Annual Report
2016
MY FELLOW
STOCKHOLDERS:
A year ago, we outlined our strategy to become a leader in acquiring and deploying mission-
critical infrastructure in the communications industry while diversifying our reliance on
our largest tenant. I am proud to report that we made excellent progress in 2016 executing
this strategy.
We invested approximately $700 million in 2016 to acquire fiber infrastructure providers
who primarily serve the wireless industry’s ever-growing demand for scalable backhaul. We
believe fiber is the new mission-critical asset in the communications ecosystem and our
newly branded Uniti Fiber business unit will become a platform for future growth. We also
established a tower operating platform branded Uniti Towers in 2016 through a series of
small transactions to acquire wireless macro towers, ground lease assets and a management
team with deep-rooted industry experience. Pro-forma for our 2016 acquisitions, revenues
from sources other than our largest tenant grew from 4 percent in 2015 to 20 percent of
consolidated revenues in the 4th quarter of 2016.
As our wireless customers look to densify their networks to support mobile wireless data
growth and the expected launch of the next generation technology to serve residential
customers through a fixed wireless broadband connection, our fiber and tower operating
platforms are well positioned to capture the convergence of fiber, towers, small cells and
distributed antenna systems. We expect the wireless industry investment cycle to densify their
networks is in the early stages and will create tremendous opportunity for us for many years.
We were very active in the capital markets during 2016 as we raised over $600 million of new
capital to support the acquisitions, re-priced over $2 billion in term loans and eliminated
the overhang in our common stock by facilitating the sale of our largest tenant’s ownership
stake in us. We are very pleased to see our cost of capital decline and the strong demand and
support from our investors as we execute our strategy.
2016 was also a successful year in building our management team, Board of Directors and
the culture that will make us successful. I greatly appreciate the effort and entrepreneurial
spirit of my colleagues to meet the challenges of building a unique REIT of communication
infrastructure assets. To better reflect our alignment with our business units, we changed our
corporate name to Uniti Group Inc. and now trade under the symbol “UNIT”.
As we look ahead to 2017, we are ideally positioned to capitalize on organic growth prospects
of our Uniti Fiber and Uniti Towers operating units and be active in mergers and acquisitions,
utilizing our recently established UPREIT structure, to continue to diversify our revenues and
deliver a predictable and growing dividend to our stockholders. I appreciate your patience and
confidence in our strategy.
Sincerely,
Kenny A. Gunderman
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
OR
(cid:133) 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 001-36708
COMMUNICATIONS SALES & LEASING, INC.
(Exact name of Registrant as specified in its Charter)
Maryland
( State or other jurisdiction of
incorporation or organization)
10802 Executive Center Drive
Benton Building Suite 300
Little Rock, Arkansas
(Address of principal executive offices)
46-5230630
(I.R.S. Employer
Identification No.)
72211
(Zip Code)
Registrant’s telephone number, including area code: (501) 850-0820
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 Par Value
Name of each exchange
on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES (cid:95) NO (cid:134)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:134) NO (cid:95)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YES (cid:95) NO (cid:134)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the Registrant was required to submit and post such files). YES (cid:95) NO (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer (cid:95)
Accelerated filer
(cid:134)
(cid:134) (Do not check if a small reporting company)
Non-accelerated filer
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:134) NO (cid:95)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing
price of the shares of common stock on The NASDAQ Stock Market on June 30, 2016, was $3,618,955,277.
The number of shares of Registrant’s Common Stock outstanding as of February 15, 2017 was 155,785,924.
Smaller reporting company (cid:134)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to the 2017 annual meeting of stockholders are incorporated by reference
into Part III of this Annual Report on Form 10-K.
(cid:3) (cid:3)(cid:3)
Page
Table of Contents
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Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
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EXPLANATORY NOTE
Prior to April 24, 2015, Communications Sales & Leasing, Inc. (the “Company,” “CS&L,” “we,” “us” or “our”) was
a wholly-owned subsidiary of Windstream Holdings, Inc. (“Windstream Holdings,” and together with its
subsidiaries, “Windstream”). On April 24, 2015, Windstream contributed certain telecommunications network
assets, including fiber and copper networks and other real estate (the “Distribution Systems”) and a small consumer
competitive local exchange carrier (“CLEC”) business (the “Consumer CLEC Business”), to CS&L. In exchange,
CS&L issued to Windstream (i) approximately 149.8 million shares of its common stock, (ii) $400.0 million
aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “Senior Secured Notes”), (iii)
$1.11 billion aggregate principal amount of 8.25% Senior Notes due October 15, 2023 (the “Senior Unsecured
Notes” and together with the Senior Secured Notes, the “Notes”) and (iv) approximately $2.0 billion in cash
obtained from borrowings under CS&L’s senior credit facilities. The contribution of the Distribution Systems and
the Consumer CLEC Business and the related issuance of cash, debt and equity securities are referred to herein as
the “Spin-Off.” The Spin-Off was effective on April 24, 2015.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements as defined under U.S. federal securities law.
Forward-looking statements include all statements that are not historical statements of fact and those regarding our
intent, belief or expectations, including, but not limited to, statements regarding: our expectations regarding the
future growth and demand of the telecommunication industry; future financing plans, business strategies, growth
prospects and operating and financial performance; expectations regarding the acquisition of Network Management
Holdings LTD (“NMS”), including expectations regarding operational synergies with Uniti Towers; expectations
regarding settling conversion of our 3% convertible preferred stock in cash upon conversion; expectations regarding
the probability of our obligation to pay contingent consideration upon Tower Cloud, Inc.’s (“Tower Cloud”)
achievement of certain defined operational and financial milestones; expectations regarding future deployment of
fiber strand miles and recognition of revenue related thereto; expectations regarding levels of capital expenditures;
expectations regarding the deductibility of goodwill for tax purposes; expectations regarding the amortization of
intangible assets; and expectations regarding the payment of dividends.
Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,”
“should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-
looking statements. These statements are based on management’s current expectations and beliefs and are subject to
a number of risks and uncertainties that could lead to actual results differing materially from those projected,
forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are
reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material
adverse effect on our operations and future prospects or which could cause actual results to differ materially from
our expectations include, but are not limited to:
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the ability and willingness of our customers to meet and/or perform their obligations under any
contractual arrangements entered into with us, including master lease arrangements;
the ability of our customers to comply with laws, rules and regulations in the operation of the assets we
lease to them;
the ability and willingness of our customers to renew their leases with us upon their expiration, and the
ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event
we replace an existing tenant;
our ability to renew, extend or obtain our contracts with significant customers (including customers of
the businesses that we acquire);
the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire
and lease the respective properties on favorable terms or operate and integrate the acquired businesses;
the ability to generate sufficient cash flows to service our outstanding indebtedness;
the ability to access debt and equity capital markets;
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the impact on our business or the business of our customers as a result of credit rating downgrades, and
fluctuating interest rates;
our ability to retain our key management personnel;
our ability to qualify or maintain our status as a real estate investment trust (“REIT”);
changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs;
covenants in our debt agreements that may limit our operational flexibility;
the possibility that we may experience equipment failures, natural disasters, cyber attacks or terrorist
attacks for which our insurance may not provide adequate coverage;
the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the
companies we acquire;
other risks inherent in the communications industry and in the ownership of communications
distribution systems, including potential liability relating to environmental matters and illiquidity of real
estate investments; and
additional factors discussed in Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on
Form 10-K, as well as those described from time to time in our future reports filed with the U.S.
Securities and Exchange Commission (the “SEC”).
Forward-looking statements speak only as of the date of this Annual Report. Except in the normal course of our public
disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any
forward-looking statements to reflect any change in our expectations or any change in events, conditions or
circumstances on which any such statement is based.
4
Item 1. Business.
The Company
PART I
Communications Sales & Leasing, Inc. (the “Company,” “CS&L,” “we,” “us” or “our”) was incorporated in the
state of Maryland on September 4, 2014 as a subsidiary of Windstream Holdings, Inc. (“Windstream Holdings” and,
together with its consolidated subsidiaries, “Windstream”). On April 24, 2015, CS&L was separated and spun-off
from Windstream (the “Spin-Off”). In connection with the Spin-Off, Windstream contributed certain
telecommunications network assets to CS&L, including fiber and copper networks and other real estate (the
“Distribution Systems”) and a small consumer competitive local exchange carrier (“CLEC”) business (the
“Consumer CLEC Business”). Immediately following the Spin-Off, we entered into a long-term exclusive triple-net-
lease agreement with Windstream (the “Master Lease”) pursuant to which we lease the Distribution Systems back to
Windstream.
CS&L operates as a real estate investment trust (REIT) for U.S. federal income tax purposes. As a REIT, the
Company is generally not subject to U.S. federal income taxes on income generated by its REIT operations, which
includes income derived from the Master Lease. We have elected to treat the subsidiaries through which we operate
Uniti Fiber and Consumer CLEC Business as taxable REIT subsidiaries (“TRSs”). TRSs enable us to engage in
activities that do not result in income that would be qualifying income for a REIT. Our TRSs are subject to U.S.
federal, state and local corporate income taxes.
On February 23, 2017, the Company announced that it will change its corporate name to Uniti Group Inc. for
alignment with the brand name of its principal business units – Uniti Towers, Uniti Fiber and Uniti Leasing.
Effective at market open on February 27, 2017, trading for Uniti Group Inc. will begin under the symbol “UNIT”
(NASDAQ: UNIT). The Company’s common stock will continue to trade under the ticker symbol “CSAL” on
NASDAQ until market close on February 24, 2017. The name change does not affect the rights of the Company’s
stockholders. No action is required by stockholders with respect to the name change. The Company’s new website is
www.uniti.com.
For the year ended December 31, 2016, we had revenues of $770.4 million, net loss available to common
shareholders of $5.5 million, Funds From Operations (“FFO”) of $346.1 million and Adjusted Funds From
Operations (“AFFO”) of $398.5 million. Both FFO and AFFO are non-GAAP financial measures, which we use to
analyze our results. Refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and
Results of Operations, of this Annual Report for additional information regarding these non-GAAP measures. As of
December 31, 2016, we managed our operations in three reportable business segments, which are described in more
detail in Note 13 to our consolidated financial statements contained in Part II, Item 8 Financial Statements and
Supplementary Data.
Business
We are an independent, internally-managed REIT engaged in the acquisition and construction of mission critical
infrastructure in the communications industry. Effective in the first quarter of 2017, following the acquisition of
NMS, we commenced managing our operations in four separate lines of business: Uniti Fiber, Uniti Towers, Uniti
Leasing and Talk America.
5
Uniti Fiber
On May 2, 2016, we acquired PEG Bandwidth, LLC (“PEG”), a provider of infrastructure solutions including cell
site backhaul and dark fiber for telecommunications carriers and enterprises. As a result of the PEG acquisition, we
gained an extensive fiber network located in the Northeast/Mid Atlantic, Illinois and South Central regions of the
United States. On August 31, 2016, we acquired Tower Cloud, Inc. (“Tower Cloud”), a provider of data transport
services focused on infrastructure solutions to the wireless and enterprise sectors, including fiber-to-the-tower
backhaul, small cell networks, and dark fiber deployments in the South East region of the United States. Following
these acquisitions, on August 31, 2016, we announced the combination of Tower Cloud and PEG Bandwidth into a
unified organization, Uniti Fiber.
Today Uniti Fiber is a leading provider of infrastructure solutions, including cell site backhaul and small cell for
wireless operators and Ethernet, wavelengths and dark fiber for telecommunications carriers and enterprises. With
Uniti Fiber, our goal is to capitalize on the rising demand by carriers and enterprises for dark fiber, establish
ourselves as a proven small-cell systems provider and leverage wholesale enterprise opportunities as well as
opportunities through the School and Libraries Program (commonly referred to as E-Rate) administered by the
Universal Service Administrative Company. We believe our launch of Uniti Fiber is well-timed as fiber becomes the
mission-critical focal point in the modern communications infrastructure industry and will accelerate our growth and
diversification strategy and expand our relationships with high quality national and international wireless carriers.
At December 31, 2016, Uniti Fiber’s network consisted of 605,000 strand miles of fiber, with approximately
200,000 fiber strand miles awarded for future deployment for wireless carriers, and approximately 5,450 customer
connections. Results for Uniti Fiber are reported in our consolidated financial statements in our Fiber Infrastructure
business segment.
Uniti Towers
On January 22, 2016, we acquired Summit Wireless Infrastructure LLC, which primarily builds, owns and operates
telecommunications towers for wireless carriers in Latin America. On May 12, 2016, we acquired 32 wireless
towers owned by Windstream and operating rights for 49 wireless towers previously conveyed to the Company in
the Spin-Off and leased back to Windstream in the Master Lease. On November 14, 2016, we announced the
combination of our U.S. and Latin America towers and tower real estate businesses into a unified organization, Uniti
Towers.
On January 31, 2017, Uniti Towers completed the previously announced acquisition of Network Management
Holdings LTD (“NMS”). At close, NMS owns and operates 366 wireless communications towers in Latin America
with an additional 105 build-to-suit tower sites under development. The NMS portfolio spans three Latin American
countries with 212 sites in Mexico, 100 in Colombia, and 54 in Nicaragua. With the addition of NMS, the Uniti
Towers portfolio now consists of 468 wireless communication towers. Results for Uniti Towers are reported in our
2016 consolidated financial statements in our Leasing business segment. Beginning with the first quarter of 2017,
results for Uniti Towers will be reported in our new Towers business segment and prior period segment data will be
recast to conform to the new presentation beginning with our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017.
Our Uniti Towers strategy is to acquire and construct tower and tower-related real estate in the United States and
Latin America. We are focused on markets with strong macroeconomic fundamentals, politically stable
environments and strong underlying communications growth trends. Specifically, our focus is on markets where
numerous investment grade carriers operate and there is strong communications infrastructure potential due to
underpenetrated 4G or even 3G technology. Uniti Towers also provides build-to-suit opportunities using
customized master lease agreements designed for long-term carrier partnerships. We believe that our strategy of
focusing on fiber and towers in the United States and Latin America through Uniti Fiber and Uniti Towers is highly
synergistic and will drive incremental growth opportunities.
Uniti Leasing
Uniti Leasing is engaged in acquiring mission-critical communications assets, such as fiber, data centers, next-
generation consumer broadband, coaxial and upgradeable copper, and leasing them back to anchor customers on
6
either an exclusive or shared-tenant basis. Presently, Uniti Leasing’s primary source of revenue is rental revenues
from leasing the Distribution Systems to Windstream under the Master Lease. We believe our attractive cost of
capital and advantaged REIT structure will enable Uniti Leasing to provide creative and tax-efficient solutions to
additional customers, including (i) sale leaseback transactions, whereby Uniti Leasing acquires existing
infrastructure assets from communications service providers and leases them back on a long-term basis; (ii) capital
investment financing, whereby Uniti Leasing offers communications service providers a cost-efficient method of
raising funds for discrete capital investments to upgrade or expand their network; and (iii) mergers and acquisitions
financing, whereby Uniti Leasing facilitates mergers and acquisition transactions as a capital partner.
Results for Uniti Leasing are reported in our in our consolidated financial statements in our Leasing business
segment.
Talk America
We conduct the Consumer CLEC Business through Talk America Services, LLC (“Talk America”). Talk America
provides local telephone, high-speed Internet and long distance service to approximately 37,000 customers
principally located in 17 states across the eastern and central United States. Substantially all of the network assets
used to provide these services to customers are contracted through interconnection agreements with other
telecommunications carriers. Results for Talk America are reported in our in our consolidated financial statements
in our Consumer CLEC business segment.
Industry
The current communications infrastructure industry is marked by the growing demand for and use of bandwidth-
intensive devices and applications, such as smart devices, real-time and online streaming video, cloud-based
applications, social media and mobile broadband. This growth in consumption requires the support of robust
communications infrastructure, of which fiber networks and communications towers are critical components.
Substantial investments have been made in recent years in fiber networks, lit services and colocation facilities to
keep pace with the increased bandwidth use of both enterprise- and consumer-end users. As companies attempt to
keep pace with this rapidly evolving business sector, communications infrastructure is increasing in priority and
economic importance. We believe this considerable demand creates tremendous opportunities for us as an acquirer
and operator and as a funding source for operators seeking to capitalize on these trends through build outs and
acquisitions of infrastructure assets.
The wireless communications industry is a prime example of the growing importance of the bandwidth
infrastructure industry. As wireless traffic and mobile data consumption continue to grow worldwide, participants in
the wireless communications industry are increasing their network capacity through the development of new
wireless cell sites and the addition of bandwidth capacity. Consumers are demanding network quality and coverage,
and as a result wireless carriers are making significant capital investments to improve quality, expand their coverage
and remain relevant in a highly competitive industry. We expect this continued growth in capital expenditures to
generate high demands for wireless towers (including strong growth in long-term tower leasing), tower space and
bandwidth infrastructure services.
Strategy
Our primary goal is to create long-term stockholder value by (i) generating reliable and growing cash flows,
(ii) diversifying our tenant and asset base, (iii) paying a consistent dividend, and (iv) maintaining our financial
strength and liquidity. To achieve this goal, we employ a business strategy that leverages our first mover advantages
in the sector and our strong access to the capital markets. The key components of our business strategy include:
Acquire Additional Infrastructure Assets Through Sale Leaseback Transactions
We are actively seeking to acquire communications infrastructure assets from communication service providers and
lease these assets back to the communication service providers on a long-term basis. We believe this type of
transaction benefits the communication service providers with incremental liquidity which can be used to reduce
indebtedness or for other investments, while they continue to focus on their existing business. We will employ a
7
disciplined, opportunistic acquisition strategy and seek to price transactions appropriately based on, among other
things, growth opportunities, the mix of assets acquired, length and terms of the lease, and credit worthiness of the
tenant.
This strategy will also expand our mix of tenants and other real property and will reduce our revenue concentration
with Windstream. We expect that this objective will be achieved over time as part of our overall strategy to acquire
new distribution systems and other real property within the communications infrastructure industry to further
diversify our overall portfolio.
Capitalize on the Market Demand for Increased Bandwidth Infrastructure and Performance
Bandwidth intensive devices and applications are rapidly fueling worldwide consumption of bandwidth, which in
turn fuels a continuously growing demand for stable and secure bandwidth. Communications service providers and
other enterprises whose services and businesses require substantial amounts of bandwidth are increasingly looking
to infrastructure providers to support their bandwidth needs and to expand the reach, performance and security of
their networks. We believe Uniti Fiber is well positioned to capitalize on this ongoing demand for bandwidth
infrastructure solutions.
Fund Capital Extensions and Improvements of Infrastructure Assets for Existing and New Tenants
We believe the communications infrastructure industry in the United States is currently going through an upgrade
cycle driven by the consumer’s general desire for greater bandwidth and wireless services. These upgrades require
significant capital expenditures, and we believe CS&L provides an attractive, non-competitive funding source for
communication service providers to help accelerate the expansion of their networks at an attractive cost of capital.
We intend to support our tenant operators and other communication service providers by providing capital to them
for a variety of purposes, including capacity augmentation projects, tower construction and network expansions. We
expect to structure these investments as lease arrangements that produce additional rents.
Facilitate M&A Transactions in the Communication Service Sector as a Capital Partner
We believe CS&L can provide cost efficient funds to potential acquirors in the communication service sector, and
thereby facilitate M&A transactions as a capital partner. The highly fragmented nature of the communication service
sector is expected to result in more consolidation, which we believe will provide us ample opportunity to pursue
these types of transactions.
Maintain Balance Sheet Strength and Liquidity
We seek to maintain a capital structure that provides the resources and financial flexibility to position us to
capitalize on strategic growth opportunities. Our access to, and cost of, external capital is dependent on various
factors, including general market conditions, credit ratings on our securities, interest rates and expectations of our
future business performance. We intend to maintain a strong balance sheet through disciplined use of leverage,
aiming to lower our relative cost of capital over time, and continuing to have access to multiple sources of capital
and liquidity. As of December 31, 2016, we had $171.8 million of unrestricted cash and cash equivalents, and $500
million of undrawn borrowing capacity under our revolving credit facility. All of our debt is either fixed-rate debt,
or floating-rate debt that we have fixed through the use of interest rate swaps.
Competition
We compete for investments in the communications industry with telecommunications companies, investment
companies, private equity funds, hedge fund investors, sovereign funds and other REITs who focus primarily on
specific segments of the communications infrastructure industry. The communications infrastructure industry is
characterized by a high degree of competition among a large number of participants, including many local, regional
and global corporations. Some of our competitors are significantly larger and have greater financial resources and
8
lower costs of capital than we have. In addition, revenues from our network properties are dependent, to an extent,
on the ability of our operating partners, like Windstream, to compete with other communication service providers.
However, we believe we are positioned to identify and successfully capitalize on acquisition opportunities that meet
our investment objectives and that we have significant competitive advantages that support our leadership position
in owning, funding the construction of and leasing communications infrastructure, including:
First-Mover Advantage; Uniquely Positioned to Capitalize on Expansion Opportunities
We are the first and only REIT primarily focused on the acquisition and construction of mission critical
infrastructure in the communications industry. We believe this provides us with a significant first-mover competitive
advantage to capitalize on the large and fragmented communications infrastructure industry. Additionally, we
believe our position, scale and national reach will help us achieve operational efficiencies and support future growth
opportunities.
Large Scale Anchor Tenant; Stable Rent Revenues
We believe the assets we lease to Windstream under the Master Lease are critical for Windstream to successfully
run its business and operations. Windstream, as our anchor tenant, provides us with a base of stable and highly
predictable rent revenues as an initial platform for us to grow and diversify our portfolio and tenant base.
Windstream is a publicly-traded company that provides advanced network communications, including cloud
computing and managed services, to businesses nationwide. Windstream also offers broadband, phone and digital
TV services to consumers primarily in rural areas. Windstream continues to operate the Distribution Systems, hold
the associated regulatory licenses and own and operate other assets, including distribution systems in select states
not included in the Spin-Off.
Windstream has a diverse customer base, encompassing enterprise and small business customers, carriers and
consumers. The Distribution Systems we lease to Windstream are located in 29 different states across the continental
United States. The fiber assets in any one state do not account for more than 20% of the total route miles in our
network. We believe this geographic diversification will limit the effect of changes in any one market on our overall
performance.
Windstream is subject to the reporting requirements of the SEC, which include the requirements to file annual
reports containing audited financial information and quarterly reports containing unaudited financial information.
Windstream’s filings with the SEC can be found at www.sec.gov. Windstream’s filings are not incorporated by
reference into this Annual Report.
Strong Relationships with Communication Service Providers
Members of our management team have developed an extensive network of relationships with qualified local,
regional and national communication service providers across the United States. This extensive network has been
built by our management team through decades of operating experience, involvement in industry trade organizations
and the development of banking relationships and investor relations within the communications infrastructure
industry. We believe these strong relationships will allow us to effectively source investment opportunities from
communication service providers other than Windstream. We intend to work collaboratively with our operating
partners in providing expansion capital at attractive rates to help them achieve their growth and business objectives.
We will seek to partner with communication service providers who possess local market knowledge, demonstrate
hands-on management and have proven track records.
Experienced and Committed Management Team
Our senior management team is comprised of veteran leaders with strong backgrounds in their respective
disciplines. As a result of extensive public company experience, our senior management team has over 70 years of
combined experience in managing telecommunications operations, consummating mergers and acquisitions and
accessing both debt and equity capital markets to fund growth and maintain a flexible capital structure.
9
Insurance
We maintain, or will require in our leases, including the Master Lease, that our tenants maintain, all applicable lines
of insurance on our properties and their operations. Under the Master Lease, Windstream has the right to self-insure
or use a captive provider with respect to its insurance obligations. We believe that the amount and scope of
insurance coverage provided by our policies and the policies maintained by our tenants are customary for similarly
situated companies in the telecommunications industry. However, our tenants may elect not to, or be able to,
maintain the required insurance coverages, and the failure by any of them to do so could have a material adverse
effect on us. We may not continue to require the same levels of insurance coverage under our leases, including the
Master Lease, and such insurance may not be available at a reasonable cost in the future or fully cover all losses on
our properties upon the occurrence of a catastrophic event. Moreover, we cannot guarantee the future financial
viability of the insurers.
Employees
At December 31, 2016, we had 316 full-time employees, none of whom are subject to a collective bargaining
agreement.
Significant Customers
For the years ended December 31, 2016 and December 31, 2015, 87.9% and 96.3% of our revenues, respectively,
were derived from leasing our Distribution Systems to Windstream Holdings pursuant to the Master Lease.
Government Regulation, Licensing and Enforcement
U.S. Telecommunications Regulatory Overview
Market Overview
Our subsidiaries and our tenants operate in a regulated and highly competitive market. Current and potential
competitors include other communications tower owners, providers of voice and data services, providers of fiber and
other backhaul services, traditional telephone companies, cable companies, Internet service providers, and other
companies. As operators of telecommunications facilities and services, both we and the current and future tenants of
our telecommunications assets are typically subject to extensive and complex federal, state and local
telecommunications laws and regulations. The Federal Communications Commission (“FCC”) regulates the
provision of interstate and international telecommunications services, and state public utility commissions (“PUCs”)
regulate intrastate telecommunications services. Both FCC and PUC telecommunications regulations are wide-
ranging and can subject us and our tenants to civil, criminal and administrative sanctions. We expect that the
telecommunications industry, in general, will continue to face increased competition and regulation. Changes in
laws and regulations and regulatory non-compliance by us or our tenants could have a significant direct or indirect
effect on our operations and financial condition, which in turn may adversely affect us, as detailed below and set
forth under “Risk Factors—Risks Related to Our Business.”
Our operations require that certain of our subsidiaries hold licenses or other forms of authorization from the FCC
and state PUCs in those states where we operate, and in some jurisdictions our subsidiaries must file tariffs or other
price lists describing their rates, terms and conditions of the services they provide. The FCC and PUCs can modify
or terminate a service provider’s license or other authority to provide telecommunications services for failure to
comply with applicable laws and regulations. The FCC and PUCs may also investigate our subsidiaries’ operations
and may impose fines or other penalties for violations of the same. In addition, our subsidiaries are required to
submit periodic reports to the FCC and PUCs documenting their revenues and other data. Some of this information
is used as the basis for the imposition of various regulatory fees and other assessments. In order to engage in certain
transactions in some jurisdictions, including changes of control, the encumbrance of certain assets, the issuance of
securities, the incurrence of indebtedness, the guarantee of indebtedness of other entities, including subsidiaries of
ours, and the transfer of our assets, we are required to provide notice and/or obtain prior approval from certain
governmental agencies. The construction of additions to our current fiber network through our Uniti Fiber
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subsidiary is also subject to certain state and local governmental permitting and licensing requirements. Uniti Fiber
also holds and maintains a number of licenses from the FCC for the operation of microwave backhaul links.
Our subsidiaries are subject to a number of federal and state regulations that govern the way we can conduct our
business. Such regulations also impose certain operating costs on our businesses. These regulations can include
restrictions on pricing flexibility for certain products, minimum service quality standards, service reporting,
intercarrier compensation, universal service funding, and other obligations.
We believe that we have structured the operations for our core real estate business in a manner that will not require
us to become regulated as a public utility or common carrier by the FCC or PUCs. But, a number of our business
operations nonetheless are subject to federal, state, and local regulation.
Consumer CLEC Business
Talk America Services operates the Consumer CLEC Business as a reseller of telecommunication services pursuant
to a Wholesale Master Services Agreement and a Master Service Agreement with Windstream. In almost all cases,
Windstream does not own the underlying telecommunication facilities required to support the Consumer CLEC
Business, rather it is a reseller of facility-based services pursuant to wholesale interconnection agreements with
third-party carriers that own the underlying telecommunication facilities. Talk America Services is authorized and
regulated as a CLEC and an interexchange (long-distance) service provider in most states where it has Consumer
CLEC Business customers. These certifications subject Talk America Services to regulations requiring it to file and
maintain tariffs for the rates charged to its Consumer CLEC Business customers for regulated services and to
comply with service quality, service reporting and other regulatory obligations. Talk America Service’s ability to
operate the Consumer CLEC Business is dependent on existing telecommunication regulations that allow access to
such underlying facilities of other carriers at reasonable rates.
With respect to the broadband Internet services that we provide, traditionally, the FCC has recognized that
broadband Internet access services are “information services” subject to limited regulation. In 2015, the FCC issued
a “network neutrality” decision that declared broadband Internet access services to be subject to certain
“telecommunications services” regulation under Title II of the Communications Act of 1934. This decision creates
uncertainty concerning the level of regulation that will apply to broadband services going forward. These regulations
will limit the ways that broadband Internet access service providers can structure business arrangements and manage
their networks and could spur additional restrictions, including rate regulation, which could adversely affect
broadband investment and innovation. The proper scope of such regulations is being debated in Congress and may
be revisited by the FCC. It is unclear at this time how broadband services will be regulated in the future, and the
potential impact those regulations may have on our broadband Internet service business.
Uniti Towers
Uniti Towers is subject to international, federal, state and local regulatory requirements with respect to the
registration, siting, construction, lighting, marking and maintenance of our towers. In the United States, the
construction of new towers or modifications to existing towers may require pre-approval by the FCC and the Federal
Aviation Administration (“FAA”), depending on factors such as tower height and proximity to public airfields.
Towers requiring pre-approval must be registered with the FCC and maintained in accordance with FCC and FAA
standards. Similar requirements regarding pre-approval of the construction and modification of towers are imposed
by regulators in other countries where Uniti Towers owns and operates towers. Non-compliance with applicable
tower-related requirements may lead to monetary penalties or site deconstruction orders.
Regulatory regimes outside of the U.S. and its territories vary by country and locality; however, these regulations
typically require approval from local officials or government agencies prior to tower construction or modification or
the addition of a new antenna to an existing tower. Additionally, some regulations include ongoing obligations
regarding painting, lighting and maintenance. Our international operations may also be subject to limitations on
foreign ownership of land in certain areas. Non-compliance with such regulations may lead to monetary penalties or
deconstruction orders. Our international operations are also subject to various regulations and guidelines regarding
employee relations and other occupational health and safety matters.
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In all countries where Uniti Towers operates, it is subject to zoning restrictions and restrictive covenants imposed by
local authorities or community organizations. While these regulations vary, they typically require approval from
local authorities or community standards organizations prior to tower construction or the addition of a new antenna
to an existing tower. Opposition by local zoning authorities and community residents can delay or prevent new
tower construction or site upgrade projects, thereby increasing the costs and timing of new tower construction and
modifications or site upgrades.
The failure to properly maintain towers pursuant to applicable regulatory requirements, such as but not limited to,
lighting, painting, and other safety standards, can subject us to significant enforcement actions, including monetary
penalties both within the U.S. and abroad.
