| (2) | We have binding commitments with numerous suppliers for future pre-tax book income over the periods that the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these temporary differences. However, management may reduce the amount of deferred tax assets it considers realizable in the near term if estimates of future taxable income during the carryforward period are reduced. Estimates of future taxable income are based on the estimated recognition of taxable temporary differences, available and prudent tax planning strategies and projections of future pre-tax book income. The amount of estimated future taxable income is expected to allow for the full utilization of the NOL carryforward, partial utilization of the state NOL carryforwards and partial utilization of the state credit carryforwards, as described below.Consolidated and its wholly owned subsidiaries, which file a consolidated federal income tax return, estimates it has available federal NOL carryforwards as of December 31, 2017 of $296.5 million and related deferred tax assets of $62.3 million. The federal NOL carryforwards expire from 2018 to 2036.
ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL carryforwards as of December 31, 2017 of $1.4 million and related deferred tax assets of $0.3 million. ETFL’s federal NOL carryforwards expire from 2021 to 2024.
We estimate that we have available state NOL carryforwards as of December 31, 2017 of $305.5 million and related deferred tax assets of $20.6 million. The state NOL carryforwards expire from 2018 to 2038. Management believes that it is more likely than not that we will not be able to realize state NOL carryforwards of $89.7 million and related deferred tax asset of $6.2 million and have placed a valuation allowance on this amount. The related NOL carryforwards expire from 2018 to 2036. If or when recognized, the tax benefits related to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.
We estimate that we have available federal alternative minimum tax (“AMT”) credit carryforwards as of December 31, 2017 of $2.9 million and related deferred tax assets of $2.9 million. The newly enacted Tax Act repeals the AMT regime for tax years beginning after December 31, 2017. The remaining AMT credit carryforward will be fully refundable to the Company in future tax years based on the provisions of the Tax Act.
We estimate that we have available state tax credit carryforwards as of December 31, 2017 of $9.9 million and related deferred tax assets of $7.2 million. The state tax credit carryforwards are limited annually and expire from 2018 to 2027. Management believes that it is more likely than not that we will not be able to realize state tax carryforwards of $2.7 million and related deferred tax asset of $1.9 million and has placed a valuation allowance on this amount. The related state tax credit carryforwards expire from 2018 to 2022. If or when recognized, the tax benefits related to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.
Unrecognized Tax Benefits
Under the accounting guidance applicable to uncertainty in income taxes, we have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns as well as all open tax years in these jurisdictions. This accounting guidance clarifies the accounting for uncertainty in income taxes recognized in a company’s
financial statements; prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Our unrecognized tax benefits as of December 31, 2017 and 2016 were $4.3 million and $0.1 million, respectively. The net increase of $4.3 million to unrecognized tax benefits in 2017 was primarily due to the acquisition of FairPoint and was recorded in purchase accounting. There were no material effects on the Company’s effective tax rate. The net amount of unrecognized benefits that, if recognized, would result in an impact to the effective rate is $4.1 million compared to less than $0.1 million in 2016.
Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively. During 2017 and 2016, we did not have a material liability for interest or penalties and had no material interest or penalty expense.
The periods subject to examination for our federal return are years 2014 through 2016. The periods subject to examination for our state returns are years 2013 through 2016. In addition, prior tax years may be subject to examination by federal or state taxing authorities if the Company's NOL carryovers from those prior years are utilized in the future. We are currently under examination by a state taxing authority. We do not expect any settlement or payment that may result from the examination to have a material effect on our results or cash flows.
We do not expect that the total unrecognized tax benefits and related accrued interest will significantly change due to the settlement of audits or the expiration of statute of limitations in the next twelve months. The net increase of $4.3 million to unrecognized tax benefits in 2017 was primarily due to the acquisition of FairPoint. There were no material effects on the Company’s effective tax rate.
The following is a reconciliation of the unrecognized tax benefits for the years ended December 31, 2017 and 2016:
| | | | | | | | | | Liability for | | | | Unrecognized | | | | Tax Benefits | | (In thousands) | | 2017 | | 2016 | | | | | | | | | | Balance at January 1 | | $ | 64 | | $ | 66 | | Additions for tax positions related to FairPoint acquisition | | | 4,296 | | | — | | Reduction for tax positions of prior years | | | (64) | | | — | | Reduction for lapse of state statute of limitations | | | — | | | (2) | | Balance at December 31 | | $ | 4,296 | | $ | 64 | |
11.COMMITMENTS AND CONTINGENCIES
We have certain other obligations for various contractual agreements to secure future rights to goods and services to be used in the normal course of our operations. These include purchase commitments for planned capital expenditures, agreements securing dedicated access and transport services, and service and support agreements.
