The Securities and Exchange Commission("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. Certain statements in this Quarterly Report on Form 10-Q, including those which relate to the impact on future revenue sources, pending and future regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new communications markets, are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-looking statements reflect, among other things, our current expectations, plans, strategies and anticipated financial results. There are a number of risks, uncertainties and conditions that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements including the impact of the ongoing novel coronavirus ("COVID-19") pandemic and our response to it. Many of these circumstances are beyond our ability to control or predict. Moreover, forward-looking statements necessarily involve assumptions on our part. These forward-looking statements generally are identified by the words "believe," "expect," "anticipate," "estimate," "project," "intend," "plan," "should," "may," "will," "would," "will be," "will continue" or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Consolidated Communications Holdings, Inc.and its subsidiaries ("Consolidated," the "Company," "we" or "our") to be different from those expressed or implied in the forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements that appear throughout this report. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our 2021 Annual Report on Form 10-K filed with the SECand in Item 1A - "Risk Factors" of this report. Furthermore, undue reliance should not be placed on forward-looking statements, which speak only as of the date they are made. Except as required under federal securities laws or the rules and regulations of the SEC, we disclaim any intention or obligation to update or revise publicly any forward-looking statements. Management's Discussion and Analysis ("MD&A") should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes to the financial statements ("Notes") as of and for the quarter and nine months ended September 30, 2022included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Throughout this MD&A, we refer to certain measures that are not measures of financial performance in accordance with accounting principles generally accepted in the United States("US GAAP" or "GAAP"). We believe the use of these non-GAAP measures on a consolidated basis provides the reader with additional information that is useful in understanding our operating results and trends. These measures should be viewed in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. See the "Non-GAAP Measures" section below for a more detailed discussion on the use and calculation of these measures.
Consolidated is a broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers across a 22-state service area. We operate an advanced fiber network spanning approximately 57,500 fiber route miles across many rural areas and metro communities. We offer residential high-speed Internet, video, phone and home security services as well as multi-service residential and small business bundles. Our business product suite includes: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services. We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections. We generate the majority of our consolidated operating revenues primarily from monthly subscriptions to our broadband, data and transport services (collectively "broadband services") marketed to residential and business customers. As consumer demands for bandwidth continue to increase, our focus is on expanding our fiber broadband services and upgrading data speeds in order to offer a highly competitive fiber product. Our investment in more competitive broadband speeds is critical to our long-term success. Our strategic investment with
Searchlight Capital Partners L.P.("Searchlight") combined with the refinancing of our capital structure in 2020 has provided us with additional capital that has enabled us 25 Table of Contents to accelerate our fiber expansion plans and provided significant benefits to our consumer, commercial and carrier customers. With this strategic investment, we are enhancing our fiber infrastructure and accelerating our investments in high-growth and competitive areas. By leveraging our existing dense core fiber network and an accelerated build plan, we expect to be able to significantly increase data speeds, expand our multi-Gig coverage and strategically extend our network across our strong existing commercial and carrier footprint to attract more on-net and near-net opportunities. As part of our fiber expansion plan, we plan to upgrade approximately 1.6 million passings to fiber over five years across select service areas to enable multi-Gig capable services to these homes and small businesses including more than 1 million passings within our northern New Englandservice areas. Our fiber build plan includes the upgrade of 400,000 homes and small businesses in 2022. During the quarter and nine months ended September 30, 2022, we upgraded approximately 116,200 and 342,200 passings, respectively, and added approximately 12,100 and 29,400 consumer fiber Gig-capable subscribers, respectively. During the year ended December 31, 2021, we upgraded approximately 330,000 passings. In our northern New Englandservice areas, approximately 31% of the homes we serve were 1 Gig capable as of September 30, 2022compared to 12% during the same period in 2021. As of September 30, 2022, approximately 41% of the homes we serve in all other markets had availability to broadband speeds of up to 1 Gbps compared to 27% during the same period in 2021. Fidium Fiber, our new Gigabit consumer fiber internet product with an all-new customer experience, launched in November 2021in select northern New Englandmarkets, reinforcing our broadband-first strategy. In May 2022, Fidium Fiber was expanded to additional markets in California, Illinois, Minnesota, Pennsylvaniaand Texas. In June 2022, we launched symmetrical 2 Gig speeds across the entire Fidium fiber network. Our Fidium plans offer symmetrical speeds from 50 Mbps to 2 Gbps with no data caps. As we continue to increase broadband speeds, we believe that we will also be able to simultaneously expand the array of services and content offerings that our network provides. We continue to focus on expanding our commercial and carrier product offerings including broadband and our commercial product suite, and are continually enhancing our commercial product offerings to meet the needs of our business customers. By leveraging our advanced fiber network, we can tailor our services for business customers by developing solutions to fit their specific needs. Additionally, we are continuously enhancing our suite of managed and cloud services by adding new functionality and support, which increases efficiency and enables greater scalability and reliability for businesses. We anticipate future momentum in commercial and carrier services as these products gain traction as well as from the demand from customers for additional bandwidth and data-based services. However, operating revenues continue to be impacted by the industry-wide trend of declines in voice services, access lines and related network access revenue. Many customers are choosing to subscribe to alternative communication services, and competition for these subscribers continues to increase. Total voice connections decreased 10% as of September 30, 2022compared to 2021. We have been able to mitigate some of the access line losses through alternative product offerings, such as our VoIP service. Our competitive broadband speeds enable us to meet consumer demand for higher bandwidth for streaming programming or on-demand content on any device. The consumers demand for streaming services, either to augment their current video subscription plan or to entirely replace their linear video subscription may impact our future video subscriber base and, accordingly, reduce our video revenue as well as our video programing costs. Total video connections decreased 23% as of September 30, 2022compared to 2021 as we continue to de-emphasize our linear video services and transition customers to streaming and over-the-top video services. We believe the trend in changing consumer viewing habits will continue to impact our business results and complement our strategy of providing consumers with higher broadband speeds to facilitate streaming content including services offered through our streaming partnerships. Our operating revenues are impacted by legislative or regulatory changes at the federal and state levels, which could reduce or eliminate the current subsidies revenue we receive. A number of proceedings and recent orders relate to universal service reform, inter-carrier compensation ("ICC") and network access charges. Recent orders adopted in 2020 resulted in a reduction in the federal subsidies we receive of approximately $42.2 millionannually as of January 1, 2022. See the "Regulatory Matters" section below for a further discussion
of the subsidies we receive. 26 Table of Contents Recent Developments
Discontinued Operations – Sale of Investment in Wireless Partnerships
September 13, 2022, we completed the sale of our five limited wireless partnership interests to Cellco Partnership("Cellco") for an aggregate purchase price of $490.0 million. Cellco is the general partner for each of the five wireless partnerships and is an indirect, wholly-owned subsidiary of Verizon Communications, Inc. Our wireless partnership investment consisted of ownership in five wireless partnerships: 2.34% of GTE Mobilnet of South Texas Limited Partnership, 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership, 3.60% of Pittsburgh SMSA Limited Partnership, 16.67% of Pennsylvania RSA No. 6(I) Limited Partnership and 23.67% of Pennsylvania RSA No. 6(II) Limited Partnership. We intend to use the proceeds from the sale to support our fiber expansion plan. The financial results of the limited partnership interests have been reported as discontinued operations in our condensed consolidated financial statements for all periods presented. In the statement of cash flows, we have elected to combine cash flows from discontinued operations with cash flows from continuing operations. In connection with the sale of the partnership interests, we recognized a pre-tax gain on sale of $389.9 millionduring the quarter and nine months ended September 30, 2022. For the quarters ended September 30, 2022and 2021, we recognized investment income of $4.7 millionand $11.0 million, respectively, and received cash distributions of $5.5 millionand $11.1 million, respectively, from these wireless partnerships. For the nine months ended September 30, 2022and 2021, we recognized investment income of $22.6 millionand $31.8 million, respectively, and received cash distributions of $25.0 millionand $33.2 million, respectively, from these wireless partnerships.
