Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 11/02/2012 17:22:15)

Table of Contents

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

or

 

[     ]    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-51446

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

 (Exact name of registrant as specified in its charter)

 

 

Delaware

 

 

 

02-0636095

 

 

(State or other jurisdiction

 

 

 

(IRS Employer

 

 

of incorporation or organization)

 

 

 

Identification No.)

 

 

 

 

 

 

 

 

 

 

121 South 17 th  Street, Mattoon, Illinois

 

 

 

 

61938-3987

 

 

(Address of principal executive offices)

 

 

 

(Zip Code)

 

 

    (217) 235-3311    

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X            No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    X             No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer             

Accelerated filer      X   

 

Non-accelerated filer___ (Do not check if a smaller reporting company) Smaller reporting company ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                   No    X

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

 

 

 

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 6.

Exhibits

37

 

 

 

SIGNATURES

39

 



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands except per share amounts)

 

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

157,012

 

 

$

92,548

 

 

$

343,381

 

 

$

280,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation and amortization)

 

59,589

 

 

33,913

 

 

131,979

 

 

103,864

 

 

Selling, general and administrative expenses

 

35,568

 

 

21,148

 

 

75,092

 

 

60,994

 

 

Financing and other transaction costs

 

14,525

 

 

109

 

 

19,909

 

 

2,649

 

 

Depreciation and amortization

 

37,252

 

 

22,161

 

 

81,258

 

 

66,306

 

 

Operating income

 

10,078

 

 

15,217

 

 

35,143

 

 

46,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(20,624

)

 

(13,447

)

 

(52,117

)

 

(37,783

)

 

Investment income

 

8,229

 

 

6,403

 

 

21,457

 

 

19,417

 

 

Other, net

 

232

 

 

516

 

 

431

 

 

953

 

 

(Loss) income before income taxes

 

(2,085

)

 

8,689

 

 

4,914

 

 

29,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(1,895

)

 

2,723

 

 

314

 

 

10,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(190

)

 

5,966

 

 

4,600

 

 

18,976

 

 

Less: net income attributable to noncontrolling interest

 

121

 

 

148

 

 

366

 

 

442

 

 

Net (loss) income attributable to common stockholders

 

$

(311

)

 

$

5,818

 

 

$

4,234

 

 

$

18,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share - basic and diluted

 

$

(0.01

)

 

$

0.19

 

 

$

0.12

 

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.39

 

 

$

0.38

 

 

$

1.16

 

 

$

1.16

 

 

 

See accompanying notes.

 

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Table of Contents

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; Amounts in thousands)

 

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(190

)

 

$

5,966

 

 

$

4,600

 

 

$

18,976

 

 

Change in prior service cost, net of tax of $36 and $(19) for the quarter ended September 30, 2012 and 2011, and $579 and $61 for nine months ended September 30, 2012 and 2011

 

60

 

 

(33

)

 

957

 

 

102

 

 

Change in fair value of cash flow hedges, net of tax of $921 and $1,349 for the quarter ended September 30, 2012 and 2011, and $1,845 and $3,405 for nine months ended September 30, 2012 and 2011

 

1,577

 

 

2,314

 

 

3,161

 

 

5,872

 

 

Comprehensive income

 

1,447

 

 

8,247

 

 

8,718

 

 

24,950

 

 

Less: comprehensive income attributable to noncontrolling interest

 

121

 

 

148

 

 

366

 

 

442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income attributable to common stockholders

 

$

1,326

 

 

$

8,099

 

 

$

8,352

 

 

$

24,508

 

 

 

See accompanying notes.

 

2



Table of Contents

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

24,775

 

 

  $

105,704

 

 

Accounts receivable, net

 

60,661

 

 

35,492

 

 

Income tax receivable

 

11,474

 

 

8,988

 

 

Deferred income taxes

 

10,202

 

 

4,825

 

 

Prepaid expenses and other current assets

 

9,335

 

 

6,170

 

 

Total current assets

 

116,447

 

 

161,179

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

876,115

 

 

339,197

 

 

Investments

 

102,860

 

 

98,069

 

 

Goodwill

 

629,967

 

 

520,562

 

 

Other intangible assets

 

63,574

 

 

70,158

 

 

Deferred debt issuance costs, net and other assets

 

13,767

 

 

4,904

 

 

Total assets

 

  $

1,802,730

 

 

  $

1,194,069

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

  $

19,732

 

 

  $

13,673

 

 

Advance billings and customer deposits

 

29,068

 

 

20,324

 

 

Dividends payable

 

15,463

 

 

11,571

 

 

Accrued compensation

 

18,884

 

 

12,814

 

 

Accrued interest

 

11,690

 

 

237

 

 

Accrued expense

 

45,576

 

 

14,099

 

 

Current portion of long-term debt and capital lease obligations

 

9,029

 

 

8,992

 

 

Current portion of derivative liability

 

6,801

 

 

3,580

 

 

Total current liabilities

 

156,243

 

 

85,290

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

1,202,059

 

 

875,719

 

 

Deferred income taxes

 

136,033

 

 

77,327

 

 

Pension and other postretirement obligations

 

133,246

 

 

93,754

 

 

Other long-term liabilities

 

11,382

 

 

14,167

 

 

Total liabilities

 

1,638,963

 

 

1,146,257

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 39,917,265 and 29,869,512, shares outstanding as of September 30, 2012 and December 31, 2011, respectively

 

399

 

 

299

 

 

Additional paid-in capital

 

191,223

 

 

79,852

 

 

Retained earnings

 

-

 

 

-

 

 

Accumulated other comprehensive loss, net

 

(33,715

)

 

(37,833

)

 

Noncontrolling interest

 

5,860

 

 

5,494

 

 

Total shareholders’ equity

 

163,767

 

 

47,812

 

 

Total liabilities and stockholders’ equity

 

  $

1,802,730

 

 

  $

1,194,069

 

 

 

See accompanying notes.

 

3



Table of Contents

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

 

 

 

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

  $

71,900

 

 

  $

93,309

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Business acquisition, net of cash acquired

 

(377,021

)

 

-

 

 

Purchases of property, plant and equipment, net

 

(50,420

)

 

(31,246

)

 

Proceeds from sale of assets

 

415

 

 

427

 

 

Other

 

(314

)

 

159

 

 

Net cash used for investing activities

 

(427,340

)

 

(30,660

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds on bond offering

 

298,035

 

 

-

 

 

Proceeds from issuance of long-term debt

 

35,000

 

 

-

 

 

Payment of capital lease obligation

 

(140

)

 

(108

)

 

Payment on long-term debt

 

(6,600

)

 

-

 

 

Payment of financing costs

 

(13,147

)

 

(3,471

)

 

Dividends on common stock

 

(38,637

)

 

(34,719

)

 

Net cash provided by (used in) financing activities

 

274,511

 

 

(38,298

)

 

 

 

 

 

 

 

 

 

(Decrease)/increase in cash and cash equivalents

 

(80,929

)

 

24,351

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

105,704

 

 

67,654

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

  $

24,775

 

 

  $

92,005

 

 

 

See accompanying notes.

