Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 05/06/2016 17:03:31)

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 March 31, 2016

 

or

 

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-51446

 

RG_HI

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

 

 

02-0636095

 

 

(State or other jurisdiction

 

 

 

(I.R.S. 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    

 

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 29, 2016, the registrant had 50,65 4,989 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

 

24

 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

Item 4.  

Controls and Procedures

 

40

 

 

 

 

PART II. OTHER INFORMATION  

 

 

 

 

 

 

Item 1.  

Legal Proceedings

 

41

 

 

 

 

Item 6.  

Exhibits

 

43

 

 

 

 

SIGNATURES  

 

44

 

 

 

 


 

Table of Contents

PART I.  FINANCIAL INFORMATIO N

 

ITEM 1.  FINANCIAL STATEMENT S

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; Amounts in thousands except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

 

 

 

    

2016

    

2015

    

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

188,846

 

$

192,578

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

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

 

 

79,720

 

 

79,892

 

 

Selling, general and administrative expenses

 

 

40,676

 

 

42,385

 

 

Depreciation and amortization

 

 

44,140

 

 

43,556

 

 

Income from operations

 

 

24,310

 

 

26,745

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

(18,646)

 

 

(20,674)

 

 

Investment income

 

 

7,197

 

 

6,441

 

 

Other, net

 

 

14

 

 

(57)

 

 

Income before income taxes

 

 

12,875

 

 

12,455

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

4,973

 

 

4,626

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

7,902

 

 

7,829

 

 

Less: net income attributable to noncontrolling interest

 

 

53

 

 

19

 

 

Net income attributable to common shareholders

 

$

7,849

 

$

7,810

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.15

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.39

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

 

 

 

    

2016

    

2015

    

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,902

 

$

7,829

 

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

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

 

 

679

 

 

402

 

 

Derivative instruments designated as cash flow hedges:

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of tax

 

 

(430)

 

 

(565)

 

 

Reclassification of realized loss to earnings, net of tax

 

 

149

 

 

262

 

 

Comprehensive income

 

 

8,300

 

 

7,928

 

 

Less: comprehensive income attributable to noncontrolling interest

 

 

53

 

 

19

 

 

Total comprehensive income attributable to common shareholders

 

$

8,247

 

$

7,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,461

 

$

15,878

 

Accounts receivable, net of allowance for doubtful accounts

 

 

63,477

 

 

68,848

 

Income tax receivable

 

 

18,760

 

 

23,867

 

Prepaid expenses and other current assets

 

 

21,109

 

 

17,815

 

Total current assets

 

 

127,807

 

 

126,408

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,081,323

 

 

1,093,261

 

Investments

 

 

106,002

 

 

105,543

 

Goodwill

 

 

764,630

 

 

764,630

 

Other intangible assets

 

 

40,260

 

 

43,497

 

Other assets

 

 

6,059

 

 

5,187

 

Total assets

 

$

2,126,081

 

$

2,138,526

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

10,854

 

$

12,576

 

Advance billings and customer deposits

 

 

27,955

 

 

27,616

 

Dividends payable

 

 

19,623

 

 

19,551

 

Accrued compensation

 

 

17,414

 

 

21,883

 

Accrued interest

 

 

17,496

 

 

9,353

 

Accrued expense

 

 

40,598

 

 

42,384

 

Current portion of long-term debt and capital lease obligations

 

 

11,016

 

 

10,937

 

Total current liabilities

 

 

144,956

 

 

144,300

 

 

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

 

1,375,945

 

 

1,377,892

 

Deferred income taxes

 

 

236,786

 

 

236,529

 

Pension and other postretirement obligations

 

 

111,545

 

 

112,966

 

Other long-term liabilities

 

 

16,567

 

 

16,140

 

Total liabilities

 

 

1,885,799

 

 

1,887,827

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 50,654,989 and 50,470,096 shares outstanding as of March 31, 2016 and December 31, 2015, respectively

 

 

506

 

 

505

 

Additional paid-in capital

 

 

269,988

 

 

281,738

 

Retained earnings (deficit)

 

 

 —

 

 

(881)

 

Accumulated other comprehensive loss, net

 

 

(35,301)

 

 

(35,699)

 

Noncontrolling interest

 

 

5,089

 

 

5,036

 

Total shareholders’ equity

 

 

240,282

 

 

250,699

 

Total liabilities and shareholders’ equity

 

$

2,126,081

    

$

2,138,526

 

 

 

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

59,541

 

$

52,404

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment, net

 

 