September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio, Consolidated Communications of Ohio Company("CCOC"). CCOC provides telecommunications and data services to residential and business customers in 11 rural communities in Ohioand surrounding areas and included approximately 3,800 access lines, 3,900 data connections and 1,400 video connections. The sale was completed on January 31, 2022for approximately $26.0 millionin cash, subject to a customary working capital adjustment. As of December 31, 2021, the assets and liabilities to be disposed of were classified as held for sale in the condensed consolidated balance sheet and consisted primarily of allocated goodwill of $16.3 millionand property, plant and equipment of $9.5 million. In connection with the classification as assets held for sale, we recognized an impairment loss of $5.7 millionduring the quarter ended September 30, 2021. During the nine months ended September 30, 2022, we recognized an additional loss on the sale of $0.5 million, which is included in selling, general and administrative expense in the condensed consolidated statement of operations. We intend to use the proceeds from the asset sale to further our fiber expansion plans. On March 2, 2022, we entered into a definitive agreement to sell substantially all the assets of our business located in the Kansas Citymarket (the " Kansas Cityoperations") for estimated cash consideration of approximately $90.0 million, subject to certain working capital and other purchase price adjustments. The Kansas Cityoperations provide data, voice and video services to customers within the Kansas Citymetropolitan area and surrounding counties and includes approximately 17,500 consumer customers and 1,700 commercial customers. The transaction is expected to close by the end of 2022 and is subject to the receipt of all customary regulatory approvals and the satisfaction of other closing conditions. At September 30, 2022, the assets and liabilities to be disposed of were classified as held for sale in the condensed consolidated balance sheet and consisted primarily of allocated goodwill of $83.7 millionand property, plant and equipment of $135.9 million. In connection with the expected sale, the carrying value of the net assets to be sold was reduced to their estimated fair value and we recognized an impairment loss of $126.5 millionduring the quarter ended March 31, 2022. During the quarter ended September 30, 2022, we recognized an additional impairment loss of $5.2 millionas a result of an increase in net assets held for sale and estimated selling costs during the period. The asset sales align with our strategic asset review and focus on our core broadband regions. 27 Table of Contents Searchlight InvestmentOn September 13, 2020, we entered into an investment agreement (the "Investment Agreement") with an affiliate of Searchlight. In connection with the Investment Agreement, affiliates of Searchlight have invested an aggregate of $425.0 millionin the Company. The investment commitment was structured in two stages. In the first stage of the transaction, which was completed on October 2, 2020, Searchlight invested $350.0 millionin the Company in exchange for 6,352,842 shares, or approximately 8%, of the Company's common stock and a contingent payment right ("CPR") that was convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 17,870,012 shares, or 16.9%, of the Company's common stock. In addition, Searchlight received the right to an unsecured subordinated note with an aggregate principal amount of approximately $395.5 million(the "Note"), which, at the time of issuance, was convertible into shares of a new series of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the Note plus accrued interest as of the date of conversion. On July 15, 2021, the Company received all required state public utility commission regulatory approvals necessary for the conversion of the CPR into 16.9% additional shares of the Company's common stock. As a result, the CPR was converted into 17,870,012 shares of common stock, which were issued to Searchlight on July 16, 2021. In the second stage of the Investment, which was completed on December 7, 2021following the receipt of Federal Communications Commission(" FCC") and certain regulatory approvals and the satisfaction of certain other customary closing conditions, Searchlight invested an additional $75.0 millionand was issued the Note. The Note bore interest at 9.0% per annum from the date of the closing of the first stage of the transaction and was payable semi-annually in arrears. The Note included a paid-in-kind ("PIK") option for a five-year period beginning as of October 2, 2020. During the year ended December 31, 2021, the Company elected the PIK option and accrued interest of $38.8 millionwas added to the principal balance of the Note. On December 7, 2021, Searchlight elected to convert the Note into 434,266 shares of Series A Perpetual Preferred Stock, par value $0.01per share (the "Series A Preferred Stock"). In addition, on December 7, 2021, the CPR converted into an additional 15,115,899 shares, or an additional 10.1%, of the Company's common stock. As of September 30, 2022and December 31, 2021, shares of common stock issued to Searchlight represent approximately 34% and 35%, respectively, of the Company's outstanding common stock. The strategic investment with Searchlight provides us a valued partner with significant experience in deploying broadband infrastructure as we continue to execute our fiber-focused strategy and grow broadband services. 28 Table of Contents Results of Operations
The following tables reflect our financial results on a consolidated basis and key operating metrics as of and for the quarters and nine months ended
September 30, 2022and 2021. Financial Data Quarter Ended September 30, Nine Months Ended September 30, $ % $ %
(In millions, except for percentages) 2022 2021 Change Change 2022 2021 Change Change Operating Revenues Consumer: Broadband (Data and VoIP)
$ 69.6 $ 68.6 $ 1.01 % $ 203.1 $ 202.4 $ 0.70 % Voice services 36.4 40.6 (4.2) (10) 110.5 121.2 (10.7) (9) Video services 13.6 16.1 (2.5) (16) 42.3 49.7 (7.4) (15) 119.6 125.3 (5.7)
(5) 355.9 373.3 (17.4) (5)
Data services (includes VoIP)
56.8 57.5 (0.7) (1) 171.8 171.4 0.4 0 Voice services 35.5 38.4 (2.9) (8) 107.6 117.3 (9.7) (8) Other 9.9 10.2 (0.3) (3) 32.8 28.6 4.2 15 102.2 106.1 (3.9) (4) 312.2 317.3 (5.1) (2) Carrier: Data and transport services 33.9 33.6 0.3 1 103.7 100.8 2.9 3 Voice services 3.5 4.2 (0.7) (17) 11.0 13.1 (2.1) (16) Other 0.6 0.4 0.2 50 1.4 1.2 0.2 17 38.0 38.2 (0.2) (1) 116.1 115.1 1.0 1 Subsidies 7.2 17.3 (10.1) (58) 20.3 52.1 (31.8) (61) Network access 27.3 29.9 (2.6) (9) 78.4 92.6 (14.2) (15) Other products and services 2.3 1.8 0.5 28 12.4 13.4 (1.0) (7) Total operating revenues 296.6 318.6 (22.0) (7) 895.3 963.8 (68.5) (7) Operating Expenses Cost of services and products (exclusive of depreciation and amortization) 141.2 142.5 (1.3)
(1) 413.0 431.8 (18.8) (4)
Selling, general and administrative
72.8 64.1 8.7
14 221.6 200.0 21.6 11
Loss on impairment of assets held for
5.2 5.7 (0.5)
(9) 131.7 5.7 126.0 2,211
Gain on disposal of assets
(19.2) - (19.2) (100) (19.2) - (19.2) (100) Depreciation and amortization 75.7 73.8 1.9
3 220.6 225.5 (4.9) (2)
Total operating expenses
275.7 286.1 (10.4)
(4) 967.7 863.0 104.7 12
Income (loss) from operations
20.9 32.5 (11.6)
(36) (72.4) 100.8 (173.2) (172)
Interest expense, net
(32.0) (43.2) (11.2)