As of December 31, 2017, future minimum contractual obligations, including capital and operating leases, and the estimated timing and effect the obligations will have on our liquidity and cash flows in future periods are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Minimum Annual Contractual Obligations | | (in thousands) | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | | Operating lease agreements | | $ | 15,151 | | $ | 12,025 | | $ | 9,144 | | $ | 5,377 | | $ | 3,088 | | $ | 8,641 | | $ | 53,426 | | Capital lease agreements | | | 11,346 | | | 8,636 | | | 3,416 | | | 468 | | | 24 | | | — | | | 23,890 | | Capital expenditures (1) | | | 13,081 | | | 1,371 | | | 2,225 | | | 1,226 | | | — | | | — | | | 17,903 | | Service and support agreements (2) | | | 32,229 | | | 22,604 | | | 14,404 | | | 2,570 | | | 188 | | | 540 | | | 72,535 | | Transport and data connectivity | | | 13,603 | | | 12,660 | | | 8,868 | | | 6,817 | | | 6,097 | | | 5,733 | | | 53,778 | | Total | | $ | 85,410 | | $ | 57,296 | | $ | 38,057 | | $ | 16,458 | | $ | 9,397 | | $ | 14,914 | | $ | 221,532 | |
| (1)
| | We have binding commitments with numerous suppliers for future capital expenditures.
expenditures. |
| (2)
| | We have entered into service and maintenance agreements to support various computer hardware and software applications and certain equipment.
|
Leases
Operating
| (3) | We have entered into various non-cancelable operating leases with terms greater than one yearrental agreements for certain facilities and equipment used in our operations. The facility leases generally require us to pay operating costs, including property taxes, insurance and maintenance, and certain of them contain scheduled rent increases and renewal options. Leasehold improvements are amortized over their estimated useful lives or lease period, whichever is shorter. We recognize rent expense on a straight-line basis over the term of each lease.We incurred rent expense of $18.0 million, $12.7 million and $12.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Capital Leases
We lease certain facilities and equipment under various capital lease arrangements, all of which expire between 2018 and 2022. As of December 31, 2017, the present value of the minimum remaining lease commitments, net of imputed interest of $2.2 million, was approximately $23.9 million, of which $11.3 million was due and payable within the next twelve months. See Note 12 for information regarding the capital leases we have entered into with related parties.
Litigation, Regulatory Proceedings and Other Contingencies
Access Charges
In 2014, Sprint Communications Company L.P. (“Sprint”) along with MCI Communications Services, Inc. and Verizon Select Services Inc. (collectively, “Verizon”) filed lawsuits against certain entities of the Company including FairPoint, and many other Local Exchange Carriers (collectively, “LECs”) throughout the country challenging the switched access charges LECs assessed Sprint and Verizon, as interexchange carriers (“IXCs”), for certain calls originating from or terminating to mobile devices that are routed to or from these LECs through these IXCs. The plaintiffs’ position is based on their interpretation of federal law, among other things, and they are seeking refunds of past access charges paid for such calls. The disputed amounts total $4.8 million and cover periods dating back as far as 2006. CenturyLink, Inc. and its LEC subsidiaries (collectively “CenturyLink”), requested that the U.S. Judicial Panel on Multidistrict Litigation (the “Panel”), which has the authority to transfer the pretrial proceedings to a single court for multiple civil cases involving common questions of fact, transfer and consolidate these cases in one court. The Panel granted CenturyLink’s request and ordered that these cases be transferred to and centralized in the U.S. District Court for the Northern District of Texas (the “U.S. District Court”). On November 17, 2015, the U.S. District Court dismissed these complaints based on its interpretation of federal law and held that LECs could assess switched access charges for the calls at issue (the “November 2015 Order”). The November 2015 Order also allowed the plaintiffs to amend their complaints to assert claims that arise under state laws independent of the dismissed claims asserted under federal law. While Verizon did not make such a filing, on May 16, 2016, Sprint filed amended complaints and on June 30, 2016, the LEC defendants named in such complaints filed, among other things, a Joint Motion to Dismiss them, which the U.S. District Court granted on May 3, 2017.
Relatedly, in 2016, numerous LECs across the country, including a number of our LEC entities and FairPoint, filed complaints in various U.S. district courts against Level 3 Communications, LLC and certain of its affiliates (collectively, “Level 3”) for its failure to pay access charges for certain calls that the November 2015 Order held could be assessed by LECs. The total amount of the Company’s LEC entities including FairPoint, seek from Level 3 in this proceeding is at least approximately $1.6 million, excluding late payment charges/penalties and attorneys’ fees. These complaint cases were transferred to and included in the above-referenced consolidated proceeding before the U.S. District Court. Level 3 filed a Motion to Dismiss these complaints that, in part, repeated arguments the November 2015 Order rejected. On March 22, 2017, the U.S. District Court denied Level 3’s Motion to Dismiss (“March 2017 Order”).