 

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Table of Contents

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Accounting

 

Consolidated Communications Holdings, Inc. (the “Company”, “we” or “our”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communications services to residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri.

 

In the opinion of management, the accompanying condensed consolidated balance sheets and related interim statements of operations, comprehensive income and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2011 Annual Report on Form 10-K filed with the SEC.

 

SureWest Merger

 

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

 

Reclassifications

 

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

 

Property, Plant and Equipment

 

Property, plant and equipment consisted of the following:

 

(Amounts in thousands)

 

September 30,
2012

 

December 31,
2011

 

Estimated
Useful Lives

 

Land and buildings

 

  $

93,529

 

 

  $

66,704

 

 

18-40 years

 

Network and outside plant facilities

 

1,397,113

 

 

897,140

 

 

3-50 years

 

Furniture, fixtures and equipment

 

93,451

 

 

73,185

 

 

3-15 years

 

Assets under capital lease

 

10,014

 

 

10,014

 

 

11 years

 

Total plant in service

 

1,594,107

 

 

1,047,043

 

 

 

 

Less: accumulated depreciation and amortization

 

(752,878

)

 

(721,527

)

 

 

 

Plant in service

 

841,229

 

 

325,516

 

 

 

 

Construction in progress

 

24,630

 

 

6,530

 

 

 

 

Construction inventory

 

10,256

 

 

7,151

 

 

 

 

Totals

 

  $

876,115

 

 

  $

339,197

 

 

 

 

 

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Table of Contents

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

Recently Adopted Accounting Pronouncements

 

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

 

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

 

2.     MERGER WITH SUREWEST COMMUNICATIONS

 

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

 

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

 

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

 

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Table of Contents

 

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

 

 

 

(In thousands)

 

Current assets

 

  $

46,791

 

 

Property, plant and equipment

 

551,315

 

 

Goodwill

 

109,405

 

 

Other intangible assets

 

10,500

 

 

Other long-term assets

 

4,589

 

 

Total assets acquired

 

722,600

 

 

Current liabilities

 

51,350

 

 

Pension and other post-retirement obliations

 

55,653

 

 

Deferred income taxes

 

58,316

 

 

Other long-term liabilities

 

6,485

 

 

Total liabilities assumed

 

171,804

 

 

Net assets acquired

 

  $

550,796

 

 

 

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

 

Unaudited Pro Forma Results

 

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

 

 

 

 

 

 

Nine Months

 

 

 

Quarter Ended

 

Ended September 30,

 

(In thousands, except share amounts)

 

September 30, 2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

  $

155,700

 

 

  $

471,283

 

 

  $

466,277

 

 

Income from operations

 

  $

18,392

 

 

  $

54,919

 

 

  $

55,177

 

 

Net income

 

  $

2,476

 

 

  $

10,629

 

 

  $

7,214

 

 

Less: income attributable to noncontrolling interest

 

148

 

 

366

 

 

442

 

 

Net income attributable to common stockholders

 

  $

2,328

 

 

  $

10,263

 

 

  $

6,772

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

Net income

 

  $

0.06

 

 

  $

0.26

 

 

  $

0.17

 

 

 

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Table of Contents

 

3.     EARNINGS PER SHARE

 

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

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Share using Two-class Method:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

  $

(190

)

 

  $

5,966

 

 

  $

4,600

 

 

  $

18,976

 

 

Less: net income attributable to noncontrolling interest

 

121

 

 

148

 

 

366

 

 

442

 

 

Net (loss) income attributable to common shareholders before allocation of earnings to participating securities

 

(311

)

 

5,818

 

 

4,234

 

 

18,534

 

 

Less: earnings allocated to participating securities

 

 

 

117

 

 

255

 

 

363

 

 

Net (loss) income attributable to common shareholders

 

  $

(311

)

 

  $

5,701

 

 

  $

3,979

 

 

  $

18,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding (1)

 

39,439

 

 

29,593

 

 

32,963

 

 

29,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share attributable to common stockholders - basic and diluted

 

  $

(0.01

)

 

  $

0.19

 

 

  $

0.12

 

 

  $

0.61

 

 

 

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

 

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

 

4.               INVESTMENTS

 

Our investments are as follows:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

Cash surrender value of life insurance policies

 

  $

1,895

 

 

  $

1,978

 

 

Cost method investments:

 

 

 

 

 

 

 

GTE Mobilnet of South Texas Limited Partnership (2.34% interest)

 

21,450

 

 

21,450

 

 

Pittsburgh SMSA Limited Partnership (3.60% interest)

 

22,950

 

 

22,950

 

 

CoBank, ACB Stock

 

4,961

 

 

3,394

 

 

Other

 

115

 

 

15

 

 

Equity method investments:

 

 

 

 

 

 

 

GTE Mobilnet of Texas RSA #17 Limited Partnership (17.02% interest)

 

19,142

 

 

19,422

 

 

Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest)

 

7,424

 

 

7,063

 

 

Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)

 

23,390

 

 

21,797

 

 

CVIN, LLC (13.61% interest)

 

1,533

 

 

-

 

 

Totals

 

  $

102,860

 

 

  $

98,069

 

 

 

Cost Method

 

We own 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”).  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas.  We also own 3.60% of Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we use the cost method to account for both of these investments.  It is not practicable to estimate fair value of these investments.  We did not evaluate any of the investments for impairment as no factors indicating impairment existed during the year.  For the three-month periods ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $3.7 million and $2.7 million, respectively.  For the nine months ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $9.3 million and $7.7 million, respectively.

 

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CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers.  Annually, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which has traditionally been a significant lender in the Company’s credit facility.  The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.

 

Equity Method

 

We own 17.02% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”), and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory.  Because we have significant influence over the operating and financial policies of these three entities, we account for the investments using the equity method.  For the three months ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $4.0 million and $4.2 million, respectively.  For the nine months ended September 30, 2012 and 2011, we received cash distributions from these partnerships totaling $10.5 million and $11.9 million, respectively.

