prices Significant
(In thousands)
Long-term interest rate swap assets
Current interest rate swap liabilities
Long-term interest rate swap liabilities
Total
In Active
Markets for
Identical Assets
(Level 1)
Other
Significant
Observable Unobservable
Inputs
(Level 2)
— $ 1,256 $
—
—
— $
(27)
(1,761)
(532) $
Inputs
(Level 3)
—
—
—
—
Total
$ 1,256 $
(27)
(1,761)
$
(532) $
F-22
(In thousands)
Long-term interest rate swap assets
Current interest rate swap liabilities
Long-term interest rate swap liabilities
Total
As of December 31, 2016
Quoted Prices Significant
In Active
Markets for
Identical Assets
(Level 1)
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
— $
—
—
— $
398 $
(453)
(216)
(271) $
—
—
—
—
Total
$ 398 $
(453)
(216)
$ (271) $
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, 2017 and 2016.
As of December 31, 2017
As of December 31, 2016
(In thousands)
Investments, equity basis
Investments, at cost
Long-term debt, excluding capital leases
Cost & Equity Method Investments
Carrying Value
Fair Value
$
$
$
52,738
53,848
2,331,400 $
n/a $
n/a $
2,253,545 $
Carrying Value Fair Value
51,327
52,738
n/a
n/a
1,388,786 $ 1,390,773
Our investments at December 31, 2017 and 2016 accounted for under both the equity and cost methods consisted primarily
of minority positions in various cellular telephone limited partnerships and our investment in CoBank. It is impracticable
to determine fair value of these investments.
Long-term Debt
The fair value of our senior notes was based on quoted market prices, and the fair value of borrowings under our credit
agreement was determined using current market 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, 2017
and 2016:
(In thousands)
Senior secured credit facility:
Term loans, net of discounts of $8,344 and $4,662 at December 31, 2017 and
2016, respectively
Revolving loan
6.50% Senior notes due 2022, net of discount of $3,669 and $4,302 at December 31,
2017 and 2016, respectively
Capital leases
Less: current portion of long-term debt and capital leases
Less: deferred debt issuance costs
Total long-term debt
Credit Agreement
2017
2016
$
1,813,069
22,000
$
893,088
—
496,331
23,890
2,355,290
(29,696)
(14,080)
2,311,514
495,698
16,857
1,405,643
(14,922)
(13,967)
1,376,754
$
$
In October 2016, the Company, through certain of its wholly owned subsidiaries, entered into a Third Amended and
Restated Credit Agreement with various financial institutions (as amended, the “Credit Agreement”). The Credit
Agreement consists of a $110.0 million revolving credit facility, an initial term loan in the aggregate amount of $900.0
million (the “Initial Term Loan”) and an incremental term loan in the aggregate amount of $935.0 million (the “Incremental
F-23
Term Loan”), collectively (the “Term Loans”). The Incremental Term Loan was issued on July 3, 2017 upon completion
of the FairPoint Merger, as described below. The Credit Agreement also includes an incremental loan facility which
provides the ability to borrow, subject to certain terms and conditions, incremental loans in an aggregate amount of up to
the greater of (a) $300.0 million and (b) an amount which would cause its senior secured leverage ratio not to exceed
3.00:1.00 (the “Incremental Facility”). Borrowings under the Credit Agreement are secured by substantially all of the
assets of the Company and its subsidiaries, including certain of the FairPoint subsidiaries acquired in the Merger, with the
exception of Consolidated Communications of Illinois Company and our majority-owned subsidiary, East Texas Fiber
Line Incorporated.
The Initial Term Loan was issued in an original aggregate principal amount of $900.0 million with a maturity date of
October 5, 2023, but is subject to earlier maturity on March 31, 2022 if the Company’s unsecured Senior Notes due in
October 2022 are not repaid in full or redeemed in full on or prior to March 31, 2022. The Initial Term Loan contains an
original issuance discount of 0.25% or $2.3 million, which is being amortized over the term of the loan. The Initial Term
Loan requires quarterly principal payments of $2.25 million and has an interest rate of 3.00% plus the London Interbank
Offered Rate (“LIBOR“) subject to a 1.00% LIBOR floor.
In connection with the execution of the Merger Agreement, in December 2016, the Company entered into two amendments
to the Credit Agreement to secure committed financing related to the acquisition of FairPoint. On December 14, 2016, we
entered into Amendment No. 1 to the Credit Agreement and on December 21, 2016, the Company entered into Amendment
No. 2 to the Credit Agreement, pursuant to which a syndicate of lenders agreed to provide the Incremental Term Loan,
subject to the satisfaction of certain conditions. The Incremental Term Loan was made pursuant to the Incremental Facility
set forth in the Credit Agreement. Fees of $2.5 million paid to the lenders in connection with Amendment No. 1 are
reflected as an additional discount on the Initial Term Loan and are being amortized over the term of the debt as interest
expense. Ticking fees accrued on the incremental term loan commitments from January 15, 2017 through the July 3, 2017
Merger closing date at a rate of 3.00% plus LIBOR subject to a 1.00% LIBOR floor and became due and payable on the
closing date. In connection with entering into the committed financing, commitment fees of $14.0 million were capitalized
in December 2016 and were amortized to interest expense over the term of the commitment period through July 2017.
On July 3, 2017, the Merger with FairPoint was completed and the net proceeds from the incurrence of the Incremental
Term Loan were used, in part, to repay and redeem certain existing indebtedness of FairPoint and to pay certain fees and
expenses in connection with the Merger and the related financing. The Incremental Term Loan included an original issue
discount of 0.50% and has the same maturity date and interest rate as the Initial Term Loan. The Incremental Term Loan
requires quarterly principal payments of $2.34 million, which began in December 2017.
In addition, effective contemporaneously with the Merger, the Company entered into Amendment No. 3 to the Credit
Agreement, among other things, to increase the permitted amount of outstanding letters of credit from $15.0 million to
$20.0 million and to provide that certain existing letters of credit of FairPoint be deemed to be letters of credit under the
Credit Agreement.
The revolving credit facility has a maturity date of October 5, 2021 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, 2017, the borrowing margin for the next three month
period ending March 31, 2018 will be at a weighted-average margin of 3.00% for a LIBOR-based loan or 2.00% for an
alternate base rate loan. The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect
the leverage ratio from the prior quarter-end. As of December 31, 2017, borrowings of $22.0 million were outstanding
under the revolving credit facility, which consisted of LIBOR-based borrowings of $17.0 million and alternate base rate
borrowings of $5.0 million. At December 31 2016, there were no outstanding borrowings under the revolving credit
facility. Stand-by letters of credit of $18.3 million were outstanding under our revolving credit facility as of December
31, 2017. The stand-by letters of credit are renewable annually and reduce the borrowing availability under the revolving
credit facility. As of December 31, 2017, $69.7 million was available for borrowing under the revolving credit facility.
The weighted-average interest rate on outstanding borrowings under our credit facility was 4.58% and 4.00% at December
31, 2017 and 2016, respectively. Interest is payable at least quarterly.
F-24
2016 Amendment to the Credit Agreement
In connection with entering into the restated Credit Agreement in October 2016, fees of $3.9 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 operations. We also incurred a loss on the extinguishment
of debt of $6.6 million during the year ended December 31, 2016 related to the repayment of the outstanding term loan
under the previous credit agreement which was scheduled to mature in December 2020.
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, 2017, 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, 2017, and including the $27.4 million dividend declared in October 2017 and
paid on February 1, 2018, we had $257.7 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, 2017, our total net leverage ratio under
the Credit Agreement was 4.09:1.00, and our interest coverage ratio was 5.73:1.00.
Senior Notes
6.50% Senior Notes due 2022
In September 2014, we completed an offering of $200.0 million aggregate principal amount of 6.50% Senior Notes due in
October 2022 (the “Existing Notes”). The Existing Notes were priced at par, which resulted in total gross proceeds of
$200.0 million. On June 8, 2015, we completed an additional offering of $300.0 million in aggregate principal amount of
6.50% Senior Notes due 2022 (the “New Notes” and together with the Existing Notes, the “Senior Notes”). The New
Notes were issued as additional notes under the same indenture pursuant to which the Existing Notes were previously
issued on in September 2014. The New Notes were priced at 98.26% of par with a yield to maturity of 6.80% and resulted
in total gross proceeds of approximately $294.8 million, excluding accrued interest. The discount is being amortized using
the effective interest method over the term of the notes.
The Senior Notes mature on October 1, 2022 and interest is payable semi-annually on April 1 and October 1 of each year.
Consolidated Communications, Inc. (“CCI”) is the primary obligor under the Senior Notes, and we and certain of our
wholly-owned subsidiaries, including certain of the FairPoint subsidiaries, have fully and unconditionally guaranteed the
Senior Notes. The Senior Notes are senior unsecured obligations of the Company.
The net proceeds from the issuance of the Senior Notes, together with cash on hand, were used, in part, to finance the
acquisition of Enventis Corporation (“Enventis”) in 2014 including related fees and expenses, to repay the existing
indebtedness of Enventis and to redeem our then outstanding $300.0 million aggregate principal amount of 10.875% Senior
Notes due 2020 (the “2020 Notes”). In December 2014, we paid $84.1 million to redeem $72.8 million of the original
aggregate principal amount of the 2020 Notes and recognized a loss of $13.8 million on the partial extinguishment of debt
during the year ended December 31, 2014. In June 2015, we redeemed the remaining $227.2 million of the original
aggregate principal amount of the 2020 Notes. In connection with the redemption of the 2020 Notes, we paid $261.9
million and recognized a loss on extinguishment of debt of $41.2 million during the year ended December 31, 2015.
F-25
On October 16, 2015, we completed an exchange offer to register all of the Senior Notes under the Securities Act of 1933
(“Securities Act”). The terms of the registered Senior Notes are substantially identical to those of the Senior Notes prior
to the exchange, except that the Senior Notes are now registered under the Securities Act and the transfer restrictions and
registration rights previously applicable to the Senior Notes no longer apply to the registered Senior Notes. The exchange
offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.
Senior Notes Covenant Compliance
Subject to certain exceptions and qualifications, the indenture governing the Senior Notes contains customary covenants
that, among other things, limits CCI’s and its restricted subsidiaries’ ability to: incur additional 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. The indenture also contains customary
events of default.
Among other matters, the Senior Notes indenture provides that CCI may not pay dividends or make other restricted
payments, as defined in the indenture, if its total net leverage ratio is 4.75:1.00 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 certain acquisitions but not yet reflected in historical results. At December
31, 2017, this ratio was 4.22:1.00. If this ratio is met, dividends and other restricted payments may be made from
cumulative consolidated cash flow since April 1, 2012, less 1.75 times fixed charges, less dividends and other restricted
payments made since May 30, 2012. 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 indenture.
Since dividends of $433.6 million have been paid since May 30, 2012, including the quarterly dividend declared in October
2017 and paid on February 1, 2018, there was $888.3 million of the $1,321.9 million of cumulative consolidated cash flow
since May 30, 2012 available to pay dividends at December 31, 2017. At December 31, 2017, the Company was in
compliance with all terms, conditions and covenants under the indenture governing the 2022 Notes.
Future Maturities of Debt
At December 31, 2017, the aggregate maturities of our long-term debt excluding capital leases were as follows:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
Total maturities
Less: Unamortized discount
$
18,350
18,350
18,350
40,350
518,350
1,729,663
2,343,413
(12,013)
$ 2,331,400
See Note 11 regarding the future maturities of our obligations for capital leases.
7. DERIVATIVE FINANCIAL INSTRUMENTS
We may utilize interest rate swap agreements to mitigate risk associated with fluctuations in interest rates related to our
variable rate debt. Derivative financial instruments are recorded at fair value in our consolidated balance sheet.
F-26
The following interest rate swaps were outstanding at December 31, 2017:
(In thousands)
Cash Flow Hedges:
Fixed to 1-month floating LIBOR (with floor)
Fixed to 1-month floating LIBOR (with floor)
Forward starting fixed to 1-month floating LIBOR
(with floor)
Series of forward starting fixed to 1-month floating
LIBOR (with floor)
Total Fair Values
Notional
Amount
2017 Balance Sheet Location
Fair Value
$
$
600,000 Other assets
150,000 Accrued expense
$
$
600,000 Other assets
873
(27)
383
$ 1,410,000 Other long-term liabilities
(1,761)
(532)
$
The following interest rate swaps were outstanding at December 31, 2016:
(In thousands)
Cash Flow Hedges:
Notional
Amount
2016 Balance Sheet Location
Fair Value
Fixed to 1-month floating LIBOR (with floor)
Fixed to 1-month floating LIBOR (with floor)
Fixed to 1-month floating LIBOR (with floor)
$
$
$
100,000
100,000 Accrued expense
Other assets
50,000 Other long-term liabilities
Total Fair Values
$
$
398
(453)
(216)
(271)
The counterparties to our various swaps are highly rated financial institutions. 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.
For interest rate swaps designated as a cash flow hedge, the effective portion of the unrealized gain or loss in fair value is
recorded in AOCI and reclassified into earnings when the underlying hedged item impacts earnings. The ineffective
portion of the change in fair value of the cash flow hedge is recognized immediately in earnings. For derivative financial
instruments that are not designated as a hedge, including those that have been de-designated changes in fair value are
recognized in earnings as interest expense.
In connection with the acquisition of FairPoint, during the quarter ended June 30, 2017, we entered into a series of four
deal contingent forward-starting interest rate swap agreements each with a term of one year which begin at various dates
between July 2017 and July 2020 and mature between July 2018 and July 2021. The forward starting interest rate swap
agreements have a notional value ranging from $450.0 million to $705.0 million. These interest rate swap agreements
have been designated as cash flow hedges.
In conjunction with the refinancing of our Credit Agreement in October 2016 as discussed in Note 6, the interest rate swaps
were simultaneously de-designated and re-designated as cash flow hedges of future anticipated interest payments
associated with our variable rate debt. The balance of the unrealized loss included in AOCI as of the date the swaps were
de-designated is being amortized to earnings over the remaining term of the agreements. The interest rate swap agreements
mature on various dates through September 2019.
In 2013, interest rate swaps previously designated as cash flow hedges were de-designated as a result of amendments to
our Credit Agreement. These interest rate swap agreements matured on various dates through September 2016. 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 was amortized to earnings
over the remaining term of the swap agreements. Changes in fair value of the de-designated swaps were immediately
recognized in earnings as interest expense. During the years ended December 31, 2016 and 2015, gains of $0.2 million
and $0.8 million, respectively, were recognized as a reduction to interest expense for the change in fair value of the de-
designated swaps.
F-27
At December 31, 2017 and 2016, the pre-tax unrealized gains and (losses) related to our interest rate swap agreements
included in AOCI were $0.6 million and $(0.2) million, respectively. The estimated amount of gains included in AOCI as
of December 31, 2017 that will be recognized in earnings in the next twelve months is approximately $0.6 million.
The following table presents the effect of interest rate derivatives designated as cash flow hedges on AOCI and on the
consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015:
(In thousands)
Unrealized loss recognized in AOCI, pretax
Deferred losses reclassified from AOCI to interest expense
Gain (loss) recognized in interest expense from ineffectiveness
2017
2016
$
(411)
$ (1,246)
(121)
$
$
(469)
$ (1,352)
242
$
2015
$ (1,744)
$ (1,371)
—
$
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. On May 4, 2015, the
shareholders approved an amendment to the Plan to increase by 1,000,000 the number of shares of our common stock
authorized for issuance under the Plan. Approximately 2,650,000 shares of our common stock are authorized for issuance
under the Plan, 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 to be in
effect through May 5, 2019.
We measure the fair value of RSAs based on the market price of the underlying common stock on the date of grant. We
recognize the expense associated with RSAs on a straight-line basis over the requisite service period, which generally
ranges from immediate vesting to a four year vesting period.
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 are 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. An estimate of the number of PSAs that are expected to vest is made, and
the fair value of the PSAs is expensed utilizing the fair value on the date of grant over the requisite service period.
The following table summarizes grants of RSAs and PSAs under the Plan during the years ended December 31, 2017,
2016 and 2015:
Year Ended December 31,
RSAs Granted
PSAs Granted
Total
2017
124,100
36,982
161,082
Grant Date
Fair Value
$
$
23.12 100,040
23.27 94,066
194,106
Grant Date
Fair Value
2016
2015
$
$
23.95 83,571
20.86 77,786
161,357
Grant Date
Fair Value
$ 21.08
$ 19.74
F-28
The following table summarizes the RSA and PSA activity during the year ended December 31, 2017:
Non-vested shares outstanding - January 1, 2017
Shares granted
Shares vested
Shares forfeited, cancelled or retired
Non-vested shares outstanding - December 31, 2017
RSAs
Weighted
Average Grant
Date Fair Value
22.34
23.12
22.23
22.86
23.32
Shares
93,662 $
124,100 $
(100,230) $
(15,351) $
102,181 $
PSAs
Weighted
Average Grant
Date Fair Value
Shares
109,160 $
36,982 $
(59,306) $
(9,308) $
77,528 $
20.12
23.27
20.13
21.40
21.46
The total fair value of the RSAs and PSAs that vested during the years ended December 31, 2017, 2016 and 2015 was $3.4
million, $3.4 million and $3.9 million, respectively.
Share-based Compensation Expense
The following table summarizes total compensation costs recognized for share-based payments during the years ended
December 31, 2017, 2016 and 2015:
(In thousands)
Restricted stock
Performance shares
Total
Year Ended December 31,
2016
2015
2017
$
$
2.0 $
0.8
2.8 $
2.1 $
0.9
3.0 $
1.7
1.3
3.0
Income tax benefits related to share-based compensation of approximately $1.1 million, $1.2 million and $1.2 million were
recorded for the years ended December 31, 2017, 2016 and 2015, respectively. Share-based compensation expense is
included in “selling, general and administrative expenses” in the accompanying consolidated statements of operations.
As of December 31, 2017, total unrecognized compensation cost related to non-vested RSAs and PSAs was $3.0 million
and will be recognized over a weighted-average period of approximately 1.7 years.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component during
2017 and 2016:
(In thousands)
Balance at December 31, 2015
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive
income
Net current period other comprehensive income
Balance at December 31, 2016
$
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive income
Pension and
Post-Retirement
Obligations
Derivative
Instruments
$
(35,025) $
(14,831)
(674) $
(289)
2,706
(12,125)
(47,150)
(4,467)
3,153
(1,314)
$
836
547
(127)
(250)
758
508
381
$
$
Total
(35,699)
(15,120)
3,542
(11,578)
(47,277)
(4,717)
3,911
(806)
(48,083)
Balance at December 31, 2017
$
(48,464)
$
F-29
The following table summarizes reclassifications from accumulated other comprehensive loss during 2017 and 2016:
(In thousands)
Amortization of pension and post-retirement items:
2017
2016
Amount Reclassified from AOCI
Year Ended December 31,
Affected Line Item in the
Statement of Income
Prior service credit
Actuarial loss
Loss on cash flow hedges:
Interest rate derivatives
$
$
$
$
837
(6,071)
(5,234)
2,081
(3,153)
(1,246)
488
(758)
$
$
$
$
979 (a)
(5,423) (a)
(4,444) Total before tax
1,738 Tax benefit
(2,706) Net of tax
(1,352) Interest expense
516 Tax benefit
(836) Net of tax
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 under collective bargaining agreements who fulfill minimum age and service requirements. Certain
salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen. The
Retirement Plan is closed to all new entrants. Benefits for eligible participants under collective bargaining agreements are
accrued based on a cash balance benefit plan.