The U.S. District Court has adopted scheduling orders in the consolidated cases on how the claims at issue (“intraMTA claims”) would be addressed in upcoming aspects of the proceeding. While the parties are seeking the Court’s assistance to address certain open issues during this phase of the proceeding, once the proceeding before the U.S. District Court on the intraMTA claims becomes final, including resolution of any related counterclaims, Sprint, Verizon, and Level 3 are expected to appeal the U.S. District Court’s November 2015 and March 2017 Orders. Absent a decision by an appellate
court that overturns these orders, it could be difficult for Sprint or Verizon to succeed on its claims against us or for Level 3 to avoid paying the access charges it disputes in this litigation. Therefore, we do not expect any potential settlement or judgment to have a material adverse impact on our financial results or cash flows.
Gross Receipts Tax
Two of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), have, at various times, received assessment notices from the Commonwealth of Pennsylvania Department of Revenue (“DOR”) increasing the amounts owed for Pennsylvania Gross Receipts Tax, and/or have had audits performed for the tax years of 2008 through 2016. In addition, a re-audit was performed on CCPA for the 2010 calendar year.
Pennsylvania generally imposes tax on the gross receipts received from telephone messages transmitted wholly within the state and telephone messages transmitted in interstate commerce where such messages originate or terminate in Pennsylvania, and the charges for such messages are billed to a service address in the state. In a 2013 decision involving Verizon Pennsylvania, Inc. (“Verizon Pennsylvania”), the Commonwealth Court of Pennsylvania held that the gross receipts tax applies to Verizon Pennsylvania’s installation of private phone lines because the sole purpose of private lines is to transmit messages. Similarly, the court held that directory assistance is subject to the gross receipts tax because it makes the transmission of messages more effective and satisfactory. However, the court did not find Verizon Pennsylvania’s nonrecurring charges for the installation of telephone lines, moves of and changes to telephone lines and services and repairs of telephone lines to be subject to the gross receipts tax as no telephone messages are transmitted when Verizon Pennsylvania performs these nonrecurring services.
In November 2015, on appeal, the Supreme Court of Pennsylvania held in Verizon Pennsylvania, Inc. v. Commonwealth of Pennsylvania, 127 A.3d 745 (Pa. 2015), that charges for the installation of private phone lines, charges for directory assistance and certain nonrecurring charges were all subject to the state’s gross receipt tax. The Supreme Court of Pennsylvania found that all of the services, including those related to nonrecurring charges, in some way made transmission more effective or communication more satisfactory even though such services did not involve actual transmission. This is a partial reversal of the 2013 Commonwealth Court of Pennsylvania decision described above, which had ruled that while the charges for the installation of private phone lines and directory assistance were subject to the state’s gross receipts tax, the nonrecurring charges in question were not. As neither reargument nor reconsideration was sought, the Verizon Pennsylvania case is now final.
For our CCES and CCPA subsidiaries, the total additional tax liability calculated by the DOR auditors for the calendar years 2008 through 2013, including interest, is approximately $4.3 million and $5.1 million, respectively. In May 2016, the Commonwealth of Pennsylvania Board of Finance and Revenue reviewed our appeals of the cases for the audits in calendar years 2008 through 2013 and held that the charges in question were subject to the state’s gross receipts tax. In June 2016, we filed appeals with the Pennsylvania Commonwealth Court for the audits in calendar years 2008 through 2013, captioned as Consolidated Communications Enterprise Services, Inc. v. Commonwealth of Pennsylvania, Nos. 400 through 411 FR 2016 and Consolidated Communications of Pennsylvania Company, LLC v. Commonwealth of Pennsylvania, Nos. 422 through 432 FR 2016. These appeals are presently in the fact development stage, with further joint status reports to be filed with the Commonwealth Court in March 2018.
In October and December 2016, CCPA and CCES received Audit Assessment Notices from the DOR increasing the amounts owed for Pennsylvania Gross Receipts Tax for the 2014 tax year. The total additional tax liability calculated by the DOR auditors for CCPA and CCES for 2014, including interest, is approximately $0.8 million and $0.9 million, respectively. We filed Petitions for Reassessment with the DOR’s Board of Appeals in January 2017 for CCPA and in March 2017 for CCES, contesting these audit assessments. By Interlocutory Orders issued in April 2017, the Board stayed the matters pending final action of the Commonwealth Court in litigation involving the same issues related to CCPA’s and CCES’s 2008 through 2013 tax periods.