 

We have a 13.61% interest in Central Valley Independent Network, LLC (“CVIN”), a joint enterprise comprised of affiliates of several Independent Telephone Companies located in central and northern California. CVIN provides network services and oversees a broadband infrastructure project designed to expand and improve the availability of network services to counties in central California.  During the quarter and nine months ended September 30, 2012, we did not receive any distributions from this partnership.

 

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

 

 

 

Quarter Ended

 

Nine Months

 

 

 

September 30,

 

Ended September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Total revenues

 

  $

75,317

 

 

  $

79,880

 

 

  $

221,207

 

 

  $

223,428

 

 

Income from operations

 

21,611

 

 

23,065

 

 

63,538

 

 

63,861

 

 

Net income before taxes

 

21,626

 

 

23,087

 

 

63,582

 

 

63,935

 

 

Net income

 

21,522

 

 

22,987

 

 

63,270

 

 

63,635

 

 

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

Current assets

 

  $

53,569

 

 

  $

43,517

 

 

Non-current assets

 

77,834

 

 

79,432

 

 

Current liabilities

 

1,302

 

 

13,901

 

 

Non-current liabilities

 

1,281

 

 

1,096

 

 

Partnership equity

 

116,221

 

 

107,951

 

 

 

5.               FAIR VALUE MEASUREMENTS

 

The Company’s derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using an internal valuation model which relies on the expected London Interbank Offered Rate (“LIBOR”) based yield curve and estimates of counterparty and Consolidated’s non-performance risk as the most significant inputs.  Because each of these inputs are directly observable or can be corroborated by observable market data, we have categorized these interest rate swaps as Level 2 within the fair value hierarchy. See Note 7 for further discussion regarding our interest rate swap agreements.

 

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Table of Contents

 

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

 

 

 

 

 

As of September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices
In Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Current interest rate swap liabilities

 

  $

(6,801

)

 

 

 

  $

(6,801

)

 

 

 

Long-term interest rate swap liabilities

 

(4,135

)

 

 

 

(4,135

)

 

 

 

Totals

 

  $

(10,936

)

 

  $

 

 

  $

(10,936

)

 

  $

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices
In Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

(In thousands)

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Current interest rate swap liabilities

 

 

  $

(3,580

)

 

 

 

 

  $

 

(3,580

)

 

 

 

 

Long-term interest rate swap liabilities

 

 

(12,401

)

 

 

 

 

 

(12,401

)

 

 

 

 

Totals

 

 

  $

(15,981

)

 

  $

 

 

  $

 

(15,981

)

 

  $

 

 

 

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

 

We have not elected the fair value option for any of our financial assets or liabilities.  The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.  The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of September 30, 2012 and December 31, 2011.

 

 

 

As of September 30, 2012

 

As of December 31, 2011

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

51,489

 

 

n/a

 

 

$

48,282

 

 

n/a

 

 

Investments, at cost

 

$

49,476

 

 

n/a

 

 

$

47,809

 

 

n/a

 

 

Long-term debt

 

$

1,206,517

 

 

$

1,206,517

 

 

$

880,000

 

 

$

880,000

 

 

 

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

 

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

 

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

 

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6.     LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

Senior secured credit facility - term loan

 

$

873,400

 

 

$

880,000

 

 

Senior secured credit facility - revolving loan

 

35,000

 

 

-

 

 

Senior notes - net of discount

 

298,117

 

 

-

 

 

Capital leases

 

4,571

 

 

4,711

 

 

 

 

1,211,088

 

 

884,711

 

 

Less: current portion of long-term debt and capital leases

 

(9,029

)

 

(8,992

)

 

Total long-term debt

 

$

1,202,059

 

 

$

875,719

 

 

 

Credit Agreement

 

The Company, through certain of its wholly owned subsidiaries, has an outstanding credit agreement with several financial institutions, which consists of a $50.0 million revolving credit facility and an $873.4 million term loan facility.  In addition, the Company has outstanding $300.0 million of Senior Notes.  As of September 30, 2012, $35.0 million was outstanding under the revolving credit facility. Borrowings under the senior secured credit facility are secured by substantially all of the assets of the Company, with the exception of Illinois Consolidated Telephone Company and our majority-owned subsidiary, East Texas Fiber Line Incorporated.  The Senior Notes are unsecured.

 

Our term loan credit facility is made up of two separate tranches, resulting in different maturity dates and interest rate margins for each term loan tranche.  The first term loan tranche consists of $467.4 million aggregate principal amount, matures on December 31, 2014 and has an applicable margin (at our election) equal to either 2.50% for a LIBOR-based term loan or 1.50% for an alternative base rate loan.  The second term loan tranche consists of $406.0 million aggregate principal amount, matures on December 31, 2017 and has an applicable margin (at our election) equal to either 3.75% for a LIBOR-based term loan or 2.75% for an alternative base rate term loan.  The applicable margins for each of the term loan tranches are fixed for the duration of the loans.  The amended term loan facility also requires $2.2 million in quarterly principal payments which began on March 31, 2012.

 

Our revolving credit facility has a maturity date of June 8, 2016 and an applicable margin (at our election) of between 2.75% and 3.50% for LIBOR-based borrowings and between 1.75% and 2.50% for alternative base rate borrowings, depending on our leverage ratio.  Based on our leverage ratio at September 30, 2012, the borrowing margin for the next three month period ending December 31, 2012 will be at a weighted-average margin of 3.25% for a LIBOR-based loan or 2.25% for an alternative base rate loan.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.  During the quarter ended September 30, 2012, we borrowed $35.0 million of the revolving credit facility in connection with the acquisition of SureWest as described in Note 2.  There were no borrowings or letters of credit outstanding under the revolving credit facility as of December 31, 2011.

 

The weighted-average interest rate incurred on our credit facilities during the three month periods ended September 30, 2012 and 2011, including amounts paid on our interest rate swap agreements and the applicable margin, was 6.49% and 5.73% per annum, respectively.  Interest is payable at least quarterly.

 

The credit agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, issue capital stock, and commit to future capital expenditures.  We have agreed to maintain certain financial ratios, including interest coverage, and total net leverage ratios, all as defined in the credit agreement.  As of September 30, 2012, we were in compliance with the credit agreement covenants.

 

In connection with the acquisition of SureWest, on February 5, 2012 the Company received committed financing for a total of $350.0 million to fund the cash portion of the anticipated transaction, to refinance SureWest’s debt and to pay for certain transaction costs. The financing package included a $350.0 million Senior Unsecured Bridge Loan Facility (“Bridge Facility”). As anticipated, permanent financing for the SureWest acquisition was funded by our Senior Note offering, as described below.  As a result, the $4.1 million commitment fee incurred for the Bridge Facility was capitalized as deferred debt issuance costs and was amortized over the expected life of the Bridge Facility, which was four months.