(26) (91.7) (137.0) (45.3) (33)
Loss on extinguishment of debt
- - - - - (17.1) 17.1 100 Change in fair value of contingent payment rights - (2.2) 2.2 100 - (99.6) 99.6 100 Other income, net 3.0 2.4 0.6 25 9.4 4.5 4.9 109 Income tax expense (benefit) (1.0) 2.6 (3.6)
(138) (17.8) (1.9) (15.9) (837)
Loss from continuing operations
(7.1) (13.1) 6.0
46 (136.9) (146.5) 9.6 7
Income from discontinued operations,
net of tax
299.9 8.6 291.3
3,387 312.5 24.8 287.7 1,160
Dividends on Series A preferred stock 10.4
- 10.4 100 29.8 - 29.8 100 Net income attributable to noncontrolling interest 0.1 0.2 (0.1) (50) 0.4 0.5 (0.1) (20) Net income (loss) attributable to common shareholders
$ 282.3 $ (4.7) $ 287.06,106 $ 145.4 $ (122.2) $ 267.6219 Adjusted EBITDA (1) $ 97.2 $ 127.4 $ (30.2)(24) % $ 311.9 $ 380.7 $ (68.8)(18) % 29 Table of Contents (1) A non-GAAP measure. See the "Non-GAAP Measures" section below for additional information and reconciliation to the most directly comparable GAAP measure. Key Operating Statistics As of September 30, 2022 2021 Change % Change Consumer customers 505,302 527,327 (22,025) (4) % Fiber Gig+ capable 115,598 81,539 34,059 42 DSL/Copper 266,314 309,122 (42,808) (14) Consumer data connections 381,912 390,661 (8,749) (2) Consumer voice connections 294,441 341,135 (46,694) (14) Video connections 51,339 66,971 (15,632) (23) Operating Revenues Consumer Broadband Services Broadband services include revenues from residential customers for subscriptions to our VoIP and data products. We offer high-speed Internet access at speeds of up to 2 Gbps, depending on the network facilities that are available, the level of service selected and the location. Our VoIP digital phone service is also available in certain markets as an alternative to the traditional telephone line. Broadband services revenues increased $1.0 millionand $0.7 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Excluding the sale of COCC, broadband services revenues increased $1.7 millionand $2.5 millionduring the quarter and nine months ended September 30, 2022, respectively, despite a decrease in data connections of 2%, primarily as a result of price increases as well as growth in fiber Internet services. Voice Services We offer several different basic local phone service packages and long-distance calling plans, including unlimited flat-rate calling plans. The plans include options for voicemail and other custom calling features such as caller ID, call forwarding and call waiting. Voice services revenues decreased $4.2 millionand $10.7 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to a 16% decline in access lines. The number of local access lines in service directly affects the recurring revenues we generate from end users and continues to be impacted by the industry-wide decline in access lines. We expect to continue to experience erosion in voice connections due to competition from alternative
technologies. 30 Table of Contents Video Services
Depending on geographic market availability, our video services range from limited basic service to advanced digital television, which includes several plans, each with hundreds of local, national and music channels including premium and Pay-Per-View channels as well as video On-Demand service. Certain customers may also subscribe to our advanced video services, which consist of high-definition television, digital video recorders ("DVR") and/or a whole home DVR. Our video subscribers can also watch their favorite shows, movies and livestreams on any device. In addition, we offer other in-demand streaming TV services, which provide endless entertainment options. Video services revenues decreased
$2.5 millionand $7.4 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to a 26% decrease in connections as consumers are choosing to subscribe to alternative video services such as over-the-top streaming or other competitive services. We expect to continue to experience a decline in video connections as we de-emphasize our linear video subscriptions and transition customers to streaming services, which may amplify the demand for higher broadband speeds to facilitate streaming content.
We provide a variety of business communication services to business customers of all sizes, including voice and data services over our advanced fiber network. The services we offer include scalable high-speed broadband Internet access and VoIP phone services, which range from basic service plans to virtual hosted systems. In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; private line data services; software defined wide area network ("SD-WAN") and multi-protocol label switching. Our networking services include point-to-point and multi-point deployments from 2.5 Mbps to 10 Gbps to accommodate the growth patterns of our business customers. We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer's on-site phone systems and data networks, managed network security services and data protection services. Data center and disaster recovery solutions provide a reliable and local colocation option for commercial customers. Data services revenues decreased
$0.7 millionand increased $0.4 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 as declines in Metro Ethernet due to customer churn during the quarter were reduced in part by the continued growth in dedicated Internet access, VoIP and SD-WAN services.
Voice services include basic local phone and long-distance service packages for business customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller ID, call forwarding, speed dialing and call waiting. Services can be charged at a fixed monthly rate, a measured rate or can be bundled with selected services at a discounted rate. Voice services revenues decreased
$2.9 millionand $9.7 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to a 10% decline in access lines as commercial customers are increasingly choosing alternative technologies and the broad range of features that Internet based voice services can offer. Other Other services include business equipment sales and related hardware and maintenance support, video services and other miscellaneous revenues, including 911 service revenues. Other services revenues decreased $0.3 millionduring the quarter ended September 30, 2022compared to the same period in 2021 primarily due to a reduction in structured cabling projects, but was offset in part by an increase in custom construction revenues. Other services revenues increased $4.2 millionduring the nine months ended September 30, 2022compared to the same period in 2021 primarily due to an increase in business systems and custom
construction revenues. 31 Table of Contents Carrier Data and Transport Services We provide high-speed fiber data transmission services to regional and national interexchange and wireless carriers including Ethernet, cellular backhaul, dark fiber and colocation services. Data services revenues increased
$0.3 millionand $2.9 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to an increase in dark fiber revenue as a result of a new IRU agreement entered into during the nine months ended September 30, 2022. However, continued growth in Ethernet services was offset in part by a decline in cellular backhaul as a result of price compression and a reduction in pricing of recent contract renewals with our wireless backhaul partners. We expect to recognize further declines in cellular backhaul revenue as a result of the delayed timing of new pricing in 2022 and ongoing contract renewals.
