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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, 2020

or

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

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-51446

Graphic

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 17th Street, MattoonIllinois

61938-3987

(Address of principal executive offices)

(Zip Code)

  (217) 235-3311   

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock - $0.01 par value

CNSL

The NASDAQ Global Select Market

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 every Interactive Data File required to be submitted 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 such files).

Yes X No ____

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

Large accelerated filer     Accelerated filer

Non-accelerated filer___ Smaller reporting company ____ Emerging growth company ____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

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 27, 2020, the registrant had 73,041,782 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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

43

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

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 OPERATIONS

(Unaudited; Amounts in thousands except per share amounts)

Quarter Ended

March 31,

  

2020

 

2019

   

 

Net revenues

$

325,662

$

338,649

Operating expense:

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

 

137,755

 

148,319

Selling, general and administrative expenses

 

67,817

 

74,367

Depreciation and amortization

 

82,738

 

99,243

Income from operations

 

37,352

 

16,720

Other income (expense):

Interest expense, net of interest income

 

(32,095)

 

(34,283)

Gain on extinguishment of debt

 

234

 

Investment income

 

10,579

 

8,601

Other, net

 

4,594

 

(1,369)

Income (loss) before income taxes

 

20,664

 

(10,331)

Income tax expense (benefit)

 

5,041

 

(3,145)

Net income (loss)

 

15,623

 

(7,186)

Less: net income attributable to noncontrolling interest

 

76

 

79

Net income (loss) attributable to common shareholders

$

15,547

$

(7,265)

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

$

0.22

$

(0.11)

Dividends declared per common share

$

$

0.39

See accompanying notes.

1

Table of Contents

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; Amounts in thousands)

Quarter Ended

March 31,

    

2020

    

2019

    

 

Net income (loss)

$

15,623

$

(7,186)

Pension and post-retirement obligations:

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

 

336

 

1,026

Derivative instruments designated as cash flow hedges:

Change in fair value of derivatives, net of tax

 

(11,944)

 

(6,689)

Cumulative adjustment upon adoption of ASU 2017-12

(576)

Reclassification of realized loss (gain) to earnings

 

1,608

 

(207)

Comprehensive income (loss)

 

5,623

 

(13,632)

Less: comprehensive income attributable to noncontrolling interest

 

76

 

79

Total comprehensive income (loss) attributable to common shareholders

$

5,547

$

(13,711)

See accompanying notes.

2

Table of Contents

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

March 31,

December 31,

   

2020

    

2019

 

ASSETS

Current assets:

Cash and cash equivalents

$

14,139

$

12,395

Accounts receivable, net of allowance for credit losses

 

122,340

 

120,016

Income tax receivable

 

4,174

 

2,669

Prepaid expenses and other current assets

 

45,175

 

41,787

Total current assets

 

185,828

 

176,867

Property, plant and equipment, net

 

1,806,945

 

1,835,878

Investments

 

113,197

 

112,717

Goodwill

 

1,035,274

 

1,035,274

Customer relationships, net

 

151,407

 

164,069

Other intangible assets

 

10,557

 

10,557

Other assets

 

51,925

 

54,915

Total assets

$

3,355,133

$

3,390,277

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

19,902

$

30,936

Advance billings and customer deposits

 

47,224

 

45,710

Accrued compensation

 

56,105

 

57,069

Accrued interest

14,945

7,874

Accrued expense

 

73,776

 

75,406

Current portion of long-term debt and finance lease obligations

 

25,722

 

27,301

Total current liabilities

 

237,674

 

244,296

Long-term debt and finance lease obligations

 

2,209,748

 

2,250,677

Deferred income taxes

 

174,489

 

173,027

Pension and other post-retirement obligations

 

293,145

 

302,296

Other long-term liabilities

 

86,418

 

72,730

Total liabilities

 

3,001,474

 

3,043,026

Commitments and contingencies (Note 12)

Shareholders’ equity:

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 73,041,782 and 71,961,045 shares outstanding as of March 31, 2020 and December 31, 2019, respectively

 

731

 

720

Additional paid-in capital

 

493,125

 

492,246

Accumulated deficit

 

(55,775)

 

(71,217)

Accumulated other comprehensive loss, net

 

(90,868)

 

(80,868)

Noncontrolling interest

 

6,446

 

6,370

Total shareholders’ equity

 

353,659

 

347,251

Total liabilities and shareholders’ equity

$

3,355,133

    

$

3,390,277

See accompanying notes.