(28,688)

 

 

(32,552)

 

Proceeds from sale of assets

 

 

14

 

 

29

 

Net cash used in investing activities

 

 

(28,674)

 

 

(32,523)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 —

 

 

20,000

 

Payment of capital lease obligation

 

 

(387)

 

 

(222)

 

Payment on long-term debt

 

 

(2,275)

 

 

(17,275)

 

Share repurchases for minimum tax withholding

 

 

(71)

 

 

(214)

 

Dividends on common stock

 

 

(19,551)

 

 

(19,510)

 

Net cash used in financing activities

 

 

(22,284)

 

 

(17,221)

 

Increase in cash and cash equivalents

 

 

8,583

 

 

2,660

 

Cash and cash equivalents at beginning of period

 

 

15,878

 

 

6,679

 

Cash and cash equivalents at end of period

 

$

24,461

 

$

9,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

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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 integrated communications services in consumer, commercial and carrier channels in California, Illinois, Iowa, Kansas, Minnesota, Missouri, North Dakota, Pennsylvania, South Dakota, Texas and Wisconsin. 

 

We operate as both an Incumbent Local Exchange Carrier (“ILEC”) and a Competitive Local Exchange Carrier (“CLEC”), dependent upon the territory served.  We provide a wide range of services and products that include local and long-distance service, high-speed broadband Internet access, video services, Voice over Internet Protocol (“VoIP”), private line services, carrier grade access services, network capacity services over our regional fiber optic networks, cloud services, data center and managed services, directory publishing and equipment sales.  As of March 31, 2016, we had approximately 478 thousand voice connections, 460 thousand data connections and 1 14 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 (“US 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 US 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 2015 Annual Report on Form 10-K filed with the SEC.

 

Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update No. 2016-09 (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting . ASU 2016-09 simplifies various aspects of accounting for share-based payment arrangements including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.

 

In February 2016, FASB issued the Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases . ASU 2016-02 establishes a new lease accounting model for leases. Lessees will be required to recognize most leases on their balance sheets but lease expense will be recognized on the income statement in a manner similar to existing requirements. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.

 

Effective January 1, 2016, we adopted Accounting Standards Update No. 2015-16 (“ASU 2015-16”), Simplifying the Accounting for Measurement-Period Adjustments . ASU 2015-16 requires that the acquiring company in a business combination recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined and record in the reporting period in which the adjustments are determined the effect on earnings of changes in depreciation, amortization and other items resulting from the change to the provisional

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amounts. The adoption of this standard did not have any impact on our condensed consolidated financial statements and related disclosures.

 

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.  The adoption of ASU 2014-15 is not expected to have a material impact on our financial position or results of operations.

 

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 the recognition and measurement of revenue. As a result, significant additional disclosures are required about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, FASB issued the Accounting Standards Update No. 2015-14 (“ASU 2015-14”), Deferral of the Effective Date . ASU 2015-14 defers the effective date of ASU 2014-09 for all entities by one year. Accordingly, the new guidance in ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2017.  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.  In April 2016, FASB issued the Accounting Standards Update No. 2016-10 (“ASU 2016-10”), Identifying Performance Obligations and Licensing . ASU 2016-10 clarifies the implementation guidance relating to identifying performance obligations and determining the nature of an entity’s promise in granting a license to its intellectual property. In March 2016, FASB issued the Accounting Standards Update No. 2016-08 (“ASU 2016-08”), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. The effective date and transition requirements for ASU 2016-10 and ASU 2016-08 are the same as the effective date and transition requirements for ASU 2014-09. We are currently evaluating the alternative methods of adoption and the effect this guidance will have on our condensed consolidated financial statements and related disclosures.

 

 

 

2.  SUBSEQUENT EVENTS

 

Acquisition

 

On April 18, 2016, we entered into a definitive agreement to acquire substantially all of the assets of Champaign Telephone Company, Inc. and its sister company, Big Broadband Services, LLC, a private business communications provider in the Champaign-Urbana, IL area.  The aggregate purchase price consists of cash consideration of approximately $13.0 million, which will be paid from our existing cash resources.  The acquisition is subject to standard closing conditions, including regulatory approvals, and is expected to close in the third quarter of 2016. 

