Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 05/02/2014 16:05:49)

 

 

 

 

 

 

 

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 March 31, 2014

 

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 April 23, 2014, the registrant had 40,287,654 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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 6.

Exhibits

40

 

 

 

SIGNATURES

41

 



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; Amounts in thousands except per share amounts)

 

 

 

 

Quarter Ended March 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

Net revenues

 

$

149,648

 

 

$

151,528

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

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

 

55,300

 

 

55,052

 

Selling, general and administrative expenses

 

32,864

 

 

33,305

 

Depreciation and amortization

 

35,542

 

 

34,841

 

Income from operations

 

25,942

 

 

28,330

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest expense, net of interest income

 

(19,831

)

 

(24,600

)

Investment income

 

8,336

 

 

8,784

 

Other, net

 

(903

)

 

(107

)

Income from continuing operations before income taxes

 

13,544

 

 

12,407

 

 

 

 

 

 

 

 

Income tax expense

 

5,122

 

 

5,549

 

 

 

 

 

 

 

 

Income from continuing operations

 

8,422

 

 

6,858

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

-

 

 

24

 

 

 

 

 

 

 

 

Net income

 

8,422

 

 

6,882

 

Less: net income attributable to noncontrolling interest

 

98

 

 

99

 

Net income attributable to common shareholders

 

$

8,324

 

 

$

6,783

 

 

 

 

 

 

 

 

Net income per common share - basic and diluted

 

 

 

 

 

 

Income from continuing operations

 

$

0.20

 

 

$

0.17

 

Income from discontinued operations

 

-

 

 

-

 

Net income per basic and diluted common share attributable to common shareholders

 

$

0.20

 

 

$

0.17

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.39

 

 

$

0.39

 

 

 

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 March 31,

 

 

 

 

 

 

 

2014

 

2013

 

Net income

 

$

8,422

 

$

6,882

 

Pension and post-retirement obligations:

 

 

 

 

 

Amortization of actuarial (gains) losses and prior service credit to earnings, net of tax

 

(136)

 

474

 

Derivative instruments designated as cash flow hedges:

 

 

 

 

 

Change in fair value of derivatives, net of tax

 

-

 

(32)

 

Reclassification of realized loss to earnings, net of tax

 

408

 

2,290

 

Comprehensive income

 

8,694

 

9,614

 

Less: comprehensive income attributable to noncontrolling interest

 

98

 

99

 

Total comprehensive income attributable to common shareholders

 

$

8,596

 

$

9,515

 

 

 

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)

 

 

 

March 31,

 

December 31,

 

 

 

 

 

 

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,829

 

$

5,551

 

Accounts receivable, net

 

52,368

 

52,033

 

Income tax receivable

 

4,689

 

9,796

 

Deferred income taxes

 

7,960

 

7,960

 

Prepaid expenses and other current assets

 

14,151

 

12,380

 

Total current assets

 

85,997

 

87,720

 

 

 

 

 

 

 

Property, plant and equipment, net

 

875,467

 

885,362

 

Investments

 

112,585

 

113,099

 

Goodwill

 

603,446

 

603,446

 

Other intangible assets

 

37,628

 

40,084

 

Deferred debt issuance costs, net and other assets

 

17,891

 

17,667

 

Total assets

 

$

1,733,014

 

$

1,747,378

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

7,775

 

$

4,885

 

Advance billings and customer deposits

 

26,527

 

25,934

 

Dividends payable

 

15,607

 

15,520

 

Accrued compensation

 

17,333

 

22,252

 

Accrued interest

 

12,124

 

3,524

 

Accrued expense

 

31,008

 

35,173

 

Current portion of long-term debt and capital lease obligations

 

9,773

 

9,751

 

Current portion of derivative liability

 

694

 

660

 

Total current liabilities

 

120,841

 

117,699

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

1,204,873

 

1,212,134

 

Deferred income taxes

 

180,023

 

179,859

 

Pension and other postretirement obligations

 

71,066

 

75,754

 

Other long-term liabilities

 

10,000

 

9,593

 

Total liabilities

 

1,586,803

 

1,595,039

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 40,287,654 and 40,065,246 shares outstanding as of March 31, 2014 and December 31, 2013, respectively

 

403

 

401

 

Additional paid-in capital

 

141,933

 

148,433

 

Retained earnings

 

-

 

-

 

Accumulated other comprehensive loss, net

 

(728)

 

(1,000)

 

Noncontrolling interest

 

4,603

 

4,505

 

Total shareholders’ equity

 

146,211

 

152,339

 

Total liabilities and shareholders’ equity

 

$

1,733,014

 

$

1,747,378

 

 

 

See accompanying notes.

 

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Table of Contents

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

 

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

Net cash provided by continuing operations

 

$

48,394

 

$

37,723

 

Net cash used in discontinued operations

 

-

 

(1,531)

 

Net cash provided by operating activities

 

48,394

 

36,192

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment, net

 

(25,405)

 

(27,506)

 

Proceeds from sale of assets

 

1,241

 

21

 

Other

 

-

 

(84)

 

Net cash used in continuing operations

 

(24,164)

 

(27,569)

 

Net cash used in discontinued operations

 

-

 

(11)

 

Net cash used in investing activities

 

(24,164)

 

(27,580)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the issuance of long-term debt

 

10,000

 

13,000

 

Payment of capital lease obligation

 

(157)

 

(85)

 

Payment on long-term debt

 

(17,275)

 

(15,310)

 

Dividends on common stock

 

(15,520)

 

(15,447)

 

Net cash used in financing activities

 

(22,952)

 

(17,842)

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

1,278

 

(9,230)

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

5,551

 

17,854

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

6,829

 

$

8,624

 

 

 

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.

 

We offer a wide range of telecommunications services to residential and business customers in the areas we serve. Our telecommunications services include local and long-distance service, high-speed broadband Internet access, video services, digital telephone service (“VOIP”), custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, directory publishing, Competitive Local Exchange Carrier (“CLEC”) services and equipment sales.  As of March 31, 2014, we had approximately 254 thousand access lines, 122 thousand voice connections, 258 thousand data and Internet connections and 111 thousand video connections.

 

We historically operated our business as two separate reportable segments: Telephone Operations and Other Operations.  Based on changes in our business structure, during the quarter ended June 30, 2013 we concluded that we operate our business as one reportable segment. See the “Recent Business Developments” section below for a more detailed discussion regarding the circumstances that resulted in the change to our segment reporting.

 

In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of income, 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 2013 Annual Report on Form 10-K filed with the SEC.