Uniti Fiber
Our subsidiaries that compose Uniti Fiber own and operate significant fiber and other communications backhaul
facilities throughout various regions of the U.S. The provision of such services is subject to FCC and PUC licensure
in many jurisdictions, and the companies are typically licensed as CLECs and/or interexchange carriers in those
states where they operate. The companies also hold various FCC wireless licenses in order to provide microwave
backhaul services. Because of the nature of the licenses that these companies hold, and the nature of the services
that they provide, they are subject to various federal and state regulatory requirements, including, but not limited to,
revenue and other reporting requirements and tariffing requirements. The companies must also maintain their
wireless licenses with the FCC, which requires construction and notification reporting and other regulatory
requirements.
Regulatory Changes
Future revenues, costs and capital investment in the communication businesses of our tenants, Talk America
Services, Uniti Fiber, Uniti Towers, and other related entities could be adversely affected by material changes to, or
decisions regarding applicability of, government requirements, including, but not limited to, changes in rules
governing inter-carrier compensation, interconnection access to network facilities, state and federal universal service
fund (“USF”) support, rules governing the prices that can be charged for business data services, infrastructure
location and siting rules, and other requirements. Federal and state communications laws may be amended in the
future, and other laws may affect our business. In addition, certain laws and regulations applicable to us and our
competitors may be, and have been, challenged in the courts and could be changed at any time. We cannot predict
future developments or changes to the regulatory environment or the impact such developments or changes would
have on our business.
In addition, regulations could create significant compliance costs for us. Delays in obtaining FCC and PUC
certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and
conditions imposed in connection with such approvals could adversely affect the rates that we are able to charge our
customers. Both our subsidiaries and our tenants may also be affected by legislation and/or regulation imposing new
or additional obligations related to, for example, law enforcement assistance, cyber-security protection, intellectual
property rights protections, environmental protections, consumer privacy, tax, or other areas. We can’t predict how
any such future changes may impact our business, or the business of our tenants.
Environmental Matters
A wide variety of federal, state and local environmental and occupational health and safety laws and regulations
affect telecommunications operations and facilities. These complex laws, and their enforcement, involve a myriad of
regulations, many of which involve strict liability on the part of the potential offender. Some of these federal, state
and local laws may directly impact us. Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property, such as us, may be liable for the costs of removal or remediation of hazardous
or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating
to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent
property). The cost of any required remediation, removal, fines or personal property damages and the owner’s
liability therefore could exceed or impair the value of the property and/or the assets of the owner. In addition, the
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presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect
the owner’s ability to sell or rent such property or to borrow using such property as collateral, which, in turn, could
reduce revenues.
Available Information
Our principal executive offices are located at 10802 Executive Center Drive, Benton Building Suite 300, Little
Rock, AR 72211 and our telephone number is (501) 850-0820. We currently maintain a website at
www.cslreit.com. In connection with the Company’s name change, on February 27, 2017, we will launch a new
corporate website: www.uniti.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) are available on our current website (and will be
available on our new website), free of charge, as soon as reasonably practicable after we electronically file such
materials with, or furnish them to, the SEC. Our Exchange Act filings can also be found at www.sec.gov.
Current copies of our Code of Business Conduct and Ethics & Whistleblower Policy, Corporate Governance
Guidelines, and the charters for our Audit, Compensation and Governance Committees are posted in the Corporate
Governance section of the Investors page of our website at www.cslreit.com and will be available at www.uniti.com
starting on February 27, 2017.
Item 1A. Risk Factors.
Risks Related to Our Business
We are dependent on Windstream Holdings to make payments to us under the Master Lease, and an event that
materially and adversely affects Windstream’s business, financial position or results of operations could
materially and adversely affect our business, financial position or results of operations.
Windstream Holdings is the lessee of the Distribution Systems pursuant to the Master Lease and, therefore, is
presently the source of a substantial portion of our revenues. There can be no assurance that Windstream Holdings
will have sufficient assets, income and access to financing to enable it to satisfy its payment obligations under the
Master Lease. The inability or unwillingness of Windstream Holdings to meet its rent obligations under the Master
Lease could materially adversely affect our business, financial position or results of operations, including our ability
to pay dividends to our stockholders as required to maintain our status as a REIT. The inability of Windstream
Holdings to satisfy its other obligations under the Master Lease, such as the payment of insurance, taxes and
utilities, could materially and adversely affect the condition of the Distribution Systems as well as the business,
financial position and results of operations of Windstream. In addition, Windstream Holdings will be dependent on
distributions from Windstream Services and its subsidiaries in order to satisfy the payment obligations under the
Master Lease, as such, if Windstream Services or their subsidiaries were to experience a material and adverse effect
on their business, financial position or results of operations, our business, financial position or results of operations
could also be materially and adversely affected.
Failure by Windstream Holdings to comply with the terms of the Master Lease or to comply with the regulations to
which the Distribution Systems are subject could require us to find another lessee for such Distribution Systems, or a
portion thereof, and there could be a decrease or cessation of rental payments by Windstream Holdings.
There is no assurance that we would be able to lease the Distribution Systems to another lessee on substantially
equivalent or better terms than the Master Lease, or at all, successfully reposition the Distribution Systems for other
uses or sell the Distribution Systems on terms that are favorable to us. It may be more difficult to find a replacement
tenant for a telecommunications property than it would be to find a replacement tenant for a general commercial
property due to the specialized nature of the business. Even if we are able to find a suitable replacement tenant for
the Distribution Systems, transfers of operations of communication distribution systems are subject to regulatory
approvals not required for transfers of other types of commercial operations, which may affect our ability to
successfully transition the Distribution Systems.
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If the Spin-Off, together with certain related transactions, fails to qualify as a tax-free transaction for U.S.
federal income tax purposes, both we and Windstream could be subject to significant tax liabilities and, in certain
circumstances, we could be required to indemnify Windstream for material taxes pursuant to indemnification
obligations under the tax matters agreement entered into in connection with the Spin-Off.
Windstream received a private letter ruling (the “IRS Ruling”) from the Internal Revenue Service (the “IRS”) to the
effect that, on the basis of certain facts presented and representations and assumptions set forth in the request
submitted to the IRS, the Spin-Off will qualify as tax-free under Sections 355 and 368(a)(1)(D) of the Internal
Revenue Code of 1986, as amended (the “Code”). Although a private letter ruling from the IRS generally is binding
on the IRS, if the factual representations and assumptions made in the letter ruling request are untrue or incomplete
in any material respect, then Windstream will not be able to rely on the IRS Ruling. In addition, the IRS Ruling does
not address certain requirements for tax-free treatment of the Spin-Off under Sections 355 and 368(a)(1)(D) of the
Code and Windstream’s use of CS&L indebtedness and common stock to retire certain of Windstream’s
indebtedness (the “debt exchanges”). Accordingly, the Spin-Off was conditioned upon the receipt by Windstream of
a tax opinion from its counsel with respect to the requirements on which the IRS did not rule, which concluded that
such requirements also should be satisfied. The tax opinion was based on, among other things, the IRS Ruling, then
current law and certain representations and assumptions as to factual matters made by Windstream and us. Any
change in currently applicable law, which may or may not be retroactive, or the failure of any factual representation
or assumption to be true, correct and complete in all material respects, could adversely affect the conclusions
reached in the tax opinion. In addition, the tax opinion is not binding on the IRS or the courts, and the IRS or the
courts may not agree with the tax opinion.
If the Spin-Off were determined to be taxable, Windstream would recognize taxable gain. Under the terms of the tax
matters agreement entered into with Windstream in connection with the Spin-Off (the “Tax Matters Agreement”),
we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the
debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and
Section 368(a)(1)(D) of the Code, as applicable, to the extent such failure to qualify is attributable to certain actions,
events or transactions relating to our stock, indebtedness, assets or business, or a breach of the relevant
representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in
connection with the request for the IRS Ruling or the representations provided in connection with the tax opinion.
Our indemnification obligations to Windstream are not limited by any maximum amount and such amounts could be
substantial. If we are required to indemnify Windstream under the circumstances set forth in the Tax Matters
Agreement, we may also be subject to substantial tax liabilities.
In addition, if the Spin-Off or the debt exchanges failed to qualify as tax free for U.S. federal income tax purposes,
Windstream may incur significant tax liabilities that could materially affect Windstream’s ability to make payments
under the Master Lease.
Our level of indebtedness could materially and adversely affect our financial position, including reducing funds
available for other business purposes and reducing our operational flexibility.
As of December 31, 2016, we had outstanding long term indebtedness of approximately $4.2 billion consisting of a
combination of senior notes and term loans. Additionally, we have a revolving credit facility in an aggregate
principal amount of up to $500 million, which was undrawn as of December 31, 2016, provided by a syndicate of
banks and other financial institutions. Subject to the restrictions set forth in our debt agreements, our board of
directors may establish and change our leverage policy at any time without stockholder approval. Any significant
additional indebtedness could require a substantial portion of our cash flow to make interest and principal payments
due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay dividends,
make capital expenditures and acquisitions, or carry out other aspects of our business strategy. Increased
indebtedness can also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to
general adverse economic and industry conditions and create competitive disadvantages for us compared to other
companies with relatively lower debt levels. Increased future debt service obligations may limit our operational
flexibility, including our ability to acquire assets, finance or refinance our assets or sell assets as needed.
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Covenants in our debt agreements may limit our operational flexibility, and a covenant breach or default could
materially and adversely affect our business, financial position or results of operations.
The agreements governing our indebtedness, including the indentures and our senior secured credit facilities, contain
customary covenants, which may limit our operational flexibility. The indentures have terms customary for high
yield senior notes, including covenants relating to debt incurrence, liens, restricted payments, asset sales,
transactions with affiliates, and mergers, acquisitions or sales of all or substantially all of our assets, and customary
provisions regarding optional redemption and events of default. Our credit agreement contains customary covenants
that, among other things, require us to maintain our REIT status and restrict, subject to certain exceptions, our ability
to grant liens on assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or
consolidations and pay certain dividends and other restricted payments. The credit agreement also contains
customary events of default and requires us to comply with specified financial maintenance covenants. Breaches of
certain covenants may result in defaults and cross-defaults under certain of our other indebtedness, even if we satisfy
our payment obligations to the respective obligee. In addition, defaults under the Master Lease, including defaults
associated with the bankruptcy of the tenant or the termination of the Master Lease, may result in cross-defaults
under certain of our indebtedness.
Covenants that limit our operational flexibility, as well as covenant breaches or defaults under our debt instruments,
could materially and adversely affect our business, financial position or results of operations, or our ability to incur
additional indebtedness or refinance existing indebtedness.
We intend to pursue acquisitions of additional properties and seek other strategic opportunities, which may result
in the use of a significant amount of management resources or significant costs, and we may not fully realize the
potential benefits of such transactions.
We intend to pursue acquisitions of additional properties and seek acquisitions and other strategic opportunities.
Accordingly, we currently are, and expect in the future to be, engaged in evaluating potential transactions and
other strategic alternatives. In addition, from time to time, we may engage in discussions that may result in one or
more transactions. Consistent with our strategy, we are currently pursuing a number of opportunities to grow our
business through acquisitions that are complementary to our current platform. Although there is uncertainty that
any of these discussions will result in definitive agreements or the completion of any transaction, we may devote a
significant amount of our management resources to such a transaction, which could negatively impact our
operations. We may incur significant costs in connection with seeking acquisitions or other strategic opportunities
regardless of whether the transaction is completed. In the event that we consummate an acquisition or strategic
alternative in the future, there is no assurance that we would fully realize the potential benefits of such a transaction.
Integration may be difficult and unpredictable, and acquisition-related integration costs, including certain non-
recurring charges, could materially and adversely affect our results of operations. Moreover, integrating assets and
businesses may significantly burden management and internal resources, including the potential loss or
unavailability of key personnel. If we fail to successfully integrate the assets and businesses we acquire, we may not
fully realize the potential benefits we expect, and our operating results could be adversely affected.
Risks Related to the Status of CS&L as a REIT
If we do not qualify as a REIT, or fail to remain qualified as a REIT, we will be subject to U.S. federal income
tax as a regular corporation and could face a substantial tax liability, which could reduce the amount of cash
available for distribution to our stockholders and to service debt.
We operate as a REIT for U.S. federal income tax purposes. We received an opinion of tax counsel to Windstream
with respect to our qualification as a REIT in connection with the Spin-Off. Investors should be aware, however,
that opinions of counsel are not binding on the IRS or any court. The opinion of tax counsel represents only the view
of such counsel based on its review and analysis of existing law and on certain representations as to factual matters
and covenants made by us, including representations relating to the values of our assets and the sources of our
income. The opinion was expressed only as of the date issued. Tax counsel has no obligation to advise us or the
holders of our stock of any subsequent change in the matters stated, represented or assumed or of any subsequent
change in applicable law. Furthermore, both the validity of the opinion of tax counsel and our qualification as a
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REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership
and other requirements on a continuing basis, the results of which will not be monitored by tax counsel. Our ability
to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some
of which are not susceptible to a precise determination, and for which we may not obtain independent appraisals.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax on our
taxable income at regular corporate rates, including any applicable alternative minimum tax, and dividends paid to
our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate liability
could be substantial and could reduce the amount of cash available for distribution to our stockholders, which in turn
could have an adverse impact on the value of our common stock and to service debt. Unless we were entitled to
relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the
four taxable years following the year in which we failed to qualify as a REIT.
Qualification as a REIT involves highly technical and complex provisions of the Code.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only
limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our
REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income,
organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our
ability to satisfy the requirements to qualify as a REIT may depend in part on the actions of third parties over which
we have no control or only limited influence, including legislative actions adverse to REITs.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative
process and by the IRS and the U.S. Department of the Treasury (“Treasury”). Changes to the tax laws affecting
REITs or TRSs, which may have retroactive application, could adversely affect our stockholders or us. We cannot
predict how changes in the tax laws might affect our stockholders or us. Accordingly, we cannot provide assurance
that new legislation, Treasury regulations, administrative interpretations or court decisions will not significantly
affect our ability to remain qualified as a REIT, the federal income tax consequences of such qualification, the
determination of the amount of REIT taxable income or the amount of tax paid by the TRSs.
We could fail to qualify as a REIT if income we receive from Windstream is not treated as qualifying income.
Under applicable provisions of the Code, we will not be treated as a REIT unless we satisfy various requirements,
including requirements relating to the sources of our gross income. Rents received or accrued by us from
Windstream will not be treated as qualifying rent for purposes of these requirements if the Master Lease is not
respected as a true lease for U.S. federal income tax purposes and is instead treated as a service contract, joint
venture or some other type of arrangement. If the Master Lease is not respected as a true lease for U.S. federal
income tax purposes, we may fail to qualify as a REIT.
In addition, subject to certain exceptions, rents received or accrued by us from Windstream will not be treated as
qualifying rent for purposes of the REIT gross income requirements if we or a beneficial or constructive owner of
10% or more of our stock beneficially or constructively owns 10% or more of the total combined voting power of all
classes of Windstream Holdings stock entitled to vote or 10% or more of the total value of all classes of Windstream
Holdings stock. Our charter provides for restrictions on ownership and transfer of our shares of stock, including
restrictions on such ownership or transfer that would cause the rents received or accrued by us from Windstream to
be treated as non-qualifying rent for purposes of the REIT gross income requirements. Nevertheless, there can be no
assurance that such restrictions will be effective in ensuring that rents received or accrued by us from Windstream
will not be treated as qualifying rent for purposes of REIT qualification requirements.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the
dividends paid deduction and excluding any net capital gains, in order for us to qualify as a REIT (assuming that
certain other requirements are also satisfied) so that U.S. federal corporate income tax does not apply to earnings
that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but
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distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction
and excluding any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net
taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we
distribute to our stockholders in a calendar year is less than a minimum amount specified for REITs under U.S.
federal income tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements
of the Code.
Our FFO is currently generated primarily by rents paid under the Master Lease. From time to time, we may generate
taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable
income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or
required debt or amortization payments. If we do not have other funds available in these situations, we could be
required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that
would otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out
enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax,
including the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.
Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the
value of our common stock and decrease cash available to service debt.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes
on our income and assets, including taxes on any undistributed income and state or local income, property and
transfer taxes. For example, we hold some of our assets and conduct certain of our activities through a TRS that is
subject to U.S. federal, state and local corporate-level income taxes as a regular C corporation. In addition, we may
incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these
taxes could decrease cash available for distribution to our stockholders and servicing our debt.
Complying with the REIT requirements may cause us to forego otherwise attractive acquisition opportunities or
liquidate otherwise attractive investments.
To qualify as a REIT for U.S. federal income tax purposes, we must ensure that, at the end of each calendar quarter,
at least 75% of the value of our assets consists of cash, cash items, government securities and “real estate assets” (as
defined in the Code). The remainder of our investments (other than government securities, qualified real estate
assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities
of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in
general, no more than 5% of the value of our total assets (other than government securities, qualified real estate
assets and securities issued by a TRS) can consist of the securities of any one issuer, no more than 25% of the value
of our total assets (or 20% after December 31, 2017) can be represented by securities of one or more TRSs, and for
taxable years starting after December 31, 2015, no more than 25% of the value of our total assets can be
represented by nonqualified publicly offered REIT debt instruments (as defined in the Code). If we fail to
comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after
the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT
qualification and suffering adverse tax consequences. As a result of such asset limitations, we may be required to
liquidate or forego otherwise attractive investments. These actions could have the effect of reducing our income and
amounts available for distribution to our stockholders and servicing our debt.
In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning,
among other things, the sources of our income, the amounts we distribute to our stockholders and the ownership of
our stock. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy
the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the
REIT requirements may hinder our ability to make certain attractive investments.
Risks Related to our Business
We are dependent on the communications industry and may be susceptible to the risks associated with it, which
could materially adversely affect our business, financial position or results of operations.
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As the owner, lessor and provider of communications services and distribution systems serving the communications
industry, we are impacted by the risks associated with the communications industry. Therefore, our success is to
some degree dependent on the communications industry, which could be adversely affected by economic conditions
in general, changes in consumer trends and preferences, changes in communications technology and other factors
over which we and our tenants have no control. As we are subject to risks inherent in substantial investments in a
single industry, a decrease in the communications business would likely have an adverse effect on our revenues.
Our business is subject to government regulations and changes in current or future laws or regulations could
restrict our ability to operate our business in the manner currently contemplated.
Our business, and that of our tenants, is subject to federal, state, local and foreign regulation. In certain jurisdictions
these regulations could be applied or enforced retroactively. Local zoning authorities and community organizations
are often opposed to construction in their communities and these regulations can delay, prevent or increase the cost
of new distribution system construction and modifications, thereby limiting our ability to respond to customer
demands and requirements. Existing regulatory policies may materially and adversely affect the associated timing or
cost of such projects and additional regulations may be adopted which increase delays or result in additional costs to
us, or that prevent such projects in certain locations. These factors could materially and adversely affect our
business, results of operations or financial condition. For more information regarding the regulations we are
subject to, please see the section entitled “Business – Government Regulation, Licensing and Enforcement.”
If Uniti Fiber is unable to renew or extend its contracts with significant customers, our results may be
adversely affected.
Most of Uniti Fiber’s revenues are generated through contracts with customers that must be renewed or
extended from time to time. A number of customer contracts are subject to renewal or extension in the near
term. If significant customers terminate or do not renew or extend their contracts with Uniti Fiber, our business,
financial condition and results of operations could be adversely affected. If we lose any of our significant
customers, one of our significant customers reduces its use of our services, or if any of our significant customers
negotiates less favorable terms with us, then we will lose revenue, which would materially adversely affect our
business, financial condition and results of operations. Revenue from customers that have accounted for
significant revenue in past periods, individually or as a group, may not continue, or if continued, may not reach
or exceed historical levels in any period.
Any failure of Uniti Fiber’s physical infrastructure or services could lead to significant costs and disruptions.
Uniti Fiber’s business depends on providing customers with highly reliable service. The services provided are
subject to failure resulting from numerous factors, including human error, power loss, improper maintenance,
physical or electronic security breaches, fire, earthquake, hurricane, flood and other natural disasters, water
damage, the effect of war, terrorism and any related conflicts or similar events worldwide, and sabotage and
vandalism. Problems within Uniti Fiber’s networks or facilities, whether within our control or the control of
third-party providers, could result in service interruptions or equipment damage. We may not be able to
efficiently upgrade or change Uniti Fiber’s networks or facilities to meet new demands without incurring
significant costs that we may not be able to pass on to customers. Given the service guarantees that may be
included in Uniti Fiber’s agreements with customers, such disruptions could result in customer credits; however,
we cannot assume that customers will accept these credits as compensation in the future, and we may face
additional liability or loss of customers.
Uniti Fiber uses franchises, licenses, permits, rights-of-way, conduit leases, fiber agreements, and property
leases, which could be canceled or not renewed.
Uniti Fiber must maintain rights-of-way, franchises, and other permits from railroads, utilities, state highway
authorities, local governments, transit authorities, and others to operate its fiber network. We cannot be certain
that we will be successful in maintaining these rights-of-way agreements or obtaining future agreements on
acceptable terms. Some of these agreements are short-term or revocable at will, and we cannot assure you that
18
we will continue to have access to existing rights-of-way after they have expired or terminated. If a material
portion of these agreements are terminated or are not renewed, we might be forced to abandon these networks.
In order to operate these networks, we must also maintain fiber leases and indefeasible right of use (“IRU”)
agreements between Uniti Fiber and both public and private entities, and there is no assurance that we will be
able to renew those fiber leases and IRU agreements on favorable terms, or at all. If we are unable to renew
those fiber leases and IRU agreements on favorable terms, we may face increased costs or reduced revenues.
In order to expand Uniti Fiber’s network to new locations, we often need to obtain additional rights-of-way,
franchises, and other permits. Our failure to obtain these rights in a prompt and cost-effective manner may
prevent us from expanding our network, which may be necessary to meet our contractual obligations to our
customers and could expose us to liabilities.
If we lose or are unable to renew key real property leases where Uniti Fiber has located networks or facilities, it
could adversely affect our services and increase our costs, as we would be required to restructure or move these
networks or facilities.
New technologies or changes in a tenant’s business model could make our business less desirable
and result in decreasing revenues.
The development and implementation of new technologies designed to enhance the efficiency of communications
distribution systems, including lit fiber networks and wireless equipment, or changes in a tenant’s business model
due to such technological changes, could reduce the need for our services, decrease demand for tower space or fiber
or reduce previously obtainable lease rates for communications infrastructure. In addition, tenants may allocate less
of their budgets to certain types of communications infrastructure, as the industry is trending towards deploying
increased capital to the development and implementation of new technologies. Further, a tenant may decide to no
longer outsource certain types of communications infrastructure or otherwise change its business model, which
would result in a decrease in our revenue. The development and implementation of any of these and similar
technologies to any significant degree or changes in a tenant’s business model could have a material adverse effect
on our business, results of operations or financial condition.
Our foreign operations are subject to economic, political and other risks that could materially and adversely
affect our results of operations and financial condition.
Our international business operations expose us to potential adverse financial and operational problems not typically
experienced in the United States, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
international political, economic and legal conditions;
our ability to comply with foreign regulations and/or laws affecting operations and projects;
difficulties in attracting and retaining staff and business partners to operate internationally;
language and cultural barriers;
seasonal reductions in business activities and operations in the countries where our international projects
are located;
integration of foreign operations;
potential adverse tax consequences; and
potential foreign currency fluctuations.
In addition, many of our tenants in our international operations are subsidiaries of global telecommunications
companies. These subsidiaries may not have the explicit or implied financial support of their parent entities. Any of
these factors could adversely affect our results of operations and financial condition.
Our continued operation and expansion outside the United States, including in developing countries, increase the
risk of violations of applicable anti-corruption in the future.
19
Our internal policies provide for compliance with all applicable anti-corruption laws, but despite our training and
compliance programs, we cannot assure you that our internal control policies and procedures will always protect us
from unauthorized, reckless or criminal acts committed by our employees, agents or partners. A finding that the
Company or its affiliates have violated the U.S. Foreign Corrupt Practices Act (“FCPA”) or similar foreign anti-
corruption laws may result in severe criminal or civil sanctions, which could disrupt our business and result in a
material adverse effect on our reputation, financial condition and results of operations.
We or our tenants may experience uninsured or underinsured losses, which could result in a significant loss of
the capital we have invested in a property, decrease anticipated future revenues or cause us to incur
unanticipated expenses.
The Master Lease requires, and we expect that new lease agreements that we enter into will require, that the tenant
maintain comprehensive insurance and hazard insurance or self-insure its insurance obligations. However, there are
certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods that may be
uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market
value or current replacement cost of a loss. Inflation, changes in ordinances, environmental considerations, and other
factors also might make it infeasible to use insurance proceeds to replace the property after such property has been
damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore
the economic position with respect to such property.
In addition, even if damage to our properties is covered by insurance, a disruption of business caused by a casualty
event may result in loss of revenue for our tenants or us. Any business interruption insurance may not fully
compensate them or us for such loss of revenue. If one of our tenants experiences such a loss, it may be unable to
satisfy its payment obligations to us under its lease with us.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or
security failure of that technology could harm our business.
We rely on information technology networks and systems, including the Internet, to process, transmit and store
electronic information and to manage or support a variety of our business processes, including financial transactions
and maintenance of records. We rely on commercially available systems, software, tools and monitoring to provide
security for processing, transmitting and storing confidential information. Although we have taken steps to protect
the security of the data maintained in our information systems, it is possible that our security measures will not be
able to prevent the systems’ improper functioning, or the improper disclosure of information in the event of cyber-
attacks. Physical or electronic break-ins, computer viruses, attacks by hackers and similar security breaches, can
create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain
proper function, security and availability of our information systems could interrupt our operations, damage our
reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect us.
Risks Related to Our Common Stock
We cannot assure you of our ability to pay dividends in the future.
It is expected that our dividend will be $2.40 per share per annum, subject to approval of our board of directors. The
qualify as a REIT, the annual dividend must not be less than 90% of our REIT taxable income on an annual basis,
determined without regard to the dividends paid deduction and excluding any net capital gains. Our ability to pay
dividends may be adversely affected by a number of factors, including the risk factors herein. Dividends will be
authorized by our board of directors and declared by us based upon a number of factors, including actual results of
operations, restrictions under Maryland law or applicable debt covenants, our financial condition, our taxable
income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and
other factors our directors deem relevant. We cannot assure you that we will achieve investment results that will
allow us to make a specified level of cash dividends or year-to-year increases in cash dividends in the future.
Furthermore, while we are required to pay dividends in order to maintain our REIT status (as described above under
“Risks Related to Our Status as a REIT- REIT distribution requirements could adversely affect our ability to execute
our business plan”), we may elect not to maintain our REIT status, in which case we would no longer be required to
20
pay such dividends. Moreover, even if we do maintain our REIT status, after completing various procedural steps,
we may elect to comply with the applicable distribution requirements by distributing, under certain circumstances,
shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required
distributions in shares of common stock in lieu of cash, such action could negatively affect our business and
financial condition as well as the market price of our common stock. No assurance can be given that we will pay any
dividends on shares of our common stock in the future.
Our charter restricts the ownership and transfer of our outstanding stock, which may have the effect of delaying,
deferring or preventing a transaction or change of control of our company.
In order for us to qualify as a REIT, not more than 50% in value of our outstanding shares of stock may be owned,
beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year after
the first year for which we elect to be taxed and qualify as a REIT. Additionally, at least 100 persons must
beneficially own our stock during at least 335 days of a taxable year (other than the first taxable year for which we
elect to be taxed and qualify as a REIT). Our charter, with certain exceptions, authorizes our board of directors to
take such actions as are necessary or advisable to preserve our qualification as a REIT. Our charter also provides
that, unless exempted by the board of directors, no person may own more than 9.8% in value or in number,
whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the
aggregate of the outstanding shares of all classes and series of our stock. The constructive ownership rules are
complex and may cause shares of stock owned directly or constructively by a group of related individuals or entities
to be constructively owned by one individual or entity. These ownership limits could delay or prevent a transaction
or a change in control of us that might involve a premium price for shares of our stock or otherwise be in the best
interests of our stockholders. The acquisition of less than 9.8% of our outstanding stock by an individual or entity
could cause that individual or entity to own constructively in excess of 9.8% in value of our outstanding stock, and
thus violate our charter’s ownership limit. Our charter also prohibits any person from owning shares of our stock
that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to
qualify as a REIT. In addition, our charter provides that (i) no person shall beneficially own shares of stock to the
extent such beneficial ownership of stock would result in us failing to qualify as a “domestically controlled qualified
investment entity” within the meaning of Section 897(h) of the Code, and (ii) no person shall beneficially or
constructively own shares of stock to the extent such beneficial or constructive ownership would cause us to own,
beneficially or constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in a tenant
of our real property. Any attempt to own or transfer shares of our stock in violation of these restrictions may result
in the transfer being automatically void.
Maryland law and provisions in our charter and bylaws may delay or prevent takeover attempts by third parties
and therefore inhibit our stockholders from realizing a premium on their stock.
Our charter and bylaws contain, and Maryland law contains, provisions that are intended to deter coercive takeover
practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our board of
directors, rather than to attempt a hostile takeover. Our charter and bylaws, among other things, (1) contain transfer
and ownership restrictions on the percentage by number and value of outstanding shares of our stock that may be
owned or acquired by any stockholder; (2) provide that stockholders are not allowed to act by written consent; (3)
permit the board of directors, without further action of the stockholders, to increase or decrease the authorized
number of shares and to issue and fix the terms of one or more classes or series of preferred stock, which may have
rights senior to those of the common stock; (4) permit only the board of directors to amend the bylaws; (5) establish
certain advance notice procedures for stockholder proposals and director nominations; and (6) designate the
Maryland courts as the exclusive forum for resolving certain claims.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring
potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to
assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However,
these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or
prevent an acquisition that our board of directors determines is not in our best interests. These provisions may also
prevent or discourage attempts to remove and replace incumbent directors.