As part of our acquisition of FairPoint, we assumed sponsorship of its two non-contributory qualified defined benefit
pension plans (together, the “Qualified Pension Plan”). The Qualified Pension Plan for certain non-management employees
under collective bargaining agreements is closed to new participants and benefits have previously been frozen. For existing
participants, benefit accruals are capped at 30 years of total credited service. The Qualified Pension Plan for certain
management employees is frozen and all future benefit accruals for existing participants have ceased.
We also have two non-qualified supplemental retirement plans (the “Supplemental Plans” and, together with the
Retirement Plan and the Qualified Pension Plan, the “Pension Plans”). The Supplemental Plans provide supplemental
retirement benefits to certain former employees by providing for incremental pension payments to partially offset the
reduction of the amount that would have been payable under the qualified defined benefit pension plans if it were not for
limitations imposed by federal income tax regulations. The Supplemental Plans have previously been frozen so that no
person is eligible to become a new participant. 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.
F-30
The following tables summarize the change in benefit obligation, plan assets and funded status of the Pension Plans as of
December 31, 2017 and 2016:
(In thousands)
Change in benefit obligation
Benefit obligation at the beginning of the year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Acquisition
Plan curtailment
Plan settlement
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
Plan settlement
Fair value of plan assets at the end of the year
Funded status at year end
2017
2016
350,392 $
3,055
21,882
41,232
(26,099)
390,269
(27)
(2,717)
777,987 $
352,206
343
16,291
12,935
(31,383)
—
—
—
350,392
2017
2016
263,733
12,533
60,785
(26,099)
244,005
(2,717)
552,240
(225,747)
$
$
$
278,038
258
16,820
(31,383)
—
—
263,733
(86,659)
$
$
$
$
$
Amounts recognized in the consolidated balance sheets at December 31, 2017 and 2016 consisted of:
(In thousands)
Current liabilities
Long-term liabilities
2017
$
$
(243) $
(225,504) $
2016
(245)
(86,414)
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2017 and 2016 consisted
of:
(In thousands)
Unamortized prior service credit
Unamortized net actuarial loss
2016
2017
(3,054)
(1,401) $
85,984
83,367
84,583 $ 80,313
$
$
The following table summarizes the components of net periodic pension cost recognized in the consolidated statements of
operations for the plans for the years ended December 31, 2017, 2016 and 2015:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Net actuarial loss
Prior service credit
Plan curtailment
Plan settlement
Net periodic pension cost (benefit)
$
$
2017
2016
2015
3,055 $
21,882
(28,459)
6,244
(316)
(1,337)
17
1,086 $
343 $
16,291
(20,635)
5,423
(458)
—
—
964 $
410
15,788
(23,372)
4,018
(457)
—
—
(3,613)
In May 2017, the Retirement Plan was amended to freeze benefit accruals under the cash balance benefit plan for certain
participants under collective bargaining agreements effective as of June 30, 2017. As a result of this amendment, we
recognized a pre-tax curtailment gain of $1.3 million as a component of net periodic pension cost during the year ended
December 31, 2017.
F-31
The following table summarizes other changes in plan assets and benefit obligations recognized in other comprehensive
loss, before tax effects, during 2017 and 2016:
(In thousands)
Actuarial loss, net
Recognized actuarial loss
Recognized prior service credit
Plan curtailment
Plan settlement
Total amount recognized in other comprehensive loss, before tax effects
2017
8,906
(6,272)
316
1,337
(17)
4,270
2016
$ 16,750
(5,423)
458
—
—
11,785
$
$
$
The estimated net actuarial loss and net prior service credit for the defined benefit pension plans that will be amortized
from accumulated other comprehensive loss in net periodic pension cost in 2018 is $5.8 million and $(0.2) million,
respectively.
The weighted-average assumptions used to determine the projected benefit obligations and net periodic benefit cost for the
years ended December 31, 2017, 2016 and 2015 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
2017
2015
2016
4.02 % 4.76 % 4.27 %
3.75 % 4.27 % 4.76 %
7.23 % 7.75 % 8.00 %
2.39 % 1.75 % 1.75 %
We also are liable for deferred compensation agreements with former members of the board of directors and certain other
former employees of acquired companies. Depending on the plan, benefits are payable in monthly or annual installments
for a period of time based on the terms of the agreement which range from five years up to the life of the participant or to
the beneficiary upon death of the participant and may begin as early as age 55. Participants accrue no new benefits as
these plans had previously been frozen. Payments related to the deferred compensation agreements totaled approximately
$0.2 million for each of the years ended December 31, 2017 and 2016. The net present value of the remaining obligations
was approximately $1.9 million and $2.0 million at December 31, 2017 and 2016, respectively, and is included in pension
and post-retirement benefit obligations in the accompanying balance sheets.
We also maintain 25 life insurance policies on certain of the participating former directors and employees. We recognized
$0.2 million in life insurance proceeds as other non-operating income in 2016. We did not recognize any insurance
proceeds in 2017. 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 $2.3 million and $2.2 million at
December 31, 2017 and 2016, 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 $7.0 million and $6.8 million as of December 31, 2017 and 2016, respectively.
Post-retirement Benefit Obligations
We sponsor various healthcare and life insurance plans (“Post-retirement Plans”) that provide post-retirement medical and
life insurance benefits to certain groups of retired employees. Certain plans have previously been frozen so that no person
is eligible to become a new participant. 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. A majority of the healthcare plans are unfunded and have no assets, and benefits are paid from the
general operating funds of the Company. However, a plan acquired in the purchase of another company is funded by
assets that are separately designated within the Retirement Plan for the sole purpose of providing payments of the retiree
medical benefits for this specific plan.
F-32
In connection with the acquisition of FairPoint, we have acquired its post-retirement benefit plan as of the date of
acquisition. The post-retirement benefit plan provides medical, dental and life insurance benefits to certain eligible
employees and in some instances, to their spouses and families. The post-retirement benefit plan is unfunded and the
Company funds the benefits that are paid.
The following tables summarize the change in benefit obligation, plan assets and funded status of the post-retirement
benefit obligations as of December 31, 2017 and 2016:
(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
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
Fair value of plan assets at the end of the year
Funded status at year end
2017
2016
$ 46,318 $ 40,538
602
2,019
544
6,767
(4,152)
—
$ 116,970 $ 46,318
498
3,034
456
(2,815)
(6,934)
76,413
2017
2016
$
2,286 $
6,478
456
198
(6,934)
$
2,484 $
$ (114,486) $
2,985
3,608
544
(699)
(4,152)
2,286
(44,032)
Amounts recognized in the consolidated balance sheets at December 31, 2017 and 2016 consist of:
(In thousands)
Current liabilities
Long-term liabilities
2017
(7,515) $ (1,555)
$
$ (106,971) $ (42,477)
2016
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2017 and 2016 consist
of:
(In thousands)
Unamortized prior service credit
Unamortized net actuarial loss (gain)
2017
2016
$ (4,095) $ (4,616)
956
$ (5,865) $ (3,660)
(1,770)
The following table summarizes the components of the net periodic costs for post-retirement benefits for the years ended
December 31, 2017, 2016 and 2015:
2017
2016
2015
$
498 $
3,034
(113)
(173)
(521)
2,725 $
602 $
2,019
(148)
—
(521)
1,952 $
601
1,713
(150)
(134)
(622)
1,408
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Net actuarial gain
Prior service credit
Net periodic postretirement benefit cost
$
F-33
The following table summarizes other changes in plan assets and benefit obligations recognized in other comprehensive
loss, before tax effects, during 2017 and 2016:
2017
(In thousands)
Actuarial loss (gain), net
$ (2,899) $ 7,614
Recognized actuarial gain
—
521
Recognized prior service credit
Total amount recognized in other comprehensive loss, before tax effects $ (2,205) $ 8,135
173
521
2016
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 2018 is approximately $(0.1) million and $(0.5) million, respectively.
The weighted-average discount rate assumptions utilized for the years ended December 31 were as follows:
Net periodic benefit cost
Benefit obligation
2017
2016 2015
3.96 % 4.61 % 4.11 %
3.67 % 4.12 % 4.61 %
For purposes of determining the cost and obligation for post-retirement medical benefits, a 7.50% healthcare cost trend
rate was assumed for the plan in 2017, declining to the ultimate trend rate of 5.00% in 2022. 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
Plan Assets
1% Increase 1% Decrease
(162)
$
(3,843)
$
179
3,993
$
$
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 weighted average target allocation of the Pension Plan assets is approximately 66% in 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, 2017 were generated by using market
transactions involving identical or comparable assets. There were no changes in the valuation techniques used during
2017.
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.
Mutual Funds: Valued at the daily closing net asset value (“NAV”) based on the closing price reported on the active
market on which the funds are traded.
U.S. Treasury and Government Agency Securities: Valued at the closing price reported on the active market on which the
individual securities are traded (Level 1). Government issued mortgage-backed securities are valued based on external
pricing indices ( Level 2).
F-34
Corporate and Municipal Bonds: Valued based on yields currently available on comparable securities of issuers with
similar credit ratings.
Mortgage/Asset-backed Securities: Valued based on market prices from external pricing indices based on recent market
activity.
Common Collective Trusts and Commingled Funds: Units in the fund are valued based on the NAV of the funds, which
is based on the fair value of the underlying investments held by the fund less its liabilities as reported by the issuer of the
fund. The NAV per share is used as a practical expedient to estimate fair value. This practical expedient is not used when
it is determined to be probable that the fund will sell the investment for an amount different than the reported net asset
value. These investments have no unfunded commitments, are redeemable daily or monthly and have redemption notice
periods of up to 10 days.
The fair values of our assets for our defined benefit pension plans at December 31, 2017 and 2016, by asset category were
as follows:
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
As of December 31, 2017
Significant
Other
Observable Unobservable
Significant
Inputs
(Level 2)
Inputs
(Level 3)
$
10,383
$
—
$
—
62,088
12,310
5,874
36,306
45,427
18,736
104,403
—
—
—
—
—
—
—
27,190
—
—
12,140
334,857
2
37,069
9,024
—
$ 46,095
$
$
—
—
—
—
—
—
—
—
—
—
—
—
(In thousands)
Cash and cash equivalents
Equities:
Stocks:
U.S. common stocks
International stocks
Funds:
U.S. small cap
U.S. mid cap
U.S. large cap
Emerging markets
International
Fixed Income:
U.S. treasury and government agency securities
Corporate and municipal bonds
Mortgage/asset-backed securities
Mutual funds
Total plan assets in the fair value hierarchy
Common Collective Trusts measured at NAV: (1)
Short-term investments (2)
Equities:
U.S. small cap
U.S. large cap
Emerging markets
International
Fixed Income
Total plan assets
Other liabilities (3)
Net plan assets
Total
$ 10,383
62,088
12,310
5,874
36,306
45,427
18,736
104,403
27,192
37,069
9,024
12,140
380,952
11,037
11,862
14,126
10,669
19,480
104,282
552,408
(168)
$ 552,240
F-35
(In thousands)
Cash and cash equivalents
Equities:
Stocks:
U.S. common stocks
International stocks
Funds:
U.S. mid cap
U.S. large cap
Emerging markets
International
Fixed Income:
U.S. treasury and government agency securities
Corporate and municipal bonds
Mortgage/asset-backed securities
Mutual funds
Total plan assets in the fair value hierarchy
Common Collective Trusts measured at NAV: (1)
Short-term investments (2)
Equities:
U.S. small cap
U.S. large cap
Emerging markets
International
Fixed Income
Total plan assets
Other liabilities (3)
Net plan assets
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
As of December 31, 2016
Significant
Significant
Other
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
$
671
$
—
$
—
Total
$
671
23,285
8,756
9,294
7,564
14,382
47,784
23,285
8,756
9,294
7,564
14,382
47,784
—
—
—
—
—
—
16,821
6,712
4,171
20,055
159,495
$
8,794
—
—
20,055
140,585
8,027
6,712
4,171
—
$ 18,910
$
—
—
—
—
—
—
—
—
—
—
—
7,330
10,093
14,064
7,865
15,434
52,340
266,621
(2,888)
$ 263,733
(1) Certain investments that are measured at fair value using the NAV per share as a practical expedient have not been categorized in
the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value
hierarchy to the total plan assets.
(2) Short-term investments include an investment in a common collective trust which is principally comprised of certificates of deposit,
commercial paper, U.S. government obligations and variable rate securities with maturities less than one year.
(3) Net amount due for securities purchased and sold.
F-36
The fair values of our assets for our post-retirement benefit plans at December 31, 2017 and 2016 were as follows:
As of December 31, 2017
Quoted Prices Significant
In Active
Markets for
Identical Assets
(Level 1)
Inputs
(Level 2)
Other
Observable Unobservable
Significant
$
4
$
—
$
Total
$
4
(In thousands)
Cash and cash equivalents
Equities:
U.S. common stocks
International stocks
Funds:
U.S. mid cap
U.S. large cap
Emerging markets
International
Total plan assets in the fair value hierarchy
Common Collective Trusts measured at NAV: (1)
Short-term investments (2)
Equities:
U.S. small cap
U.S. large cap
Emerging markets
International
Fixed Income
Total plan assets
Benefit payments payable
Other liabilities (3)
Net plan assets
Inputs
(Level 3)
—
—
—
—
—
—
—
242
76
92
73
176
487
1,150
$
—
—
—
—
—
—
—
$
242
76
92
73
176
487
1,150
56
$
111
132
100
183
978
2,710
(225)
(1)
$ 2,484
F-37
As of December 31, 2016
Quoted Prices Significant
In Active
Markets for
Identical Assets
(Level 1)
Other
Observable Unobservable
Significant
Inputs
(Level 2)
Inputs
(Level 3)
$
6
$
—
$
—
225
84
90
73
139
462
85
—
—
194
1,358
$
$
—
—
—
—
—
—
78
65
40
—
183
$
—
—
—
—
—
—
—
—
—
—
—
(In thousands)
Cash and cash equivalents
Equities:
U.S. common stocks
International stocks
Funds:
U.S. mid cap
U.S. large cap
Emerging markets
International
Fixed Income:
U.S. treasury and government agency securities
Corporate and municipal bonds
Mortgage/asset-backed securities
Mutual funds
Total plan assets in the fair value hierarchy
Common Collective Trusts measured at NAV: (1)
Short-term investments (2)
Equities:
U.S. small cap
U.S. large cap
Emerging markets
International
Fixed Income
Total plan assets
Benefit payments payable
Other liabilities (3)
Net plan assets
Total
$
6
225
84
90
73
139
462
163
65
40
194
1,541
71
98
136
76
149
506
2,577
(263)
(28)
$ 2,286
(1) Certain investments that are measured at fair value using NAV per share as a practical expedient have not been categorized in the
fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy
to the total plan assets.
(2) Short-term investments include investment in a common collective trust which is principally comprised of certificates of deposit,
commercial paper and U.S. government obligations with maturities less than one year.
(3) Net amount due for securities purchased and sold.
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 $26.9 million to our
Pension Plans and $10.0 million to our other post-retirement plans in 2018.
F-38
Estimated Future Benefit Payments
As of December 31, 2017, benefit payments expected to be paid over the next ten years are outlined in the following table:
(In thousands)
2018
2019
2020
2021
2022
2023 - 2027
Defined Contribution Plans
$
Pension
Plans
Other
Post-retirement
Plans
33,006 $
34,746
35,598
36,839
37,727
203,525
10,013
9,418
9,238
8,822
8,295
35,131
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 $9.6 million, $6.5 million and $6.9 million in 2017, 2016 and 2015, respectively.
The increase in 2017 is attributable to the acquisition of FairPoint which accounted for $3.8 million of the total expense.
10. INCOME TAXES
Income tax expense (benefit) 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 (benefit)
For the Year Ended
2016
2017
2015
$
$
1,055
145
1,200
1,390
709
2,099
$
(3,708)
655
(3,053)
(141,726)
15,599
(126,127)
$ (124,927)
20,087
776
20,863
$ 22,962
$
4,321
1,507
5,828
2,775
The following is a reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December
31, 2017, 2016 and 2015:
(In percentages)
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
Change in deferred tax rate - Federal Tax Reform
Valuation allowance
Provision to return
Sale of stock in subsidiary
Non deductible goodwill
Other
F-39
For the Year Ended
2017
2016
2015
35.0 % 35.0 % 35.0 %
2.9
—
0.9
—
(4.0)
—
1.6
0.3
(37.9)
—
10.8
(8.2)
91.9
—
43.4
(1.5)
—
—
(1.6)
4.1
(5.8)
0.2
—
(9.1)
189.4
(4.3)
—
—
—
—
19.1
3.8
0.6
209.5 % 60.2 % 131.9 %
Deferred Taxes
The components of the net deferred tax liability are as follows:
(In thousands)
Non-current deferred tax assets:
Reserve for uncollectible accounts
Accrued vacation pay deducted when paid
Accrued expenses and deferred revenue
Net operating loss carryforwards
Pension and postretirement obligations
Share-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
Other
Net non-current deferred taxes
Year Ended December 31,
2017
2016
$
1,757
4,594
12,256
83,278
91,311
—
(164)
199
10,112
—
203,343
(8,103)
195,240
$
1,090
2,286
7,687
13,068
50,353
189
80
492
5,383
22
80,650
(1,775)
78,875
(99,460)
140
(14,645)
(285,996)
(4,999)
(404,960)
$ (209,720)
(36,558)
(38)
(22,360)
(264,217)
—
(323,173)
$ (244,298)
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), was signed into law on December 22, 2017, making significant
changes to the U.S. tax law. The new tax legislation contains several key tax provisions including, but not limited to, a
reduction of the corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, as
well as a variety of other changes including acceleration of expensing of certain business assets acquired and placed in
service after September 27, 2017, limitation of the tax deductibility of interest expense, and reductions in the amount of
executive pay that could qualify as a tax deduction. The Company has calculated the provisional amount of the impact of
the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available
as of the date of this filing and as a result has recorded a non-cash tax benefit estimate of $112.9 million (corresponding
federal and state impact is $(123.0) million and $10.1 million, respectively) as a reduction in income tax expense in the
fourth quarter of 2017. This provisional income tax benefit reflects the impact of re-measurement of the Company’s
deferred tax assets and liabilities to the enacted tax rate at which the balances are expected to reverse. In addition, we
recorded valuation allowances of $0.9 million against state NOL and state tax credit carryforwards that we no longer expect
to be able to realize based upon the Tax Act and new information evaluated in the fourth quarter of 2017. The provisional
tax impact of the Tax Act is based on a preliminary review of the new law and is subject to revision based upon further
analysis of the Tax Act. The Company’s re-measurement of deferred tax assets and liabilities is provisional along with the
reversal of certain deferred tax balances including but not limited to fixed assets and stock compensation. We will continue
to analyze information and evaluate aspects of the Tax Act and the impact to our deferred tax assets and liabilities.
Additionally, there is currently uncertainty as to what portions, if any, of the Tax Act will be adopted by the U.S. state and
local taxing authorities. The state tax implications of the Tax Act are provisional and are subject to further analysis as
guidance is published by the states in response to the Tax Act. Additional time is needed to gather the information necessary
to finalize the computations of the impact of the Tax Act. The changes included in the Tax Act are broad and complex.
The impact of the Tax Act may differ from the above estimate due to, among other things, changes in interpretations of
the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting
standards for income taxes or related interpretations in response to the Tax Act, regulatory guidance that may be issued,
or any updates or changes to estimates the Company has utilized to calculate the impacts.
F-40
ASC 740 requires us to recognize the effect of the tax law changes in the period of enactment. However, on December 22,
2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 will allow us to record
provisional amounts during a measurement period which is similar to the measurement period used when accounting for
business combinations. SAB 118 would allow for a measurement period of up to one year after the enactment date of the
Tax Act to finalize the recording of the related tax impacts. Any subsequent adjustment to these amounts will be recorded
to tax expense in 2018 when the analysis is complete.