 

Recent Business Developments

 

Segment Reporting

 

Historically, we classified our operations into two separate reportable business segments: Telephone Operations and Other Operations.  Our Telephone Operations consisted of a wide range of telecommunications services to residential and business customers, including local and long-distance service, high-speed broadband Internet access, video services, VOIP services, custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, mobile services and directory publishing.  Our Other Operations segment operated two complementary non-core businesses including telephone services to state and county correctional facilities (“Prison Services”) and equipment sales.  As discussed below, our contract to provide telephone services to correctional facilities operated by the Illinois Department of Corrections was not renewed and the process of transitioning those services to another service provider was completed during the quarter ended March 31, 2013.  The remaining Prison Services assets and operations were classified as discontinued operations during the quarter ended June 30, 2013 and subsequently sold during the quarter ended September 30, 2013.  Prison Services comprised nearly all of the Other Operations segment revenue and results of operations.  Consequently, with the cessation of our Prison Services business and based on the segment accounting guidance, we concluded that we operate as one segment as of the quarter ended June 30, 2013. As required by the authoritative guidance for segment presentation, segment results of operations have been retrospectively adjusted to reflect this change for all periods presented.

 

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Table of Contents

 

Prison Services Contract

 

We previously provided telephone service to inmates incarcerated at facilities operated by the Illinois Department of Corrections and to certain county jails.  On June 27, 2012, the Illinois Department of Central Management Services announced its intent to replace us as the provider of those services with a competitor. Although we challenged our competitor’s bid and the State’s decision to accept that bid in a variety of different forums, during the quarter ended March 31, 2013, the process of transitioning these services to another service provider was completed. All related assets have been assessed for recoverability in light of this change and we determined that no impairment was necessary.

 

Discontinued Operations

 

On September 13, 2013, we completed the sale of the assets and contractual rights used to provide communications services to inmates in thirteen county jails located in Illinois for a total purchase price of $2.5 million.  In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, “ Discontinued Operations ”, the financial results of the Prison Services business have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented. For a more complete discussion of the transaction, refer to Note 2.

 

Reclassifications

 

Certain amounts in our 2013 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2014 condensed consolidated financial statements, which consists of the effects of reclassifications from the presentation of Prison Services as a discontinued operation.

 

Recent Accounting Pronouncements

 

In April 2014, FASB issued the Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . ASU 2014-08 revises the definition of a discontinued operation to limit the circumstances under which a disposal or classification as held for sale qualifies for presentation as a discontinued operation. Amendments in this ASU require expanded disclosures concerning a discontinued operation and the disposal of an individually-material component of an entity not qualifying as a discontinued operation. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014 and should be applied prospectively, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

 

Effective January 1, 2014, we adopted Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . ASU 2013-11 provides guidance concerning the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is present. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

 

2.  DISCONTINUED OPERATIONS

 

In September 2013, we completed the sale of the assets and contractual rights of our Prison Services business for a total cash purchase price of $2.5 million, which included the settlement of any pending legal matters.  The financial results of the operations for Prison Services, which were previously reported in the Other Operations segment, have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented.

 

The following table summarizes the financial information for the Prison Services operations for the quarter ended March 31, 2013:

 

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Table of Contents

 

 

 

Quarter Ended
March 31,

 

(In thousands)

 

2013

 

Operating revenues

 

$

4,767

 

Operating expenses including depreciation and amortization

 

4,699

 

Income from operations

 

68

 

Income tax expense

 

44

 

Income from discontinued operations

 

$

24

 

 

3. EARNINGS PER SHARE

 

The computation of basic and diluted earnings per share attributable to common shareholders computed using the two-class method is as follows:

 

 

 

Quarter Ended

 

 

 

March 31,

 

(In thousands, except per share amounts)

 

2014

 

2013

 

Income from continuing operations

 

$

8,422

 

$

6,858

 

Less: net income attributable to noncontrolling interest

 

98

 

99

 

Income attributable to common shareholders before allocation of earnings to participating securities

 

8,324

 

6,759

 

Less: earnings allocated to participating securities

 

153

 

132

 

Income from continuing operations attributable to common shareholders

 

8,171

 

6,627

 

Net income from discontinued operations

 

-

 

24

 

Net income attributable to common shareholders

 

$

8,171

 

$

6,651

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

39,877

 

39,755

 

 

 

 

 

 

 

Basic and diluted earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

0.20

 

$

0.17

 

Income from discontinued operations, net of tax

 

0.00

 

0.00

 

Net income per common share attributable to common shareholders

 

$

0.20

 

$

0.17

 

 

Diluted earnings per common share attributable to common shareholders for the quarters ended March 31, 2014 and 2013, excludes 0.2 million shares of potential common shares that could be issued under our share-based compensation plan, because the inclusion of the potential common shares would have had an antidilutive effect.

 

4. INVESTMENTS

 

Our investments are as follows:

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2014

 

2013

 

Cash surrender value of life insurance policies

 

$

2,362

 

$

2,183

 

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

 

5,147

 

5,112

 

Other

 

200

 

200

 

Equity method investments:

 

 

 

 

 

GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)

 

27,141

 

27,467

 

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

 

7,533

 

7,696

 

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

 

23,866

 

24,105

 

CVIN, LLC (13.455% interest)

 

1,936

 

1,936

 

Totals

 

$

112,585

 

$

113,099

 

 

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Table of Contents

 

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 during the quarters ended March 31, 2014 or 2013 as no factors indicating impairment existed.  For the three-month periods ended March 31, 2014 and 2013, we received cash distributions from these partnerships totaling $3.5 million and $4.0 million, respectively.

 

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

 

Equity Method

 

We own 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  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 quarters ended March 31, 2014 and 2013, we received cash distributions from these partnerships totaling $5.6 million and $4.1 million, respectively.

 

We have a 13.455% interest in Central Valley Independent Network, LLC (“CVIN”), a joint enterprise comprised of affiliates of several independent telephone companies located in central and northern California. CVIN provides network services and oversees a broadband infrastructure project designed to expand and improve the availability of network services to counties in central California.  Because we have significant influence over the operating and financial policies of this entity, we account for this investment using the equity method.  During the quarter ended March 31, 2013, we made an additional capital investment of $0.1 million in this partnership.  We did not receive any distributions from this partnership during the quarters ended March 31, 2014 and 2013.

 

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

 

 

 

Quarter Ended

 

 

 

March 31,

 

(In thousands)

 

2014

 

2013

 

Total revenues

 

$

80,816

 

$

76,719

 

Income from operations

 

25,562

 

23,973

 

Net income before taxes

 

25,585

 

23,985

 

Net income

 

25,585

 

23,985

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2014

 

2013

 

Current assets

 

$

52,843

 

$

54,837

 

Non-current assets

 

88,635

 

87,968

 

Current liabilities

 

14,584

 

15,221

 

Non-current liabilities

 

2,166

 

1,786

 

Partnership equity

 

124,731

 

125,799

 

 

5.               FAIR VALUE MEASUREMENTS

 

Our derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using valuation models which rely 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

 

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Level 2 within the fair value hierarchy. See Note 7 for further discussion regarding our interest rate swap agreements.