21
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
CS&L and its subsidiaries own approximately 88,100 fiber network route miles, representing approximately
4.2 million fiber strand miles, approximately 231,900 route miles of copper cable lines, central office land and
buildings across 32 states and beneficial rights to permits, pole agreements and easements. Below is a geographic
distribution summary of our fiber and copper mileage and wireless communication towers as of December 31, 2016:
Network Properties
Location
GA
TX
IA
KY
NC
AR
OH
OK
FL
MO
NM
IL
PA
MS
AL
IN
VA
MI
WI
NY
NE
Other(1)(cid:3)
Fiber Route Miles
15,100
9,200
8,600
7,400
4,200
2,900
3,200
1,600
3,600
1,300
900
5,800
5,700
2,400
1,200
2,600
2,400
2,200
2,100
1,500
—
4,200
88,100
Copper Route
Miles
Total Route Miles
Towers
45,200
39,700
32,700
31,600
18,600
12,900
10,800
12,200
8,400
10,700
5,200
—
—
1,500
2,400
—
—
—
—
—
—
—
231,900
60,300 (cid:3)(cid:3)
48,900 (cid:3)(cid:3)
41,300 (cid:3)(cid:3)
39,000 (cid:3)(cid:3)
22,800 (cid:3)(cid:3)
15,800 (cid:3)(cid:3)
14,000 (cid:3)(cid:3)
13,800 (cid:3)(cid:3)
12,000 (cid:3)(cid:3)
12,000 (cid:3)(cid:3)
6,100 (cid:3)(cid:3)
5,800 (cid:3)(cid:3)
5,700 (cid:3)(cid:3)
3,900 (cid:3)(cid:3)
3,600 (cid:3)(cid:3)
2,600 (cid:3)(cid:3)
2,400 (cid:3)(cid:3)
2,200 (cid:3)(cid:3)
2,100 (cid:3)(cid:3)
1,500 (cid:3)(cid:3)
— (cid:3)(cid:3)
4,200 (cid:3)(cid:3)
320,000 (cid:3)(cid:3)
3
21
—
2
2
1
1
3
—
1
25
—
3
—
—
—
—
—
—
1
13
26
102
(1) Includes 11 states and Mexico.
Item 3. Legal Proceedings.
In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we
believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our
business, financial condition, cash flows or results of operations.
Pursuant to the Separation and Distribution Agreement, Windstream has agreed to indemnify us (including our
subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from
or relating to legal proceedings involving Windstream's telecommunications business prior to the Spin-Off, and,
pursuant to the Master Lease, Windstream has agreed to indemnify us for, among other things, any use, misuse,
maintenance or repair by Windstream with respect to the Distribution Systems. Windstream is currently a party to
various legal actions and administrative proceedings, including various claims arising in the ordinary course of its
telecommunications business, which are subject to the indemnities provided by Windstream to us. While these
22
actions and proceedings are not believed to be material, individually or in the aggregate, the ultimate outcome of
these matters cannot be predicted. The resolution of any such legal proceedings, either individually or in the
aggregate, could have a material adverse effect on Windstream's business, financial position or results of operations,
which, in turn, could have a material adverse effect on our business, financial position or results of operations if
Windstream is unable to meet their indemnification obligations.
Item 4. Mine Safety Disclosures.
None
23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “CSAL.” In connection with
the name change, on February 27, 2017, the Company’s common stock will commence trading on the NASDAQ
Global Select Market under the ticker symbol “UNIT” and will cease trading under the symbol “CSAL.” It has been
our policy to declare quarterly dividends to common shareholders so as to comply with the provisions of the Internal
Revenue Code governing REITs. The following table sets forth, for the periods indicated, the high and low sales
prices per share of our common stock as reported on the NASDAQ Global Select Market since our common stock
commenced trading on April 20, 2015, and the cash dividends declared per common share:
2016
Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
(cid:3)(cid:3)
2015
Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
(cid:3)(cid:3)
High
$ 22.91
$ 29.57
$ 32.73
$ 31.54
Low
$ 15.13 $
$ 21.63 $
$ 28.71 $
$ 22.50 $
Per Share
Declared
0.60
0.60
0.60
0.60
High
Low
Per Share
Declared
*
$ 34.63
$ 24.83
$ 20.93
*
*
$ 24.39 $ 0.4418
0.60
$ 17.50 $
0.60
$ 16.96 $
(1 )
* Information not applicable for periods presented or any prior periods
(1)
Per share distribution represents a pro-rata quarterly distribution of $0.60 based upon the date of the Spin-Off,
which was April 24, 2015.
Holders
As of February 15, 2017, the closing price of our common stock was $26.39 per share as reported on the NASDAQ
Global Select Market. As of February 15, 2017, we had 155,785,924 outstanding shares of common stock, 23,711
record holders and approximately 190,126 beneficial owners of our common stock.
Dividends (Distributions)
Distributions with respect to our common stock is characterized for federal income tax purposes as taxable ordinary
dividends, capital gains dividends, non-dividend distribution or a combination thereof. For the year ended December
31, 2016 and for the period from April 24, 2015 to December 31, 2015 our common stock distribution per share was
$2.40 and $1.04, respectively, characterized as follows:
(cid:3)
(cid:3)(cid:3)
Ordinary dividends
Non-dividend distributions
Total
Year Ended
December 31, 2016
Period from
1.31 $
1.09
2.40 $
April 24 - December 31, 2015
0.87
0.17
1.04
$
$
It is expected that our dividend will be $2.40 per share per annum, subject to approval of our board of directors.
24
Stock Performance
The following graph shows a comparison from April 20, 2015 (the date our common stock commenced trading on
the NASDAQ Global Select Market) through December 31, 2016 of the cumulative total return for our common
stock, the Standard & Poor's 400 Stock Index (S&P 400 Index), and the MSCI US REIT Index. The graph assumes
that $100 was invested at the market open on April 20, 2015 and that all dividends were reinvested in the common
stock of CS&L, the S&P 400 Index and the MSCI US REIT Index. The stock price performance of the following
graph is not necessarily indicative of future stock price performance.
Comparison of Quarterly Cumulative Total Return
Assumes Initial Investment of $100
December 2016
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
4/20/2015
6/30/2015
9/30/2015
12/31/2015
3/31/2016
6/30/2016
9/30/2016
12/31/2016
Communications Sales & Leasing, Inc.
S&P 400 Index - Total Returns
MSCI US REIT INDEX
Cumulative Total Stockholder Returns
Based on Investment of $100.00 Beginning on April 20, 2015
Communications Sales and Leasing, Inc.
S&P 400 Index
MSCI US REIT Index
Issuer Purchases of Equity Securities
4/20/2015 12/31/2015 12/31/2016
107.65
$ 100.00 $
111.76
100.00
109.46
100.00
72.33 $
92.56
100.78
The table below provides information regarding shares withheld from CS&L employees to satisfy minimum
statutory tax withholding obligations arising from the vesting of restricted stock granted under the Communications
Sales & Leasing, Inc. 2015 Equity Incentive Plan. The shares of common stock withheld to satisfy tax withholding
obligations may be deemed purchases of such shares required to be disclosed pursuant to this Item 5.
Period
October 1, 2016 to October 31, 2016
November 1, 2016 to November 30, 2016
December 1, 2016 to December 31, 2016
Total
Average Price
Paid per
Share(2)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
31.41
-
—
31.41
—
—
—
—
—
—
—
—
Total
Number of
Shares
Purchased(1)
164
—
—
164 $
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
25
(1) Excludes 7,656 shares withheld related to awards of CS&L restricted stock held by current Windstream
employees granted in connection with the Spin-Off accordance with the Employee Matters
Agreement. Additional information regarding the Employee Matters Agreement is contained in Note 11 –
Related Party Transactions of the Notes to the Consolidated Financial Statements.
(2) The weighted-average price per share is the weighted-average of the fair market prices at which we calculated
the number of shares withheld to cover tax withholdings for the employees.
Item 6. Selected Financial Data.
The following table sets forth selected financial data for CS&L on a consolidated and combined historical basis as of
the dates and for the years indicated.
Prior to April 24, 2015, we did not operate the Consumer CLEC Business separately from Windstream, nor did we
commence our leasing business. The selected historical financial data as of December 31, 2014 and 2013 and for the
period from January 1, 2015 to April 24, 2015 and the years ended December 31, 2014, 2013 and 2012 has been
derived from the audited financial statements of the Consumer CLEC Business and Distribution Systems.
The following should be read in conjunction with the combined financial statements, accompanying notes and
Management's Discussion and Analysis of Financial Condition and Results of Operations, each of which are
included elsewhere in this Form 10-K.
(Thousands, except per share data)
Statement of Income Data:
Total revenue(1)(cid:3)
Interest expense
Net (loss) income applicate to common
shareholders
(Loss) earnings per common share - basic
(Loss) earnings per common share - diluted
Balance Sheet Data:
Total assets(2)(cid:3)
Notes and other debt(3)(cid:3)
Total shareholders' (deficit) equity(4)(cid:3)
Other Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Dividends paid
Dividends declared per common share
Funds from operations ("FFO")(5)(cid:3)
Diluted FFO per common share
Adjusted funds from operations ("AFFO")(5)
Diluted AFFO per common share
Year Ended
December 31,
2016
(cid:3)
April 24 -
December 31,
2015
January 1
- April 24,
2015
$
770,408 $
275,394
476,314 $ 10,149 $
181,797
*
(5,497)
(0.04)
(0.04)
23,718
0.16
0.16
*
*
*
Year Ended December 31,
2014
2013
2012
36,015 $
*
*
*
*
45,126 $63,478
*
*
*
*
*
*
*
*
$ 3,318,752 $ 2,542,636
4,082,749 3,505,228
(1,402,445) (1,166,906)
* $2,588,450 $ 2,704,882 $29,444
*
*
*
*
*
* 2,580,565 2,695,223
$
293,208
375,988 $
(535,231) (1,079,442)
928,714
188,766
156,854
367,830
1.64
2.40
259,829
346,051
1.73
2.27
267,077
398,537
1.78
2.61
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
* Information not applicable for periods presented
(1)
For periods prior to April 24, 2015, amounts represent revenues of the Consumer CLEC Business as an
integrated operation within Windstream.
(2) As of December 31, 2014 and 2013 amounts represent the combined assets of the Consumer CLEC Business
and the Distribution Systems. For the year ended December 31, 2012, amount represents only the Consumer
CLEC Business.
(3) As of December 31, 2016, amount includes $54.5 million of capital lease obligations.
26
(4) As of December 31, 2014 and 2013 amounts include the net assets contributed of the Consumer CLEC
(5)
Business and the Distribution Systems.
For a more detailed discussion and reconciliation of FFO and AFFO, see “Non-GAAP Financial Measures” in
Item 7.
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis of financial condition and results of operations describes the
principal factors affecting the results of our operations, financial condition, and changes in financial condition, as
well as our critical accounting estimates. Because we were formed in connection with the Spin-Off from
Windstream Holdings on April 24, 2015, the comparable period results discussed in this section cover only the 252-
day period from April 24, 2015 to December 31, 2015. As such, there are inherent limitations to period over period
comparability. This discussion should be read in conjunction with the accompanying audited financial statements,
and the notes thereto set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Overview
Company Description
On April 24, 2015, CS&L completed the Spin-Off from Windstream pursuant to which Windstream contributed the
Distribution Systems and the Consumer CLEC Business to CS&L and CS&L issued common stock and
indebtedness and paid cash obtained from borrowings under CS&L's senior credit facilities to Windstream. In
connection with the Spin-Off, we entered into the Master Lease with Windstream, pursuant to which a substantial
portion of our real property is leased to Windstream and from which a substantial portion of our revenues are
currently derived.
We are an independent, internally managed real estate investment trust (“REIT”) engaged in the acquisition and
construction of mission critical infrastructure in the communications industry. We are principally focused on
acquiring and constructing fiber optic broadband networks, wireless communications towers, copper and coaxial
broadband networks and data centers. Our goal is to grow and diversify our company by pursuing a range of
transaction structures with communication service providers as discussed further in Part I, Item 1 “Business” of this
Annual Report on Form 10-K. As a REIT, the Company is generally not subject to U.S. federal income taxes on
income generated by its REIT operations, which includes income derived from the Master Lease. We have elected
to treat the subsidiaries through which we operate our fiber business (“Uniti Fiber”) and the Consumer CLEC
Business (“Talk America”) as taxable REIT subsidiaries (“TRSs”). TRSs enable us to engage in activities that do
not result in income that would be qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and
local corporate income taxes.
During 2016, we managed our operations as three reportable business segments: Leasing, Fiber Infrastructure and
Consumer CLEC. Our Leasing segment represents our REIT operations, including the results of our leasing
programs (“Uniti Leasing”) and our tower operations (“Uniti Towers”), and corporate expenses not directly
attributable to other operating segments. The Fiber Infrastructure segment represents the operations of the Uniti
Fiber business, as well as corporate expenses directly attributable to the operations of that business, and the
Consumer CLEC segment represents the operations of Talk America and corporate expenses directly attributable to
the operation of that business. We evaluate the performance of each segment based on Adjusted EBITDA, which is
a segment performance measure defined as net income determined in accordance with GAAP, before interest
expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, the impact,
which may be recurring in nature, of transaction and integration related expenses, the write off of unamortized
deferred financing costs, costs incurred as a result of the early repayment of debt, changes in the fair value of
contingent consideration and financial instruments, and other similar items. For more information on Adjusted
EBITDA, see “Non-GAAP Financial Measures.” Detailed information about our segments can be found in Note 13
to our consolidated financial statements contained in Part II, Item 8 Financial Statements and Supplementary Data.
Effective in the first quarter of 2017, following the acquisition of NMS, we commenced managing and reporting our
operations in four reportable business segment: Leasing, Fiber Infrastructure, Towers and Consumer CLEC. Our
Leasing segment includes Uniti Leasing, Fiber Infrastructure includes Uniti Fiber, Towers includes Uniti Towers
and our ground lease investments, and Consumer CLEC includes Talk America. This change in segments aligns
with how management, including our Chief Executive Officer, who is our chief operating decision maker, evaluates
the performance of our businesses and make decisions regarding the allocation of resources. We will recast prior
period segment data to conform to this new presentation beginning with our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2017.
28
Significant Business Developments
Acquisition of NMS. On January 31, 2017, we completed the previously announced acquisition of Network
Management Holdings LTD (‘‘NMS’’). At close, NMS owns and operates 366 wireless communications towers in
Latin America with an additional 105 build to suit tower sites under development. The NMS portfolio spans three
Latin America countries with 212 towers in Mexico, 54 in Nicaragua, and 100 in Colombia. The consideration for
the 366 wireless towers currently in operation was $62.6 million, which was funded through cash on hand. Under
the terms of the purchase agreement, we will acquire the towers under development when construction is completed.
Following the close of the NMS transaction, the Uniti Towers portfolio consists of consists of 468 wireless
communication towers.
Issuance of Senior Unsecured Notes. On December 15, 2016, we, along with our wholly-owned subsidiary CSL
Capital, LLC (“CSL Capital”), co-issued $400 million aggregate principal amount of 7.125% Senior Unsecured
Notes due December 15, 2024 (“the 2024 Notes”). The 2024 Notes were issued at an issue price of 100% of par
value, and are guaranteed by each of CS&L’s wholly-owned domestic subsidiaries that guarantee indebtedness
under CS&L’s senior credit facilities. A portion of the proceeds from the issuance of the 2024 Notes were used to
repay existing borrowings under the $500 million revolving credit facility that matures on April 24, 2020 (the
“Revolving Credit Facility”) under the credit agreement entered into by the Company and CSL Capital on April 24,
2015 (the “Credit Agreement”), and the remaining proceeds were retained for general corporate purposes.
Acquisition of Tower Cloud, Inc. On August 31, 2016, we completed the previously announced acquisition of Tower
Cloud, Inc. The consideration for all outstanding equity interests was valued at $345 million, and included $187.7
million in cash and the issuance of 1.9 million shares of the Company’s common stock with an acquisition date fair
value of $58.5 million. Additional contingent consideration of up to $130 million, with an acquisition date fair value
of $98.6 million, will be paid upon the achievement of certain defined operational and financial milestones. Tower
Cloud provides data transport services, with particular focus on providing infrastructure solutions to the wireless and
enterprise sectors, including fiber-to-the-tower backhaul, small cell networks, and dark fiber deployments. At
acquisition, Tower Cloud’s network consisted of approximately 90,000 fiber strand miles in service across the
southeastern United States, with 181,000 fiber strand miles awarded for future deployment for major wireless
carriers. We funded the cash portion of the transaction through cash on hand and $150 million of borrowings under
our Revolving Credit Facility. This transaction compliments our diversification strategy, expands our national
wireless carrier relationships, and will accelerate our small cell and dark fiber businesses. Following the close of the
transaction, the Tower Cloud and PEG Bandwidth businesses were combined into a unified fiber infrastructure
organization, Uniti Fiber. During January 2017, we paid contingent consideration payments of $18.8 million for the
achievement of certain milestones in accordance with the Tower Cloud merger agreement.
Windstream’s Disposition of Retained Interest in CS&L. On June 15, 2016, Windstream Holdings disposed of 14.7
million shares of our common stock, representing approximately half of its retained ownership interest, to certain
creditors of Windstream in exchange for satisfaction of certain Windstream debt. Citigroup Global Markets Inc.
(“Citigroup”) then acquired such shares from the creditors and sold the shares to institutional accredited investors,
including funds managed by Searchlight Capital Partners, L.P. (“Searchlight”). The Company did not receive any
proceeds resulting from the disposition of these shares.
In connection with the transaction, Searchlight, as the lead private investor of 10 million shares of our common
stock, was offered by CS&L the right to designate one member to the Company’s board of directors, provided such
designee is reasonably acceptable to the Company, as noted above. The designation right will terminate if
Searchlight’s ownership drops below 5% prior to June 15, 2019 or below 8% thereafter.
On June 24, 2016, Windstream Holdings disposed of its remaining 14.7 million shares of our common stock as part
of a public offering (the “Resale Offering”). The Company did not receive any proceeds resulting from the
disposition of these shares.
In connection with the Resale Offering, we issued 2.2 million additional shares of our common stock pursuant to an
overallotment option granted to the underwriters. The shares were sold at a public offering price of $26.01, resulting
in proceeds to the Company of $54.8 million, net of underwriting discounts and commissions, which were used to
repay existing borrowings under our Revolving Credit Facility.
29
Issuance of Senior Secured Notes. On June 9, 2016, we, along with our wholly-owned subsidiary CSL Capital, co-
issued $150 million aggregate principal amount of 6.00% Senior Secured Notes as an add-on to the Company’s
existing Senior Secured Notes due April 15, 2023, which are referred to herein as add-on Notes. The add-on Notes
were issued at an issue price of 99.25%, are subject to the same customary covenant requirements as the existing
Senior Secured Notes, and are guaranteed by each of CS&L’s wholly-owned domestic subsidiaries that guarantee
indebtedness under CS&L’s senior credit facilities. The issuance of the add-on Notes was not registered under the
Securities Act of 1933, as amended (the “Securities Act”), but was exempt from registration under Securities Act
pursuant to Rule 144A, Regulation S and other applicable exemptions of the Securities Act. Proceeds from the
issuance of the add-on Notes, together with cash on hand, were used to re-pay existing borrowings under the
Revolving Credit Facility.
Acquisition of PEG Bandwidth, LLC. On May 2, 2016, we completed the previously announced acquisition of PEG
Bandwidth. The purchase price for all outstanding equity interests was valued at $424 million, and included $322.5
million of cash, issuance of one million shares of the Company’s common stock, and the issuance of 87,500 shares
of the Company’s 3% Series A Convertible Preferred Stock. PEG Bandwidth is a leading provider of infrastructure
solutions, including cell site backhaul and dark fiber, to the telecommunications industry, and has an extensive fiber
network consisting of over 300,000 strand miles in the Northeast/Mid Atlantic and South Central regions of the
United States and the State of Illinois. We funded the cash portion of the transaction through cash on hand and $321
million of borrowings under our Revolving Credit Facility.
Comparison of the year ended December 31, 2016 to the period from April 24, 2015 to December 31, 2015
The following tables sets forth, for the periods indicated, our results of operations expressed as dollars and as a
percentage of total revenues:
Year Ended
December 31, 2016
% of
Revenues
Period from April 24 -
December 31, 2015 (cid:3)
% of
Revenues
(Thousands)
Revenues:
Leasing
Fiber Infrastructure
Consumer CLEC
Total revenues
Costs and Expenses:
Interest expense
Depreciation and amortization
General and administrative expense
Operating expense
Transaction related costs
Total costs and expenses
Income before income taxes
Income tax expense
Net (loss) income
Participating securities' share in earnings
Dividends declared on convertible preferred stock
Amortization of discount on convertible preferred
stock
Net (loss) income applicable to common shareholders
$
$
677,368 87.9% $
70,568 9.2%
22,472 2.9%
770,408 100.0%
275,394 35.7%
375,970 48.8%
35,402 4.6%
49,668 6.4%
33,669 4.4%
770,103 100.0%
305 0.0%
517 0.1%
(212) (0.0%)
(1,557) (0.2%)
(1,743) (0.2%)
458,614 96.3%
- 0.0%
17,700 3.7%
476,314 100.0%
181,797 38.2%
238,748 50.1%
11,208 2.4%
13,743 2.9%
5,210 1.1%
450,706 94.6%
25,608 5.4%
738 0.2%
24,870 5.2%
(1,152) (0.2%)
- 0.0%
(1,985) (0.3%)
(5,497) (0.7%) $
- 0.0%
23,718 5.0%
Revenues
Leasing – Lease revenues are primarily attributable to rental revenue from leasing our Distribution Systems to
Windstream Holdings pursuant to the Master Lease. Under the Master Lease, Windstream Holdings is responsible
for the costs related to operating the Distribution Systems, including property taxes, insurance, and maintenance and
repair costs. As a result, we do not record an obligation related to the payment of property taxes, as Windstream
30
makes direct payments to the taxing authorities. The Master Lease has an initial term of 15 years with four five-year
renewal options and encompasses properties located in 29 states. Rent under the Master Lease is an annual fixed
amount of $650 million during the first three years. Commencing with the fourth year of the Master Lease and
continuing for the remainder of the initial term, rent under the Master Lease is subject to an annual escalation of
0.5%. Additionally, we funded $43.1 million of capital expenditures related to the Distribution System on December
29, 2015. Monthly rent paid by Windstream increased by approximately $3.5 million per year in accordance with
the Master Lease effective as of the date we provided the funding. Rental revenues over the initial term of the
Master Lease are recognized in the financial statements on a straight line basis, representing approximately $670.7
million per year.
The Master Lease provides that tenant funded capital improvements (“TCIs”), defined as maintenance, repair,
overbuild, upgrade or replacement to leased network, including without limitation, the replacement of copper
distribution systems with fiber distribution systems, automatically become property of CS&L upon their
construction by Windstream. We receive non-monetary consideration related to TCIs as they automatically become
our property, and we recognize the cost basis of TCIs that are capital in nature as real estate investments and
deferred revenue. We depreciate the real estate investments over their estimated useful lives and amortize the
deferred revenue as additional leasing revenues over the same depreciable life of the TCI assets. During the year
ended December 31, 2016 and for the period from April 24, 2015 through December 31, 2015, we recorded $157.0
million and $68.6 million of TCIs, respectively.
For the year ended December 31, 2016, we recognized $677.4 million of revenue under the Master Lease, which
included $6.1 million of TCI revenue. For the period from April 24, 2015 to December 31, 2015, we recognized
$458.6 million of revenue under the Master Lease, which includes $0.8 million of TCI revenue. The increase is
primarily attributable to a full year of revenue during 2016 as compared to 252 days of revenue during the period
from April 24, 2015 to December 31, 2015.
Because a substantial portion of our revenue is derived from lease payments by Windstream pursuant to the Master
Lease, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial
condition if Windstream experiences operating difficulties and becomes unable to generate sufficient cash to make
payments to us under the Master Lease. In recent years, Windstream has experienced annual declines in its total
revenue and sales. Accordingly, we monitor the credit quality of Windstream through numerous methods, including
by (i) reviewing the credit ratings of Windstream by nationally recognized credit rating agencies, (ii) reviewing the
financial statements of Windstream that are publicly available and that are required to be delivered to us pursuant to
the Master Lease, (iii) monitoring news reports regarding Windstream and its businesses, (iv) conducting research to
ascertain industry trends potentially affecting Windstream, and (v) monitoring the timeliness of its lease payments.
In addition to periodic financial statements, Windstream is obligated under the Master Lease to provide us (i) a
detailed consolidated budget on an annual basis and any significant revisions approved by Windstream’s board of
directors, (ii) prompt notice of any adverse action or investigation by a governmental authority relating to
Windstream’s licenses affecting the leased property, and (iii) any information we require to comply with our
reporting and filing obligations with the SEC. Furthermore, pursuant to the Master Lease, we may inspect the
properties leased to Windstream upon reasonable advance notice, and, no more than twice per year, we may require
Windstream to deliver an officer’s certificate certifying, among other things, its material compliance with the
covenants under the Master Lease, the amount of rent and additional charges payable thereunder, the dates the same
were paid, and any other questions or statements of fact we reasonably request.
Fiber Infrastructure – We recognized $70.6 million of revenue, approximately 78% of which was derived from lit
backhaul services, from our Fiber Infrastructure segment for the year ended December 31, 2016. This revenue was
derived from the newly acquired PEG Bandwidth and Tower Cloud businesses. Revenues related to the PEG
Bandwidth acquisition have been included in our results of operations for the period from May 2, 2016 to December
31, 2016 and revenues related to the Tower Cloud acquisition have been included in our results of operations for the
period from September 1, 2016 to December 31, 2016. At December 31, 2016, we had approximately 5,450
customer connections.
Consumer CLEC – For the year ended December 31, 2016, we recognized $22.5 million of revenue from the
Consumer CLEC Business, compared to $17.7 million for the period from April 24, 2015 to December 31, 2015.
31
The increase is primarily attributable to a full year of revenue during 2016 as compared to 252 days of revenue
during the prior year period. We served approximately 37,000 customers as of December 31, 2016, a 19.6%
decrease from 46,000 at December 31, 2015. The decrease in customers is due to the effects of competition and
customer attrition.
The increase in the performance of our Leasing and Consumer CLEC segments for the year ended December 31,
2016 compared to the period from April 24 to December 31, 2015, is primarily attributable to the impact of a full
four quarters of activity in 2016, while there was only 252 days of activity in 2015.
Interest Expense
Interest expense for the year ended December 31, 2016 totaled $275.4 million (35.7% of revenue), which included
non-cash interest expense of $16.0 million resulting from the amortization of our debt discounts and debt issuance
costs. During the year ended December 31, 2016, we incurred $4.1 million in interest expense related to our
previously undrawn Revolving Credit Facility, $4.9 million related to the $150 million of newly issued add-on
Notes and $1.2 million in interest expense related to the 2024 Notes.
Interest expense for the period from April 24, 2015 to December 31, 2015 totaled $181.8 million, which included
non-cash interest expense of $10.0 million resulting from the amortization of our debt discounts and debt issuance
costs.
Depreciation and Amortization Expense
We incur depreciation and amortization expense related to our property, plant and equipment, corporate assets and
intangible assets. Charges for depreciation and amortization for the year ended December 31, 2016 totaled $376.0
million (48.8% of revenue), which included property, plant and equipment depreciation of $369.9 million and
intangible asset amortization of $6.1 million. Charges for depreciation and amortization for the period from April
24, 2015 to December 31, 2015 totaled $238.7 million (50.1% of revenue), which included real estate investment
depreciation of $235.9 million, corporate asset depreciation of $0.2 million and intangible asset amortization of $2.6
million.
General and Administrative Expense
General and administrative expenses include compensation costs (including stock-based compensation awards),
professional and legal services, corporate office costs and other costs associated with administrative activities. For
the year ended December 31, 2016, general and administrative costs totaled $35.4 million (4.6% of revenue), which
included $4.8 million of stock-based compensation expense. For the year ended December 31, 2016, our general and
administrative expenses included $13.1 million (1.7% of revenue) of expense related to the newly acquired PEG
Bandwidth and Tower Cloud businesses.
For the period from April 24, 2015 to December 31, 2015, general and administrative costs totaled $11.2 million
(representing 2.4 % of revenue), which includes $1.9 million of stock-based compensation expense.
Operating Expense
Operating expense for the year ended December 31, 2016 totaled $49.7 million (6.4% of revenue), which consists of
$17.4 million (2.3% of revenue) of expense related to the operation of the Consumer CLEC Business and $32.1
million (4.2% of revenue) of expense related to the newly acquired PEG Bandwidth and Tower Cloud businesses.
For the year ended December 31, 2016, Fiber Infrastructure operating expenses include $7 million of tower rent,
$5.3 million of payroll related expense, and $4.3 million of lit service expense.
Operating expense for the period from April 24, 2015 to December 31, 2015 totaled $13.7 million (2.9% of
revenue), which consist primarily of expenses related to the operation of the Consumer CLEC Business.
32
Reportable Segments
The following sets forth, for the year ended December 31, 2016, revenues and Adjusted EBITDA of our reportable
segments:
(cid:3)
(Thousands)
Revenues
Adjusted EBITDA
Less:
Interest expense
Depreciation and amortization
Transaction related costs
Stock-based compensation
Income tax expense
Net loss
Year Ended December 31, 2016
Leasing
(cid:3)
Infrastructure (cid:3) Consumer CLEC (cid:3)(cid:3)
Fiber
Subtotal of
Reportable
Segments
677,368 $
70,568 $
22,472 $
770,408
659,198 $
25,912 $
5,074 $
690,184
(cid:3)
$
$
344,083
28,629
3,258
$
275,394
375,970
33,669
4,846
517
(212)
The following table sets forth, for the period from April 24, 2015 to December 31, 2015, revenues and Adjusted
EBITDA of our reportable segments:
(cid:3)
(Thousands)
Revenues
Adjusted EBITDA
Less:
Interest expense
Depreciation and amortization
Transaction related costs
Stock-based compensation
Income tax expense
Net income
Non-GAAP Financial Measures
Period from April 24, 2015 to December 31, 2015
Leasing
(cid:3) Consumer CLEC (cid:3)(cid:3)
Subtotal of Reportable
Segments
458,614 $
17,700 $
476,314
449,340 $
3,957 $
453,297
(cid:3)
$
$
236,177
2,571
$
181,797
238,748
5,210
1,934
738
24,870
We refer to EBITDA, Adjusted EBITDA, Funds From Operations (“FFO”) as defined by the National Association
of Real Estate Investment Trusts (“NAREIT”), Normalized Funds From Operations (“NFFO”) and Adjusted Funds
From Operations (“AFFO”) in our analysis of our results of operations, which are not required by, or presented in
accordance with, accounting principles generally accepted in the United States (“GAAP”). While we believe that net
income, as defined by GAAP, is the most appropriate earnings measure, we also believe that EBITDA, Adjusted
EBITDA, FFO, NFFO and AFFO are important non-GAAP supplemental measures of operating performance for a
REIT.