 

Divestiture

 

On May 3, 2016, we entered into a definitive agreement to sell our rural ILEC business located in northwest Iowa (Consolidated Communications of Iowa Company, formerly Heartland Telecommunications) for approximately $22.5 million in cash, prior to certain contractual adjustments.  The transaction is expected to close in the third quarter of 2016 and is subject to customary closing conditions, including regulatory approvals.  At March 31, 2016, the carrying amount of the assets to be disposed of were classified as held and used and consisted primarily of property, plant and equipment of $20.7 million.  We are currently in the process of estimating the amount of goodwill to be allocated to the disposal group based on the relative fair values of the Iowa ILEC and the consolidated reporting unit as well as estimating the related loss on disposal. 

 

 

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3.  EARNINGS PER SHARE

 

Basic and diluted earnings per share (“EPS”) are computed using the two-class method, which is an earnings allocation that determines EPS for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company’s restricted stock awards are considered participating securities because holders are entitled to receive non-forfeitable dividends during the vesting term. Diluted EPS includes securities that could potentially dilute basic EPS during a reporting period.  Dilutive securities are not included in the computation of loss per share when a company reports a net loss from continuing operations as the impact would be anti-dilutive.

 

The potentially dilutive impact of the Company’s restricted stock awards is determined using the treasury stock method. Under the treasury stock method, awards are treated as if they had been exercised with any proceeds used to repurchase common stock at the average market price during the period. Any incremental difference between the assumed number of shares issued and purchased is included in the diluted share computation.

 

The computation of basic and diluted EPS attributable to common shareholders computed using the two ‑class method is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

March 31,

 

 

(In thousands, except per share amounts)

    

2016

    

2015

    

 

Net income

 

$

7,902

 

$

7,829

 

 

Less: net income attributable to noncontrolling interest

 

 

53

 

 

19

 

 

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

 

 

7,849

 

 

7,810

 

 

Less: earnings allocated to participating securities

 

 

131

 

 

129

 

 

Net income attributable to common shareholders, after earnings allocated to participating securities

 

$

7,718

 

$

7,681

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

50,289

 

 

50,148

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.15

 

$

0.15

 

 

 

Diluted earnings per common share attributable to common shareholders for the quarters ended March 31, 2016 and 2015 excludes 0.2 million and 0.3 million potential common shares, respectively, that could be issued under our share-based compensation plan because the inclusion of the potential common shares would have an antidilutive effect.

 

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4.  INVESTMENTS

 

Our investments are as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(In thousands)

    

2016

    

2015

 

Cash surrender value of life insurance policies

 

$

2,208

 

$

2,149

 

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

 

 

8,138

 

 

7,971

 

Other

 

 

200

 

 

200

 

Equity method investments:

 

 

 

 

 

 

 

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

 

 

17,919

 

 

18,099

 

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

 

 

6,267

 

 

6,167

 

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

 

 

26,870

 

 

26,557

 

Totals

 

$

106,002

 

$

105,543

 

 

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 the fair value of these investments.  We did not evaluate any of the investments for impairment during the quarters ended March 31, 2016 or 2015 as no factors indicating impairment existed.  For the quarters ended March 31, 2016 and 2015, we received cash distributions from these partnerships totaling $2.8 million and $1.9 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”), 16.67% 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 March 31, 2016 and 2015, we received cash distributions from these partnerships totaling $4.0 million and $5.2 million, respectively.

   

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)

    

2016

    

2015

    

 

Total revenues

 

$

82,657

 

$

86,731

 

 

Income from operations

 

 

25,470

 

 

26,895

 

 

Net income before taxes

 

 

25,063

 

 

26,990

 

 

Net income

 

 

25,063

 

 

26,990

 

 

 

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March 31,

 

December 31,

 

(In thousands)

    

2016

    

2015

 

Current assets

 

$

61,446

 

$

57,716

 

Non-current assets

 

 

94,011

 

 

96,197

 

Current liabilities

 

 

19,848

 

 

20,576

 

Non-current liabilities

 

 

52,306

 

 

52,414

 

Partnership equity

 

 

83,302

 

 

80,923

 

 

 

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.

