CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
Reference is made to Part I - Item 1 - "Note About Forward-Looking Statements" and Part I - Item 1A - "Risk Factors" which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of
Consolidated Communications Holdings, Inc.("Consolidated," the "Company," "we," "our" or "us"). MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to the consolidated financial statements ("Notes") as of and for each of the three years in the period ended December 31, 2021included elsewhere in this Annual Report on Form 10-K. Throughout MD&A, we refer to certain measures that are not a measure of financial performance in accordance with accounting principles generally accepted in the United States("US GAAP" or "GAAP"). We believe the use of these non-GAAP measures on a consolidated basis provides the reader with additional information that is useful in understanding our operating results and trends. These measures should be viewed in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. See the Non-GAAP Measures section below for a more detailed discussion on the use and calculation of these measures.
Consolidated is a broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers across a service area in over 20 states. We operate an advanced fiber network spanning approximately 52,400 fiber route miles across many rural areas and metro communities. 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. We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections. We generate the majority of our consolidated operating revenues primarily from monthly subscriptions to our broadband, data and transport services (collectively "broadband services") marketed to residential and business customers. As consumer demands for bandwidth continue to increase, our focus is on expanding our fiber broadband services and upgrading data speeds in order to offer a highly competitive fiber product. Our investment in more competitive broadband speeds is critical to our long-term success. Our strategic investment with
Searchlight Capital Partners L.P.("Searchlight") combined with the refinancing of our capital structure, as described below, has provided us with additional capital that has enabled us to accelerate our fiber expansion plans and provided significant benefits to our consumer, commercial and carrier customers. With this strategic investment, we intend to enhance our fiber infrastructure and accelerate our investments in high-growth and competitive areas. By leveraging our existing dense core fiber network and an accelerated build plan, we expect to be able to significantly increase data speeds, expand our multi-Gig coverage and strategically extend our network across our strong existing commercial and carrier footprint to attract more on-net and near-net opportunities. As part of our fiber expansion plan, we plan to upgrade approximately 1.6 million passings to fiber over five years across select service areas to enable multi-Gig capable services to these homes and small businesses including more than 1 million passings within our northern New Englandservice areas. During the year ended December 31, 2021, we upgraded approximately 330,000 passings and added approximately 15,500 consumer fiber Gig-capable subscribers. As of December 31, 2021, approximately 41% of the homes we serve on our legacy Consolidated network had availability to broadband speeds of up to 1 Gbps compared to 17% at December 31, 2020. In our northern New Englandservice areas, approximately 14% of the homes we serve were 1 Gig capable as of December 31, 2021compared to 4% at December 31, 2020. Our fiber build plan includes the upgrade of an additional 400,000 homes and small businesses in 2022. In November 2021, we launched Fidium Fiber, our new Gigabit consumer fiber internet product available in select northern New Englandmarkets, reinforcing our broadband-first strategy. We expect to launch Fidium Fiber in other regions in 2022. As we continue to increase broadband speeds, we believe that we will also be able to simultaneously expand the array of services and content offerings that our network provides. Commercial and carrier services represent the largest source of our operating revenues and we are focused on expanding our broadband and commercial product suite and are continually enhancing our commercial product offerings to meet the needs of our business customers. By leveraging our advanced 26 Table of Contents fiber network, we can tailor our services for business customers by developing solutions to fit their specific needs. Additionally, we are continuously enhancing our suite of managed and cloud services by adding new functionality and support, which increases efficiency and enables greater scalability and reliability for businesses. We anticipate future momentum in commercial and carrier services as these products gain traction as well as from the demand from customers for additional bandwidth and data-based services. However, operating revenues continue to be impacted by the industry-wide trend of declines in voice services, access lines and related network access revenue. Many customers are choosing to subscribe to alternative communication services, and competition for these subscribers continues to increase. Total voice connections decreased 8% as of December 31, 2021compared to 2020. We have been able to mitigate some of the access line losses through alternative product offerings, such as our VoIP service. Our competitive broadband speeds enable us to meet consumer demand for higher bandwidth for streaming programming or on-demand content on any device. The consumers demand for streaming services, either to augment their current video subscription plan or to entirely replace their linear video subscription may impact our future video subscriber base and, accordingly, reduce our video revenue as well as our video programing costs. Total video connections decreased 17% as of December 31, 2021compared to 2020. We believe the trend in changing consumer viewing habits will continue to impact our business results and complement our strategy of providing consumers with higher broadband speeds to facilitate streaming content including services offered through our streaming partnerships.
Our operating revenues are impacted by legislative or regulatory changes at the federal and state levels, which could reduce or eliminate the current subsidies revenue we receive. A number of proceedings and recent orders relate to universal service reform, inter-carrier compensation ("ICC") and network access charges. Recent orders adopted in 2020 will result in a reduction in the federal subsidies we receive of approximately
$42.2 millionannually beginning January 1, 2022. See the "Regulatory Matters" section below for a further discussion of the subsidies we receive.
Important Recent Developments
September 13, 2020, we entered into an investment agreement (the "Investment Agreement") with an affiliate of Searchlight. In connection with the Investment Agreement, affiliates of Searchlight have invested an aggregate of $425.0 millionin the Company. The investment commitment was structured in two stages. In the first stage of the transaction, which was completed on October 2, 2020, Searchlight invested $350.0 millionin the Company in exchange for 6,352,842 shares, or approximately 8%, of the Company's common stock and a contingent payment right ("CPR") that was convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 17,870,012 shares, or 16.9% of the Company's common stock. In addition, Searchlight received the right to an unsecured subordinated note with an aggregate principal amount of approximately $395.5 million(the "Note"), which will be convertible into shares of a new series of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the Note plus accrued interest as of the date of conversion. On July 15, 2021, the Company received all required state public utility commission regulatory approvals necessary for the conversion of the CPR into 16.9% additional shares of the Company's common stock. As a result, the CPR was converted into 17,870,012 shares of common stock, which were issued to Searchlight on July 16, 2021. In the second stage of the Investment, which was completed on December 7, 2021following the receipt of Federal Communications Commission(" FCC") and certain regulatory approvals and the satisfaction of certain other customary closing conditions, Searchlight invested an additional $75.0 millionand was issued the Note. The Note bore interest at 9.0% per annum from the date of the closing of the first stage of the transaction and was payable semi-annually in arrears. The Note included a paid-in-kind ("PIK") option for a five-year period beginning as of October 2, 2020. During the year ended December 31, 2021, the Company elected the PIK option and accrued interest of $38.8 millionwas added to the principal balance of the Note. On December 7, 2021, Searchlight elected to convert the Note into 434,266 shares of Series A Perpetual Preferred Stock, par value $0.01per share (the "Series A Preferred Stock"). In addition, on December 7, 2021, the CPR converted into an additional 15,115,899 shares, or an additional 10.1%, of the Company's common stock. As of December 31, 2021, shares of common stock issued to Searchlight represent approximately 35% of the Company's outstanding common stock. The strategic investment with Searchlight provides us a valued partner with significant 27 Table of Contents
experience in deploying broadband infrastructure as we continue to execute our fiber-first strategy and expand broadband services.
Refinancing of long-term debt
October 2, 2020, the Company and certain of its wholly-owned subsidiaries completed a refinancing of our long-term debt through the issuance of $2,250.0 millionin new secured debt and retired all of our then existing outstanding debt obligations. As described in the "Liquidity and Capital Resources" section, we entered into a new credit agreement which consisted of term loans in the original aggregate amount of $1,250.0 millionand a $250.0 millionrevolving credit facility. On October 2, 2020, we also issued $750.0 millionaggregate principal amount of 6.50% senior secured notes due 2028. On January 15, 2021, the Company issued an additional $150.0 millionaggregate principal amount of incremental term loans under the credit agreement. On March 18, 2021, we issued $400.0 millionaggregate principal amount 5.00% Senior Notes and used the net proceeds from the issuance of notes to repay $397.0 millionof the term loans outstanding under the credit agreement. On April 5, 2021, we entered into an amendment to the credit agreement to refinance the outstanding term loans, which reduced the combined interest rate margin and LIBOR floor by 1.5%. The refinancing extended the maturities of our debt obligations and improved our liquidity, which, combined with the strategic investment with Searchlight, provides us the immediate flexibility to support our planned expansion of our fiber network and revenue growth plan.