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 NOL carryforward, partial
utilization of the state NOL carryforwards and partial utilization of the state credit 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 as of December 31, 2017 of $296.5 million and related deferred tax assets of
$62.3 million. The federal NOL carryforwards expire from 2018 to 2036.
ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL carryforwards
as of December 31, 2017 of $1.4 million and related deferred tax assets of $0.3 million. ETFL’s federal NOL carryforwards
expire from 2021 to 2024.
We estimate that we have available state NOL carryforwards as of December 31, 2017 of $305.5 million and related
deferred tax assets of $20.6 million. The state NOL carryforwards expire from 2018 to 2038. Management believes that
it is more likely than not that we will not be able to realize state NOL carryforwards of $89.7 million and related deferred
tax asset of $6.2 million and have placed a valuation allowance on this amount. The related NOL carryforwards expire
from 2018 to 2036. 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.
We estimate that we have available federal alternative minimum tax (“AMT”) credit carryforwards as of December 31,
2017 of $2.9 million and related deferred tax assets of $2.9 million. The newly enacted Tax Act repeals the AMT regime
for tax years beginning after December 31, 2017. The remaining AMT credit carryforward will be fully refundable to the
Company in future tax years based on the provisions of the Tax Act.
We estimate that we have available state tax credit carryforwards as of December 31, 2017 of $9.9 million and related
deferred tax assets of $7.2 million. The state tax credit carryforwards are limited annually and expire from 2018 to 2027.
Management believes that it is more likely than not that we will not be able to realize state tax carryforwards of $2.7
million and related deferred tax asset of $1.9 million and has placed a valuation allowance on this amount. The related
state tax credit carryforwards expire from 2018 to 2022. 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.
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
F-41
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, 2017 and 2016 were $4.3 million and $0.1 million, respectively. The
net increase of $4.3 million to unrecognized tax benefits in 2017 was primarily due to the acquisition of FairPoint and was
recorded in purchase accounting. There were no material effects on the Company’s effective tax rate. The net amount of
unrecognized benefits that, if recognized, would result in an impact to the effective rate is $4.1 million compared to less
than $0.1 million in 2016.
Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and
administrative expense, respectively. During 2017 and 2016, we did not have a material liability for interest or penalties
and had no material interest or penalty expense.
The periods subject to examination for our federal return are years 2014 through 2016. The periods subject to examination
for our state returns are years 2013 through 2016. In addition, prior tax years may be subject to examination by federal or
state taxing authorities if the Company's NOL carryovers from those prior years are utilized in the future. We are currently
under examination by a state taxing authority. We do not expect any settlement or payment that may result from the
examination to have a material effect on our results or cash flows.
We do not expect that the total unrecognized tax benefits and related accrued interest will significantly change due to the
settlement of audits or the expiration of statute of limitations in the next twelve months. The net increase of $4.3 million
to unrecognized tax benefits in 2017 was primarily due to the acquisition of FairPoint. There were no material effects on
the Company’s effective tax rate.
The following is a reconciliation of the unrecognized tax benefits for the years ended December 31, 2017 and 2016:
(In thousands)
Balance at January 1
Additions for tax positions related to FairPoint acquisition
Reduction for tax positions of prior years
Reduction for lapse of state statute of limitations
Balance at December 31
Liability for
Unrecognized
Tax Benefits
2017
2016
$
64
4,296
(64)
—
$ 4,296
$
$
66
—
—
(2)
64
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.
As of December 31, 2017, 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:
(in thousands)
Operating lease agreements
Capital lease agreements
Capital expenditures (1)
Service and support agreements (2)
Transport and data connectivity
Total
2018
$ 15,151
11,346
13,081
32,229
13,603
$ 85,410
2019
$ 12,025
8,636
1,371
22,604
12,660
$ 57,296
Minimum Annual Contractual Obligations
2021
$ 5,377
468
1,226
2,570
6,817
$ 16,458
2022
$ 3,088
24
—
188
6,097
$ 9,397
2020
$ 9,144
3,416
2,225
14,404
8,868
$ 38,057
$ 8,641
—
—
540
5,733
$ 14,914
$ 53,426
23,890
17,903
72,535
53,778
$ 221,532
Thereafter Total
(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.
F-42
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 $18.0 million, $12.7 million and $12.1 million for the years ended December 31, 2017, 2016,
and 2015, respectively.
Capital Leases
We lease certain facilities and equipment under various capital lease arrangements, all of which expire between 2018 and
2022. As of December 31, 2017, the present value of the minimum remaining lease commitments, net of imputed interest
of $2.2 million, was approximately $23.9 million, of which $11.3 million was due and payable within the next twelve
months. See Note 12 for information regarding the capital leases we have entered into with related parties.
Litigation, Regulatory Proceedings and Other Contingencies
Access Charges
In 2014, Sprint Communications Company L.P. (“Sprint”) along with MCI Communications Services, Inc. and Verizon
Select Services Inc. (collectively, “Verizon”) filed lawsuits against certain entities of the Company including FairPoint,
and many other Local Exchange Carriers (collectively, “LECs”) throughout the country challenging the switched access
charges LECs assessed Sprint and Verizon, as interexchange carriers (“IXCs”), for certain calls originating from or
terminating to mobile devices that are routed to or from these LECs through these IXCs. The plaintiffs’ position is based
on their interpretation of federal law, among other things, and they are seeking refunds of past access charges paid for such
calls. The disputed amounts total $4.8 million and cover periods dating back as far as 2006. CenturyLink, Inc. and its
LEC subsidiaries (collectively “CenturyLink”), requested that the U.S. Judicial Panel on Multidistrict Litigation (the
“Panel”), which has the authority to transfer the pretrial proceedings to a single court for multiple civil cases involving
common questions of fact, transfer and consolidate these cases in one court. The Panel granted CenturyLink’s request and
ordered that these cases be transferred to and centralized in the U.S. District Court for the Northern District of Texas (the
“U.S. District Court”). On November 17, 2015, the U.S. District Court dismissed these complaints based on its
interpretation of federal law and held that LECs could assess switched access charges for the calls at issue (the “November
2015 Order”). The November 2015 Order also allowed the plaintiffs to amend their complaints to assert claims that arise
under state laws independent of the dismissed claims asserted under federal law. While Verizon did not make such a filing,
on May 16, 2016, Sprint filed amended complaints and on June 30, 2016, the LEC defendants named in such complaints
filed, among other things, a Joint Motion to Dismiss them, which the U.S. District Court granted on May 3, 2017.
Relatedly, in 2016, numerous LECs across the country, including a number of our LEC entities and FairPoint, filed
complaints in various U.S. district courts against Level 3 Communications, LLC and certain of its affiliates (collectively,
“Level 3”) for its failure to pay access charges for certain calls that the November 2015 Order held could be assessed by
LECs. The total amount of the Company’s LEC entities including FairPoint, seek from Level 3 in this proceeding is at
least approximately $1.6 million, excluding late payment charges/penalties and attorneys’ fees. These complaint cases
were transferred to and included in the above-referenced consolidated proceeding before the U.S. District Court. Level 3
filed a Motion to Dismiss these complaints that, in part, repeated arguments the November 2015 Order rejected. On March
22, 2017, the U.S. District Court denied Level 3’s Motion to Dismiss (“March 2017 Order”).
The U.S. District Court has adopted scheduling orders in the consolidated cases on how the claims at issue (“intraMTA
claims”) would be addressed in upcoming aspects of the proceeding. While the parties are seeking the Court’s assistance
to address certain open issues during this phase of the proceeding, once the proceeding before the U.S. District Court on
the intraMTA claims becomes final, including resolution of any related counterclaims, Sprint, Verizon, and Level 3 are
expected to appeal the U.S. District Court’s November 2015 and March 2017 Orders. Absent a decision by an appellate
F-43
court that overturns these orders, it could be difficult for Sprint or Verizon to succeed on its claims against us or for Level
3 to avoid paying the access charges it disputes in this litigation. Therefore, we do not expect any potential settlement or
judgment to have a material adverse impact on our financial results or cash flows.
Gross Receipts Tax
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
Receipts Tax, and/or have had audits performed for the tax years of 2008 through 2016. In addition, a re-audit was
performed on CCPA for the 2010 calendar year.
Pennsylvania generally imposes tax on the gross receipts received from telephone messages transmitted wholly within the
state and telephone messages transmitted in interstate commerce where such messages originate or terminate in
Pennsylvania, and the charges for such messages are billed to a service address in the state. In a 2013 decision involving
Verizon Pennsylvania, Inc. (“Verizon Pennsylvania”), the Commonwealth Court of Pennsylvania held that the gross
receipts tax applies to Verizon Pennsylvania’s installation of private phone lines because the sole purpose of private lines
is to transmit messages. Similarly, the court held that directory assistance is subject to the gross receipts tax because it
makes the transmission of messages more effective and satisfactory. However, the court did not find Verizon
Pennsylvania’s nonrecurring charges for the installation of telephone lines, moves of and changes to telephone lines and
services and repairs of telephone lines to be subject to the gross receipts tax as no telephone messages are transmitted when
Verizon Pennsylvania performs these nonrecurring services.
In November 2015, on appeal, the Supreme Court of Pennsylvania held in Verizon Pennsylvania, Inc. v. Commonwealth
of Pennsylvania, 127 A.3d 745 (Pa. 2015), that charges for the installation of private phone lines, charges for directory
assistance and certain nonrecurring charges were all subject to the state’s gross receipt tax. The Supreme Court of
Pennsylvania found that all of the services, including those related to nonrecurring charges, in some way made transmission
more effective or communication more satisfactory even though such services did not involve actual transmission. This
is a partial reversal of the 2013 Commonwealth Court of Pennsylvania decision described above, which had ruled that
while the charges for the installation of private phone lines and directory assistance were subject to the state’s gross receipts
tax, the nonrecurring charges in question were not. As neither reargument nor reconsideration was sought, the Verizon
Pennsylvania case is now final.
For our CCES and CCPA subsidiaries, the total additional tax liability calculated by the DOR auditors for the calendar
years 2008 through 2013, including interest, is approximately $4.3 million and $5.1 million, respectively. In May 2016,
the Commonwealth of Pennsylvania Board of Finance and Revenue reviewed our appeals of the cases for the audits in
calendar years 2008 through 2013 and held that the charges in question were subject to the state’s gross receipts tax. In
June 2016, we filed appeals with the Pennsylvania Commonwealth Court for the audits in calendar years 2008 through
2013, captioned as Consolidated Communications Enterprise Services, Inc. v. Commonwealth of Pennsylvania, Nos. 400
through 411 FR 2016 and Consolidated Communications of Pennsylvania Company, LLC v. Commonwealth of
Pennsylvania, Nos. 422 through 432 FR 2016. These appeals are presently in the fact development stage, with further
joint status reports to be filed with the Commonwealth Court in March 2018.
In October and December 2016, CCPA and CCES received Audit Assessment Notices from the DOR increasing the
amounts owed for Pennsylvania Gross Receipts Tax for the 2014 tax year. The total additional tax liability calculated by
the DOR auditors for CCPA and CCES for 2014, including interest, is approximately $0.8 million and $0.9 million,
respectively. We filed Petitions for Reassessment with the DOR’s Board of Appeals in January 2017 for CCPA and in
March 2017 for CCES, contesting these audit assessments. By Interlocutory Orders issued in April 2017, the Board stayed
the matters pending final action of the Commonwealth Court in litigation involving the same issues related to CCPA’s and
CCES’s 2008 through 2013 tax periods.
In May and September 2017, CCES and CCPA received Audit Assessment Notices from the DOR increasing the amounts
owed for Pennsylvania Gross Receipts Tax for the 2015 tax year. The total additional tax liability calculated by the DOR
auditors for CCES and CCPA for 2015, including interest, is approximately $0.7 million for each subsidiary. We filed
Petitions for Reassessment with the DOR’s Board of Appeals in May 2017 for CCES and in November 2017 for CCPA,
contesting these audit assessments. By Interlocutory Orders issued in August 2017 and November 2017, the Board stayed
F-44
the CCES and CCPA matters pending final action of the Commonwealth Court in litigation involving the same issues
related to CCES’s and CCPA’s 2008 through 2013 tax periods.
In December 2017, CCES and CCPA received audit schedules from the DOR increasing the amounts owed for
Pennsylvania Gross Receipts Tax for the 2016 tax year. The total additional tax liability calculated by the DOR auditors
for CCES and CCPA for 2016, including interest, is approximately $0.5 million and $0.7 million, respectively. We expect
to appeal the audit findings for each subsidiary when the respective Audit Assessment Notices are issued.
In May 2017, we entered into an agreement to guarantee any potential liability to the DOR up to $5.0 million. However,
we believe that certain of the DOR’s findings regarding the Company’s additional tax liability for the calendar years 2008
through 2015, for which we have filed appeals, continue to lack merit. Nevertheless, in light of the Supreme Court of
Pennsylvania’s Verizon Pennsylvania decision, we have accrued $1.6 million and $1.4 million, including interest, for our
CCES and CCPA subsidiaries, respectively. These accruals also include the Company’s best estimate of the potential
2016 and 2017 additional tax liabilities. We do not believe that the outcome of these claims will have a material adverse
impact on our financial results or cash flows.
In January 2018, CCES and CCPA submitted initial settlement offers to the Pennsylvania Office of Attorney General
proposing to settle the intrastate and interstate cases at a reduced tax liability of the total assessed tax liability under dispute
for the calendar years 2008 through 2013. The settlement offers are currently under review and consideration by the
Commonwealth Court. We expect to receive responses to our offers during the second quarter of 2018. While we continue
to believe a settlement of all disputed claims is possible, we cannot anticipate at this time what the ultimate resolution of
these cases will be, nor can we evaluate the likelihood of a favorable or unfavorable outcome or the potential losses (or
gains) should such an outcome occur.
From time to time, we may be involved in litigation that we believe is of the type common to companies in our industry,
including regulatory issues. While the outcome of these claims cannot be predicted with certainty, we do not believe that
the outcome of any of these legal matters will have a material adverse impact on our business, results of operations,
financial condition or cash flows.
12. RELATED PARTY TRANSACTIONS
Capital Leases
Richard A. Lumpkin, a member of our Board of Directors, together with his family, beneficially owned 37.0% of
Agracel, Inc. (“Agracel”), a real estate investment company, at December 31, 2017 and 2016. 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 68.5% beneficial ownership of LATEL at December 31, 2017 and 2016.
As of December 31, 2017, 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, 2017 and 2016 was approximately $2.2 million and $2.7 million, respectively. We
recognized $0.3 million in interest expense in 2017 and $0.4 million in interest expense in each of 2016 and 2015 and
amortization expense of $0.4 million in 2017, 2016 and 2015 related to the capitalized leases.
Long-Term Debt
A portion of the 2020 Notes was sold to accredited investors consisting of certain members of the Company’s Board of
Directors or a trust of which a director is the beneficiary (“related parties”). In May 2012, the related parties purchased
$10.8 million of the 2020 Notes on the same terms available to other investors, except that the related parties were not
entitled to registration rights. In 2015, the 2020 Notes were fully redeemed and we paid an early redemption premium of
$1.5 million and recognized approximately $0.7 million in interest expense in the aggregate for the 2020 Notes purchased
F-45
by related parties. In September 2014, $5.0 million of the 2022 Notes were sold to a trust, the beneficiary of which is a
member of the Company’s Board of Directors and we recognized approximately $0.3 million in each of 2017 and 2016 in
interest expense for the 2022 Notes purchased by the related party.
Other Services
Mr. Lumpkin also has a minority ownership interest in First Mid-Illinois Bancshares, Inc. (“First Mid-Illinois”). We
provide telecommunication products and services to First Mid-Illinois and we received approximately $0.7 million in each
of 2017 and 2016 and $0.8 million in 2015 for these services.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2017
Net revenues
Operating income (loss)
Net income (loss) attributable to common stockholders
Basic and diluted earnings (loss) per share
2016
Net revenues
Operating income
Net income (loss) attributable to common stockholders
Basic and diluted earnings (loss) per share
Quarter Ended
March 31, June 30,
September 30, December 31,
(In thousands, except per share amounts)
$ 169,935
$ 18,587
(3,685)
$
(0.07)
$
$ 169,950
$ 21,578
(2,728)
$
(0.06)
$
$ 363,329
$
(7,998)
$ (28,448)
(0.41)
$
$ 356,360
6,487
$
99,806
$
1.41
$
March 31, June 30,
September 30, December 31,
Quarter Ended
$ 188,846
$ 24,310
7,849
$
0.15
$
(In thousands, except per share amounts)
$
$
$
$
$ 191,541
22,736
$
7,012
$
0.14
$
$ 186,871
$ 22,954
76
$
$
—
175,919
17,440
(6)
—
On December 22, 2017, the Tax Act was enacted as discussed in Note 10 and, as a result, we recorded a non-cash tax
benefit estimate of $112.9 million as a reduction in income tax expense in the fourth quarter of 2017.
During the third quarter of 2017, we acquired all the issued and outstanding shares of FairPoint in exchange for shares of
our common stock. FairPoint’s results of operations have been included in our consolidated financial statements as of the
acquisition date of July 3, 2017. As result of the FairPoint acquisition, we incurred transaction costs of $1.5 million, $1.7
million, $27.0 million and $2.8 million during the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and
December 31, 2017, respectively.
In December 2016, in connection with the acquisition of FairPoint, we secured committed debt financing through a $935.0
million incremental term loan facility, as described in Note 6. In connection with entering into the committed financing,
we incurred ticking fees and the amortization of commitment fees of $1.2 million, $11.4 million, $13.3 million and $6.2
million during quarters ended December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, respectively.
In October 2016, we amended our Credit Agreement to restate and amend our term loan credit facilities as described in
Note 6. In connection with entering into the Third Amended and Restated Credit Agreement, we incurred a loss on the
extinguishment of debt of $6.6 million during the quarter ended December 31, 2016.
