Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 11/10/2014 15:42:11)

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, 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 October 27, 2014, the registrant had 50,433,553 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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 6.

Exhibits

46

 

 

 

SIGNATURES

47

 


 


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 September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

149,040

 

 

$

150,773

 

 

$

449,724

 

 

$

453,621

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

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

 

56,435

 

 

55,780

 

 

167,653

 

 

166,774

Selling, general and administrative expenses

 

32,659

 

 

33,715

 

 

97,945

 

 

100,385

Financing and other transaction costs

 

729

 

 

355

 

 

1,995

 

 

712

Depreciation and amortization

 

34,968

 

 

34,756

 

 

106,515

 

 

104,306

Income from operations

 

24,249

 

 

26,167

 

 

75,616

 

 

81,444

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(20,721

)

 

(20,632

)

 

(60,280

)

 

(65,929)

Investment income

 

8,315

 

 

9,687

 

 

25,964

 

 

27,164

Other, net

 

293

 

 

(687

)

 

(862

)

 

(712)

Income from continuing operations before income taxes

 

12,136

 

 

14,535

 

 

40,438

 

 

41,967

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

4,387

 

 

4,205

 

 

14,380

 

 

15,219

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

7,749

 

 

10,330

 

 

26,058

 

 

26,748

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

-

 

 

92

 

 

-

 

 

(156)

Gain on sale of discontinued operations, net of tax

 

-

 

 

1,333

 

 

-

 

 

1,333

Total discontinued operations

 

-

 

 

1,425

 

 

-

 

 

1,177

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

7,749

 

 

11,755

 

 

26,058

 

 

27,925

Less: net income attributable to noncontrolling interest

 

107

 

 

61

 

 

285

 

 

254

Net income attributable to common shareholders

 

$

7,642

 

 

$

11,694

 

 

$

25,773

 

 

$

27,671

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

 

$

0.26

 

 

$

0.63

 

 

$

0.65

Discontinued operations, net of tax

 

-

 

 

0.03

 

 

-

 

 

0.03

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

 

$

0.19

 

 

$

0.29

 

 

$

0.63

 

 

$

0.68

Dividends declared per common share

 

$

0.39

 

 

$

0.39

 

 

$

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,

 

 

2014

 

2013

 

2014

 

2013

Net income

 

$

7,749

 

 

$

11,755

 

 

$

26,058

 

 

$

27,925

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(136

)

 

433

 

 

(408

)

 

1,381

 

Derivative instruments designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of tax

 

-

 

 

(417

)

 

-

 

 

(285

)

Reclassification of realized loss to earnings, net of tax

 

290

 

 

566

 

 

1,001

 

 

3,411

 

Comprehensive income

 

7,903

 

 

12,337

 

 

26,651

 

 

32,432

 

Less: comprehensive income attributable to noncontrolling interest

 

107

 

 

61

 

 

285

 

 

254

 

Total comprehensive income attributable to common shareholders

 

$

7,796

 

 

$

12,276

 

 

$

26,366

 

 

$

32,178

 

 

See accompanying notes.

 

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

4,890

 

 

  $

5,551

 

Restricted cash

 

204,803

 

 

-

 

Accounts receivable, net

 

51,388

 

 

52,033

 

Income tax receivable

 

804

 

 

9,796

 

Deferred income taxes

 

8,905

 

 

7,960

 

Prepaid expenses and other current assets

 

13,756

 

 

12,380

 

Total current assets

 

284,546

 

 

87,720

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

859,620

 

 

885,362

 

Investments

 

113,594

 

 

113,099

 

Goodwill

 

603,446

 

 

603,446

 

Other intangible assets

 

33,018

 

 

40,084

 

Deferred debt issuance costs, net and other assets

 

19,231

 

 

17,667

 

Total assets

 

  $

1,913,455

 

 

  $

1,747,378

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

  $

4,991

 

 

  $

4,885

 

Advance billings and customer deposits

 

23,512

 

 

25,934

 

Dividends payable

 

15,607

 

 

15,520

 

Accrued compensation

 

17,534

 

 

22,252

 

Accrued interest

 

12,433

 

 

3,524

 

Accrued expense

 

33,008

 

 

35,173

 

Current portion of long-term debt and capital lease obligations

 

9,809

 

 

9,751

 

Current portion of derivative liability

 

877

 

 

660

 

Total current liabilities

 

117,771

 

 

117,699

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

1,407,354

 

 

1,212,134

 

Deferred income taxes

 

180,204

 

 

179,859

 

Pension and other postretirement obligations

 

60,822

 

 

75,754

 

Other long-term liabilities

 

12,463

 

 

9,593

 

Total liabilities

 

1,778,614

 

 

1,595,039

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 40,289,154 and 40,065,246 shares outstanding as of September 30, 2014 and December 31, 2013, respectively

 

403

 

 

401

 

Additional paid-in capital

 

130,055

 

 

148,433

 

Retained earnings

 

-

 

 

-

 

Accumulated other comprehensive loss, net

 

(407

)

 

(1,000

)

Noncontrolling interest

 

4,790

 

 

4,505

 

Total shareholders’ equity

 

134,841

 

 

152,339

 

Total liabilities and shareholders’ equity

 

  $

1,913,455

 

 

  $

1,747,378

 

 

See accompanying notes.