 

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Effective February 17, 2012, we amended our credit facility to provide us with the ability to escrow proceeds from a high-yield note offering prior to the closing of the SureWest acquisition and, until closing, exclude the debt from current leverage calculations.  The amendment also permitted us additional flexibility for future high yield notes issuances with the same subsidiary guarantees required by our current credit facility, which enabled us to issue the Senior Notes described below.  All other terms, coverage and leverage ratios of the credit facility were unchanged.  In connection with the amendment, fees of $3.5 million were recognized as expense during the quarter ended March 31, 2012 while $1.2 million in fees were capitalized as deferred debt issuance costs and amortized over the remaining life of the term debt.

 

On May 30, 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% Senior Notes, due 2020 through our wholly-owned subsidiary, Consolidated Communications Finance Co. (“Finance Co.”) for the acquisition of SureWest.  The Senior Notes will mature on June 1, 2020 and earn interest at a rate of 10.875% per year, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2012.  The Senior Notes were sold to investors at a price equal to 99.345% of the principal amount thereof, for a yield to maturity of 11.00%.  This discount will be amortized over the term of the Senior Notes.  The proceeds of the sale of the Senior Notes were held in an escrow account prior to the closing of the SureWest transaction.  Upon closing of the SureWest acquisition on July 2, 2012, Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., which assumed the Senior Notes, and we and certain of our subsidiaries fully and unconditionally guaranteed the Senior Notes. Deferred debt issuance costs of $7.8 million incurred in connection with the issuance of the Senior Notes will be amortized over the term of the Senior Notes through June 2020.

 

A portion of the Senior Notes was sold to certain accredited investors consisting of the Company’s Chairman of the Board of Directors (“BOD”) and certain other members of the BOD, including the Company’s Chief Executive Officer (collectively “related parties”). The related parties purchased $10.8 million of the Senior Notes on same terms available to other investors, except that the related parties were not entitled to registration rights.

 

Capital Leases

 

The Company has four capital leases, all of which expire in 2021, for the lease of office, warehouse and tech center space.  As of September 30, 2012, the present value of the minimum remaining lease commitments was approximately $4.6 million, of which $0.2 million is due and payable within the next 12 months.  The leases will require total remaining rental payments to LATEL, a related party entity, of approximately $6.6 million and total remaining rental payments to Spruce of approximately $1.3 million over the term of the leases.  These leases have total payments of $7.9 million on the remaining terms of the leases.

 

7.     DERIVATIVE FINANCIAL INSTRUMENTS

 

In order to manage the risk associated with changes in interest rates, we have entered into interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  We account for these transactions as cash flow hedges under the FASB’s ASC Topic 815 (“ASC 815”), Derivatives and Hedging .  The swaps are designated as cash flow hedges of our expected future interest payments.  In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”) and is subsequently reclassified into earnings during the same period in which the hedged item impacts earnings.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

 

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Table of Contents

 

The following interest rate swaps, all designated as cash flow hedges, were outstanding at September 30, 2012:

 

(In thousands)

 

Notional
Amount

 

2012 Balance Sheet Location

 

Fair Value

 

Fixed to 3-month floating LIBOR

 

$

230,000

 

Current portion of derivative liability

 

$

(3,657

)

3-month floating LIBOR minus spread to 1-month floating LIBOR

 

230,000

 

Current portion of derivative liability

 

(77

)

Fixed to 1-month floating LIBOR

 

100,000

 

Other long-term liabilities

 

(1,804

)

Fixed to 1-month floating LIBOR

 

300,000

 

Current portion of derivative liability

 

(3,067

)

Forward starting fixed to 1-month floating LIBOR

 

175,000

 

Other long-term liabilities

 

(2,331

)

Total Fair Values

 

 

 

 

 

$

(10,936

)

 

The following interest rate swaps, all designated as cash flow hedges, were outstanding at December 31, 2011:

 

(In thousands)

 

Notional
Amount

 

2011 Balance Sheet Location

 

Fair Value

 

Fixed to 3-month floating LIBOR

 

$

100,000

 

Current portion of long-term liabilites

 

$

(3,401

)

Fixed to 3-month floating LIBOR

 

130,000

 

Other long-term liabilities

 

(6,053

)

3-month floating LIBOR minus spread to 1-month floating LIBOR

 

100,000

 

Current portion of long-term liabilites

 

(179

)

3-month floating LIBOR minus spread to 1-month floating LIBOR

 

130,000

 

Other long-term liabilities

 

(269

)

Fixed to 1-month floating LIBOR

 

300,000

 

Other long-term liabilities

 

(5,343

)

Forward starting fixed to

 

 

 

 

 

 

 

1- month floating LIBOR

 

200,000

 

Other long-term liabilities

 

(736

)

Total Fair Values

 

 

 

 

 

$

(15,981

)

 

At September 30, 2012 and December 31, 2011, the interest rate on approximately 72% and 60%, respectively, of our outstanding debt under the term loan credit facility was fixed through the use of interest rate swaps.

 

The counterparties to our various swaps are 5 major U.S. and European banks.  None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties.  The swaps of any counterparty that is a “Lender” as defined in our credit facility are secured along with the other creditors under the credit facility.  Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties.  This provision allows us to partially mitigate the risk of non-performance by a counterparty.

 

At September 30, 2012 and December 31, 2011, the pretax deferred losses related to our interest rate swap agreements included in other comprehensive income totaled $10.9 million and $15.9 million, respectively.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

 

Information regarding our cash flow hedge transactions is as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Gain recognized AOCI, pretax

 

  $

(2,512

)

 

  $

(3,347

)

 

  $

(5,021

)

 

  $

(8,076

)

 

Gain arising from ineffectiness reducing interest expense

 

  $

(9

)

 

  $

(19

)

 

  $

(40

)

 

  $

(77

)

 

Deferred losses/(gains) reclassed from AOCI to interest expense

 

  $

(14

)

 

  $

316

 

 

  $

(15

)

 

  $

1,201

 

 

 

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Table of Contents

 

 

 

September 30,

 

December 31,

 

(In thousands, except months)

 

2012

 

2011

 

Aggregate notional value of current derivatives outstanding

 

$

630,000 

 

 

$

530,000 

 

 

Aggregate notional value of forward derivatives outstanding

 

$

175,000 

 

 

$

200,000 

 

 

Period through which derivative positions currently exist

 