 

Our interest rate swap liabilities measured at fair value on a recurring basis and subject to disclosure requirements at March 31, 2014 and December 31, 2013 were as follows:

 

 

 

 

 

As of March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(694)

 

$

 

$

(694)

 

$

 

Long-term interest rate swap liabilities

 

 

(1,727)

 

 

 

 

(1,727)

 

 

 

Total

 

$

(2,421)

 

$

 

$

(2,421)

 

$

 

 

 

 

 

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(660)

 

$

 

$

(660)

 

$

 

Long-term interest rate swap liabilities

 

(1,959)

 

 

(1,959)

 

 

Total

 

$

(2,619)

 

$

 

$

(2,619)

 

$

 

 

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 March 31, 2014 and December 31, 2013.

 

 

 

As of March 31, 2014

 

As of December 31, 2013

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

60,476

 

n/a

 

$

61,204

 

n/a

 

Investments, at cost

 

$

49,747

 

n/a

 

$

49,712

 

n/a

 

Long-term debt

 

$

1,209,681

 

$

1,265,299

 

$

1,216,764

 

$

1,261,508

 

 

Cost & Equity Method Investments

 

Our investments at March 31, 2014 and December 31, 2013 accounted for under both the equity and cost methods consisted primarily of minority positions in various cellular telephone limited partnerships and our investment in CoBank.  These investments are recorded using either the equity or cost methods. It is impracticable to determine fair value of these investments.

 

Long-term Debt

 

The fair value of our long-term debt was estimated using a discounted cash flow analyses based on incremental borrowing rates for similar types of borrowing arrangements.  We have categorized the long-term debt as Level 2 within the fair value hierarchy.

 

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6.               LONG-TERM DEBT

 

Long-term debt, presented net of unamortized discounts, consisted of the following:

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2014

 

2013

 

Senior secured credit facility:

 

 

 

 

 

Term Loan 4, net of discount of $4,391 and $4,537 at March 31, 2014 and December 31, 2013, respectively

 

  $

903,334

 

  $

905,463 

 

Revolving loan

 

8,000

 

13,000 

 

Senior notes, net of discount of $1,653 and $1,699 at March 31, 2014 and December 31, 2013, respectively

 

298,347

 

298,301 

 

Capital leases

 

4,965

 

5,121 

 

 

 

1,214,646

 

1,221,885 

 

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

 

(9,773)

 

(9,751)

 

Total long-term debt

 

  $

1,204,873

 

  $

1,212,134 

 

 

Credit Agreement

 

In December 2013, the Company, through certain of its wholly owned subsidiaries, entered into a Second Amended and Restated Credit Agreement with various financial institutions (the “Credit Agreement”) to replace the Company’s previously amended credit agreement.  The Credit Agreement consists of a $75.0 million revolving credit facility and initial term loans in the aggregate amount of $910.0 million (“Term 4”).  The proceeds from the Credit Agreement were used to repay the outstanding term loans from the previous agreement in its entirety.  The Credit Agreement also includes an incremental term loan facility which provides the ability to borrow up to $300.0 million of incremental term loans subject to certain terms and conditions.  Borrowings under the senior secured credit facility are secured by substantially all of the assets of the Company and its subsidiaries, with the exception of Illinois Consolidated Telephone Company and our majority-owned subsidiary, East Texas Fiber Line Incorporated.

 

The Term 4 loan was issued in an original aggregate principal amount of $910.0 million with a maturity date of December 23, 2020, but is subject to earlier maturity on December 31, 2019 if the Company’s unsecured Senior Notes due in 2020 (“Senior Notes”) are not repaid or redeemed in full by December 31, 2019.  The Term 4 loan contains an original issuance discount of $4.6 million, which is being amortized over the term of the loan.  The Term 4 loan requires quarterly principal payments of $2.3 million, which commenced March 31, 2014, and has an interest rate of LIBOR plus 3.25% subject to a 1.00% LIBOR floor.

 

Our revolving credit facility has a maturity date of December 23, 2018 and an applicable margin (at our election) of between 2.50% and 3.25% for LIBOR-based borrowings or between 1.50% and 2.25% for alternate base rate borrowings, depending on our leverage ratio.  Based on our leverage ratio at March 31, 2014, the borrowing margin for the next three month period ending June 30, 2014 will be at a weighted-average margin of 3.00% for a LIBOR-based loan or 2.00% for an alternate base rate loan.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.  As of March 31, 2014 and December 31, 2013, borrowings of $8.0 million and $13.0 million were outstanding under the revolving credit facility, respectively.  A stand-by letter of credit of $0.9 million, issued in connection with the Company’s insurance coverage, was outstanding under our revolving credit facility as of March 31, 2014.  The stand-by letter of credit is renewable annually and reduces the borrowing availability under the revolving credit facility.

 

The weighted-average interest rate on outstanding borrowings under our credit facility was 4.24% and 4.23% at March 31, 2014 and December 31, 2013, respectively.  Interest is payable at least quarterly.

 

Net proceeds from asset sales exceeding certain thresholds, to the extent not reinvested, are required to be used to repay loans outstanding under the Credit Agreement.

 

Credit Agreement Covenant Compliance

 

The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue capital stock.  We have agreed to maintain

 

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certain financial ratios, including interest coverage and total net leverage ratios, all as defined in the Credit Agreement.  As of March 31, 2014, we were in compliance with the Credit Agreement covenants.

 

In general, our Credit Agreement restricts our ability to pay dividends to the amount of our Available Cash as defined in our Credit Agreement.  As of March 31, 2014, and including the $15.6 million dividend declared in February 2014 and paid on May 1, 2014, we had $215.6 million in dividend availability under the credit facility covenant.

 

Under our Credit Agreement, if our total net leverage ratio (as defined in the Credit Agreement), as of the end of any fiscal quarter, is greater than 5.10:1.00, we will be required to suspend dividends on our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to fund acquisitions, or make other investments.  During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in Available Cash, among other things.  In addition, we will not be permitted to pay dividends if an event of default under the Credit Agreement has occurred and is continuing.  Among other things, it will be an event of default if our total net leverage ratio and interest coverage ratio as of the end of any fiscal quarter is greater than 5.25:1.00 and less than 2.25:1.00, respectively.  As of March 31, 2014, our total net leverage ratio under the Credit Agreement was 4.27:1.00, and our interest coverage ratio was 3.52:1.00.