We provide basic local phone service packages with customized features for resell by wholesale customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features. Voice services revenues decreased
$0.7 millionand $2.1 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 as customers continue to choose alternative technology solutions. Other
Other services revenues include conduit and other asset lease revenue as well as
other miscellaneous revenue. Other services revenues increased
during each of the quarter and nine month periods ended
compared to the same periods in 2021 due to an increase in conduit lease
Subsidies consist of both federal and state subsidies, which are designed to promote widely available, quality broadband services at affordable prices with higher data speeds in rural areas. Subsidies revenues decreased
$10.1 millionand $31.8 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to a reduction in federal subsidies support. In 2020, the FCCadopted an order establishing the Rural Digital Opportunity Fund("RDOF"), which resulted in a reduction in our annual support of approximately $42.2 millionas of January 1, 2022. See the "Regulatory Matters" section below for a further discussion of the subsidies we receive. Network Access Services
Network access services include interstate and intrastate switched access, network special access and end user access. Switched access revenues include access services to other communications carriers to terminate or originate long-distance calls on our network. Special access circuits provide dedicated lines and trunks to business customers and interexchange carriers. Network access services revenues decreased
$2.6 millionand $14.2 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to the continuing decline in interstate rates, minutes of use, voice connections and carrier circuits as carriers transition to Ethernet based transport solutions. In addition, for the nine months ended September 30, 2022, end user access revenue decreased due to a reduction in the Federal Universal Service Fund Contribution Factor during
the first half of 2022. Other Products and Services Other products and services include revenues from telephone directory publishing, video advertising, billing and support services and other miscellaneous revenues. We have entered into numerous
Public Private Partnershipagreements with several towns in New Hampshireto build new fiber to the premise ("FTTP") Internet networks. The new town networks provide broadband speeds of up to 1 Gbps to residential and commercial customers. Public Private Partnerships are a key component of Consolidated's commitment to expand rural broadband access. 32 Table of Contents Other products and services revenues increased $0.5 millionand decreased $1.0 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to the recognition of Public Private Partnershipconstruction projects during 2022
and 2021. Operating Expenses
Cost of Services and Products
Cost of services and products decreased
$1.3 millionand $18.8 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Video programming costs decreased as a result of a 23% decline in video connections, which were offset in part by an increase in utility and fuel costs in the current year periods. In addition, for the nine months ended September 30, 2022, required contributions to the Federal Universal Service Fund("USF") decreased $6.7 millionas a result of a reduction in the annual funding rate for the first half of the year. Access expense also decreased as a result of access charges of $3.4 millionincurred during the nine months ended September 30, 2021related to the early termination of a contract obligation for fixed wireless services.
Selling, General and Administrative Costs
Selling, general and administrative costs increased
$8.7 millionand $21.6 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Advertising expense increased due to greater promotional activities surrounding the continued marketing of our new fiber broadband products. Property and real estate taxes increased primarily due to refunds and settlements received in 2021. Employee labor costs also increased from the prior year periods.
Gain on Disposal of Assets
During the quarter and nine months ended
September 30, 2022, we completed the sale of certain non-strategic communication towers for cash proceeds of $19.4 millionand recognized a pre-tax gain on the sale of $19.2 million.
Depreciation and Amortization
Depreciation and amortization expense increased
$1.9 millionand decreased $4.9 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to a decline in amortization expense for customer relationships, which are amortized under the accelerated method. Depreciation expense also declined due to the sale of the Ohioassets and the classification of the Kansas Cityassets as held for sale in the first quarter of 2022. These declines in depreciation and amortization expense were offset by ongoing capital expenditures related to the fiber network expansion and customer service improvements as well as success-based capital projects for consumer and commercial services.
Certain amounts in our 2021 condensed consolidated financial statements have been reclassified to conform to the 2022 presentation, primarily related to the presentation of the financial results for our wireless partnership interests as discontinued operations. Certain operating revenues have also been reclassified to report commercial and carrier revenues separately. The change in the classification of these revenues had no impact to total operating revenues
as previously reported. Regulatory Matters Our revenues are subject to broad federal and/or state regulations, which include such telecommunications services as local telephone service, network access service and toll service. The telecommunications industry is subject to extensive federal, state and local regulation. Under the Telecommunications Act of 1996, federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices. 33 Table of Contents At the federal level, the
FCCgenerally exercises jurisdiction over facilities and services of local exchange carriers, such as our rural telephone companies, to the extent they are used to provide, originate or terminate interstate or international communications. The FCChas the authority to condition, modify, cancel, terminate or revoke our operating authority for failure to comply with applicable federal laws or FCCrules, regulations and policies. Fines or penalties also may be imposed for any of these violations. State regulatory commissions generally exercise jurisdiction over carriers' facilities and services to the extent they are used to provide, originate or terminate intrastate communications. In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks. State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations.
In general, telecommunications service in rural areas is costlier to provide than service in urban areas. The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain. By supporting the high-cost of operations in rural markets, USF subsidies promote widely available, quality telephone service at affordable prices in rural areas. Our annual support through the
FCC's Connect America Fund("CAF") Phase II funding was $48.1 millionthrough 2021. The specific obligations associated with CAF Phase II funding included the obligation to serve approximately 124,500 locations by December 31, 2020(with interim milestones of 40%, 60% and 80% completion by December 2017, 2018 and 2019, respectively); to provide broadband service with speeds of 10 Mbps downstream and 1 Mbps upstream; to achieve latency of less than 100 milliseconds; to provide data of at least 100 gigabytes per month; and to offer pricing reasonably comparable to pricing in urban areas. The Company met the buildout milestones and performance metrics requirements for 2017 through 2020 for all states where it received funding. In April 2019, the FCCannounced plans for the RDOF, the next phase of the CAF program. The RDOF is a $20.4 billionfund to bring speeds of 25 Mbps downstream and 3 Mbps upstream to unserved and underserved areas of America. The FCCissued a Notice of Proposed Rulemaking at their August 2019Open Commission Meeting. The order prioritizes terrestrial broadband as a bridge to rural 5G networks by providing a significant weight advantage to traditional broadband providers. Funding will occur in two phases with the first phase auctioning $16.0 billionand the second phase auctioning $4.4 billion, each to be distributed over 10 years. The minimum speed required to receive funding is 25 Mbps downstream and 3 Mbps upstream. CAF Phase II funding was extended through December 31, 2021for price cap holding companies. The FCCissued the final census block groups with locations and reserve price. We filed the RDOF short form application on July 14, 2020and were listed as a qualified bidder by the FCCon October 13, 2020and participated in the auction. The auction began on October 29, 2020and ended on November 24, 2020. Consolidated won 246 census block groups serving in seven states. The bids we won are at the 1 Gbps downstream and 500 Mbps upstream speed tier to approximately 27,000 locations at an annual funding level of $5.9 million, which resulted in a reduction of approximately $42.2 millionin annual support as of January 1, 2022through December 31, 2031. Consolidated filed its long form application with supporting documents on January 29, 2021and received final FCCapproval on December 14, 2021. Consolidated began receiving RDOF funding in January 2022. The annual FCCprice cap filing was made on June 16, 2022and became effective on July 1, 2022. The net impact is an increase of approximately $2.0 millionin network access and CAF ICC support funding for the July 2022through June 2023tariff period. 34 Table of Contents State Matters Texas The Texas Universal Service Fund("TUSF") is administered by the National Exchange Carrier Association("NECA"). The Texas Public Utilities Regulatory Act directs the Public Utilities Commission of Texas("PUCT") to adopt and enforce rules requiring local exchange carriers to contribute to a state universal service fund that helps telecommunications providers offer basic local telecommunications service at reasonable rates in high-cost rural areas. The TUSF is also used to reimburse telecommunications providers for revenues lost by providing lifeline service. Our Texasrural telephone companies receive disbursements from this fund.