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited; Amounts in thousands)

Accumulated

 

    

    

    

Additional 

Retained 

    

Other 

    

Non-

    

 

Common Stock

Paid-in 

Earnings

Comprehensive

controlling 

 

Shares

Amount

Capital

(Deficit)

Loss, net

Interest

Total

 

Balance at December 31, 2018

 

71,187

$

712

$

513,070

$

(50,834)

$

(53,212)

$

5,918

$

415,654

Cash dividends on common stock

 

 

 

(27,356)

 

(576)

 

 

(27,932)

Shares issued under employee plan, net of forfeitures

 

923

 

9

 

(9)

 

 

 

Non-cash, share-based compensation

 

 

 

1,498

 

 

 

1,498

Other comprehensive income (loss)

 

 

 

 

 

(6,446)

 

(6,446)

Cumulative adjustment: adoption of ASU 2017-12

576

576

Net income (loss)

 

 

 

 

(7,265)

 

79

 

(7,186)

Balance at March 31, 2019

 

72,110

$

721

$

487,203

$

(58,099)

$

(59,658)

$

5,997

$

376,164

Balance at December 31, 2019

 

71,961

$

720

$

492,246

$

(71,217)

$

(80,868)

$

6,370

$

347,251

Shares issued under employee plan, net of forfeitures

 

1,081

11

 

(11)

 

 

 

Non-cash, share-based compensation

 

 

 

890

 

 

 

890

Other comprehensive income (loss)

 

 

 

 

 

(10,000)

 

(10,000)

Cumulative adjustment: adoption of ASU 2016-13

(105)

(105)

Net income (loss)

 

 

 

 

15,547

 

76

 

15,623

Balance at March 31, 2020

 

73,042

$

731

$

493,125

$

(55,775)

$

(90,868)

$

6,446

$

353,659

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,

    

2020

    

2019

 

Cash flows from operating activities:

Net income (loss)

$

15,623

$

(7,186)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

 

82,738

 

99,243

Cash distributions from wireless partnerships less than current earnings

 

(307)

 

(1,118)

Pension and post-retirement contributions in excess of expense

(8,571)

(5,980)

Stock-based compensation expense

 

890

 

1,498

Amortization of deferred financing costs

 

1,196

 

1,213

Gain on extinguishment of debt

 

(234)

 

Other, net

 

(4,138)

 

397

Changes in operating assets and liabilities, net of acquired businesses:

Accounts receivable, net

 

1,204

 

810

Income tax receivable

 

5,024

 

(3,227)

Prepaid expenses and other assets

 

(1,826)

 

(2,419)

Accounts payable

 

(11,034)

 

(6,497)

Accrued expenses and other liabilities

 

4,425

 

(1,737)

Net cash provided by operating activities

84,990

74,997

Cash flows from investing activities:

Purchases of property, plant and equipment, net

 

(42,389)

 

(53,394)

Proceeds from sale of assets

 

2,187

 

865

Proceeds from sale of investments

426

329

Net cash used in investing activities

 

(39,776)

 

(52,200)

Cash flows from financing activities:

Proceeds from issuance of long-term debt

 

10,000

 

51,000

Payment of finance lease obligations

 

(2,674)

 

(3,507)

Payment on long-term debt

 

(46,588)

 

(45,588)

Repurchase of senior notes

(4,208)

Dividends on common stock

 

 

(27,577)

Net cash used in financing activities

 

(43,470)

 

(25,672)

Change in cash and cash equivalents

 

1,744

 

(2,875)

Cash and cash equivalents at beginning of period

 

12,395

 

9,599

Cash and cash equivalents at end of period

$

14,139

$

6,724

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,” “our” or “us”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communication solutions to consumer, commercial and carrier customers across a 23-state service area.

Leveraging our advanced fiber network spanning more than 37,500 fiber route miles, we offer residential high-speed Internet, video, phone and home security services as well as multi-service residential and small business bundles.  Our business product suite includes data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services.  As of March 31, 2020, we had approximately 821,000 voice connections, 786,000 data connections and 83,000 video connections.

In the opinion of management, the accompanying unaudited condensed consolidated balance sheets and related condensed consolidated statements of operations, comprehensive income (loss), shareholders’ equity 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 2019 Annual Report on Form 10-K filed with the SEC.