 

Senior Notes

 

On May 30, 2012, we completed an offering of $300.0 million aggregate principal amount of 10.875% unsecured Senior Notes, due 2020 through our wholly-owned subsidiary, Consolidated Communications Finance Co. (“Finance Co.”) for the acquisition of SureWest Communications (“SureWest”).  The Senior Notes will mature on June 1, 2020 and earn interest at a rate of 10.875% per year, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2012.  The Senior Notes were sold in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (the “Securities Act”) and outside the United States in compliance with Regulation S under the Securities Act.  In addition, some of the Senior Notes were sold to certain “accredited investors” (as defined in Rule 501 under the Securities Act).  The Senior Notes were sold to investors at a price equal to 99.345% of the principal amount thereof, for a yield to maturity of 11.00%.  This discount is being amortized over the term of the Senior Notes.  Upon closing of the SureWest acquisition on July 2, 2012, Finance Co. merged with and into our wholly-owned subsidiary Consolidated Communications, Inc., (“CCI”) which assumed the Senior Notes, and we and certain of our subsidiaries fully and unconditionally guaranteed the Senior Notes.  On August 3, 2012, SureWest and its subsidiaries guaranteed the Senior Notes.

 

In 2013, we completed an exchange offer to issue registered notes (“Exchange Notes”) for $287.3 million of the original Senior Notes.  The terms of the Exchange Notes are substantially identical to the Senior Notes, except that the Exchange Notes are registered under the Securities Act and the transfer restrictions and registration rights applicable to the Senior Notes do not apply to the Exchange Notes.  The exchange offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.

 

Senior Notes Covenant Compliance

 

The indenture governing the Senior Notes contains customary covenants for high yield notes, which limits CCI’s and its restricted subsidiaries’ ability to: incur debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions.

 

Among other matters, the Senior Notes indenture provides that CCI may not pay dividends or make other “restricted payments” to the Company if its total net leverage ratio is 4.25:1.00 or greater.  This ratio is calculated differently than the comparable ratio under the Credit Agreement; among other differences, it takes into account on a pro forma basis synergies expected to be achieved as a result of the SureWest acquisition but not yet reflected in historical results.  At March 31, 2014, this ratio was 4.23:1.00.  If this ratio is met, dividends and other restricted payments may be made from cumulative consolidated cash flow since the date the Senior Notes were issued, less 1.75 times fixed charges, less dividends and other restricted payments made since the date the Senior Notes were issued.  Dividends may be paid and other restricted payments may also be made from a “basket” of $50.0 million, none of which has been used to date, and pursuant to other exceptions identified in the Senior

 

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Notes indenture.  Since dividends of $124.1 million have been paid since May 30, 2012, at March 31, 2014 there was $178.6 million of the $302.7 million of cumulative consolidated cash flow since May 30, 2012 available to pay dividends.

 

On March 19, 2014, CCI commenced a solicitation of consents from the eligible holders of the Senior Notes in order to amend the indenture governing the Senior Notes to (i) modify CCI’s Consolidated Leverage Ratio (as defined in the indenture governing the Senior Notes) level required before CCI (subject to certain other conditions specified in the indenture) can make Restricted Payments (as defined in the indenture) otherwise available under the consolidated cash flow builder basket from 4.25:1.00 to 4.50:1.00 and (ii) modify the size of a permitted lien basket for liens securing Indebtedness (as defined in the indenture) by amending the multiplier for CCI’s Consolidated Cash Flow (as defined in the indenture) in the calculation of such permitted lien basket from 2.50 to 2.75.  On April 1, 2014, the required consent of the holders of the Senior Notes was obtained and the consent solicitation expired, and we entered into a supplemental indenture effecting the proposed amendments as provided in the consent solicitation.  The amendment to the indenture with respect to modifying the size of a permitted lien basket for liens securing Indebtedness modified such provision in the indenture so that it would be the same as the equivalent provision in our Credit Agreement.  In connection with entering into the supplemental indenture, we paid consent fees of approximately $2.5 million, during the second quarter ended June 30, 2014, to the holders of the Senior Notes who validly consented to the proposed amendment.  The consent fees will be capitalized as deferred debt issuance costs and amortized over the term of the Senior Notes.

 

Capital Leases

 

As of March 31, 2014, we had seven capital leases which expire between 2015 and 2021.  As of March 31, 2014, the present value of the minimum remaining lease commitments was approximately $5.0 million, of which $0.7 million was due and payable within the next twelve months.  The leases require total remaining rental payments of $7.5 million as of March 31, 2014, of which $5.6 million will be paid to LATEL LLC, a related party entity.

 

7.               DERIVATIVE FINANCIAL INSTRUMENTS

 

We use derivative financial instruments to manage our exposure to the risks associated with fluctuations in interest rates. Our interest rate swap agreements effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  Derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet.  We may designate certain of our interest rate swaps as cash flow hedges of our expected future interest payments.  For derivative instruments designated as a cash flow hedge, the effective portion of the change in the fair value is recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and is recognized as an adjustment to earnings over the period in which the hedged item impacts earnings. When an interest rate swap agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt obligation.  If a derivative instrument is de-designated, the remaining gain or loss in AOCI on the date of de-designation is amortized to earnings over the remaining term of the hedging instrument. For derivative financial instruments that are not designated as a hedge, including those that have been de-designated, changes in fair value are recognized on a current basis in earnings.  The ineffective portion of the change in fair value of any hedging derivative is recognized immediately in earnings.  Cash flows from hedging activities are classified under the same category as the cash flows from the hedged items in our condensed consolidated statement of cash flows.

 

The following interest rate swaps were outstanding at March 31, 2014:

 

(In thousands)

 

Notional 
Amount

 

2014 Balance Sheet Location

 

Fair Value

 

 

 

 

 

 

 

 

 

De-designated Hedges:

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR

 

  $

150,000

 

Other long-term liabilities

 

  $

(1,581)

 

Fixed to 1-month floating LIBOR

 

125,000

 

Current portion of derivative liability

 

(694)

 

Fixed to 1-month floating LIBOR (with floor)

 

50,000

 

Other long-term liabilities

 

(146)

 

Total Fair Values

 

 

 

 

 

  $

(2,421)

 

 

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The following interest rate swaps were outstanding at December 31, 2013:

 

(In thousands)

 

Notional 
Amount

 

2013 Balance Sheet Location

 

Fair Value

 

 

 

 

 

 

 

 

 

De-designated Hedges:

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR

 

  $

175,000

 

Other long-term liabilities

 

  $

(1,897)

 

Fixed to 1-month floating LIBOR

 

100,000

 

Current portion of derivative liability

 

(660)

 

Fixed to 1-month floating LIBOR (with floor)

 

50,000

 

Other long-term liabilities

 

(62)

 

Total Fair Values

 

 

 

 

 

  $

(2,619)

 

 

As of March 31, 2014, the counterparties to our various swaps are four major U.S. and European banks.  None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties.  The swaps of any counterparty that is a “Lender” as defined in our credit facility are secured along with the other creditors under the credit facility.  Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties.  This provision allows us to partially mitigate the risk of non-performance by a counterparty.