 

Our interest rate swap liabilities measured at fair value on a recurring basis and subject to disclosure requirements as of March 31, 2016 and December 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Current interest rate swap liabilities

 

$

(76)

 

$

 -

 

$

(76)

 

$

 -

 

Long-term interest rate swap liabilities

 

 

(1,551)

 

 

 -

 

 

(1,551)

 

 

 -

 

Total

 

$

(1,627)

 

$

 -

 

$

(1,627)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Current interest rate swap liabilities

 

$

(190)

 

$

 -

 

$

(190)

 

$

 -

 

Long-term interest rate swap liabilities

 

 

(1,084)

 

 

 -

 

 

(1,084)

 

 

 -

 

Total

 

$

(1,274)

 

$

 -

 

$

(1,274)

 

$

 -

 

 

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, 2016 and December 31, 2015 .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

As of December 31, 2015

 

(In thousands)

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

  

Investments, equity basis

 

$

51,056

 

 

n/a

 

$

50,823

 

 

n/a

 

Investments, at cost

 

$

52,738

 

 

n/a

 

$

52,571

 

 

n/a

 

Long-term debt, excluding capital leases

 

$

1,391,591

 

$

1,331,412

 

$

1,393,567

 

$

1,312,383

 

 

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Cost & Equity Method Investments

 

Our investments as of March 31, 2016 and December 31, 2015 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.  It is impracticable to determine the fair value of these investments.

 

Long-term Debt

 

The fair value of our senior notes was based on quoted market prices, and the fair value of borrowings under our credit facility was determined using current market rates for similar types of borrowing arrangements.  We have categorized the long-term debt as Level 2 within the fair value hierarchy.

 

6.     LONG-TERM DEBT

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(In thousands)

    

2016

    

2015

 

Senior secured credit facility:

 

 

 

 

 

 

 

Term loan 4, net of discount of $3,185 and $3,340 at March 31, 2016 and December 31, 2015, respectively

 

$

886,340

 

$

888,460

 

Revolving loan

 

 

10,000

 

 

10,000

 

6.50% Senior notes due 2022, net of discount of $4,749 and $4,893 at March 31, 2016 and December 31, 2015, respectively

 

 

495,251

 

 

495,107

 

Capital leases

 

 

7,193

 

 

7,580

 

 

 

 

1,398,784

 

 

1,401,147

 

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

 

 

(11,016)

 

 

(10,937)

 

Less: deferred debt issuance costs

 

 

(11,823)

 

 

(12,318)

 

Total long-term debt

 

$

1,375,945

 

$

1,377,892

 

 

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 Credit Agreement also includes an incremental term loan facility which provides the ability to request 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 Consolidated Communications of Illinois 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.  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 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 as of March 31, 2016, the borrowing margin for the next three month period ending June 30, 2016 will be at a weighted-average margin of 3.00% f or 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, 2016 and December 31, 2015, borrowings of $10.0 million were outstanding under the revolving credit facility.  A stand-by letter of credit of $1.6 million, issued primarily in connection with the Company’s insurance coverage, was outstanding under our revolving credit facility as of March 31,

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2016.  The stand-by letter of credit is renewable annually and reduces the borrowing availability under the revolving credit facility.  As of March 31, 2016, $63.4 million was available for borrowing under the revolving credit facility.

 

The weighted-average interest rate on outstanding borrowings under our credit facility was 4.24% as of March 31, 2016 and December 31, 2015.  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 certain financial ratios, including interest coverage and total net leverage ratios, all as defined in the Credit Agreement.  As of March 31, 2016, 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, 2016, and including the $19.6 million dividend declared in February 2016 and paid on May 2, 2016, we had $255.0 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 or 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, 2016, our total net leverage ratio under the Credit Agreement was 4.21:1.00, and our interest coverage ratio was 4.20:1.00.

 

Senior Notes

 

6.50% Senior Notes due 2022

 

In September 2014, we completed an offering of $200.0 million aggregate principal amount of 6.50% Senior Notes due in October 2022 (the “Existing Notes”).  The Existing Notes were priced at par, which resulted in total gross proceeds of $200.0 million.  On June 8, 2015, we completed an additional offering of $300.0 million in aggregate principal amount of 6.50% Senior Notes due 2022 (the “New Notes” and together with the Existing Notes, the “Senior Notes”).  The New Notes were issued as additional notes under the same indenture pursuant to which the Existing Notes were previously issued on September 18, 2014.  The New Notes were priced at 98.26% of par with a yield to maturity of 6.80% and resulted in total gross proceeds of approximately $294.8 million, excluding accrued interest.  The discount and deferred debt issuance costs of $4.5 million incurred in connection with the issuance of the New Notes are being amortized using the effective interest method over the term of the notes. 

 

The Senior Notes mature on October 1, 2022 and interest is payable semi-annually on April 1 and October 1 of each year. Consolidated Communications, Inc. (“CCI”) is the primary obligor under the Senior Notes, and we and certain of our wholly ‑owned subsidiaries have fully and unconditionally guaranteed the Senior Notes.  The Senior Notes are senior unsecured obligations of the Company.