Our Texas Incumbent Local Exchange Carriers (“ILECs”) have historically received
support from two state funds, the small and rural incumbent local exchange
December 2020, the PUCT announced a TUSF funding shortfall and would be reducing all funded carriers support by 64% beginning January 15, 2021. The potential impact of the decision by the PUCT was a reduction in support we receive of approximately $4.0 millionannually. The Texas Telephone Association("TTA"), which Consolidated is a member, and the Texas Statewide Telephone Cooperative, Inc.("TSTCI"), filed a lawsuit seeking to overturn the PUCT decision as well as a temporary injunction on the funding reduction. On June 7, 2021, the court ruled in favor of the PUCT. The TTA and TSTCI filed a notice to appeal on July 2, 2021. We filed our brief on September 18, 2021, along with a Motion to Expedite. The motion to expedite was granted. On June 30, 2022, the Third Court of Appealsin Austinruled in favor of the rural phone companies requiring the state to increase the state surcharge to fully fund the TUSF and reimburse rural phone companies for the shortfall. The state had 45 days from the ruling date to decide whether to appeal the decision. The state did not appeal the ruling and in October 2022, the TTA, TSTCI and PUCT reached an agreement on how the outstanding funding would be repaid. Monthly support payments will resume in full in October 2022and the funding shortfall for the periods from January 2021through September 2022will be reimbursed to carriers evenly over a 15-month period. All reimbursements are expected to be completed by December 2023.
American Rescue Plan Act Funding
President Bidensigned the American Rescue Plan Act of 2021 ("ARPA") on March 11, 2021. States have been allocated federal funds to be utilized for capital infrastructure, including broadband deployment, and are in various stages of implementation. We are working with the states and municipalities to participate in this broadband grant program.
March 13, 2020, the FCCissued a pledge to Keep America Connected through May 13, 2020, which was later extended to June 30, 2020. The pledge asked all communications providers to not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the coronavirus pandemic; to waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and to open their Wi-Fi hotspots to any American who needs them. Consolidated signed on to the pledge through June 30, 2020. Several states took the FCCpledge a step further by not allowing any carrier to disconnect service within their state during the Governors' declared state of emergency, which Consolidated also supported. Most state moratoriums on disconnections have expired; however, certain states such as Washingtonand New Yorkwere extended to July 31, 2021and December 31, 2021, respectively. In February 2021, the FCCcreated the Emergency Broadband Benefit Program ("EBB"), a temporary program to help low income households stay connected during the COVID-19 pandemic by providing broadband service discounts for eligible households. Consolidated is a participant in this program. The EBB ended December 31, 2021. EBB recipients fully enrolled as of December 31, 2021automatically continued to receive their current monthly benefit until March 1, 2022when the Affordable Connectivity Program took its place. 35
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Affordable Connectivity Program
The Affordable Connectivity Program ("ACP") is a permanent broadband affordability program set up to replace the EBB. The ACP program helps ensure that households can afford the broadband access they need for work, school, healthcare and more. The benefit provides a discount of up to
$30per month toward internet service for eligible households and up to $75per month for households on qualifying Tribal lands. Eligible households can also receive a one-time discount of up to $100to purchase a laptop, desktop computer, or tablet from participating providers if they contribute more than $10and less than $50toward the purchase price. The ACP is limited to one monthly service discount and one device discount per household. The program began funding March 1, 2022. Consolidated is participating in this program.
The Infrastructure Investmentand Jobs Act (the "Infrastructure Act") passed on June 30, 2021included $65.0 billiontoward broadband. The broadband internet portion of the Infrastructure Act is aimed at increasing internet coverage for more universal access, including for rural, low-income, and tribal communities.
65% of this funding is set aside specifically for underserved communities.
Additionally, this measure is designed to help make internet access more
affordable and increase digital literacy.
The Infrastructure Act set aside
$42.5 billionfor Broadband Equity, Access and Deployment grants. The National Telecommunications and Information Administrationadministers the grant program and is in the process of soliciting comments before issuing final rules.
Other Regulatory Matters
We are also subject to a number of regulatory proceedings occurring at the federal and state levels that may have a material impact on our operations. The
FCCand state commissions have authority to issue rules and regulations related to our business. A number of proceedings are pending or anticipated that are related to such telecommunications issues as competition, interconnection, access charges, ICC, broadband deployment, consumer protection and universal service reform. Some proceedings may authorize new services to compete with our existing services. Proceedings that relate to our cable television operations include rulemakings on set top boxes, carriage of programming, industry consolidation and ways to promote additional competition. There are various on-going legal challenges to the scope or validity of FCCorders that have been issued. As a result, it is not yet possible to fully determine the impact of the related FCCrules and regulations on our operations.
Interest Expense, Net
Interest expense, net of interest income, decreased
$11.2 millionand $45.3 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. During the quarter and nine months ended September 30, 2021, we recognized interest expense, including amortized costs, of $10.9 millionand $32.0 million, respectively, on the Note issued to Searchlight as part of the investment agreement entered into in October 2020. The Note was converted into perpetual preferred stock in conjunction with the closing of the second stage of the Searchlight investment in December 2021. In addition, the maturity of an interest rate swap agreement in July 2021reduced interest expense $0.9 millionand $6.3 millionduring the quarter and nine months ended September 30, 2022, respectively, as compared to 2021. Interest expense on our outstanding term loan also decreased during the nine months ended September 30, 2022due a reduction in the annual interest rate as part of the refinancing of our credit agreement in April 2021, as described in the "Liquidity and Capital Resources" section below.
Loss on Extinguishment of Debt
As described in the "Liquidity and Capital Resources" section below, we incurred a loss on the extinguishment of debt of
$12.0 millionin connection with the repayment of $397.0 millionof outstanding term loans under our credit agreement during the nine months ended September 30, 2021. In addition, we recognized a loss of $5.1 millionon the extinguishment 36
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of debt during the nine-month period ended
refinancing of our credit agreement in
Change in Fair Value of Contingent Payment Rights
We were required to measure our contingent payment rights at fair value until they were converted into shares of the Company's common stock. During the quarter and nine months ended
September 30, 2021, we recognized a loss of $2.2 millionand $99.6 million, respectively, on the increase in the fair value of the contingent payment right issued to Searchlight.