September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio, Consolidated Communications of Ohio Company("CCOC"), for approximately $26.0 millionin cash, subject to a customary working capital adjustment. CCOC provides telecommunications and data services to residential and business customers in 11 rural communities in Ohioand surrounding areas and includes approximately 4,000 access lines and 3,900 data connections. The asset sale aligns with our strategic asset review and focus on our core broadband regions. As of December 31, 2021, the assets and liabilities to be disposed of were classified as held for sale in the condensed consolidated balance sheet and consisted primarily of allocated goodwill of $16.3 millionand property, plant and equipment of $9.5 million. In connection with the classification as assets held for sale, we recognized an impairment loss of $5.7 millionduring the year ended December 31, 2021. Subsequent to December 31, 2021, the parties received all required regulatory approvals and the transaction closed on February 1, 2022. Subsequent to December 31, 2021, we entered into a definitive agreement on March 2, 2022to sell substantially all the assets of our business located in the Kansas Citymarket (the " Kansas Cityoperations"). The Kansas Cityoperations provides data, voice and video services to customers within the Kansas Citymetropolitan area and surrounding counties and includes approximately 19,000 consumer customers and 1,900 commercial customers. The transaction is expected to close in the second half of 2022 and is subject to the receipt of all customary regulatory approvals and the satisfaction of other closing conditions. We estimate that the pre-tax impairment loss to be recognized during the quarter ended March 31, 2022will range from $125.0 millionto $130.0 million, which includes approximately $90.0 millionin allocated goodwill.
We are closely monitoring the ongoing impact on our business of the coronavirus ("COVID-19") pandemic. 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. Health and safety measures implemented include transitioning to remote work-from-home policies, providing our field technicians with personal protective equipment and additional safety training, practicing social distancing and adding call aheads for work that must be performed inside customer premises. While we have not seen a material adverse impact to our financial results from COVID-19 to date, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. If the pandemic worsens or new variants of the virus become more dominant and were to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted. See Part I, Item 1A - "Risk Factors."
economy and fund a national effort to reduce the economic effects of COVID-19. The CARES Act included, among
other things, deferral of certain employer payroll tax payments and certain income tax law changes including modifications to the net interest deduction limitations. In 2020, we deferred the payment of approximately
$12.0 millionfor the employer portion of Social Securitytaxes otherwise due in 2020 with 50% due by December 31, 2021and the remaining 50% by December 31, 2022. The portion of the taxes deferred until 2021 were paid during the third quarter of 2021. On March 11, 2021, the American Rescue Plan Act of 2021 ("ARPA") was enacted and provides further economic relief to address the continued economic impact of COVID-19. To date, these acts have not had a material impact on our consolidated financial statements, although we will continue to monitor the impact of any effects from these acts and other future legislation.
The following tables reflect our financial results on a consolidated basis and key operating statistics as of and for the years ended
December 31, 2021, 2020 and 2019. Financial Data % Change 2021 vs. 2020 vs.
(In millions, except for percentages) 2021 2020 2019 2020 2019 Operating Revenues Commercial and carrier: Data and transport services (includes VoIP)
$ 362.3 $ 362.1 $ 355.30 % 2 % Voice services 171.8 181.7 188.3 (5) (4) Other 41.6 45.1 52.9 (8) (15) 575.7 588.9 596.5 (2) (1) Consumer: Broadband (Data and VoIP) 269.3 263.1 257.1 2 2 Video services 65.1 74.3 81.4 (12) (9) Voice services 160.7 170.5 180.8 (6) (6) 495.1 507.9 519.3 (3) (2) Subsidies 69.8 72.0 72.4 (3) (1) Network access 120.5 125.3 138.1 (4) (9) Other products and services 21.1 9.9 10.2 113 (3) Total operating revenues 1,282.2 1,304.0
1,336.5 (2) (2)
Operating Expenses Cost of services and products (exclusive of depreciation and amortization) 569.6 560.6 574.9 2 (2) Selling, general and administrative costs 271.1 275.4 299.1 (2) (8) Acquisition and other transaction costs - 7.6 - (100) 100 Loss on impairment of assets held for sale 5.7 - - 100 - Depreciation and amortization 300.6 324.9 381.2 (7) (15) Total operating expenses 1,147.0 1,168.5
1,255.2 (2) (7) Income from operations 135.2 135.5 81.3 (0) 67 Interest expense, net (175.2) (143.6) (136.7) 22 5
Gain (loss) on extinguishment of debt (17.1) (18.3) 4.5 (7) (507) Change in fair value of contingent payment rights (86.5) 23.8 - (463) 100 Other income, net 43.2 50.8 27.2 (15) 87 Income tax expense (benefit) 6.3 10.9 (3.7) (42) 395 Net income (loss) (106.7) 37.3 (20.0) (386) 287 Dividends on Series A preferred stock 2.7 - - 100 - Net income attributable to noncontrolling interest 0.4 0.3 0.4 33 (25) Net income (loss) attributable to common shareholders
$ (109.8) $ 37.0 $ (20.4)(397) 281 Adjusted EBITDA (1) $ 506.9 $ 529.2 $ 523.5(4) % 1 % (1) A non-GAAP measure. See the "Non-GAAP Measures" section below for additional information and reconciliation to the most directly comparable GAAP measure. 29 Table of Contents Key Operating Statistics % Change 2021 vs. 2020 vs. 2021 2020 2019 2020 2019 Consumer customers 516,949 554,763 582,818 (7) % (5) % Consumer data connections 384,564 401,357 417,410 (4) (4) Consumer voice connections 328,849 370,660 404,943 (11) (8) Video connections 63,447 76,041 84,171 (17) (10) Operating Revenues Commercial and Carrier Data and Transport Services We provide a variety of business communication services to business customers of all sizes, including voice and data services over our advanced fiber network. The services we offer include scalable high-speed broadband Internet access and VoIP phone services, which range from basic service plans to virtual hosted systems. In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; private line data services; software defined wide area network ("SD-WAN") and multi-protocol label switching. Our networking services include point-to-point and multi-point deployments from 2.5 Mbps to 10 Gbps to accommodate the growth patterns of our business customers. We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer's on-site phone systems and data networks, managed network security services and data protection services. Data center and disaster recovery solutions provide a reliable and local colocation option for commercial customers. We also offer wholesale services to regional and national interexchange and wireless carriers, including cellular backhaul and other fiber transport solutions. Data and transport services revenues increased $0.2 millionduring 2021 compared to 2020 due to continued growth in Metro Ethernet and SD-WAN services, which was largely offset by a decline in carrier services and cellular backhaul in 2021 as a result of price compression and a reduction in pricing of recent contract renewals with our wireless backhaul partners. Data and transport services revenues increased $6.8 millionduring 2020 compared to 2019 primarily due to growth in Metro Ethernet and VoIP services. In recent years, the growth in data and transport services revenues has been impacted by increased competition and price compression as customers are migrating from legacy data connection products to more competitive Ethernet based products, which have a lower average revenue per user. In addition, recent and ongoing contract renewals with our wireless backhaul partners have also resulted in a decline in pricing. Future declines are expected to be partially offset with the increasing demand for bandwidth and other Ethernet services.
Voice services include basic local phone and long-distance service packages for business customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller ID, call forwarding, speed dialing and call waiting. Services can be charged at a fixed monthly rate, a measured rate or can be bundled with selected services at a discounted rate. Voice services revenues decreased
$9.9 millionduring 2021 compared to 2020 primarily due to a 9% decline in access lines in 2021 compared to 2020. Voice services revenues decreased $6.6 millionduring 2020 compared to 2019 primarily due to a 7% decline in access lines in 2020 compared to 2019. Commercial customers are increasingly choosing alternative technologies, including our own VoIP product, and the broad range of features that Internet-based voice services can offer. Other Other services include business equipment sales and related hardware and maintenance support, video services and other miscellaneous revenues, including 911 service revenues. We are a full service 911 provider and have installed and maintained two turn-key, state of the art statewide next-generation emergency 911 systems. These systems, located in Maineand Vermont, have processed several million calls relying on the caller's location information for routing. As of October 29, 2020, we were no longer the 911 service provider in Vermont. Next-generation emergency 911 systems are 30
an improvement over traditional 911 and should provide the foundation for handling future modes of communication such as SMS and video.