 

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

 

 

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

Net cash provided by continuing operations

 

  $

133,364

 

 

  $

124,053

 

Net cash used in discontinued operations

 

-

 

 

(3,412

)

Net cash provided by operating activities

 

133,364

 

 

120,641

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, plant and equipment, net

 

(76,038

)

 

(80,584

)

Proceeds from sale of assets

 

1,563

 

 

111

 

Restricted cash related to acquisition

 

(149,917

)

 

-

 

Other

 

-

 

 

(238

)

Net cash used in continuing operations

 

(224,392

)

 

(80,711

)

Net cash provided by discontinued operations

 

-

 

 

2,331

 

Net cash used in investing activities

 

(224,392

)

 

(78,380

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from bond offering

 

200,000

 

 

-

 

Restricted cash on bond offering

 

(54,886

)

 

-

 

Proceeds from the issuance of long-term debt

 

28,000

 

 

57,000

 

Payment of capital lease obligation

 

(481

)

 

(368

)

Payment on long-term debt

 

(32,825

)

 

(63,930

)

Payment of financing costs

 

(2,707

)

 

-

 

Dividends on common stock

 

(46,734

)

 

(46,526

)

Net cash provided by (used in) financing activities

 

90,367

 

 

(53,824

)

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(661

)

 

(11,563

)

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

5,551

 

 

17,854

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

  $

4,890

 

 

  $

6,291

 

 

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 September 30, 2014, we had approximately 245 thousand access lines, 119 thousand voice connections, 261 thousand data and Internet connections and 111 thousand video connections.

 

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 thereto included in our 2013 Annual Report on Form 10-K filed with the SEC.

 

Recent Business Developments

 

Enventis Merger

 

On June 29, 2014, we entered into an agreement and plan of merger with Enventis Corporation, a Minnesota corporation (“Enventis”), to acquire all the issued and outstanding shares of Enventis in exchange for shares of our common stock and cash in lieu of fractional shares. On October 16, 2014, the merger was completed and Enventis became a wholly owned subsidiary of the Company. For a more complete discussion of the transaction, refer to Note 2.

 

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

 

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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.

 

Recent Accounting Pronouncements

 

In August 2014, FASB issued the Accounting Standards Update No. 2014-15 (“ASU 2014-15”), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate for each annual and interim reporting period whether conditions or events give rise to substantial doubt that an entity has the ability to continue as a going concern within one year following issuance of the financial statements and requires specific disclosures regarding the conditions or events leading to substantial doubt. The new guidance is effective for annual and interim periods ending after December 15, 2016, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

 

In June 2014, FASB issued the Accounting Standards Update No. 2014-12 (“ASU 2014-12”), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period . ASU 2014-12 provides guidance requiring a performance target that could be achieved after the requisite service period has ended to be treated as a performance condition affecting vesting of the award and therefore not reflected in estimating the fair value of the award at the date of grant. The amended guidance is effective for annual and interim periods beginning on or after December 15, 2015, with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements.

 

In May 2014, FASB issued the Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 provides new, globally applicable converged guidance concerning recognition and measurement of revenue. As a result, significant additional disclosures are required about nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual and interim periods beginning on or after December 15, 2016. Companies are allowed to transition using either the modified retrospective or full retrospective adoption method. If full retrospective adoption is chosen, three years of financial information must be presented in accordance with the new standard as well as summarized financial data for five years. We are currently evaluating the impact this update will have on our condensed consolidated financial statements as well as the transition method we will use.

 

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.

 

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. ACQUISITION AND DISPOSITIONS

 

Merger with Enventis Corporation

 

On June 29, 2014, we entered into an agreement and plan of merger (the “Merger Agreement”) with Sky Merger Sub Inc., a newly formed Minnesota corporation and wholly-owned subsidiary of the Company, and Enventis, to acquire all the issued and outstanding shares of Enventis in exchange for shares of our common stock and cash in lieu of fractional shares. Enventis is an advanced communications provider, which services business and residential customers primarily in the upper Midwest. On October 16, 2014, the acquisition of Enventis was completed, and as a result, Enventis became a wholly-owned subsidiary of the Company. The acquisition reflects our strategy to diversify revenue and cash flows amongst multiple products and to expand our network to new markets.

 

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At the effective time of the merger, each share of common stock, no par value, of Enventis owned immediately prior to the effective time of the merger converted into and became the right to receive 0.7402 shares of common stock, par value of $0.01 per share, of our common stock plus cash in lieu of fractional shares, as set forth in the Merger Agreement. Based on the closing price of our common stock on the date preceding the merger, the total value of the purchase consideration to be exchanged is approximately $257.7 million, excluding the assumption of debt of approximately $149.9 million. On the date of the merger, we issued an approximate aggregate total of 10.1 million shares of our common stock to the former Enventis shareholders.