14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Consolidated Communications, Inc. is the primary obligor under the unsecured Senior Notes. We and substantially all of
our subsidiaries, including our FairPoint subsidiaries, 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, 2017 and 2016, and condensed consolidating statements of
operations and cash flows for the years ended December 31, 2017, 2016 and 2015 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-46
Condensed Consolidating Balance Sheets
(amounts in thousands)
Parent
Subsidiary
Issuer
Guarantors Non-Guarantors Eliminations Consolidated
December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Income taxes receivable
Prepaid expenses and other current assets
Assets held for sale
$
Total current assets
— $
—
20,275
—
—
20,275
8,919 $
—
—
—
—
8,919
6,738 $
— $
— $
114,303
1,571
33,188
—
155,800
7,701
—
130
21,310
29,141
(476)
—
—
—
(476)
15,657
121,528
21,846
33,318
21,310
213,659
Property, plant and equipment, net
—
—
1,972,190
65,416
—
2,037,606
Intangibles and other assets:
Investments
Investments in subsidiaries
Goodwill
Other intangible assets
Advances due to/from affiliates, net
Deferred income taxes
Other assets
—
3,643,930
—
—
—
21,244
—
8,495
2,133,049
2,441,690
—
1,307
100,363
35,374
971,851
297,696
555,332
—
12,844
Total assets
$ 3,685,449 $ 4,593,460 $ 4,101,450 $
—
—
66,181
9,087
92,615
—
37
108,858
—
1,038,032
306,783
—
—
14,188
262,477 $ (8,923,710) $ 3,719,126
—
(5,812,353)
—
—
(3,089,637)
(21,244)
—
LIABILITIES AND SHAREHOLDERS’
EQUITY
Current liabilities:
Accounts payable
Advance billings and customer deposits
Dividends payable
Accrued compensation
Accrued interest
Accrued expense
Current portion of long term debt and capital
lease obligations
Liabilities held for sale
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
$
— $
—
27,418
—
—
107
— $
—
—
—
8,824
504
24,143 $
41,026
—
48,795
519
70,976
—
—
27,525
18,350
—
27,678
—
3,089,637
—
—
—
3,117,162
2,298,970
—
750
—
1,761
2,329,159
11,150
—
196,609
12,139
—
209,116
315,129
31,030
764,023
— $
1,500
—
975
—
930
196
1,003
4,604
— $
—
—
—
—
(476)
—
—
(476)
24,143
42,526
27,418
49,770
9,343
72,041
29,696
1,003
255,940
405
—
21,098
19,064
1,026
46,197
—
(3,089,637)
(21,244)
—
—
(3,111,357)
2,311,514
—
209,720
334,193
33,817
3,145,184
708
567,579
—
2,264,301
17,411
3,314,361
30,000
186,280
(47,411)
(5,764,942)
708
567,579
568,287
—
568,287
2,264,301
—
2,264,301
$ 3,685,449 $ 4,593,460 $ 4,101,450 $
3,331,772
5,655
3,337,427
568,287
216,280
5,655
—
573,942
216,280
262,477 $ (8,923,710) $ 3,719,126
(5,812,353)
—
(5,812,353)
F-47
Parent
Subsidiary
Issuer
Guarantors Non-Guarantors Eliminations Consolidated
December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Income taxes receivable
Prepaid expenses and other current assets
$
Total current assets
— $
—
20,756
—
20,756
27,064 $
—
—
12,856
39,920
13 $
— $
48,911
885
15,310
65,119
7,347
(25)
126
7,448
Property, plant and equipment, net
—
—
999,416
55,770
— $
(42)
—
—
(42)
27,077
56,216
21,616
28,292
133,201
—
1,055,186
Intangibles and other assets:
Investments
Investments in subsidiaries
Goodwill
Other intangible assets
Advances due to/from affiliates, net
Deferred income taxes
Other assets
—
2,192,556
—
—
—
17,150
—
8,338
2,019,692
—
—
1,524,906
—
1,562
97,883
14,279
690,696
22,525
427,720
—
8,058
Total assets
$ 2,230,462 $ 3,594,418 $ 2,325,696 $
—
—
66,181
9,087
87,171
—
41
106,221
—
756,877
31,612
—
—
9,661
225,698 $ (6,283,516) $ 2,092,758
—
(4,226,527)
—
—
(2,039,797)
(17,150)
—
LIABILITIES AND SHAREHOLDERS’
EQUITY
Current liabilities:
Accounts payable
Advance billings and customer deposits
Dividends payable
Accrued compensation
Accrued interest
Accrued expense
Current portion of long term debt and
capital lease obligations
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
$
— $
—
19,605
—
—
36
— $
—
—
—
10,824
15,057
6,766 $
24,981
—
16,002
436
38,192
—
19,641
9,000
34,881
5,735
92,112
—
2,039,797
—
1,365,820
—
984
—
70
2,059,508
—
216
1,401,901
10,332
—
232,668
109,185
13,807
458,104
— $
1,457
—
969
—
880
187
3,493
— $
—
—
—
—
(42)
6,766
26,438
19,605
16,971
11,260
54,123
—
(42)
14,922
150,085
602
—
27,796
—
(2,039,797)
(17,150)
21,608
480
53,979
—
—
(2,056,989)
1,376,754
—
244,298
130,793
14,573
1,916,503
506
170,448
506
170,448
—
2,192,517
17,411
1,844,880
30,000
141,719
(47,411)
(4,179,116)
170,954
—
170,954
2,192,517
—
2,192,517
$ 2,230,462 $ 3,594,418 $ 2,325,696 $
1,862,291
5,301
1,867,592
170,954
171,719
5,301
—
176,255
171,719
225,698 $ (6,283,516) $ 2,092,758
(4,226,527)
—
(4,226,527)
F-48
Condensed Consolidating Statements of Operations
(amounts in thousands)
Year Ended December 31, 2017
Net revenues
Operating expenses:
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative expenses
Acquisition 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) before income taxes
Income tax expense (benefit)
Net income (loss)
Less: net income attributable to noncontrolling
interest
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.
Subsidiary
Issuer
Parent
$
— $
Guarantors Non-Guarantors Eliminations Consolidated
1,059,574
— $ 1,013,505 $
(12,707) $
58,776 $
—
1,924
33,650
—
(35,574)
—
30
—
—
(30)
(12)
—
—
101,863
—
66,277
1,332
64,945
(128,737)
58,909
157
109,015
3
39,317
(27,610)
66,927
447,247
234,438
—
280,843
50,977
(1,183)
(58,827)
31,592
1,918
(236)
24,241
(97,667)
121,908
11,094
13,371
—
11,030
23,281
146
(82)
—
—
(12)
23,333
(982)
24,315
(12,276)
(431)
—
—
—
—
—
—
(212,796)
—
(212,796)
—
(212,796)
—
—
354
—
—
$ 64,945 $
66,927 $
121,554 $
24,315 $
(212,796) $
446,065
249,332
33,650
291,873
38,654
(129,786)
—
31,749
—
(245)
(59,628)
(124,927)
65,299
354
64,945
Total comprehensive income (loss) attributable to
common shareholders
$ 64,139 $ 71,746 $ 119,174 $
25,381 $
(216,301) $
64,139
F-49
Net revenues
Operating expenses:
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative expenses
Acquisition and other transaction costs
Loss on 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) before income taxes
Income tax expense (benefit)
Net income (loss)
Less: net income attributable to noncontrolling interest
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.
Year Ended December 31, 2016
Subsidiary
Issuer
Parent
— $
$
Guarantors Non-Guarantors Eliminations Consolidated
743,177
(13,150) $
58,785 $
(15) $ 697,557 $
—
3,331
1,214
—
—
(4,545)
—
7
—
—
—
(22)
323,112
141,533
—
610
164,577
67,725
46
(63,773)
—
—
58,208
—
(10,064)
(24,995)
14,931
—
(76,213)
97,102
(6,559)
166
56,600
(328)
70,746
12,538
58,208
—
(694)
(34,846)
—
32,806
711
1,478
67,180
25,807
41,373
265
12,401
12,669
—
—
9,433
24,282
35
1,517
—
—
—
(19)
25,815
9,612
16,203
—
(12,721)
(429)
—
—
—
—
—
—
—
—
(115,519)
—
(115,519)
—
(115,519)
—
$ 14,931 $ 58,208 $
41,108 $
16,203 $
(115,519) $
322,792
157,111
1,214
610
174,010
87,440
(76,826)
—
(6,559)
32,972
—
1,131
38,158
22,962
15,196
265
14,931
Total comprehensive income (loss) attributable to
common shareholders
$ 3,353 $ 46,630 $
30,442 $
14,744 $
(91,816) $
3,353
Year Ended December 31, 2015
Net revenues
Operating expenses:
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative expenses
Acquisition 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) before income taxes
Income tax expense (benefit)
Net income (loss)
Less: net income attributable to noncontrolling
interest
Net income (loss) attributable to Consolidated
Communications Holdings, Inc.
Subsidiary
Issuer
Parent
$
— $
Guarantors Non-Guarantors Eliminations Consolidated
775,737
728,910 $
(13,388) $
60,094 $
121 $
—
3,160
1,413
—
(4,573)
—
150
—
—
(29)
(104)
(153,713)
—
—
93,391
—
(64,999)
(64,118)
(881)
(79,680)
166,838
(41,242)
326
64,812
(26)
110,999
17,608
93,391
328,714
156,380
—
171,232
72,584
154
(15,917)
—
36,364
567
(1,346)
92,406
40,346
52,060
12,567
19,044
—
8,690
19,793
12
2,792
—
—
—
(129)
22,468
8,939
13,529
(12,881)
(507)
—
—
—
—
—
—
—
(158,770)
—
(158,770)
—
(158,770)
—
—
210
—
—
$
(881) $
93,391 $
51,850 $
13,529 $
(158,770) $
328,400
178,227
1,413
179,922
87,775
(79,618)
—
(41,242)
36,690
—
(1,501)
2,104
2,775
(671)
210
(881)
Total comprehensive income (loss) attributable to
common shareholders
$
(4,940) $ 89,332 $
48,434 $
13,105 $
(150,871) $
(4,940)
F-50
Condensed Consolidating Statements of Cash Flows
(amounts in thousands)
Year Ended December 31, 2017
Net cash (used in) provided by operating activities
$
(23,237)
Parent
Subsidiary
Issuer
(25,625)
$
Guarantors
Non-Guarantors Consolidated
$
235,810
$
23,079
$
210,027
Cash flows from investing activities:
Business acquisition, net of cash acquired
Purchases of property, plant and equipment
Proceeds from sale of assets
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
Share repurchases for minimum tax withholding
Dividends on common stock
Transactions with affiliates, net
Other
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(862,385)
—
—
(862,385)
—
—
—
—
—
(167,187)
829
(166,358)
—
(13,998)
30
(13,968)
(862,385)
(181,185)
859
(1,042,711)
—
—
—
—
(571)
(94,138)
980,681
(350)
885,622
—
—
—
1,052,325
—
(111,337)
(16,732)
—
—
(916,776)
—
7,480
(18,145)
27,064
8,919
$
$
$
—
(7,746)
—
—
—
—
(54,981)
—
(62,727)
6,725
13
6,738
$
—
(187)
—
—
—
—
(8,924)
—
(9,111)
—
—
—
1,052,325
(7,933)
(111,337)
(16,732)
(571)
(94,138)
—
(350)
821,264
(11,420)
27,077
15,657
$
Year Ended December 31, 2016
Net cash (used in) provided by operating activities
$
(23,634)
$
13,315
Parent
Subsidiary
Issuer
Guarantors Non-Guarantors Consolidated
218,233
200,098
28,454
$
$
$
Cash flows from investing activities:
Business acquisition, net of cash acquired
Purchases of property, plant and equipment
Proceeds from sale of assets
Proceeds from business disposition
Net cash provided by (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
Share repurchases for minimum tax withholding
Dividends on common stock
Transactions with affiliates, net
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(13,422)
—
—
30,119
16,697
—
—
—
—
—
—
—
—
—
(1,231)
(78,419)
86,587
6,937
—
—
—
936,750
—
(943,050)
(9,912)
—
—
24,084
7,872
21,187
5,877
27,064
$
$
$
—
(111,389)
198
—
(111,191)
—
(2,743)
—
—
—
—
(93,780)
(96,523)
(7,616)
7,629
13
$
—
(13,803)
10
—
(13,793)
—
(142)
—
—
—
—
(16,891)
(17,033)
(2,372)
2,372
—
(13,422)
(125,192)
208
30,119
(108,287)
936,750
(2,885)
(943,050)
(9,912)
(1,231)
(78,419)
—
(98,747)
11,199
15,878
27,077
$
F-51
Net cash (used in) provided by operating activities
$ (119,472)
$
76,962
Parent
Issuer
Subsidiary
Year Ended December 31, 2015
Guarantors Non-Guarantors Consolidated
219,179
240,372
21,317
$
$
$
Cash flows from investing activities:
Purchases of property, plant and equipment
Proceeds from sale of assets
Proceeds from sale of investments
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from bond offering
Proceeds from issuance of long-term debt
Payment of capital lease obligation
Payment on long-term debt
Redemption of senior notes
Payment of financing costs
Share repurchases for minimum tax withholding
Dividends on 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
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,125)
(78,209)
198,806
119,472
—
—
—
294,780
69,000
—
(107,100)
(261,874)
(4,805)
—
—
(66,026)
(76,025)
937
4,940
5,877
$
$
(126,168)
13,535
846
(111,787)
—
—
(1,029)
—
—
—
—
—
(120,747)
(121,776)
6,809
820
7,629
$
(7,766)
13
—
(7,753)
—
—
(78)
—
—
—
—
—
(12,033)
(12,111)
1,453
919
2,372
(133,934)
13,548
846
(119,540)
294,780
69,000
(1,107)
(107,100)
(261,874)
(4,805)
(1,125)
(78,209)
—
(90,440)
9,199
6,679
15,878
$
F-52
Report of Independent Certified Public Accountants
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, which
comprise the statements of income and comprehensive income, changes in partners’ capital and cash flows for the year
ended December 31, 2015, 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 U.S.
generally accepted accounting principles; 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.
Auditor's 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. 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 entity'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 entity'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 results of operations
and cash flows of Pennsylvania RSA No. 6(II) Limited Partnership for the year ended December 31, 2015, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Orlando, FL
February 26, 2016
S-1
Pennsylvania RSA No. 6(II) Limited Partnership
Balance Sheets - As of December 31, 2017 and 2016
(Dollars in Thousands)
ASSETS
CURRENT ASSETS:
Due from affiliate
Accounts receivable, net of allowances of $594 and $713
Unbilled revenue
Prepaid expenses
Total current assets
PROPERTY, PLANT AND EQUIPMENT - NET
OTHER ASSETS - NET
TOTAL ASSETS
LIABILITIES AND PARTNERS’ CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities
Advance billings and other
Financing obligation
Deferred rent
Total current liabilities
LONG TERM LIABILITIES:
Financing obligation
Deferred rent
Other liabilities
Total long term liabilities
Total liabilities
PARTNERS’ CAPITAL
General Partner's interest
Limited Partners' interest
Total partners' capital
2017
(Unaudited)
2016
(Unaudited)
$
$
$
$
$
$
4,468
22,162
1,201
653
28,484
20,255
6,709
55,448
4,668
4,130
48
13
8,859
419
1,106
189
1,714
10,573
22,944
21,931
44,875
5,199
22,311
958
768
29,236
17,568
6,927
53,731
4,772
4,076
47
13
8,908
421
1,076
—
1,497
10,405
22,153
21,173
43,326
TOTAL LIABILITIES AND PARTNERS’ CAPITAL
$
55,448
$
53,731
See notes to financial statements.
S-2
Pennsylvania RSA No. 6(II) Limited Partnership
Statements of Income and Comprehensive Income – For the Years Ended
December 31, 2017, 2016, and 2015
(Dollars in Thousands)
OPERATING REVENUES:
Service revenues
Equipment revenues
Other
Total operating revenues
OPERATING EXPENSES:
Cost of service (exclusive of depreciation and
amortization)
Cost of equipment
Depreciation and amortization
Selling, general and administrative
Total operating expenses
OPERATING INCOME
INTEREST INCOME, NET
2017
2016
(Unaudited) (Unaudited)
2015
(Audited)
$
107,517 $
114,071 $
27,092
8,378
142,987
26,780
8,077
148,928
121,247
28,121
8,007
157,375
52,463
30,823
3,480
30,270
117,036
51,138
31,532
3,334
32,599
118,603
47,596
35,448
3,223
36,075
122,342
25,951
30,325
35,033
48
11
114
NET INCOME AND COMPREHENSIVE INCOME
$
25,999 $
30,336 $
35,147
Allocation of Net Income:
General Partners
Limited Partners
See notes to financial statements.
$
$
13,292 $
12,707 $
15,512 $
14,824 $
17,969
17,178
S-3
Pennsylvania RSA No. 6(II) Limited Partnership
Statements of Changes in Partners’ Capital – For the Years Ended December 31, 2017, 2016, and 2015
(Dollars in Thousands)
General Partner
Cellco
Partnership
Cellco
Partnership
Limited Partners
Consolidated
Communications
Enterprise
Services, Inc.
Venus Cellular
Telephone
Company, Inc.
Total Partners’
Capital
BALANCE—January 1, 2015
$
15,029
$
2,507
$
6,957
$
4,900
$
29,393
Distributions
Net Income
BALANCE— December 31, 2015 (Audited)
Distributions
Net Income
BALANCE— December 31, 2016 (Unaudited)
Distributions
Net Income
(13,958)
17,969
19,040
(12,399)
15,512
22,153
(12,501)
13,292
(2,329)
2,999
3,177
(2,069)
2,588
3,696
(2,086)
2,218
(6,462)
8,320
8,815
(5,740)
7,180
10,255
(5,787)
6,154
(4,551)
5,859
6,208
(4,042)
5,056
7,222
(4,076)
4,335
(27,300)
35,147
37,240
(24,250)
30,336
43,326
(24,450)
25,999
BALANCE— December 31, 2017 (Unaudited)
$
22,944
$
3,828
$
10,622
$
7,481
$
44,875
See notes to financial statements.
S-4
Pennsylvania RSA No. 6(II) Limited Partnership
Statements of Cash Flows – For the Years Ended December 31, 2017, 2016, and
2015
(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
Imputed interest on financing obligation
Provision for losses on accounts receivable
Changes in certain assets and liabilities:
Accounts receivable
Unbilled revenue
Prepaid expenses
Other assets
Accounts payable and accrued liabilities
Advance billings and other
Deferred rent
Other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Fixed asset transfers out
Change in due from affiliate
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing obligation
Repayments of financing obligation
Distributions
Net cash used in financing activities
CHANGE IN CASH
CASH—Beginning of year
CASH—End of year
2017
(Unaudited)
2016
(Unaudited
)
2015
(Audited)
$
25,999 $
30,336 $ 35,147
3,480
46
681
(532)
(243)
115
217
(204)
54
30
189
29,832
(6,996)
930
731
(5,335)
3,334
45
502
(4,677)
73
(510)
(208)
604
(321)
46
—
29,224
3,223
34
1,638
(7,698)
(70)
(15)
(4,748)
303
(724)
404
—
27,494
(2,791)
441
(2,578)
(4,928)
(6,886)
536
5,720
(630)
-
(47)
(24,450)
(24,497)
-
(46)
(24,250)
(24,296)
474
(38)
(27,300)
(26,864)
-
-
- $
-
-
- $
-
-
-
$
NONCASH TRANSACTIONS FROM INVESTING ACTIVITIES:
Accruals for capital expenditures
$
150 $
49 $
22
See notes to financial statements
S-5
Pennsylvania RSA No. 6(II) Limited Partnership
Notes to Financial Statements - Years Ended December 31, 2017, 2016, and 2015
(Dollars in Thousands)
1. ORGANIZATION AND MANAGEMENT
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 Rural Service Area 6-B2. Under the terms of the partnership
agreement, the partnership expires on January 1, 2091.
In accordance with the partnership agreement, Cellco Partnership (“Cellco”), doing
business as Verizon Wireless, a general partner of the Partnership, is responsible for
managing the operations of the Partnership (see Note 7).
The partners and their respective ownership percentages of the Partnership as of
December 31, 2017, 2016, and 2015 are as follows:
General Partner:
Cellco Partnership
Limited Partners:
Cellco Partnership
Consolidated Communications Enterprise Services, Inc.
Venus Cellular Telephone Company, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
51.13 %
8.53 %
23.67 %
16.67 %
Use of estimates – The financial statements are prepared using U.S. generally
accepted accounting principles (GAAP), which requires management to make
estimates and assumptions that affect reported amounts and disclosures. Actual
results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful accounts, the
recoverability of property, plant and equipment, unbilled revenues, fair values of
financial instruments, accrued expenses and contingencies.
Revenue recognition – The Partnership offers products and services to customers
through bundled arrangements. These arrangements involve multiple deliverables
which may include products, services, or a combination of products and services.
The Partnership earns revenue primarily by providing access to and usage of its
network as well as the sale of equipment. In general, access revenue is billed one
month in advance and recognized when earned. Usage revenue is generally billed in
S-6
arrears and recognized when service is rendered. Equipment revenue associated
with the sale of wireless devices and accessories is generally recognized when the
products are delivered to and accepted by the customer, as equipment sales is
considered to be a separate earnings process from providing wireless services. For
agreements involving the resale of third-party services in which the Partnership is
considered the primary obligor in the arrangements, the revenue is recorded gross at
the time of sale.