We define “EBITDA” as net income, as defined by GAAP, before interest expense, provision for income taxes and
depreciation and amortization. We define “Adjusted EBITDA” as EBITDA before stock-based compensation
expense and the impact, which may be recurring in nature, of transaction and integration related costs, the write off
of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, changes in the fair
value of contingent consideration and financial instruments, and other similar items. We believe EBITDA and
Adjusted EBITDA are important supplemental measures to net income because they provide additional information
to evaluate our operating performance on an unleveraged basis. In addition, Adjusted EBITDA is calculated similar
to defined terms in our material debt agreements used to determine compliance with specific financial
33
covenants. Since EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, they
should not be considered as alternatives to net income determined in accordance with GAAP.
Because the historical cost accounting convention used for real estate assets requires the recognition of depreciation
expense except on land, such accounting presentation implies that the value of real estate assets diminishes
predictably over time. However, since real estate values have historically risen or fallen with market and other
conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could
be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs
that excludes historical cost depreciation and amortization, among other items, from net income, as defined by
GAAP. FFO is defined by NAREIT as net income applicable to common shareholders computed in accordance with
GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and
impairment charges. We compute FFO in accordance with NAREIT’s definition.
The Company defines NFFO, as FFO excluding the impact, which may be recurring in nature, of transaction and
integration related costs. The Company defines AFFO, as NFFO excluding (i) non-cash revenues and expenses such
as stock-based compensation expense, amortization of debt and equity discounts, amortization of deferred financing
costs, depreciation and amortization of non-real estate assets, straight line revenues, revenue associated with the
amortization of TCIs and (ii) the impact, which may be recurring in nature, of maintenance capital expenditures, the
write-off of unamortized deferred financing fees, additional costs incurred as a result of early repayment of debt,
changes in the fair value of contingent consideration and financial instruments and similar items. We believe that the
use of FFO, NFFO and AFFO, and their respective per share amounts, combined with the required GAAP
presentations, improves the understanding of operating results of REITs among investors and analysts, and makes
comparisons of operating results among such companies more meaningful. We consider FFO, NFFO and AFFO to
be useful measures for reviewing comparative operating performance. In particular, we believe AFFO, by excluding
certain revenue and expense items, can help investors compare our operating performance between periods and to
other REITs on a consistent basis without having to account for differences caused by unanticipated items and
events, such as transaction and integration related costs. The Company uses FFO, NFFO and AFFO, and their
respective per share amounts, only as performance measures, and FFO, NFFO and AFFO do not purport to be
indicative of cash available to fund our future cash requirements. While FFO, NFFO and AFFO are relevant and
widely used measures of operating performance of REITs, they do not represent cash flows from operations or net
income as defined by GAAP and should not be considered an alternative to those measures in evaluating our
liquidity or operating performance.
Further, our computations of EBITDA, Adjusted EBITDA, FFO, NFFO and AFFO may not be comparable to that
reported by other REITs or companies that do not define FFO in accordance with the current NAREIT definition or
that interpret the current NAREIT definition or define EBITDA, Adjusted EBITDA, NFFO and AFFO differently
than we do.
The reconciliation of our net income to EBITDA and Adjusted EBITDA and of our net income applicable to
common shareholders to FFO, NFFO and AFFO for the year ended December 31, 2016 and for the period from
April 24, 2015 to December 31, 2015 is as follows:
(Thousands)
Net (loss) income
Depreciation and amortization
Interest expense
Income tax expense
EBITDA
Stock based compensation
Transaction related costs
Adjusted EBITDA
$
$
$
34
Year Ended
December 31, 2016
Period from
(212) $
375,970
275,394
517
651,669 $
4,846
33,669
690,184 $
April 24 - December 31, 2015
24,870
238,748
181,797
738
446,153
1,934
5,210
453,297
(Thousands)
Net (loss) income attributable to common shareholders $
Real estate depreciation and amortization
Participating securities' share in earnings
Participating securities' share in FFO
FFO applicable to common shareholders
Transaction related costs
NFFO applicable to common shareholders
Amortization of deferred financing costs
Amortization of debt discount
Stock-based compensation
Non-real estate depreciation and amortization
Straight-line revenue
Maintenance capital expenditures
Amortization of discount on convertible preferred stock
Other non-cash (revenue) expense, net
AFFO applicable to common shareholders
$
Critical Accounting Estimates
Year Ended
December 31, 2016
Period from
(5,497) $
April 24 - December 31, 2015
23,718
236,177
1,152
(1,218)
259,829
5,210
265,039
4,832
5,172
1,934
2,571
(11,795)
-
-
(676)
267,077
351,548
1,557
(1,557)
346,051
33,669
379,720
7,823
8,179
4,846
24,422
(17,293)
(3,327)
1,985
(7,818)
398,537 $
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the
preparation of our financial statements. The nature of the estimates and assumptions are material due to the levels of
subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to
change. We have identified the accounting for income taxes, revenue recognition, useful lives of assets, and the
impairment of property, plant and equipment as critical accounting estimates, as they are the most important to our
financial statement presentation and require difficult, subjective and complex judgments.
We believe the current assumptions and other considerations used to estimate amounts reflected in our financial
statements are appropriate. However, if actual experience differs from the assumptions and other considerations
used in estimating amounts reflected in our financial statements, the resulting changes could have a material adverse
effect on our results of operations and, in certain situations, could have a material adverse effect on our financial
condition.
Income Taxes
We have elected on our U.S. federal income tax return for the taxable year ending December 31, 2015 to be treated
as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must
distribute at least 90% of our annual REIT taxable income to shareholders, and meet certain organizational and
operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S.
federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in
any taxable year, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax,
on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our
shareholders in computing taxable income. Any resulting corporate liability could be substantial and could
materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we
were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a
REIT for the four taxable years following the year in which we failed to qualify as a REIT.
To maintain REIT status, we must distribute a minimum of 90% of our taxable income. We intend to make regular
quarterly dividend payments of all or substantially all of our income to holders of our common stock, and therefore
no provision is required in the accompanying Consolidated Financial Statements for U.S. federal income taxes
related to the activities of the REIT and its passthrough subsidiaries. We are subject to the statutory requirements of
35
the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the
best judgment of management based on analysis and interpretation of respective tax laws.
CS&L operates as a REIT for U.S. federal income tax purposes. As a REIT, the Company is generally not subject to
U.S. federal income taxes on income generated by its REIT operations, which includes income derived from the
Master Lease. We have elected to treat the subsidiaries through which we operate Uniti Fiber and Talk America as
TRSs. TRSs enable us to engage in activities that do not result in income that would be qualifying income for a
REIT. Our TRSs are subject to U.S. federal, state and local corporate income taxes.
Deferred tax assets and liabilities are recognized under the asset and liability method for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently
enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the
period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax
assets unless it is more likely than not that such assets will be realized.
We recognize the benefit of tax positions that are "more likely than not" to be sustained upon examination based on
their technical merit. The benefit of a tax position is measured at the largest amount that has a greater than 50
percent likelihood of being realized upon ultimate settlement. If applicable, we will report tax-related penalties and
interest expense as a component of income tax expense.
The Company will be subject to a federal corporate level tax (currently 35%) on any gain recognized from the sale
of assets occurring within a specified recognition period after the Spin-Off up to the amount of the built in gain that
existed on April 24, 2015, which is based on the fair market value of the assets in excess of the Company’s tax basis
as of such date. The Company has no plans to dispose of the assets it acquired through the Spin-Off within the
applicable recognition period.
Revenue Recognition
Leasing revenues are primarily derived from providing access to or usage of leased networks and facilities. Leasing
revenues are recognized on a straight-line basis over the initial lease term. Revenues derived from other
telecommunications services, including broadband, long distance and enhanced service revenues are recognized
monthly as services are provided. Sales of customer premise equipment and modems are recognized when products
are delivered to and accepted by customers.
Service revenues are primarily derived from providing broadband transport and backhaul communications services
and are recognized when (i) persuasive evidence of an arrangement exists, (ii) the services have been provided to the
customer, (iii) the sales price is fixed or determinable, and (iv) the collection of the sales price is reasonably assured.
Services provided to the Company’s customers are pursuant to contractual fee-based arrangements, which generally
provide for recurring fees charged for the use of designated portions of the Company’s network and typically range
for a period of three to ten years. The Company’s revenue arrangements often include upfront fees charged to the
customer for the cost of establishing the necessary components of the Company’s network prior to the
commencement of use by the customer. Fees charged to customers for the recurring use of the Company’s network
are recognized during the related periods of service. Upfront fees that are billed in advance of providing services are
deferred until such time the customer accepts the Company’s network and then are recognized as service revenues
ratably over a period in which substantive services required under the revenue arrangement are expected to be
performed, which is the initial term of the arrangement.
Useful Lives of Assets
The calculation of depreciation and amortization expense is based on the estimated economic useful lives of the
underlying property, plant and equipment and customer lists intangible assets. Some of our Distribution Systems
assets use a group composite depreciation method. Under this method, when plant is retired, the original cost, net of
salvage value, is charged against accumulated depreciation and no immediate gain or loss is recognized on the
disposition of the plant.
36
Rapid changes in technology or changes in market conditions could result in significant changes to the estimated
useful lives of our property, plant and equipment that could materially affect the carrying value of these assets and
our future operating results. An extension of the average useful life of our property, plant and equipment of one year
would decrease depreciation expense by approximately $24.8 million per year, while a reduction in the average
useful life of one year would increase depreciation expense by approximately $31.3 million per year.
At December 31, 2016, our unamortized customer lists intangible assets totaled $160.6 million. The customer lists
are amortized using the straight-line method over their estimated useful lives. A reduction in the average useful lives
of the customer lists of one year would have increased the amount of amortization expense recorded in 2016 by
approximately $1.4 million.
Impairment of Property, Plant, and Equipment
We continually monitor events and changes in circumstances that could indicate that the carrying amount of our
property, plant and equipment may not be recoverable or realized. When indicators of potential impairment suggest
that the carrying value may not be recoverable, we assess the recoverability by estimating whether we will recover
the carrying value of those assets through its undiscounted future cash flows and the eventual disposition of the
asset. If, based on this analysis, we do not believe that we will be able to recover the carrying value of our property,
plant and equipment, we would record an impairment loss to the extent that the carrying value exceeds the estimated
fair value of the related assets.
Business Combinations
We apply the acquisition method of accounting for acquisitions meeting the definition of a business combination,
where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results
of operations are included with those of the Company from the dates of the respective acquisitions. Any excess of
the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is
recorded as goodwill. ASC 805 also requires acquirers, among other things, to estimate the acquisition date fair
value of any contingent consideration and to recognize any subsequent changes in the fair value of contingent
consideration in earnings. When provisional amounts are initially recorded, the Company continues to evaluate
acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine
whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired
and liabilities assumed.
Goodwill
Goodwill is recognized for the excess of purchase price over the fair value of net assets of businesses acquired.
Goodwill is reviewed for impairment at least annually. In accordance with ASC 350-20, Intangibles-Goodwill and
Other, we evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Unless
circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter. During the year
ended December 31, 2016, no impairment losses were recognized.
Liquidity and Capital Resources
Our principal liquidity needs are to fund operating expenses, meet debt service requirements, fund investment
activities, and make dividend distributions. Our primary sources of liquidity and capital resources are cash on hand,
cash provided by operating activities (primarily arising under the Master Lease with Windstream), borrowings under
our Credit Agreement, and proceeds from the issuance of debt and equity securities.
As of December 31, 2016, we had we had $171.8 million of unrestricted cash and cash equivalents, and $500
million of undrawn borrowing capacity under our revolving credit facility.
Cash provided by operating activities totaled $375.9 million and $293.2 million for the year ended December 31,
2016 and for the period from April 24, 2015 through December 31, 2015, respectively. Cash provided by operating
activities is driven by favorable changes in working capital, primarily attributable to our leasing activities.
37
Cash used in investing activities was $535.2 million for the year ended December 31, 2016, which was driven by the
acquisitions of PEG Bandwidth ($315.4 million) and Tower Cloud ($173.4 million) and capital expenditures ($46.4
million). Cash used in investing activities was $1.1 billion for the period from April 24, 2015 through December 31,
2015, due to consideration paid to Windstream for their contribution of the Distribution Systems and the Consumer
CLEC Business in connection with the Spin-Off ($1.04 billion) and capital expenditures ($44 million), primarily due
to the funding of capital expenditures related to the Distribution Systems.
Cash provided by financing activities was $188.8 million for the year ended December 31, 2016, which primarily
represents the proceeds from the 2024 Notes ($400 million), add-on Notes ($148.9 million), proceeds from the sale
of common stock ($54.2 million), partially offset by dividend payments ($367.8 million) and principal payments
related to the $2.14 billion senior secured term loan B facility that matures on October 24, 2022 (the “Term Loan
Facility”) under our Credit Agreement ($22.0 million). Cash provided by financing activities was $928.7 million for
the period from April 24, 2015 through December 31, 2015, which primarily represents the proceeds received from
the Term Loan Facility of $1.1 billion, partially offset by dividend payments of $156.9 million.
Master Lease
The Master Lease has an initial term of 15 years which, at the option of Windstream, may be extended for up to four
renewal terms of five years each beyond the initial term. In addition, Windstream has the right to extend the initial
term from 15 years to 20 years and, if exercised, the number of renewal terms will be reduced to three so that the
maximum term (taking into account all renewals) is 35 years. The initial annual rent under the Master Lease is $650
million during the first three years. Commencing with the fourth year, the rent is subject to annual escalation of
0.5%. The rent for the first year of each renewal term will be an amount agreed to by us and Windstream, or if we
are unable to agree, the renewal rent will be determined by an independent appraisal process. Commencing with the
second year of each renewal term, the renewal rent will increase at an escalation rate of 0.5%. In addition, if we fund
any capital improvements by Windstream, the rent will be increased to account for such funding.
At-the-Market Common Stock Offering Program
We have an effective shelf registration statement on file with the SEC (the “Registration Statement”) to offer and sell
various securities from time to time. Under the Registration Statement, we have established an at-the-market common
stock offering program (the “ATM Program”) to sell shares of common stock having an aggregate offering price of up
to $250.0 million. To date, no sales have been made under the ATM Program. This program provides additional
financial flexibility and an alternative mechanism to access the capital markets at an efficient cost as and when we need
financing, including for acquisitions. While we have not used the program to date, we currently intend to utilize the
program when we believe the price we can obtain for our common stock is attractive.
UPREIT Operating Partnership Units
When implemented, our UPREIT structure will enable us to acquire properties by issuing to sellers, as a form of
consideration, limited partnership interests in our operating partnership. As a result, this structure may potentially
facilitate our acquisition of assets in a more efficient manner and may allow us to acquire assets that an owner would
otherwise be unwilling to sell. Although we have no current plan or intention to use limited partnership units in the
operating partnership as consideration for properties we acquire, we believe that the flexibility to do so provides us an
advantage in seeking future acquisitions while preserving our available cash for other purposes, including the possible
payment of dividends.
Senior Notes
At December 31, 2016, we had outstanding $550.0 million aggregate principal amount of 6.00% Senior Secured
Notes due April 15, 2023 (the “Secured Notes”), $1.11 billion aggregate principal amount of 8.25% Senior Notes
due October 15, 2023 (the “2023 Notes”) and $400 million aggregate principal amount of 7.125% Senior Unsecured
Notes due December 15, 2024 (the “2024 Notes” and collectively with the Secured Notes and the 2023 Notes, the
“Notes”). The Secured Notes are secured by substantially all of the assets of the Company, CSL Capital and certain
of our wholly owned domestic subsidiaries, each of which also guarantees indebtedness under our senior credit
38
facilities (the “Guarantors”), subject to certain exceptions, and are guaranteed by the Guarantors. The 2023 Notes
and 2024 Notes are guaranteed by the Guarantors.
The Notes contain customary high yield covenants limiting our ability to incur or guarantee additional indebtedness;
incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock;
make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or
consolidate or sell all or substantially all of our assets; and create restrictions on our ability to pay dividends. The
covenants are subject to a number of limitations, qualifications and exceptions.
Credit Agreement
Our Credit Agreement consists of the Term Loan Facility and a $500 million revolving credit facility that matures
on April 24, 2020 (the “Revolving Credit Facility”). On October 21, 2016, the Company and CSL Capital amended
the Credit Agreement to, among other things, replace the then outstanding principal amounts of the term loans
thereunder with a like aggregate amount of new term loans having substantially similar terms as the then outstanding
term loans, other than with respect to the applicable interest rate and the period of time for which prepayment
premiums in respect of certain repricing transactions apply. The Term Loan Facility bears interest at a rate equal to
a Eurodollar rate, subject to a 1.00% floor, plus an applicable margin equal to 3.50%, and is subject to amortization
of 1.00% per annum. The Revolving Credit Facility bears interest at a rate equal to LIBOR plus 1.75% to 2.25%
based on our consolidated secured leverage ratio as defined in the Credit Agreement. Borrowings under the Credit
Agreement are guaranteed by the Guarantors, and are secured by substantially all of the assets of the Company, CSL
Capital and the Guarantors, subject to certain exceptions, which assets also secure the Secured Notes. We are subject
to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured
leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to
customary conditions, to incur incremental term loan borrowings and/or increased commitments under the Credit
Agreement in an aggregate amount equal to $150 million plus, an unlimited amount, so long as, on a pro forma basis
after giving effect to any such increases, our consolidated total leverage ratio, as defined in the Credit Agreement,
does not exceed 6.50 to 1.00 and our consolidated secured leverage ratio, as defined in the Credit Agreement, does
not exceed 4.00 to 1.00.
On February 9, 2017, we completed a repricing of our Term Loan Facility. The repricing (i) decreases the interest
rate by 50 basis points to LIBOR plus 3.00% per annum with a minimum LIBOR rate of 1.0% and (ii) will reduce
our cash interest costs by $10 million annually. Our interest rate swap agreements are unaffected by this repricing
and effectively fix the interest rate on our Term Loan Facility at 5.1%.
Interest Rate Swaps
On April 27, 2015 we entered into interest rate swap agreements to mitigate the interest rate risk inherent in our
variable rate Term Loan Facility. These interest rate swaps are designated as cash flow hedges and have a notional
value of $2.13 billion and mature on October 24, 2022. The weighted average fixed rate paid is 2.105%, and the
variable rate received resets monthly to the one-month LIBOR subject to a minimum rate of 1.0%.
Outlook
We anticipate our cash on hand and borrowing availability under our Revolving Credit Facility, combined with our
cash flows provided by leasing activities will be sufficient to fund our business operations, debt service and
distributions to our shareholders over the next twelve months. However, we may take advantage of opportunities to
generate additional liquidity through capital markets transactions. The amount, nature and timing of any capital
markets transactions will depend on: our operating performance and other circumstances; our then-current
commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed
by our current credit arrangements; and overall market conditions. These expectations are forward-looking and
subject to a number of uncertainties and assumptions. If our expectations about our liquidity prove to be incorrect,
we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no
notice, which would limit our ability to address the shortfall on a timely basis.
39
Contractual Obligations
As of December 31, 2016, we had contractual obligations and commitments as follows:
(millions)
Long-term debt(a)(cid:3)
Interest payments on long-term debt
obligations(b)(cid:3)
Operating leases
Capital leases
Network deployment(c)
Total projected obligations and
commitments(d)(cid:3)
Less than 1
Year
1-3
Years
3-5
Years
Payments Due by Period
$
21
$
42
$
42 $
More than
5 Years
Total
4,062 $4,167
249
15
7
33
495
19
14
-
491
7
13
-
390
6
61
-
1,625
47
95
33
$
325
$
570
$
553 $
4,519 $5,967
(a) Excludes $139.8 million of unamortized discounts on long-term debt and deferred financing costs.
(b)
(c) Network deployment purchase commitments are for success-based projects for which we have a signed
Interest rates on our Term Loan Facility are based on our swap rates.
customer contract before we commit resources to expand our network.
(d) Excludes $6.1 million of derivative liability related to interest rate swaps maturing on October 24, 2022.
Dividends
We have elected to be taxed as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for
dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it
annually distributes less than 100% of its taxable income. In order to maintain our REIT status, we intend to make
regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock
out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we
make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both
our operating requirements and debt service obligations. If our cash available for distribution is less than our taxable
income, we could be required to sell assets or borrow funds to make cash dividends or we may make a portion of the
required dividend in the form of a taxable distribution of stock or debt securities.
On January 13, 2017, we paid, to shareholders of record as of the close of business on December 30, 2016, a cash
dividend on our common stock of $0.60 per share for the period from October 1, 2016 through December 31, 2016.
On October 14, 2016, we paid, to shareholders of record as of the close of business on September 30, 2016, a cash
dividend on our common stock of $0.60 per share for the period from July 1, 2016 through September 30, 2016.
On July 15, 2016, we paid, to shareholders of record as of the close of business on June 30, 2016, a cash dividend on
our common stock of $0.60 per share for the period from April 1, 2016 through June 30, 2016.
On April 15, 2016, we paid, to shareholders of record as of the close of business on March 31, 2016, a cash dividend
on our common stock of $0.60 per share for the period from January 1, 2016 through March 31, 2016.
On January 15, 2016, we paid, to shareholders of record as of the close of business on December 31, 2015, a cash
dividend on our common stock of $0.60 per share for the period from October 1, 2015 through December 31, 2015.
Capital Expenditures
Capital expenditures for the Distribution Systems leased under the Master Lease are generally the responsibility of
Windstream. The Master Lease stipulates that Windstream can request that we fund $50 million of capital
expenditures per year for five years (but in no event to extend beyond the end of the sixth year of the Master Lease);
however, Windstream cannot require CS&L to make such capital expenditures. If we elect to fund requested capital
expenditures, the annual lease payments will be increased by 8.125% of the capital expenditures funded by us during
40
the first two years and at a floating rate based on our cost of capital thereafter. No capital expenditure funding
requests were made by Windstream for the year ended December 31, 2016.
We anticipate incurring total capital expenditures of $70 million to $85 million during 2017 related to the Uniti
Fiber business, driven by network deployment.
We anticipate incurring total capital expenditures of $25 million to $30 million during 2017 related to the Uniti
Towers business, driven by the development of build-to-suit towers.
We do not anticipate incurring significant capital expenditures on an annual basis in connection with operating our
Consumer CLEC Business or related to our corporate assets.
Off Balance-Sheet Arrangements
As of the date of this Annual Report on Form 10-K, we do not have any off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk exposure is interest rate risk with respect to our variable rate indebtedness under our Term
Loan Facility. In addition, we have a variable rate Revolving Credit Facility in an aggregate principal amount of $500
million, which is undrawn as of the date of this Annual Report on Form 10-K. To manage this exposure, we have
entered into interest rate swap agreements in order to mitigate the interest rate risk inherent in our variable rate Term
Loan Facility. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and variable
rates for our indebtedness. The interest rate risk for variable rate debt has been mitigated through the interest rate swap
agreement, and the interest rate for our remaining debt has a fixed rate, therefore a hypothetical 10% change in interest
rates effective at December 31, 2016 would have no material adverse impact on CS&L’s results of operations.
An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates
could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon
refinancing and increase interest expense on refinanced indebtedness.
41
Item 8. Financial Statements and Supplementary Data.
Communications Sales & Leasing, Inc.
Consolidated Financial Statements
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Communications Sales & Leasing, Inc.
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CLEC Business
Report of Independent Registered Public Accounting Firm
Statement of Revenues and Direct Expenses
Notes to Financial Statements
Page
43
45
46
47
48
49
50
84
85
86
42
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Communications Sales & Leasing, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income,
comprehensive income (loss), shareholders’ deficit and cash flows present fairly, in all material respects, the
financial position of Communications Sales & Leasing, Inc. and its subsidiaries at December 31, 2016 and
December 31, 2015, and the results of their operations and their cash flows for the year ended December 31, 2016
and for the period from April 24, 2015 through December 31, 2015 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules
listed in the index appearing under Item 15 present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements and financial statement schedules, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the
Company's internal control over financial reporting based on our audits (which was an integrated audit in 2016).
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As described in Management's Annual Report on Internal Control Over Financial Reporting, management has
excluded Tower Cloud, Inc. and PEG Bandwidth, LLC from its assessment of internal control over financial
reporting as of December 31, 2016 because they were acquired by the Company in purchase business combinations
during 2016. We have also excluded Tower Cloud, Inc. and PEG Bandwidth, LLC from our audit of internal control
over financial reporting. Tower Cloud, Inc. and PEG Bandwidth, LLC are wholly-owned subsidiaries whose total
43
assets represent 12.7% and 14.8%, respectively and total revenues represent 1.8% and 7.4%, respectively, of the
related consolidated financial statement amounts as of and for the year ended December 31, 2016.
/s/ PricewaterhouseCoopers LLP
Little Rock, Arkansas
February 23, 2017
44
Communications Sales & Leasing, Inc.
Consolidated Balance Sheets
(Thousands, except par value)
Assets:
Property, plant and equipment, net
Cash and cash equivalents
Accounts receivable, net
Goodwill
Intangible assets, net
Straight-line revenue receivable
Other assets
Total Assets
Liabilities, Convertible Preferred Stock and Shareholders' Deficit:
Liabilities:
Accounts payable, accrued expenses and other liabilities
Accrued interest payable
Deferred revenue
Derivative liability
Dividends payable
Deferred income taxes
Capital lease obligations
Contingent consideration
Notes and other debt, net
Total liabilities
Commitments and contingencies (Note 14)
Convertible Preferred Stock, Series A, $0.0001 par value, 88 shares
authorized, issued and outstanding, $87,500 liquidation value
Shareholders' Deficit:
Preferred stock, $0.0001 par value, 50,000 shares authorized, no shares
issued and outstanding
Common stock, $0.0001 par value, 500,000 shares authorized, issued
and outstanding: 155,139 shares at December 31, 2016 and 149,862 at
December 31, 2015
Additional paid-in capital
Accumulated other comprehensive loss
Distributions in excess of accumulated earnings
Total shareholders' deficit
December 31, 2016 December 31, 2015
$
$
$
$
$
$
2,670,037
171,754
15,281
262,334
160,584
29,088
9,674
3,318,752
40,977
27,812
261,404
6,102
94,607
28,394
54,535
98,600
4,028,214
4,640,645
2,374,760
142,498
2,083
-
10,530
11,795
970
2,542,636
10,409
24,440
67,817
5,427
90,507
5,714
-
-
3,505,228
3,709,542
80,552
-
-
-
15
141,092
(6,369 )
(1,537,183 )
(1,402,445 )
15
1,392
(5,427)
(1,162,886)
(1,166,906)
Total Liabilities, Convertible Preferred Stock, and Shareholders'
Deficit
$
3,318,752
$
2,542,636
The accompanying notes are an integral part of these consolidated financial statements.
45
Communications Sales & Leasing, Inc.
Consolidated Statements of Income
Year Ended
Period from
December 31, 2016
April 24 - December 31, 2015
(Thousands, except per share data)
Revenues:
Leasing
Fiber Infrastructure
Consumer CLEC
Total revenues
Costs and Expenses:
Interest expense
Depreciation and amortization
General and administrative expense
Operating expense (exclusive of depreciation,
accretion and amortization)
Transaction related costs
Total costs and expenses
Income before income taxes
Income tax expense
Net (loss) income
Participating securities' share in earnings
Dividends declared on convertible preferred stock
Amortization of discount on convertible preferred
stock
Net (loss) income applicable to common
shareholders
(Loss) earnings per common share:
Basic
Diluted
Weighted-average number of common shares
outstanding
Basic
Diluted
$
$
$
$
677,368 $
70,568
22,472
770,408
275,394
375,970
35,402
49,668
33,669
770,103
305
517
(212)
(1,557)
(1,743)
(1,985)
(5,497) $
(0.04) $
(0.04) $
152,473
152,473
458,614
-
17,700
476,314
181,797
238,748
11,208
13,743
5,210
450,706
25,608
738
24,870
(1,152)
-
-
23,718
0.16
0.16
149,835
149,835
1.64
Dividends declared per common share
$
2.40 $
The accompanying notes are an integral part of these consolidated financial statements.
46
Communications Sales & Leasing, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Thousands)
Net (loss) income
Other comprehensive (loss) income:
Unrealized (loss) gain on derivative contracts
Changes in foreign currency translation
Other comprehensive (loss) income
$
Year Ended
December 31, 2016
Period from
(cid:3) April 24 - December 31, 2015
24,870
(212) $
(675)
(267)
(942)
(5,427)
-
(5,427)
19,443
Comprehensive (loss) income
$
(1,154) $
The accompanying notes are an integral part of these consolidated financial statements.
47
Communications Sales & Leasing, Inc.
Consolidated Statements of Shareholders’ Deficit
Preferred Stock
Shares Amount
- $
-
Common Stock
Shares
- 149,827,214 $
-
-
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Distributions
in Excess of
Accumulated
Earnings
Total
Shareholders'
Deficit
15 $
-
-
-
-
-
-
-
15 $
- $
-
-
-
-
(542)
1,934
-
1,392 $
- $ 2,508,405 $ 2,508,420
24,870
-
24,870
(5,427 )
-
-
-
-
- (3,447,879 ) (3,447,879)
(5,427)
-
(247,361)
(247,361 )
(656)
(114 )
1,934
-
(807)
(807 )
(5,427 ) $ (1,162,886 ) $(1,166,906)
-
-
-
-
-
-
-
-
35,245
-
-
-
- 149,862,459 $
-
-
-
-
-
-
5,077,629
-
-
- 137,665
-
-
(212 )
-
(212)
137,665
-
-
-
-
-
-
(1,985)
-
-
-
(942 )
-
-
-
(370,186 )
(1,985)
(942)
(370,186)
-
-
-
-
-
-
-
198,549
- 155,138,637 $
-
-
-
-
-
(623)
(203)
4,846
15 $141,092 $
-
-
-
-
(1,743)
(623)
(2,359)
4,846
(6,369 ) $ (1,537,183 ) $(1,402,445)
(1,743 )
-
(2,156 )
-
(Thousands, except share data)
Balance at April 24, 2015
Net income
Distributions to Windstream
related to Spin-Off
Other comprehensive loss
Common stock dividends
Equity issuance cost
Stock-based compensation
Other
Balance at December 31, 2015
2016 Activity:
Net loss
Issuance of common stock
Amortization of discount on
convertible preferred stock
Other comprehensive loss
Common stock dividends
Convertible preferred stock
dividends
Equity issuance cost
Net share settlement
Stock-based compensation
Balance at December 31, 2016
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
- $
The accompanying notes are an integral part of these consolidated financial statements.
48
Communications Sales & Leasing, Inc.