In May and September 2017, CCES and CCPA received Audit Assessment Notices from the DOR increasing the amounts owed for Pennsylvania Gross Receipts Tax for the 2015 tax year. The total additional tax liability calculated by the DOR auditors for CCES and CCPA for 2015, including interest, is approximately $0.7 million for each subsidiary. We filed Petitions for Reassessment with the DOR’s Board of Appeals in May 2017 for CCES and in November 2017 for CCPA, contesting these audit assessments. By Interlocutory Orders issued in August 2017 and November 2017, the Board stayed
the CCES and CCPA matters pending final action of the Commonwealth Court in litigation involving the same issues related to CCES’s and CCPA’s 2008 through 2013 tax periods.
In December 2017, CCES and CCPA received audit schedules from the DOR increasing the amounts owed for Pennsylvania Gross Receipts Tax for the 2016 tax year. The total additional tax liability calculated by the DOR auditors for CCES and CCPA for 2016, including interest, is approximately $0.5 million and $0.7 million, respectively. We expect to appeal the audit findings for each subsidiary when the respective Audit Assessment Notices are issued.
In May 2017, we entered into an agreement to guarantee any potential liability to the DOR up to $5.0 million. However, we believe that certain of the DOR’s findings regarding the Company’s additional tax liability for the calendar years 2008 through 2015, for which we have filed appeals, continue to lack merit. Nevertheless, in light of the Supreme Court of Pennsylvania’s Verizon Pennsylvania decision, we have accrued $1.6 million and $1.4 million, including interest, for our CCES and CCPA subsidiaries, respectively. These accruals also include the Company’s best estimate of the potential 2016 and 2017 additional tax liabilities. We do not believe that the outcome of these claims will have a material adverse impact on our financial results or cash flows.
In January 2018, CCES and CCPA submitted initial settlement offers to the Pennsylvania Office of Attorney General proposing to settle the intrastate and interstate cases at a reduced tax liability of the total assessed tax liability under dispute for the calendar years 2008 through 2013. The settlement offers are currently under review and consideration by the Commonwealth Court. We expect to receive responses to our offers during the second quarter of 2018. While we continue to believe a settlement of all disputed claims is possible, we cannot anticipate at this time what the ultimate resolution of these cases will be, nor can we evaluate the likelihood of a favorable or unfavorable outcome or the potential losses (or gains) should such an outcome occur.
From time to time, we may be involved in litigation that we believe is of the type common to companies in our industry, including regulatory issues. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse impact on our business, results of operations, financial condition or cash flows.
12.RELATED PARTY TRANSACTIONS
Capital Leases
Richard A. Lumpkin, a member of our Board of Directors, together with his family, beneficially owned 37.0% of Agracel, Inc. (“Agracel”), a real estate investment company, at December 31, 2017 and 2016. Mr. Lumpkin also is a director of Agracel. Agracel is the sole managing member and 50% owner of LATEL LLC (“LATEL”). Mr. Lumpkin and his immediate family had a 68.5% beneficial ownership of LATEL at December 31, 2017 and 2016.
As of December 31, 2017, we had three capital lease agreements with LATEL for the occupancy of three buildings on a triple net lease basis. In accordance with the Company’s related person transactions policy, these leases were approved by our Audit Committee and Board of Directors (“BOD”). We have accounted for these leases as capital leases in accordance with ASC Topic 840, Leases, and have capitalized the lower of the present value of the future minimum lease payments or their fair value. The capital lease agreements require us to pay substantially all expenses associated with general maintenance and repair, utilities, insurance and taxes. Each of the three lease agreements have a maturity date of May 31, 2021 and each have two five-year options to extend the terms of the lease after the initial expiration date. We are required to pay LATEL approximately $7.9 million over the terms of the lease agreements. The carrying value of the capital leases at December 31, 2017 and 2016 was approximately $2.2 million and $2.7 million, respectively. We recognized $0.3 million in interest expense in 2017 and $0.4 million in interest expense in each of 2016 and 2015 and amortization expense of $0.4 million in 2017, 2016 and 2015 related to the capitalized leases.
Long-Term Debt
A portion of the 2020 Notes was sold to accredited investors consisting of certain members of the Company’s Board of Directors or a trust of which a director is the beneficiary (“related parties”). In May 2012, the related parties purchased $10.8 million of the 2020 Notes on the same terms available to other investors, except that the related parties were not entitled to registration rights. In 2015, the 2020 Notes were fully redeemed and we paid an early redemption premium of $1.5 million and recognized approximately $0.7 million in interest expense in the aggregate for the 2020 Notes purchased
by related parties. In September 2014, $5.0 million of the 2022 Notes were sold to a trust, the beneficiary of which is a member of the Company’s Board of Directors and we recognized approximately $0.3 million in each of 2017 and 2016 in interest expense for the 2022 Notes purchased by the related party.
Other Services
Mr. Lumpkin also has a minority ownership interest in First Mid-Illinois Bancshares, Inc. (“First Mid-Illinois”). We provide telecommunication products and services to First Mid-Illinois and we received approximately $0.7 million in each of 2017 and 2016 and $0.8 million in 2015 for these services.