Other services revenues decreased
$3.5 millionduring 2021 compared to 2020 primarily due to the expiration of our 911 service contract in Vermontas well as decreases in pole attachment and custom construction revenues. Other services revenues decreased $7.8 millionduring 2020 compared to 2019 primarily due to a decrease in business system sales in 2020.
Broadband services include revenues from residential customers for subscriptions to our VoIP and data products. We offer high-speed Internet access at speeds of up to 1 Gbps, depending on the network facilities that are available, the level of service selected and the location. Our VoIP digital phone service is also available in certain markets as an alternative to the traditional telephone line. CCiTV, which is a customizable, cloud-enabled video service, supports a wide variety of viewing habits and provides an app-based approach to video services. Content can be delivered in high-definition quality to a big-screen TV, as well as to tablets and mobile devices. Broadband services revenues increased
$6.2 millionduring 2021 compared to 2020 and $6.0 millionduring 2020 compared to 2019 despite a 4% decrease in broadband connections in both 2021 and 2020 primarily due to an increase in Internet services as a result of price increases as well as growth in CCiTV revenue.
However, the increase in broadband revenue was partially offset by a decline in VoIP revenue due to a 15% drop in connections in 2021 and 2020.
Depending on geographic market availability, our video services range from limited basic service to advanced digital television, which includes several plans, each with hundreds of local, national and music channels including premium and Pay-Per-View channels as well as video On-Demand service. Certain customers may also subscribe to our advanced video services, which consist of high-definition television, digital video recorders ("DVR") and/or a whole home DVR. Our video subscribers can also watch their favorite shows, movies and livestreams on any device. In addition, we offer several in-demand streaming TV services, which provide endless entertainment options.
Revenue from video services fell
expect to continue to experience a decline in video connections as consumers choose to subscribe to alternative video services such as over-the-top streaming services.
Voice Services We offer several different basic local phone service packages and long-distance calling plans, including unlimited flat-rate calling plans. The plans include options for voicemail and other custom calling features such as caller ID, call forwarding and call waiting. Voice services revenues decreased
$9.8 millionduring 2021 compared to 2020 primarily due to a 11% decline in access lines during 2021 compared to 2020. Voice services revenues decreased $10.3 millionduring 2020 compared to 2019 primarily due to an 8% decline in access lines during 2020 compared to 2019.
The number of local access lines in service directly affects the recurring revenue we generate from end users and continues to be impacted by the industry-wide decline in access lines. We expect to continue to experience voice connection erosion due to competition from alternative technologies, including our own competitive VoIP product.
Subsidies consist of both federal and state subsidies, which are designed to promote widely available, quality broadband services at affordable prices with higher data speeds in rural areas. Subsidies revenues decreased
$2.2 millionduring 2021 compared to 2020 and $0.4 millionin 2020 compared to 2019 primarily due to a reduction in state subsidies support. We 31
anticipate future declines in federal subsidies support. In 2020, the
FCCadopted an order establishing the Rural Digital Opportunity Fund("RDOF"), which will result in a reduction in our annual support of approximately $42.2 millionbeginning January 1, 2022. See the "Regulatory Matters" section below for a further discussion of the subsidies we receive.
Network access services include interstate and intrastate switched access, network special access and end user access. Switched access revenues include access services to other communications carriers to terminate or originate long-distance calls on our network. Special access circuits provide dedicated lines and trunks to business customers and interexchange carriers. Network access services revenues decreased
$4.8 millionduring 2021 compared to 2020 and $12.8 millionin 2020 compared to 2019 primarily as a result of the continuing decline in interstate rates, minutes of use, voice connections and carrier circuits; however, a portion of the decrease can be attributed to carriers shifting to our fiber Metro Ethernet product, contributing to the growth in
that area. Other Products and Services Other products and services include revenues from telephone directory publishing, video advertising, billing and support services and other miscellaneous revenues. We have entered into numerous
Public Private Partnershipagreements with several towns in New Hampshireto build new FTTP Internet networks. The new town networks provide broadband speeds of up to 1 Gbps to residential and commercial customers. Public Private Partnerships are a key component of Consolidated's commitment to expand rural broadband access.
Revenue from other products and services increased
Cost of services and products
Cost of services and products increased
$9.0 millionduring 2021 compared to 2020 primarily due to an increase in access expense related to fiber costs for the Public Private Partnershipagreements, as described above. In addition, during 2021, we incurred access charges of $3.4 millionrelated to the early termination of a contract obligation for fixed wireless services. Required contributions to the Federal Universal Service Fund("USF") also increased in 2021 as a result of an increase in the annual funding rate. The increase in cost of services and products was also due to insurance recoveries received in 2020. However, employee labor costs declined due to an increase in capitalized costs for the fiber network expansion in 2021 as well as a reduction in headcount. Video programming costs decreased as a result of a decline in video connections. Contract labor costs and repair and maintenance expense also decreased as a result of operating efficiencies and a reduction in maintenance costs for utility poles. In 2020, cost of services and products decreased $14.3 millioncompared to 2019 primarily due to a reduction in video programming costs as a result of a 10% decline in video connections, which was offset in part by an increase in programming costs per channel as costs continue to rise as a result of annual rate increases. Video programming costs are impacted by license fees charged by cable networks, the amount and quality of the content we provide and the number of video subscribers we serve. Cost of goods sold related to equipment sales also decreased from a decline in business system sales in 2020. Employee salaries and benefits declined in 2020 as a result of a reduction in staff through continued cost savings initiatives. Cost of services and products was also reduced by insurance recoveries received in 2020 for hurricane damage incurred in prior years. However, access expense increased due to new fiber and co-location costs as a result of an increase in commercial and carrier services.
Selling, general and administrative expenses
Selling, general and administrative costs decreased
$4.3 millionduring 2021 compared to 2020 primarily due to a reduction in property and real estate taxes as a result of property tax refunds and settlements received in 2021. However, advertising expense increased from additional radio and television advertising to promote our new Fidium brand and fiber broadband speeds. 32
Selling, general and administrative costs decreased
$23.7 millionduring 2020 compared to 2019 primarily due a decline in integration and severance costs in connection with cost savings initiatives. Employee salaries and benefits also declined in 2020 as a result of a reduction in headcount. In addition, contract labor costs decreased as a result of operating efficiency improvements. However, customer acquisition costs increased related to the amortization of sales commissions following the adoption of ASC 606. Real estate taxes also increased due to property tax abatements received in 2019.
Acquisition costs and other transaction costs
Acquisition and other transaction costs of
$7.6 millionincludes costs incurred in 2020 in connection with the investment agreement entered into with Searchlight in October 2020. Transaction costs consist primarily of legal, finance and other professional fees incurred in connection with the CPRs issued as part of the transaction.
Depreciation and amortization
Depreciation and amortization expense decreased
$24.3 millionduring 2021 compared to 2020 primarily due to a decline in amortization expense for customer relationships, which are amortized under the accelerated method. Depreciation expense also declined due to the sale of utility poles located in the state of New Hampshirein 2020 and certain acquired assets becoming fully depreciated or amortized. These declines in depreciation and amortization expense were offset in part by ongoing capital expenditures related to the fiber network expansion and customer service improvements. Depreciation and amortization expense decreased $56.3 millionduring 2020 compared to 2019 primarily due to acquired assets becoming fully depreciated or amortized. Depreciation expense also declined due to the sale of utility poles located in the state of Vermontin 2019. These declines in depreciation and amortization expense were offset in part by ongoing capital expenditures related to CAF Phase II funding requirements and success-based capital projects for consumer, commercial and carrier services as well as network enhancements and customer service improvements.