Other income increased
$0.6 millionand $4.9 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Pension and post-retirement expense decreased $0.9 millionand $1.5 million, respectively. See Note 13 to the condensed consolidated financial statements for a more detailed discussion regarding our pension and post-retirement plans. In addition, during the nine months ended September 30, 2021, we recognized a loss of $3.6 millionon the disposition of wireless spectrum licenses.
Income taxes decreased
$3.6 millionand $15.9 millionduring the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Our effective tax rate was 11.9% and (24.2)% for the quarters ended September 30, 2022and 2021, respectively, and 11.5% and 1.3% for the nine-month periods ended September 30, 2022and 2021, respectively. On March 2, 2022, we entered into a definitive agreement to sell substantially all the assets of our Kansas Cityoperations. On September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio(the " Ohiotransaction"). The Ohiotransaction closed on January 31, 2022. As a result of the Kansas Cityand Ohiotransactions, we recorded an increase of $1.9 millionand $23.2 millionto our current tax expense for the quarter and nine months ended September 30, 2022, respectively, related to the writedown of noncash goodwill included in the transactions that is not deductible for tax purposes. For the Ohiotransaction, we recorded an increase to our current tax expense of $1.5 millionfor the quarter and nine-month period ended September 30, 2021related to the writedown of noncash goodwill in 2021. The Company does not consider these sales transactions and related goodwill adjustments unusual or infrequent and therefore the corresponding tax impact is recorded through continuing operations. The investment made by Searchlight in 2020 is treated as a contribution of equity for federal tax purposes. Accordingly, the impact of the non-cash PIK interest expense, discount and issuance costs, and fair value adjustments on the CPR are not recognized for federal income tax purposes, resulting in an increase to our current tax expense of $3.6 millionand $34.7 millionfor the quarter and nine months ended September 30, 2021, respectively. For the quarter and nine months ended September 30, 2021, the Company utilized the discrete effective tax rate method, as allowed by Accounting Standards Codification ("ASC") 740-270-30-18, "Income Taxes - Interim Reporting," to calculate its interim income tax provision. The Company applied the discrete method, at that time, because the application of the estimated annual effective tax rate method (i) was not reliable due to the high degree of uncertainty in estimating annual pretax earnings and (ii) would result in small changes to the projected ordinary annual income causing significant changes in the estimated annual effective rate. Exclusive of the discrete effective tax rate method and permanent income tax impact related to the Kansas City, Ohioand Searchlight transactions, our effective tax rate for the quarters ended September 30, 2022and 2021 would have been approximately 28.2% and 23.9%, respectively, and approximately 26.1% and 25.6% for the nine months ended September 30, 2022and 2021, respectively. The effective tax rate differed from the federal and state statutory rates primarily due to permanent income tax differences related to the Kansas City, Ohio, and Searchlight transactions, recurring permanent tax differences, and differences in allocable income for the Company's state tax filings. 37 Table of Contents Non-GAAP Measures
In addition to the results reported in accordance with US GAAP, we also use certain non-GAAP measures such as EBITDA and adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends. These financial measures are not measures of financial performance under US GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance and net cash provided by operating activities as a measure of liquidity. They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies. Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below. EBITDA is defined as net earnings before interest expense, income taxes and depreciation and amortization. Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below. These measures are a common measure of operating performance in the telecommunications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash. The following table is a reconciliation of loss from continuing operations to adjusted EBITDA for the quarters and nine months ended
September 30, 2022and 2021: Quarter Ended Nine Months Ended September 30, September 30, (In thousands, unaudited) 2022 2021 2022 2021 Loss from continuing operations $ (7,257) $ (13,100) $ (136,944) $ (146,542)Add (subtract): Interest expense, net of interest income 32,071 43,176 91,742 137,022 Income tax expense (benefit) (978) 2,552 (17,814) (1,860) Depreciation and amortization 75,659 73,765 220,552 225,455 EBITDA 99,495 106,393 157,536 214,075 Adjustments to EBITDA: Other, net (1) 3,236 (1,288) 8,857 3,865 Gain on disposal of assets (19,163) - (19,163) -
Loss on extinguishment of debt - - - 17,101 Loss on impairment 5,208 5,704 131,698 5,704 Change in fair value of contingent payment rights - 2,205 - 99,619 Non-cash, stock-based compensation 2,939 3,217 7,971 7,160 Adjusted EBITDA from continuing operations 91,715 116,231 286,899 347,524 Investment distributions from discontinued operations 5,478 11,127 25,023 33,160 Adjusted EBITDA
$ 97,193 $ 127,358 $ 311,922 $ 380,684
Includes dividend income, income attributable to noncontrolling interests in
(1) subsidiaries, acquisition and transaction related costs including integration
and severance, non-cash pension and post-retirement benefits and certain
other miscellaneous items.
Liquidity and Capital Resources
Outlook and Overview
Our operating requirements have historically been funded from cash flows generated from our business and borrowings under our credit facilities. We expect that our future operating requirements will continue to be funded from cash flows from operating activities, existing cash and cash equivalents, proceeds from sales of nonstrategic assets and, if needed, borrowings under our revolving credit facility and our ability to obtain future external financing. We anticipate that we 38 Table of Contents
will continue to use a substantial portion of our cash flow to fund capital
expenditures for our accelerated fiber network expansion and growth plan and
invest in future business opportunities.
The following table summarizes our cash flows:
Nine Months Ended September 30, (In thousands) 2022 2021 Cash flows provided by (used in): Operating activities Continuing operations
$ 193,108 $ 262,819Discontinued operations 25,023 33,160 Investing activities Continuing operations (338,059) (493,127) Discontinued operations 489,567 - Financing activities (7,225) 140,269
Change in cash and cash equivalents
Cash Flows Provided by Operating Activities
Net cash provided by operating activities from continuing operations was
$193.1 millionduring the nine-month period ended September 30, 2022, a decrease of $69.7 millioncompared to the same period in 2021. Cash flows provided by operating activities decreased in part due to a decline in earnings as a result of a decrease in operating revenue and a reduction in our annual federal subsidies support. The decline is also as a result of changes in working capital and the timing of expenditures. These reductions in cash provided by operating activities were offset in part by a decrease in cash paid for interest of $1.9 millionand cash contributions to our defined benefit pension plan of $6.1 millionduring the nine-month period ended September 30, 2022compared to the same period in 2021. In addition, in response to the potential impacts of the COVID-19 pandemic in 2020, we deferred certain employer payroll tax payments under the CARES Act. The portion of the taxes deferred until 2021 of approximately $6.0 millionwere paid during the nine months ended September 30, 2021.