 

During the quarter ended September 30, 2015, we completed an exchange offer to register all of the Senior Notes under the Securities Act of 1933 (“Securities Act”).  The terms of the registered Senior Notes are substantially identical to those of the Senior Notes prior to the exchange, except that the Senior Notes are now registered under the Securities Act and the transfer restrictions and registration rights previously applicable to the Senior Notes no longer apply to the registered

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Senior Notes.  The exchange offer did not impact the aggregate principal amount or the remaining terms of the Senior Notes outstanding.

 

Senior Notes Covenant Compliance

 

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

 

Among other matters, the Senior Notes indenture provides that CCI may not pay dividends or make other restricted payments, as defined in the indenture, if its total net leverage ratio is 4.75:1.00 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 not yet reflected in historical results.  As of March 31, 2016, 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 April 1, 2012, less 1.75 times fixed charges, less dividends and other restricted payments made since May 30, 2012.  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 $272.7 million have been paid since May 30, 2012, including the quarterly dividend declared in February 2016 and paid on May 2, 2016, there was $377.6 million of the $650.3 million of cumulative consolidated cash flow since May 30, 2012 available to pay dividends as of March 31, 2016.  As of March 31, 2016, the Company was in compliance with all terms, conditions and covenants under the indenture governing the Senior Notes.

 

Capital Leases

 

We lease certain facilities and equipment under various capital leases which expire between 2016 and 2021.  As of March 31, 2016, the present value of the minimum remaining lease commitments was approximately $7.2 million, of which $1.9 million was due and payable within the next twelve months. The leases require total remaining rental payments of $8.8 million as of March 31, 2016, of which $4.5 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 sheets.  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 statements of cash flows.

 

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The following interest rate swaps were outstanding as of March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

    

Notional

    

 

    

 

 

 

(In thousands)

 

Amount

 

2016 Balance Sheet Location

 

Fair Value

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR (with floor)

 

$

200,000

 

Other long-term liabilities

 

$

(1,551)

 

 

 

 

 

 

 

 

 

 

 

De-designated Hedges:

 

 

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR (with floor)

 

$

50,000

 

Accrued expense

 

 

(76)

 

Total Fair Values

 

 

 

 

 

 

$

(1,627)

 

 

The following interest rate swaps were outstanding as of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

    

Notional

    

 

    

 

 

 

(In thousands)

 

Amount

 

2015 Balance Sheet Location

 

Fair Value

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR (with floor)

 

$

150,000

 

Other long-term liabilities

 

$

(1,084)

 

 

 

 

 

 

 

 

 

 

 

De-designated Hedges:

 

 

 

 

 

 

 

 

 

Fixed to 1-month floating LIBOR

 

$

50,000

 

Accrued expense

 

 

(80)

 

Fixed to 1-month floating LIBOR (with floor)

 

$

50,000

 

Accrued expense

 

 

(110)

 

Total Fair Values

 

 

 

 

 

 

$

(1,274)

 

 

The counterparties to our various swaps are highly rated financial institutions. 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 2013, interest rate swaps previously designated as cash flow hedges were de-designated as a result of amendments to our credit agreement.  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 was recognized in AOCI.  The balance of the unrealized loss included in AOCI as of the date the swaps were de-designated is being 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, 2016 and 2015, a gain of $0.1 million and $0.2 million, respectively, was recognized as a reduction to interest expense for the change in fair value of the de-designated swaps. 

 

As of March 31, 2016 and December 31, 2015, the pre-tax deferred losses related to our interest rate swap agreements included in AOCI were $1.5 million and $1.1 million, respectively.  The estimated amount of losses included in AOCI as of March 31, 2016 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

 

 

 

 

March 31,

 

 

(In thousands)

    

2016

    

2015

    

 

Loss recognized in AOCI, pretax

 

$

(700)

 

$

(917)

 

 

Deferred losses reclassified from AOCI to interest expense

 

$

(243)

 

$

(426)

 

 

 

 

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8.  EQUITY

 

Share-Based Compensation

 

The following table summarizes total compensation costs recognized for share-based payments during the quarters ended March 31, 2016 and 2015 :  

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

March 31,

 

 

(In thousands)

    

2016

    

2015

    

 

Restricted stock

 

$

561

 

$

487

 

 

Performance shares

 

 

331

 

 

326

 

 

Total

 

$

892

 

$

813

 

 

 

Share-based compensation expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income .

 

As of March 31, 2016, total unrecognized compensation costs related to non-vested Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”) was $7.5 million and will be recognized over a weighted-average period of approximately 1.6 years.