Our revenues are subject to broad federal and/or state regulations, which include such telecommunications services as local telephone service, network access service and toll service. The telecommunications industry is subject to extensive federal, state and local regulation. Under the Telecommunications Act of 1996, federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices. At the federal level, the
FCCgenerally exercises jurisdiction over facilities and services of local exchange carriers, such as our rural telephone companies, to the extent they are used to provide, originate or terminate interstate or international communications. The FCChas the authority to condition, modify, cancel, terminate or revoke our operating authority for failure to comply with applicable federal laws or FCCrules, regulations and policies. Fines or penalties also may be imposed for any of these violations. State regulatory commissions generally exercise jurisdiction over carriers' facilities and services to the extent they are used to provide, originate or terminate intrastate communications. In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks. State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations.
In general, telecommunications service in rural areas is costlier to provide than service in urban areas. The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain. By supporting the high-cost of operations in rural markets, USF subsidies promote widely available, quality telephone service at affordable prices in rural areas.
Our annual support through the
124,500 locations by
December 31, 2020(with interim milestones of 40%, 60% and 80% completion by December 2017, 2018 and 2019, respectively); to provide broadband service with speeds of 10 Mbps downstream and 1 Mbps upstream; to achieve latency of less than 100 milliseconds; to provide data of at least 100 gigabytes per month; and to offer pricing reasonably comparable to pricing in urban areas. The Company met the buildout milestones and performance metrics requirements for 2017 through 2020 for all states where it received funding. We accepted CAF Phase II support in all of our operating states except Coloradoand Kansas, where we declined the offered CAF Phase II support. We continued to receive annual frozen CAF Phase I support of $1.0 millionin Coloradoand Kansasuntil April 2019, when the FCCCAF Phase II auction assigned support to another provider. The annual FCCprice cap filing was made on June 16, 2021and became effective on July 1, 2021. The net impact is a decrease of approximately $3.3 millionin network access and CAF ICC support funding for the July 2021through June 2022tariff period. In April 2019, the FCCannounced plans for the RDOF, the next phase of the CAF program. The RDOF is a $20.4 billionfund to bring speeds of 25 Mbps downstream and 3 Mbps upstream to unserved and underserved areas of America. The FCCissued a Notice of Proposed Rulemaking at their August 2019Open Commission Meeting. The order prioritizes terrestrial broadband as a bridge to rural 5G networks by providing a significant weight advantage to traditional broadband providers. Funding will occur in two phases with the first phase auctioning $16.0 billionand the second phase auctioning $4.4 billion, each to be distributed over 10 years. The minimum speed required to receive funding is 25 Mbps downstream and 3 Mbps upstream. CAF Phase II funding was extended through December 31, 2021for price cap holding companies. The FCCissued the final census block groups with locations and reserve price. We filed the RDOF short form application on July 14, 2020and were listed as a qualified bidder by the FCCon October 13, 2020and participated in the auction. The auction began on October 29, 2020and ended on November 24, 2020. Consolidated won 246 census block groups serving in seven states. The bids we won are at the 1 Gbps downstream and 500 Mbps upstream speed tier to approximately 27,000 locations at an annual funding level of $5.9 million, which will result in a reduction of approximately $42.2 millionin annual support beginning January 1, 2022through December 31, 2031. Consolidated filed its long form application with supporting documents on January 29, 2021and received final FCCapproval on December 14, 2021.
The Texas Universal Service Fund("TUSF") is administered by the National Exchange Carrier Association("NECA"). The Texas Public Utilities Regulatory Act directs the Public Utilities Commission of Texas("PUCT") to adopt and enforce rules requiring local exchange carriers to contribute to a state universal service fund that helps telecommunications providers offer basic local telecommunications service at reasonable rates in high-cost rural areas. The TUSF is also used to reimburse telecommunications providers for revenues lost by providing lifeline service. Our Texasrural telephone companies receive disbursements from this fund.
Our Texas incumbent local exchange carriers (“ILECs”) have historically received support from two state funds, the Small and Rural Incumbent Local Exchange Carrier Plan
December 2020, the PUCT announced a TUSF funding shortfall and would be reducing all funded carriers support by 64% beginning January 15, 2021. The Texas Telephone Association("TTA"), which Consolidated is a member, and the Texas Statewide Telephone Cooperative, Inc.("TSTCI"), filed a lawsuit seeking to overturn the PUCT decision as well as a temporary injunction on the funding reduction. On June 7, 2021, the court ruled in favor of the PUCT. The TTA and TSTCI filed a notice to appeal on July 2, 2021. We filed our brief on September 18, 2021, along with a Motion to Expedite. The defendant's response was due October 21, 2021, unless the motion to expedite was granted. The potential impact is a reduction in support of approximately $4.0 millionannually.
Funding for the Coronavirus Aid, Relief, and Economic Security Act
States are exploring opportunities to use federal funding from the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to help roll out broadband to unserved and underserved areas of their respective states.
consolidation has been granted until
34 Table of Contents homes and businesses in
New Hampshirefor the towns of Danbury, Springfieldand Mason. The state funded 10% upfront with the remainder received upon completion of projects in December 2020.
Funding the US Bailout Act
President Bidensigned the American Rescue Plan Act of 2021 ("ARPA") on March 11, 2021. States have been allocated federal funds to be utilized for capital infrastructure, including broadband deployment, and are in various stages of implementation. We are working with the states and municipalities to participate in this broadband grant program.
March 13, 2020, the FCCissued a pledge to Keep America Connected through May 13, 2020, which was later extended to June 30, 2020. The pledge asked all communications providers to not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the coronavirus pandemic; to waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and to open their Wi-Fi hotspots to any American who needs them. Consolidated signed on to the pledge through June 30, 2020. Several states took the FCCpledge a step further by not allowing any carrier to disconnect service within their state during the Governors' declared state of emergency, which Consolidated also supported. Most state moratoriums on disconnections have expired; however, certain states such as Washingtonand New Yorkwere extended to July 31, 2021and December 31, 2021, respectively. In February 2021, the FCCcreated the Emergency Broadband Benefit Program ("EBB"), a temporary program to help low income households stay connected during the COVID-19 pandemic by providing broadband service discounts for eligible households. Consolidated is a participant in this program. The EBB ended December 31, 2021. EBB recipients fully enrolled as of December 31, 2021will automatically continue to receive their current monthly benefit until March 1, 2022when the Affordable Connectivity Program takes its place.
Affordable Connectivity Program
The Affordable Connectivity Program ("ACP") is a permanent broadband affordability program set up to replace the EBB. The ACP program helps ensure that households can afford the broadband access they need for work, school, healthcare and more. The benefit provides a discount of up to
$30per month toward internet service for eligible households and up to $75per month for households on qualifying Tribal lands. Eligible households can also receive a one-time discount of up to $100to purchase a laptop, desktop computer, or tablet from participating providers if they contribute more than $10and less than $50toward the purchase price. The ACP is limited to one monthly service discount and one device discount per household. The program begins funding March 1, 2022. Consolidated will be participating in this program.
The Infrastructure Investmentand Jobs Act (the "Infrastucture Act") passed on March 31, 2021included $65.0 billiontoward broadband. The broadband internet portion of the Infrastructure Act is aimed at increasing internet coverage for more universal access, including for rural, low-income, and tribal communities.
65% of this funding is earmarked specifically for underserved communities.
Additionally, this measure is designed to help make Internet access more affordable and increase digital literacy.
The Infrastructure Act set aside
$42.5 billionfor Broadband Equity, Access and Deployment grants. The National Telecommunications and Information Administrationadministers the grant program and is in the process of soliciting comments before issuing final rules.
Other Regulatory Issues
We are also subject to a number of regulatory proceedings occurring at the federal and state levels that may have a material impact on our operations. The
FCCand state commissions have authority to issue rules and regulations related to our business. A number of proceedings are pending or anticipated that are related to such telecommunications issues as competition, interconnection, access charges, ICC, broadband deployment, consumer protection and universal service reform. Some proceedings may authorize new services to compete with our existing services. Proceedings that relate to our cable television operations include rulemakings on set top boxes, carriage of programming, industry consolidation and 35 Table of Contents ways to promote additional competition. There are various on-going legal challenges to the scope or validity of FCCorders that have been issued. As a result, it is not yet possible to fully determine the impact of the related FCCrules and regulations on our operations.