March 2016

 

 

June 2015

 

 

Fair value of derivatives

 

$

10,936 

 

 

$

15,981 

 

 

Deferred losses included in AOCI (pretax)

 

$

10,927 

 

 

$

15,932 

 

 

Losses included in AOCI to be recognized in the next 12 months

 

$

13

 

 

$

65 

 

 

Number of months over which loss in OCI is to be recognized

 

6

 

 

15

 

 

 

8.     SHARE-BASED COMPENSATION

 

The following table summarizes total compensation costs recognized for share-based payments during the quarters and nine-month periods ended September 30, 2012 and 2011:

 

 

 

Quarter Ended

 

Nine Months

 

 

 

September 30,

 

Ended September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Restricted stock

 

 $

328

 

 

 $

345

 

 

 $

978

 

 

 $

1,036

 

 

Performance shares

 

266

 

 

237

 

 

706

 

 

636

 

 

Total

 

 $

594

 

 

 $

582

 

 

 $

1,684

 

 

 $

1,672

 

 

 

Stock-based compensation expense is included in “selling, general and administrative expenses” in the accompanying statements of operations.

 

As of September 30, 2012, total unrecognized compensation costs related to nonvested Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”) was $2.8 million and will be recognized over a weighted-average period of approximately 0.93 years.

 

The following table summarizes the RSA and PSA activity during the nine-month period ended September 30, 2012:

 

 

 

RSAs

 

PSAs

 

 

 

Shares

 

Weighted
Avegerage Grant
Date Fair Value

 

Shares

 

Weighted
Avegerage Grant
Date Fair Value

 

Non-vested shares outstanding - January 1, 2012

 

129,203

 

 

  $

17.79

 

 

50,879

 

 

  $

17.04

 

 

Shares granted

 

14,732

 

 

19.30

 

 

67,040

 

 

17.92

 

 

Shares cancelled

 

-   

 

 

 

 

 

-   

 

 

-   

 

 

Shares vested

 

-   

 

 

 

 

 

-   

 

 

-   

 

 

Non-vested shares outstanding - September 30, 2012

 

143,935

 

 

  $

17.94

 

 

117,919

 

 

  $

17.54

 

 

 

9.               PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

 

Qualified Retirement Plans

 

We sponsor a defined-benefit pension plan (“Retirement Plan”) that is non-contributory covering certain of our hourly employees who fulfill minimum age and service requirements.  Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.

 

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The following table summarizes the components of net periodic pension cost for the qualified retirement plan for the quarters and nine-month periods ended September 30, 2012 and 2011:

 

 

 

Quarter Ended

 

Nine Months

 

 

 

September 30,

 

Ended September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

 $

175

 

 

 $

319

 

 

 $

888

 

 

 $

957

 

 

Interest cost

 

2,546

 

 

2,725

 

 

7,801

 

 

8,175

 

 

Expected return on plan assets

 

(3,364

)

 

(2,723

)

 

(8,586

)

 

(8,169

)

 

Net amortization loss

 

265

 

 

188

 

 

1,861

 

 

564

 

 

Prior service credit amortization

 

(128

)

 

(41

)

 

(211

)

 

(123

)

 

Net periodic pension (benefit) cost

 

 $

(506

)

 

 $

468

 

 

 $

1,753

 

 

 $

1,404

 

 

 

In July of 2012, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”), which includes pension funding stabilization provisions, was signed into law. These provisions establish an interest rate corridor which is designed to stabilize the segment rates used to determine minimum funding requirements from the effects of interest rate volatility, which is expected to reduce the Company’s minimum required pension contributions in the near-term.

 

During the quarter ended September 30, 2012, estimated annual pension cost was reduced $1.1 million based on the completion of the final actuarial calculations for 2012. This change in estimate increased net income by $0.7 million ($0.02 per share) during the quarter and nine-month period ended September 30, 2012.

 

As part of our acquisition of SureWest, we acquired and now maintain a frozen non-contributory defined-benefit pension plan (the “Pension Plan”), unfunded Supplemental Executive Retirement (“SERP”), and provide certain post-retirement benefits other than pensions (“Other Benefits Plan”). The Pension Plan covers certain eligible employees and benefits are based on years of service and the employee’s average compensation during the five highest consecutive years of the last ten years of credit service. SERP provides supplemental retirement benefits to certain of our retired executives by providing for incremental pension payments to partially offset the reduction that would have been payable under the Pension Plan if it were not for limitations imposed by federal income tax regulations. Other Benefits Plan provides life insurance benefits and a stated reimbursement for Medicare supplemental insurance to certain eligible employees.

 

The Pension Plan, SERP and Other Benefits Plans have previously been frozen so that no person is eligible to become a new participant and all future benefit accruals for existing participants have ceased.

 

The following table summarizes the benefit costs related to our Pension and SERP Plans:

 

(In thousands)

 

Quarter and Nine Months
Ended September 30,
2012

 

Interest cost

 

 $

1,582

 

 

Expected return on plan assets

 

(1,641

)

 

Net amortization loss

 

8

 

 

Net periodic pension benefit

 

 $

(51

)

 

 

Net periodic benefit costs related to the Other Benefits Plan were not significant to our condensed consolidated financial statements for the quarter and nine months ending September 30, 2012.

 

The weighted-average assumptions used to determine net periodic pension benefit cost for the SureWest Plans for 2012 were as follows:

 

 

 

Pension Plan

 

SERP

 

Other Benefits
Plan

 

Discount rate

 

4.43%

 

4.77%

 

3.22%

 

Expected long-term return on plan assets

 

7.20%

 

NA

 

7.20%

 

 

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Non-qualified Pension Plan

 

The Company also has non-qualified supplemental pension plans (“Restoration Plans”), which we acquired as part of our North Pittsburgh Systems, Inc. (“North Pittsburgh”) and TXU Communications Venture Company (“TXUCV”) acquisitions.  The Restoration Plans cover certain former employees of our Pennsylvania and Texas operations.  The Restoration Plans restores benefits that were precluded under the Retirement Plan by Internal Revenue Service limits on compensation and benefits applicable to qualified pension plans, and by the exclusion of bonus compensation from the Retirement Plan’s definition of earnings.