Consolidated Statements of Cash Flows
(cid:3)
(Thousands)
Cash flow from operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization
Amortization of deferred financing costs
Amortization of debt discount
Deferred income taxes
Straight-line rental revenues
Stock-based compensation
Other
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
Other assets
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
Cash flow from investing activities
Acquisition of businesses, net of cash acquired
Consideration paid to Windstream Services, LLC
Acquisition of ground lease investments
Other capital expenditures
Net cash used in investing activities
Cash flow from financing activities
Principal payment on debt
Dividends paid
Proceeds from issuance of Term Loans
Proceeds from issuance of Notes
Borrowings under revolving credit facility
Payments under revolving credit facility
Capital lease payments
Deferred financing costs
Common stock issuance, net of costs
Net share settlement
Cash in-lieu of fractional shares
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes
Non-cash investing and financing activities:
Property and equipment acquired but not yet paid
Tenant capital improvements
Acquisition of businesses through non-cash consideration
Issuance of notes and other debt to Windstream Services, LLC, net
of deferred financing costs ($34,681)
Year Ended
December 31, 2016
(cid:3)
(cid:3)
Period from
April 24 -
December 31, 2015
$
(212 ) $
24,870
375,970
7,823
8,179
(2,186 )
(17,293 )
4,846
936
(3,516 )
(1,365 )
2,806
375,988
(488,788 )
-
(11,543 )
(34,900 )
(535,231 )
(22,027 )
(367,830 )
-
548,875
641,000
(641,000 )
(1,549 )
(20,557 )
54,213
(2,359 )
-
188,766
(267 )
29,256
142,498
171,754 $
255,945 $
3,003 $
(cid:3)
5,752 (cid:3)$
156,972 (cid:3)$
259,996 (cid:3)$
238,748
4,832
5,172
(1,211)
(11,795)
1,934
(3)
(215)
(1,148)
32,024
293,208
-
(1,035,029)
-
(44,413)
(1,079,442)
(10,700)
(156,854)
1,127,000
-
-
-
-
(30,057)
(543)
(113)
(19)
928,714
-
142,480
18
142,498
147,428
1,284
-
68,569
-
- (cid:3)$
2,412,829
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
49
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements
Note 1. Organization and Description of Business
Communications Sales & Leasing, Inc. (the “Company,” “CS&L,” “we,” “us” or “our”) was incorporated in the
state of Delaware in February 2014 and reorganized in the state of Maryland on September 4, 2014 as a subsidiary
of Windstream Holdings, Inc. (“Windstream Holdings” and, together with its consolidated subsidiaries
“Windstream”). On April 24, 2015, in connection with the separation and spin-off of CS&L from Windstream (the
“Spin-Off”), Windstream contributed certain telecommunications network assets, including fiber and copper
networks and other real estate (the “Distribution Systems”) to CS&L, which it leases back from CS&L pursuant to a
long-term, triple-net-lease (“the Master Lease”) and a small consumer competitive local exchange carrier (“CLEC”)
business (the “Consumer CLEC Business”) to CS&L in exchange for certain consideration paid to Windstream. The
assets and liabilities of the Distribution Systems and Consumer CLEC Business were recorded in our consolidated
financial statements on a carryover basis as of the date of the Spin-Off.
We are an independent, internally managed REIT engaged in the acquisition and construction of mission critical
infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic
broadband networks, wireless communications towers, copper and coaxial broadband networks and data
centers. Our fiber infrastructure group, Uniti Fiber, is a leading provider of infrastructure solutions including cell
site backhaul and dark fiber, to the telecommunications industry. Uniti Towers is a provider of build-to-suit
construction in both the U.S and Latin America. At December 31, 2016, Uniti Towers’ portfolio consists of 102
wireless communication towers.
The Consumer CLEC Business, which was reported as an integrated operation within Windstream prior to the Spin-
Off, offers voice, broadband, long-distance, and value-added services to residential customers located primarily in
rural locations. Substantially all of the network assets used to provide these services to customers are contracted
through interconnection agreements with other telecommunications carriers.
Note 2. Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) for financial information set forth in the Accounting Standards Codification
(“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and
regulations of the Securities and Exchange Commission (“SEC”).
The consolidated financial statements include the accounts of CS&L and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been eliminated in consolidation.
Note 3. Summary of Significant Accounting Policies
Use of Estimates—The preparation of financial statements, in accordance with GAAP, requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial
statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the
financial statements. Actual results may differ from the estimates and assumptions used in preparing the
accompanying financial statements, and such differences could be material.
Property, Plant and Equipment—Property, plant and equipment is stated at original cost, net of accumulated
depreciation. The Company capitalizes costs incurred in bringing property, plant and equipment to an operational
state, including all activities directly associated with the acquisition, construction, and installation of the related
assets it owns. The Company also enters into leasing arrangements providing for the long-term use of constructed
fiber that is then integrated into the Company’s network infrastructure. For each lease that qualifies as a capital
lease, the present value of the lease payments, which may include both periodic lease payments over the term of the
lease as well as upfront payments to the lessor, is capitalized at the inception of the lease and included in property
and equipment.
50
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Certain Distribution System property, plant and equipment are depreciated using a group composite depreciation
method. Under this method, when property is retired, the original cost, net of salvage value, is charged against
accumulated depreciation and no immediate gain or loss is recognized on the disposition of the property. For all
other property, which includes amortization of capital lease assets, depreciation is computed using the straight-line
method over the estimated useful life of the respective property. When the property is retired or otherwise disposed
of, the related cost and accumulated depreciation are written-off, with the corresponding gain or loss reflected in
operating results. Construction in progress includes direct materials and labor related to fixed assets during the
construction period. Depreciation will begin once the construction period has ceased and the related asset has been
placed into service, in which it will be depreciated over its useful life.
Costs of maintenance and repairs to property, plant and equipment subject to the Master Lease are the responsibility
of our tenant. Costs of maintenance and repairs to property, plant and equipment not subject to triple-net leasing
arrangements are expensed as incurred.
We acquire real property interests from third parties who own land where communications infrastructure assets are
located and desire to monetize the underlying real property. These real property interests entitle us to receive rental
payments from leases on our sites. The financial results of the acquired real property interests are included in the
Leasing segment from the date of acquisition and were not material, individually or in the aggregate, to our results
of operations. Real property interests are recorded in property, plant and equipment on our Consolidated Balance
Sheet.
Tenant Capital Improvements—Our lease with Windstream provides that tenant funded capital improvements
(“TCI’s”), defined as maintenance, repair, overbuild, upgrade or replacements to the leased network, including,
without limitation, the replacement of copper distribution systems with fiber distribution systems, automatically
become property of CS&L upon their construction by Windstream. We receive non-monetary consideration related
to the TCIs as they automatically become our property, and we recognize the cost basis of TCIs that are capital in
nature as real estate investments and deferred revenue. We depreciate the real estate investments over their estimated
useful lives and amortize the deferred revenue as additional leasing revenues over the same depreciable life of the
TCI assets. At December 31, 2016 and December 31, 2015, the net book value of TCI’s recorded as a component of
property, plant and equipment on our Consolidated Balance Sheet was $218.7 million and $67.8 million,
respectively. For the year ended December 31, 2016 we recognized $6.1 million of revenue and depreciation
expense related to TCIs. From the period April 24, 2015 to December 31, 2015 we recognized $0.8 million of
revenue and depreciation expense related to TCIs.
Impairment of Long-Lived Assets—We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset group may not be recoverable from future undiscounted
net cash flows we expect the asset group to generate. If the asset group is not fully recoverable, an impairment loss
would be recognized for the difference between the carrying value of the asset group and its estimated fair value
based on discounted net future cash flows. During the year ended December 31, 2016 and from the period April 24,
2015 to December 31, 2015 no impairment losses were recognized.
Asset Retirement Obligations—The Company records obligations to perform asset retirement activities, primarily
including requirements to remove equipment from leased space or customer sites as required under the terms of the
related lease and customer agreements. The fair value of the liability for asset retirement obligations, which
represents the net present value of the estimated expected future cash outlay, is recognized in the period in which it
is incurred and the fair value of the liability can reasonably be estimated. The liability accretes as a result of the
passage of time and related accretion expense is recognized in the consolidated statement of operations. The
associated asset retirement costs are capitalized as an additional carrying amount of the related long-lived asset and
depreciated on a straight-line basis over the asset’s useful life.
Cash and Cash Equivalents—Cash and cash equivalents include all non-restricted cash held at financial institutions
and other non-restricted highly liquid short-term investments with original maturities of three months or less.
Derivative Instruments and Hedging Activities—We account for our derivatives in accordance with FASB ASC
815, Derivatives and Hedging, in which we reflect all derivative instruments at fair value as either assets or
liabilities on our Consolidated Balance Sheet. For derivative instruments that are designated and qualify as hedging
51
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
instruments, we record the effective portion of the gain or loss on the hedged instruments as a component of
accumulated other comprehensive income or loss. Any ineffective portion of a derivative’s change in fair value is
immediately recognized within net income. For derivatives that do not meet the criteria for hedge accounting,
changes in fair value are immediately recognized within net income. See Note 5 and Note 7.
Customer List Intangible Assets—Customer list intangible assets are presented in the financial statements at cost
less accumulated amortization and are amortized using the sum-of-the-digits method over their estimated useful
lives.
Foreign Currency Translation—The financial statements of our international subsidiaries whose functional currency
is the local currency are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and
liabilities and the weighted average exchange rate for the applicable period for revenues, expenses, gains and losses.
Translation adjustments are recorded as a separate component of comprehensive income in stockholders’ equity.
Reclassifications—Certain prior year amounts have been reclassified to conform with current year presentation.
Transaction Related Costs—The Company expenses transaction related costs in the period in which they are
incurred and services are received. Transaction related costs include incremental acquisition pursuit, transaction and
integration costs, including unsuccessful acquisition pursuit costs. Pursuit and transaction costs include professional
services (legal, accounting, advisory, regulatory, etc.), finder’s fees, travel expenses, and other direct expenses
associated with an acquisition. Integration costs include direct costs necessary to integrate an acquired business,
including professional services, systems and data conversion, severance and retention bonuses payable to employees
of an acquired business.
Debt Issuance Costs—The Company recognizes debt issuance costs related to a recognized debt liability as a direct
deduction from the carrying amount of the debt liability, consistent with debt discounts. The costs, which include
underwriting, legal, and other direct costs related to the issuance of debt, are amortized over the contractual term of
the debt using the effective interest method.
Revenue Recognition—We recognize leasing revenues on a straight-line basis over the applicable lease term when
collectability is reasonably assured. Recognizing leasing income on a straight-line basis generally results in
recognized revenues during the first half of the lease term in excess of cash amounts contractually due from our
tenants, creating a straight-line rent receivable.
We evaluate the collectability of straight-line rent receivables and record a provision for doubtful accounts if
management believes the receivables to be uncollectible. At December 31, 2016 and December 31, 2015, no
allowance was recorded related to our straight-line rent receivable.
We lease the Distribution Systems to Windstream under a triple-net lease basis, whereby Windstream is responsible
for the costs related to operating the Distribution Systems, including property taxes, insurance and maintenance and
repair costs. As a result, we do not record an obligation related to the payment of property taxes, as Windstream
makes direct payments to the taxing authorities.
Consumer CLEC Business revenues are primarily derived from providing access to or usage of leased networks and
facilities, and are recognized over the period that the corresponding services are rendered to customers. Revenues
derived from other telecommunications services, including broadband, long distance and enhanced service revenues
are recognized monthly as services are provided. Sales of customer premise equipment and modems are recognized
when products are delivered to and accepted by customers.
The Company recognizes service revenues related to its broadband transport and backhaul communications services
when (i) persuasive evidence of an arrangement exists, (ii) the services have been provided to the customer, (iii) the
sales price is fixed or determinable, and (iv) the collection of the sales price is reasonably assured. Services provided
to the Company’s customers are rendered pursuant to contractual fee-based arrangements, which generally provide
for recurring fees charged for the use of designated portions of the Company’s network and typically range for a
period of three to ten years. The Company’s revenue arrangements often include upfront fees charged to the
52
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
customer for the cost of establishing the necessary components of the Company’s network prior to the
commencement of use by the customer. Fees charged to customers for the recurring use of the Company’s network
are recognized during the related periods of service. Upfront fees that are billed in advance of providing services are
deferred until such time the customer accepts the Company’s network and then are recognized as service revenues
ratably over a period in which substantive services required under the revenue arrangement are expected to be
performed, which is the initial term of the arrangement.
We evaluate the collectability of service receivables by considering a variety of factors. The Company typically does
not require collateral. When the Company becomes aware of a specific customer’s inability to meet its financial
obligations, the Company records a specific reserve for bad debt to reduce the related accounts receivable to the
amount the Company reasonably believes is collectible. When appropriate, the Company also records reserves for
bad debts for all other customers based on a variety of factors including the length of time the receivable is past due,
the financial health of the customer, macroeconomic considerations, and historical experience. If circumstances
related to specific customers change, the Company adjusts its estimates of the recoverability of receivables as
needed. At December 31, 2016 the allowance recorded for service receivables was $1.4 million. At December 31,
2015 no allowance was recorded for service receivables.
Stock-Based Compensation—We account for stock-based compensation using the fair value method of accounting.
We have determined that our stock-based payment awards granted in exchange for employee services qualify as
equity classified awards, which are measured based on the fair value of the award on the date of the grant. The fair
value of restricted stock-based payments is based on the market value of our common stock on the date of grant. The
fair value of performance-based awards, which have performance conditions, is based on a Monte Carlo simulation.
The fair value of all stock-based compensation is recognized over the period during which an employee is required
to provide services in exchange for the award. See Note 10.
Income Taxes— We have elected on our U.S. federal income tax return for the taxable year ending December 31,
2015 to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a
REIT, we must distribute at least 90% of our annual REIT taxable income to shareholders, and meet certain
organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not
be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to
qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate income tax rates, and we could not deduct
dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be
substantial and could materially and adversely affect our net income and net cash available for distribution to
shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from
reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a
REIT.
To maintain REIT status, we must distribute a minimum of 90% of our taxable income. We intend to make regular
quarterly dividend payments of all or substantially all of our income to holders of our common stock, and therefore
no provision is required in the accompanying Consolidated Financial Statements for U.S. federal income taxes
related to the activities of the REIT and its passthrough subsidiaries. We are subject to the statutory requirements of
the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the
best judgment of management based on analysis and interpretation of respective tax laws.
CS&L operates as a real estate investment trust (REIT) for U.S. federal income tax purposes. As a REIT, the
Company is generally not subject to U.S. federal income taxes on income generated by its REIT operations, which
includes income derived from the Master Lease. We have elected to treat the subsidiaries through which we operate
Uniti Fiber and Talk America as taxable REIT subsidiaries (“TRSs”). TRSs enable us to engage in activities that do
not result in income that would be qualifying income for a REIT. Our TRSs are subject to U.S. federal, state and
local corporate income taxes.
Deferred tax assets and liabilities are recognized under the asset and liability method for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently
53
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the
period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax
assets unless it is more likely than not that such assets will be realized.
We recognize the benefit of tax positions that are "more likely than not" to be sustained upon examination based on
their technical merit. The benefit of a tax position is measured at the largest amount that has a greater than 50
percent likelihood of being realized upon ultimate settlement. If applicable, we will report tax-related penalties and
interest expense as a component of income tax expense. We currently have no liabilities for uncertain income tax
positions.
The Company will be subject to a federal corporate level tax rate (currently 35%) on any gain recognized from the
sale of assets occurring within a specified recognition period after the Spin-Off up to the amount of the built in gain
that existed on April 24, 2015, which is based on the fair market value of the assets in excess of the Company’s tax
basis as of such date. The Company has no plans to dispose of the assets it acquired through the Spin-Off within the
applicable recognition period.
Business Combinations—In accordance with ASC 805, Business Combinations, we apply the acquisition method of
accounting for acquisitions meeting the definition of a business combination, where assets acquired and liabilities
assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with
those of the Company from the dates of the respective acquisitions. Any excess of the purchase price paid by the
Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. ASC 805
also requires acquirers, among other things, to estimate the acquisition date fair value of any contingent
consideration and to recognize any subsequent changes in the fair value of contingent consideration in earnings.
When provisional amounts are initially recorded, the Company continues to evaluate acquisitions for a period not to
exceed one year after the applicable acquisition date of each transaction to determine whether any additional
adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.
Goodwill—Goodwill is recognized for the excess of purchase price over the fair value of net assets of businesses
acquired. Goodwill is reviewed for impairment at least annually. In accordance with ASC 350-20, Intangibles-
Goodwill and Other, we evaluate goodwill for impairment between annual impairment tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter.
During the year ended December 31, 2016, no impairment losses were recognized.
Earnings per Share—Outstanding restricted stock awards that contain rights to non-forfeitable dividends are deemed
to be participating securities, requiring the application of the two-class method of computing basic and dilutive
earnings per share.
Basic earnings per share includes only the weighted average number of common shares outstanding during the
period. Dilutive earnings per share includes the weighted average number of common shares and the dilutive effect
of restricted stock and performance-based awards outstanding during the period, when such awards are dilutive. See
Note 10.
Concentration of Credit Risks—In connection with the Spin-Off, we entered into the Master Lease agreement with
Windstream, pursuant to which all real property associated with the Spin-Off is leased to Windstream and from
which substantially all of CS&L’s leasing revenues are currently derived. Windstream is a publicly traded company
and is subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended. Windstream
filings can be found at www.sec.gov. Windstream filings are not incorporated by reference in this Annual Report on
Form 10-K.
Because 87.9% of our revenue for the year ended December 31, 2016 is derived from lease payments by
Windstream pursuant to the Master Lease, there could be a material adverse impact on our consolidated results of
operations, liquidity and/or financial condition if Windstream experiences operating difficulties and becomes unable
54
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
to generate sufficient cash to make payments to us. In recent years, Windstream has experienced annual declines in
its total revenue and sales. Accordingly, we monitor the credit quality of Windstream through numerous methods,
including by (i) reviewing the credit ratings of Windstream by nationally recognized credit rating agencies, (ii)
reviewing the financial statements of Windstream that are publicly available and that are required to be delivered to
us pursuant to the Master Lease, (iii) monitoring news reports regarding Windstream and its businesses, (iv)
conducting research to ascertain industry trends potentially affecting Windstream, and (v) monitoring the timeliness
of its payments to us under the Master Lease.
Recently Issued Accounting Standards—In March 2016, the FASB issued ASU No. 2016-09, Improvements to
Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the
accounting for share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. We
adopted ASU 2016-09 effective April 1, 2016, and will reverse compensation cost of forfeited awards as they occur. At
the time of adoption, we had not experienced any forfeited awards and therefore no cumulative-effect adjustment was
necessary.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments (“ASU 2015-16”) which eliminates the prior requirement to
recognize measurement-period adjustments to provisional amounts retrospectively. Instead, ASU 2015-16 requires
the acquirer to recognize measurement-period adjustments, as well as the impact on earnings of changes in
depreciation, amortization and similar items (if any) resulting from the change to the provisional amounts, in the
period when the amount of each measurement-period adjustment is determined. As required, the Company adopted
the provisions of ASU 2015-16 in the third quarter of its fiscal year ending December 31, 2016 and its adoption did
not have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as
a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance around management’s responsibility to evaluate
whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods
within annual periods beginning after December 15, 2016. Early adoption is permitted. We adopted ASU 2014-15
effective December 31, 2016, and there was no material impact on our financial position, results of operations or cash
flows.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill and
Other (Topic 350): Simplifying the Accounting for Goodwill Impairment" ("ASU 2017-04”), which removes the
requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill
impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed
the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim periods beginning January 1,
2020, with early adoption permitted, and applied prospectively. The adoption of this guidance is not expected to
have a material impact on our financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business (“ASU 2017-01”), in an effort to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years, with early adoption permitted. We have elected to early adopt ASU 2017-01 as of
January 1, 2017, with prospective application. The adoption of this guidance is not expected to have a material
impact on our financial statements. Currently, our real property interest investments will be impacted by ASU 2017-
01 as transaction cost associated with the investments will be capitalized as opposed to be recorded as an expense
prior to adoption.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on reducing the
diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
55
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
In addition to other specific cash flow issues, ASU 2016-15 provides clarification on when an entity should separate
cash receipts and cash payments into more than one class of cash flows and when an entity should classify those
cash receipts and payments into one class of cash flows on the basis of predominance. The new guidance is effective
for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early
adoption is permitted. The Company is currently evaluating the impacts the adoption of this accounting standard will
have on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), which sets out the principles for the
recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors).
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases
based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification
will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over
the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all
leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases today. The Company is currently evaluating this
guidance to determine the impact it will have on our financial statements by reviewing its existing operating lease
contracts, where we are the lessee and service contracts that may include embedded leases. The Company expects a
gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets, the extent
of the impact of a gross-up is under evaluation. The Company does not anticipate material changes to the recognition
of operating lease expense in its Consolidated Statements of Income.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This
update outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue
from contracts with customers and supersedes most current revenue recognition guidance, including industry-
specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled to receive for those goods or services. ASU 2014-09 is effective for annual periods beginning after
December 15, 2017 and interim periods within those annual periods. Early adoption is permitted for public
companies for annual periods beginning after December 15, 2016. The Company intends to adopt the revenue
recognition guidance on January 1, 2018. The Company’s implementation efforts include reviewing revenue
contracts and the identification of revenue within scope of the guidance. While the Company currently has not
identified any material changes in the timing of revenue recognition, the evaluation is ongoing and we are in the
process of determining the method of adoption.
Note 4. Business Combinations
Tower Cloud, Inc.
On August 31, 2016, we acquired 100% of the outstanding equity of Tower Cloud, Inc. (“Tower Cloud”) for $187.7
million in cash and 1.9 million shares of our common stock with an acquisition date fair value of $58.5
million. Additional contingent consideration of up to $130 million, with an acquisition date fair value of $98.6
million, may be paid upon the achievement of certain defined operational and financial milestones. At the
Company’s discretion, a combination of cash and CS&L common shares may be used to satisfy the contingent
consideration payments, provided that at least 50% of the aggregate amount of payments is satisfied in cash. Tower
Cloud provides data transport services, with particular focus on providing infrastructure solutions to the wireless and
enterprise sectors, including fiber-to-the-tower backhaul, small cell networks, and dark fiber deployments.
Following the close of the transaction, the Tower Cloud business and the previously acquired PEG Bandwidth
business were combined into a unified fiber infrastructure organization, Uniti Fiber. The operating results from this
acquisition are included in the consolidated financial statements from the acquisition date. The acquisition was
recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date.
The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill within our
Fiber Infrastructure segment. See Note 13. The following is a summary of the estimated fair values of the assets
acquired and liabilities assumed:
56
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Property, plant and equipment
Cash and cash equivalents
Accounts receivable
Other assets
Intangible assets
Accounts payable, accrued expenses and other liabilities
Deferred revenue
Deferred income taxes
Capital lease obligations
Net assets acquired
Goodwill
$
$
$
(thousands)
163,680
14,346
3,043
2,595
116,218
(16,782)
(23,900)
(24,866)
(6,750)
227,584
117,280
The above purchase price allocation is considered preliminary and is subject to revision when the valuation of assets
and liabilities are finalized upon receipt of the final valuation report from a third party valuation expert, and
resolution of contractual adjustments, such as working capital adjustments, set forth in the merger agreement, which
is anticipated to be finalized during the first half of 2017.
The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of Tower Cloud. The
acquisition was treated as a taxable acquisition of the outstanding stock of Tower Cloud, Inc. Thus, none of the
goodwill is expected to be deductible for tax purposes.
We acquired an intangible asset that was assigned to customer relationships of $116.2 million (30 year life).
Tower Cloud had federal net operating loss (“NOL”) carryforwards of approximately $81.2 million at the date of the
acquisition, which will expire between 2026 and 2036. As a result of the change in ownership, the utilization of
NOL carryforwards is subject to limitations imposed by the Internal Revenue Code. The gross deferred tax assets
associated with the NOL and other temporary differences as of August 31, 2016 were approximately $37.0 million,
with respect to which we have determined that a valuation allowance is not required. A net deferred tax liability of
$24.8 million was recorded in connection with the acquisition, which is primarily related to the excess of the
recorded amounts for Property, Plant and Equipment and Intangible Assets over their respective historical tax bases.
The acquired business contributed revenue of $13.5 million and an operating loss of $2.1 million, which excludes
transaction and transition costs, to our consolidated results from the date of acquisition through December 31, 2016.
We recorded transaction related costs related to the acquisition of Tower Cloud for the year ended December
31, 2016 of $9.1 million within transaction related costs on the Consolidated Statement of Income.
The following table presents the unaudited pro forma summary of our financial results as if the business
combination had occurred as of the Spin-Off. The pro forma results include additional depreciation and amortization
resulting from purchase accounting adjustments, adjustments to amortized deferred revenue, and interest expense
associated with debt used to fund the acquisition. The pro forma results do not include any synergies or other
benefits of the acquisition. The pro forma results are not indicative of future results of operations, or results that
might have been achieved had the acquisition been consummated as of as of the Spin-Off.
(Thousands, except per share data)
Pro forma revenue
Pro forma net (loss) income
Pro forma net (loss) income per share
Year Ended
December 31, 2016
(cid:3)(cid:3)
Period from
April 24 - December 31,
2015
$
$
798,054 $
(3,581)
(0.02) (cid:3)(cid:3) $
505,764
17,609
0.12
57
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
PEG Bandwidth, LLC
On May 2, 2016, we acquired 100% of the outstanding equity of PEG Bandwidth for $322.5 million in cash, the
issuance of 87,500 shares of our 3.00% Series A Convertible Preferred Stock with a fair value of $78.6 million and 1
million shares of our common stock with an acquisition date fair value of $23.2 million. PEG Bandwidth is a leading
provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry.
The operating results from this acquisition are included in the consolidated financial statements from the acquisition
date. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values
at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded
as goodwill within our Fiber Infrastructure segment. See Note 13. The following is a summary of the estimated fair
values of the assets acquired and liabilities assumed:
Property, plant and equipment
Cash and cash equivalents
Accounts receivable
Other assets
Intangible assets
Accounts payable, accrued expenses and other liabilities
Deferred revenue
Capital lease obligations
Net assets acquired
Goodwill
$
$
$
(thousands)
293,030
7,003
6,584
5,161
38,000
(8,643)
(12,700)
(49,195)
279,240
145,054
The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of PEG Bandwidth.
The goodwill is expected to be deductible for tax purposes.
Of the $38 million of acquired intangible assets, $36 million was assigned to customer relationships (weighted
average 17 year life) and $2 million was assigned to trademarks (indefinite life).
The acquired business contributed revenue of $57.0 million and an operating loss of $8.8 million, which excludes
transaction and transition costs, to our consolidated results from the date of acquisition through December 31, 2016.
We recorded transaction related costs related to the acquisition of PEG Bandwidth for the year ended December
31, 2016 of $11.2 million within transaction related costs on the Consolidated Statement of Income.
The following table presents the unaudited pro forma summary of our financial results as if the business
combination had occurred as of the Spin-Off. The pro forma results include additional depreciation and amortization
resulting from purchase accounting adjustments, adjustments to amortized deferred revenue, and interest expense
associated with debt used to fund the acquisition. The pro forma results do not include any synergies or other
benefits of the acquisition. The pro forma results are not indicative of future results of operations, or results that
might have been achieved had the acquisition been consummated as of the Spin-Off.
(Thousands, except per share data)
Pro forma revenue
Pro forma net income
Pro forma net income per share
Summit Wireless Infrastructure, LLC
Year Ended
December 31, 2016
(cid:3)(cid:3)
Period from
April 24 - December 31,
2015
$
$
797,637 $
6,264
0.04 (cid:3)(cid:3) $
529,911
19,809
0.13
On January 22, 2016, we acquired 100% of the outstanding equity of Summit Wireless Infrastructure LLC
(“Summit”). Summit builds, owns and operates telecommunication infrastructure serving wireless carriers in
Mexico. Consideration given to acquire Summit included performance-based shares of common equity valued at
58
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
$1.1 million, which will vest in full on the third anniversary of the closing date, subject to Summit meeting certain
performance targets, and the assumption of Summit’s existing debt. The financial results of Summit are included in
the Leasing segment from the date of acquisition and were not material, individually or in the aggregate, to our
results of operations and therefore, pro forma financial information has not been presented.
Note 5. Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements, establishes a hierarchy of valuation techniques based on the
observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-
based or observable inputs as the preferred source of values, followed by valuation models using management
assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can
access at the assessment date
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly
Level 3 – Unobservable inputs for the asset or liability
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, a derivative liability,
contingent consideration, our outstanding notes and other debt, and accounts, interest and dividends payable.
The following table summarizes the fair value of our financial instruments at December 31, 2016 and December 31,
2015:
(Thousands)
At December 31, 2016
Liabilities
Quoted Prices in
Active Markets
(Level 1)
Prices with Other
Observable Inputs
(Level 2)
Total
Prices with
Unobservable
Inputs
(Level 3)
Senior secured term loan B - variable rate, due
October 24, 2022
Senior secured notes - 6.00% , due April 15, 2023
Senior unsecured notes - 8.25%, due October 15,
2023
Senior unsecured notes - 7.125%, due December 15,
2024
Derivative liability
Contingent consideration
Total
2,139,586
569,250
—
—
2,139,586
569,250
1,176,600
—
1,176,600
—
—
—
404,000
6,102
98,600
$ 4,394,138 $
—
—
—
— $
404,000
6,102
—
4,295,538 $
—
—
98,600
98,600
(Thousands)
At December 31, 2015
Liabilities
Senior secured term loan B - variable rate, due
October 24, 2022
Senior secured notes - 6.00% , due April 15, 2023
Senior unsecured notes - 8.25%, due October 15,
2023
Derivative liability
Total
Quoted Prices in
Active Markets
(Level 1)
Prices with Other
Observable Inputs
(Level 2)
Total
Prices with
Unobservable
Inputs
(Level 3)
— $
—
—
—
- $
1,986,198 $
376,000
937,950
5,427
3,305,575 $
—
—
—
—
—
$ 1,986,198 $
376,000
937,950
5,427
$ 3,305,575 $
59
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
The carrying value of cash and cash equivalents, accounts and other receivables, and accounts, interest and
dividends payable approximate fair values due to the short-term nature of these financial instruments.