 

The following table summarizes the RSA and PSA activity for the quarter ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSAs

 

PSAs

 

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

 

Average Grant

 

 

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Shares

 

Date Fair Value

 

Non-vested shares outstanding - January 1, 2016

 

99,360

 

$

19.40

 

83,224

 

$

18.75

 

Shares granted

 

100,040

 

$

23.95

 

94,066

 

$

20.86

 

Shares vested

 

(6,974)

 

$

21.31

 

(2,104)

 

$

19.11

 

Shares forfeited, cancelled or retired

 

(2,067)

 

$

19.74

 

(4,112)

 

$

19.81

 

Non-vested shares outstanding - March 31, 2016

 

190,359

 

$

21.72

 

171,074

 

$

19.88

 

 

Accumulated Other Comprehensive Loss

 

The following table summarizes the changes in accumulated other comprehensive loss, net of tax, by component for the quarter ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Pension and

    

 

 

    

 

 

 

 

 

Post-Retirement

 

Derivative

 

 

 

 

(In thousands)

 

Obligations

 

Instruments

 

Total

 

Balance at December 31, 2015

 

$

(35,025)

 

$

(674)

 

$

(35,699)

 

Other comprehensive income before reclassifications

 

 

 —

 

 

(430)

 

 

(430)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

679

 

 

149

 

 

828

 

Net current period other comprehensive income

 

 

679

 

 

(281)

 

 

398

 

Balance at March 31, 2016

 

$

(34,346)

 

$

(955)

 

$

(35,301)

 

 

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The following table summarizes reclassifications from accumulated other comprehensive loss for the quarters ended March 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Quarter Ended March 31,

 

Affected Line Item in the

 

(In thousands)

    

2016

    

2015

    

Statement of Income

 

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

 

 

Prior service credit

 

$

244

 

$

224

 

(a)

 

Actuarial loss

 

 

(1,355)

 

 

(884)

 

(a)  

 

 

 

 

(1,111)

 

 

(660)

 

Total before tax

 

 

 

 

432

 

 

258

 

Tax benefit

 

 

 

$

(679)

 

$

(402)

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

Loss on cash flow hedges:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

$

(243)

 

$

(426)

 

Interest expense

 

 

 

 

94

 

 

164

 

Tax benefit

 

 

 

$

(149)

 

$

(262)

 

Net of tax

 

 


(a)

These items are included in the components of net periodic benefit cost for our pension and other post-retirement benefit plans.  See Note 9 for further discussion regarding our pension and other post-retirement benefit plans.

 

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 under collective bargaining agreements who fulfill minimum age and service requirements.  Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.  The Retirement Plan is closed to all new entrants. Benefits for eligible participants under collective bargaining agreements are accrued based on a cash balance benefit plan.

 

We also have two non-qualified supplemental retirement plans (“Supplemental Plans”).  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. The Supplemental Plans have previously been frozen so that no person is eligible to become a new participant.  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, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

March 31,

 

(In thousands)

    

2016

    

2015

 

Service cost

 

$

86

 

$

129

 

Interest cost

 

 

4,073

 

 

3,932

 

Expected return on plan assets

 

 

(5,159)

 

 

(5,844)

 

Net amortization loss

 

 

1,355

 

 

954

 

Net prior service credit amortization

 

 

(114)

 

 

(114)

 

Net periodic pension cost (benefit)

 

$

241

 

$

(943)

 

 

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Other Non-qualified Deferred Compensation Agreements

 

We are also liable for deferred compensation agreements with former members of the board of directors and certain other former employees of acquired companies.  Depending on the plan, benefits are payable in monthly or annual installments for a period of time based on the terms of the agreement, which range from five years 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.  Payments related to the deferred compensation agreements totaled approximately   $0.1 million for each of the quarters ended March 31, 2016 and 2015.  The net present value of the remaining obligations was approximately $2.0 million and $2.1 million as of March 31, 2016 and December 31, 2015, respectively, and is included in pension and other post-retirement benefit obligations in the accompanying condensed consolidated balance sheets .

 

We also maintain 25 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 in the quarter ended March 31, 2016. We did not recognize any life insurance proceeds during the quarter ended March 31, 2015.  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 $2.2 million and $2.1 million as of March 31, 2016 and December 31, 2015, respectively.  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 various healthcare and life insurance plans (“Post-retirement Plans”) that provide post-retirement medical and life insurance benefits to certain groups of retired employees.  Certain plans have previously been frozen so that no person is eligible to become a new participant.  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 incurred.  Post-retirement life insurance benefits are fully insured.  A majority of the healthcare plans are unfunded and have no assets, and benefits are paid from the general operating funds of the Company.  However, a plan acquired in the purchase of another company has assets that are separately designated within the Retirement Plan for the sole purpose of providing payments of retiree medical benefits for this specific plan.  The assets used to provide payment of these retiree medical benefits are the same as those of the Retirement Plan. 