Recent Developments

We are closely monitoring the impact on our business of the current outbreak of a novel strain of coronavirus (“COVID-19”).  We are taking precautions to ensure the safety of our employees, customers and business partners, while assuring business continuity and reliable service and support to our customers.  While we have not seen a significant adverse impact to our financial results from COVID-19 to date, if the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be adversely impacted.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted by the U.S. government as an emergency economic stimulus package that includes spending and tax breaks to strengthen the US economy and fund a nationwide effort to curtail the economic effects of COVID-19.  The CARES Act includes, among other things, deferral of certain employer payroll tax payments, the delay in payment of minimum required pension contributions due in 2020 until January 1, 2021 and certain income tax law changes including modifications to the net interest deduction limitations.  In April 2020, we began deferring the payment of the employer portion of Social Security taxes and estimate that approximately $4.2 million for employer payroll tax payments otherwise due in the second quarter of 2020 will be deferred with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022.  At this time, we have elected not to delay the payment of our minimum required pension contributions due in 2020 and the potential deferral of employer payroll tax payments for future quarters in 2020 will continued to be assessed based on the extent of the future impacts of COVID-19 on our business.  The CARES Act is not expected to have a material impact on our consolidated financial statements.

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Accounts Receivable and Allowance for Credit Losses

Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments, using the modified retrospective method.  The adoption of the new standard did not result in a material impact to the Company.  As part of the adoption, we recorded a cumulative effect adjustment of $0.1 million, net of tax, to opening retained earnings during the quarter ended March 31, 2020.  The following disclosures have been made in accordance with ASU 2016-13.

Accounts receivable (“AR”) consists primarily of amounts due to the Company from normal business activities.  We maintain an allowance for credit losses (“ACL”) based on our historical loss experience, current conditions and forecasted changes including but not limited to changes related to the economy, our industry and business.  Uncollectible accounts are written-off (removed from AR and charged against the ACL) when internal collection efforts have been unsuccessful.  Subsequently, if payment is received from the customer, the recovery is credited to the ACL.

The following table summarizes the activity in ACL for the quarters ended March 31, 2020 and 2019:

Quarter Ended
March 31,

 

(In thousands)

    

2020

    

2019

    

 

Balance at beginning of year

$

4,549

$

4,421

Cumulative adjustment upon adoption of ASU 2016-13

144

Provision charged to expense

 

2,083

2,608

Write-offs, less recoveries

 

(1,814)

(2,233)

Balance at end of year

$

4,962

$

4,796

Recent Accounting Pronouncements

Effective January 1, 2020, we adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, using the modified retrospective method.  ASU 2016-13 establishes the new “current expected credit loss” model for measuring and recognizing credit losses on financial assets based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts.  For additional information on the adoption of the new standard and the impact to our condensed consolidated financial statements and related disclosures, refer to the Accounts Receivable and Allowance for Credit Losses section above.

Effective January 1, 2020, we adopted ASU No. 2018-15 (“ASU 2018-15”), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 provides guidance on accounting for costs of implementation activities in a cloud computing arrangement that is a service contract. The new guidance will be applied prospectively. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04 (“ASU 2020-04”), Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The new guidance is effective upon issuance through December 31, 2022. We are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.

In November 2019, the FASB issued ASU No. 2019-12 (“ASU 2019-12”), Income Taxes.  ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions and adding certain requirements to the general framework in ASC 740, Income Taxes. The new guidance is effective for annual periods beginning after December 15, 2020 with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.

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In August 2018, the FASB issued ASU No. 2018-14 (“ASU 2018-14”), Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies disclosure requirements for defined benefit pension and other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirement of disclosures and adding disclosure requirements identified as relevant. The new guidance is effective retrospectively for annual periods beginning after December 15, 2020 with early adoption permitted. We are currently evaluating the impact this update will have on our condensed consolidated financial statements and related disclosures.  

2.  REVENUE

Nature of Contracts with Customers

Our revenue contracts with customers may include a promise or promises to deliver goods such as equipment and/or services such as broadband, video or voice services.  Promised goods and services are considered distinct as the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer and the Company’s promise to transfer a good or service to the customer is separately identifiable from other promises in the contract.  The Company accounts for goods and services as separate performance obligations.  Each service is considered a single performance obligation as it is providing a series of distinct services that are substantially the same and have the same pattern of transfer.