The total principal balance of our Notes and other debt was $4.2 billion at December 31, 2016, with a fair value of
$4.3 billion. The estimated fair value of the Notes and other debt was based on available external pricing data and
current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within
the fair value hierarchy. Derivative liabilities are carried at fair value. See Note 7. The fair value of our interest rate
swap is determined based on the present value of expected future cash flows using observable, quoted LIBOR swap
rates for the full term of the swap and also incorporate credit valuation adjustments to appropriately reflect both
CS&L's own non-performance risk and non-performance risk of the respective counterparties. The Company has
determined that the majority of the inputs used to value its derivative liabilities fall within Level 2 of the fair value
hierarchy; however the associated credit valuation adjustments utilized Level 3 inputs, such as estimates of credit
spreads, to evaluate the likelihood of default by the Company and its counterparties. As of December 31, 2016, the
Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of
its derivative positions and has determined that the credit valuation adjustment is not significant to the overall value
of the derivatives. As such, the Company classifies its derivative liabilities valuation in Level 2 of the fair value
hierarchy.
As part of the acquisition of Tower Cloud on August 31, 2016, we may be obligated to pay contingent consideration
upon achievement of certain defined operational and financial milestones; therefore, we recorded the estimated fair
value of future contingent consideration of $98.6 million as of August 31, 2016. The fair value of the contingent
consideration as of August 31, 2016, was determined using a discounted cash flow model and probability adjusted
estimates of the future earnings and is classified as Level 3. Changes in the fair value of contingent consideration
will be recorded in our Consolidated Statement of Income in the period in which the change occurs. There was no
change in the fair value of the contingent consideration as of December 31, 2016.
The following is a roll forward of our liability measured at fair value on a recurring basis using unobservable inputs
(Level 3):
(Thousands)
Contingent consideration
December 31,
2015
Transfers into
Level 3
Gain/(Loss)
included in
earnings
Settlements
— $
— $
December 31,
2016
98,600
$
— $
98,600 $
60
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Note 6. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
(Thousands)
Land
Building and improvements
Real property interests
Poles
Fiber
Equipment
Copper
Conduit
Tower assets
Capital lease assets
Construction in progress
Other assets
Corporate assets
Less accumulated depreciation
Net property, plant and equipment
Depreciable Lives
Indefinite $
3 - 40 years
50 - 99 years
13 - 40 years
7 - 40 years
5 - 7 years
7 - 40 years
13 - 47 years
20 - 49 years
See Note 3
See Note 3
15 - 20 years
3 - 7 years
$
December 31, 2016 December 31, 2015
26,841
314,750
-
228,031
1,948,192
-
3,475,987
89,460
1,209
-
4,749
4,322
2,319
6,095,860
(3,721,100)
2,374,760
26,833
318,967
12,265
234,393
2,243,822
130,945
3,538,566
90,540
4,307
89,723
52,685
5,299
2,731
6,751,076
(4,081,039 )
2,670,037
$
$
Capital lease assets above represent fiber leases, where we have the exclusive, unrestricted, and indefeasible right to
use one, a pair, or more strands of fiber of a fiber cable.
Depreciation expense for the year ended December 31, 2016 and for the period from April 24, 2015 to December
31, 2015 was $369.9 million and $236.2 million, respectively.
Note 7. Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate the effects of interest rate volatility inherent in our variable
rate debt, which could unfavorably impact our future earnings and forecasted cash flows. The Company does not use
derivative instruments for speculative or trading purposes.
On April 27, 2015, we entered into interest rate swap agreements to mitigate the interest rate risk inherent in our
variable rate Senior Secured Term Loan B facility. These interest rate swaps are designated as cash flow hedges and
have a notional value of $2.13 billion and mature on October 24, 2022. The weighted average fixed rate paid is
2.105%, and the variable rate received resets monthly to the one-month LIBOR subject to a minimum rate of 1.0%.
The Company does not currently have any master netting arrangements related to its derivative contracts.
The following table summarizes the fair value and the presentation in our Consolidated Balance Sheet:
(Thousands)
Interest rate swaps
Location on Consolidated
Balance Sheet
Derivative liability
December 31, 2016
$
6,102
December 31, 2015
$
5,427
As of December 31, 2016 and December 31, 2015, all of the interest rate swaps were valued in net unrealized loss
positions and recognized as liability balances within the derivative liability balance. For the year ended December
31, 2016 and for the period from April 24, 2015 to December 31, 2015, the amount recorded in other comprehensive
income related to the unrealized loss on derivative instruments was $24.5 million and $21.7 million, respectively.
The amount reclassified out of other comprehensive income into interest expense on our Consolidated Statement of
Income for the year ended December 31, 2016 and for the period from April 24, 2015 to December 31, 2015 was
61
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
$23.8 million and $16.3 million, respectively. For the year ended December 31, 2016 and for the period from April
24, 2015 to December 31, 2015, there were no ineffective portions of the change in fair value derivatives.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest
expense as interest payments are made on our variable-rate debt. During the next twelve months, beginning January
1, 2017, we estimate that $24 million will be reclassified as an increase to interest expense.
Note 8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2016, are as follows:
(Thousands)
Goodwill at December 31, 2015
Goodwill associated with 2016 acquisitions
Goodwill at December 31, 2016
Fiber Infrastructure
$
- $
262,334
262,334 $
$
Total
-
262,334
262,334
The carrying value of our other intangible assets is as follows:
(Thousands)
Indefinite life intangible assets:
Trade name
Finite life intangible assets:
Customer lists
(cid:3)(cid:3)
Total intangible assets
Less: Accumulated amortization
Total intangible assets, net
December 31, 2016
December 31, 2015
Cost
Accumulated
Amortization
Cost
Accumulated
Amortization
$
2,000 $
- $
- $
-
188,642
(30,058)
190,642
(30,058)
160,584
$
$
(cid:3)(cid:3)(cid:3)
34,501
(cid:3)(cid:3)(cid:3)
34,501
(23,971 )
10,530 (cid:3)
(23,971)
Amortization expense for the customer list intangible assets was $6.1 million and $2.6 million for the year ended
December 31, 2016 and for the period from April 24, 2015 to December 31, 2015, respectively. Amortization
expense is estimated to be $8.7 million in 2017, $8.1 million in 2018, $7.5 million in 2019, $7.0 million in 2020 and
$6.5 million in 2021.
Note 9. Notes and Other Debt
Notes and other debt is as follows:
(Thousands)
Principal amount
Less unamortized discount and debt issuance costs
Notes and other debt less unamortized discount and debt issuance costs
62
December 31, 2016 (cid:3)(cid:3) December 31, 2015
3,639,300
$
(134,072)
3,505,228
4,167,967 (cid:3)(cid:3) $
(139,753 ) (cid:3)(cid:3)
4,028,214 (cid:3)(cid:3) $
$
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Notes and other debt at December 31, 2016 consisted of the following:
(cid:3)
(Thousands)
Senior secured term loan B - variable rate, due October
24, 2022
(discount is based on imputed interest rate of 5.66%)
Senior secured notes - 6.00%, due April 15, 2023
(discount is based on imputed interest rate of 6.29%)
Senior unsecured notes - 8.25%, due October 15, 2023
(discount is based on imputed interest rate of 9.06%)
Senior unsecured notes - 7.125%, due December 15,
2024
Total
December 31, 2016
December 31, 2015
Unamortized
Discount and
Debt Issuance
Costs
Unamortized
Discount and
Debt Issuance
Costs
Principal
(cid:3)(cid:3)
Principal
$ 2,107,967 $
(78,699) $ 2,129,300 (cid:3)(cid:3)$
(77,105)
550,000
(9,817) 400,000 (cid:3)(cid:3)
(6,767)
1,110,000
(45,599) 1,110,000 (cid:3)(cid:3)
(50,200)
400,000
$ 4,167,967
(5,638)
-
(139,753) $ 3,639,300 (cid:3)(cid:3)$ (134,072)
- (cid:3)(cid:3)
At December 31, 2016, we had outstanding: (i) $2.1 billion under our senior secured term loan B facility that
matures on October 24, 2022 (“Term Loan Facility”); (ii) $550.0 million aggregate principal amount of 6.00%
Senior Secured Notes due April 15, 2023 (the “Secured Notes”); (iii) $1.11 billion aggregate principal amount of
8.25% Senior Notes due October 15, 2023 (the “2023 Notes”); and (iv) $400 million aggregate principal amount of
7.125% Senior Unsecured Notes due December 15, 2024 (the “2024 Notes”).
Credit Agreement
On April 24, 2015 the Company and CSL Capital entered into a credit agreement (the “Credit Agreement”), which
provides for the Term Loan Facility (in an initial principal amount of $2.14 billion) and a $500 million senior
secured revolving credit facility maturing April 24, 2020 (the “Revolving Credit Facility” and, together with the
Term Loan Facility, the “Facilities”). On October 21, 2016, the Company and CSL Capital amended the Credit
Agreement to, among other things, replace the then outstanding principal amounts of the term loans thereunder with
a like aggregate amount of new term loans having substantially similar terms as the then outstanding term loans,
other than with respect to the applicable interest rate and the period of time for which prepayment premiums in
respect of certain repricing transactions apply. The term loans under the Facilities were originally issued at an issue
price of 98.00% of par value, now bear interest at a rate equal to a Eurodollar rate, subject to a 1.0% floor, plus an
applicable margin equal to 3.50%, and are subject to amortization of 1.0% per annum. The loans have been incurred
by the Company and CSL Capital, are guaranteed by certain of CS&L’s wholly-owned subsidiaries (the
“Guarantors”), and are secured by substantially all of the assets of CS&L, CSL Capital and the Guarantors, subject
to certain exceptions, which assets also secure the Secured Notes. The Revolving Credit Facility bears interest at a
rate equal to LIBOR plus 1.75% to 2.25% based on our consolidated secured leverage ratio, as defined in the Credit
Agreement.
We are subject to customary covenants under the Credit Agreement, including an obligation to maintain a
consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are
permitted, subject to customary conditions, to incur incremental term loan borrowings and/or increased
commitments under the Credit Agreement in an aggregate amount equal to $150 million plus, an unlimited amount,
so long as, on a pro forma basis after giving effect to any such increases, our consolidated total leverage ratio, as
defined in the Credit Agreement, does not exceed 6.50 to 1.00 and our consolidated secured leverage ratio, as
defined in the Credit Agreement, does not exceed 4.00 to 1.00. In addition, the Credit Agreement contains
customary events of default, including a cross default provision whereby the failure by the Company or certain of its
subsidiaries to make payments under other debt obligations, or the occurrence of certain events affecting those other
borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement.
In particular, a repayment obligation could be triggered if (i) the Company or certain of its subsidiaries fails to make
a payment when due of any principal or interest on any other indebtedness aggregating $75.0 million or more, or (ii)
an event occurs that causes, or would permit the holders of any other indebtedness aggregating $75.0 million or
63
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
more to cause, such indebtedness to become due prior to its stated maturity. As of December 31, 2016, we were in
compliance with all of the covenants under the Credit Agreement.
On April 22, 2016, the Company borrowed $321 million under the Revolving Credit Facility to fund the cash
portion of consideration paid to acquire PEG Bandwidth and related transaction costs and, on August 26, 2016, the
Company borrowed $150 million under the Revolving Credit Facility to fund the cash portion of consideration paid
to acquire Tower Cloud and related transaction costs. See Note 4. As of December 31, 2016, the date hereof, the
Revolving Credit Facility is undrawn.
The Notes
On April 24, 2015, we, along with CSL Capital, co-issued $400 million aggregate principal amount of the Secured
Notes and $1.11 billion aggregate principal amount of the 2023 Notes (together the “Notes”). The Secured Notes
were issued at an issue price of 100% of par value, while the 2023 Notes were issued at an issue price of 97.055% of
par value. The Notes are guaranteed by the Guarantors. The Notes were issued to Windstream Services as partial
consideration for the contribution of the Distribution Systems and the Consumer CLEC Business in connection with
the Spin-Off. As such, CS&L did not receive any proceeds from the issuance of the Notes. The issuance of the Notes
and their exchange by Windstream Services for certain of its outstanding indebtedness were not registered under the
Securities Act of 1933, as amended (the “Securities Act”), but were exempt from registration under Rule 144A,
Regulation S and other applicable exemptions of the Securities Act. Pursuant to a registration rights agreement
entered into by the Company in connection with the sale of the 2023 Notes, the Company subsequently filed with
the SEC a registration statement relating to an exchange offer pursuant to which 2023 Notes due 2023 (the
“Exchange Notes”) that were registered with the SEC, were offered in exchange for 2023 Notes tendered by the
holders of those notes. The terms of the Exchange Notes are substantially identical to the terms of the 2023 Notes in
all material respects, except that the Exchange Notes are registered under the Securities Act of 1933, as amended,
and the transfer restrictions, registration rights and additional interest provision applicable to the 2023 Notes do not
apply to the Exchange Notes. The exchange offer was completed on September 2, 2015, with all outstanding 2023
Notes being tendered and exchanged for Exchange Notes.
On June 9, 2016, we, along with CSL Capital, co-issued an additional $150 million aggregate principal amount of
6.00% Senior Secured Notes (the “add-on Notes”) as an add-on to the Company’s existing Secured Notes. The add-
on Notes were issued at an issue price of 99.25% of par value, are subject to the same customary covenant
requirements as the existing Secured Notes, and are guaranteed by the Guarantors. The issuance of the add-on
Notes was not registered under the Securities Act of 1933, as amended (the “Securities Act”), but was exempt from
registration under Rule 144A, Regulation S and other applicable exemptions of the Securities Act. Proceeds from
the issuance of the add-on Notes were used to repay existing borrowings under the Revolving Credit Facility.
On December 15, 2016, we, along with CSL Capital, co-issued $400 million aggregate principal amount of the 2024
Notes. The 2024 Notes were issued at an issue price of 100% of par value and are guaranteed by the Guarantors.
Proceeds from the issuance of the 2024 Notes were used to repay existing borrowings under the Revolving Credit
Facility.
Deferred Financing Cost
Deferred financing costs were incurred in connection with the issuance of the Notes and the Facilities. These costs
are amortized using the effective interest method over the term of the related indebtedness, and are included in
interest expense in our Consolidated Statement of Income. For the year ended December 31, 2016 and for the period
from April 24, 2015 to December 31, 2015, we recognized $7.8 million and $4.8 million of non-cash interest
expense, respectively, related to the amortization of deferred financing costs.
64
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Aggregate annual maturities of our long-term obligations at December 31, 2016 are as follows:
(Thousands)
2017
2018
2019
2020
2021
Thereafter
Total
$
$
21,133
21,133
21,133
21,133
21,133
4,062,302
4,167,967
As discussed in Note 6, we have acquired property pursuant to capital leases. At December 31, 2016, future
minimum lease payments under capital lease obligations are as follows:
(Thousands)
2017
2018
2019
2020
2021
Thereafter
Total minimum payments
Less amount representing interest
Total
$
$
7,313
7,115
7,125
6,655
6,262
60,495
94,965
(40,430)
54,535
Note 10. Stock-Based Compensation
The Company’s Board of Directors adopted the 2015 Equity Incentive Plan (the “Equity Plan”), which is
administered by the Compensation Committee of the Board of Directors. Awards issuable under the Equity Plan
include incentive stock options, “non-qualified” stock options, stock appreciation rights, performance units and
performance shares, restricted shares, and restricted stock units.
In connection with the Spin-Off, the Company issued 538,819 restricted shares and 70,889 performance-based
restricted stock units to employees of Windstream in accordance with the terms of the Employee Matters Agreement
between the Company and Windstream. Under the Employee Matters Agreement, which governs the compensation
and employee benefit obligations of CS&L and Windstream with respect to the current and former employees of
each company, employees of Windstream who held equity awards as of the date of the Spin-Off were entitled to
receive equity awards of CS&L in the same proportion as if the equity awards had been common shares on the date
of the Spin-Off. The CS&L awards issued have the same form and vesting requirements as the underlying
Windstream awards. For the purposes of vesting in the CS&L awards, continued service with Windstream is deemed
to be continued service with CS&L. We do not recognize any compensation expense in our Consolidated Statement
of Income related to these awards, as none of the employees granted awards provide service to CS&L. At December
31, 2016, 161,588 restricted shares and 16,033 performance-based restricted stock units issued to Windstream
employees remained outstanding.
Certain employees of CS&L have retained their unvested Windstream awards that were held prior to the Spin-Off.
Unrecognized compensation expense related to these awards was $5,100 at December 31, 2016, and will be
amortized to compensation expense in our Consolidated Statement of Income on a straight-line basis over the
vesting period. For the year ended December 31, 2016 and for the period from April 24, 2015 to December 31,
2015, we recognized $63,000 and $197,000, respectively, of compensation expense related to these awards, which is
recorded in general and administrative expense on our Consolidated Statement of Income.
65
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Restricted Awards
During the year ended December 31, 2016, the Company granted 308,146 shares of restricted stock to employees,
which had a fair value of $6.3 million as of the date of grant. We calculate the grant date fair value of non-vested
shares of restricted stock awards using the closing sale prices on the trading day on the grant date. The restricted
stock awards are amortized on a straight-line basis to expense over the vesting period, which is generally three
years. As of December 31, 2016, there were 5,110,563 shares available for future issuance under the Equity Plan.
The following table sets forth the number of unvested restricted stock awards and the weighted-average fair value of
these awards at the date of grant:
(cid:3)
Restricted Awards
Weighted Average Fair Value at
Grant Date
Aggregate Intrinsic
Value(1) ($000s)
Unvested balance December 31, 2015
Granted
Forfeited
Vested
Unvested balance, December 31, 2016
241,140 $
308,146 $
(12,419) $
(42,976) $
493,891 $
25.82
20.56
21.42
26.34
22.60 $
12,550
(1) The aggregate intrinsic value is calculated as the market value of our common stock as of December 30, 2016.
The market value as of December 30, 2016 was $25.41 per share, which was the closing price of our common
stock reported for transactions effected on the NASDAQ Global Select Market on December 30, 2016, the final
trading day of 2016.
The total fair value of shares vesting during the ended December 31, 2016 was $1.1 million.
As of December 31, 2016, total unrecognized compensation expense on restricted awards was approximately $7.1
million, and the expense is expected to be recognized over a weighted average vesting period of 1.8 years.
Performance Awards
The Company grants long-term incentives to members of management in the form of performance-based restricted
stock units (“PSUs”) under the Equity Plan. The number of PSUs earned is based on the Company’s achievement of
specified performance goals, over a specified performance period, and may range from 0% to 150% of the target
shares. The PSUs have a service condition that will expire at the end of the three-year performance period provided
that the holder continues to be employed by the Company at the end of the performance period. Holders of PSUs are
entitled to dividend equivalents, which will be accrued quarterly and paid in cash upon the vesting of a PSU.
Dividend equivalents are forfeited to the extent that the underlying PSU is forfeited.
On February 29, 2016, we issued 101,660 PSUs equal to 100% of the target amount, with an aggregate value of $2.1
million on the grant date. The PSUs, in addition to a service condition, are subject to the Company’s performance
versus the total return of the MSCI US REIT Index and a triple-net lease peer group, as defined by the
Compensation Committee. Upon evaluating the results of the market conditions, the final number of shares is
determined and such shares vest based on satisfaction of the service condition. The PSUs are amortized on a
straight-line basis over the vesting period. During the year ended December 31, 2016, no PSUs were forfeited due to
termination of service. The following table sets forth the number of unvested PSUs and the weighted-average fair
value of these awards at the date of grant:
Performance Awards
Weighted Average Fair
Value at Grant Date
Aggregate Intrinsic
Value(1) ($000s)
Unvested balance December 31, 2015
Granted
Forfeited
Vested
Unvested balance, December 31, 2016
60,970 $
101,660 $
— $
— $
162,630 $
66
21.82
20.71
—
—
21.13 $
4,132
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
(1) The aggregate intrinsic value is calculated as the market value of our common stock as of December 30, 2016.
The market value as of December 30, 2016 was $25.41 per share, which was the closing price of our common
stock reported for transactions effected on the NASDAQ Global Select Market on December 30, 2016, the final
trading day of 2016.
As of December 31, 2016, total unrecognized compensation expense related to PSUs was approximately $2.1
million, and the weighted-average vesting period was 1.8 years. The fair value of each PSU award is estimated at the
date of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free
return, and dividend yield. Our assumptions include a 0% dividend yield, which is the mathematical equivalent to
reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs. The
following table summarizes the assumptions used to value the PSUs granted during the year ended December 31,
2016 and for the period from April 24, 2015 to December 31, 2015:
Expected term (years)
Expected volatility
Expected annual dividend
Risk free rate
Year Ended
December 31, 2016
Period from
April 24 - December 31, 2015
2.9
26.6%
0.0%
0.9%
3.0
48.8%
0.0%
0.9%
For the year ended December 31, 2016 and for the period from April 24, 2015 to December 31, 2015, we recognized
$4.8 million and $1.9 million, respectively, of compensation expense related to restricted stock awards and
performance-based awards, which is recorded in general and administrative expense on our Consolidated Statement
of Income.
Note 11. Related Party Transactions
In connection with the Spin-Off, we issued approximately 149.8 million shares of our common stock, par value
$0.0001 per share, to Windstream as partial consideration for the contribution of the Distribution Systems and the
Consumer CLEC Business. Windstream Holdings distributed approximately 80.4% of the CS&L shares it received
to existing stockholders of Windstream Holdings and retained a passive ownership interest of approximately 19.6%
of the common stock of CS&L. As a result of this ownership Windstream was deemed to be a related party.
On June 15, 2016, Windstream Holdings disposed of 14.7 million shares of our common stock, representing
approximately half of its retained ownership interest. On June 24, 2016, Windstream Holdings disposed of its
remaining 14.7 million shares of our common stock as part of a public offering. The Company did not receive any
proceeds resulting from the disposition of these shares.
Accordingly, Windstream is no longer deemed a related party under applicable accounting regulations. Our
consolidated financial statements reflect the following transactions with Windstream during the periods in which
Windstream was deemed a related party.
Revenues – The Company records leasing revenue pursuant to the Master Lease. For the six months ended June 30,
2016, we recognized leasing revenues of $337.6 million related to the Master Lease. For the period from April 24,
2015 to December 31, 2015, we recognized leasing revenues of $458.6 million related to the Master Lease, which
includes $0.8 million of TCI revenue recognized as a result of upgrades made by Windstream to the Distribution
Systems.
General and Administrative Expenses – We are party to a Transition Services Agreement (“TSA”) pursuant to
which Windstream and its affiliates provide, on an interim basis, various services, including but not limited to
information technology services, payment processing and collection services, financial and tax services, regulatory
compliance and other support services. On April 1, 2016, the TSA ceased and we incurred $19,000 of related TSA
expense for the three months ended March 31, 2016. For the period from April 24, 2015 to December 31, 2015, we
incurred $0.1 million of expense under the TSA.
67
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
CLEC Operating Expenses – We are party to a Wholesale Master Services Agreement (“Wholesale Agreement”)
and a Master Services Agreement with Windstream related to the Consumer CLEC Business. Under the Wholesale
Agreement, Windstream provides us transport services (local and long distance telecommunications service),
provisioning services (directory assistance, directory listing, service activation and service changes), and repair
services (routine and emergency network maintenance, network audits and network security). Under the Master
Services Agreement, Windstream provides billing and collections services to CS&L. During the six months ended
June 30, 2016, we incurred expenses of $6.6 million and $0.9 million related to the Wholesale Agreement and
Master Services Agreement, respectively. During the period from April 24, 2015 to December 31, 2015 we incurred
expenses of $10.1 million and $1.1 million related to the Wholesale Agreement and Master Services Agreement,
respectively.
Accounts Receivable – As of December 31, 2015, there was $1.7 million accounts receivable from Windstream
related to the collection of Consumer CLEC Business revenues, net of amounts owed to Windstream under the
Wholesale Agreement and Master Services Agreement recorded in accounts receivable on our Consolidated Balance
Sheet.
Dividend Payable – At December 31, 2015 there was a $17.6 million dividend payable to Windstream related to the
dividend declared on November 6, 2015, based on Windstream ownership of CS&L shares as of the December 31,
2015 record date. This amount was paid to Windstream on January 15, 2016 along with the dividends payable to all
common shareholders.
Employee Matters Agreement – We are party to an Employee Matters Agreement (“Employee Matters Agreement”)
with Windstream that governs the respective compensation and employee benefit obligations of the Company and
Windstream in connection with and following the Spin-Off. Under the Employee Matters Agreement, if requested
by a Windstream employee, the Company is required to withhold shares to satisfy the employee’s tax obligations
arising from the recognition of income and the vesting of shares related to awards of CS&L restricted stock held by
the employee that were granted in connection with the Spin-Off. In that case, the Company must pay to Windstream
an amount of cash equal to the amount required to be withheld to satisfy minimum statutory tax withholding
obligations or, at the request of Windstream, remit such cash directly to the applicable taxing authorities. During the
six months ended June 30, 2016, we withheld 91,412 common shares to satisfy these minimum statutory tax-
withholding obligations and delivered $1.9 million to Windstream for remittance to the applicable taxing authorities.
Tower Purchase – In May, 2016, we completed the previously announced transaction with Windstream to acquire 32
wireless towers owned by Windstream and operating rights for 49 wireless towers previously conveyed to the
Company in the Spin-Off for a purchase price of approximately $3 million.
Lease Amendment – During the quarter ended March 31, 2016, we amended the Master Lease with Windstream (the
“Master Lease Amendment”) to allow for the transfer of ownership rights or exchanges of indefeasible rights of use
(an “IRU”) and other long term rights in certain fiber and associated assets constituting leased property under the
Master Lease. We will enter into such transactions pursuant to certain fiber exchange agreements under which we
will grant to a third party ownership rights in certain fiber assets or an IRU in certain fiber assets that constitute
leased property under the Master Lease in exchange for CS&L receiving ownership rights in certain fiber assets or
an IRU in certain fiber assets of the third party, which we will then lease to Windstream as leased property under the
Master Lease. Under the terms of the Master Lease Amendment, Windstream is responsible for any taxes imposed
on CS&L related to the sale, exchange or other disposition of the fiber assets delivered to a third party or the
granting of rights to the leased property that arise from fiber exchange agreements. As of June 30, 2016, no such
transactions had been consummated. The Master Lease Amendment also permits us to install, own and operate
certain wireless communication towers, antennas and related equipment on designated portions of the leased
property.
Landlord Funded Capital Expense – Windstream Holdings requested, and we funded, $43.1 million of capital
expenditures related to the Distribution Systems on December 29, 2015. Monthly rent paid by Windstream increased
in accordance with the Master Lease effective as of the date we provided the funding, which equates to
approximately $3.5 million of incremental rent per year.
68
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Note 12. Earnings Per Share
Our restricted stock awards are considered participating securities as they receive non-forfeitable rights to dividends
at the same rate as common stock. As participating securities, we included these instruments in the computation of
earnings per share under the two-class method described in FASB ASC 260, Earnings per Share.
We also issue PSUs; however these units contain forfeitable rights to receive dividends and are therefore considered
non-participating restrictive shares and are not dilutive under the two-class method until performance conditions are
met. During the year ended December 31, 2016, approximately 220,000 PSUs were excluded from the computation
of diluted net loss per share because their effect is anti-dilutive as a result of our net loss for this period. For the
period from April 24, 2015 through December 31, 2015, approximately 61,000 PSUs were excluded from the
computation of diluted earnings per share as their performance conditions had not been met.
The earnings per share impact of the Series A Shares (See Note 17) is calculated using the net share settlement
method, whereby the redemption value of the instrument is assumed to be settled in cash and only the conversion
premium, if any, is assumed to be settled in shares. The Series A Shares provide CS&L the option to cash or share
settle the instrument, and it is our policy to settle the instrument in cash upon conversion.
The following sets forth the computation of basic and diluted earnings per share under the two-class method:
(Thousands, except per share data)
Basic earnings per share:
Numerator:
Net (loss) income
$
Less: Income allocated to participating securities
Dividends declared on convertible preferred
stock
Amortization of discount on convertible
preferred stock
Net (loss) income applicable to common shares
$
Denominator:
Basic weighted-average common shares outstanding
$
Basic (loss) earnings per common share
(Thousands, except per share data)
Diluted earnings per share:
Numerator:
Net (loss) income
$
Less: Income allocated to participating securities
Dividends declared on convertible preferred
stock
Amortization of discount on convertible
preferred stock
Net (loss) income applicable to common shares
$
Denominator:
Basic weighted-average common shares outstanding
Effect of dilutive non-participating securities
Weighted-average shares for dilutive earnings per
common share
Dilutive (loss) earnings per common share
$
69
Year Ended
December 31, 2016
Period from
April 24 - December 31, 2015 (cid:3)
(cid:3)
(212) $
(1,557)
(1,743)
(1,985)
(5,497) $
152,473
(0.04) $
24,870
(1,152)
-
-
23,718
149,835
0.16
Year Ended
December 31, 2016
Period from
April 24 - December 31, 2015
(212) $
(1,557)
(1,743)
(1,985)
(5,497) $
152,473
—
152,473
(0.04) $
24,870
(1,152)
-
-
23,718
149,835
—
149,835
0.16
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Note 13. Segment Information
As of December 31, 2016, our management, including our chief executive officer, who is our chief operating
decision maker, manages our operations as three operating business segments: Leasing, Fiber Infrastructure and
Consumer CLEC. Our Leasing segment represents our REIT operations, including the results of our tower and
ground lease operations and corporate expenses not directly attributable to our other operating segments. The Fiber
Infrastructure segment represents the operations of the Uniti Fiber business, as well as corporate expenses directly
attributable to the operations of that business, and the Consumer CLEC segment represents the operations of our
Consumer CLEC Business and corporate expenses directly attributable to the operation of that business. We
determined that each of these operating segments represents a reportable segment.
Management evaluates the performance of each segment using Adjusted EBITDA, which is a segment performance
measure defined as net income determined in accordance with GAAP, before interest expense, provision for income
taxes, depreciation and amortization, stock-based compensation expense, the impact, which may be recurring in
nature, of transaction and integration related expenses, the write off of unamortized deferred financing costs, costs
incurred as a result of the early repayment of debt, changes in the fair value of contingent consideration and
financial instruments, and other similar items. The Company believes that net income, as defined by GAAP, is the
most appropriate earnings metric; however we believe that Adjusted EBITDA serves as a useful supplement to net
income because it allows investors, analysts and management to evaluate the performance of our segments in a
manner that is comparable period over period. Adjusted EBITDA should not be considered as an alternative to net
income as determined in accordance with GAAP.