 

The acquisition will be accounted for in accordance with the acquisition method of accounting for business combinations. The tangible and intangible assets acquired and liabilities assumed will be recorded at their estimated fair values as of the date of the acquisition. The results of operations of Enventis will be reported in our consolidated financial statements beginning as of the effective date of the acquisition. Due to the limited time between the acquisition date and this filing, the initial accounting for the business combination and the valuation of the assets acquired and liabilities assumed has not been completed, including the measurement of certain intangible assets and goodwill and the preparation of supplemental pro forma information. We have not included pro forma revenue or earnings information of the combined entity as the information required to determine any pro forma adjustments is not available as of the date of this filing.

 

Upon closing of the Enventis acquisition or shortly thereafter, various triggering events occurred which will result in the payment of various change in control payments and other contingent payments to certain Enventis employees. The estimated cash payments under these agreements will be approximately $7.0 million and are expected to be paid in the second quarter of 2015.

 

Transaction costs related to the acquisition of Enventis were $0.7 million and $1.7 million during the quarter and nine months ended September 30, 2014, respectively, which are included in financing and other transaction costs in the condensed consolidated statements of income.

 

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 and nine months ended September 30, 2013:

 

 

 

Quarter Ended

 

Nine Months Ended

(In thousands)

 

September 30, 2013

 

September 30, 2013

Operating revenues

 

 $

373

 

 

 $

5,622

 

Operating expenses including depreciation and amortization

 

306

 

 

5,883

 

Income (loss) from operations

 

67

 

 

(261

)

Income tax benefit

 

(25

)

 

(105

)

Income (loss) from discontinued operations

 

 $

92

 

 

 $

(156

)

 

 

 

 

 

 

 

Gain on sale of discontinued operations, net of tax

 

 $

1,333

 

 

 $

1,333

 

 

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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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except per share amounts)

 

2014

 

2013

 

2014

 

2013

 

Income from continuing operations

 

$

7,749

 

$

10,330

 

$

26,058

 

$

26,748

 

Less: net income attributable to noncontrolling interest

 

107

 

61

 

285

 

254

 

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

 

7,642

 

10,269

 

25,773

 

26,494

 

Less: earnings allocated to participating securities

 

153

 

131

 

459

 

394

 

Income from continuing operations attributable to common shareholders

 

7,489

 

10,138

 

25,314

 

26,100

 

Net income from discontinued operations

 

-

 

1,425

 

-

 

1,177

 

Net income attributable to common shareholders

 

$

7,489

 

$

11,563

 

$

25,314

 

$

27,277

 

 

Weighted-average number of common shares outstanding

 

39,877

 

39,755

 

39,877

 

39,755

 

Basic and diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

$

0.26

 

$

0.63

 

$

0.65

 

Income from discontinued operations, net of tax

 

-

 

0.03

 

-

 

0.03

 

Net income per common share attributable to common shareholders

 

$

0.19

 

$

0.29

 

$

0.63

 

$

0.68

 

 

Diluted earnings per common share attributable to common shareholders for the quarter and nine months ended September 30, 2014 excludes 0.4 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. For the quarter and nine months ended September 30, 2013, diluted earnings per share excluded 0.4 million and 0.3 million potential common shares, respectively.

 

4. INVESTMENTS

 

Our investments are as follows:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2014

 

2013

 

Cash surrender value of life insurance policies

 

 $

1,898

 

 $

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

 

5,107

 

5,112

 

Other

 

200

 

200

 

Equity method investments:

 

 

 

 

 

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

 

28,020

 

27,467

 

Pennsylvania RSA 6(I) Limited Partnership (16.67% interest)

 

7,448

 

7,696

 

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

 

24,585

 

24,105

 

CVIN, LLC (12.09% interest)

 

1,936

 

1,936

 

Totals

 

 $

113,594

 

 $

113,099

 

 

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 practical to estimate fair value of these investments. We did not evaluate any of the investments for impairment during the quarters or nine months ended September 30, 2014 or 2013 as no factors indicating impairment existed. For the quarters ended September 30, 2014 and 2013, we received cash distributions from these partnerships totaling $3.8 million and $4.3 million, respectively. For the nine months ended September 30, 2014 and 2013, we received cash distributions from these partnerships totaling $11.1 million and $12.1 million, respectively.

 

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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”), 16.67% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”). RSA #17 provides cellular service to a limited rural area in Texas. RSA 6 (I) and RSA 6 (II) provide cellular service in and around our Pennsylvania service territory. Because we have significant influence over the operating and financial policies of these three entities, we account for the investments using the equity method. For the quarters ended September 30, 2014 and 2013, we received cash distributions from these partnerships totaling $3.8 million and $4.2 million, respectively. For the nine months ended September 30, 2014 and 2013, we received cash distributions from these partnerships totaling $14.2 million and $12.2 million, respectively.