The transaction price is determined at contract inception and reflects the amount of consideration to which we expect to be entitled in exchange for transferring a good or service to the customer.  This amount is generally equal to the market price of the goods and/or services promised in the contract and may include promotional discounts.  The transaction price excludes amounts collected on behalf of third parties such as sales taxes and regulatory fees.  Conversely, nonrefundable upfront fees, such as service activation and set-up fees, are included in the transaction price.  In determining the transaction price, we consider our enforceable rights and obligations within the contract.  We do not consider the possibility of a contract being cancelled, renewed or modified.

The transaction price is allocated to each performance obligation based on the standalone selling price of the good or service, net of the related discount, as applicable.

Revenue is recognized when or as performance obligations are satisfied by transferring control of the good or service to the customer.

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Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the quarters ended March 31, 2020 and 2019:

Quarter Ended

March 31,

(In thousands)

    

2020

    

2019

 

Operating Revenues

Commercial and carrier:

 

 

Data and transport services (includes VoIP)

$

89,572

$

88,126

Voice services

 

45,720

 

48,070

Other

11,712

15,176

147,004

151,372

Consumer:

Broadband (VoIP and Data)

64,076

63,085

Video services

19,131

20,736

Voice services

43,176

45,879

126,383

129,700

Subsidies

18,454

18,159

Network access

31,465

36,591

Other products and services

2,356

2,827

Total operating revenues

$

325,662

$

338,649

Contract Assets and Liabilities

The following table provides information about receivables, contract assets and contract liabilities from our revenue contracts with customers:

March 31,

(In thousands)

    

2020

    

2019

Accounts receivable, net

$

122,340

$

132,326

Contract assets

 

19,704

 

13,897

Contract liabilities

 

52,905

 

55,212

Contract assets include costs that are incremental to the acquisition of a contract.  Incremental costs are those that result directly from obtaining a contract or costs that would not have been incurred if the contract had not been obtained, which primarily relate to sales commissions.  These costs are deferred and amortized over the expected customer life.  We determined that the expected customer life is the expected period of benefit as the commission on the renewal contract is not commensurate with the commission on the initial contract.  During the quarters ended March 31, 2020 and 2019, the Company recognized expense of $2.1 million and $1.2 million, respectively, related to deferred contract acquisition costs.

Contract liabilities include deferred revenues related to advanced payments for services and nonrefundable, upfront service activation and set-up fees, which are generally deferred and amortized over the expected customer life as the option to renew without paying an upfront fee provides the customer with a material right.  During the quarters ended March 31, 2020 and 2019, the Company deferred and recognized revenues of $111.2 million and $94.0 million, respectively.

A receivable is recognized in the period the Company provides goods or services when the Company’s right to consideration is unconditional.  Payment terms on invoiced amounts are generally 30 to 60 days.

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Performance Obligations

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), requires that the Company disclose the aggregate amount of the transaction price that is allocated to remaining performance obligations that are unsatisfied as of March 31, 2020.  The guidance provides certain practical expedients that limit this requirement.  The service revenue contracts of the Company meet the following practical expedients provided by ASC 606:

1.The performance obligation is part of a contract that has an original expected duration of one year or less.
2.Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18.

The Company has elected these practical expedients.  Performance obligations related to our service revenue contracts are generally satisfied over time.  For services transferred over time, revenue is recognized based on amounts invoiced to the customer as the Company has concluded that the invoice amount directly corresponds with the value of services provided to the customer.  Management considers this a faithful depiction of the transfer of control as services are substantially the same and have the same pattern of transfer over the life of the contract.  As such, revenue related to unsatisfied performance obligations that will be billed in future periods has not been disclosed.

3.  EARNINGS (LOSS) PER SHARE

Basic and diluted earnings (loss) per common share (“EPS”) are computed using the two-class method, which is an earnings allocation method that determines EPS for each class of common stock and participating securities considering dividends declared and participation rights in undistributed earnings.  Certain of the Company’s restricted stock awards are considered participating securities because holders are entitled to receive non-forfeitable dividends, if declared, during the vesting term.  

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

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.

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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)

    

2020

    

2019

    

 

Net income (loss)

$

15,623

$

(7,186)

Less: net income attributable to noncontrolling interest

 

76

 

79

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

 

15,547

 

(7,265)

Less: earnings allocated to participating securities

 

247

 

457

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

$

15,300

$

(7,722)

Weighted-average number of common shares outstanding

 

71,153

 

70,813

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

$

0.22

$

(0.11)

Diluted EPS attributable to common shareholders for the quarters ended March 31, 2020 and 2019 excludes 1.1 million and 0.7 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.