 

In December 2013, $325.0 million notional interest rate swaps previously designated as cash flow hedges were de-designated as a result of the amendment to our Credit Agreement on December 23, 2013 as discussed in Note 6.  The interest rate swap agreements mature on various dates through September 2016.  In December 2012, interest rate swaps with an aggregate notional value of $660.0 million were de-designated as cash flow hedges in connection with the amendment to our previous credit agreement on December 4, 2012.  Of these agreements, $200.0 million notional interest rate swap agreements expired on December 31, 2012 and the remainder expired on March 31, 2013.  Prior to de-designation, the effective portion of the change in fair value of the interest rate swaps were recognized in AOCI.  The balance of the unrealized loss included in AOCI as of the date the swaps were de-designated is amortized to earnings over the remaining term of the swap agreements.  Changes in fair value of the de-designated swaps are immediately recognized in earnings as interest expense.  During the quarters ended March 31, 2014 and 2013, a gain of $0.2 million and $2.1 million, respectively, was recognized as a reduction to interest expense for the change in fair value of the de-designated swaps.

 

At March 31, 2014 and December 31, 2013, the pre-tax deferred losses related to our interest rate swap agreements included in AOCI were $2.0 million and $2.6 million, respectively.  The estimated amount of losses included in AOCI as of March 31, 2014 that will be recognized in earnings in the next twelve months is approximately $1.6 million.

 

Information regarding our cash flow hedge transactions is as follows:

 

 

 

Quarter Ended

 

 

 

March 31,

 

(In thousands)

 

2014

 

2013

 

Loss recognized in AOCI, pretax

 

 $

-   

 

 $

(52)

 

Deferred losses reclassed from AOCI to interest expense

 

 $

(659)

 

 $

(3,641)

 

 

8.               EQUITY

 

Share-Based Compensation

 

The following table summarizes total compensation costs recognized for share-based payments during the quarters ended March 31, 2014 and 2013:

 

 

 

Quarter Ended

 

 

 

March 31,

 

(In thousands)

 

2014

 

2013

 

Restricted stock

 

 $

517

 

 $

456

 

Performance shares

 

267

 

200

 

Total

 

 $

784

 

 $

656

 

 

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

 

As of March 31, 2014, total unrecognized compensation costs related to nonvested Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”) was $7.0 million and will be recognized over a weighted-average period of approximately 1.7 years.

 

The following table summarizes the RSA and PSA activity for the quarter ended March 31, 2014:

 

 

 

RSAs

 

PSAs

 

 

 

Shares

 

Weighted
Average Grant
Date Fair Value

 

Shares

 

Weighted
Average Grant
Date Fair Value

 

Non-vested shares outstanding - January 1, 2014

 

123,501

 

$

17.32

 

64,266

 

$

17.96

 

Shares granted

 

131,281

 

$

19.74

 

91,127

 

$

17.13

 

Non-vested shares outstanding - March 31, 2014

 

254,782

 

 

 

155,393

 

 

 

 

Accumulated Other Comprehensive Income

 

The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component for the quarter ended March 31, 2014:

 

 

 

Pension and

 

 

 

 

 

 

 

Post-Retirement

 

Derivative

 

 

 

(In thousands)

 

Obligations

 

Instruments

 

Total

 

Balance at December 31, 2013

 

$

643

 

$

(1,643)

 

$

(1,000)

 

Amounts reclassified from accumulated other comprehensive income

 

(136)

 

408

 

272

 

Net current period other comprehensive income

 

(136)

 

408

 

272

 

Balance at March 31, 2014

 

$

507

 

$

(1,235)

 

$

(728)

 

 

The following table summarizes reclassifications from accumulated other comprehensive loss for the quarters ended March 31, 2014 and 2013:

 

 

 

Amount Reclassified from AOCI

 

 

 

 

 

Quarter Ended March 31,

 

Affected Line Item in the

 

(In thousands)

 

2014

 

2013

 

Statement of Income

 

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

Prior service credit

 

$

80

 

$

116

 

(a)

 

Actuarial gain (loss)

 

142

 

(891)

 

(a)

 

 

 

222

 

(775)

 

Total before tax

 

 

 

(86)

 

301

 

Tax (expense) benefit

 

 

 

$

136

 

$

(474)

 

Net of tax

 

 

 

 

 

 

 

 

 

Loss on cash flow hedges:

 

 

 

 

 

 

 

Interest rate derivatives

 

$

(659)

 

$

(3,641)

 

Interest expense

 

 

 

251

 

1,351

 

Tax benefit

 

 

 

$

(408)

 

$

(2,290)

 

Net of tax

 

 

(a)  These items are included in the components of net periodic benefit cost for our pension and post-retirement benefit plans.  See Note 9 for additional details.

 

9.               PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS

 

Defined Benefit Plans

 

We sponsor a qualified defined benefit pension plan (“Retirement Plan”) that is non-contributory covering certain of our hourly employees who fulfill minimum age and service requirements.  Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.  In April 2013, the

 

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Retirement Plan was amended for certain employees under collective bargaining agreements to among other things: (i) change the benefit formula to a cash balance account as of May 1, 2013 and (ii) freeze entrance into the Retirement Plan so that no person is eligible to become a participant on or following May 1, 2013.  As of May 2013, all employees under collective bargaining agreements that include a defined benefit plan are on a cash balance plan.

 

In connection with our acquisition of SureWest, we assumed sponsorship in 2012 of a frozen non-contributory defined benefit pension plan (the “SureWest Plan”).  The SureWest Plan covers certain eligible employees and benefits are based on years of service and the employee’s average compensation during the five highest consecutive years of the last ten years of credited service.  This plan has previously been frozen so that no person is eligible to become a new participant and all future benefit accruals for existing participants have ceased.   As of January 1, 2014, the SureWest Plan was merged into and consolidated with the Retirement Plan.

 

We also have two non-qualified supplemental retirement plans (“Supplemental Plans”): the Restoration Plan, which we acquired as part of our North Pittsburgh Systems, Inc. (“North Pittsburgh”) and TXU Communications Venture Company (“TXUCV”) acquisitions, and a Supplemental Executive Retirement Plan (“SERP”), which we acquired as part of our acquisition of SureWest.  The Supplemental Plans provide supplemental retirement benefits to certain former employees by providing for incremental pension payments to partially offset the reduction that would have been payable under the qualified defined benefit pension plans if it were not for limitations imposed by federal income tax regulations. Both plans have previously been frozen so that no person is eligible to become a new participant in the Supplemental Plans.  These plans are unfunded and have no assets.  The benefits paid under the Supplemental Plans are paid from the general operating funds of the Company.