Cash Flows Used In Investing Activities
Net cash used in investing activities from continuing operations was
$338.1 millionduring the nine-month period ended September 30, 2022and consisted primarily of cash used for capital expenditures, the purchase and maturity of short-term investments and proceeds received from business dispositions and the sale of assets. Capital expenditures continue to be our primary recurring investing activity and were $497.0 millionand $339.5 millionduring the nine-month periods ended September 30, 2022and 2021, respectively. Capital expenditures for 2022 are expected to be $565.0 millionto $585.0 million, which will be used for our planned fiber projects and broadband network expansion, which will include the upgrade in 2022 of approximately 400,000 fiber passings, and to support success-based capital projects for commercial, carrier and consumer initiatives. We expect to continue to invest in the enhancement and expansion of our fiber network in order to retain and acquire more customers through a broader set of products and an expanded network footprint. During the nine months ended September 30, 2022, we received proceeds from the maturity and sale of investments of $151.6 million, which was offset in part by the purchase of $40.0 millionin short-term investments consisting primarily of held-to-maturity debt securities with original maturities of three to twelve months. During the nine months ended September 30, 2021, we purchased $155.0 millionin short-term investments. During the nine months ended September 30, 2022, we completed the sale of substantially all of the assets of CCOC, our non-core, rural ILEC business located in Ohio, for cash proceeds of $26.0 million. Cash proceeds from the sale of assets increased $21.1 millionduring the nine-month period ended September 30, 2022, primarily from cash proceeds of $19.4 millionfor the sale of certain non-strategic communication towers. 39
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Net cash provided by discontinued operations of
$489.6 millionconsists of the net proceeds from the sale of our five limited wireless partnership interests during the nine months ended September 30, 2022. The proceeds from the sale are expected to be used to support the fiber expansion plan.
Cash Flows Used In Financing Activities
Net cash used in financing activities consists primarily of our proceeds from
and principal payments on long-term borrowings.
October 2, 2020, the Company, through certain of its wholly-owned subsidiaries, entered into a Credit Agreement with various financial institutions (as amended, the "Credit Agreement") to replace the Company's previous credit agreement in its entirety. The Credit Agreement consisted of term loans in an original aggregate amount of $1,250.0 million(the "Initial Term Loans") and a revolving loan facility of $250.0 million. The Credit Agreement also includes an incremental loan facility which provides the ability to borrow, subject to certain terms and conditions, incremental loans in an aggregate amount of up to the greater of (a) $300.0 millionplus (b) an amount which would not cause its senior secured leverage ratio not to exceed 3.70:1.00 (the "Incremental Facility"). Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its subsidiaries, subject to certain exceptions. The Initial Term Loans were issued in an original aggregate principal amount of $1,250.0 millionwith a maturity date of October 2, 2027and contained an original issuance discount of 1.5% or $18.8 million, which is being amortized over the term of the loan. Prior to amendments to the Credit Agreement, as described below, the Initial Term Loans required quarterly principal payments of $3.1 million, which commenced December 31, 2020, and bore interest at a rate of 4.75% plus the London Interbank Offered Rate ("LIBOR") subject to a 1.00% LIBOR floor. On January 15, 2021, the Company entered into Amendment No. 1 to the Credit Agreement in which we borrowed an additional $150.0 millionaggregate principal amount of incremental term loans (the "Incremental Term Loans"). The Incremental Term Loans have terms and conditions identical to the Initial Term Loans including the same maturity date and interest rate. The Initial Term Loans and Incremental Term Loans, collectively (the "Term Loans"), comprise a single class of term loans under the Credit Agreement. On March 18, 2021, the Company repaid $397.0 millionof the outstanding Term Loans with the net proceeds received from the issuance of $400.0 millionaggregate principal amount of 5.00% senior secured notes due 2028 (the "5.00% Senior Notes"), as described below. The repayment of the Term Loans was applied to the remaining principal payments in direct order of maturity, thereby eliminating the required quarterly principal payments through the remaining term of the loan. In connection with the repayment of the Term Loans, we recognized a loss on extinguishment of debt of $12.0 millionduring the nine months ended September 30, 2021. On April 5, 2021, the Company, entered into a second amendment to the Credit Agreement (the "Second Amendment") to refinance the outstanding Term Loans of $999.9 million. The terms and conditions of the Credit Agreement remain substantially similar and unchanged except with respect to the interest rate applicable to the Term Loans and certain other provisions. As a result of the Second Amendment, the interest rate of the Term Loans was reduced to 3.50% plus LIBOR subject to a 0.75% LIBOR floor. The maturity date of the Term Loans of October 2, 2027remained unchanged. In connection with entering into the Second Amendment, we recognized a loss of $5.1 millionon the extinguishment of debt during the nine months ended September 30, 2021. The revolving credit facility has a maturity date of October 2, 2025and an applicable margin (at our election) of 4.00% for LIBOR-based borrowings or 3.00% for alternate base rate borrowings, with a 0.25% reduction in each case if the consolidated first lien leverage ratio, as defined in the Credit Agreement, does not exceed 3.20 to 1.00. At September 30, 2022and December 31, 2021, there were no borrowings outstanding under the revolving credit facility. Stand-by letters of credit of $26.4 millionwere outstanding under our revolving credit facility as of September 30, 2022. The stand-by 40
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letters of credit are renewable annually and reduce the borrowing availability under the revolving credit facility. As of
September 30, 2022, $223.6 millionwas available for borrowing under the revolving credit facility. The weighted-average interest rate on outstanding borrowings under our credit facility was 6.06% and 4.25% as of September 30, 2022and December 31, 2021, respectively. Interest is payable at least quarterly.
Credit Agreement Covenant Compliance
The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue certain capital stock. We have agreed to maintain certain financial ratios, including a maximum consolidated first lien leverage ratio, as defined in the Credit Agreement. Among other things, it will be an event of default, with respect to the revolving credit facility only, if our consolidated first lien leverage ratio is greater than 5.85:1.00 as of the end of any fiscal quarter, if on such date the testing threshold is met. The testing threshold is met if the aggregate amount of our borrowings outstanding under the revolving credit facility exceeds 35%. As of
September 30, 2022, the testing threshold was not met and our consolidated first lien leverage ratio under the Credit Agreement was 5.12:1.00. As of September 30, 2022, we were in compliance with the Credit Agreement covenants.
October 2, 2020, we completed an offering of $750.0 millionaggregate principal amount of 6.50% unsubordinated secured notes due 2028 (the "6.50% Senior Notes"). The 6.50% Senior Notes were priced at par and bear interest at a rate of 6.50%, payable semi-annually on April 1and October 1of each year, beginning on April 1, 2021. The 6.50% Senior Notes mature on October 1, 2028. On March 18, 2021, we issued $400.0 millionaggregate principal amount 5.00% Senior Notes, together with the 6.50% Senior Notes (the "Senior Notes"). The 5.00% Senior Notes were priced at par and bear interest at a rate of 5.00% per year, payable semi-annually on April 1and October 1of each year, beginning on October 1, 2021. The 5.00% Senior Notes mature on October 1, 2028. The net proceeds from the issuance of the 5.00% Senior Notes were used to repay $397.0 millionof the Term Loans outstanding under the Credit Agreement. The Senior Notes are unsubordinated secured obligations of the Company, secured by a first priority lien on the collateral that secures the Company's obligations under the Credit Agreement. The Senior Notes are fully and unconditionally guaranteed on a first priority secured basis by the Company and the majority of our wholly-owned subsidiaries. The offerings of the Senior Notes have not been registered under the Securities Act of 1933, as amended or any state securities laws.