Interest expense, net
Interest expense, net of interest income, increased
Interest expense, net of interest income, increased
$6.9 millionduring 2020 compared to 2019 primarily due to additional interest of $7.9 millionrecognized on the Note issued to Searchlight as part of the investment agreement entered into in October 2020. Interest on our outstanding senior notes also increased in 2020 due to the issuance of $750.0 millionin 6.50% Senior Notes due 2028, which were used in part, to redeem the then-remaining amount of our outstanding 6.50% Senior Notes due 2022 as part of the refinancing of our long-term debt in October 2020as described in the "Liquidity and Capital Resources" section below. However, interest expense was reduced in part by a reduction in outstanding debt under our revolving credit facility and a decline in variable interest rates in 2020.
Loss on extinguishment of debt
As described in the "Liquidity and Capital Resources" section below, we incurred a loss on the extinguishment of debt of
$17.1 millionin connection with the repayment of $397.0 millionof outstanding term loans under our credit agreement and the refinancing of our credit agreement during the year ended December 31, 2021. In 2020, we incurred a loss on the extinguishment of debt of $18.3 millionin connection with the refinancing of our credit agreement and the redemption of our 6.50% Senior Notes due 2022 during the year ended December 31, 2020.
Change in fair value of contingent payment obligations
Our contingent payment obligations were measured at fair value until they were converted into shares of the Company's common stock. During the years ended
December 31, 2021and 2020, we recognized a loss of $86.5 millionand a gain of $23.8 million, respectively, on the change in the fair value of the contingent payment rights issued to Searchlight.
Other income decreased
$7.6 millionduring 2021 compared to 2020. In 2021, we recognized a loss of $3.6 millionon the disposition of wireless spectrum licenses. In 2020, we recognized a gain of $3.7 millionon the sale of our 39 GHz wireless spectrum licenses as part of the FCC's efforts to reclaim broadcast TV spectrum for wireless use. Pension and post-retirement benefit expense increased $0.5 millionas the reduction in annual expense was offset by a pension settlement charge of $5.9 millionrecognized during the year ended December 31, 2021as a result of the transfer of the pension liability for a select group of retirees to an annuity provider. See Note 13 to the consolidated financial statements for a more detailed discussion regarding our pension and other post-retirement plans. Investment income increased $1.2 millionduring 2021 from our wireless partnership interests.
Other income increased
During the year ended
December 31, 2019, we recognized a pension settlement charge of $6.7 millionas a result of the transfer of the pension liability for a select group of retirees to an annuity provider. Investment income increased $3.0 millionduring 2020 from our wireless partnership interests. In addition, during 2020, we recognized a gain of $3.7 millionon the sale of our 39 GHz wireless spectrum licenses as part of the FCC's efforts to reclaim broadcast TV spectrum for wireless use.
Income taxes decreased
$4.6 millionin 2021 compared to 2020. Our effective tax rate was (6.3)% for 2021 compared to 22.7% for 2020. In 2021 and 2020, we placed additional valuation allowances on deferred tax assets related to state NOL and state tax credit carryforwards of $1.7 millionand $1.3 million, respectively. On September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio(the " Ohio36 Table of Contents transaction"). As a result, we recorded an increase to our current tax expense of $1.5 millionrelated to the $5.7 millionimpairment loss of noncash goodwill that is not deductible for tax purposes. We also recognized approximately $2.6 millionof tax benefit in the fourth quarter of 2021 to adjust our 2020 provision to match our 2020 returns compared to $0.5 millionof tax benefit in the fourth quarter of 2020 to adjust our 2019 provision to match our 2019 returns. In addition, the investment made by Searchlight in 2020 is treated as a contribution of equity for federal tax purposes. Accordingly, the impact of the non-cash PIK interest expense, discount and issuance costs, and fair value adjustments on the CPR are not recognized for federal income tax purposes, resulting in an increase of $33.1 millionand a decrease of $1.6 millionto our current tax expense for 2021 and 2020, respectively. In addition, for 2021 and 2020, the effective tax rate differed from the federal and state statutory rates due to various permanent income tax differences and differences in allocable income for the Company's state tax filings. Exclusive of these discrete adjustments, our effective tax rate for 2021 would have been approximately 26.8% compared to 24.8% for 2020. Income taxes increased $14.6 millionin 2020 compared to 2019. The increase was primarily related to the change in pretax income. Our effective tax rate was 22.7% for 2020 compared to 15.7% for 2019. In 2020 and 2019, we placed additional valuation allowances on deferred tax assets related to state NOL and state tax credit carryforwards of $1.3 millionand $1.1 million, respectively. The investment transaction with Searchlight on October 2, 2020resulted in a net decrease to our tax provision of $1.6 milliondue to various permanent income taxes differences. In addition, for 2020 and 2019, the effective tax rate differed from the federal and state statutory rates due to various permanent income tax differences and differences in allocable income for the Company's state tax filings. Exclusive of discrete adjustments, our effective tax rate for 2020 would have been approximately 24.8% compared to 27.1% for 2019.
In addition to the results reported in accordance with US GAAP, we also use certain non-GAAP measures such as EBITDA and Adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends. These financial measures are not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance and net cash provided by operating activities as a measure of liquidity. They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies. Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below. EBITDA is defined as net earnings before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below. These measures are a common measure of operating performance in the telecommunications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash. 37 Table of Contents
The following tables present a reconciliation of net income and adjusted EBITDA for the years ended
Year Ended December 31, (In thousands, unaudited) 2021 2020 2019 Net income (loss)
$ (106,693) $ 37,302 $ (19,931)Add (subtract): Interest expense, net of interest income 175,195 143,591 136,660 Income tax expense (benefit) 6,279 10,936 (3,714) Depreciation and amortization 300,597 324,864 381,237 EBITDA 375,378 516,693 494,252 Adjustments to EBITDA: Other, net (1) (30,934) (30,993) (8,847) Investment distributions (2) 43,040 41,529 35,809 Loss (gain) on extinguishment of debt 17,101 18,264 (4,510) Loss on impairment 5,704 - -
Change in fair value of conditional payment rights 86,476 (23,802)
- Non-cash, stock-based compensation 10,097 7,533 6,836 Adjusted EBITDA
$ 506,862 $ 529,224 $ 523,540
Other, the net amount includes earnings on equity of our investments, dividend
income, income attributable to non-controlling interests in subsidiaries, (1) acquisition and transaction costs, including integration costs and
severance pay, non-cash pensions and post-retirement benefits and certain other
(2) Includes all cash dividends and other cash distributions received from our investments. Liquidity and Capital Resources Outlook and Overview Our operating requirements have historically been funded from cash flows generated from our business and borrowings under our credit facilities. We expect that our future operating requirements will continue to be funded from cash flows from operating activities, existing cash and cash equivalents, and, if needed, from borrowings under our revolving credit facility and our ability to obtain future external financing. We anticipate that we will continue to use a substantial portion of our cash flow to fund capital expenditures for our accelerated fiber network expansion and growth plan and to invest in future business opportunities.