 

The following table summarizes the components of net periodic pension cost for our defined benefit plans for the quarters ended March 31, 2014 and 2013:

 

 

 

Quarter Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

(In thousands)

 

2014

 

2013

 

Service cost

 

$

140

 

$

304

 

Interest cost

 

4,073

 

3,862

 

Expected return on plan assets

 

(5,777)

 

(5,151)

 

Net amortization loss

 

5

 

891

 

Prior service credit amortization

 

(115)

 

(71)

 

Net periodic pension benefit

 

$

(1,674)

 

$

(165)

 

 

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 or to the beneficiary upon the death of the participant and may begin as early as age 55.  Participants accrue no new benefits as these plans had previously been frozen by TXUCV’s predecessor company prior to our acquisition of TXUCV.  Payments related to the deferred compensation agreements totaled approximately $0.1 million for each of the quarters ended March 31, 2014 and 2013.  The net present value of the remaining obligations was approximately $1.7 million and $1.8 million at March 31, 2014 and December 31, 2013, respectively, and is included in pension and post-retirement benefit obligations in the accompanying condensed consolidated balance sheets.

 

We also maintain 34 life insurance policies on certain of the participating former directors and employees.  The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $2.4 million at March 31, 2014 and $2.2 million at December 31, 2013.  These amounts are included in investments in the accompanying condensed consolidated balance sheets.  Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the condensed consolidated statements of cash flows.  We did not recognize any life insurance proceeds during the quarters ended March 31, 2014 and 2013.

 

Post-retirement Benefit Obligations

 

We sponsor a healthcare and life insurance plan (“Post-retirement Plan”) that provides post-retirement medical benefits and life insurance to certain groups of retired employees.  Retirees share in the cost of healthcare benefits,

 

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making contributions that are adjusted periodically—either based upon collective bargaining agreements or because total costs of the program have changed.  Covered expenses for retiree health benefits are paid as they are incurred.  Post-retirement life insurance benefits are fully insured.  The Post-retirement Plan is unfunded and has no assets, and benefits are paid from the general operating funds of the Company.

 

In connection with the acquisition of SureWest in 2012, we acquired its post-retirement benefit plan which provides life insurance benefits and a stated reimbursement for Medicare supplemental insurance to certain eligible retired participants.  This plan has previously been frozen so that no person is eligible to become a new participant.  Employer contributions for retiree medical benefits are separately designated within the SureWest Plan pension trust for the sole purpose of providing payments of retiree medical benefits.  The nature of the assets used to provide payment of retiree medical benefits is the same as that of the SureWest Plan.

 

 

 

Quarter Ended

 

 

 

 

 

 

 

March 31,

 

(In thousands)

 

2014

 

2013

 

Service cost

 

$

90

 

$

232

 

Interest cost

 

355

 

391

 

Expected return on plan assets

 

(55)

 

(58)

 

Net amortization (gain) loss

 

(147)

 

-

 

Net prior service cost (credit) amortization

 

35

 

(45)

 

Net periodic postretirement benefit cost

 

$

278

 

$

520

 

 

Contributions

 

We expect to contribute approximately $15.5 million to our pension plans and $2.5 million to our other post-retirement plans in 2014.  As of March 31, 2014, we have contributed $2.7 million and $0.7 million of the annual contribution to the pension plans and other post-retirement plans, respectively.

 

10.  INCOME TAXES

 

We did not have any unrecognized tax benefits as of March 31, 2014 and December 31, 2013.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At March 31, 2014, we did not have a material liability for interest or penalties and had no material interest or penalty expense.

 

The periods subject to examination for our federal return are years 2010 through 2012.  The periods subject to examination for our state returns are years 2005 through 2012.  We are currently under examination by federal and state taxing authorities.  We have received proposed assessments in connection with our federal examination for tax years ended December 31, 2010 and 2011.  We are in the process of responding to the IRS and providing support for our tax position.  We believe that our tax position will more likely than not be upheld based on the technical merits of our position.  Accordingly, we have not made any adjustments to our unrecognized tax benefits for the proposed assessments.  We do not expect any settlement or payment that may result from the audits to have a material effect on our results of operations or cash flows.

 

Our effective tax rate was 37.8% and 44.7% for the quarters ended March 31, 2014 and 2013, respectively. For the quarter ended March 31, 2013, the effective tax rate differed from the federal and state statutory rates primarily due to non-deductible compensation in relation to the acquisition of SureWest.  Exclusive of this adjustment, our effective tax rate for the three months ended March 31, 2013 would have been approximately 37.0%.

 

On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014.  We have evaluated these regulations and we do not expect they will have a material adverse impact on our consolidated results of operations, cash flows or financial position.

 

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11. COMMITMENTS AND CONTINGENCIES

 

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates (“Salsgiver”) filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs.  Salsgiver originally claimed to have sustained losses of approximately $125 million.  We believe that these claims are without merit and that the alleged damages are completely unfounded.  Discovery concluded and Consolidated filed a motion for summary judgment on June 18, 2012 and the court heard oral arguments on August 30, 2012.  On February 12, 2013, the court, in part, granted our motion.  The court ruled that Salsgiver could not recover prejudgment interest and could not use as a basis of liability any actions prior to April 14, 2006. In September 2013, in order to avoid the distraction and uncertainty of further litigation, we reached an agreement in principle (the “Agreement”) with Salsgiver, Inc.  In accordance with the terms of the Agreement, we will pay Salsgiver approximately $0.9 million in cash and grant approximately $0.3 million in credits that may be used for make-ready charges (the “Credits”).  The Credits will be available for services performed in connection with the pole attachment applications within five years of the execution of the agreement. We had previously recorded approximately $0.4 million in 2011 in anticipation of the settlement of this case.  During the quarter ended September 30, 2013, per the terms of the agreement we recorded an additional $0.9 million, which included estimated legal fees.  The agreement is contingent on appropriate documentation and there is no assurance that the agreement will be finalized.

 

Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), have, at various times, received assessment notices from the Commonwealth of Pennsylvania Department of Revenue (“DOR”) increasing the amounts owed for Pennsylvania Gross Receipt Taxes, and/or have had audits performed for the tax years of 2008, 2009, and 2010.  For the calendar years for which we received both additional assessment notices and audit actions, those issues have been combined by the DOR into a single Docket for each year.  For the CCES subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $1.9 million.  As of March 2013, all three of these cases have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  For the CCPA subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008, 2009, and 2010 is approximately $2.0 million.  As of December 2013, the cases for calendar years 2009 and 2010 have been appealed, and have received continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  The calendar year 2008 audit result was appealed to the Board of Finance and Revenue on March 19, 2014.  We anticipate that the 2008 case will be continued pending the outcome of the Verizon litigation as well.  The Gross Receipts Tax issues in the Verizon Pennsylvania case are substantially the same as those presently facing CCPA and CCES.  In addition, there are numerous telecommunications carriers with Gross Receipts Tax matters dealing with the same issues that are in various stages of appeal before the Board of Finance and Revenue and the Commonwealth Court.  Those appeals by other similarly situated telecommunications carriers have been continued until resolution of the Verizon Pennsylvania case.  We believe that these assessments and the positions taken by the Commonwealth of Pennsylvania are without substantial merit.  We do not believe that the outcome of these claims will have a material adverse impact on our financial results.