13.QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| | | | | | | | | | | | | | | | Quarter Ended | | 2017 | | March 31, | | June 30, | | September 30, | | December 31, | | | | (In thousands, except per share amounts) | | Net revenues | | $ | 169,935 | | $ | 169,950 | | $ | 363,329 | | $ | 356,360 | | Operating income (loss) | | $ | 18,587 | | $ | 21,578 | | $ | (7,998) | | $ | 6,487 | | Net income (loss) attributable to common stockholders | | $ | (3,685) | | $ | (2,728) | | $ | (28,448) | | $ | 99,806 | | Basic and diluted earnings (loss) per share | | $ | (0.07) | | $ | (0.06) | | $ | (0.41) | | $ | 1.41 | |
| | | | | | | | | | | | | | | | Quarter Ended | | 2016 | | March 31, | | June 30, | | September 30, | | December 31, | | | | (In thousands, except per share amounts) | | Net revenues | | $ | 188,846 | | $ | 186,871 | | $ | 191,541 | | $ | 175,919 | | Operating income | | $ | 24,310 | | $ | 22,954 | | $ | 22,736 | | $ | 17,440 | | Net income (loss) attributable to common stockholders | | $ | 7,849 | | $ | 76 | | $ | 7,012 | | $ | (6) | | Basic and diluted earnings (loss) per share | | $ | 0.15 | | $ | — | | $ | 0.14 | | $ | — | |
On December 22, 2017, the Tax Act was enacted as discussed in Note 10 and, as a result, we recorded a non-cash tax benefit estimate of $112.9 million as a reduction in income tax expense in the fourth quarter of 2017.
During the third quarter of 2017, we acquired all the issued and outstanding shares of FairPoint in exchange for shares of our common stock. FairPoint’s results of operations have been included in our consolidated financial statements as of the acquisition date of July 3, 2017. As result of the FairPoint acquisition, we incurred transaction costs of $1.5 million, $1.7 million, $27.0 million and $2.8 million during the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017, respectively.
In December 2016, in connection with the acquisition of FairPoint, we secured committed debt financing through a $935.0 million incremental term loan facility, as described in Note 6. In connection with entering into the committed financing, we incurred ticking fees and the amortization of commitment fees of $1.2 million, $11.4 million, $13.3 million and $6.2 million during quarters ended December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, respectively.
In October 2016, we amended our Credit Agreement to restate and amend our term loan credit facilities as described in Note 6. In connection with entering into the Third Amended and Restated Credit Agreement, we incurred a loss on the extinguishment of debt of $6.6 million during the quarter ended December 31, 2016.
14.CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Consolidated Communications, Inc. is the primary obligor under the unsecured Senior Notes. We and substantially all of our subsidiaries, including our FairPoint subsidiaries, have jointly and severally guaranteed the Senior Notes. All of the subsidiary guarantors are 100% direct or indirect wholly owned subsidiaries of the parent, and all guarantees are full, unconditional and joint and several with respect to principal, interest and liquidated damages, if any. As such, we present condensed consolidating balance sheets as of December 31, 2017 and 2016, and condensed consolidating statements of operations and cash flows for the years ended December 31, 2017, 2016 and 2015 for each of Consolidated Communications Holdings, Inc. (Parent), Consolidated Communications, Inc. (Subsidiary Issuer), guarantor subsidiaries and other non-guarantor subsidiaries with any consolidating adjustments. See Note 6 for more information regarding our Senior Notes.