Under the Verizon device payment plan program, eligible wireless customers
purchase wireless devices under a device payment plan agreement. The Partnership
may offer certain promotions that allow a customer to trade in his or her owned
device in connection with the purchase of a new device. Under these types of
promotions, the customer receives a credit for the value of the trade-in device. In
addition, the Partnership may provide the customer with additional future credits that
will be applied against the customer’s monthly bill as long as service is maintained.
The Partnership recognizes a liability for the trade-in device measured at fair value,
which is approximated by considering several factors, including the weighted-
average selling prices obtained in recent resales of devices eligible for trade-in.
Future credits are recognized when earned by the customer.
From time to time, the Partnership offers certain marketing promotions that allow our
customers to upgrade to a new device after paying down a certain specified portion
of their required device payment plan agreement amount and trading in their device
in good working order. When a customer enters into a device payment plan
agreement with the right to upgrade to a new device, the Partnership accounts for
this trade-in right as a guarantee obligation. The full amount of the trade-in right’s fair
value (not an allocated value) is recognized as a guarantee liability and the
remaining allocable consideration is allocated to the device. The value of the
guarantee liability effectively results in a reduction to the revenue recognized for the
sale of the device.
In multiple element arrangements that bundle devices and monthly wireless service,
revenue is allocated to each unit of accounting using a relative selling price method.
At the inception of the arrangement, the amount allocable to the delivered units of
accounting is limited to the amount that is not contingent upon the delivery of the
monthly wireless service (the noncontingent amount). The Partnership effectively
recognizes revenue on the delivered device at the lesser of the amount allocated
based on the relative selling price of the device or the noncontingent amount owed
when the device is sold.
Roaming revenue reflects service revenue earned by the Partnership when
customers not associated with the Partnership operate in the service area of the
Partnership and use the Partnership’s network. The roaming rates with third party
carriers associated with those customers are based on agreements with such
carriers. The roaming rates and methodology to determine roaming volumes
charged by the Partnership to Cellco are established by Cellco on a periodic basis
and may not reflect current market rates (see Note 7).
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Other revenues primarily consist of certain fees billed to customers for surcharges
and elected services. The Partnership reports taxes imposed by governmental
authorities on revenue-producing transactions between the Partnership and its
customers which is passed through to the customers on a net basis. Other revenues
resulting from a cell sharing agreement, which excludes sharing of site expenses,
with Cellco are recognized based upon a rate per minute of use (see Note 7).
Operating 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 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 total subscribers, are calculated in accordance with the
Partnership agreement and are a reasonable method of allocating such costs (see
Note 7). In 2016 and 2015, allocations were principally based on the Partnership’s
percentage of certain revenue streams, total subscribers and customer gross
additions or minutes-of-use; in 2017, allocations were principally based on total
subscribers. The impact of the change in allocation factors was insignificant.
Cost of roaming, included in the cost of service, reflects costs incurred by the
Partnership when customers associated with the Partnership operate in a service
area not associated with the Partnership and use a network not associated with the
Partnership. The roaming rates with third party carriers are based on agreements
with such carriers. The roaming rates and methodology to determine roaming
volumes charged to the Partnership by Cellco are established by Cellco on a
periodic basis and may not reflect current market rates (see Note 7).
Cost of equipment is recorded upon sale of the related equipment at Cellco’s cost
basis. Inventory is wholly owned by Cellco until the moment of sale and is not
recorded in the financial statements of the Partnership.
Maintenance and repairs – The cost of maintenance and repairs, including the cost
of replacing minor items not constituting substantial betterments, is charged
principally to Cost of service as these costs are incurred.
Advertising costs – Costs for advertising products and services as well as other
promotional and sponsorship costs are charged to Selling, general and
administrative expense in the periods in which they are incurred (See Note 7).
Comprehensive income – Comprehensive income is the same as net income as
presented in the accompanying statements of income and comprehensive income.
Income taxes – On December 22, 2017 the Tax Cuts and Jobs Act (“TCJA”) was
enacted. The TCJA significantly revised the U.S. federal corporate income tax by,
among other things, lowering the corporate income tax rate to 21% and imposing
limitations on the deduction of interest expense. The Partnership is treated as a pass
S-8
through entity for income tax purposes and, therefore, is not subject to federal, state,
or local taxes. Accordingly, no provision has been recorded for income taxes in the
Partnership’s financial statements. The results of operations, including taxable
income, gains, losses, deductions and credits, are allocated to and reflected on the
income tax returns of the respective partners.
The Partnership files partnership income tax returns in the U.S. federal jurisdiction
and various state and local jurisdictions. The Partnership remains subject to
examination by tax authorities for tax years as early as 2014. It is reasonably
possible that various current tax examinations will conclude or required
reevaluations of the Partnership’s tax positions during this period. An estimate of the
range of the possible change cannot be made until these tax matters are further
developed or resolved.
Due to/from affiliate – Due to/from affiliate principally represents the Partnership’s
cash position with Cellco. Cellco manages, on behalf of the Partnership, all cash,
investing and financing activities of the Partnership. As such, the change in due
to/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, cost of equipment, administrative and operating costs incurred by
Cellco on behalf of the Partnership, as well as property, plant and equipment and
wireless license transactions with affiliates, are charged to the Partnership through
this account. Interest income on due from affiliate is based on the Applicable Federal
Rate which was approximately 1.2%, 0.7%, and 0.5% for the years ended December
31, 2017, 2016, and 2015, respectively. Interest expense on due to affiliate is
calculated by applying Cellco’s average cost of borrowing from Verizon
Communications Inc., which was approximately 4.7%, 4.8%, and 4.8% for the years
ended December 31, 2017, 2016, and 2015 respectively, to the outstanding due
to/from affiliate balance. Included in Interest income, net is interest income of $77
(Unaudited), $41 (Unaudited), and $29 for the years ended December 31, 2017,
2016, and 2015, respectively, related to due to/from affiliate.
Allowance for doubtful accounts – Accounts receivable are recorded in the
financial statements at cost, net of allowance for credit losses, with the exception of
device payment plan agreement receivables which are initially recorded at fair value
based on a number of factors including historical write-off experience, credit quality
of the customer base and other factors such as macroeconomic conditions. The
Partnership maintains allowances for uncollectible accounts receivable, including
device payment plan agreement receivables, for estimated losses resulting from the
failure or inability of customers to make required payments. The allowance for
uncollectible accounts receivable is based on Cellco’s assessment of the
collectability of each Partnership’s specific customer accounts and includes
consideration of the credit worthiness and financial condition of those customers.
The Partnership records an allowance to reduce the receivables to the amount that
is reasonably believed to be collectible. The Partnership also records an allowance
for all other receivables based on multiple factors including historical experience with
S-9
bad debts, the general economic environment and the aging of such receivables.
Similar to traditional service revenue accounting treatment, bad debt expense
related to device payment plan agreement receivables is recorded based on an
estimate of the percentage of device payment plan agreement receivables that will
not be collected. This estimate is based on a number of factors including historical
write-off experience, credit quality of the customer base and other factors such as
macroeconomic conditions. Due to the device payment plan agreement being
incorporated in the standard Verizon Wireless bill, the collection and risk strategies
continue to follow historical practices. The Partnership monitors the aging of
accounts with device payment plan agreement receivables and writes off account
balances if collection efforts are unsuccessful and future collection is unlikely.
Property, plant and equipment and Depreciation – Property, plant and equipment
are recorded at cost. Property, plant and equipment are generally depreciated on a
straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated life of the
improvement or the remaining term of the related lease, calculated from the time the
asset was placed in service.
When depreciable assets are retired or otherwise disposed of, the related cost and
accumulated depreciation are deducted from the property, plant and equipment
accounts and any gains or losses on disposition are recognized in income. Transfers
of property, plant and equipment between Cellco and affiliates are recorded at net
book value on the date of the transfer with an offsetting entry included in due to/from
affiliate.
Interest associated with the construction of network-related assets is capitalized.
Capitalized interest is reported as a reduction in interest expense and depreciated as
part of the cost of the network-related assets.
In connection with the ongoing review of estimated useful lives of property, plant and
equipment during 2016, Cellco determined that the average useful lives of certain
leasehold improvements would be increased from 5 to 7 years. This change was
immaterial to the Partnerships in 2016. Cellco determined that changes were also
necessary to the remaining estimated useful lives of certain assets as a result of
technology upgrades, enhancements, and planned retirements. While the timing and
extent of current deployment plans are subject to ongoing analysis and modification,
Cellco and the Partnership believe the current estimates of useful lives are
reasonable.
Other assets – Other assets - net primarily include long term device payment plan
agreement receivables, net of allowances of $233 (Unaudited), $214 (Unaudited),
and $317 at December 31, 2017, 2016, and 2015, respectively (see Note 3).
Impairment – All long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. If any indications were to become present, the Partnership would test
S-10
for recoverability by comparing the carrying amount of the asset group to the net
undiscounted cash flows expected to be generated from the asset group. If those net
undiscounted cash flows do not exceed the carrying amount, the next step would be
to determine the fair value of the asset and record an impairment, if any. The
Partnership re-evaluates the useful life determinations for these long-lived assets
each year to determine whether events and circumstances warrant a revision to their
remaining useful lives.
Wireless licenses – Cellco maintains wireless licenses that provide the Partnership
with the exclusive right to utilize designated radio frequency spectrum to provide
wireless communications services. While licenses are issued for only a fixed time,
generally ten years, such licenses are subject to renewal by the Federal
Communications Commission (FCC). License renewals, which are managed by
Cellco, have historically occurred routinely and at nominal cost. Moreover, Cellco
management has determined that there are currently no legal, regulatory,
contractual, competitive, economic or other factors that limit the useful life of wireless
licenses. As a result, wireless licenses are treated as an indefinite-lived intangible
asset. The useful life determination for wireless licenses is re-evaluated each year to
determine whether events and circumstances continue to support an indefinite useful
life. When evaluating for impairment, Cellco aggregates wireless licenses into one
single unit of accounting, as they are utilized on an integrated basis.
The Partnership owns a wireless license in the rural service area which has no
carrying value. The average remaining renewal period of the Partnership’s wireless
license portfolio was 2.8 years as of December 31, 2017.
Cellco on behalf of the Partnership tests the wireless licenses balance for potential
impairment annually or more frequently if impairment indicators are present. In 2017
and 2016, Cellco performed a qualitative impairment assessment to determine
whether it is more likely than not that the fair value of the wireless licenses was less
than the carrying amount. As part of the assessment, several qualitative factors were
considered including market transactions, the business enterprise value of Cellco,
macroeconomic conditions (including changes in interest rates and discount rates),
industry and market considerations (including industry revenue and EBITDA
(Earnings before interest, taxes, depreciation and amortization) margin projections),
the projected financial performance of Cellco, as well as other factors. In 2015,
Cellco performed a quantitative impairment assessment for its aggregate wireless
licenses which consisted of comparing the estimated fair value of its aggregate
wireless licenses to the aggregated carrying amount as of the test date.
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 licenses included in Cellco’s national footprint. Cellco evaluated its
wireless licenses for potential impairment as of December 15, 2017 and 2016. These
evaluations resulted in no impairment of wireless licenses.
Financial instruments – The Partnership’s trade receivables and payables are
short-term in nature, and accordingly, their carrying value approximates fair value.
S-11
Fair value measurements – Fair value of financial and non-financial assets and
liabilities is defined as 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. The three-tier hierarchy for inputs used in measuring fair value, which
prioritizes the inputs used in the methodologies of measuring fair value for assets
and liabilities, is as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Observable inputs other than quoted prices in active markets for identical
assets and liabilities
Level 3 - No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurements. The
assessment of the significance of a particular input to the fair value measurements
requires judgment, and may affect the valuation of the assets and liabilities being
measured and their categorization within the fair value hierarchy. As of December
31, 2017 and 2016, the Partnership does not have any assets or liabilities measured
at fair value on a recurring basis.
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,
which are typically made a quarter in arrears.
Recent accounting standards – In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments.” This standard update requires that certain financial assets
be measured at amortized cost net of an allowance for estimated credit losses such
that the net receivable represents the present value of expected cash collection. In
addition, this standard update requires that certain financial assets be measured at
amortized cost reflecting an allowance for estimated credit losses expected to occur
over the life of the assets. The estimate of credit losses must be based on all
relevant information including historical information, current conditions and
reasonable and supportable forecasts that affect the collectability of the amounts.
This standard update is effective as of the first quarter of 2020; however early
adoption is permitted. The Partnership is currently evaluating the impact that this
standard update will have on the financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This
standard update intends to increase transparency and improve comparability by
requiring entities to recognize assets and liabilities on the balance sheet for all
leases, with certain exceptions. In addition, through improved disclosure
requirements, the standard update will enable users of financial statements to
further understand the amount, timing, and uncertainty of cash flows arising from
S-12
leases. This standard update is effective as of the first quarter of 2019; however
early adoption is permitted. The Partnership’s current operating lease portfolio is
primarily comprised of spectrum, network, real estate, and equipment leases. Upon
adoption of this standard, the Partnership expects the balance sheet to include a
right of use asset and liability related to substantially all operating lease
arrangements. At Cellco, a cross-functional coordinated implementation team has
been established to implement the standard update related to leases. The
Partnership is in the process of determining the scope of arrangements that will be
subject to this standard as well as assessing the impact to its systems, processes
and internal controls to meet the standard update’s reporting and disclosure
requirements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with
Customers (Topic 606).” This standard, update along with related subsequently
issued updates clarifies the principles for recognizing revenue and develops a
common revenue standard for GAAP. The standard provides a more robust
framework for addressing revenue issues; improves comparability of revenue
recognition practices across entities, industries, jurisdictions, and capital markets;
and provides more useful information to users of financial statements through
improved disclosure requirements. The standard update also amends current
guidance for the recognition of costs to obtain and fulfill contracts with customers
such that incremental costs of obtaining and direct costs of fulfilling contracts with
customers will be deferred and amortized consistent with the transfer of the related
good or service. The two permitted transition methods under the new standard are
the full retrospective method, in which case the standard would be applied to each
prior reporting period presented and the cumulative effect of applying the standard
would be recognized at the earliest period shown, or the modified retrospective
method, in which case the standard is applied only to the most current period
presented and the cumulative effect of applying the standard would be recognized at
the date of initial application. In August 2015, an accounting standard update was
issued that delayed the effective date of this standard until the first quarter of 2018,
at which time the Partnership will adopt the standard using the modified
retrospective approach to open contracts. At Cellco, a cross-functional coordinated
team has been established to implement this standard. Summarized below are the
key impacts and areas requiring significant judgement arising from the initial
adoption of Topic 606.
The ultimate impact on revenue resulting from the application of the new standard is
subject to assessments that are dependent on many variables, including, but not
limited to, the terms of the contractual arrangements and mix of business. The
Partnership expects the allocation of revenue between equipment and service for
wireless subsidy contracts will result in more revenue allocated to equipment and
recognized upon delivery, and less service revenue recognized over the contract
term than under current GAAP. Total revenue over the full contract term will be
unchanged and there will be no change to customer billing, the timing of cash flows
or the presentation of cash flows.
S-13
Additionally, the new standard requires the deferral of incremental costs to obtain a
customer contract, which are then amortized to expense, as part of Selling, general
and administrative expense, over the respective periods of expected benefit. As a
result, a significant amount of our sales commission costs, which would have
historically been expensed as incurred will be deferred and amortized.
In addition, for certain contractual arrangements, the device may be sold by one
Cellco entity but the service contract is the performance obligation of another Cellco
entity. In contractual arrangements where another Cellco entity sells the device on
behalf of the Partnership, the Partnership with compensate the other Cellco entity for
obtaining the service contract. This represents an incremental cost to obtain the
service contract and will be deferred by the Partnership and recognized over the
expected benefit period. The Partnership will recognize service revenue for the
wireless service that it provides to the customer. In contractual arrangements where
the Partnership sells the device on behalf of another Cellco entity, the equipment
revenue associated with the transaction will be recognized by the Partnership, and
the Partnership will also recognize commission revenue as compensation for
obtaining the service contract on behalf of the other Cellco entity.
Subsequent events – Events subsequent to December 31, 2017 have been
evaluated through February 28, 2018, the date the financial statements were issued.
3. WIRELESS DEVICE PAYMENT PLANS
Under the Verizon device payment program, eligible wireless customers purchase
wireless devices under a device payment plan agreement. Customers that activate
service on devices purchased under the device payment program pay lower service
fees as compared to those under fixed-term service plans, and their device payment
plan charge is included on their standard wireless monthly bill. As of January 2017,
the Partnership no longer offers consumers new fixed-term service plans for phones,
however the Partnership continues to service existing plans as consumers move to
unsubsidized pricing driven by the activation of devices purchased under the Verizon
device payment program.
Wireless device payment plan agreement receivables – The following table
displays device payment plan agreement receivables, net, that continue to be
recognized in the accompanying consolidated balance sheets:
S-14
Device payment plan agreement receivables, gross
Unamortized imputed interest
Device payment plan agreement receivables, net of
unamortized imputed interest
Allowance for credit losses
Device payment plan agreement receivables, net
Classified on the balance sheets:
Accounts receivable, net
Other assets, net
Device payment plan agreement receivables, net
$
$
$
$
2017
(Unaudited)
2016
(Unaudited)
24,620 $
(1,137)
23,483
(729)
22,754
$
24,528
(1,017)
23,511
(708)
22,803
16,108 $
6,646
22,754 $
15,950
6,853
22,803
The Partnership may offer customers certain promotions that allow a customer to
trade in his or her owned device in connection with the purchase of a new device.
Under these types of promotions, the customer receives a credit for the value of the
trade-in device. In addition, the Partnership may provide the customer with additional
future credits that will be applied against the customer’s monthly bill as long as
service is maintained. The Partnership recognizes a liability for the trade-in device
measured at fair value, which is determined by considering several factors, including
the weighted-average selling prices obtained in recent resales of similar devices
eligible for trade-in. Future credits are recognized when earned by the customer.
Device payment plan agreement receivables, net does not reflect the trade-in device
liability. At December 31, 2017 and 2016, the amount of trade-in liability was
insignificant.
From time to time, the Partnership offers certain marketing promotions that allow our
customers to upgrade to a new device after paying down a certain specified portion
of the required device payment plan agreement amount as well as trading in their
device in good working order. When a customer enters into a device payment plan
agreement with the right to upgrade to a new device, the Partnership accounts for
this trade-in right as a guarantee obligation. At December 31, 2017 and 2016, the
amount of the guarantee obligation was insignificant. The amount of the guarantee
obligation was included in Advance billings and other on the accompanying balance
sheets.
At the time of sale, the Partnership imputes risk adjusted interest on the device
payment plan agreement receivables. Imputed interest is recorded as a reduction to
the related accounts receivable. Interest income, which is included within Other
revenues on the statements of income and comprehensive income, is recognized
over the financed device payment term.
When originating device payment plan agreements, the Partnership uses internal
and external data sources to create a credit risk score to measure the credit quality
of a customer and to determine eligibility for the device payment program. If a
customer is either new to the Partnership or has less than 210 days of customer
tenure (a new customer), the credit decision process relies more heavily on external
data sources. If the customer has 210 days or more of customer tenure (an existing
S-15
customer), the credit decision process relies on internal data sources. The
Partnership’s experience has been that the payment attributes of longer tenured
customers are highly predictive in estimating their ability to pay in the future. External
data sources include obtaining a credit report from a national consumer credit
reporting agency, if available. Internal data and/or credit data obtained from the
credit reporting agencies is used to create a custom credit risk score. The custom
credit risk score is generated automatically (except with respect to a small number of
applications where the information needs manual intervention) from the applicant’s
credit data using Verizon Wireless proprietary custom credit models, which are
empirically derived and demonstrably and statistically sound. The credit risk score
measures the likelihood that the potential customer will become severely delinquent
and be disconnected for non-payment. For a small portion of new customer
applications, a traditional credit report is not available from one of the national credit
reporting agencies because the potential customer does not have sufficient credit
history. In those instances, alternate credit data is used for the risk assessment.