 

The following table summarizes the components of net periodic pension cost for the Restoration Plans for the quarters and nine-month periods ended September 30, 2012 and 2011:

 

 

 

Quarter Ended

 

Nine Months

 

 

 

September 30,

 

Ended September 30,

 

(In thousands)

 

 

2012

 

2011

 

2012

 

2011

 

Interest cost

 

 $

16

 

 

 $

14

 

 

 $

44

 

 

 $

42

 

 

Net amortization loss

 

7

 

 

9

 

 

29

 

 

27

 

 

Net periodic pension cost

 

 $

23

 

 

 $

23

 

 

 $

73

 

 

 $

69

 

 

 

Other Non-qualified Deferred Compensation Agreements

 

We also are liable for deferred compensation agreements with former members of the board of directors and certain other former employees of a subsidiary of TXUCV, which was acquired in 2004.  The benefits are payable for up to the life of the participant and may begin as early as age 65 or upon the death of the participant.  Participants accrue no new benefits as these plans had previously been frozen by TXUCV’s predecessor company prior to our acquisition of TXUCV.  Payments related to the deferred compensation agreements totaled approximately $0.1 million for both the three-month periods ended September 30, 2012 and 2011, respectively, and $0.4 million and $0.5 million for nine-month periods ended September 30, 2012 and 2011, respectively.  The net present value of the remaining obligations was approximately $2.1 million at September 30, 2012 and $2.5 million at December 31, 2011, and is included in pension and post-retirement benefit obligations in the accompanying balance sheets.

 

We also maintain 37 life insurance policies on certain of the participating former directors and employees.  We recognized $0.2 million and $0.4 million in life insurance proceeds as other non-operating income in the three and nine-month periods ended September 30, 2012.  We recognized $0.5 million in life insurance proceeds in other income for the three and nine-month periods ended September 30, 2011.  The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $1.9 million at September 30, 2012 and $2.0 million at December 31, 2011.  These amounts are included in investments in the accompanying balance sheets.  Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the statements of cash flows.

 

Post-retirement Benefit Obligation

 

We sponsor a healthcare plan and life insurance plan that provides post-retirement medical benefits and life insurance to certain groups of retired employees.  Retirees share in the cost of healthcare benefits, making contributions that are adjusted periodically—either based upon collective bargaining agreements or because total costs of the program have changed.  We generally pay the covered expenses for retiree health benefits as they are incurred.  Post-retirement life insurance benefits are fully insured.

 

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The following table summarizes the components of the net periodic costs for post-retirement benefits for the quarters and nine-month periods ended September 30, 2012 and 2011:

 

 

 

Quarter Ended

 

Nine Months

 

 

 

September 30,

 

Ended September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

 $

160

 

 

 $

116

 

 

 $

587

 

 

 $

561

 

 

Interest cost

 

419

 

 

471

 

 

1,247

 

 

1,269

 

 

Net prior service credit amortization

 

(46

)

 

(47

)

 

(141

)

 

(141

)

 

Net amortization gain

 

-

 

 

(160

)

 

-

 

 

(159

)

 

Net periodic postretirement benefit cost

 

 $

533

 

 

 $

380

 

 

 $

1,693

 

 

 $

1,530

 

 

 

10.        INCOME TAXES

 

There have been no changes to the balance of our unrecognized tax benefits reported at December 31, 2011.  As of September 30, 2012 and December 31, 2011, the amount of unrecognized tax benefits was $1.2 million.  The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is $0.8 million.  We do not expect any changes in our unrecognized tax benefits during the remainder of 2012.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At September 30, 2012, we had no material liability for interest or penalties and had no material interest or penalty expense.

 

The only periods subject to examination for our federal return are years 2008 through 2011.  The periods subject to examination for our state returns are years 2005 through 2011.  We are not currently under examination by federal taxing authorities.  We are currently under examination by state taxing authorities.  We do not expect any settlement or payment that may result from the audit to have a material effect on our results of operations or cash flows.

 

Our effective tax rate was 90.9% and 31.3% for the three month periods ended September 30, 2012 and 2011, respectively and 6.4% and 35.4% for the nine month periods ended September 30, 2012 and 2011 respectively.  The acquisition of SureWest on July 2, 2012 resulted in changes to our unitary state filings and correspondingly the Company’s state deferred income taxes.  These changes resulted in a net decrease of $1.3 million to our net state deferred tax liabilities and a corresponding decrease to our state tax provision.  In addition, we incurred non-deductible expenses in relation to the acquisition that resulted in an increase to our tax provision of $0.4 million.  We recognized these changes in the three month period ended September 30, 2012.

 

11.        COMMITMENTS AND CONTINGENCIES

 

Prior to the completion of the SureWest Merger on July 2, 2012, six putative class action lawsuits were filed by alleged SureWest shareholders challenging the Company’s proposed merger with SureWest in which the Company, WH Acquisition Corp. and WH Acquisition II Corp, SureWest and members of the SureWest board of directors have been named as defendants.  Five shareholder actions were filed in the Superior Court of California, Placer County, and one shareholder action was filed in the United States District Court for the Eastern District of California.  The actions are called Needles v. SureWest Communications, et al., filed February 17, 2012, Errecart v. Oldham, et al., filed February 24, 2012, Springer v. SureWest Communications, et al., filed March 9, 2012, Aievoli v. Oldham, et al., filed March 15, 2012, and Waterbury v. SureWest Communications, et al., filed March 26, 2012, and the federal action is called Broering v. Oldham, et al., filed April 18, 2012.  The actions generally allege, among other things, that each member of the SureWest board of directors breached fiduciary duties to SureWest and its shareholders by authorizing the sale of SureWest to the Company for consideration that allegedly was unfair to the SureWest shareholders and agreed to terms that allegedly unduly restrict other bidders from making a competing offer.  The complaints also allege that the Company and SureWest aided and abetted the breaches of fiduciary duties allegedly committed by the members of the SureWest board of directors.  The Broering complaint also alleges, among other things, that the joint proxy statement/prospectus filed with the SEC on March 28, 2012 did not make sufficient disclosures regarding the merger, that SureWest’s board should have appointed an independent committee to negotiate the transaction and that SureWest should have gone back to another bidder to create a competitive bid process.  The lawsuits seek equitable relief, including an order to prevent the defendants from consummating the merger on the agreed-upon terms and/or an award of unspecified monetary damages.  On March 14, 2012, the Placer County Superior Court entered an order consolidating the

 

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Needles, Errecart and Springer actions into a single action under the caption In re SureWest Communications Shareholder Litigation.  Under the terms of this order, all cases subsequently filed in the Superior Court for the State of California, County of Placer, that relate to the same subject matter and involve similar questions of law or fact were to be consolidated with these cases as well.  This included the Aievoli and Waterbury cases.  On April 10, 2012, the plaintiff in Waterbury filed a request for voluntary dismissal of her complaint without prejudice.  On May 18, 2012, pursuant to the parties’ stipulation, the federal Court entered an order staying the Broering action for 90 days. The federal Court subsequently extended the stay of the Broering action until December 31, 2012. On June 1, 2012, the parties entered into a proposed settlement of all of the shareholder actions without any admission of liability by the Company or the other defendants.  Pursuant to the proposed settlement, SureWest agreed to make, and subsequently made, certain additional disclosures in a Current Report on Form 8-K filed with the SEC in advance of the special meeting of SureWest shareholders held on June 12, 2012.  The proposed settlement also provided that plaintiffs’ counsel collectively are to receive attorneys’ fees of $0.5 million of which the Company is to pay $36 thousand, with the balance to be paid by SureWest and its insurer.  The proposed settlement is subject to approval by the Placer County Superior Court.  Upon approval by the court, the consolidated state court actions and the federal action will be dismissed with prejudice.