 

We have a 12.09% 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 and nine months ended September 30, 2013, we made additional capital investments of $0.1 million and $0.2 million, respectively, in this partnership. We did not receive any distributions from this partnership during the quarters or nine months ended September 30, 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

 

Nine Months

 

 

 

September 30,

 

Ended September 30,

 

(In thousands)

 

2014 (1)

 

2013

 

2014 (2)

 

2013

 

Total revenues

 

$

69,219

 

$

82,394

 

$

233,263

 

$

238,455

 

Income from operations

 

18,473

 

25,874

 

67,779

 

74,762

 

Net income before taxes

 

24,273

 

25,896

 

73,635

 

74,808

 

Net income

 

24,273

 

25,896

 

73,635

 

74,808

 

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2014 (3)

 

2013

 

Current assets

 

$

56,915

 

$

54,837

 

Non-current assets

 

92,414

 

87,968

 

Current liabilities

 

14,816

 

15,221

 

Non-current liabilities

 

3,001

 

1,786

 

Partnership equity

 

131,512

 

125,799

 

 


(1)  Quarter ended September 30, 2014 excludes total revenue and income from operations of RSA 6(I), as the information was not available at the time of this filing; however estimated net income before taxes and net income are included.

 

(2)  Nine months ended September 30, 2014 excludes total revenue and income from operations of RSA 6(I) for the quarter ended September 30, 2014, as the information was not available at the time of this filing; however, estimated net income before taxes and net income are included.

 

(3)  Financial position as of September 30, 2014 for RSA 6(I) is as of June 30, 2014, which was the most recent available data at the time of this filing.

 

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

 

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Our interest rate swap liabilities measured at fair value on a recurring basis and subject to disclosure requirements at September 30, 2014 and December 31, 2013 were as follows:

 

 

 

 

 

As of September 30, 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

 

$

(877)

 

$

 

$

(877)

 

$

 

Long-term interest rate swap liabilities

 

(583)

 

 

 

(583)

 

 

 

Total

 

$

(1,460)

 

$

 

$

(1,460)

 

$

 

 

 

 

 

 

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 September 30, 2014 and December 31, 2013.

 

 

 

As of September 30, 2014

 

As of December 31, 2013

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

61,989

 

n/a

 

$

61,204

 

n/a

 

Investments, at cost

 

$

49,707

 

n/a

 

$

49,712

 

n/a

 

Long-term debt

 

$

1,412,522

 

$

1,456,281

 

$

1,216,764

 

$

1,261,508

 

 

Cost & Equity Method Investments

 

Our investments at September 30, 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:

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2014

 

2013

 

Senior secured credit facility:

 

 

 

 

 

Term Loan 4, net of discount of $4,096 and $4,537 at September 30, 2014 and December 31, 2013, respectively

 

 $

899,079

 

 $

905,463

 

Revolving loan

 

15,000

 

13,000

 

10.875% Senior notes due 2020, net of discount of $1,557 and $1,699 at September 30, 2014 and December 31, 2013, respectively

 

298,443

 

298,301

 

6.50% Senior notes due 2022

 

200,000

 

-

 

Capital leases

 

4,641

 

5,121

 

 

 

1,417,163

 

1,221,885

 

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

 

(9,809)

 

(9,751)

 

Total long-term debt

 

 $

1,407,354

 

 $

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 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 September 30, 2014, the borrowing margin for the next three month period ending December 31, 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 September 30, 2014 and December 31, 2013, borrowings of $15.0 million and $13.0 million, respectively, were outstanding under the revolving credit facility. 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 September 30, 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 4.23% at September 30, 2014 and December 31, 2013. 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.

 

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Credit Agreement Covenant Compliance

 

The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue capital stock. We have agreed to maintain certain financial ratios, including interest coverage and total net leverage ratios, all as defined in the Credit Agreement. As of September 30, 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 September 30, 2014, we had $230.4 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 September 30, 2014, our total net leverage ratio under the Credit Agreement was 4.35:1.00, and our interest coverage ratio was 3.51:1.00.

 

Senior Notes

 

6.50% Senior Notes

 

On September 18, 2014, Consolidated Communications Finance II Co., a wholly–owned subsidiary of the Company completed an offering of $200.0 million aggregate principal amount of 6.50% senior notes due in 2022 (the “2022 Notes”). Interest on the 2022 Notes is payable semi-annually on April 1 and October 1, commencing on April 1, 2015. The 2022 Notes were priced at par, which resulted in total gross proceeds of $200.0 million.

 

The proceeds from the sale of the 2022 Notes with interest payable through January 31, 2015 were held in an escrow account pending the completion of the Enventis acquisition. At September 30, 2014, restricted cash consisted of the $200.0 million of gross proceeds from the issuance of the 2022 Notes plus $4.8 million of interest held in the escrow account.

 

Upon closing of the Enventis acquisition, the obligations under the 2022 Notes were assumed by Consolidated Communications, Inc. (“CCI”) and were guaranteed by the Company and certain of its wholly-owned subsidiaries. On October 16, 2014, the net proceeds from the issuance of the 2022 Notes were released from escrow and used to finance the acquisition of Enventis including related fees and expenses, to repay the existing indebtedness of Enventis and to repurchase a portion of our 10.875% Senior Notes due 2020, as described below.

 

A portion of the 2022 Notes were sold to a trust, the beneficiary of which is a member of the Company’s Board of Directors (“related party”). The related party purchased $5.0 million of the 2022 Notes on the same terms available to other investors.