Based on the custom credit risk score, each customer is assigned to a credit class,
each of which has a specified required down payment percentage, which ranges
from zero to 100%, and specified credit limits. Device payment plan agreement
receivables originated from customers assigned to credit classes requiring no down
payment represent the lowest risk. Device payment plan agreement receivables
originated from customers assigned to credit classes requiring a down payment
represent a higher risk.
Subsequent to origination, the Partnership monitors delinquency and write-off
experience as key credit quality indicators for its portfolio of device payment plan
agreements and fixed-term service plans. The extent of collection efforts with
respect to a particular customer are based on the results of proprietary custom
empirically derived internal behavioral scoring models that analyze the customer’s
past performance to predict the likelihood of the customer falling further delinquent.
These customer scoring models assess a number of variables, including origination
characteristics, customer account history and payment patterns. Based on the score
derived from these models, accounts are grouped by risk category to determine the
collection strategy to be applied to such accounts. The Partnership continuously
monitors collection performance results and the credit quality of device payment plan
agreement receivables based on a variety of metrics, including aging. The
Partnership considers an account to be delinquent and in default status if there are
unpaid charges remaining on the account on the day after the bill’s due date.
As of December 31, 2017 and 2016, the balance and aging of the device payment
plan agreement receivables on a gross basis was as follows:
S-16
Unbilled
Billed:
Current
Past due
Device payment plan agreement receivables, gross
$
2017
(Unaudited)
2016
(Unaudited)
$
23,023
$
23,043
1,373
224
24,620
$
1,269
216
24,528
Activity in the allowance for credit losses for the device payment plan agreement
receivables was as follows:
Balance at January 1
Bad debt expenses
Write-offs
Other
Balance at December 31
2017
(Unaudited)
2016
(Unaudited)
$
$
708 $
537
(485)
(31)
729
$
906
203
(401)
—
708
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of the following at December 31, 2017 and
2016:
Buildings and improvements (15-45 years)
Wireless plant and equipment (3-50 years)
Furniture, fixtures and equipment (3-10 years)
Leasehold improvements (5-7 years)
Less: accumulated depreciation
Property, plant and equipment, net
$
2017
(Unaudited)
$
2016
(Unaudited)
$
10,287
34,003
486
2,754
47,530
(27,275)
20,255
$
9,883
29,049
482
2,466
41,880
(24,312)
17,568
Capitalized network engineering costs of $242 (Unaudited), $164 (Unaudited), and
$376, were recorded during the years ended December 31, 2017, 2016, and 2015,
respectively. Construction in progress included in certain classifications shown
above, principally consists of wireless plant and equipment, amounted to $762
(Unaudited), $334 (Unaudited), and $1,067, as of December 31, 2017, 2016, and
2015, respectively. Depreciation expense of $3,480 (Unaudited), $3,329
(Unaudited), and $3,220 was incurred during the years ended December 31, 2017,
2016 and 2015.
5. TOWER MONETIZATION TRANSACTION
During March 2015, Verizon Communications, the parent company of Cellco,
entered into an agreement with American Tower Corporation (ATC) giving ATC
S-17
exclusive rights to lease and operate approximately 11,300 wireless towers owned
and operated by Cellco and its subsidiaries for an upfront payment of $5.0 billion
(not in thousands). Verizon Communications also sold 162 towers to ATC for an
upfront payment of $0.1 billion (not in thousands). Under the terms of the lease
agreements, ATC has exclusive rights to lease and operate the towers over an
average term of approximately 28 years. As the leases expire, ATC has fixed-price
purchase options to acquire these towers based on their anticipated fair market
values at the end of the lease terms. The Partnership has subleased capacity on the
towers from ATC for a minimum of 10 years at current market rates, with options to
renew. The Partnership participated in this arrangement and has leased 2 towers to
ATC for an upfront payment of $849. The upfront payment was accounted for as
deferred rent and as a financing obligation. The $375 accounted for as deferred rent
was included in cash flows provided by operating activities and relates to the portion
of the towers for which the right-of-use has passed to ATC. The deferred rent is
being recognized on a straight-line basis over the Partnership’s average lease term
of 30 years. As of December 31, 2015, a financing obligation in the amount of $474
was included in cash flows provided by financing activities, which relates to the
portion of the towers that continue to be occupied and used for the Partnership’s
network operations. The Partnership makes a sublease payment to ATC for $1.9 per
month per site, with annual increases of 2 percent. During 2017 and 2016, the
Partnership made $47 and $46, respectively, of sublease payments to ATC, which
are recorded as Repayments of financing obligation.
At December 31, 2017 and 2016, the balance of deferred rent was $339 (Unaudited)
and $352 (Unaudited), respectively. At December 31, 2017 and 2016, the balance of
the financing obligation was $467 (Unaudited) and $468 (Unaudited), respectively.
6. CURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following at December 31,
2017 and 2016:
2017
(Unaudited)
2016
(Unaudited)
Accounts payable
Non-income based taxes and regulatory fees
Accrued commissions
Accounts payable and accrued liabilities
$
$
2,667
604
1,397
4,668
$
$
2,713
590
1,469
4,772
S-18
Advance billings and other consist of the following at December 31, 2017 and 2016:
Advance billings
Customer deposits
Guarantee liability
Advance billings and other
2017
(Unaudited)
2016
(Unaudited)
$
$
3,311
743
76
4,130
$
$
3,524
437
115
4,076
7. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
In addition to fixed asset purchases and right to use licenses substantially all of
service revenues, equipment revenues, 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 (1) revenues and
expenses that pertain to the Partnership which are processed by Cellco and directly
attributed to or directly charged to the Partnership; (2) roaming revenue by
customers of other Cellco affiliated markets within the Partnership market or
Partnership customers’ cost when roaming in other Cellco affiliated markets; (3)
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 revenue streams, customers, gross customer additions, or minutes of use in 2015
and 2016 and on total subscribers in 2017; (4) certain costs of operating switches
which are allocated to the Partnership; and (5) lease agreements with Cellco,
whereas the Partnership has the right to use certain spectrum. These transactions
do not necessarily represent arm’s length transactions and may not represent all
revenues and costs that would be present if the Partnership operated on a
standalone basis. Cellco periodically reviews the methodology and allocation bases
for allocating certain revenues, operating costs, selling, general and administrative
expenses to the Partnership. Resulting changes, if any, in the allocated amounts
have historically not been significant.
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. For the
years ended December 31, 2017, 2016, and 2015 roaming revenues were $24,618
(Unaudited), $25,198 (Unaudited), and $25,063, respectively. During 2017, Cellco
updated its roaming rates and methodology for determining roaming volumes
charged for postpaid, prepaid and reseller revenue, resulting in a net decrease of
$5,346 (Unaudited) to roaming revenue as compared to prior periods. Service
revenues also include 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 revenues – Equipment revenues include 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
S-19
rebates that are processed by Cellco and allocated to the Partnership based on
certain factors deemed appropriate by Cellco.
Other revenues – 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 the
Partnership’s customers roaming in other affiliated markets and switch costs that are
incurred by Cellco and allocated to the Partnership based on certain factors deemed
appropriate by Cellco. For the years ended December 31, 2017, 2016, and 2015
roaming costs were $40,725 (Unaudited), $39,340 (Unaudited), and $36,313 and
switch costs were $3,003 (Unaudited), $3,484 (Unaudited), and $3,408, respectively.
During 2017, Cellco updated its roaming rates and methodology for determining
roaming volumes charged for postpaid, prepaid and reseller cost, resulting in a net
decrease of $9,497 (Unaudited) to roaming cost as compared to prior periods. 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 lease agreements for the right
to use additional spectrum owned by Cellco. See Notes 2 and 8 for further
information regarding these arrangements.
Cost of equipment – Cost of equipment is recorded at Cellco’s cost basis (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. The Partnership was allocated $2,381
(Unaudited), $2,627 (Unaudited), and $2,344 in advertising costs for the years
ended December 31, 2017, 2016, and 2015, respectively.
Property, plant and equipment – Property, plant and equipment includes assets
purchased by Cellco and directly charged to the Partnership as well as assets
transferred between Cellco and the Partnership (see Note 2).
8. COMMITMENTS
Cellco, on behalf of the Partnership, and the Partnership itself have entered into
operating leases for facilities, and equipment 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
S-20
assured of occurring. 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, 2017, 2016, and 2015, the Partnership
incurred a total of $2,150 (Unaudited), 2,279 (Unaudited), and $1,823 respectively,
as rent expense related to these operating leases, which is included in Cost of
service and Selling, general and administrative expenses in the accompanying
statements of income and comprehensive income depending on the nature of the
facility. Aggregate future minimum rental commitments under noncancellable
operating leases, excluding renewal options that are not reasonably assured of
occurring for the years shown are as follows:
Years
2018
2019
2020
2021
2022
2023 and thereafter
Total minimum payments
$
Amount
(Unaudited)
1,923
1,749
1,642
1,534
1,413
3,181
$
11,442
The Partnership has also entered into certain agreements with Cellco, whereas the
Partnership leases certain spectrum from Cellco that overlaps the Pennsylvania
Rural Service Area 6-B2. Total rent expense under these spectrum leases amounted
to $659 (Unaudited) in 2017, $659 (Unaudited) in 2016, and $658 in 2015, which is
included in Cost of service in the accompanying statements of income and
comprehensive income.
Based on the terms of these leases as of December 31, 2017, future spectrum lease
obligations are as follows:
Years
2018
2019
2020
2021
2022
2023 and thereafter
Amount
(Unaudited)
$
660
518
376
377
377
3,230
Total minimum payments
$
5,538
The General Partner currently expects that any renewal option in the leases will be
exercised.
9. CONTINGENCIES
Cellco and the Partnership are subject to lawsuits and other claims including class
actions, product liability, patent infringement, intellectual property, antitrust,
S-21
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. The Partnership
has no accrual for any pending matters. An estimate of the reasonably possible loss
or range of loss with respect to these matters as of December 31, 2017 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. Cellco and
the Partnership continuously monitors these proceedings as they develop and will
adjust any accrual or disclosure as needed. It is not expected that the ultimate
resolution of any pending 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 the results of operations for a given reporting period.
10. RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Additions Write-offs Balance at
Beginning
of the Year Expenses
Charged to
Net of
End
Recoveries of the Year (a)
Accounts Receivable Allowances:
2017 (Unaudited)
2016 (Unaudited)
2015 (Audited)
$
927 $
1,255
498
681 $
502
1,638
(781) $
(830)
(881)
827
927
1,255
a) Allowance for Uncollectible Accounts Receivable includes approximately $233
(Unaudited), $214 (Unaudited), and $317, at December 31, 2017, 2016, and 2015,
respectively, related to long-term device payment plan receivables.
S-22
Report of Independent Certified Public Accountants
The Partners of GTE Mobilnet of Texas RSA #17
Limited Partnership
We have audited the accompanying financial statements of GTE Mobilnet of Texas RSA #17
Limited Partnership, which comprise the balance sheets as of December 31, 2016, and the related statements of income
and comprehensive income, changes in partners’ capital and cash flows for each of the two years in the period ended
December 31, 2016, 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
U.S. generally accepted accounting principles; 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.
Auditor's 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. 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 entity'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 entity'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
GTE Mobilnet of Texas RSA #17 at December 31, 2016, and the consolidated results of their operations and their cash
flows for each of the two years in the period ended December 31, 2016 in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Orlando, FL
February 28, 2017
S-23
GTE Mobilnet of Texas RSA #17 Limited Partnership
Balance Sheets - As of December 31, 2017 and 2016
(Dollars in Thousands)
ASSETS
CURRENT ASSETS:
Due from affiliate
Accounts receivable, net of allowance of $1,015 and $1,122
Unbilled revenue
Prepaid expenses
Total current assets
PROPERTY, PLANT AND EQUIPMENT - NET
WIRELESS LICENSES
OTHER ASSETS - NET
TOTAL ASSETS
LIABILITIES AND PARTNERS’ CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities
Advance billings and other
Financing obligation
Deferred rent
Total current liabilities
LONG TERM LIABILITIES:
Financing obligation
Deferred rent
Other liabilities
Total long term liabilities
Total liabilities
PARTNERS’ CAPITAL
General Partner's interest
Limited Partners' interest
Total partners' capital
2017
2016
(Unaudited)
(Audited)
$
$
$
$
23,640
10,084
3,371
344
37,439
13,086
9,028
2,287
425
24,826
49,621
48,462
441
441
$
$
2,670
90,171
5,495
1,159
2,460
702
9,816
21,202
19,532
51
40,785
50,601
7,914
31,656
39,570
2,252
75,981
4,389
1,740
2,412
702
9,243
21,356
19,857
—
41,213
50,456
5,105
20,420
25,525
TOTAL LIABILITIES AND PARTNERS’ CAPITAL
$
90,171
$
75,981
See notes to financial statements.
S-24
GTE Mobilnet of Texas RSA #17 Limited Partnership
Statements of Income and Comprehensive Income – For the Years Ended
December 31, 2017, 2016 and 2015
(Dollars in Thousands)
OPERATING REVENUES:
Service revenues
Equipment revenues
Other
Total operating revenues
OPERATING EXPENSES:
Cost of service (exclusive of depreciation and
amortization)
Cost of equipment
Depreciation and amortization
Selling, general and administrative
Total operating expenses
OPERATING INCOME
OTHER EXPENSE:
Interest expense, net
Other
Total other interest expense
2017
(Unaudited)
2016
(Audited)
2015
(Audited)
$ 134,403
8,686
5,684
148,773
$ 113,816
7,119
5,613
126,548
$ 117,289
7,011
4,900
129,200
53,794
10,248
9,549
17,815
91,406
40,711
10,040
10,364
20,662
81,777
39,702
10,606
11,348
23,356
85,012
57,367
44,771
44,188
(1,322)
-
(1,322)
(1,391)
-
(1,391)
(914)
(392)
(1,306)
NET INCOME AND COMPREHENSIVE INCOME
$
56,045
$
43,380
$
42,882
Allocation of Net Income:
General Partner
Limited Partners
See notes to financial statements.
$
$
11,209
44,836
$
$
8,676
34,704
$
$
8,576
34,306
S-25
GTE Mobilnet of Texas RSA #17 Limited Partnership
Statements of Changes in Partners’ Capital – For the Years Ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
General
Partner
San Antoni
o
Eastex
Telecom
Consolidated
Limited Partners
Communications
ALLTEL
Verizon
Total
Investments,
Enterprise
MTA, L.P.
LLC
Services, Inc.
Communications San Antonio Wireless
(VAW) LL
C
MTA, L.P.
LLC
Partners'
Capital
BALANCE—January 1, 2015
$
16,313 $
16,731 $
16,731 $
13,883 $
9,718 $
8,187 $
81,563
(18,600)
(19,077)
(19,077)
(15,830)
(11,081)
(9,335)
(93,000)
Distributions
Net Income
Distributions
Net Income
BALANCE—December 31, 2015 (Audited)
6,289
6,450
8,576
8,796
8,796
6,450
7,299
5,110
4,305
42,882
5,352
3,747
3,157
31,445
(9,860)
(10,113)
(10,113)
(8,391)
(5,874)
(4,949)
(49,300)
BALANCE—December 31, 2016 (Audited)
5,105
5,236
8,676
8,899
8,899
5,236
7,384
5,168
4,354
43,380
4,345
3,041
2,562
25,525
Distributions
Net Income
(8,400)
(8,615)
(8,615)
(7,150)
(5,004)
(4,216)
(42,000)
11,209
11,496
11,496
9,540
6,678
5,626
56,045
BALANCE—December 31, 2017 (Unaudited) $
7,914 $
8,117 $
8,117 $
6,735 $
4,715 $
3,972 $
39,570
See notes to financial statements.
S-26
GTE Mobilnet of Texas RSA #17 Limited Partnership
Statements of Cash Flows – For the Years Ended December 31, 2017, 2016 and
2015
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to reconcile net income to net cash provided
by operating activities:
$
56,045 $
43,380 $
42,882
2017
(Unaudited)
2016
(Audited)
2015
(Audited)
Depreciation and amortization
Imputed interest on financing obligation
Provision for losses on accounts receivable
Changes in certain assets and liabilities:
Accounts receivable
Unbilled revenue
Prepaid expenses
Other assets
Accounts payable and accrued liabilities
Advance billings and other
Deferred rent
Other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Fixed asset transfers out
Acquisition of wireless licenses
Change in due from affiliate
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing obligation
Repayments of financing obligation
Distributions
Net cash used in financing activities
9,549
2,306
956
(2,012)
(1,084)
81
(418)
1,020
(581)
(325)
51
65,588
(12,334)
1,712
-
(10,554)
(21,176)
-
(2,412)
(42,000)
(44,412)
10,364
2,289
2,128
(3,200)
24
19
(298)
324
(108)
(308)
—
54,614
(1,980)
506
-
(1,476)
(2,950)
11,348
1,704
1,546
(3,337)
(180)
(313)
(1,327)
315
(230)
19,591
—
71,999
(4,734)
1,341
(441)
2,696
(1,138)
-
(2,364)
(49,300)
(51,664)
24,077
(1,938)
(93,000)
(70,861)
CHANGE IN CASH
CASH—Beginning of year
CASH—End of year
-
-
$
-
- $
-
- $
-
-
-
NONCASH TRANSACTIONS FROM INVESTING
ACTIVITIES:
Accruals for capital expenditures
$
328 $
242 $
71
See notes to financial statements.
S-27
GTE Mobilnet of Texas RSA #17 Limited Partnership
Notes to Financial Statements - Years Ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
1. ORGANIZATION AND MANAGEMENT
GTE Mobilnet of Texas RSA #17 Limited Partnership (the “Partnership”) was formed
in 1989. The principal activity of the Partnership is providing cellular service in the
Texas #17 rural service area.
Cellco Partnership (“Cellco”), doing business as Verizon Wireless, indirectly wholly-
owns San Antonio MTA, L.P. and through such ownership, manages the operations
of the Partnership (see Note 8).
The partners and their respective ownership percentages of the Partnership as of
December 31, 2017, 2016 and 2015 are as follows:
General Partner:
San Antonio MTA, L.P.
Limited Partners:
Eastex Telecom Investments, LLC
Consolidated Communications Enterprise Services, Inc.
ALLTEL Communications, LLC *
San Antonio MTA, L.P.
Verizon Wireless (VAW) LLC *
20.000000 %
20.512855 %
20.512855 %
17.021300 %
11.914800 %
10.038190 %
*Verizon Wireless (VAW) LLC and Alltel Communications, LLC are wholly-owned
and indirectly owned, respectively, subsidiaries of Cellco.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of estimates – The financial statements are prepared using U.S. generally
accepted accounting principles (GAAP), which requires management to make
estimates and assumptions that affect reported amounts and disclosures. Actual
results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful accounts, the
recoverability of property, plant and equipment, the recoverability of wireless
licenses and other long-lived assets, unbilled revenues, fair values of financial
instruments, accrued expenses and contingencies.
Revenue recognition – The Partnership offers products and services to customers
through bundled arrangements. These arrangements involve multiple deliverables
which may include products, services, or a combination of products and services.