Condensed Consolidating Balance Sheets
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | Parent | | Subsidiary Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | ASSETS | | | | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | — | | $ | 8,919 | | $ | 6,738 | | $ | — | | $ | — | | $ | 15,657 | | Accounts receivable, net | | | — | | | — | | | 114,303 | | | 7,701 | | | (476) | | | 121,528 | | Income taxes receivable | | | 20,275 | | | — | | | 1,571 | | | — | | | — | | | 21,846 | | Prepaid expenses and other current assets | | | — | | | — | | | 33,188 | | | 130 | | | — | | | 33,318 | | Assets held for sale | | | — | | | — | | | — | | | 21,310 | | | — | | | 21,310 | | Total current assets | | | 20,275 | | | 8,919 | | | 155,800 | | | 29,141 | | | (476) | | | 213,659 | | | | | | | | | | | | | | | | | | | | | | Property, plant and equipment, net | | | — | | | — | | | 1,972,190 | | | 65,416 | | | — | | | 2,037,606 | | | | | | | | | | | | | | | | | | | | | | Intangibles and other assets: | | | | | | | | | | | | | | | | | | | | Investments | | | — | | | 8,495 | | | 100,363 | | | — | | | — | | | 108,858 | | Investments in subsidiaries | | | 3,643,930 | | | 2,133,049 | | | 35,374 | | | — | | | (5,812,353) | | | — | | Goodwill | | | — | | | | | | 971,851 | | | 66,181 | | | — | | | 1,038,032 | | Other intangible assets | | | — | | | | | | 297,696 | | | 9,087 | | | — | | | 306,783 | | Advances due to/from affiliates, net | | | — | | | 2,441,690 | | | 555,332 | | | 92,615 | | | (3,089,637) | | | — | | Deferred income taxes | | | 21,244 | | | — | | | — | | | — | | | (21,244) | | | — | | Other assets | | | — | | | 1,307 | | | 12,844 | | | 37 | | | — | | | 14,188 | | Total assets | | $ | 3,685,449 | | $ | 4,593,460 | | $ | 4,101,450 | | $ | 262,477 | | $ | (8,923,710) | | $ | 3,719,126 | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | | | | Accounts payable | | $ | — | | $ | — | | $ | 24,143 | | $ | — | | $ | — | | $ | 24,143 | | Advance billings and customer deposits | | | — | | | — | | | 41,026 | | | 1,500 | | | — | | | 42,526 | | Dividends payable | | | 27,418 | | | — | | | — | | | — | | | — | | | 27,418 | | Accrued compensation | | | — | | | — | | | 48,795 | | | 975 | | | — | | | 49,770 | | Accrued interest | | | — | | | 8,824 | | | 519 | | | — | | | — | | | 9,343 | | Accrued expense | | | 107 | | | 504 | | | 70,976 | | | 930 | | | (476) | | | 72,041 | | Current portion of long term debt and capital lease obligations | | | — | | | 18,350 | | | 11,150 | | | 196 | | | — | | | 29,696 | | Liabilities held for sale | | | — | | | — | | | — | | | 1,003 | | | — | | | 1,003 | | Total current liabilities | | | 27,525 | | | 27,678 | | | 196,609 | | | 4,604 | | | (476) | | | 255,940 | | | | | | | | | | | | | | | | | | | | | | Long-term debt and capital lease obligations | | | — | | | 2,298,970 | | | 12,139 | | | 405 | | | — | | | 2,311,514 | | Advances due to/from affiliates, net | | | 3,089,637 | | | — | | | — | | | — | | | (3,089,637) | | | — | | Deferred income taxes | | | — | | | 750 | | | 209,116 | | | 21,098 | | | (21,244) | | | 209,720 | | Pension and postretirement benefit obligations | | | — | | | — | | | 315,129 | | | 19,064 | | | — | | | 334,193 | | Other long-term liabilities | | | — | | | 1,761 | | | 31,030 | | | 1,026 | | | — | | | 33,817 | | Total liabilities | | | 3,117,162 | | | 2,329,159 | | | 764,023 | | | 46,197 | | | (3,111,357) | | | 3,145,184 | | Shareholders’ equity: | | | | | | | | | | | | | | | | | | | | Common Stock | | | 708 | | | — | | | 17,411 | | | 30,000 | | | (47,411) | | | 708 | | Other shareholders’ equity | | | 567,579 | | | 2,264,301 | | | 3,314,361 | | | 186,280 | | | (5,764,942) | | | 567,579 | | Total Consolidated Communications Holdings, Inc. shareholders’ equity | | | 568,287 | | | 2,264,301 | | | 3,331,772 | | | 216,280 | | | (5,812,353) | | | 568,287 | | Noncontrolling interest | | | — | | | — | | | 5,655 | | | — | | | — | | | 5,655 | | Total shareholders’ equity | | | 568,287 | | | 2,264,301 | | | 3,337,427 | | | 216,280 | | | (5,812,353) | | | 573,942 | | Total liabilities and shareholders’ equity | | $ | 3,685,449 | | $ | 4,593,460 | | $ | 4,101,450 | | $ | 262,477 | | $ | (8,923,710) | | $ | 3,719,126 | |
| | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | | Parent | | Subsidiary Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | ASSETS | | | | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | — | | $ | 27,064 | | $ | 13 | | $ | — | | $ | — | | $ | 27,077 | | Accounts receivable, net | | | — | | | — | | | 48,911 | | | 7,347 | | | (42) | | | 56,216 | | Income taxes receivable | | | 20,756 | | | — | | | 885 | | | (25) | | | — | | | 21,616 | | Prepaid expenses and other current assets | | | — | | | 12,856 | | | 15,310 | | | 126 | | | — | | | 28,292 | | Total current assets | | | 20,756 | | | 39,920 | | | 65,119 | | | 7,448 | | | (42) | | | 133,201 | | | | | | | | | | | | | | | | | | | | | | Property, plant and equipment, net | | | — | | | — | | | 999,416 | | | 55,770 | | | — | | | 1,055,186 | | | | | | | | | | | | | | | | | | | | | | Intangibles and other assets: | | | | | | | | | | | | | | | | | | | | Investments | | | — | | | 8,338 | | | 97,883 | | | — | | | — | | | 106,221 | | Investments in subsidiaries | | | 2,192,556 | | | 2,019,692 | | | 14,279 | | | — | | | (4,226,527) | | | — | | Goodwill | | | — | | | — | | | 690,696 | | | 66,181 | | | — | | | 756,877 | | Other intangible assets | | | — | | | — | | | 22,525 | | | 9,087 | | | — | | | 31,612 | | Advances due to/from affiliates, net | | | — | | | 1,524,906 | | | 427,720 | | | 87,171 | | | (2,039,797) | | | — | | Deferred income taxes | | | 17,150 | | | — | | | — | | | — | | | (17,150) | | | — | | Other assets | | | — | | | 1,562 | | | 8,058 | | | 41 | | | — | | | 9,661 | | Total assets | | $ | 2,230,462 | | $ | 3,594,418 | | $ | 2,325,696 | | $ | 225,698 | | $ | (6,283,516) | | $ | 2,092,758 | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | | | | Accounts payable | | $ | — | | $ | — | | $ | 6,766 | | $ | — | | $ | — | | $ | 6,766 | | Advance billings and customer deposits | | | — | | | — | | | 24,981 | | | 1,457 | | | — | | | 26,438 | | Dividends payable | | | 19,605 | | | — | | | — | | | — | | | — | | | 19,605 | | Accrued compensation | | | — | | | — | | | 16,002 | | | 969 | | | — | | | 16,971 | | Accrued interest | | | — | | | 10,824 | | | 436 | | | — | | | — | | | 11,260 | | Accrued expense | | | 36 | | | 15,057 | | | 38,192 | | | 880 | | | (42) | | | 54,123 | | Current portion of long term debt and capital lease obligations | | | — | | | 9,000 | | | 5,735 | | | 187 | | | — | | | 14,922 | | Total current liabilities | | | 19,641 | | | 34,881 | | | 92,112 | | | 3,493 | | | (42) | | | 150,085 | | | | | | | | | | | | | | | | | | | | | | Long-term debt and capital lease obligations | | | — | | | 1,365,820 | | | 10,332 | | | 602 | | | — | | | 1,376,754 | | Advances due to/from affiliates, net | | | 2,039,797 | | | — | | | — | | | — | | | (2,039,797) | | | — | | Deferred income taxes | | | — | | | 984 | | | 232,668 | | | 27,796 | | | (17,150) | | | 244,298 | | Pension and postretirement benefit obligations | | | — | | | — | | | 109,185 | | | 21,608 | | | — | | | 130,793 | | Other long-term liabilities | | | 70 | | | 216 | | | 13,807 | | | 480 | | | — | | | 14,573 | | Total liabilities | | | 2,059,508 | | | 1,401,901 | | | 458,104 | | | 53,979 | | | (2,056,989) | | | 1,916,503 | | Shareholders’ equity: | | | | | | | | | | | | | | | | | | | | Common Stock | | | 506 | | | — | | | 17,411 | | | 30,000 | | | (47,411) | | | 506 | | Other shareholders’ equity | | | 170,448 | | | 2,192,517 | | | 1,844,880 | | | 141,719 | | | (4,179,116) | | | 170,448 | | Total Consolidated Communications Holdings, Inc. shareholders’ equity | | | 170,954 | | | 2,192,517 | | | 1,862,291 | | | 171,719 | | | (4,226,527) | | | 170,954 | | Noncontrolling interest | | | — | | | — | | | 5,301 | | | — | | | — | | | 5,301 | | Total shareholders’ equity | | | 170,954 | | | 2,192,517 | | | 1,867,592 | | | 171,719 | | | (4,226,527) | | | 176,255 | | Total liabilities and shareholders’ equity | | $ | 2,230,462 | | $ | 3,594,418 | | $ | 2,325,696 | | $ | 225,698 | | $ | (6,283,516) | | $ | 2,092,758 | |
Condensed Consolidating Statements of Operations