4.  INVESTMENTS

Our investments are as follows:

March 31,

December 31,

(In thousands)

    

2020

    

2019

 

Cash surrender value of life insurance policies

$

2,699

$

2,474

Investments at cost:

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

 

8,882

 

8,910

Other

 

273

 

298

Equity method investments:

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

 

20,399

 

20,162

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

 

7,620

 

7,658

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

 

28,924

 

28,815

Totals

$

113,197

$

112,717

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Investments at Cost

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, which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we account for these investments at our initial cost less any impairment because fair value is not readily available for these investments.  No indictors of impairment existed for any of the investments during the quarters ended March 31, 2020 or 2019.  For these investments, we adjust the carrying value for any purchases or sales of our ownership interests, if any. We record distributions received from these investments as investment income in non-operating income (expense).  For the quarters ended March 31, 2020 and 2019, we received cash distributions from these partnerships totaling $5.3 million and $3.3 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.  Income is recognized as investment income in non-operating income (expense) on our proportionate share of earnings and cash distributions are recorded as a reduction in our investment.  For the quarters ended March 31, 2020 and 2019, we received cash distributions from these partnerships totaling $4.8 million and $4.0 million, respectively.  

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 and are categorized within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and observable market data of similar instruments.  See Note 7 for further discussion regarding our interest rate swap agreements.

Our interest rate swap agreements measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 were as follows:

As of March 31, 2020

 

    

    

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

$

(3,049)

 

$

$

(3,049)

 

$

Long-term interest rate swap liabilities

(38,209)

 

(38,209)

 

Total

$

(41,258)

$

$

(41,258)

$

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As of December 31, 2019

 

    

    

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

$

(2,565)

 

$

$

(2,565)

 

$

Long-term interest rate swap liabilities

 

(24,960)

 

 

(24,960)

 

Total

$

(27,525)

$

$

(27,525)

$

We have not elected the fair value option for any of our other 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.  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, 2020 and December 31, 2019.

As of March 31, 2020

As of December 31, 2019

 

(In thousands)

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

  

Long-term debt, excluding finance leases

$

2,221,567

$

1,943,100

$

2,262,111

$

2,125,497

Cost & Equity Method Investments

Our investments as of March 31, 2020 and December 31, 2019 accounted for at cost and under the equity method 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)

    

2020

    

2019

 

Senior secured credit facility:

Term loans, net of discounts of $5,250 and $5,604 at March 31, 2020 and December 31, 2019, respectively

$

1,774,875

$

1,779,109

Revolving loan

 

8,000

 

40,000

6.50% Senior notes due 2022, net of discount of $1,817 and $1,998 at March 31, 2020 and December 31, 2019, respectively

438,692

443,002

Finance leases

21,345

24,019

 

2,242,912

 

2,286,130

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

 

(25,722)

 

(27,301)

Less: deferred debt issuance costs

(7,442)

(8,152)

Total long-term debt

$

2,209,748

$

2,250,677

Credit Agreement

In October 2016, the Company, through certain of its wholly owned subsidiaries, entered into a Third Amended and Restated Credit Agreement with various financial institutions (as amended, the “Credit Agreement”).  The Credit Agreement consists of a $110.0 million revolving credit facility, an initial term loan in the aggregate amount of $900.0 million (the “Initial Term Loan”) and an incremental term loan in the aggregate amount of $935.0 million (the

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“Incremental Term Loan”), collectively (the “Term Loans”).  The Credit Agreement also includes an incremental loan facility which provides the ability to borrow, subject to certain terms and conditions, incremental loans in an aggregate amount of up to the greater of (a) $300.0 million and (b) an amount which would cause its senior secured leverage ratio not to exceed 3.00:1.00 (the “Incremental Facility”).  Borrowings under the Credit Agreement 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 Initial Term Loan was issued in an original aggregate principal amount of $900.0 million with a maturity date of October 5, 2023, but is subject to earlier maturity on March 31, 2022 if the Company’s unsecured Senior Notes due in October 2022 are not repaid in full or redeemed in full on or prior to March 31, 2022. The Initial Term Loan contains an original issuance discount of 0.25% or $2.3 million, which is being amortized over the term of the loan.  The Initial Term Loan requires quarterly principal payments of $2.25 million and has an interest rate of 3.00% plus the London Interbank Offered Rate (“LIBOR”) subject to a 1.00% LIBOR floor.