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The Partnership earns revenue primarily by providing access to and usage of its
network as well as the sale of equipment. In general, access revenue is billed one
month in advance and recognized when earned. Usage revenue is generally billed in
arrears and recognized when service is rendered. Equipment revenue associated
with the sale of wireless devices and accessories is generally recognized when the
products are delivered to and accepted by the customer, as equipment sales is
considered to be a separate earnings process from providing wireless services. For
agreements involving the resale of third-party services in which the Partnership is
considered the primary obligor in the arrangements, the revenue is recorded gross at
the time of sale.
Under the Verizon device payment plan program, eligible wireless customers
purchase wireless devices under a device payment plan agreement. The Partnership
may offer certain promotions that allow a customer to trade in his or her owned
device in connection with the purchase of a new device. Under these types of
promotions, the customer receives a credit for the value of the trade-in device. In
addition, the Partnership may provide the customer with additional future credits that
will be applied against the customer’s monthly bill as long as service is maintained.
The Partnership recognizes a liability for the trade-in device measured at fair value,
which is approximated by considering several factors, including the weighted-
average selling prices obtained in recent resales of devices eligible for trade-in.
Future credits are recognized when earned by the customer.
From time to time, the Partnership offers certain marketing promotions that allow our
customers to upgrade to a new device after paying down a certain specified portion
of their required device payment plan agreement amount and trading in their device
in good working order. When a customer enters into a device payment plan
agreement with the right to upgrade to a new device, the Partnership accounts for
this trade-in right as a guarantee obligation. The full amount of the trade-in right’s fair
value (not an allocated value) is recognized as a guarantee liability and the
remaining allocable consideration is allocated to the device. The value of the
guarantee liability effectively results in a reduction to the revenue recognized for the
sale of the device.
In multiple element arrangements that bundle devices and monthly wireless service,
revenue is allocated to each unit of accounting using a relative selling price method.
At the inception of the arrangement, the amount allocable to the delivered units of
accounting is limited to the amount that is not contingent upon the delivery of the
monthly wireless service (the noncontingent amount). The Partnership effectively
recognizes revenue on the delivered device at the lesser of the amount allocated
based on the relative selling price of the device or the noncontingent amount owed
when the device is sold.
Roaming revenue reflects service revenue earned by the Partnership when
customers not associated with the Partnership operate in the service area of the
Partnership and use the Partnership’s network. The roaming rates with third party
carriers associated with those customers are based on agreements with such
carriers. The roaming rates and methodology to determine roaming volumes
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charged by the Partnership to Cellco are established by Cellco on a periodic basis
and may not reflect current market rates (see Note 8).
Other revenues primarily consist of certain fees billed to customers for surcharges
and elected services. The Partnership reports taxes imposed by governmental
authorities on revenue-producing transactions between the Partnership and its
customers which is passed through to the customers on a net basis.
Operating 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 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 total subscribers, are calculated in accordance with the
Partnership agreement and are a reasonable method of allocating such costs (see
Note 8). In 2016 and 2015, allocations were principally based on the Partnership’s
percentage of certain revenue streams, total subscribers and customer gross
additions or minutes-of-use; in 2017, allocations were principally based on total
subscribers. The impact of the change in allocation factors was insignificant.
Cost of roaming, included in cost of service, reflects costs incurred by the
Partnership when customers associated with the Partnership operate in a service
area not associated with the Partnership and use a network not associated with the
Partnership. The roaming rates with third party carriers are based on agreements
with such carriers. The roaming rates and methodology to determine roaming
volumes charged to the Partnership by Cellco are established by Cellco on a
periodic basis and may not reflect current market rates (see Note 8).
Cost of equipment is recorded upon sale of the related equipment at Cellco’s cost
basis. Inventory is wholly owned by Cellco until the moment of sale and is not
recorded in the financial statements of the Partnership.
Maintenance and repairs – The cost of maintenance and repairs, including the cost
of replacing minor items not constituting substantial betterments, is charged
principally to Cost of service as these costs are incurred.
Advertising costs – Costs for advertising products and services as well as other
promotional and sponsorship costs are charged to Selling, general and
administrative expense in the periods in which they are incurred (See Note 8).
Comprehensive income – Comprehensive income is the same as net income as
presented in the accompanying statements of income and comprehensive income.
Income taxes – On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was
enacted. The TCJA significantly revised the U.S. federal corporate income tax by,
among other things, lowering the corporate income tax rate to 21% and imposing
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limitations on the deduction of interest expense. The Partnership is treated as a pass
through entity for income tax purposes and, therefore, is not subject to federal, state
or local income taxes. Accordingly, no provision has been recorded for income taxes
in the Partnership’s financial statements. The results of operations, including taxable
income, gains, losses, deductions and credits, are allocated to and reflected on the
income tax returns of the respective partners.
The Partnership files partnership income tax returns in the U.S. federal jurisdiction
and various state and local jurisdictions. The Partnership remains subject to
examination by tax authorities for tax years as early as 2014. It is reasonably
possible that various current tax examinations will conclude or require reevaluations
of the Partnership’s tax positions during this period. An estimate of the range of the
possible change cannot be made until these tax matters are further developed or
resolved.
Due to/from affiliate – Due to/from affiliate principally represents the Partnership’s
cash position with Cellco. Cellco manages, on behalf of the Partnership, all cash,
investing and financing activities of the Partnership. As such, the change in due
to/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, cost of equipment, administrative and operating costs incurred by
Cellco on behalf of the Partnership, as well as property, plant and equipment and
wireless license transactions with affiliates, are charged to the Partnership through
this account. Interest income on due from affiliate is based on the Applicable Federal
Rate which was approximately 1.2%, 0.7% and 0.5% for the years ended December
31, 2017, 2016 and 2015, respectively. Interest expense on due to affiliate is
calculated by applying Cellco’s average cost of borrowing from Verizon
Communications Inc., which was approximately 4.7%, 4.8% and 4.8% for the years
ended December 31, 2017, 2016 and 2015, respectively, to the outstanding due
to/from affiliate balance. Included in Interest expense, net is interest income of $162
(Unaudited), $97 and $177 for the years ended December 31, 2017, 2016 and 2015,
respectively, related to due to/from affiliate.
Allowance for doubtful accounts – Accounts receivable are recorded in the
financial statements at cost, net of allowance for credit losses, with the exception of
device payment plan agreement receivables which are initially recorded at fair value
based on a number of factors including historical write-off experience, credit quality
of the customer base and other factors such as macroeconomic conditions. The
Partnership maintains allowances for uncollectible accounts receivable, including
device payment plan agreement receivables, for estimated losses resulting from the
failure or inability of customers to make required payments. The allowance for
uncollectible accounts receivable is based on Cellco’s assessment of the
collectability of each Partnership’s specific customer accounts and includes
consideration of the credit worthiness and financial condition of those customers.
The Partnership records an allowance to reduce the receivables to the amount that
is reasonably believed to be collectible. The Partnership also records an allowance
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for all other receivables based on multiple factors including historical experience with
bad debts, the general economic environment and the aging of such receivables.
Similar to traditional service revenue accounting treatment, bad debt expense
related to device payment plan agreement receivables is recorded based on an
estimate of the percentage of device payment plan agreement receivables that will
not be collected. This estimate is based on a number of factors including historical
write-off experience, credit quality of the customer base and other factors such as
macroeconomic conditions. Due to the device payment plan agreement being
incorporated in the standard Verizon Wireless bill, the collection and risk strategies
continue to follow historical practices. The Partnership monitors the aging of
accounts with device payment plan agreement receivables and writes off account
balances if collection efforts are unsuccessful and future collection is unlikely.
Property, plant and equipment, and Depreciation – Property, plant and
equipment are recorded at cost. Property, plant and equipment are generally
depreciated on a straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated life of the
improvement or the remaining term of the related lease, calculated from the time the
asset was placed in service.
When depreciable assets are retired or otherwise disposed of, the related cost and
accumulated depreciation are deducted from the property, plant, and equipment
accounts and any gains or losses on disposition are recognized in income. Transfers
of property, plant and equipment between Cellco and affiliates are recorded at net
book value on the date of the transfer with an offsetting entry included in due to/from
affiliate.
Interest associated with the construction of network-related assets is capitalized.
Capitalized interest is reported as a reduction in interest expense and depreciated as
part of the cost of the network-related assets.
In connection with the ongoing review of estimated useful lives of property, plant and
equipment during 2016, Cellco determined that the average useful lives of certain
leasehold improvements would be increased from 5 to 7 years. This change was
immaterial to the Partnership in 2016. Cellco determined that changes were also
necessary to the remaining estimated useful lives of certain assets as a result of
technology upgrades, enhancements, and planned retirements. While the timing and
extent of current deployment plans are subject to ongoing analysis and modification,
Cellco and the Partnership believe the current estimates of useful lives are
reasonable.
Other assets – Other assets - net primarily include long term device payment plan
agreement receivables, net of allowances of $393 (Unaudited) and $289 at
December 31, 2017 and 2016, respectively (See Note 3).
Impairment – All long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be
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recoverable. If any indications were to become present, the Partnership would test
for recoverability by comparing the carrying amount of the asset group to the net
undiscounted cash flows expected to be generated from the asset group. If those net
undiscounted cash flows do not exceed the carrying amount, the next step would be
to determine the fair value of the asset and record an impairment, if any. The
Partnership re-evaluates the useful life determinations for these long-lived assets
each year to determine whether events and circumstances warrant a revision to their
remaining useful lives.
Wireless licenses – Wireless licenses provide the Partnership with the exclusive
right to utilize designated radio frequency spectrum to provide wireless
communications services. In addition, Cellco maintains wireless licenses that provide
the Partnership with the exclusive right to utilize designated radio frequency
spectrum to provide wireless communications services (see Note 4). While licenses
are issued for only a fixed time, generally ten years, such licenses are subject to
renewal by the Federal Communications Commission (FCC). License renewals,
which are managed by Cellco, have historically occurred routinely and at nominal
cost. Moreover, Cellco determined that there are currently no legal, regulatory,
contractual, competitive, economic or other factors that limit the useful life of the
Partnership’s wireless licenses. As a result, wireless licenses are treated as an
indefinite-lived intangible asset. The useful life determination for wireless licenses is
re-evaluated each year to determine whether events and circumstances continue to
support an indefinite useful life. When evaluating for impairment, Cellco aggregates
wireless licenses into one single unit of accounting, as they are utilized on an
integrated basis.
Cellco on behalf of the Partnership tests the wireless licenses balance for potential
impairment annually or more frequently if impairment indicators are present. In 2017,
2016 and 2015, Cellco performed a qualitative impairment assessment to determine
whether it is more likely than not that the fair value of the Partnership’s wireless
licenses was less than the carrying amount. As part of the assessment, several
qualitative factors were considered including market transactions, the business
enterprise value of the Partnership, macroeconomic conditions (including changes in
interest rates and discount rates), industry and market considerations (including
industry revenue and EBITDA (Earnings before interest, taxes, depreciation and
amortization) margin projections), the projected financial performance, as well as
other factors. In 2017 and 2016, Cellco also performed a qualitative impairment
assessment similar to that described for the Partnership for its aggregate wireless
licenses. In 2015, Cellco performed a quantitative impairment assessment for its
aggregate wireless licenses which consisted of comparing the estimated fair value of
its aggregate wireless licenses to the aggregated carrying amount as of the test
date.
Interest expense incurred while qualifying activities are performed to ready wireless
licenses for their intended use is capitalized as part of wireless licenses. The
capitalization period ends when the development is discontinued or substantially
complete and the license is ready for its intended use.
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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 licenses included in Cellco’s national footprint. Cellco and the Partnership
evaluated their wireless licenses for potential impairment as of December 15, 2017
and 2016. These evaluations resulted in no impairment of wireless licenses.
Financial instruments – The Partnership’s trade receivables and payables are
short-term in nature, and accordingly, their carrying value approximates fair value.
Fair value measurements – Fair value of financial and non-financial assets and
liabilities is defined as 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. The three-tier hierarchy for inputs used in measuring fair value, which
prioritizes the inputs used in the methodologies of measuring fair value for assets
and liabilities, is as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Observable inputs other than quoted prices in active markets for identical
assets and liabilities
Level 3 - No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurements. The
assessment of the significance of a particular input to the fair value measurements
requires judgment, and may affect the valuation of the assets and liabilities being
measured and their categorization within the fair value hierarchy. As of December
31, 2017 and 2016, the Partnership does not have any assets or liabilities measured
at fair value on a recurring basis.
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,
which are typically made a quarter in arrears.
Recent accounting standards - In June 2016, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments.” This standard update requires that certain financial assets be
measured at amortized cost net of an allowance for estimated credit losses such that
the net receivable represents the present value of expected cash collection. In
addition, this standard update requires that certain financial assets be measured at
amortized cost reflecting an allowance for estimated credit losses expected to occur
over the life of the assets. The estimate of credit losses must be based on all
relevant information including historical information, current conditions and
reasonable and supportable forecasts that affect the collectability of the amounts.
This standard update is effective as of the first quarter of 2020; however early
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adoption is permitted. The Partnership is currently evaluating the impact that this
standard update will have on the financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This
standard update intends to increase transparency and improve comparability by
requiring entities to recognize assets and liabilities on the balance sheet for all
leases, with certain exceptions. In addition, through improved disclosure
requirements, the standard update will enable users of financial statements to further
understand the amount, timing, and uncertainty of cash flows arising from leases.
This standard update is effective as of the first quarter of 2019; however early
adoption is permitted. The Partnership’s current operating lease portfolio is primarily
comprised of spectrum, network, real estate, and equipment leases. Upon adoption
of this standard, the Partnership expects the balance sheet to include a right of use
asset and liability related to substantially all operating lease arrangements. At Cellco,
a cross-functional coordinated implementation team has been established to
implement the standard update related to leases. The Partnership is in the process
of determining the scope of arrangements that will be subject to this standard as well
as assessing the impact to its systems, processes and internal controls to meet the
standard update’s reporting and disclosure requirements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with
Customers (Topic 606).” This standard, update along with related subsequently
issued updates clarifies the principles for recognizing revenue and develops a
common revenue standard for GAAP. The standard provides a more robust
framework for addressing revenue issues; improves comparability of revenue
recognition practices across entities, industries, jurisdictions, and capital markets;
and provides more useful information to users of financial statements through
improved disclosure requirements. The standard update also amends current
guidance for the recognition of costs to obtain and fulfill contracts with customers
such that incremental costs of obtaining and direct costs of fulfilling contracts with
customers will be deferred and amortized consistent with the transfer of the related
good or service. The two permitted transition methods under the new standard are
the full retrospective method, in which case the standard would be applied to each
prior reporting period presented and the cumulative effect of applying the standard
would be recognized at the earliest period shown, or the modified retrospective
method, in which case the standard is applied only to the most current period
presented and the cumulative effect of applying the standard would be recognized at
the date of initial application. In August 2015, an accounting standard update was
issued that delayed the effective date of this standard until the first quarter of 2018,
at which time the Partnership will adopt the standard using the modified
retrospective approach to open contracts. At Cellco, a cross-functional coordinated
team has been established to implement this standard. Summarized below are the
key impacts and areas requiring significant judgement arising from the initial
adoption of Topic 606.
The ultimate impact on revenue resulting from the application of the new standard is
subject to assessments that are dependent on many variables, including, but not
limited to, the terms of the contractual arrangements and mix of business. The
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Partnership expects the allocation of revenue between equipment and service for
wireless subsidy contracts will result in more revenue allocated to equipment and
recognized upon delivery, and less service revenue recognized over the contract
term than under current GAAP. Total revenue over the full contract term will be
unchanged and there will be no change to customer billing, the timing of cash flows
or the presentation of cash flows.
Additionally, the new standard requires the deferral of incremental costs to obtain a
customer contract, which are then amortized to expense, as part of Selling, general
and administrative expense, over the respective periods of expected benefit. As a
result, a significant amount of our sales commission costs, which would have
historically been expensed as incurred will be deferred and amortized.
In addition, for certain contractual arrangements, the device may be sold by one
Cellco entity but the service contract is the performance obligation of anther Cellco
entity. In contractual arrangements where another Cellco entity sells the device on
behalf of the Partnership, the Partnership will compensate the other Cellco entity for
obtaining the service contract. This represents an incremental cost to obtain the
service contract and will be deferred by the Partnership and recognized over the
expected benefit period. The Partnership will recognize service revenue for the
wireless service that it provides to the customer. In contractual arrangements where
the Partnership sells the device on behalf of another Cellco entity, the equipment
revenue associated with the transaction will be recognized by the Partnership, and
the Partnership will also recognize commission revenue as compensation for
obtaining the service contract on behalf of the other Cellco entity.
Subsequent events – Events subsequent to December 31, 2017 have been
evaluated through February 28, 2018, the date the financial statements were issued.
3. WIRELESS DEVICE PAYMENT PLANS
Under the Verizon device payment program, eligible wireless customers purchase
wireless devices under a device payment plan agreement. Customers that activate
service on devices purchased under the device payment program pay lower service
fees as compared to those under fixed-term service plans, and their device payment
plan charge is included on their standard wireless monthly bill. As of January 2017,
the Partnership no longer offers consumers new fixed-term service plans for phones,
however the Partnership continues to service existing plans as consumers move to
unsubsidized pricing driven by the activation of devices purchased under the Verizon
device payment program.
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Wireless device payment plan agreement receivables – The following table
displays device payment plan agreement receivables, net, that continue to be
recognized in the accompanying balance sheets:
2017
(Unaudited)
2016
(Audited)
Device payment plan agreement receivables, gross
Unamortized imputed interest
Device payment plan agreement receivables, net of
$
unamortized imputed interest
Allowance for credit losses
Device payment plan agreement receivables, net $
Classified on the balance sheets:
Accounts receivable, net
Other assets, net
Device payment plan agreement receivables, net $
$
10,309 $
(484)
9,825
(1,235)
8,590 $
5,955 $
2,635
8,590 $
8,516
(351)
8,165
(939)
7,226
5,011
2,215
7,226
The Partnership may offer customers certain promotions that allow a customer to
trade in his or her owned device in connection with the purchase of a new device.
Under these types of promotions, the customer receives a credit for the value of the
trade-in device. In addition, the Partnership may provide the customer with additional
future credits that will be applied against the customer’s monthly bill as long as
service is maintained. The Partnership recognizes a liability for the trade-in device
measured at fair value, which is determined by considering several factors, including
the weighted-average selling prices obtained in recent resales of similar devices
eligible for trade-in. Future credits are recognized when earned by the customer.
Device payment plan agreement receivables, net does not reflect the trade-in device
liability. At December 31, 2017 and 2016, the amount of trade-in liability was
insignificant.
From time to time, the Partnership offers certain marketing promotions that allow our
customers to upgrade to a new device after paying down a certain specified portion
of the required device payment plan agreement amount as well as trading in their
device in good working order. When a customer enters into a device payment plan
agreement with the right to upgrade to a new device, the Partnership accounts for
this trade-in right as a guarantee obligation. At December 31, 2017 and 2016, the
amount of the guarantee obligation was insignificant. The amount of the guarantee
obligation was included in Advance billings and other on the accompanying balance
sheets.
At the time of sale, the Partnership imputes risk adjusted interest on the device
payment plan agreement receivables. Imputed interest is recorded as a reduction to
the related accounts receivable. Interest income, which is included within Other
revenues on the statements of income and comprehensive income, is recognized
over the financed device payment term.