 

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs.  Salsgiver originally claimed to have sustained losses of approximately $125 million and did not request a specific dollar amount in damages.  We believe that these claims are without merit and that the alleged damages are completely unfounded.  We intend to defend against these claims vigorously.  In the third quarter of 2008, we filed preliminary objections and responses to Salsgiver’s complaint.  However, the court ruled against our preliminary objections.  On November 3, 2008, we responded to Salsgiver’s amended complaint and filed a counter-claim for trespass, alleging that Salsgiver attached cables to our poles without an authorized agreement and in an unsafe manner.  We are currently in the discovery and deposition stage.  Consolidated filed a motion for summary judgment on June 18, 2012 and the court heard oral arguments on August 30, 2012.  The judge requested additional information from the plaintiff within 20 days.  Salsgiver filed the plaintiff’s supplemental brief on September 19, 2012 and Consolidated filed its response to the plaintiff’s supplemental brief on October 9, 2012.  We anticipate the Judge to rule on our motion for summary judgment by December 31, 2012.

 

In addition, we have asked the FCC Enforcement Bureau to address Salsgiver’s unauthorized pole attachments and safety violations on those attachments.  We believe that these are violations of an FCC order regarding Salsgiver’s complaint against us.  We do not believe that these claims will have a material adverse impact on our financial results.

 

Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), received assessment notices from the Commonwealth of Pennsylvania Department of Revenue increasing the amounts owed for Pennsylvania Gross Receipt Taxes for the tax period ending December 31, 2009.  These two assessments adjusted the subsidiaries’ combined total outstanding taxable gross receipts liability (with interest) to approximately $2.3 million.  In addition, based upon recently completed audits of CCES for 2008, 2009 and 2010, we believe the Commonwealth of Pennsylvania may issue additional assessments totaling approximately $1.7 million for Gross Receipt Taxes allegedly owed.  Our CCPA subsidiary has also been notified by the Commonwealth of Pennsylvania that they will conduct a gross receipts audit for the calendar year 2008.  An appeal challenging the 2009 CCPA assessment was filed with the Department of Revenue’s Board of Appeals on September 15, 2011, and we filed a similar appeal for CCES with the Board of Appeals on November 11, 2011 challenging the 2009 CCES assessment.  We also intend to appeal any adverse decisions from the Board of Appeals involving CCPA or CCES to the Commonwealth’s Board of Finance and Revenue.  At the Board of Finance and Revenue, we anticipate that these matters will be continued pending the outcome of present litigation in Commonwealth Court between Verizon Pennsylvania, Inc. and the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  The Gross Receipts Tax issues in the Verizon Pennsylvania case are substantially the same as those presently facing CCPA and CCES.  In addition, there are numerous telecommunications carriers with Gross Receipts Tax matters dealing with the same issues that are in various stages of appeal before the Board of Finance and Revenue and the Commonwealth Court.  Those appeals by other similarly situated telecommunications carriers have been continued until resolution of the Verizon Pennsylvania case.  We believe

 

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that these assessments and the positions taken by the Commonwealth of Pennsylvania are without substantial merit.  We do not believe that the outcome of these claims will have a material adverse impact on our financial results.

 

Consolidated Communications currently provides telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace the Company as the provider of those services with a competitor, Securus Technologies, Inc.  We have challenged Securus’ bid, and the State’s decision to accept that bid, in a variety of different forums including: (i) protests with the Chief Procurement Officer of the Illinois Executive Ethics Commission, which were denied, (ii) a lawsuit filed in the Circuit Court of Sangamon County, Illinois that was dismissed, but is now under appeal in the Illinois Appellate Court Fourth District, (iii) a declaratory judgment action filed with the Illinois Commerce Commission and (iv) a complaint filed with the Illinois Procurement Policy Board.  In each of those challenges, we claimed either that Securus was not a responsible vendor, as defined by the State's bid solicitation document, and/or that rates for the services Securus proposes to provide are subject to regulatory limits below those Securus has proposed to charge. We do not believe the outcome of this proceeding will have a material impact on our consolidated financial position or results of operations.

 

We are from time to time involved in various other legal proceedings and regulatory actions arising out of our operations.  We do not believe that any of these, individually or in the aggregate, will have a material adverse effect upon our business, operating results or financial condition.

 

12 .        BUSINESS SEGMENTS

 

The Company is viewed and managed as two separate, but highly integrated, reportable business segments: “Telephone Operations” and “Other Operations”.  Telephone Operations consists of a wide range of telecommunications services, including local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  The financial results of SureWest are included in the Telephone Operations segment as of the date acquisition.  The Company also operates two complementary non-core businesses that comprise “Other Operations”, including telephone services to correctional facilities and equipment sales.  Management evaluates the performance of these business segments based upon net revenue and operating income.

 

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Table of Contents

 

 

 

Quarter Ended

 

Nine Months

 

 

 

September 30,

 

Ended September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Telephone operations

 

 $

149,423

 

 

 $

84,764

 

 

 $

319,518

 

 

 $

256,967

 

 

Other operations

 

7,589

 

 

7,784

 

 

23,863

 

 

23,645

 

 

Total net revenue

 

157,012

 

 

92,548

 

 

343,381

 

 

280,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense - telephone operations

 

102,866

 

 

48,433

 

 

205,765

 

 

146,175

 

 

Operating expense - other operations

 

6,816

 

 

6,737

 

 

21,215

 

 

21,332

 

 

Total operating expense

 

109,682

 

 

55,170

 

 

226,980

 

 

167,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization - telephone operations

 

37,047

 

 

21,953

 

 

80,640

 

 

65,678

 

 

Depreciation and amortization - other operations

 

205

 

 

208

 

 

618

 

 

628

 

 

Total depreciation expense

 