 

10.875% 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 (the “2020 Notes”). The 2020 Notes 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 2020 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 2020 Notes. CCI is the primary obligor under the 2020 Notes, and we and certain of our subsidiaries have fully and unconditionally guaranteed the 2020 Notes.

 

In 2013, we completed an exchange offer to issue registered notes (“Exchange Notes”) for $287.3 million of the original 2020 Notes. The terms of the Exchange Notes are substantially identical to the 2020 Notes, except that the Exchange Notes are registered under the Securities Act of 1933 and the transfer restrictions and registration rights applicable to the 2020 Notes do not apply to the Exchange Notes. The exchange offer did not impact the aggregate principal amount or the remaining terms of the 2020 Notes outstanding.

 

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On October 16, 2014, we redeemed $46.8 million of the original aggregate principal amount of the 2020 Notes at a price of 116.75%, plus accrued and unpaid interest.  In connection with the repurchase of the 2020 Notes, we paid $56.5 million and recognized a loss of approximately $9.4 million on the partial extinguishment of debt during the fourth quarter ended December 31, 2014.

 

Senior Notes Covenant Compliance

 

The indenture governing the 2020 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 2020 Notes indenture provides that CCI may not pay dividends or make other “restricted payments” to the Company if its total net leverage ratio is 4.50:1.00 or greater.  This ratio is calculated differently than the comparable ratio under the Credit Agreement; among other differences, it takes into account, on a pro forma basis, synergies expected to be achieved as a result of certain acquisitions but not yet reflected in historical results.  At September 30, 2014, this ratio was 4.38:1.00.  If this ratio is met, dividends and other restricted payments may be made from cumulative consolidated cash flow since the date the 2020 Notes were issued, less 1.75 times fixed charges, less dividends and other restricted payments made since the date the 2020 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 indenture.  Since dividends of $139.7 million have been paid since May 30, 2012, at September 30, 2014 there was $231.5 million of the $371.2 million of cumulative consolidated cash flow since May 30, 2012 available to pay dividends, exclusive of the quarterly dividend declared in July 2014 and payable on November 1, 2014.

 

On March 19, 2014, CCI commenced a solicitation of consents from the eligible holders of the 2020 Notes in order to amend the indenture governing the 2020 Notes to (i) modify CCI’s Consolidated Leverage Ratio (as defined in the indenture governing the 2020 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 2020 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, consent fees of $2.5 million paid to the holders of the 2020 Notes who validly consented to the proposed amendment were capitalized during the quarter ended June 30, 2014 as deferred debt issuance costs and amortized over the remaining term of the 2020 Notes.  Solicitation fees of $0.5 million were recognized as other expense in the condensed consolidated statements of income during the nine months ended September 30, 2014.

 

The indenture governing the 2022 Notes contains substantially the same covenants as the indenture governing the 2020 notes, except that the indenture governing the 2022 Notes provides that CCI may not pay dividends or make other “restricted payments” to the Company if its total net leverage ratio is 4.75:1.00 or greater.

 

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Bridge Loan Facility

 

In connection with the acquisition of Enventis, the Company entered into a $140.0 million senior unsecured bridge loan facility (“Bridge Facility”) on June 29, 2014 in order to fund the anticipated acquisition including the related fees and expenses and to repay the existing indebtedness of Enventis.  As anticipated, financing for the Enventis acquisition was completed through the 2022 Note offering, as described above, replacing the Bridge Facility on the closing date of the acquisition.  No amounts were drawn or funded under the Bridge Facility prior to replacement.  In connection with entering into the Bridge Facility, commitment fees of $1.4 million were capitalized during the quarter ended June 30, 2014 as deferred debt issuance costs and amortized over the expected life of the Bridge Facility through October 2014.

 

Capital Leases

 

As of September 30, 2014, we had seven capital leases which expire between 2015 and 2021.  As of September 30, 2014, the present value of the minimum remaining lease commitments was approximately $4.6 million, of which $0.7 million was due and payable within the next twelve months.  The leases require total remaining rental payments of $6.9 million as of September 30, 2014, of which $5.2 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 September 30, 2014:

 

(In thousands)

 

Notional Amount

 

2014 Balance Sheet Location

 

Fair Value

 

 

 

 

 

 

 

De-designated Hedges:

 

 

 

 

 

 

Fixed to 1-month floating LIBOR

 

 $

50,000

 

Other long-term liabilities

 

 $

(465)

Fixed to 1-month floating LIBOR

 

225,000

 

Current portion of derivative liability

 

(877)

Fixed to 1-month floating LIBOR (with floor)

 

50,000

 

Other long-term liabilities

 

(118)

Total Fair Values

 

 

 

 

 

 $

(1,460)

 

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 September 30, 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

 

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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.  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.  Subsequent to the de-designation of the interest rate swaps, changes in fair value of the de-designated swaps are immediately recognized in earnings as interest expense.  During the quarter and nine months ended September 30, 2014, a gain of $0.7 million and $1.2 million, respectively, was recognized as a reduction to interest expense for the change in fair value of the de-designated swaps.