Selected financial data related to our segments is presented below for the year ended December 31, 2016 and for the
period from April 24, 2015 to December 31, 2015:
(cid:3)
(Thousands)
Revenues
Adjusted EBITDA
Less:
Interest expense
Depreciation and amortization
Transaction related costs
Stock-based compensation
Income tax expense
Net loss
Year Ended December 31, 2016
Leasing
(cid:3)
Infrastructure (cid:3) Consumer CLEC (cid:3)(cid:3)
Fiber
Subtotal of
Reportable
Segments
677,368 $
70,568 $
22,472 $
770,408
659,198 $
25,912 $
5,074 $
690,184
(cid:3)
$
$
344,083
28,629
3,258
$
275,394
375,970
33,669
4,846
517
(212)
Capital expenditures (1)(cid:3)
$
15,437 $
31,006 $
- $
46,443
70
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
(cid:3)
(Thousands)
Revenues
Adjusted EBITDA
Less:
Interest expense
Depreciation and amortization
Transaction related costs
Stock-based compensation
Income tax expense
Net income
Period from April 24, 2015 to December 31, 2015
Leasing
(cid:3) Consumer CLEC (cid:3)(cid:3)
Subtotal of Reportable
Segments
458,614 $
17,700 $
476,314
449,340 $
3,957 $
453,297
(cid:3)
$
$
236,177
2,571
181,797
238,748
5,210
1,934
738
24,870
44,413
$
- $
Capital expenditures (1)(cid:3)
$
44,413 $
(1) Segment capital expenditures represents acquisition of ground lease investments and other capital expenditures
as reported in the investing activities section of the Statement of Cash Flows.
Total assets by business segment as of December 31, 2016 and December 31, 2015 are as follows:
(Thousands)
Leasing
Fiber Infrastructure
Consumer CLEC
Subtotal of reportable segments
2,390,431 $
914,082
14,239
3,318,752
December 31, 2016
$
$
$
December 31, 2015
2,527,915
-
14,721
2,542,636
Following the acquisition of Network Management Holdings, LTD in the first quarter of 2017, the Company now
manages and reports our operations in four reportable business segment: Leasing, Fiber Infrastructure, Towers and
Consumer CLEC. This change in segments aligns with how management, including our Chief Operating Decision
maker, evaluates the performance of our businesses and make decisions regarding the allocation of resources. We
will recast prior period segment data to conform to this new presentation beginning with our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2017.
Note 14. Commitments and Contingencies
In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we
believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our
business, financial condition, cash flows or results of operations.
We have fiber lease agreements and office space lease agreements under non-cancelable operating leases. Rental
expense under operating leases approximated $834,000 for the year ended December 31, 2016 and $132,000 for the
period from April 24, 2015 to December 31, 2015. Future minimum payments, by year and in the aggregate, under
non-cancellable operating leases with initial or remaining lease terms of one year or more, are as follows:
(Thousands)
2017
2018
2019
2020
2021
Thereafter
Total
$
$
15,483
11,390
7,450
4,840
2,030
5,579
46,772
71
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Pursuant to the Separation and Distribution Agreement, Windstream has agreed to indemnify us (including our
subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from
or relating to legal proceedings involving Windstream's telecommunications business prior to the Spin-Off, and,
pursuant to the Master Lease, Windstream has agreed to indemnify us for, among other things, any use, misuse,
maintenance or repair by Windstream with respect to the Distribution Systems. Windstream is currently a party to
various legal actions and administrative proceedings, including various claims arising in the ordinary course of its
telecommunications business, which are subject to the indemnities provided by Windstream to us.
Under the terms of the Tax Matters Agreement entered into with Windstream, we are generally responsible for any
taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-
free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Code,
as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to
our stock, indebtedness, assets or business, or a breach of the relevant representations or any covenants made by us
in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the private letter
ruling or the representations provided in connection with the tax opinion. We believe that the probability of us
incurring obligations under the Tax Matters Agreement are remote; and therefore, have recorded no such liabilities
in our consolidated balance sheet.
Note 15. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component is as follows for the year ended December 31,
2016:
(Thousands)
Beginning balance at December 31, 2015
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Ending balance at December 31, 2016
Note 16. Income Taxes
Currency Translation
Adjustment
Changes in Fair Value
of Effective Cash Flow
Hedge
(Note 7)
$
$
— $
(267)
—
(267) $
(5,427 ) $
(24,465 )
23,790
(6,102 ) $
Total
(5,427)
(24,732)
23,790
(6,369)
We have elected on our U.S. federal income tax return for the taxable year ending December 31, 2015 to be treated
as a REIT and thus have no provision for U.S. federal income tax related to activities of the REIT and its
passthrough subsidiaries. The REIT and certain of its subsidiaries are subject to certain state and local income taxes,
franchise taxes, and gross receipts taxes. Our TRSs are subject to U.S. federal, state and local corporate income
taxes.
72
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Income tax expense (benefit) for the year ended December 31, 2016 and for the period from April 24, 2015 to
December 31, 2015 as reported in the accompanying Consolidated Statement of Income was comprised of the
following:
(cid:3)
(Thousands)
Current
Federal
State
Total current expense
Deferred
Federal
State
Total deferred expense
Total income tax expense
(cid:3)
$
$
Year Ended
December 31, 2016
Period from
(cid:3)(cid:3)April 24 - December 31, 2015
1,596 $
1,107
2,703
(1,488)
(698)
(2,186)
517 $
1,208
741
1,949
(770)
(441)
(1,211)
738
An income tax expense reconciliation between the U.S. statutory tax rate and the effective tax rate is as follows:
(cid:3)
(Thousands)
Income from continuing operations, before tax
Income tax at U.S. statutory federal rate
Increases (decreases) resulting from:
State taxes, net of federal benefit
Benefit of REIT status
Capitalized transaction costs
Change in valuation allowance
Adjustment of deferred tax balances
Permanent differences
Rate differential
Income tax expense
Year Ended
December 31, 2016
$
(cid:3)
Period from
(cid:3) April 24 - December 31, 2015
24,795
8,665
305 $
107
(224)
(4,016)
(3,915)
8,176
149
52
188
517 $
266
(8,193)
-
-
-
-
-
738
$
The effective tax rate on income from continuing operations differs from tax at the statutory rate primarily due to
our status as a REIT, certain capitalized costs incurred to acquire assets that were transferred to a TRS, and changes
in valuation allowance related to deferred tax assets of a TRS.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
73
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
The components of the Company's deferred tax assets and liabilities are as follows:
(Thousands)
Deferred tax assets:
Deferred revenue
Accrued bonuses
Goodwill
Stock based compensation
Accrued expenses and other
Asset retirement obligation
Inventory reserve
Net operating loss carryforwards
Deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property, plant & equipment
Customer list intangible
Other intangible amortization
Other
Deferred tax liabilities
(cid:3)(cid:3)
Deferred tax asset (liability), net
$
$
$
$
December 31, 2016
December 31, 2015
4,244 $
520
1,886
179
802
790
401
39,916
48,738
(8,176)
40,562
(20,923) $
(47,721)
(137)
(175)
(68,956) $
(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3)
(28,394) $
90
-
-
-
-
-
-
-
90
-
90
(1,759)
(4,045)
-
-
(5,804)
(5,714)
A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount that we
believe is more likely than not to be realized. The valuation allowance at December 31, 2016 primarily relates to net
operating loss carryforwards (“NOL”s) of one of our TRSs.
On August 31, 2016 we acquired 100% of the outstanding equity of Tower Cloud, Inc., which had federal NOL
carryforwards of approximately $81.2 million at the date of the acquisition that will expire between 2026 and 2036.
As a result of the change in ownership, the utilization of Tower Cloud, Inc. NOL carryforwards is subject to
limitations imposed by the Internal Revenue Code. The gross deferred tax assets associated with the NOL and other
temporary differences as of August 31, 2016 were approximately $37.0 million, with respect to which we
determined that a valuation allowance is not required. A net deferred tax liability of $24.8 million was recorded in
connection with the acquisition, which is primarily related to the excess of the recorded amounts for Property, Plant
& Equipment and Intangible Assets over their respective historical tax bases.
We have total federal NOL carryforwards as of December 31, 2016 of approximately $102.9M which will expire
between 2026 and 2036.
The Company has no liability for unrecognized tax benefits or tax-related penalties or interest at December 31, 2016
and does not expect a significant change in the balance of unrecognized tax benefits within the next 12 months.
With the exception of Tower Cloud, Inc., our 2015 returns remain open to examination. As Tower Cloud, Inc. has
NOLs available to carry forward, the applicable tax years will generally remain open to examination several years
after the applicable loss carryforwards have been utilized or expire.
Note 17. Capital Stock
On August 31, 2016, we issued 1.9 million shares of our common stock, par value $0.0001 per share, as partial
consideration for all outstanding equity interests of Tower Cloud. See Note 4.
74
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
On June 24, 2016, in connection with Windstream’s disposition of its retained ownership interest in CS&L pursuant
to the public offering (See Note 11), we issued 2.2 million additional shares of our common stock. The shares were
sold at a public offering price of $26.01, resulting in proceeds to the Company of $54.8 million, net of underwriting
discounts and commissions, which were used to repay existing borrowings under our Revolving Credit Facility.
On May 2, 2016, we issued 1 million shares of our common stock, par value $0.0001 per share, as partial
consideration for all outstanding equity interests of PEG Bandwidth. See Note 4. In addition, we issued 87,500
shares of the Company’s 3% Series A Convertible Preferred Stock, $0.0001 par value (“Series A Shares”), with a
liquidation value of $87.5 million. The Series A Shares are non-voting and entitle the holders to receive cumulative
dividends at the rate per annum of 3.0%, payable in cash. Holders of the Series A Shares have the option to convert
at any time after three years, or are mandatorily convertible after eight years at a conversion rate of 28.5714 shares
of common stock per Series A Share, subject to adjustment for certain dilutive events not to exceed a conversion
rate of 50.5305 shares of common stock per Series A Share. The Series A Shares provide us the option to cash or
share settle, and it is our policy to settle in cash upon conversion. Upon liquidation, each holder of the Series A
Shares shall be entitled to receive the liquidation preference per share of $1,000 plus an amount equal to the
accumulated and unpaid dividends on such shares. The Series A Shares were recorded at inception on the
Consolidated Balance Sheet as mezzanine equity at fair value.
We are authorized to issue up to 500,000,000 shares of voting common stock and 50,000,000 shares of preferred
stock, of which 155,138,637 and 0 shares, respectively, were outstanding at December 31, 2016. We had
344,861,363 shares of voting common stock available for issuance at December 31, 2016.
Note 18. Dividends (Distributions)
Distributions with respect to our common stock is characterized for federal income tax purposes as taxable ordinary
dividends, capital gains dividends, non-dividend distribution or a combination thereof. For the year ended December
31, 2016 and for the period from April 24, 2015 to December 31, 2015 our common stock distribution per share was
$2.40 and $1.04, respectively, characterized as follows:
(cid:3)
(cid:3)(cid:3)
Ordinary dividends
Non-dividend distributions
Total
Note 19. Future Minimum Rents
Year Ended
December 31, 2016
Period from
1.31 $
1.09
2.40 $
April 24 - December 31, 2015
0.87
0.17
1.04
$
$
Future minimum lease payments to be received, excluding operating expense reimbursements, from tenant under
non-cancelable operating leases as of December 31, 2016, are as follows:
(Thousands)(cid:3)
2017
2018
2019
2020
2021
Thereafter
Total
$
$
657,103
660,883
664,727
668,578
671,845
5,769,327
9,092,463
75
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Note 20. Employee Benefit Plan
We sponsor a defined contribution plan under section 401(k) of the Internal Revenue Code, which covers employees
who are 21 years of age and over. Under this plan, we match voluntary employee contributions at a rate of 100% for
the first 3% of an employee’s annual compensation and at a rate of 50% for the next 2% of an employee’s annual
compensation. Employees vest in our contribution immediately. Our expense related to the plan recognized for the
year ended December 31, 2016 and for the period April 24, 2015 to December 31, 2015 was $0.4 million and $0.1
million, respectively.
We sponsor a deferred compensation plan. The plan is established and maintained by the Company primarily to
permit certain management or highly compensated employees of the Company and its subsidiaries, within the
meaning of Section 301(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to
defer a percentage of their compensation. The plan is an unfunded deferred compensation plan intended to qualify
for the exemptions provided in, and shall be administered in a manner consistent with Section 201, 301 and 401 of
ERISA and Section 409A of the Internal Revenue Code of 1986, as amended.
Note 21. Subsequent Events
On January 31, 2017, Uniti Towers completed the previously announced acquisition of NMS. NMS owns and
operates wireless communications towers in Latin America with an additional build-to-suit tower sites under
development. The NMS portfolio spans across Mexico, Nicaragua, and Colombia. The consideration for the wireless
towers currently in operation was $62.6 million, which was funded through cash on hand. Under the terms of the
purchase agreement, Uniti Towers will acquire the rights to towers under development when construction is
completed. With the addition of NMS, the Uniti Towers portfolio now consists of 468 wireless communication
towers.
On February 9, 2017, we completed a repricing of our Term Loan Facility. The repricing decreases the interest rate
by 50 basis points to LIBOR plus 3.00% per annum with a minimum LIBOR rate of 1.0%. Our interest rate swap
agreements are unaffected by this repricing and effectively fix the interest rate on our Term Loan Facility at 5.1%.
On February 23, 2017, we announced a definitive agreement to acquire Hunt Telecommunications, LLC (“Hunt”)
for initial consideration of $114.5 million in cash and approximately two million operating partnership units. Hunt is
a leading provider of data transport to K-12 schools and government agencies with a dense fiber network in
Louisiana. We intend to fund the cash portion of the transaction through cash on hand and borrowings under our
revolving credit facility. The transactions is expected to close during the third quarter of 2017 and is subject to
regulatory approvals and other customary terms and conditions.
Note 22. Supplemental Guarantor Information
Pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities
registered or being registered,” the Company is required to provide condensed consolidating financial information
for CSL Capital and the Guarantors because the Exchange Notes (see Note 9) and the guarantees thereof were
registered with the SEC under the Securities Act. While the condensed consolidating financial information
presented below is in respect of our Exchange Notes only, our Secured Notes, 2024 Notes and senior credit facilities
under the Credit Agreement are guaranteed by the Guarantors. These guarantees are full and unconditional as well
as joint and several. All property assets and related operations of the Guarantors are pledged as collateral under the
Secured Notes and Credit Agreement and the Guarantors are subject to restrictions on certain investments and
payments. Subject to the terms and provisions of the debt agreements, in certain circumstances, a Guarantor may be
released from its guarantee obligation including, upon the sale or transfer of any portion of its equity interest or all
or substantially all of its property, and upon any Guarantor being designated an Unrestricted Subsidiary, as defined
in the Credit Agreement, or otherwise no longer being required to remain a Guarantor given its size or regulatory
restrictions.
76
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Certain amounts in the prior period have been revised to correct errors identified during the fourth quarter 2016 that
relate to prior periods. Specifically, immaterial adjustments were made to properly reflect the Guarantor’s
proportionate share in net assets of Non-Guarantor entities. The adjustments have no impact on the consolidated
results of the Company.
77
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
The following information summarizes our Condensed Consolidating Balance Sheets as of December 31, 2016 and
December 31, 2015, Condensed Consolidating Statement of Comprehensive Income (Loss) for the year ended
December 31, 2016 and for the period from April 24, 2015 to December 31, 2015, and the Condensed Consolidating
Statement of Cash Flows for the year ended December 31, 2016 and for the period from April 24, 2015 to December
31, 2015:
(cid:3)
(Thousands)
Assets:
(cid:3)
(cid:3)
Property, plant and equipment, net $
Cash and cash equivalents
Accounts receivable, net
Affiliate receivable
Goodwill
Intangible assets, net
Straight-line revenue receivable
Investment in consolidated
subsidiaries
Other assets
Condensed Consolidating Balance Sheet
As of December 31, 2016
Non-
CS&L
CSL Capital Guarantors
Guarantors Eliminations (cid:3) Consolidated
— $
131,145
(3)
—
—
—
—
32,426
8,989
—
— $1,975,455 $ 694,582 $
8,183
—
6,295
—
—
2,413
145,054 117,280
—
37,033 123,551
—
4
29,084
—
— $ 2,670,037
171,754
—
15,281
—
(2,413 )
—
262,334
—
160,584
—
29,088
—
2,801,234 2,036,717
761,609
- (5,599,560 )
—
1,066
9,674
$ 2,933,442 $ 2,036,717 $2,996,217 $ 954,349 $ (5,601,973 ) $ 3,318,752
2,041
6,567
—
—
Total Assets
Liabilities and Shareholders'
(Deficit) Equity:
Liabilities:
Accounts payable, accrued
expenses and other liabilities
Accrued interest payable
Deferred revenue
Derivative liability
Affiliate payable
Dividends payable
Deferred income taxes
Capital lease obligations
Contingent consideration
Notes and other debt, net
Total liabilities
$
— $
27,812
—
6,102
—
94,607
—
—
98,600
— $
27,812
—
6,102
—
—
—
—
—
4,028,214 4,028,214
4,255,335 4,062,128
—
—
40,977
$
25,081 $ 15,896 $
27,812
(27,812 )
—
261,404
—
157,857 103,547
6,102
(6,102 )
—
—
(2,413 )
—
94,607
—
—
28,394
—
26,791
54,535
—
6,558
—
98,600
—
— (4,028,214 ) 4,028,214
234,931 152,792 (4,064,541 ) 4,640,645
—
2,413
—
1,603
47,977
—
—
Convertible preferred stock
80,552
—
—
—
—
80,552
Shareholders' (Deficit) Equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive
income
Distributions in excess of earnings (1,537,183) (2,019,309) 2,761,286 801,824 (1,543,801 ) (1,537,183)
(1,402,445) (2,025,411) 2,761,286 801,557 (1,537,432 ) (1,402,445)
Total shareholders' deficit
15
141,092
15
141,092
—
—
—
—
—
—
(6,369)
(6,102)
—
—
(6,369)
(267)
6,369
—
Total Liabilities, Convertible
Preferred Stock, and Shareholders'
Deficit
$ 2,933,442 $ 2,036,717 $2,996,217 $ 954,349 $ (5,601,973 ) $ 3,318,752
78
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
(Thousands)
Assets:
Property, plant and equipment, net $
Cash and cash equivalents
Accounts receivable, net
Affiliate receivable
Intangible assets, net
Straight-line rent receivable
Investment in consolidated
subsidiaries
Other assets
Total Assets
Liabilities and Shareholders'
(Deficit) Equity:
Accounts payable, accrued
expenses and other liabilities
Accrued Interest payable
Deferred Revenue
Derivative liability
Affiliate payable
Dividends payable
Deferred income taxes
Notes and other debt, net
Total liabilities
Condensed Consolidating Balance Sheet
As of December 31, 2015
Non-
CS&L
CSL Capital Guarantors
Guarantors Eliminations Consolidated
— $
17
—
—
—
—
— $1,841,712 $ 533,048 $
2,284
—
1,609
—
—
—
10,530
—
—
—
140,197
474
151
—
11,795
— $ 2,374,760
142,498
—
2,083
—
(151 )
—
10,530
—
11,795
—
2,458,679 2,458,679
—
—
510,093
970
672
$ 2,458,696 $ 2,458,679 $2,505,094 $ 547,769 $ (5,427,602 ) $ 2,542,636
— (5,427,451 )
—
298
—
$
— $
24,440
—
5,427
—
90,507
—
— $
24,440
—
5,427
—
—
—
3,505,228 3,505,228
3,625,602 3,535,095
9,204 $
—
44,862
—
—
—
1,677
—
55,743
1,205 $
—
22,955
—
151
—
4,037
10,409
— $
24,440
(24,440 )
67,817
—
5,427
(5,427 )
—
(151 )
90,507
—
5,714
—
— (3,505,228 ) 3,505,228
28,348 (3,535,246 ) 3,709,542
Common Stock
Additional paid-in capital
Accumulated other comprehensive
income
(5,427)
Distributions in excess of earnings (1,162,886) (1,070,989) 2,449,351 519,421 (1,897,783 ) (1,162,886)
(1,166,906) (1,076,416) 2,449,351 519,421 (1,892,356 ) (1,166,906)
Total shareholders' deficit
15
1,392
15
1,392
—
—
—
—
—
—
(5,427)
(5,427)
—
—
5,427
—
—
Total Liabilities and Shareholders'
(Deficit) Equity
$ 2,458,696 $ 2,458,679 $2,505,094 $ 547,769 $ (5,427,602 ) $ 2,542,636
79
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
(Thousands)
Revenues:
Leasing
Fiber Infrastructure
Consumer CLEC
Total revenues
Costs and Expenses:
Interest expense
Depreciation and amortization
General and administrative expense
Operating expense (exclusive of
depreciation, accretion and amortization)
Transaction related costs
Total costs and expenses
Earnings from consolidated subsidiaries
(Loss) income before income taxes
Income tax expense
Net (loss) income
Condensed Consolidating Statement of Comprehensive Income
For the Year Ended December 31, 2016
Non-
CS&L
CSL Capital Guarantors
Guarantors Eliminations Consolidated
$
— $
—
—
— $ 674,683 $
57,030
—
—
— 731,713
2,685 $
13,538
22,472
38,695
— $ 677,368
70,568
—
22,472
— 770,408
267,959 273,022
—
4,829
7,046
— 279,507
28,161
—
389 (273,022 ) 275,394
— 375,970
35,402
—
96,463
2,412
—
—
—
3,945
25,666
29,566
24,002
158
49,668
33,669
276,733 273,022 369,946 123,424 (273,022 ) 770,103
—
276,521 288,468
305
517
(212)
— (479,234 )
(84,729 ) (206,212 )
—
15,446 $ 275,365 $ (84,599 ) $ (206,212 ) $
(85,755)
15,446 276,012
647
(212)
—
(212) $
—
—
(130 )
—
$
Comprehensive (loss) income
$ (1,154) $
14,771 $ 275,365 $ (84,866 ) $ (205,270 ) $
(1,154)
(Thousands)
Revenues:
Rental revenues
Consumer CLEC
Total revenues
Costs and Expenses:
Interest expense
Depreciation and amortization
General and administrative expense
Operating expense (exclusive of
depreciation, accretion and amortization)
Transaction related costs
Total costs and expenses
Earnings (losses) from consolidated
subsidiaries
(Loss) Income before income taxes
Income tax expense
Net (loss) income
Condensed Consolidating Statement of Comprehensive Income
For the Period from April 24 - December 31, 2015
Non-
CS&L
CSL Capital Guarantors
Guarantors Eliminations Consolidated
$
— $
—
—
— $ 458,334 $
—
—
— 458,334
280 $
17,700
17,980
— $ 458,614
17,700
—
— 476,314
181,797 181,797
—
1,934
—
— 173,648
9,274
—
—
—
—
5,210
183,731 181,797 188,132
—
—
— (181,797 ) 181,797
— 238,748
11,208
—
65,100
—
13,743
—
13,743
5,210
78,843 (181,797 ) 450,706
—
—
208,601 208,601
24,870
—
$ 24,870 $
(62,249)
26,804 207,953
201
— (354,953 )
(60,863 ) (173,156 )
—
26,804 $ 207,752 $ (61,400 ) $ (173,156 ) $
537
—
—
25,608
738
24,870
Comprehensive (loss) income
$ 19,443 $
21,377 $ 207,752 $ (61,400 ) $ (167,729 ) $
19,443
80
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
(cid:3)
(Thousands)
Cash flow from operating activities
Net cash provided by (used in)
operating activities
Cash flow from investing activities
Acquisition of businesses, net of cash
acquired
Acquisition of ground lease investments
Other capital expenditures
Net cash used in investing activities
Cash flow from financing activities
Principal payment on debt
Dividends paid
Proceeds from issuance of Notes
Borrowings under revolving credit facility
Payments under revolving credit facility
Capital lease payments
Deferred financing costs
Common stock issuance, net of costs
Net share settlement
Intercompany transactions, net
Net cash provided (used in) by
financing activities
Effect of exchange rates on cash and cash
equivalents
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents, December 31,
2015
Cash and cash equivalents, December 31,
2016(cid:3)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2016
CSL
Non-
(cid:3) CS&L
Capital Guarantors
Guarantors Eliminations (cid:3)Consolidated
$ (59,076) $ — $ 626,147 $ 18,686 $ (209,769 ) $ 375,988
—
—
—
—
— (315,494) (173,294 )
(11,543 )
—
—
—
(20,333 )
(14,567)
— (330,061) (205,170 )
— (488,788)
(11,543)
—
—
(34,900)
— (535,231)
(22,027)
(367,830)
548,875
641,000
(641,000)
—
(20,557)
54,213
(2,359)
(111)
—
—
—
—
—
(1,357)
—
—
—
—
(22,027)
—
— (367,830)
—
— 548,875
—
— 641,000
—
— (641,000)
—
—
(1,549)
—
(20,557)
—
—
54,213
—
—
(2,359)
—
—
—
— (402,500) 192,842 209,769
—
—
—
—
—
(192 )
—
—
—
190,204
— (403,857) 192,650 209,769 188,766
—
—
—
(267 )
—
(267)
131,128
— (107,771)
5,899
—
29,256
17
— 140,197
2,284
142,498
$ 131,145 $ — $ 32,426 $
8,183 $
— $ 171,754
81
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
(Thousands)
Cash flow from operating activities
Net cash provided by operating
activities
Cash flow from investing activities
Consideration paid to Windstream Services
Capital expenditures - other
Net cash used in investing activities
Cash flow from financing activities
Proceeds from issuance of Term Loans
Deferred financing costs
Principal payment on debt
Common stock issuance costs
Net share settlement
Dividends paid
Intercompany transactions, net
Cash in-lieu of fractional shares
Net cash provided by financing
activities
Net increase in cash and cash equivalents
Cash and cash equivalents, April 24, 2015
Cash and cash equivalents, December 31,
2015(cid:3)
Condensed Consolidating Statement of Cash Flows
For the Period from April 24 - December 31, 2015
CSL
Non-
CS&L
Capital Guarantors
Guarantors Eliminations (cid:3) Consolidated
$
106,332 $ — $ 426,719 $ 13,519 $ (253,362 ) $ 293,208
(1,035,029) —
— —
(1,035,029) —
—
(33,178)
(33,178)
—
(11,235 )
(11,235 )
— (1,035,029)
—
(44,413)
— (1,079,442)
1,127,000 —
(30,057) —
(10,700) —
(543) —
(113)
—
—
—
—
—
—
—
—
(156,854) —
—
— — (253,362)
—
(19) —
—
—
— 253,362
—
—
— 1,127,000
(30,057)
—
(10,700)
—
(543)
—
(113)
(156,854)
—
(19)
928,714 — (253,362)
— 253,362
928,714
17 — 140,179
18
— —
2,284
—
—
—
142,480
18
$
17 $ — $ 140,197 $
2,284 $
— $ 142,498
Note 23. Quarterly Results of Operations (unaudited)
Selected quarterly information for each of the four quarters in the year ended December 31, 2016:
(cid:3)
(Thousands, except per share data)
Total revenues
Income (loss) before income taxes
Net income (loss)
Net income (loss) applicable to common
shareholders
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Dividends declared per common share
2016
First
Quarter
Second
Quarter
Third
Quarter
(cid:3)(cid:3)
Fourth
Quarter
174,675 $
8,480
8,036
188,573 $
(1,208)
(1,535)
200,240 $
(2,215 )
(2,343 )
206,920
(4,752)
(4,370)
7,681
(2,871)
(4,144 )
(6,163)
0.05 $
0.05 $
0.60 $
(0.02) $
(0.02) $
0.60 $
(0.03 ) $
(0.03 ) $
0.60 $
(0.04)
(0.04)
0.60
$
$
$
$
82
Communications Sales & Leasing, Inc.
Notes to the Consolidated Financial Statements – Continued
Selected quarterly information for period from April 24, 2015 to December 31, 2015:
(cid:3)
(Thousands, except per share data)
Total revenues
Income before income taxes
Net income
Net income applicable to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividends declared per common share
Period from
April 24 - June 30, 2015
2015
Third
Quarter
Fourth
Quarter
(cid:3)(cid:3)
$
$
$
$
128,748 $
8,532
8,301
7,976
173,634 $
9,671
9,403
8,973
173,932
7,405
7,166
6,769
0.05 $
0.05 $
0.44 $
0.06 $
0.06 $
0.60 $
0.05
0.05
0.60
83
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Communications Sales & Leasing, Inc.
We have audited the accompanying special purpose statements of revenue and direct expenses for the period from
January 1, 2015 to April 24, 2015 and for the year ending December 31, 2014 of the Competitive Local Exchange
Carrier (“CLEC”) Business of Windstream Holdings, Inc. These special purpose financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these special purpose
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the special purpose financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the special purpose financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall special purpose financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying special purpose financial statements were prepared for the purpose of complying with the rules
and regulations of the Securities and Exchange Commission as described in Note 2 and are not intended to be a
complete presentation of CLEC’s revenues and expenses.
In our opinion, the special purpose financial statements referred to above present fairly, in all material respects, the
revenues and direct expenses for the period from January 1, 2015 through April 24, 2015 and for the year ending
December 31, 2014 of the CLEC Business of Windstream Holdings, Inc. in conformity with accounting principles
generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Little Rock, Arkansas
March 7, 2016
84
Consumer CLEC Business
Statements of Revenues and Direct Expenses
(Thousands)
Revenues
Direct expenses:
Cost of revenues
Selling, general, and administrative
Amortization
Total direct expenses
Revenues in Excess of Direct Expenses
For the Period
January 1 - April 24,
2015
(cid:3)(cid:3)
Fiscal Year Ended
December 31, 2014
36,015
10,149 $
5,552
22
1,283
6,857
3,292 $
19,060
80
4,586
23,726
12,289
$
$
The accompanying notes are an integral part of these financial statements.
85
Consumer CLEC Business
Notes to Financial Statements
Note 1. Description of Business
Communications Sales & Leasing, Inc. (the “Company,” “CS&L,” “we,” “us” or “our”) was incorporated in the
state of Delaware in February 2014 and reorganized in the state of Maryland on September 4, 2014. On April 24,
2015, in connection with the separation and spin-off of CS&L from Windstream Holdings, Inc. (“Windstream
Holdings” and together with its consolidated subsidiaries “Windstream”), Windstream contributed certain
telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution
Systems”) and a small consumer competitive local exchange carrier (“CLEC”) business (the “Consumer CLEC
Business”) to CS&L in exchange for cash, shares of common stock of CS&L and certain indebtedness of CS&L (the
“Spin-Off”).
The Consumer CLEC Business, which historically has been reported as an integrated operation within Windstream,
offers voice, broadband, long-distance, and value-added services to residential customers located primarily in rural
locations. Substantially all of the network assets used to provide these services to customers are contracted through
interconnection agreements with other telecommunications carriers. Prior to the Spin-Off, Windstream ceased
accepting new residential customers in the service areas covered by the Consumer CLEC Business.