 

The following table summarizes the components of the net periodic cost for our post-retirement benefit plans for the quarters ended March 31, 2016 and 2015: 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

March 31,

 

(In thousands)

    

2016

    

2015

 

Service cost

 

$

150

 

$

148

 

Interest cost

 

 

505

 

 

414

 

Expected return on plan assets

 

 

(37)

 

 

(58)

 

Net amortization gain

 

 

 —

 

 

(70)

 

Net prior service credit amortization

 

 

(130)

 

 

(110)

 

Net periodic postretirement benefit cost

 

$

488

 

$

324

 

 

Contributions

 

We expect to contribute approximately $0.3 million to our Supplemental Plans and $3.6 million to our Post ‑retirement Plans in 2016.  We do not expect to contribute to the Retirement Plan in 2016.  As of March 31, 2016, we have contributed $0.1 million and $0.9 million of the annual contribution to the Supplemental Plans and Post-retirement Plans, respectively.

 

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10.  INCOME TAXES

 

There have been no changes to our unrecognized tax benefits as reported as of December 31, 2015.  As of March 31, 2016 and December 31, 2015, the amount of unrecognized tax benefits was $0.1 million. The net amount of unrecognized benefits that, if recognized, would result in an impact to the effective tax rate is less than $0.1 million. We do not expect any material changes in our unrecognized tax benefits during the remainder of 2016.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and selling, general and administrative expenses, respectively. As of March 31, 2016, 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 2013 through 2014. The periods subject to examination for our state returns are years 2011 through 2014. We are not currently under examination by federal or state taxing authorities.

 

Our effective tax rate was 38.6% and 37.1% for the quarters ended March 31, 2016 and 2015, respectively. The effective tax rate differed from the federal and state statutory rates primarily due to non-deductible expenses and differences in allocable income for our state tax filings. 

 

11.  COMMITMENTS AND CONTINGENCIES

 

Litigation, Regulatory Proceedings and Other Contingencies

 

In 2014, Sprint Corporation, Level 3 Communications, Inc. and Verizon Communications Inc. filed lawsuits against us and many others in the industry regarding the proper charges to be applied between interexchange and local exchange carriers for certain calls between mobile and wireline devices that are routed through an interexchange carrier. The plaintiffs are refusing to pay these access charges in all states and are seeking refunds of past charges paid.  The disputed amounts total $2.4 million and cover periods dating back to 2006. CenturyLink, Inc. filed to bring all related suits to the U.S. District Court’s Judicial Panel on multi district litigation.  This panel is granted authority to transfer the pretrial proceedings to a single court for civil cases involving common questions of fact. On November 17, 2015, the U.S. District Court in Dallas, Texas ruled in favor of the defendants, although we expect that the plaintiffs will file an appeal.  We have interconnection agreements in place with all wireless carriers and the applicable traffic is being billed at current access rates, therefore, we do not expect any potential settlement or judgment to have an adverse material impact on our financial results or cash flows.    

 

On April 14, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates (“Salsgiver”) filed a lawsuit against us and our former subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we had prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver sought 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 $125.0 million.  We believe that these claims are without merit and that the alleged damages are completely unfounded.  We had recorded approximately $0.4 million in 2011 in anticipation of the settlement of this case.  During the quarter ended September 30, 2013, we recorded an additional $0.9 million, which included estimated legal fees. A jury trial concluded on May 14, 2015 with the jury ruling in our favor.  Salsgiver subsequently filed a post-trial motion asking the judge to overturn the jury verdict.  That motion was denied. On June 17, 2015, Salsgiver filed an appeal in the Pennsylvania Superior Court. Salsgiver’s brief was filed with the Superior Court on December 4, 2015, and we filed our response on January 18, 2016. The Pennsylvania Superior Court will hold oral argument on May 17, 2016. We believe that, despite the appeal, the $1.3 million currently accrued represents management’s best estimate of the potential loss if the verdict is overturned in Salsgiver's favor.    

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

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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. 