 

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.  During the nine months ended September 30, 2013, a gain of $2.1 million was recognized as a reduction to interest expense for the change in fair value of the de-designated swaps.

 

At September 30, 2014 and December 31, 2013, the pre-tax deferred losses related to our interest rate swap agreements included in AOCI were $1.0 million and $2.6 million, respectively.  The estimated amount of losses included in AOCI as of September 30, 2014 that will be recognized in earnings in the next twelve months is approximately $1.0 million.

 

Information regarding our cash flow hedge transactions is as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(In thousands)

 

2014

 

2013

 

2014

 

2013

Gain recognized in AOCI, pretax

 

 $

-

 

 $

(673)

 

 $

-

 

 $

(460)

Deferred losses reclassed from AOCI to interest expense

 

 $

(468)

 

 $

(913)

 

 $

(1,616)

 

 $

(5,450)

 

8.     EQUITY

 

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, 2014 and 2013:

 

 

 

Quarter Ended

 

Nine Months

 

 

September 30,

 

Ended September 30,

(In thousands)

 

2014

 

2013

 

2014

 

2013

Restricted stock

 

 $

531

 

 $

466

 

 $

1,575

 

 $

1,383

Performance shares

 

417

 

328

 

1,097

 

851

Total

 

 $

948

 

 $

794

 

 $

2,672

 

 $

2,234

 

 

 

 

 

 

 

 

 

 

 

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

 

As of September 30, 2014, total unrecognized compensation costs related to nonvested Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”) was $5.2 million and will be recognized over a weighted-average period of approximately 1.2 years.

 

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The following table summarizes the RSA and PSA activity for the nine month period ended September 30, 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

 

132,781

 

 $

19.74

 

91,127

 

 $

17.13

Non-vested shares outstanding - September 30, 2014

 

256,282

 

 

 

155,393

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income

 

The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component for the nine month period ended September 30, 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

 

(408)

 

1,001

 

593

Net current period other comprehensive income

 

(408)

 

1,001

 

593

Balance at September 30, 2014

 

  $

235

 

  $

(642)

 

  $

(407)

 

 

 

 

 

 

 

 

The following table summarizes reclassifications from accumulated other comprehensive loss during the quarters and nine month periods ended September 30, 2014 and 2013:

 

 

 

Amount Reclassified from AOCI

 

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

Affected Line Item in the

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Statement of Income

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

 

 

 

Prior service credit

 

 $

80

 

 $

247

 

 $

239

 

 $

478

 

(a)

Actuarial gain (loss)

 

142

 

(957)

 

426

 

(2,739)

 

(a)

 

 

222

 

(710)

 

665

 

(2,261)

 

Total before tax

 

 

(86)

 

277

 

(257)

 

880

 

Tax (expense) benefit

 

 

 $

136

 

 $

(433)

 

 $

408

 

 $

(1,381)

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

Loss on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

 $

(468)

 

 $

(913)

 

 $

(1,616)

 

 $

(5,450)

 

Interest expense

 

 

178

 

347

 

615

 

2,039

 

Tax benefit

 

 

 $

(290)

 

 $

(566)

 

 $

(1,001)

 

 $

(3,411)

 

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 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.

 

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In connection with our acquisition of SureWest Communications (“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 and nine month periods ended September 30, 2014 and 2013:

 

 

 

Quarter Ended

 

Nine Months

 

 

September 30,

 

Ended September 30,

(In thousands)

 

2014

 

2013

 

2014

 

2013

Service cost

 

$

140

 

$

(51)

 

$

420

 

$

557

Interest cost

 

4,074

 

3,758

 

12,221

 

11,480

Expected return on plan assets

 

(5,776)

 

(5,188)

 

(17,329)

 

(15,490)

Net amortization loss

 

4

 

957

 

14

 

2,739

Prior service credit amortization

 

(114)

 

(202)

 

(343)

 

(343)

Net periodic pension benefit

 

$

(1,672)

 

$

(726)

 

$

(5,017)

 

$

(1,057)

 

 

 

 

 

 

 

 

 

 

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 September 30, 2014 and 2013 and $0.3 million and $0.4 million for the nine-month periods ended September 30, 2014 and 2013, respectively.  The net present value of the remaining obligations was approximately $1.5 million and $1.8 million at September 30, 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 28 life insurance policies on certain of the participating former directors and employees.  We recognized $0.2 million in life insurance proceeds as other non-operating income during the nine-month period ended September 30, 2014.  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, 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.

 

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, 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

 

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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.