Note 2. Basis of Presentation
Subsequent to the Spin-Off, all financial results of the Consumer CLEC Business are reported within the
consolidated financial statements of CS&L. The accompanying Statements of Revenues and Direct Expenses for the
period January 1, 2015 to April 24, 2015 (the “Spin Date”) and the year ended December 31, 2014 have been
prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission
(the “SEC”), as permitted by the SEC and are not intended to be a complete presentation of the results of operations
of the Consumer CLEC Business. The elements of the financial statements are stated in accordance with accounting
principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures have
been condensed or omitted as permitted by the SEC’s rules and regulations. In the opinion of management, all
adjustments considered necessary for a fair statement of the results presented have been included. The results of
operations for the periods presented are not necessarily indicative of results of the Consumer CLEC Business
following the Spin-Off.
The accompanying Statements of Revenues and Direct Expenses include all direct costs incurred in connection with
the operation of the Consumer CLEC Business for which specific identification was practicable. In addition, direct
costs incurred by Windstream to operate the Consumer CLEC Business for which specific identification was not
practicable have been allocated based on assumptions that management believes reasonable under the circumstances
as more fully discussed in Note 4. The Statements of Revenues and Direct Expenses exclude costs that are not
directly related to the Consumer CLEC Business including general corporate overhead costs, interest expense and
income taxes.
Note 3. Summary of Significant Accounting Policies
Use of Estimates —The preparation of financial statements, in accordance with GAAP, requires management to
make estimates and assumptions that affect the reported amounts of revenues and expenses. The estimates and
assumptions used in the accompanying financial statements are based upon management’s evaluation of the relevant
facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and
assumptions used in preparing the accompanying financial statements, and such differences could be material.
Revenue Recognition—Service revenues are primarily derived from providing access to or usage of leased networks
and facilities. Service revenues are recognized over the period that the corresponding services are rendered to
customers. Revenues derived from other telecommunications services, including broadband, long distance and
enhanced service revenues are recognized monthly as services are provided. Sales of customer premise equipment
and modems are recognized when products are delivered to and accepted by customers.
86
Consumer CLEC Business
Notes to Financial Statement – Continued
In assessing collectability of receivables, management considers a number of factors, including historical collection
experience, aging of the accounts receivable balances and current economic conditions. When internal collection
efforts on accounts have been exhausted, the accounts are written off by reducing the allowance for doubtful
accounts. The provision for doubtful accounts, which is included in cost of service, was $111,000 for the period
from January 1, 2015 to Spin Date.
Subsequent Events—The accompanying financial statements of the Consumer CLEC Business are derived from the
consolidated financial statements of Windstream, which issued its audited consolidated financial statements as of
and for the year ended December 31, 2015 on February 25, 2016. Accordingly, management has evaluated
transactions for consideration as recognized subsequent events in the accompanying financial statement through the
date of February 25, 2016. In addition, management has evaluated transactions that occurred as of the issuance of
these financial statements on March 7, 2016 for purposes of disclosure of unrecognized subsequent events.
Note 4. Allocations
As described in Note 2, the accompanying Statements of Revenues and Direct Expenses of the Consumer CLEC
Business include all direct costs incurred in connection with the operation of the Consumer CLEC Business for
which specific identification was practicable. In addition, certain costs incurred by Windstream to operate the
Consumer CLEC Business for which specific identification was not practicable have been allocated based on
revenues and sales. These allocated expenses are included in “Cost of revenues” and “Selling, general and
administrative.”
General and administrative costs incurred by Windstream not directly related to the Consumer CLEC Business have
not been allocated to these operations. Costs not allocated include amounts related to executive management,
accounting, treasury and cash management, data processing, legal, human resources and certain occupancy costs.
87
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the
Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to management, including our principal executive and
principal financial officers as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated
the effectiveness of our disclosure controls and procedures as of December 31, 2016. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our disclosure controls and procedures were
effective as of December 31, 2016.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) of the Exchange Act. The 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, and includes
those policies and procedures that:
(cid:120) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company;
(cid:120) 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
(cid:120) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may
deteriorate.
On August 31, 2016 and May 2, 2016, the Company completed the acquisitions of Tower Cloud, Inc. and PEG
Bandwidth, LLC, respectively. Management excluded Tower Cloud, Inc. and PEG Bandwidth, LLC from its
assessment of internal control over financial reporting as of December 31, 2016 because they were acquired by the
Company in purchase business combinations in 2016. Tower Cloud, Inc. and PEG Bandwidth, LLC represent
12.7% and 14.8% of total assets, respectively and 1.8% and 7.4% of total revenue, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2016.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated
the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework (2013).
88
Based on this evaluation under the framework in Internal Control - Integrated Framework (2013) issued by COSO,
management concluded the Company’s internal control over financial reporting was effective as of December 31,
2016.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, who has audited the
consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2016, as stated in their report which
appears in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information.
None
89
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Except as set forth below, the information required by this item is incorporated by reference from the definitive
proxy statement to be filed within 120 days after December 31, 2016, pursuant to Regulation 14A under the
Exchange Act in connection with our 2017 annual meeting of stockholders.
We have a code of ethics as defined in Item 406 of Regulation S-K, which code applies to all of our directors and
employees, including our principal executive officer, principal financial officer, principal accounting officer or
controller, and persons performing similar functions. A copy of this code of ethics, titled “Communications Sales &
Leasing, Inc. Code of Business Conduct and Ethics,” is available free of charge on our website at www.cslreit.com.
We intend to satisfy the disclosure requirements of Form 8-K regarding any amendment to, or a waiver from, any
provision of our code of ethics by posting such amendment or waiver on our website.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed
within 120 days after December 31, 2016, pursuant to Regulation 14A under the Exchange Act in connection with
our 2017 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Except as set forth below, the information required by this item is incorporated by reference from the definitive
proxy statement to be filed within 120 days after December 31, 2016, pursuant to Regulation 14A under the
Exchange Act in connection with our 2017 annual meeting of stockholders.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table contains information about our equity compensation plan as of December 31, 2016:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
-
-
-
-
-
-
5,110,5631
-
5,110,563
Plan category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
1
Shares available for issuance under the 2015 Equity Incentive Plan.
90
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed
within 120 days after December 31, 2016, pursuant to Regulation 14A under the Exchange Act in connection with
our 2017 annual meeting of stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed
within 120 days after December 31, 2016, pursuant to Regulation 14A under the Exchange Act in connection with
our 2017 annual meeting of stockholders.
91
Item 15. Exhibits, Financial Statement Schedules.
Financial Statements
PART IV
See Index to Consolidated Financial Statements in “Financial Statements and Supplementary Data.”
Financial Statement Schedules
Communication Sales & Leasing, Inc. Schedule I – Condensed Financial Information of the Registrant (Parent
Company) on page S-1 of this report.
Communication Sales & Leasing, Inc. Schedule II – Valuation and Qualifying Accounts on page S-5 of this report.
Communication Sales & Leasing, Inc. Schedule III – Schedule of Real Estate Investments and Accumulated
Depreciation on page S-6 of this report.
Index to Exhibits
The exhibits listed in the Index to Exhibits immediately preceding the exhibits are filed herewith in response to this
item.
92
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.
SIGNATURES
Date: February 23, 2017
COMMUNICATIONS SALES & LEASING, INC.
By:
/s/ Kenneth A. Gunderman
Kenneth A. Gunderman
President and 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 in the capacities and on the dates indicated.
Name
Title
Date
/s/ Kenneth A. Gunderman
Kenneth A. Gunderman
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Mark A. Wallace
Mark A. Wallace
Executive Vice President – Chief Financial Officer and
Treasurer
(Principal Financial Officer)
/s/ Blake Schuhmacher
Blake Schuhmacher
Vice President – Chief Accounting Officer
(Principal Accounting Officer)
February 23, 2017
February 23, 2017
February 23, 2017
/s/ Francis X. Frantz
Francis X. Frantz
Chairman and Director
February 23, 2017
/s/ Jennifer S. Banner
Jennifer S. Banner
Director
/s/ Scott G. Bruce
Scott G. Bruce
/s/ Andrew Frey
Andrew Frey
Director
Director
/s/ David L. Solomon
David L. Solomon
Director
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
93
Exhibit Index
Exhibit No.
Description
2.1
Separation and Distribution Agreement, dated as of March 26, 2015, by and among Windstream
Holdings, Inc., Windstream Services, LLC and Communications Sales & Leasing, Inc.
(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated and
filed with the SEC as of March 26, 2015 (File No. 001-36708))
2.2
Agreement and Plan of Merger, dated as of January 7, 2016, by and among Communications Sales
2.3**
2.4
& Leasing, Inc., CSL Bandwidth Inc., Penn Merger Sub, LLC, PEG Bandwidth, LLC, PEG
Bandwidth Holdings, LLC, and PEG Bandwidth Holdings, LLC, as Unitholders’ Representative
(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated and
filed with the SEC as of January 12, 2016 (File No. 001-36708))
Agreement and Plan of Merger, dated as of June 20, 2016, by and among Communications Sales &
Leasing, Inc., CSL Fiber Holdings LLC, Thor Merger Sub, Inc., Tower Cloud, Inc. and Shareholder
Representative Services LLC, as representative of the equityholders of Tower Cloud, Inc.
(incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q dated
and filed with the SEC as of August 11, 2016 (File No. 001-36708))
First Amendment, dated as of August 11, 2016, to the Agreement and Plan of Merger, dated as of
June 20, 2016, by and among Communications Sales & Leasing, Inc., CSL Fiber Holdings LLC,
Thor Merger Sub, Inc., Tower Cloud, Inc. and Shareholder Representative Services LLC, as
representative of the equityholders of Tower Cloud, Inc. (incorporated by reference to Exhibit 2.2 to
the Company’s Quarterly Report on Form 10-Q dated and filed with the SEC as of August 11, 2016
(File No. 001-36708))
3.1
Articles of Amendment and Restatement of Communications Sales & Leasing, Inc. (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated and filed with the
SEC as of April 10, 2015 (File No. 001-36708))
3.2
Amended and Restated Bylaws of Communications Sales & Leasing, Inc. (incorporated by
reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated and filed with the
SEC as of April 10, 2015 (File No. 001-36708))
4.1
Indenture, dated as of April 24, 2015, among Communications Sales & Leasing, Inc. and CSL
Capital, LLC, as Issuers, the guarantors named therein, and Wells Fargo Bank, National
Association, as trustee, governing the 8.25% Senior Notes due 2023 (incorporated by reference to
Exhibit 4.2 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April
27, 2015 (File No. 001-36708))
4.2
Form of 8.25% Senior Note due 2023 (included in Exhibit 4.1 above) (incorporated by reference to
Exhibit 4.4 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April
27, 2015 (File No. 001-36708))
4.3*
Second Supplemental Indenture (8.25% Senior Notes due 2023), dated as of October 19, 2016,
among Communications Sales & Leasing, Inc. and CSL Capital, LLC, as Issuers, the guarantors
thereto and Wells Fargo Bank, National Association
4.4
Indenture, dated as of April 24, 2015, among Communications Sales & Leasing, Inc. and CSL
Capital, LLC, as Issuers, the guarantors named therein, and Wells Fargo Bank, National
Association, as trustee and as collateral agent, governing the 6.00% Senior Secured Notes due 2023
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated and
filed with the SEC as of April 27, 2015 (File No. 001-36708)).
Form of 6.00% Senior Secured Note due 2023 (included in Exhibit 4.4 above) (incorporated by
reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated and filed with the
SEC as of April 27, 2015 (File No. 001-36708))
Second Supplemental Indenture (6.00% Senior Secured Notes due 2023), dated as of June 14, 2016,
among Communications Sales & Leasing, Inc. and CSL Capital, LLC, as Issuers, the guarantors
thereto and Wells Fargo Bank, National Association
4.5
4.6*
94
Exhibit No.
4.7*
Third Supplemental Indenture (6.00% Senior Secured Notes due 2023), dated as of October 19,
2016, among Communications Sales & Leasing, Inc. and CSL Capital, LLC, as Issuers, the
guarantors thereto and Wells Fargo Bank, National Association
Description
4.8
Articles Supplementary for 3.00% Series A Convertible Preferred Stock (incorporated by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of
May 4, 2016 (File No. 001-36708))
4.9
Indenture, dated as of December 15, 2016, among Communications Sales & Leasing, Inc. and CSL
Capital, LLC, as Issuers, the guarantors named therein, and Wells Fargo Bank, National
Association, as trustee, governing the 7.125% Senior Notes due 2024 (incorporated by reference to
Exhibit 4.1 of the Company’s Current Report on Form 8-K dated and filed with the SEC as of
December 15, 2016 (File No. 001-36708))
4.10
Form of 7.125% Senior Note due 2024 (included in Exhibit 4.9 above) (incorporated by reference to
Exhibit 4.2 of the Company’s Current Report on Form 8-K dated and filed with the SEC as of
December 15, 2016 (File No. 001-36708))
4.11*
First Supplemental Indenture, dated as of February 22, 2017, to the Indenture, dated as of December
10.1
10.2
15, 2016, among Communications Sales & Leasing, Inc. and CSL Capital, LLC, as Issuers, the
guarantors named therein, and Wells Fargo Bank, National Association, as trustee, governing the
7.125% Senior Notes due 2024.
Master Lease, entered into as of April 24, 2015, by and among CSL National, L.P. and the other
entities listed therein, as Landlord, and Windstream Holdings, Inc., as Tenant (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the
SEC as of April 27, 2015 (File No. 001-36708))
Tax Matters Agreement, entered into as of April 24, 2015, by and among Windstream Holdings,
Inc., Windstream Services, LLC and Communications Sales & Leasing, Inc. (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated and filed with the
SEC as of April 27, 2015 (File No. 001-36708))
10.3
Transition Services Agreement, dated April 24, 2015, by and between Windstream Services, LLC
10.4
and CSL National, L.P., on behalf of itself and its Affiliates, including Talk America Services, LLC
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated and
filed with the SEC as of April 27, 2015 (File No. 001-36708))
Intellectual Property Matters Agreement, dated as of April 24, 2015, by and among Windstream
Services, LLC, individually and on behalf of its subsidiaries that may hold certain intellectual
property as described therein, CSL National, LP, and Talk America Services, LLC (incorporated by
reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated and filed with the
SEC as of April 27, 2015 (File No. 001-36708))
10.5
Wholesale Master Services Agreement, dated April 24, 2015, between Windstream
10.6
10.7
Communications, Inc. and Talk America Services, LLC (incorporated by reference to Exhibit 10.6
to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April 27, 2015
(File No. 001-36708))
Master Services Agreement, dated as of April 24, 2015, by and between Windstream Services, LLC,
on behalf of itself and its competitive local exchange and interexchange carrier affiliates, and Talk
America Services, LLC (incorporated by reference to Exhibit 10.8 to the Company’s Current Report
on Form 8-K dated and filed with the SEC as of April 27, 2015 (File No. 001-36708))
Credit Agreement, dated as of April 24, 2015, by and among Communications Sales & Leasing, Inc.
and CSL Capital, LLC, as Borrowers, the guarantors party thereto, the lenders party thereto from
time to time and Bank of America, N.A., as administrative agent, collateral agent, swing line lender
and L/C issuer (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on
Form 8-K dated and filed with the SEC as of April 27, 2015 (File No. 001-36708))
95
Exhibit No.
Description
10.8
Recognition Agreement, dated April 24, 2015, by and among CSL National, LP and the other
entities listed therein, as Landlord, and Windstream Holdings, Inc., as Tenant, and JPMorgan Chase
Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.11 to the Company’s
Current Report on Form 8-K dated and filed with the SEC as of April 27, 2015 (File No. 001-
36708))
10.9+
Employment Agreement between Communications Sales & Leasing, Inc. and Kenneth Gunderman,
effective as of February 12, 2015 (incorporated by reference to Exhibit 10.9 to Amendment No. 3 to
the Company’s Registration Statement on Form 10 dated and filed with the SEC as of March 12,
2015 (File No. 001-36708))
10.10+
Communications Sales & Leasing, Inc. 2015 Equity Incentive Plan (incorporated by reference to
Exhibit 10.12 to Amendment No. 3 to the Company’s Registration Statement on Form 10 dated and
filed with the SEC as of March 12, 2015 (File No. 001-36708))
10.11+
Communications Sales & Leasing, Inc. 2015 Short-Term Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of
June 3, 2015 (File No. 001-36708))
10.12+
Severance Agreement, dated as of June 1, 2015, by and between Communications Sales & Leasing,
Inc. and Mark A. Wallace (incorporated by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K dated and filed with the SEC as of June 3, 2015 (File No. 001-36708))
10.13+
10.14+
10.15+
Severance Agreement, dated as of June 1, 2015, by and between Communications Sales & Leasing,
Inc. and Daniel L. Heard (incorporated by reference to Exhibit 10.16 to the Company’s Registration
Statement on Form S-4 dated and filed with the SEC as of July 2, 2015 (File No. 333-205450))
Form of Restricted Shares Agreement for employees (incorporated by reference to Exhibit 10.3 to
the Company’s Current Report on Form 8-K dated and filed with the SEC as of June 3, 2015 (File
No. 001-36708))
Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit
10.4 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of June 3, 2015
(File No. 001-36708))
10.16+
Form of Restricted Shares Agreement for non-employee directors (incorporated by reference to
Exhibit 10.5 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of June
3, 2015 (File No. 001-36708))
10.17
Form of Indemnity Agreement (incorporated by reference to Exhibit 10.20 to the Company’s
Registration Statement on Form S-4 dated and filed with the SEC as of July 2, 2015 (File No. 333-
205450))
10.18+
Communications Sales & Leasing, Inc. Deferred Compensation Plan, effective August 10, 2015
(incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q dated
and filed with the SEC as of August 13, 2015 (File No. 001-36708))
10.19
Form of Lockup Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated and filed with the SEC as of January 12, 2016 (File No. 001-36708))
10.20
Stockholders’ and Registration Rights Agreement, dated May 2, 2016, by and between
Communications Sales and Leasing, Inc. and PEG Bandwidth Holdings, LLC (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the
SEC as of May 4, 2016 (File No. 001-36708))
10.21
Amendment No. 1 to Master Lease, entered into as of February 12, 2016, by and among CSL
National, L.P. and the other entities listed therein, as Landlord, and Windstream Holdings, Inc., as
Tenant (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
dated and filed with the SEC as of May 12, 2016 (File No. 001-36708))
10.22+*** Communications Sales & Leasing, Inc. 2016 Short Term Incentive Plan (incorporated by reference
to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q dated and filed with the SEC as
of May 12, 2016 (File No. 001-36708))
96
Exhibit No.
10.23
10.24
Description
Letter Agreement between Searchlight II CLS, L.P. and Communications Sales and Leasing, Inc.
dated as of June 15, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q dated and filed with the SEC as of August 11, 2016 (File No. 001-36708))
Registration Rights Agreement by and among each of the parties listed on the signature pages
thereto and Communications Sales & Leasing, Inc. dated as of June 15, 2016 (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q dated and filed with the
SEC as of August 11, 2016 (File No. 001-36708))
10.25
Amendment No. 1 to the Credit Agreement, dated as of October 21, 2016 by and among
Communications Sales & Leasing, Inc. and CSL Capital, LLC, as borrowers, the guarantors party
thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral
agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated and filed with the SEC as of October 21, 2016 (File No. 001-36708))
10.26
Amendment No. 2 to the Credit Agreement, dated as of February 9, 2017 by and among
Communications Sales & Leasing, Inc. and CSL Capital, LLC, as borrowers, the guarantors party
thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral
agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated and filed with the SEC as of February 9, 2016 (File No. 001-36708))
List of Subsidiaries of Communications Sales & Leasing, Inc.
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
21.1*
23.1*
23.2*
31.1*
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document
101.INS*
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
*
** Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment granted by,
and have been filed separately with, the Securities and Exchange Commission. Also, certain exhibits and
schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company
agrees to furnish a supplemental copy of any such omitted exhibit or schedule to the Securities and Exchange
Commission upon request but may request confidential treatment for any exhibit or schedule so furnished.
*** Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment granted by,
and have been filed separately with, the Securities and Exchange Commission.
Constitutes a management contract or compensation plan or arrangement.
+
97
ITEM 16. FORM 10-K SUMMARY
None.
98
Communications Sales & Leasing, Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Balance Sheets
(Thousands, except par value)
Assets:
Cash and cash equivalents
Accounts receivable, net
Other assets
Investment in consolidated subsidiaries
Total Assets
Liabilities:
Accrued interest payable
Derivative liability
Dividends payable
Contingent consideration
Notes and other debt, net
Total liabilities
December 31, 2016
December 31, 2015
$
$
$
131,145 $
(3 )
1,066
2,801,234
2,933,442 $
27,812 $
6,102
94,607
98,600
4,028,214
4,255,335
17
-
-
2,458,679
2,458,696
24,440
5,427
90,507
—
3,505,228
3,625,602
Convertible Preferred Stock, Series A, $0.0001 par value, 88
shares authorized, issued and outstanding, $87,500 liquidation value
80,552
Shareholders' Deficit:
Preferred stock, $0.0001 par value, 50,000 shares authorized, no
shares issued and outstanding
Common stock, $0.0001 par value, 500,000 shares authorized,
issued and outstanding: 155,139 shares at December 31, 2016
and 149,862 at December 31, 2015
Additional paid-in capital
Accumulated other comprehensive income
Distributions in excess of accumulated earnings
Total shareholders' deficit
Total Liabilities, Convertible Preferred Stock, and
Shareholders' Deficit
-
-
15
141,092
(6,369 )
(1,537,183 )
(1,402,445 )
15
1,392
(5,427)
(1,162,886)
(1,166,906)
$
2,933,442 $
2,458,696
See notes to Consolidated Financial Statements of CS&L, Inc. included in Financial Statements and Supplementary
Data.
S-1
Communications Sales & Leasing, Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Statements of Comprehensive Income
(cid:3)
(Thousands)
Costs and Expenses:
Interest expense
General and administrative expense
Transaction related costs
Total costs and expenses
Operating loss
Earnings from consolidated subsidiaries
(Loss) income before income taxes
Net (loss) income
Comprehensive (loss) income
Year Ended
(cid:3)(cid:3)
December 31, 2016
Period from
April 24 - December 31,
2015
$
$
267,959 $
4,829
3,945
276,733
(276,733 )
276,521
(212 )
(212 )
(1,154 ) $
181,797
1,934
-
183,731
(183,731)
208,601
24,870
24,870
19,443
See notes to Consolidated Financial Statements of CS&L, Inc. included in Financial Statements and Supplementary
Data.
S-2
Communications Sales & Leasing, Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Statements of Cash Flows
(cid:3)
(Thousands)
Cash flow from operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Amortization of deferred financing costs
Amortization of debt discount
Equity in earnings from subsidiaries
Distributions from subsidiaries
Stock-based compensation
Changes in:
Accounts receivable
Other assets
Accounts payable, accrued expenses and other liabilities
Net cash (used in) provided by operating activities
Cash flow from investing activities
Acquisition of businesses, net of cash acquired
Consideration paid to Windstream Services
Capital expenditures
Net cash used in investing activities
Cash flow from financing activities
Principal payment on debt
Dividends paid
Proceeds from issuance of Term Loans
Proceeds from issuance of Notes
Borrowings under revolving credit facility
Payments under revolving credit facility
Capital lease payments
Deferred financing costs
Common stock issuance, net of costs
Net share settlement
Intercompany transactions, net
Cash in-lieu of fractional shares
Net cash provided by investing activities
Effect of exchange rates on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended
(cid:3)(cid:3)
(cid:3)(cid:3)
December 31, 2016
(cid:3)(cid:3)
Period from
April 24 - December 31,
2015
$
(212 ) $
24,870
7,823
8,179
(276,521 )
194,500
4,846
3
(1,066 )
3,372
(59,076 )
4,832
5,172
(208,601)
253,362
1,934
-
-
24,763
106,332
-
-
-
-
-
(1,035,029)
-
(1,035,029)
(22,027 )
(367,830 )
-
548,875
641,000
(641,000 )
-
(20,557 )
54,213
(2,359 )
(111 )
-
190,204
-
131,128
17
131,145 $
(10,700)
(156,854)
1,127,000
-
-
-
-
(30,057)
(543)
(113)
-
(19)
928,714
-
17
-
17
$
See notes to Consolidated Financial Statements of CS&L, Inc. included in Financial Statements and Supplementary
Data.
S-3
Communications Sales & Leasing, Inc.
Schedule I – Condensed Financial Information of
The Registrant (Parent Company)
Background and Basis of Presentation – Pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of
guarantors and issuers of guaranteed securities registered or being registered,” the Company is required to provide
condensed consolidating financial information for CSL Capital and the Guarantors because the Exchange Notes and
the guarantees thereof were registered with the SEC under the Securities Act. While the condensed consolidating
financial information presented below is in respect of our Exchange Notes only, our Secured Notes, 2024 Notes and
senior credit facilities under the Credit Agreement are guaranteed by the Guarantors. These guarantees are full and
unconditional as well as joint and several. All property assets and related operations of the Guarantors are pledged as
collateral under the Secured Notes and Credit Agreement and the Guarantors are subject to restrictions on certain
investments and payments. Accordingly, these condensed financial statements of CS&L have been presented on a
“Parent Only” basis. Under this basis of presentation, CS&L’s investment in its consolidated subsidiaries are presented
under the equity method of accounting. The condensed parent company financial statements should be read in
conjunction with the consolidated financial statements and notes of CS&L and its subsidiaries included in Item 8
Financial Statements and Supplementary Data in this Annual Report on Form 10-K.
S-4
Communications Sales and Leasing, Inc.
Schedule II – Valuation and Qualifying Accounts
(dollars in thousands)
Column A
Description
Valuation allowance for deferred tax
assets:
Year Ended December 31, 2016
Period from April 24 - December 31,
2015
(cid:3)(cid:3) Column B
(cid:3)(cid:3)
Balance at
Beginning of Period
(cid:3)(cid:3)
Column C
Column D Column E
Additions
Charged to
Cost
and Expenses
Charged to
Other Accounts
Deductions
Balance at
End of Period
(cid:3)(cid:3)
(cid:3)(cid:3)$
(cid:3)(cid:3)$
- $
- $
- $
8,176 $
- $
8,176
- $
- $
- $
-
S-5
Communications Sales and Leasing, Inc.
Schedule III – Real Estate Investments and Accumulated Depreciation
As of December 31, 2016
(dollars in thousands)
Col. A
Col. B
Col. C
Col. D
Col. E
Col. F
Col. G
Col. H
Col. I
Cost capitalized
subsequent to
acquisition(1) (3)
Gross
Amount
Carried at
Close of
Period
Distribution
Systems Total
Carry
Costs
Initial cost
to
company(1)(cid:3)
Distribution
Systems
Encumbrances
—
$
Improvements
(1)
(1)
(1) $
26,833 $
Accumulated
Depreciation
(201)
Date of
Construction(2)(cid:3)
(2)
Date
Acquired(2)
Description
Land
Building and
improvements
Poles
Fiber
Copper
Conduit
Towers
Real property
interest
Other assets
Construction
in progress
—
—
—
—
—
—
—
—
—
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
318,616
(148,432)
(1)
(1)
234,393
(173,441)
(1)
(1) 2,024,564
(820,389)
(1)
(1) 3,538,565 (2,856,327)
(1)
(1)
89,661
(54,487)
(1)
(1)
4,307
(659)
(1)
(1)
12,265
(94)
(1)
(1)
5,299
(718)
(1)
(1)
1,745
—
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
Life on which
Depreciation
in Latest
Income
Statements is
Computed
3 - 40
years
13 - 40
years
7 - 40
years
7 - 40
years
13 - 47
years
20 - 49
years
50 - 99
years
15 - 20
years
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(1) Given the voluminous nature and variety of the Distribution Systems assets, this schedule omits columns C and D
from the schedule III presentation.
(2) Because additions and improvements to the Distribution Systems are ongoing, construction and acquisition dates
are not applicable.
(3) For the year ended December 31, 2016, the amount of capitalized costs related to the Distribution Systems is as
follows (millions):
Tenant capital improvements(4)
$ 157.0
(4) Tenant capital improvements represent, maintenance, repair, overbuild, upgrade or replacements to the leased
network, including, without limitation, the replacement of copper distribution systems with fiber distribution
systems. We receive non-monetary consideration related to the TCIs as they automatically become our property,
and we recognize the cost basis of TCIs that are capital in nature.
S-6
Communications Sales and Leasing, Inc.
Schedule III – Real Estate Investments and Accumulated Depreciation
As of December 31, 2016
(dollars in thousands)
Gross amount at beginning
Additions during period:
Tenant capital improvements
Acquisitions
Other
Total additions
Deductions during period:
Cost of real estate sold or disposed
Other
Total deductions
Balance at end
Gross amount of accumulated depreciation at beginning
Additions during period:
Depreciation
Other
Total additions
Deductions during period:
Amount of accumulated depreciation for assets sold or disposed
Other
Total deductions
Balance at end
2016
6,093,541
$
156,972
15,848
-
172,820
10,113
-
10,113
$
6,256,248
2016
3,720,890
$
343,971
-
343,971
10,113
10,113
$
4,054,748
S-7
DIRECTORS:
Francis X. Frantz – Chairman of the Board of Uniti Group Inc.
Kenneth A. Gunderman – President and Chief Executive Officer,
Uniti Group Inc.
Jennifer S. Banner – Chief Executive Officer, Schaad Companies, LLC
David L. Solomon – Managing Director, Meritage Funds
Scott G. Bruce – Managing Director, Associated Partners, LP
Andrew Frey – Partner, Searchlight Capital Partners, L.P.
CORPORATE OFFICERS:
Kenneth A. Gunderman – President and Chief Executive Officer
Mark A. Wallace – Executive Vice President, Chief Financial Officer
and Treasurer
Daniel L. Heard – Executive Vice President, General Counsel
and Secretary
Ronald J. Mudry – Executive Vice President, Fiber Operations
Blake Schuhmacher – Vice President, Chief Accounting Officer
TRANSFER AGENT AND REGISTRAR
Wells Fargo Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
Little Rock, Arkansas
CORPORATE HEADQUARTERS
10802 Executive Center Drive
Benton Building, Suite 300
Little Rock, AR 72211
INVESTOR RELATIONS
Website: www.uniti.com
Contact: investor.relations@uniti.com
LISTING
NASDAQ Global Select Market, Ticker Symbol “UNIT”
10802 Executive Center Dr.
Benton Building, Suite 300
Little Rock, AR 72211
501-850-0820
www.uniti.com