 

On January 18, 2012, we filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit to review the Federal Communications Commission’s (“FCC”) Order issued November 18, 2011 that reformed intercarrier compensation (“ICC”) and core parts of the Universal Service Fund (“USF”).  We are appealing five core issues in the November 18, 2011 FCC Order. This matter was heard by the U.S. Court of Appeals for the Tenth Circuit on November 19, 2013; however a decision is not expected before the third quarter of 2014.

 

In order for eligible telecommunications carriers (“ETCs”) to receive high-cost support, the USF/ICC Transformation Order requires states to certify on an annual basis that federal universal service high-cost support is used “only for the provision, maintenance, and upgrading of facilities and services for which the support is intended”.  States, in turn, require that ETCs file certifications with them as the basis for the state filings with the FCC. Failure to meet the annual data and certification deadlines can result in reduced support to the ETC based on the length of the delay in certification.  For the calendar year 2013, the California state certification was due to be filed with the FCC on or before October 1, 2012. We were notified in January 2013 that SureWest did not submit the required certification to the California Public Utilities Commission (“CPUC”) in time to be

 

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included in its October 1, 2012, submission to the FCC.  On January 24, 2013, we filed a certification with the CPUC and filed a petition with the FCC for a waiver of the filing deadline for the annual state certification. On February 19, 2013, the CPUC filed a certification with the FCC with respect to SureWest. On October 29, 2013, the Wireline Competition Bureau of the FCC denied our petition for a waiver of the annual certification deadline.  On November 26, 2013, we applied for a review of the decision made by the FCC staff by the full Commission.  Management believes, based on the change in SureWest Telephone’s USF filing status caused by the change in the ownership of SureWest Telephone, the lack of formal notice by the FCC regarding this change in filing status, the fact that SureWest Telephone had a previously-filed certification of compliance in effect with the FCC for the two quarters for which USF was withheld, and the FCC’s past practice of granting waivers to accept late filings in similar situations, that the Company should prevail in its application to the Commission and receive USF funding for the period January 1, 2013, through June 30, 2013. However, due to the denial of our petition by the Wireline Competition Bureau and the uncertainty of the collectability of the previously recognized revenues, in December 2013, we reversed the $3.0 million of previously recognized revenues of which $1.1 million was recognized in the three months ended March 31, 2013, until such time that the Commission has the opportunity to reach a decision on our application for review.

 

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

 

12 .  CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

Consolidated Communications, Inc. is the primary obligor under the unsecured Senior Notes it issued on May 30, 2012. We and the following of our subsidiaries: Consolidated Communications Enterprise Services, Inc., Consolidated Communications Services Company, Consolidated Communications of Fort Bend Company, Consolidated Communications of Texas Company, Consolidated Communications of Pennsylvania Company, LLC, SureWest Communications, SureWest Long Distance, SureWest Telephone, SureWest TeleVideo, SureWest Kansas, Inc., SureWest Fiber Ventures, LLC, have jointly and severally guaranteed the Senior Notes.  All of the subsidiary guarantors are our 100% direct or indirect wholly owned subsidiaries, and all guarantees are full, unconditional and joint and several with respect to principal, interest and liquidated damages, if any.  As such, we present condensed consolidating balance sheets as of March 31, 2014 and December 31, 2013, and condensed consolidating statements of operations and cash flows for the quarters ended March 31, 2014 and 2013 for each of the Company (Parent), Consolidated Communications, Inc. (Subsidiary Issuer), guarantor subsidiaries and other non-guarantor subsidiaries with any consolidating adjustments.  See Note 6 for more information regarding our Senior Notes.

 

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Condensed Consolidating Balance Sheet

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

Parent

 

Subsidiary
Issuer

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

-

 

  $

1,851

 

  $

2,250

 

  $

2,728

 

  $

-

 

  $

6,829

Accounts receivable, net

 

-

 

122

 

44,039

 

8,207

 

-

 

52,368

Income taxes receivable

 

19,308

 

-

 

-

 

-

 

(14,619)

 

4,689

Deferred income taxes

 

(61)

 

(7)

 

7,533

 

495

 

 

 

7,960

Prepaid expenses and other current assets

 

-

 

-

 

13,621

 

530

 

-

 

14,151

Total current assets

 

19,247

 

1,966

 

67,443

 

11,960

 

(14,619)

 

85,997

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

-

 

-

 

825,064

 

50,403

 

-

 

875,467

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles and other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

-

 

3,765

 

108,820

 

-

 

-

 

112,585

Investments in subsidiaries

 

1,126,932

 

353,737

 

12,393

 

-

 

(1,493,062)

 

-

Goodwill

 

-

 

-

 

537,265

 

66,181

 

-

 

603,446

Other intangible assets

 

-

 

-

 

28,541

 

9,087

 

-

 

37,628

Deferred debt issuance costs, net and other assets

 

-

 

13,181

 

4,710

 

-

 

-

 

17,891

Total assets

 

  $

1,146,179

 

  $

372,649

 

  $

1,584,236

 

  $

137,631

 

  $

(1,507,681)

 

  $

1,733,014

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

  $

-

 

  $

-

 

  $

7,775

 

  $

-

 

  $

-

 

  $

7,775

Advance billings and customer deposits

 

-

 

-

 

24,168

 

2,359

 

-

 

26,527

Dividends payable

 

15,607

 

-

 

-

 

-

 

-

 

15,607

Accrued compensation

 

-

 

-

 

15,606

 

1,727

 

-

 

17,333

Accrued interest

 

-

 

12,114

 

6

 

4

 

-

 

12,124

Accrued expense

 

43

 

-

 

29,292

 

1,673

 

-

 

31,008

Income tax payable

 

-

 

4,265

 

7,681

 

2,673

 

(14,619)

 

-

Current portion of long term debt and capital

 

 

 

 

 

 

 

 

 

 

 

 

lease obligations

 

-

 

9,100

 

605

 

68

 

-

 

9,773

Current portion of derivative liability

 

-

 

694

 

-

 

-

 

-

 

694

Total current liabilities

 

15,650

 

26,173

 

85,133

 

8,504

 

(14,619)

 

120,841

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

-

 

1,200,580

 

3,499

 

794

 

-

 

1,204,873

Advances due to/from affiliates, net

 

1,010,493

 

(1,981,985)

 

1,013,048

 

(41,556)

 

-

 

-

Deferred income taxes

 

(21,598)

 

(778)

 

184,143

 

18,256

 

 

 

180,023

Pension and postretirement benefit obligations

 

-

 

-

 

58,604

 

12,462

 

-

 

71,066

Other long-term liabilities

 

26

 

1,727

 

7,970

 

277

 

-

 

10,000

Total liabilities

 

1,004,571

 

(754,283)

 

1,352,397

 

(1,263)

 

(14,619)

 

1,586,803

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

403

 

-

 

17,411

 

30,000

 

(47,411)

 