 

The following table summarizes the components of net periodic pension cost for our post-retirement plans for the quarters and nine-month periods ended September 30, 2014 and 2013:

 

 

 

Quarter Ended

 

Nine Months

 

 

September 30,

 

Ended September 30,

(In thousands)

 

2014

 

2013

 

2014

 

2013

Service cost

 

 $

91

 

 $

231

 

 $

271

 

 $

694

Interest cost

 

354

 

398

 

1,064

 

1,181

Expected return on plan assets

 

(54)

 

(58)

 

(164)

 

(174)

Net amortization gain

 

(146)

 

-

 

(440)

 

-

Net prior service cost (credit) amortization

 

34

 

(45)

 

104

 

(135)

Net periodic postretirement benefit cost

 

 $

279

 

 $

526

 

 $

835

 

 $

1,566

 

 

 

 

 

 

 

 

 

 

Contributions

 

We expect to contribute approximately $11.1 million to our pension plans and $2.5 million to our other post-retirement plans in 2014.  As of September 30, 2014, we have contributed $9.3 million and $1.9 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 September 30, 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 September 30, 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 2013.  The periods subject to examination for our state returns are years 2009 through 2013.  We are currently under examination by federal 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 Internal Revenue Service (“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 36.2% and 28.9% for the quarters ended September 30, 2014 and 2013, respectively and 35.6% and 36.3% for the nine-month periods ended September 30, 2014 and 2013, respectively.  For the nine-month period ended September 30, 2014, the effective tax rate differed from the federal and state statutory rates primarily due to the release of a $0.5 million valuation allowance set up on Federal NOL carryforwards subject to separate return limitation year restrictions.  We also recognized approximately $0.01 million of tax benefit in the third quarter of 2014 to adjust our 2013 provision to match our 2013 returns compared to $0.7 million of tax expense in the third quarter of 2013 to adjust our 2012 provision to match our 2012 returns.  In the quarter and nine-month period ended September 30, 2013, we recorded a decrease of $1.2 million to our unrecognized tax benefits, which reduced our tax expense by $0.8 million, due to the expiration of a state statute of limitations.  Exclusive of these adjustments, our effective tax rate would have been approximately 36.2% for each of the quarters ended September 30, 2014 and 2013, respectively and 36.8% and 36.5% for the nine-month periods ended September 30, 2014 and 2013, respectively.

 

On September 13, 2013, Treasury and the IRS issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167

 

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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.

 

11.  COMMITMENTS AND CONTINGENCIES

 

Five putative class action lawsuits have been filed by alleged Enventis shareholders challenging the Company’s proposed merger with Enventis in which the Company, Sky Merger Sub Inc., Enventis and members of the Enventis board of directors have been named as defendants.  The shareholder actions were filed in the Fifth Judicial District, Blue Earth County, Minnesota.  The actions are called: Hoepner v. Enventis Corp. et al , filed July 15, 2014, Case No. 07-CV-14-2489, Bockley v. Finke et al , filed July 18, 2014, Case No. 07-CV-14-2551, Kaplan et al v. Enventis Corp. et al , filed July 21, 2014, Case No. 07-CV-14-2575, Marcial v. Enventis Corp. et al ., filed July 25, 2014, Case No. 07-CV-14-2628, and Barta v. Finke et al , filed August 14, 2014, Case No. 07-CV-14-2854.  The actions generally allege, among other things, that each member of the Enventis board of directors breached fiduciary duties to Enventis and its shareholders by authorizing the sale of Enventis to the Company for consideration that allegedly is unfair to the Enventis shareholders, agreeing to terms that allegedly unduly restrict other bidders from making a competing offer, as well as allegations regarding disclosure deficiencies in the joint proxy statement/prospectus.  The complaints also allege that the Company and Sky Merger Sub Inc. aided and abetted the breaches of fiduciary duties allegedly committed by the members of the Enventis board of directors.  The lawsuits seek, amongst other things, equitable relief, including an order to prevent the defendants from consummating the merger on the agreed-upon terms.  The Enventis board of directors appointed a Special Litigation Committee to address the claims.  We believe that these claims are without merit.  On September 19, 2014, the District Court entered an order consolidating the five lawsuits as In Re: Enventis Corporation Shareholder Litigation , Case No. 07-CV-14-2489.  On September 23, 2014, the District Court entered an order that denied the plaintiffs’ request for expedited proceedings and stayed all proceedings “pending the completion of the Special Litigation Committee and the issuance of its decision.”

 

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 would 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 would 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.  In October 2014, Salsgiver rejected the Agreement, remanding the case back to the court.  A trial is anticipated to occur in the first quarter of 2015; however, we believe that despite the rejection, the $1.3 million currently accrued represents management’s best estimate of the probable payment.

 

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 through 2013.  In addition, a re-audit was performed on CCPA for the 2010 calendar year.  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 the tax years 2008-2013 is approximately $5.0 million.  Audits for calendar years 2008-2010 have been filed for appeal and have received

 

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continuance pending the outcome of present litigation in the Commonwealth of Pennsylvania (Verizon Pennsylvania, Inc. v. Commonwealth, Docket No. 266 F.R. 2008).  The preliminary audit findings for the calendar years 2011-2013 were received on September 16, 2014.  We are waiting invoicing for each of these years, at which time we will prepare to file an appeal with the DOR.

 

For the CCPA subsidiary, the total additional tax liability calculated by the auditors for calendar years 2008-2013 (using the re-audited 2010 number) is approximately $7.2 million.  Appeals of cases for calendar years 2008, 2009, and the original 2010 audit have been filed 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 preliminary audit findings for the calendar years 2011-2013, as well as the re-audit of 2010 were received on September 16, 2014.  We are awaiting invoicing for each of these years, at which time we will prepare to file an appeal with the DOR.