 

Pennsylvania generally imposes tax on the gross receipts of telephone messages transmitted wholly within the state and telephone messages transmitted in interstate commerce where such messages originate or terminate in Pennsylvania, and the charges for such messages are billed to a service address in the state. In a 2013 decision involving Verizon Telephone Company of Pennsylvania (“Verizon Pennsylvania”), the Commonwealth Court of Pennsylvania held that the gross receipts tax applies to Verizon Pennsylvania’s installation of private phone lines because the sole purpose of private lines is to transmit messages. Similarly, the court held that directory assistance is subject to the gross receipts tax because it makes the transition of messages more effective. However, the court did not find Verizon Pennsylvania’s nonrecurring charges for the installation of telephone lines, moves of and changes to telephone lines and services and repairs of telephone lines to be subject to the gross receipts tax as no telephone messages are transmitted when Verizon Pennsylvania performs nonrecurring services.

 

On appeal, the Supreme Court of Pennsylvania recently held in Verizon Pennsylvania, Inc. v. Commonwealth of Pennsylvania that charges for the installation of private phone lines, charges for directory assistance and certain nonrecurring charges were all subject to the state’s gross receipt tax. The Supreme Court of Pennsylvania found that all of the services, including those related to nonrecurring charges, in some way made transmission more effective or communication more satisfactory even though such services did not involve actual transmission. This is a partial reversal of the 2013 Commonwealth Court of Pennsylvania decision described above, which had ruled that while the charges for the installation of private phone lines and directory assistance were subject to the state’s gross receipts tax, the nonrecurring charges in question were not. As a motion for reconsideration has not been filed with the Supreme Court of Pennsylvania, and the period for such filing has expired, the case is now final.    

 

For the CCES subsidiary, the total additional tax liability calculated by the DOR auditors for the calendar years 2008 through 2013 is approximately $4.1 million.  Appeals of cases for the audits in calendar years 2008 through 2010 have been filed and received continuances pending the outcome of the Verizon Pennsylvania litigation described above.  The preliminary audit findings for the calendar years 2011 through 2013 were received on September 16, 2014.  We are awaiting invoices 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 DOR auditors for the calendar years 2008 through 2013 (using the re-audited 2010 number) is approximately $5.0 million.  Appeals of cases for the audits in calendar years 2008, 2009 and the original 2010 audit have been filed and received continuances pending the outcome of the Verizon Pennsylvania litigation described above. The preliminary audit findings for the calendar years 2011 through 2013, as well as the re-audit of 2010, were received on September 16, 2014.  We are awaiting invoices for each of these years, at which time we will prepare to file an appeal with the DOR.    

 

We believe that certain of the DOR’s findings regarding the Company’s additional tax liability for the calendar years 2008 through 2013, for which we have filed or plan to file appeals, continue to lack merit. However, in light of the Supreme Court of Pennsylvania’s decision, we have accrued $1.4 million and $1.2 million for our CCES and CCPA subsidiaries, respectively. These accruals also include the Company’s best estimate of the potential 2014 and 2015 additional tax liabilities. We do not believe that the outcome of these claims will have a material adverse impact on our financial results or cash flows.    

 

From time to time we may be involved in litigation that we believe is of the type common to companies in our industry, including regulatory issues. While the outcome of these other claims cannot be predicted with certainty, we do not believe that the outcome of any of these other legal matters will have a material adverse impact on our business, results of operations, financial condition or cash flows.

 

12 .  CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

Consolidated Communications, Inc. is the primary obligor under the unsecured Senior Notes.  We and substantially all of our subsidiaries, excluding Consolidated Communications of Illinois Company, have jointly and severally guaranteed the Senior Notes.  All of the subsidiary guarantors are 100% direct or indirect wholly owned subsidiaries of the parent, and all guarantees are full, unconditional and joint and several with respect to principal, interest and liquidated damages, if any. 

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As such, we present condensed consolidating balance sheets as of March 31, 2016 and December 31, 2015, condensed consolidating statements of operations and cash flows for the quarters ended March 31, 2016 and 2015 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.

 

Condensed Consolidating Balance Sheets

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

Parent

    

Subsidiary Issuer

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

23,578

 

$

882

 

$

1

 

$

 —

 

$

24,461

 

Accounts receivable, net

 

 

 —

 

 

 —

 

 

56,763

 

 

6,801

 

 

(87)

 

 

63,477

 

Income taxes receivable

 

 

35,122

 

 

 —

 

 

 —

 

 

 —

 

 

(16,362)

 

 

18,760

 

Prepaid expenses and other current assets

 

 

 —

 

 

 —