When originating device payment plan agreements, the Partnership uses internal
and external data sources to create a credit risk score to measure the credit quality
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of a customer and to determine eligibility for the device payment program. If a
customer is either new to the Partnership or has less than 210 days of customer
tenure (a new customer), the credit decision process relies more heavily on external
data sources. If the customer has 210 days or more of customer tenure (an existing
customer), the credit decision process relies on internal data sources. The
Partnership’s experience has been that the payment attributes of longer tenured
customers are highly predictive in estimating their ability to pay in the future. External
data sources include obtaining a credit report from a national consumer credit
reporting agency, if available. Internal data and/or credit data obtained from the
credit reporting agencies is used to create a custom credit risk score. The custom
credit risk score is generated automatically (except with respect to a small number of
applications where the information needs manual intervention) from the applicant’s
credit data using Verizon Wireless proprietary custom credit models, which are
empirically derived and demonstrably and statistically sound. The credit risk score
measures the likelihood that the potential customer will become severely delinquent
and be disconnected for non-payment. For a small portion of new customer
applications, a traditional credit report is not available from one of the national credit
reporting agencies because the potential customer does not have sufficient credit
history. In those instances, alternate credit data is used for the risk assessment.
Based on the custom credit risk score, each customer is assigned to a credit class,
each of which has a specified required down payment percentage, which ranges
from zero to 100%, and specified credit limits. Device payment plan agreement
receivables originated from customers assigned to credit classes requiring no down
payment represent the lowest risk. Device payment plan agreement receivables
originated from customers assigned to credit classes requiring a down payment
represent a higher risk.
Subsequent to origination, the Partnership monitors delinquency and write-off
experience as key credit quality indicators for its portfolio of device payment plan
agreements and fixed-term service plans. The extent of collection efforts with
respect to a particular customer are based on the results of proprietary custom
empirically derived internal behavioral scoring models that analyze the customer’s
past performance to predict the likelihood of the customer falling further delinquent.
These customer scoring models assess a number of variables, including origination
characteristics, customer account history and payment patterns. Based on the score
derived from these models, accounts are grouped by risk category to determine the
collection strategy to be applied to such accounts. The Partnership continuously
monitors collection performance results and the credit quality of device payment plan
agreement receivables based on a variety of metrics, including aging. The
Partnership considers an account to be delinquent and in default status if there are
unpaid charges remaining on the account on the day after the bill’s due date.
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As of December 31, 2017 and 2016, the balance and aging of the device payment
plan agreement receivables on a gross basis was as follows:
Unbilled
Billed:
Current
Past due
2017
(Unaudited)
2016
(Audited)
$
9,628
$
7,912
516
165
10,309
$
418
186
8,516
Device payment plan agreement receivables, gross
$
Activity in the allowance for credit losses for the device payment plan agreement
receivables was as follows:
2017
(Unaudited)
2016
(Audited)
Balance at January 1
Bad debt expenses
Write-offs
Other
$
Balance at December 31
$
939 $
779
(464)
(19)
1,235 $
254
1,182
(500)
3
939
4. SPECTRUM LICENSE TRANSACTION
Spectrum license transaction – On January 29, 2015, the FCC completed an
auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Cellco
participated in that auction and was the high bidder on the licenses covering the
Partnership service area. The licenses were deemed to be right to use assets and
were allocated and recorded by the Partnership as wireless licenses. The cash
payment made by the Partnership of $441 is classified within Acquisition of wireless
licenses on the statement of cash flows for the year ended December 31, 2015.
The average remaining renewal period of the Partnership’s wireless license portfolio
was 5.6 years as of December 31, 2017.
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5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of the following at December 31, 2017 and
2016:
Buildings and improvements (15-45 years)
Wireless plant and equipment (3-50 years)
Furniture, fixtures and equipment (3-10 years)
Leasehold improvements (5-7 years)
Less: accumulated depreciation
Property, plant and equipment, net
2017
(Unaudited)
2016
(Audited)
$
28,187 $
104,378
295
7,402
140,262
(90,641)
49,621
$
$
27,890
96,639
295
7,259
132,083
(83,621)
48,462
Capitalized network engineering costs of $533 (Unaudited) and $72, were recorded
during the years ended December 31, 2017 and 2016, respectively. Construction in
progress included in certain classifications shown above, principally consists of
wireless plant and equipment, amounted to $1,417 (Unaudited) and $1,004, as of
December 31, 2017 and 2016, respectively. Depreciation expense of $9,549
(Unaudited), $10,363, and $11,346 was incurred during the years ended December
31, 2017, 2016 and 2015.
6. TOWER MONETIZATION TRANSACTION
During March 2015, Verizon Communications, the parent company of Cellco,
entered into an agreement with American Tower Corporation (ATC) giving ATC
exclusive rights to lease and operate approximately 11,300 wireless towers owned
and operated by Cellco and its subsidiaries for an upfront payment of $5.0 billion
(not in thousands). Verizon Communications also sold 162 towers to ATC for an
upfront payment of $0.1 billion (not in thousands). Under the terms of the lease
agreements, ATC has exclusive rights to lease and operate the towers over an
average term of approximately 28 years. As the leases expire, ATC has fixed-price
purchase options to acquire these towers based on their anticipated fair market
values at the end of the lease terms. The Partnership has subleased capacity on the
towers from ATC for a minimum of 10 years at current market rates, with options to
renew. The Partnership participated in this arrangement and has leased 102 towers
to ATC for an upfront payment of $43,786. The upfront payment was accounted for
as deferred rent and as a financing obligation. The $19,709 accounted for as
deferred rent was included in cash flows provided by operating activities and relates
to the portion of the towers for which the right-of-use has passed to ATC. The
deferred rent is being recognized on a straight-line basis over the Partnership’s
average lease term of 29 years. At December 31, 2015, a financing obligation in the
amount of $24,077 was included in cash flows provided by financing activities, which
relates to the portion of the towers that continue to be occupied and used for the
Partnership’s network operations. The Partnership makes a sublease payment to
ATC for $1.9 per month per site, with annual increases of 2 percent. During 2017,
2016 and 2015, the Partnership made $2,412, $2,364 and $1,938, respectively, of
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sublease payments to ATC, which are recorded as Repayments of financing
obligation.
At December 31, 2017 and 2016, the balance of deferred rent was $17,784
(Unaudited) and $18,483, respectively. At December 31, 2017 and 2016, the
balance of the financing obligation was $23,662 (Unaudited) and $23,768,
respectively.
7. CURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following at December 31,
2017 and 2016:
Accounts payable
Non-income based taxes and regulatory fees
Texas margin tax payable
Accrued commissions
Accounts payable and accrued liabilities
2017
(Unaudited)
2016
(Audited)
$
$
3,599
676
169
1,051
5,495
$
$
2,295
888
251
955
4,389
Advance billings and other consist of the following at December 31, 2017 and 2016:
Advance billings
Customer deposits
Guarantee liability
Advance billings and other
2017
(Unaudited)
2016
(Audited)
$
$
1,056
64
39
1,159
$
$
1,650
36
54
1,740
8. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
In addition to fixed asset purchases and right to use licenses substantially all of
service revenues, equipment revenues, 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 (1) revenues and
expenses that pertain to the Partnership which are processed by Cellco and directly
attributed to or directly charged to the Partnership; (2) roaming revenue by
customers of other Cellco affiliated markets within the Partnership market or
Partnership customers’ cost when roaming in other Cellco affiliated markets; (3)
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 revenue streams, customers, gross customer additions, or minutes of use in 2015
and 2016 and on total subscribers in 2017; (4) certain costs of operating switches
which are allocated to the Partnership; and (5) lease agreements with Cellco,
whereas the Partnership has the right to use certain spectrum. These transactions
do not necessarily represent arm’s length transactions and may not represent all
S-41
revenues and costs that would be present if the Partnership operated on a
standalone basis. Cellco periodically reviews the methodology and allocation bases
for allocating certain revenues, operating costs, selling, general and administrative
expenses to the Partnership. Resulting changes, if any, in the allocated amounts
have historically not been significant, other than the roaming revenue and cost
impacts discussed below.
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. For the
years ended December 31, 2017, 2016, and 2015 roaming revenues were $77,223
(Unaudited), $52,832, and $53,031, respectively. During 2017, Cellco updated its
roaming rates and methodology for determining roaming volumes charged for
postpaid, prepaid and reseller revenue, resulting in a net increase of $954 to
roaming revenue as compared to prior periods. Service revenues also include 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 revenues – Equipment revenues include 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 – Other revenues include 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 the
Partnership’s customers roaming in other affiliated markets and switch costs that are
incurred by Cellco and allocated to the Partnership based on certain factors deemed
appropriate by Cellco. For the years ended December 31, 2017, 2016, and 2015
roaming costs were $41,335 (Unaudited), $28,228, and $27,273 and switch costs
were $1,653 (Unaudited), $1,857, and $1,833, respectively. During 2017, Cellco
updated its roaming rates and methodology for determining roaming volumes
charged for postpaid, prepaid and reseller cost, resulting in a net decrease of $1,983
to roaming cost as compared to prior periods. 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 lease agreements for the right to use additional spectrum
owned by Cellco. See Notes 2 and 9 for further information regarding these
arrangements.
Cost of equipment – Cost of equipment is recorded at Cellco’s cost basis (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.
S-42
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. The Partnership was allocated $1,328
(Unaudited), $1,875 and $1,715 in advertising costs for the years ended December
31, 2017, 2016 and 2015, respectively.
Property, plant and equipment – Property, plant and equipment includes assets
purchased by Cellco and directly charged to the Partnership as well as assets
transferred between Cellco and the Partnership (see Note 2).
Wireless licenses – Wireless licenses include the right to use assets that were
allocated by Cellco and recorded by the Partnership in exchange for a $441 payment
(see Note 4).
9. COMMITMENTS
Cellco, on behalf of the Partnership, and the Partnership itself have entered into
operating leases for facilities, and equipment 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 of
occurring. 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, 2017, 2016 and 2015, the Partnership incurred a total
of $5,229 (Unaudited), $5,189 and $5,011 respectively, as rent expense related to
these operating leases, which is included in Cost of service and in the accompanying
statements of income and comprehensive income depending on the nature of the
facility.
Aggregate future minimum rental commitments under noncancellable operating
leases, excluding renewal options that are not reasonably assured of occurring or the
years shown are as follows:
Years
2018
2019
2020
2021
2022
2023 and thereafter
Amount
(Unaudited)
$
3,386
3,357
2,866
2,634
2,643
6,730
Total minimum payments
$
21,616
S-43
The Partnership has also entered into certain agreements with Cellco, whereas the
Partnership leases certain spectrum from Cellco that overlaps the Texas #17 rural
service area. Total rent expense under these spectrum leases amounted to $935
(Unaudited), $817 and $817 in 2017, 2016 and 2015, respectively, which is included
in Cost of service in the accompanying statements of income and comprehensive
income.
Based on the terms of these leases as of December 31, 2017, future spectrum lease
obligations are as follows:
Years
2018
2019
2020
2021
2022
2023 and thereafter
Amount
(Unaudited)
$
949
777
605
607
608
4,876
Total minimum payments
$
8,422
The General Partner currently expects that any renewal option in the leases will be
exercised.
10. 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. The Partnership
has no accrual for any pending matters. An estimate of the reasonably possible loss
or range of loss with respect to these matters as of December 31, 2017 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. Cellco and
the Partnership continuously monitors these proceedings as they develop and will
adjust any accrual or disclosure as needed. It is not expected that the ultimate
resolution of any pending regulatory or legal matter in future periods will have a
S-44
material effect on the financial condition of the Partnership, but it could have a
material effect on the results of operations for a given reporting period.
11. RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Additions Write-offs Balance at
Beginning Charged to
of the Year Expenses
Net of
End
Recoveries of the Year (a)
Accounts Receivable Allowances:
2017 (Unaudited)
2016 (Audited)
2015 (Audited)
$
1,411 $
784
666
956 $
(959) $
2,128
1,546
(1,501)
(1,428)
1,408
1,411
784
a) Allowance for Uncollectible Accounts receivable primarily includes approximately
$393, $289, and $93, at December 31, 2017, 2016 and 2015, respectively, related to
long-term device payment plan receivables.
S-45
SUBSIDIARIES OF THE COMPANY
Exhibit 21
The following is a list of subsidiaries of the Company, omitting subsidiaries which, considered in the aggregate, would not
constitute a significant subsidiary. Unless otherwise noted, all subsidiaries are 100% owned (directly or indirectly) by
Consolidated Communications Holdings, Inc.
Name
BE Mobile Communications, Incorporated
Bentleyville Communications Corporation
Berkshire Cable Corp.
Berkshire Cellular, Inc.
Berkshire New York Access, Inc.
Berkshire Telephone Corporation
Big Sandy Telecom, Inc.
Bluestem Telephone Company
C&E Communications, Ltd.
Chautauqua & Erie Communications, Inc.
Chautauqua and Erie Telephone Corporation
China Telephone Company
Chouteau Telephone Company
Columbine Telecom Company
Comerco, Inc.
Communication Technologies, Inc.
Community Service Telephone Co.
Consolidated Communications, Inc.
Consolidated Communications Enterprise Services, Inc.
Consolidated Communications of California Company
Consolidated Communications of Fort Bend Company
Consolidated Communications of Illinois Company
Consolidated Communications of Mid-Comm Company
Consolidated Communications of Minnesota Company
Consolidated Communications of Pennsylvania Company, LLC
Consolidated Communications of Texas Company
C-R Communications, Inc.
C-R Long Distance, Inc.
C-R Telephone Company
El Paso Long Distance Company
Ellensburg Telephone Company
EllTel Long Distance Corp.
Enhanced Communications of Northern New England Inc.
ExOp of Missouri, Inc.
FairPoint Broadband, Inc.
FairPoint Business Services LLC
FairPoint Carrier Services, Inc.
FairPoint Communications LLC
FairPoint Communications Missouri, Inc.
FairPoint Logistics LLC
FairPoint Vermont, Inc.
Germantown Long Distance Company
GTC Communications, Inc.
GTC, Inc.
Maine Telephone Company
Marianna and Scenery Hill Telephone Company
Marianna Tel, Inc.
MJD Services Corp.
State of Incorporation
Pennsylvania
New York
New York
New York
New York
New York
Delaware
Delaware
New York
New York
New York
Maine
Oklahoma
Delaware
Washington
Maine
Maine
Illinois
Delaware
California
Texas
Illinois
Minnesota
Minnesota
Delaware
Texas
Illinois
Illinois
Illinois
Illinois
Washington
Delaware
Delaware
Missouri
Delaware
Delaware
Delaware
Delaware
Missouri
South Dakota
Delaware
Ohio
Delaware
Florida
Maine
Pennsylvania
Pennsylvania
Delaware
MJD Ventures, Inc.
Northern New England Telephone Operations LLC
Northland Telephone Company of Maine, Inc.
Odin Telephone Exchange, Inc.
Orwell Communications, Inc.
Peoples Mutual Long Distance Company
Peoples Mutual Telephone Company
Quality One Technologies, Inc.
Ravenswood Communications, Inc.
S T Enterprises, Ltd.
Sidney Telephone Company
ST Long Distance, Inc.
St. Joe Communications, Inc.
Standish Telephone Company
Sunflower Telephone Company, Inc.
Taconic Technology Corp.
Taconic Telcom Corp.
Taconic Telephone Corp.
Telephone Operating Company of Vermont LLC
The Columbus Grove Telephone Company
The El Paso Telephone Company
The Germantown Independent Telephone Company
The Orwell Telephone Company
UI Long Distance, Inc.
Unite Communications Systems, Inc.
Utilities, Inc.
YCOM Networks, Inc.
Delaware
Delaware
Maine
Illinois
Ohio
Virginia
Virginia
Ohio
Illinois
Kansas
Maine
Delaware
Florida
Maine
Kansas
New York
New York
New York
Delaware
Ohio
Illinois
Ohio
Ohio
Maine
Missouri
Maine
Washington
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(i) Registration Statement (Form S-8 No. 333-135440) pertaining to the Consolidated Communications, Inc.
401(k) Plan and Consolidated Communications 401(k) Plan for Texas Bargaining Associates,
(ii) Registration Statement (Form S-8 No. 333-128934) pertaining to the Consolidated Communications Holdings, Inc.
2005 Long-Term Incentive Plan,
(iii) Registration Statement (Form S-8 No. 333-166757) pertaining to the Consolidated Communications, Inc. 2005
Long-Term Incentive Plan,
(iv) Registration Statement (Form S-8 No. 333-182597) pertaining to the SureWest Communications Employee Stock
Ownership Plan of Consolidated Communications Holdings, Inc.,
(v) Registration Statement (Form S-8 to Form S-4/A No. 333-198000) pertaining to the Hickory Tech Corporation
1993 Stock Award Plan;
(vi) Registration Statement (Form S-8 No. 333-203974) pertaining to the Consolidated Communications Holdings, Inc.
2005 Long-Term Incentive Plan, and
of our reports dated March 1, 2018, with respect to the consolidated financial statements of Consolidated Communications
Holdings, Inc. and subsidiaries and the effectiveness of internal control over financial reporting of Consolidated
Communications Holdings, Inc. and subsidiaries included in this Annual Report (Form 10-K) of Consolidated
Communications Holdings, Inc. and subsidiaries for the year ended December 31, 2017.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 1, 2018
Exhibit 23.2
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the following Registration Statements:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Registration Statement (Form S-8 No. 333-135440) pertaining to the Consolidated Communications, Inc.
401(k) Plan and Consolidated Communications 401(k) Plan for Texas Bargaining Associates;
Registration Statement (Form S-8 No. 333-128934) pertaining to the Consolidated Communications
Holdings, Inc. 2005 Long-Term Incentive Plan;
Registration Statement (Form S-8 No. 333-166757) pertaining to the Consolidated Communications, Inc.
2005 Long-Term Incentive Plan;
Registration Statement (Form S-8 No. 333-182597) pertaining to the SureWest Communications Employee
Stock Ownership Plan of Consolidated Communications Holdings, Inc.;
Registration Statement (Form S-8 to Form S-4/A No. 333-198000) pertaining to the Hickory Tech
Corporation 1993 Stock Award Plan; and
Registration Statement (Form S-8 No. 333-203974) pertaining to the Consolidated Communications
Holdings, Inc. 2005 Long-Term Incentive Plan.
of our report dated February 28, 2017, with respect to the financial statements of GTE Mobilnet of Texas RSA #17
Limited Partnership for the years ended December 31, 2016 and 2015 and our report dated February 26, 2016, with
respect to the financial statements of Pennsylvania RSA No. 6(II) Limited Partnership for the year ended December 31,
2015 included in this Annual Report (Form 10-K) of Consolidated Communications Holdings, Inc. for the year ended
December 31, 2017.
/s/ Ernst & Young LLP
Orlando, Florida
February 28, 2018
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, C. Robert Udell Jr., certify that:
1.
I have reviewed this annual report on Form 10-K of Consolidated Communications Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
March 1, 2018
/s/ C. Robert Udell Jr.
C. Robert Udell Jr.
President and Chief Executive Officer
(Principal Executive Officer)
CHIEF FINANCIAL OFFICER CERTIFICATION
EXHIBIT 31.2
I, Steven L. Childers, certify that:
1.
I have reviewed this annual report on Form 10-K of Consolidated Communications Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
March 1, 2018
/s/ Steven L. Childers
Steven L. Childers
Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(“Section 906”), C. Robert Udell Jr. and Steven L. Childers, President and Chief Executive Officer and Chief Financial
Officer, respectively, of Consolidated Communications Holdings, Inc., each certify that to his knowledge (i) the Annual
Report on Form 10-K for the fiscal year ended December 31, 2017 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of Consolidated Communications Holdings, Inc.
/s/ C. Robert Udell Jr.
C. Robert Udell Jr.
President and Chief Executive Officer
(Principal Executive Officer)
March 1, 2018
/s/ Steven L. Childers
Steven L. Childers
Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
March 1, 2018