 

We anticipate that the outstanding audits and subsequent appeals 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 or cash flows.

 

In order for eligible telecommunications carriers (“ETCs”) to receive high-cost support, the Universal Service Fund (“USF”)/intercarrier compensation (“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 Federal Communications Commission (“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 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 is optimistic, 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 may 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 in the nine months ended September 30, 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 2020 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,

 

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SureWest Kansas, Inc., and SureWest Fiber Ventures, LLC, have jointly and severally guaranteed the 2020 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  September 30, 2014 and December 31, 2013, condensed consolidating statements of operations for the quarters and nine-month periods ended September 30, 2014 and 2013 and condensed consolidating statements of cash flows for the nine-month periods ended September 30, 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 2020 Notes.

 

Condensed Consolidating Balance Sheet

(amounts in thousands)

 

 

 

September 30, 2014

 

 

 

Parent

 

Subsidiary
Issuer

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

-

 

  $

773

 

  $

2,494

 

  $

1,623

 

  $

-

 

  $

4,890

 

Restricted cash

 

-

 

204,803

 

-

 

-

 

-

 

204,803

 

Accounts receivable, net

 

-

 

-

 

44,183

 

7,205

 

-

 

51,388

 

Income taxes receivable

 

44,701

 

-

 

-

 

-

 

(43,897)

 

804

 

Deferred income taxes

 

(61)

 

(7)

 

8,469

 

504

 

-

 

8,905

 

Prepaid expenses and other current assets

 

-

 

-

 

13,359

 

397

 

-

 

13,756

 

Total current assets

 

44,640

 

205,569

 

68,505

 

9,729

 

(43,897)

 

284,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

-

 

-

 

810,209

 

49,411

 

-

 

859,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles and other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

-

 

3,724

 

109,870

 

-

 

-

 

113,594

 

Investments in subsidiaries

 

1,181,888

 

394,207

 

12,900

 

-

 

(1,588,995)

 

-

 

Goodwill

 

-

 

-

 

537,265

 

66,181

 

-

 

603,446

 

Other intangible assets

 

-

 

-

 

23,931

 

9,087

 

-

 

33,018

 

Deferred debt issuance costs, net and other assets

 

115

 

15,196

 

3,920

 

-

 

-

 

19,231

 

Total assets

 

  $

1,226,643

 

  $

618,696

 

  $

1,566,600

 

  $

134,408

 

  $

(1,632,892)

 

  $

1,913,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

  $

-

 

  $

-

 

  $

4,991

 

  $

-

 

  $

-

 

  $

4,991

 

Advance billings and customer deposits

 

-

 

-

 

21,748

 

1,764

 

-

 

23,512

 

Dividends payable

 

15,607

 

-

 

-

 

-

 

-

 

15,607

 

Accrued compensation

 

-

 

-

 

15,844

 

1,690

 

-

 

17,534

 

Accrued interest

 

-

 

12,424

 

6

 

3

 

-

 

12,433

 

Accrued expense

 

180

 

1,399

 

28,922

 

1,326

 

1,181

 

33,008

 

Income tax payable

 

-

 

12,031

 

25,637

 

7,410

 

(45,078)

 

-

 

Current portion of long term debt and capital lease obligations

 

-

 

9,100

 

635

 

74

 

-

 

9,809

 

Current portion of derivative liability

 

-

 

877

 

-

 

-

 

-

 

877

 

Total current liabilities

 

15,787

 

35,831

 

97,783

 

12,267

 

(43,897)

 

117,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

-

 

1,403,422

 

3,177

 

755

 

-

 

1,407,354

 

Advances due to/from affiliates, net

 

1,101,842

 

(2,002,184)

 

950,625

 

(50,283)

 

-

 

-

 

Deferred income taxes

 

(21,067)

 

(844)

 

183,901

 

18,214

 

-

 

180,204

 

Pension and postretirement benefit obligations

 

-

 

-

 

55,518

 

5,304

 

-

 

60,822

 

Other long-term liabilities

 

30

 

583

 

11,289

 

561

 

-

 

12,463

 

Total liabilities

 

1,096,592

 

(563,192)

 

1,302,293

 

(13,182)

 

(43,897)

 

1,778,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

403

 

-

 

17,411

 

30,000

 

(47,411)

 

403

 

Other shareholders’ equity

 

129,648

 

1,181,888

 

242,106

 

117,590

 

(1,541,584)

 

129,648

 

Total Consolidated Communications Holdings, Inc. shareholders’ equity

 

130,051

 

1,181,888

 

259,517

 

147,590

 

(1,588,995)

 

130,051

 

Noncontrolling interest

 

-

 

-

 

4,790

 

-

 

-

 

4,790

 

Total shareholders’ equity

 

130,051

 

1,181,888

 

264,307

 

147,590

 

(1,588,995)

 

134,841

 

Total liabilities and shareholders’ equity

 

  $

1,226,643

 

  $

618,696

 

  $

1,566,600

 

  $

134,408

 

  $

(1,632,892)

 

  $

1,913,455

 

 

21



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