The following table summarizes our cash flows:
Years Ended December
(In thousands) 2021 2020
Cash flows provided by (used in): Operating activities
$ 318,867 $ 364,980 $ 339,096Investing activities (586,443) (210,066) (217,819) Financing activities 211,650 (11,748) (118,481) Increase (decrease) in cash and cash equivalents $ (55,926) $ 143,166
Cash flow generated by operating activities
Net cash provided by operating activities was
$318.9 millionin 2021, a decrease of $46.1 millioncompared to the same period in 2020. Cash flows provided by operating activities decreased in part due to a decline in earnings as a result of a decrease in operating revenue. In addition, in response to the potential impacts of the COVID-19 pandemic in 2020, we deferred approximately $12.0 millionof certain employer payroll tax payments under the CARES Act. The portion of the taxes deferred until 2021 of approximately $6.0 millionwere paid during the year ended December 31, 2021. These 38
reductions in cash provided by operating activities were offset in part by a decrease in cash paid for interest and cash contributions to our defined benefit pension plan of
$6.1 millionand $3.8 million, respectively, in 2021 compared to 2020. In 2020, net cash provided by operating activities was $365.0 million, an increase of $25.9 millioncompared to the same period in 2019 primarily as a result of an increase in earnings primarily from a reduction in operating expenses through cost management initiatives and improved operating efficiencies. Cash distributions received from our wireless partnerships also increased $5.7 millionin 2020 compared to 2019. Interest payments decreased approximately $8.6 millionfrom prior year due a decrease in variable interest rates in 2020. In response to the potential impacts of the COVID-19 pandemic, we elected the deferral of certain employer payroll tax payments under the CARES Act of approximately $12.0 millionduring 2020. In addition, cash contributions to our defined benefit pension plans decreased $3.5 millionin 2020 compared to 2019. However, income tax refunds decreased approximately $7.8 millionfrom 2019.
Cash flows used in investing activities
Net cash used in investing activities was
$586.4 millionin 2021 and consisted primarily of cash used for capital expenditures and the purchase of short-term investments. Capital expenditures continue to be our primary recurring investing activity and were $480.3 million, $217.6 millionand $232.2 millionin 2021, 2020 and 2019, respectively. Our fiber expansion plan contributed to the increase in capital expenditures in 2021, which included the upgrade of more than 330,000 passings with multi-Gig data speeds. Capital expenditures for 2022 are expected to be $475.0 millionto $495.0 million, which will be used to support success-based capital projects for commercial, carrier and consumer initiatives and for our planned fiber projects and broadband network expansion, which will include the upgrade in 2022 of approximately 400,000 fiber passings. We expect to continue to invest in the enhancement and expansion of our fiber network in order to retain and acquire more customers through a broader set of products and an expanded network footprint.
In 2021, we purchased
Cash proceeds from the sale of assets decreased
$3.6 millionin 2021 compared to 2020. In 2020, we received cash proceeds of $3.7 millionon the sale of our 39 GHz wireless spectrum licenses as part of the FCC's spectrum recovery efforts.
Cash flows generated by (used in) financing activities
Net cash used in financing activities consists primarily of proceeds and principal repayments on long-term borrowings and debt buybacks.
The following table summarizes our indebtedness as of
(In thousands) Balance Maturity Date Rate(1) 6.50% Senior Notes
$ 750,000October 1, 2028 6.50 % 5.00% Senior Notes 400,000 October 1, 2028 5.00 %
Term loans, net of discount 989,567 October 2, 2027 LIBOR plus
3.50 % Finance leases 24,990 5.55 % (2)
(2)Weighted average rate.
October 2, 2020, the Company, through certain of its wholly-owned subsidiaries, entered into a Credit Agreement with various financial institutions (the "Credit Agreement") to replace the Company's previous credit agreement in its entirety. The Credit Agreement consisted of term loans in the aggregate amount of $1,250.0 million(the "Initial Term Loans") and 39
a revolving loan facility of
$250.0 million. 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 millionplus (b) an amount which would not cause its senior secured leverage ratio not to exceed 3.70:1.00 (the "Incremental Facility"). Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its subsidiaries, subject to certain exceptions. The Term Loans were issued in an original aggregate principal amount of $1,250.0 millionwith a maturity date of October 2, 2027and contained an original issuance discount of 1.5% or $18.8 million, which is being amortized over the term of the loan. Prior to amendments to the Credit Agreement, as described below, the Initial Term Loans required quarterly principal payments of $3.1 million, which commenced December 31, 2020, and bore interest at a rate 4.75% plus the London Interbank Offered Rate ("LIBOR") subject to a 1.00% LIBOR floor. On January 15, 2021, the Company entered into Amendment No. 1 to the Credit Agreement in which we borrowed an additional $150.0 millionaggregate principal amount of incremental term loans (the "Incremental Term Loans"). The Incremental Term Loans have terms and conditions identical to the Initial Term Loans including the same maturity date and interest rate. The Initial Term Loans and Incremental Term Loans, collectively (the "Term Loans") will comprise a single class of term loans under the Credit Agreement. On March 18, 2021, the Company repaid $397.0 millionof the outstanding Term Loans with the net proceeds received from the issuance of $400.0 millionaggregate principal amount of 5.00% senior secured notes due 2028 (the "5.00% Senior Notes"), as described below. The repayment of the Term Loans was applied to the remaining principal payments in direct order of maturity, thereby eliminating the required quarterly principal payments through the remaining term of the loan. In connection with the repayment of the Term Loans, we recognized a loss on extinguishment of debt of $12.0 millionduring the year ended December 31, 2021. On April 5, 2021, the Company, entered into a second amendment to the Credit Agreement (the "Second Amendment") to refinance the outstanding Term Loans of $999.9 million. The terms and conditions of the Credit Agreement remain substantially similar and unchanged except with respect to the interest rate applicable to the Term Loans and certain other provisions. As a result of the Second Amendment, the interest rate of the Term Loans was reduced to 3.50% plus LIBOR subject to a 0.75% LIBOR floor. The maturity date of the Term Loans of October 2, 2027remains unchanged. In connection with entering into the Second Amendment, we recognized a loss of $5.1 millionon the extinguishment of debt during the year ended December 31, 2021. The revolving credit facility has a maturity date of October 2, 2025and an applicable margin (at our election) of 4.00% for LIBOR-based borrowings or 3.00% for alternate base rate borrowings, with a 0.25% reduction in each case if the consolidated first lien leverage ratio, as defined in the Credit Agreement, does not exceed 3.20 to 1.00. As of December 31, 2021and 2020, there were no borrowings outstanding under the revolving credit facility. Stand-by letters of credit of $25.1 millionwere outstanding under our revolving credit facility as of December 31, 2021. The stand-by letters of credit are renewable annually and reduce the borrowing availability under the revolving credit facility. As of December 31, 2021, $224.9 millionwas available for borrowing under the revolving credit facility.
The weighted average interest rate on outstanding borrowings under our credit facilities was 4.25% and 5.75% at
Interest is payable at least quarterly.
In connection with entering into the Credit Agreement in
October 2020, fees of $29.1 millionwere capitalized as deferred debt issuance costs. These capitalized costs are amortized over the term of the debt and are included as a component of interest expense in the consolidated statements of operations. We also incurred a loss on the extinguishment of debt of $12.3 millionduring the year ended December 31, 2020related to the repayment of the outstanding term loan under the previous credit agreement.
Compliance with the terms of the credit agreement
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 a maximum consolidated first lien leverage ratio, as defined in the Credit Agreement. Among 40
other things, it will be an event of default, with respect to the revolving credit facility only, if our consolidated first lien leverage ratio as of the end of any fiscal quarter is greater than 5.85:1.00. As of
December 31, 2021, our consolidated first lien leverage ratio under the Credit Agreement was 4.14:1.00. As of December 31, 2021, we were in compliance with the Credit
Agreement covenants. Senior Notes 6.50% Senior Notes due 2028 On
October 2, 2020, we completed an offering of $750.0 millionaggregate principal amount of 6.50% unsubordinated secured notes due 2028 (the "6.50% Senior Notes"). The 6.50% Senior Notes were priced at par and bear interest at a rate of 6.50%, payable semi-annually on April 1and October 1of each year, beginning on April 1, 2021. The 6.50% Senior Notes mature on October 1, 2028. Deferred debt issuance costs of $17.0 millionincurred in connection with the issuance of the 6.50% Senior Notes in 2020 are being amortized using the effective interest method over the term of the Senior Notes. The net proceeds from the issuance of the 6.50% Senior Notes were used to redeem our then outstanding $440.5 millionaggregate principal amount of 6.50% Senior Notes due in October 2022at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest through the redemption date, to repay a portion of the outstanding borrowings under the previous credit agreement as part of the refinancing in October 2020and to pay related fees and expenses. On March 18, 2021, we issued $400.0 millionaggregate principal amount 5.00% Senior Notes, together with the 6.50% Senior Notes (the "Senior Notes"). The 5.00% Senior Notes were priced at par and bear interest at a rate of 5.00% per year, payable semi-annually on April 1and October 1of each year, beginning on October 1, 2021. The 5.00% Senior Notes will mature on October 1, 2028. Deferred debt issuance costs of $3.8 millionincurred in connection with the issuance of the 5.00% Senior Notes are being amortized using the effective interest method over the term of the Senior Notes. The net proceeds from the issuance of the 5.00% Senior Notes were used to repay $397.0 millionof the Term Loans outstanding under the Credit Agreement.