The Incremental Term Loan was issued in an original aggregate principal amount of $935.0 million and included an original issue discount of 0.50%, which is being amortized over the term of the loan. The Incremental Term Loan has the same maturity date and interest rate as the Initial Term Loan and requires quarterly principal payments of $2.34 million.    

Our revolving credit facility has a maturity date of October 5, 2021 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, in each case depending on our total net leverage ratio.  Based on our leverage ratio as of March 31, 2020, the borrowing margin for the three month period ending June 30, 2020 will be at a weighted-average margin of 3.00% for a LIBOR-based loan or 2.00% for an alternate base rate loan.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.  As of March 31, 2020, alternate base rate borrowings of $8.0 million were outstanding under the revolving credit facility. At December 31, 2019, borrowings of $40.0 million were outstanding under the revolving credit facility, which consisted of LIBOR-based borrowings of $30.0 million and alternate base rate borrowings of $10.0 million.  Stand-by letters of credit of $18.6 million were outstanding under our revolving credit facility as of March 31, 2020.  The stand-by letters of credit are renewable annually and reduce the borrowing availability under the revolving credit facility.  As of March 31, 2020, $83.4 million was available for borrowing under the revolving credit facility.

The weighted-average interest rate on outstanding borrowings under our credit facility was 4.01% and 4.80% as of March 31, 2020 and December 31, 2019, respectively.  Interest is payable at least quarterly.

Credit Agreement Covenant Compliance

The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness and issue certain capital stock.  We have agreed to maintain certain financial ratios, including interest coverage and total net leverage ratios, all as defined in the Credit Agreement.  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 or less than 2.25:1.00, respectively.  As of March 31, 2020, our total net leverage ratio under the Credit Agreement was 4.28:1.00 and our interest coverage ratio was 3.74:1.00.  As of March 31, 2020, we were in compliance with the Credit Agreement covenants.

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 in September 2014.  The New Notes were priced at 98.26% of par with a yield to maturity of 6.80% and

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resulted in total gross proceeds of approximately $294.8 million, excluding accrued interest.  The discount is 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 the majority 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 March 31, 2020, we repurchased $4.5 million of the aggregate principal amount of the Senior Notes. In connection with the partial repurchase of the Senior Notes, we paid $4.2 million and recognized a gain on extinguishment of debt of $0.2 million during the quarter ended March 31, 2020.

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.  As of March 31, 2020, the Company was in compliance with all terms, conditions and covenants under the indenture governing the Senior Notes.

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 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.    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.

The following interest rate swaps were outstanding as of March 31, 2020:

    

Notional

    

    

 

 

(In thousands)

Amount

2020 Balance Sheet Location

Fair Value

 

Cash Flow Hedges:

 

Fixed to 1-month floating LIBOR (with floor)

$

705,000

Accrued expense

$

(3,049)

Fixed to 1-month floating LIBOR (with floor)

$

500,000

Other long-term liabilities

(27,525)

Forward starting fixed to 1-month floating LIBOR (with floor)

$

705,000

Other long-term liabilities

(10,684)

Total Fair Values

 

$

(41,258)

Our interest rate swap agreements mature on various dates between July 2020 and July 2023.  The forward-starting interest rate swap agreement has a term of one year and becomes effective in July 2020.

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The following interest rate swaps were outstanding as of December 31, 2019:

    

Notional

    

    

 

(In thousands)

Amount

2019 Balance Sheet Location

Fair Value

 

Cash Flow Hedges:

 

Fixed to 1-month floating LIBOR (with floor)

$

705,000

Accrued expense

$

(2,565)

Fixed to 1-month floating LIBOR (with floor)

$

500,000

 

Other long-term liabilities

 

(18,303)

Forward starting fixed to 1-month floating LIBOR (with floor)

$

705,000

 

Other long-term liabilities

 

(6,657)

Total Fair Values

 

$

(27,525)

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.  

As of March 31, 2020 and December 31, 2019, the total pre-tax unrealized loss related to our interest rate swap agreements included in AOCI was $(36.5) million and $(22.5) million, respectively.  From the balance in AOCI as of March 31, 2020, we expect to recognize a loss of approximately $18.8 million in earnings in the next twelve months.

Information regarding our cash flow hedge transactions is as follows:

Quarter Ended

March 31,

(In thousands)

    

2020

    

2019

    

 

Unrealized loss recognized in AOCI, pretax

$

(16,152)

$

(9,053)

Deferred (loss) gain reclassified from AOCI to interest expense

$

(2,175)

$

280

8. LEASES

Lessor