403

Other shareholders’ equity

 

141,205

 

1,126,932

 

209,825

 

108,894

 

(1,445,651)

 

141,205

Total Consolidated Communications Holdings, Inc. shareholders’ equity

 

141,608

 

1,126,932

 

227,236

 

138,894

 

(1,493,062)

 

141,608

Noncontrolling interest

 

-

 

-

 

4,603

 

-

 

-

 

4,603

Total shareholders’ equity

 

141,608

 

1,126,932

 

231,839

 

138,894

 

(1,493,062)

 

146,211

Total liabilities and shareholders’ equity

 

  $

1,146,179

 

  $

372,649

 

  $

1,584,236

 

  $

137,631

 

  $

(1,507,681)

 

  $

1,733,014

 

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Table of Contents

 

Condensed Consolidating Balance Sheet

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

Parent

 

Subsidiary
Issuer

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

-

 

  $

86

 

  $

2,366

 

  $

3,099

 

  $

-

 

  $

5,551

Accounts receivable, net

 

-

 

502

 

44,521

 

7,010

 

-

 

52,033

Income taxes receivable

 

9,346

 

-

 

370

 

80

 

-

 

9,796

Deferred income taxes

 

(61)

 

(7)

 

7,533

 

495

 

-

 

7,960

Prepaid expenses and other current assets

 

-

 

-

 

11,862

 

518

 

-

 

12,380

Total current assets

 

9,285

 

581

 

66,652

 

11,202

 

-

 

87,720

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

-

 

-

 

834,199

 

51,163

 

-

 

885,362

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles and other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

-

 

3,729

 

109,370

 

-

 

-

 

113,099

Investments in subsidiaries

 

1,101,039

 

335,659

 

12,130

 

-

 

(1,448,828)

 

-

Goodwill

 

-

 

-

 

537,265

 

66,181

 

-

 

603,446

Other intangible assets

 

-

 

-

 

30,997

 

9,087

 

-

 

40,084

Deferred debt issuance costs, net and other assets

 

-

 

13,620

 

4,047

 

-

 

-

 

17,667

Total assets

 

  $

1,110,324

 

  $

353,589

 

  $

1,594,660

 

  $

137,633

 

  $

(1,448,828)

 

  $

1,747,378

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

  $

-

 

  $

-

 

  $

4,885

 

  $

-

 

  $

-

 

  $

4,885

Advance billings and customer deposits

 

-

 

-

 

23,699

 

2,235

 

-

 

25,934

Dividends payable

 

15,520

 

-

 

-

 

-

 

-

 

15,520

Accrued compensation

 

-

 

-

 

20,447

 

1,805

 

-

 

22,252

Accrued interest

 

-

 

3,514

 

6

 

4

 

-

 

3,524

Accrued expense

 

224

 

875

 

32,703

 

1,371

 

-

 

35,173

Current portion of long term debt and capital

 

 

 

 

 

 

 

 

 

 

 

 

lease obligations

 

-

 

9,100

 

586

 

65

 

-

 

9,751

Current portion of derivative liability

 

-

 

660

 

-

 

-

 

-

 

660

Total current liabilities

 

15,744

 

14,149

 

82,326

 

5,480

 

-

 

117,699

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

-

 

1,207,663

 

3,659

 

812

 

-

 

1,212,134

Advances due to/from affiliates, net

 

968,319

 

(1,970,192)

 

1,037,969

 

(36,096)

 

-

 

-

Deferred income taxes

 

(21,598)

 

(1,029)

 

184,209

 

18,277

 

-

 

179,859

Pension and postretirement benefit obligations

 

-

 

-

 

61,053

 

14,701

 

-

 

75,754

Other long-term liabilities

 

25

 

1,960

 

7,328

 

280

 

-

 

9,593

Total liabilities

 

962,490

 

(747,449)

 

1,376,544

 

3,454

 

-

 

1,595,039

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

401

 

-

 

17,411

 

30,000

 

(47,411)

 

401

Other shareholders’ equity

 

147,433

 

1,101,038

 

196,200

 

104,179

 

(1,401,417)

 

147,433

Total Consolidated Communications Holdings, Inc. shareholders’ equity

 

147,834

 

1,101,038

 

213,611

 

134,179

 

(1,448,828)

 

147,834

Noncontrolling interest

 

-

 

-

 

4,505

 

-

 

-

 

4,505

Total shareholders’ equity

 

147,834

 

1,101,038

 

218,116

 

134,179

 

(1,448,828)

 

152,339

Total liabilities and shareholders’ equity

 

  $

1,110,324

 

  $

353,589

 

  $

1,594,660

 

  $

137,633

 

  $

(1,448,828)

 

  $

1,747,378

 

20



Table of Contents

 

Condensed Consolidating Statements of Operations

(amounts in thousands)

 

 

 

Quarter Ended March 31, 2014

 

 

Parent

 

Subsidiary
Issuer

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

Net revenues

 

  $

-    

 

  $

69

 

  $

136,255

 

  $

16,758

 

  $

(3,434)

 

  $

149,648

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

-

 

-

 

55,252

 

3,304

 

(3,256)

 

55,300

Selling, general and administrative expenses

 

877

 

39

 

27,631

 

4,495

 

(178)

 

32,864

Depreciation and amortization

 

-

 

-

 

33,647

 

1,895

 

-

 

35,542

Operating income (loss)

 

(877)

 

30

 

19,725

 

7,064

 

-

 

25,942

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(2)

 

(19,820)

 

(2)

 

(7)

 

-

 

(19,831)

Intercompany interest income (expense)

 

(26,380)

 

31,425

 

(5,496)

 

451

 

-

 

-

Investment income

 

-

 

36

 

8,300

 

-

 

-

 

8,336

Equity in earnings of subsidiaries, net

 

25,621

 

18,215

 

263

 

-

 

(44,099)

 

-

Other, net

 

-

 

-

 

(899)

 

(4)

 

-

 

(903)

Income (loss) from continuing operations before income taxes

 

(1,638)

 

29,886

 

21,891

 

7,504

 

(44,099)

 

13,544

Income tax expense (benefit)

 

(9,962)

 

4,265

 

8,066

 

2,753

 

-

 

5,122

Income (loss) from continuing operations

 

8,324

 

25,621

 

13,825

 

4,751

 

(44,099)

 

8,422

Discontinued operations, net of tax

 

-

 

-

 

 

 

-

 

-

 

-

Net income (loss)

 

8,324

 

25,621

 

13,825

 

4,751

 

(44,099)

 

8,422

Less: net income attributable to noncontrolling interest

 

-

 

-

 

98

 

-

 

-

 

98

Net income (loss) attributable to Consolidated Communications Holdings, Inc.

 

  $

8,324

 

  $

25,621

 

  $

13,727

 

  $

4,751

 

  $

(44,099)

 

  $

8,324

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) attributable to common shareholders