Compliance with the covenants of the Senior Notes
Subject to certain exceptions and qualifications, the indenture governing the Senior Notes contains customary covenants that, among other things, limits the Company 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. At
December 31, 2021, the Company was in compliance with all terms, conditions and covenants under the indenture governing the Senior Notes.
Redemption of the 6.50% Senior Notes due 2022
October 2, 2020, a notice of redemption was issued to holders of our then outstanding $440.5 millionaggregate principal amount of 6.50% Senior Notes due in October 2022(the "2022 Notes") to redeem all outstanding 2022 Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest through the redemption date. A portion of the proceeds from the issuance of the Senior Notes was deposited with the trustee to pay and discharge the entire indebtedness under the 2022 Notes. The 2022 Notes were redeemed on November 2, 2020, in accordance with the notice of redemption. In connection with the redemption of the 2022 Notes, we recognized a loss on extinguishment of debt of $5.9 millionduring the year ended December 31, 2020. During the year ended December 31, 2019, we repurchased $55.0 millionof the aggregate principal amount of the 2022 Notes for $49.8 millionand recognized a gain on extinguishment of debt of $4.5 million.
We lease certain facilities and equipment under various finance leases which expire between 2022 and 2040. As of
December 31, 2021, the present value of the minimum remaining lease commitments was approximately $25.0 million, of 41
Searchlight InvestmentIn connection with the Investment Agreement entered into in September 2020, Searchlight invested a total of $425.0 millionin Consolidated and holds a combination of perpetual Series A preferred stock and approximately 35% of the Company's outstanding common stock. On October 2, 2020, we closed on the first stage of the strategic investment of $350.0 millionwith Searchlight. The second stage of the investment was completed on December 7, 2021and we received the additional investment of $75.0 millionfrom Searchlight. On December 7, 2021, we issued 434,266 shares of Series A Preferred Stock to Searchlight. Dividends on each share of Series A Preferred Stock accrue daily on the liquidation preference at a rate of 9.0% per annum and will be payable semi-annually in arrears on January 1and July 1of each year. Dividends are payable until October 2, 2025at our election, either in cash or in-kind through an accrual of unpaid dividends, which are automatically added to the liquidation preference; and after October 2, 2025, solely in cash. The liquidation preference at any given time is $1,000per share. As of December 31, 2021, the liquidation preference of the Series A Preferred Stock was $436.9 million, which includes accrued and unpaid dividends of $2.7 million. The Company intends to exercise the PIK dividend option on the Series A Preferred Stock through at least 2022.
$55.4 millionin dividend payments to shareholders during 2019. On April 25, 2019, we announced the elimination of the payment of quarterly dividends on our stock beginning in the second quarter of 2019 in order to focus on deleveraging, fiber network investments and create long-term value for our stockholders. Future dividend payments, if any, are at the discretion of our Board of Directors. Changes in our dividend program will depend on our earnings, capital requirements, financial condition, debt covenant compliance, expected cash needs and other factors considered relevant by our Board of Directors.
Adequacy of cash resources
The following table presents selected information regarding our financial condition:
December 31, (In thousands, except for ratio) 2021 2020 Cash and cash equivalents and short-term investments
$ 210,436 $ 155,561Working capital 142,270 70,191 Current ratio 1.50 1.26
Our net working capital position improved
$72.1 millionas of December 31, 2021compared to December 31, 2020primarily as a result of an increase in cash, cash equivalents and short-term investments of $54.9 million. At December 31, 2021, working capital also included assets classified as held for sale of $25.9 millionrelated to the sale of substantially all of the assets of our ILEC business located in Ohio. Prepaid expenses and other current assets increased $10.4 million. Working capital also improved from a decline in the current portion of long-term debt and finance lease obligations of $9.6 millionas a result of the prepayment in March 2021of $397.0 millionof the outstanding Term Loans, which eliminated the required quarterly principal payments through the remaining term of the loan. However, working capital was reduced by an increase in accounts payable of $15.7 millionand accrued expense of $15.5 millionat December 31, 2021related to the timing of capital expenditures for the fiber build plan. Our most significant use of funds in 2022 is expected to be for: (i) interest payments on our indebtedness of between $123.0 millionand $127.0 million; and (ii) capital expenditures of between $475.0 millionand $495.0 million. The recent refinancing of our capital structure combined with the Searchlight investment provides us the capital and financial flexibility to fund our accelerated fiber network expansion and growth plans. In the future, our ability to use cash may be limited by our other expected uses of cash and our ability to incur additional debt will be limited by our existing and future debt agreements. We believe that cash flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for at least the next twelve months to fund our current anticipated uses of cash. 42 Table of Contents After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance and cash flow. Our ability to fund these expected uses from the results of future operations will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control. Due to the uncertainty and unpredictability related to the potential impacts of the COVID-19 pandemic on our business, we will continue to closely manage our cash and liquidity. To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities. There can be no assurance that we will be able to generate sufficient cash flows from operations in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash. Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures, which could have a material adverse effect on our financial condition and the results of operations. We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries' ability to pay dividends or advance cash in any other manner to us.
In the normal course of our business, we enter into surety bonds, performance bonds and similar bonds as required by certain jurisdictions in which we provide services.
December 31, 2021, our most significant contractual obligations include the following: (In thousands) Short-Term Long-Term Total Long-term debt $ - $ 2,149,875 $ 2,149,875Interest on long-term debt obligations 122,523 626,364 748,887 Finance leases 9,020 18,890 27,910 Operating leases 7,726 24,402 32,128 Purchase obligations 93,122 24,276 117,398 Our long-term debt obligations represent our most significant contractual obligations. The partial repayment of the Term Loans in March 2021, eliminated all future required quarterly principal payments for the remaining term of the loan. The long-term debt obligation represents the maturity of the Term Loans in 2027 and the Senior Notes in 2028. Interest on long-term debt includes amounts due on fixed and variable rate debt. As the rates on our variable debt are subject to change, the rates in effect at December 31, 2021were used in determining our future interest obligations.
Other contractual obligations primarily include purchase obligations and finance and operating leases for facilities, land, underground pipelines, co-locations and equipment used in our operations. Unrecognized purchase obligations include binding commitments for future capital expenditures and service and maintenance contracts to support various computer hardware and software applications and certain equipment. If we terminate any of the contracts before their expiration date, we would be liable for the minimum commitment payments as defined by the terms of the contracts. For more information, see Note 10 and Note 15 to the consolidated financial statements.
Defined benefit pension plans
As required, we contribute to qualified defined pension plans and non-qualified supplemental retirement plans (collectively the "Pension Plans") and other post-retirement benefit plans, which provide retirement benefits to certain eligible employees. Contributions are intended to provide for benefits attributed to service to date. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax
regulations. 43 Table of Contents
The cost to maintain our Pension Plans and future funding requirements are affected by several factors including the expected return on investment of the assets held by the Pension Plans, changes in the discount rate used to calculate pension expense and the amortization of unrecognized gains and losses. Returns generated on the Pension Plans assets have historically funded a significant portion of the benefits paid under the Pension Plans. We used a weighted-average expected long-term rate of return of 6.00% and 6.25% in 2021 and 2020, respectively. As of
January 1, 2022, we estimate the long-term rate of return of Plan assets will be 6.00%. The Pension Plans invest in marketable equity securities which are exposed to changes in the financial markets. If the financial markets experience a downturn and returns fall below our estimate, we could be required to make material contributions to the Pension Plans, which could adversely affect our cash flows from operations. Net pension and post-retirement (benefit)/costs were $(3.8) million, $(4.1) millionand $11.5 millionfor the years ended December 31, 2021, 2020 and 2019, respectively. We contributed $20.8 million, $24.0 millionand $27.5 millionin 2021, 2020 and 2019, respectively to our Pension Plans. For our other post-retirement plans, we contributed $8.6 million, $9.2 millionand $8.5 millionin 2021, 2020 and 2019, respectively. In 2022, we expect to make contributions totaling approximately $20.5 millionto our Pension Plans and $8.2 millionto our other post-retirement benefit plans. Our contribution amounts meet the minimum funding requirements as set forth in employee benefit and tax laws. ARPA, which was signed into law in March 2021, included changes to the employer funding requirements and is designed to reduce the amounts of required contributions as a relief. For 2021 and 2022, we have elected not to reduce our required pension contributions to the minimum funding requirements under ARPA and our expected contributions for 2022 are based on historical minimum funding requirements of approximately $20.5 millionin order to increase the Pension Plan's funded status. See Note 13 to the consolidated financial statements for a more detailed discussion regarding our pension and other post-retirement plans.