Senior Notes Covenant Compliance
Subject to certain exceptions and qualifications, the indentures governing the Senior Notes contains customary covenants that, among other things, limits the Company and its restricted subsidiaries' ability to: incur additional debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions. The indentures also contain customary events of default. As of
September 30, 2022, the Company was in compliance with all terms, conditions and covenants under the indentures governing the Senior Notes.
We lease certain facilities and equipment under various finance leases which expire between 2022 and 2040. As of
September 30, 2022, the present value of the minimum remaining lease commitments was approximately $29.0 million, of which $10.3 millionwas due and payable within the next twelve months. The leases require total remaining rental payments of $31.8 millionas of September 30, 2022. 41 Table of Contents
Sufficiency of Cash Resources
The following table sets forth selected information regarding our financial
September 30, December 31, (In thousands, except for ratio) 2022
Cash and cash equivalents and short-term investments
$ 462,049 $ 210,436Working capital 431,058 142,270 Current ratio 2.42 1.50 Our net working capital increased $288.8 millionas of September 30, 2022compared to December 31, 2021. Cash, cash equivalents and short-term investments increased $251.6 millionprimarily as a result of the cash proceeds from the sale of our limited wireless partnership interests, which was reduced in part by capital expenditures for the fiber build plan during 2022. Working capital also included net assets classified as held for sale of $88.2 millionat September 30, 2022related to the pending sale of substantially all of the assets of our Kansas Cityoperations compared to net assets held for sale of $26.0 millionat December 31, 2021for the ILEC business located in Ohio. However, working capital was reduced by an increase in accrued interest of $17.3 millionat September 30, 2022related to the timing of the semi-annual interest payments for our Senior Notes. Our most significant use of funds for the remainder of 2022 is expected to be for: (i) interest payments on our indebtedness of between $50.0 millionand $52.0 million; and (ii) capital expenditures of between $88.0 millionand $108.0 million. The recent refinancing of our capital structure combined with the Searchlight investment provides us the capital and financial flexibility to fund our accelerated fiber network expansion and growth plans. In the future, our ability to use cash may be limited by our other expected uses of cash and our ability to incur additional debt will be limited by our existing and future debt agreements.
We are closely monitoring the ongoing impact on our business of the novel strain
of coronavirus (“COVID-19”) and its variants. We are taking precautions to
ensure the safety of our employees, customers and business partners, while
assuring business continuity and reliable service and support to our customers.
While we have not seen a material adverse impact to our financial results from COVID-19 to date, if the pandemic worsens or new variants of the virus become more dominant and were to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted. On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted by the U.S.government as an emergency economic stimulus package that includes spending and tax breaks to strengthen the US economy and fund a nationwide effort to curtail the economic effects of COVID-19. The CARES Act included, among other things, deferral of certain employer payroll tax payments. In 2020, we deferred the payment of approximately $12.0 millionfor the employer portion of Social Securitytaxes otherwise due in 2020 with 50% due by December 31, 2021and the remaining 50% by December 31, 2022. The portion of the taxes deferred until 2021 were paid during the third quarter of 2021 and we expect to pay the remaining portion during the fourth quarter of 2022. We believe that cash flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for at least the next twelve months to fund our current anticipated uses of cash. After that, our ability to fund expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance and cash flow. Our ability to fund expected uses from the results of future operations will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control. Due to the uncertainty and unpredictability related to the potential impacts of the COVID-19 pandemic on our business, we will continue to closely manage our cash and monitor liquidity. To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities.
There can be no assurance that we will be able to generate sufficient cash
flows from operations in the future, that anticipated revenue growth will be
realized or that future borrowings or equity issuances will be available
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in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash. Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures which could have a material adverse effect on our financial condition and the results of operations. In addition, the COVID-19 pandemic has caused a disruption in the capital markets, which could make obtaining additional financing more difficult and we may not be able to obtain financing on favorable terms or at all. We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or are subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries' ability to pay dividends or advance cash in any other manner
to us. Surety Bonds
In the ordinary course of business, we enter into surety, performance and
similar bonds as required by certain jurisdictions in which we provide services.
Defined Benefit Pension Plans
As required, we contribute to qualified defined pension plans and non-qualified supplemental retirement plans (collectively the "Pension Plans") and other post-retirement benefit plans, which provide retirement benefits to certain eligible employees as described in the Note 13 to the Condensed Consolidated Financial Statements, included in this report in Part I - Item 1 "Financial Statements". Contributions are intended to provide for benefits attributed to service to date. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations. The cost to maintain our Pension Plans and future funding requirements are affected by several factors including the expected return on investment of the assets held by the Pension Plans, changes in the discount rate used to calculate pension expense and the amortization of unrecognized gains and losses. Returns generated on the Pension Plans assets have historically funded a significant portion of the benefits paid under the Pension Plans. We estimate the long-term rate of return on assets will be 6.00%. The Pension Plans invest in marketable equity securities which are exposed to changes in the financial markets. COVID-19 has also impacted the financial markets, which could significantly impact the returns on our plan assets. If the financial markets experience a sustained downturn and returns fall below our estimate, we could be required to make material contributions to the Pension Plans, which could adversely affect our cash flows from operations. In 2022, we expect to make contributions totaling approximately
$10.0 millionto our Pension Plans and $8.2 millionto our other post-retirement benefit plans. As of September 30, 2022, we have contributed $10.0 millionand $5.1 millionto our Pension Plans and our other post-retirement benefit plans, respectively. Our contribution amounts meet the minimum funding requirements as set forth in employee benefit and tax laws. We elected to participate in ARPA beginning with the 2021 plan year. ARPA, which was signed into law in March 2021, included changes to the employer funding requirements and is designed to reduce the amounts of required contributions as a relief. During 2021 and the six months ended June 30, 2022, we elected to fund our pension contributions at the pre-ARPA levels, which has created a pre-funded balance. We expect that for the remainder of 2022 and 2023, no additional pension contributions will be required as we have now adopted the ARPA minimum required contributions and will use our current pre-funded balance to satisfy those minimum contribution requirements.
The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. For example, tax laws in effect regarding accelerated or "bonus" depreciation for tax reporting resulted in less cash payments than the GAAP tax expense. Acceleration of tax deductions could eventually result in situations where cash payments will exceed GAAP tax expense. 43 Table of Contents Regulatory Matters
In 2020, the
FCCadopted an order establishing the RDOF, the next phase of the CAF program, which resulted in a reduction of approximately $42.2 millionin the annual support we receive as of January 1, 2022through December 31, 2031.
Critical Accounting Estimates
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with US GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's application of accounting policies. Our judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our condensed consolidated financial statements, refer to our 2021 Annual Report on Form 10-K filed with the
Recent Accounting Pronouncements
For information regarding the impact of certain recent accounting pronouncements, see Note 1 "Summary of Significant Accounting Policies" to the Condensed Consolidated Financial Statements, included in this report in Part I - Item 1 "Financial Statements".
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