37,252

 

 

22,161

 

 

81,258

 

 

66,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income - telephone operations

 

9,510

 

 

14,378

 

 

33,113

 

 

45,114

 

 

Operating income - other operations

 

568

 

 

839

 

 

2,030

 

 

1,685

 

 

Total operating income

 

10,078

 

 

15,217

 

 

35,143

 

 

46,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(20,624

)

 

(13,447

)

 

(52,117

)

 

(37,783

)

 

Investment income

 

8,229

 

 

6,403

 

 

21,457

 

 

19,417

 

 

Other, net

 

232

 

 

516

 

 

431

 

 

953

 

 

(Loss) income before taxes

 

 $

(2,085

)

 

 $

8,689

 

 

 $

4,914

 

 

 $

29,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

Telephone operations

 

 $

28,259

 

 

 $

10,491

 

 

 $

50,314

 

 

 $

31,113

 

 

Other operations

 

10

 

 

53

 

 

106

 

 

133

 

 

Total

 

 $

28,269

 

 

 $

10,544

 

 

 $

50,420

 

 

 $

31,246

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2012

 

2011

 

 

Goodwill:

 

 

 

 

 

 

 

 

Telephone operations

 

 $

628,947

 

 

 $

519,542

 

 

 

Other operations

 

1,020

 

 

1,020

 

 

 

Total

 

 $

629,967

 

 

 $

520,562

 

 

 

 

 

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

 

 

 

Telephone operations (1)

 

 $

1,797,372

 

 

 $

1,187,708

 

 

 

Other operations

 

5,358

 

 

6,361

 

 

 

Total

 

 $

1,802,730

 

 

 $

1,194,069

 

 

 

 

 

(1) Included within the telephone operations segment assets are our equity method investments totaling $51.5 million and $48.3 million at September 30, 2012 and December 31, 2011, respectively.

 

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Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Certain statements included in this report, including that which relates to the impact on future revenue sources, pending and future regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new communications markets, are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward looking statements generally are identified by the words “believe”, “expect”, “anticipate”, “estimate”, “intend”, “should”, “may”, “will”, “would”, “will be”, “will continue” or similar expressions. Such forward looking statements involve known and unknown risks, the impact of current economic conditions, uncertainties and other factors that may cause actual results, performance or achievements of Consolidated Communications Holdings, Inc. (“Consolidated”, the “Company”, “we” or “our”) to be different from those expressed or implied in the forward-looking statements. 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 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“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 nine months ended September 30, 2012 included in Item 1 of this Quarterly Report on Form 10-Q.

 

Throughout MD&A, we refer to measures that are not a measure of financial performance in accordance with United States generally accepted accounting principles (“US GAAP” or “GAAP”).  We believe the use of these non-GAAP measures on a consolidated and segment 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.

 

Significant Recent Development

 

On July 2, 2012, we completed the merger with SureWest Communications (“SureWest”), which resulted in the acquisition of 100% of all the outstanding shares of SureWest for $23.00 per share in a cash and stock transaction.  The acquisition of SureWest provides additional diversification of the Company’s revenues and cash flows both geographically and by service type, which offers a platform for future growth and is expected to generate operational and capital cost synergies. SureWest provides a wide range of telecommunications, digital video, Internet, data and other facilities-based communications services in Northern California, primarily in the greater Sacramento region, and in the greater Kansas City, Kansas and Missouri areas.  For the year ended December 31, 2011, SureWest reported $248.1 million in total operating revenues.  For the six months ended June 30, 2012, SureWest generated $127.9 million in operating revenues.  The total purchase price of $550.8 million, consisted of cash and assumed debt of $402.4 million and 9,965,983 shares of the Company’s common stock valued at the Company’s opening stock price on July 2, 2012 of $14.89, which totaled $148.4 million. The cash portion of the merger consideration and the funds required to repay SureWest outstanding debt was financed with the sale of $300.0 million in aggregate principal amount of 10.875% Senior Notes due 2020 (“Senior Notes”).  The Company also used cash on hand and approximately $35.0 million in borrowings from its revolving credit facility.  Because the acquisition closed on July 2, 2012, the Company’s financial information does not include any of the results of operations from SureWest prior to the acquisition date.  The financial results of SureWest are included in the Telephone Operations segment as of the date of the acquisition.

 

Overview

 

We are an established telecommunications services company providing a wide range of services to residential and business customers in Illinois, Texas, Pennsylvania, California, Kansas and Missouri.  We offer a wide range of telecommunications services, including local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, directory publishing and Competitive Local Exchange Carrier (“CLEC”) services.  We also operate two non-core complementary businesses, prison services and equipment sales. We classify our operations into two reportable business segments: Telephone Operations and Other Operations.

 

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Telephone Operations Segment

 

Our Telephone Operations segment generated approximately 93% of our consolidated operating revenues during the nine-month period ended September 30, 2012, primarily from subscriptions to our voice, video and data services (“broadband services”) to residential and business customers. Revenues in the Telephone Operations segment increased $62.6 million during the nine months ended September 30, 2012 compared to the same period in 2011, primarily from the SureWest acquisition and growth in data, video and Internet connections. We expect our broadband service revenues to continue to grow as consumer and business demands for data based services increase.

 

We market our services to residential and business customers, either individually or as a bundled package.  Our “triple play” bundle includes telephone service, data service and video service. As of September 30, 2012, our video service was available to approximately 520,000 homes in Illinois, Texas, Pennsylvania, California, Kansas and Missouri markets. As of September 30, 2012, approximately 20% of the homes in the areas we serve subscribe to our video service. Data and Internet connections continue to increase as a result of enhanced product and service offerings, such as our VOIP service and data speeds of up to 50 megabits per second, depending on the geographic market availability.

 

The increase in Telephone Operations revenues during the nine months ended September 30, 2012 was offset by an anticipated industry wide trend of a decline in access lines and related use of services.  Many customers are choosing to subscribe to alternative communications services and competition for these subscribers continues to increase. Competition from wireless providers, competitive local exchange carriers and in some cases cable television providers has increased in recent years in the markets we serve.  We have been able to mitigate some of the access line losses through marketing initiatives and product offerings, such as our VOIP service.

 

Other Operations Segment

 

Our Other Operations segment is comprised of non-core business activities including prison services and business systems.  Prison services, which only operates primarily in Illinois, provides local and long-distance telephone service and automated calling service for correctional facilities.  Business systems sells and supports telecommunications equipment to business customers in Texas and Illinois.

 

Consolidated 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-month periods ended September 30, 2012 and 2011.

 

Financial Data

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,