The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. For example, tax laws in effect regarding accelerated or "bonus" depreciation for tax reporting resulted in less cash payments than the GAAP tax expense. Acceleration of tax deductions could eventually result in situations where cash payments will exceed GAAP tax expense.
In 2020, the
FCCadopted an order establishing the RDOF, the next phase of the CAF program, which will result in a reduction of approximately $42.2 millionin the annual support we receive beginning January 1, 2022through December 31, 2031. Critical Accounting Estimates Our significant accounting policies and estimates are discussed in the Notes to our consolidated financial statements. We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of our accounting policies. Our judgments are based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and the related effects cannot be determined with certainty, actual results may differ from our estimates and assumptions and such differences could be material. Management believes that the following accounting estimates are the most critical to understanding and evaluating our reported financial results.
Indefinite life intangible assets
Our indefinite-lived intangible assets are not amortized and are tested for impairment annually or more frequently when events or changes in circumstances indicate that the asset may be impaired. We measure the carrying value of our indefinite life assets at
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GoodwillAs discussed more fully in Note 1 to the consolidated financial statements, goodwill is not amortized but instead evaluated for impairment annually, or more frequently if an event occurs or circumstances change that would indicate potential impairment. At December 31, 2021and 2020, the carrying value of our goodwill was $1,013.2 millionand $1,035.3 million, respectively. Goodwilldecreased $22.1 millionduring 2021 as a result of allocated goodwill for a divestiture classified as held for sale at December 31, 2021, as described in Note 5 to the consolidated financial statements. The evaluation of goodwill may first include a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Events and circumstances integrated into the qualitative assessment process include a combination of macroeconomic conditions affecting equity and credit markets, significant changes to the cost structure, overall financial performance and other relevant events affecting the reporting unit. Functional management within the organization evaluates the operations of our single reporting unit on a consolidated basis rather than at a geographic level or on any other component basis. In general, product managers and cost managers are responsible for managing costs and services across territories rather than treating the territories as separate business units. All of the properties are managed at a functional level. As a result, we evaluate the operations for all our service territories as a single reporting unit. For the 2021 assessment, we evaluated the fair value of the goodwill compared to the carrying value using the qualitative approach. The results of the qualitative approach concluded that it was more likely than not that the fair value was greater than the carrying value, and therefore, we did not perform the calculation of fair value for our single reporting unit as described below. When we use the quantitative approach to assess the goodwill carrying value and the fair value of our single reporting unit, the fair value of our reporting unit is compared to its carrying amount, including goodwill. We would expect to use the quantitative approach at least every third year or more frequently if an event or if circumstances change that may indicate a potential impairment of goodwill has occurred. The estimated fair value of the reporting unit is determined using a combination of market-based approaches and a discounted cash flow ("DCF") model and reconciled to our market capitalization plus an estimated control premium. The assumptions used in the estimate of fair value are based upon a combination of historical results and trends, new industry developments and future cash flow projections, as well as relevant comparable company earnings multiples for the market-based approaches. Such assumptions are subject to change as a result of changing economic and competitive conditions. Based on our assessment at November 30, 2020, using the quantitative approach, we concluded that the fair value of the reporting unit exceeded the carrying value at November 30, 2020by approximately 120% and that there was no impairment
As discussed more fully in Note 1 to the consolidated financial statements, trade names are generally not amortized, but instead evaluated annually, or more frequently if an event occurs or circumstances change that would indicate potential impairment using a preliminary qualitative assessment and a quantitative process, if deemed necessary. The carrying value of our trade name, excluding any finite lived trade names,
$10.6 millionat December 31, 2021and 2020. When we use the quantitative approach to estimate the fair value of our trade name, we use DCFs based on a relief from royalty method. If the fair value of our trade name was less than the carrying amount, we would recognize an impairment charge for the difference between the estimated fair value and the carrying value of the asset. We perform our impairment testing of our trade name as a single unit of accounting based on its use in our single reporting unit.
For the 2021 valuation, we used the qualitative approach to assess the fair value against the book value of the trade name. Based on our assessment, we concluded that the fair value of the trade name continued to exceed the carrying value.
Our current and deferred income taxes and associated valuation allowances are impacted by events and transactions arising in the normal course of business as well as in connection with the adoption of new accounting standards, acquisitions of businesses and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income 45
tax payments. Actual amounts may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances. We account for tax benefits taken or expected to be taken in our tax returns in accordance with the accounting guidance applicable for uncertainty in income taxes, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return.
Retirement and post-retirement benefits
The amounts recognized in our financial statements for pension and post-retirement benefits are determined on an actuarial basis utilizing several critical assumptions. We make significant assumptions in regards to our pension and post-retirement plans, including the expected long-term rate of return on plan assets, the discount rate used to value the periodic pension expense and liabilities, future salary increases and actuarial assumptions relating to mortality rates and healthcare trend rates. Changes in these estimates and other factors could significantly impact our benefit cost and obligations to maintain pension and post-retirement plans. Our pension investment strategy is to maximize long-term returns on invested plan assets while minimizing the risk of volatility. Accordingly, we target our allocation percentage at approximately 70 - 90% in return seeking assets consisting primarily of equity and fixed income funds with the remainder in hedge funds. Our assumed rate considers this investment mix as well as past trends. We used a weighted-average expected long-term rate of return of 6.00% and 6.25% in 2021 and 2020, respectively. As of
January 1, 2022, we estimate that the expected long-term rate of return of pension plan assets will be 6.00%. In determining the appropriate discount rate, we consider the current yields on high-quality corporate fixed-income investments with maturities that correspond to the expected duration of our pension and post-retirement benefit plan obligations. For our 2021 and 2020 projected benefit obligations, we used a weighted-average discount rate of 3.05% and 2.81%, respectively, for our pension plans and 2.93% and 2.56%, respectively, for our other post-retirement plans. Our Pension Plans are sensitive to changes in the discount rate and the expected long-term rate of return on plan assets. A one percentage-point increase or decrease in the discount rate and expected long-term rate of return would have the following effects on net periodic pension cost of the Pension Plans: 1-Percentage- 1-Percentage- (In thousands) Point Increase Point Decrease Discount rate $ 1,841 $ (1,075)Expected long-term rate of return on plan assets $ (6,166) $
Our post-retirement benefit plans are sensitive to the healthcare cost trend rate assumption. For purposes of determining the cost and obligation for post-retirement medical benefits, a 6.25% healthcare cost trend rate was assumed for 2021, declining to the ultimate trend rate of 5.00% in 2027. A 1.00% increase in the assumed healthcare cost trend rate would result in increases of approximately
$3.0 millionand $0.2 millionin the post-retirement benefit obligation and total service and interest cost, respectively. A 1.00% decrease in the assumed healthcare cost trend would result in decreases of approximately $3.1 millionand $0.2 millionin the post-retirement benefit obligation and in the total service and interest cost, respectively.
Recent accounting pronouncements
For more information regarding the impact of certain recent accounting pronouncements, see Note 1 “Description of activities and summary of significant accounting policies” of the consolidated financial statements included in this report in Part II – Heading 8 “Financial statements and additional data”.
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