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | | Parent | | Subsidiary Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | Net revenues | | $ | — | | $ | — | | $ | 1,013,505 | | $ | 58,776 | | $ | (12,707) | | $ | 1,059,574 | | Operating expenses: | | | | | | | | | | | | | | | | | | | | Cost of services and products (exclusive of depreciation and amortization) | | | — | | | — | | | 447,247 | | | 11,094 | | | (12,276) | | | 446,065 | | Selling, general and administrative expenses | | | 1,924 | | | 30 | | | 234,438 | | | 13,371 | | | (431) | | | 249,332 | | Acquisition and other transaction costs | | | 33,650 | | | — | | | — | | | — | | | — | | | 33,650 | | Depreciation and amortization | | | — | | | — | | | 280,843 | | | 11,030 | | | — | | | 291,873 | | Operating income (loss) | | | (35,574) | | | (30) | | | 50,977 | | | 23,281 | | | — | | | 38,654 | | Other income (expense): | | | | | | | | | | | | | | | | | | | | Interest expense, net of interest income | | | (12) | | | (128,737) | | | (1,183) | | | 146 | | | — | | | (129,786) | | Intercompany interest income (expense) | | | — | | | 58,909 | | | (58,827) | | | (82) | | | — | | | — | | Investment income | | | — | | | 157 | | | 31,592 | | | — | | | — | | | 31,749 | | Equity in earnings of subsidiaries, net | | | 101,863 | | | 109,015 | | | 1,918 | | | — | | | (212,796) | | | — | | Other, net | | | — | | | 3 | | | (236) | | | (12) | | | — | | | (245) | | Income (loss) before income taxes | | | 66,277 | | | 39,317 | | | 24,241 | | | 23,333 | | | (212,796) | | | (59,628) | | Income tax expense (benefit) | | | 1,332 | | | (27,610) | | | (97,667) | | | (982) | | | — | | | (124,927) | | Net income (loss) | | | 64,945 | | | 66,927 | | | 121,908 | | | 24,315 | | | (212,796) | | | 65,299 | | Less: net income attributable to noncontrolling interest | | | — | | | — | | | 354 | | | — | | | — | | | 354 | | Net income (loss) attributable to Consolidated Communications Holdings, Inc. | | $ | 64,945 | | $ | 66,927 | | $ | 121,554 | | $ | 24,315 | | $ | (212,796) | | $ | 64,945 | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income (loss) attributable to common shareholders | | $ | 64,139 | | $ | 71,746 | | $ | 119,174 | | $ | 25,381 | | $ | (216,301) | | $ | 64,139 | |
| | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2016 | | | | Parent | | Subsidiary Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | Net revenues | | $ | — | | $ | (15) | | $ | 697,557 | | $ | 58,785 | | $ | (13,150) | | $ | 743,177 | | Operating expenses: | | | | | | | | | | | | | | | | | | | | Cost of services and products (exclusive of depreciation and amortization) | | | — | | | — | | | 323,112 | | | 12,401 | | | (12,721) | | | 322,792 | | Selling, general and administrative expenses | | | 3,331 | | | 7 | | | 141,533 | | | 12,669 | | | (429) | | | 157,111 | | Acquisition and other transaction costs | | | 1,214 | | | — | | | — | | | — | | | — | | | 1,214 | | Loss on impairment | | | — | | | — | | | 610 | | | — | | | — | | | 610 | | Depreciation and amortization | | | — | | | — | | | 164,577 | | | 9,433 | | | — | | | 174,010 | | Operating income (loss) | | | (4,545) | | | (22) | | | 67,725 | | | 24,282 | | | — | | | 87,440 | | Other income (expense): | | | | | | | | | | | | | | | | | | | | Interest expense, net of interest income | | | 46 | | | (76,213) | | | (694) | | | 35 | | | — | | | (76,826) | | Intercompany interest income (expense) | | | (63,773) | | | 97,102 | | | (34,846) | | | 1,517 | | | — | | | — | | Loss on extinguishment of debt | | | — | | | (6,559) | | | — | | | — | | | — | | | (6,559) | | Investment income | | | — | | | 166 | | | 32,806 | | | — | | | — | | | 32,972 | | Equity in earnings of subsidiaries, net | | | 58,208 | | | 56,600 | | | 711 | | | — | | | (115,519) | | | — | | Other, net | | | — | | | (328) | | | 1,478 | | | (19) | | | — | | | 1,131 | | Income (loss) before income taxes | | | (10,064) | | | 70,746 | | | 67,180 | | | 25,815 | | | (115,519) | | | 38,158 | | Income tax expense (benefit) | | | (24,995) | | | 12,538 | | | 25,807 | | | 9,612 | | | — | | | 22,962 | | Net income (loss) | | | 14,931 | | | 58,208 | | | 41,373 | | | 16,203 | | | (115,519) | | | 15,196 | | Less: net income attributable to noncontrolling interest | | | — | | | — | | | 265 | | | — | | | — | | | 265 | | Net income (loss) attributable to Consolidated Communications Holdings, Inc. | | $ | 14,931 | | $ | 58,208 | | $ | 41,108 | | $ | 16,203 | | $ | (115,519) | | $ | 14,931 | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income (loss) attributable to common shareholders | | $ | 3,353 | | $ | 46,630 | | $ | 30,442 | | $ | 14,744 | | $ | (91,816) | | $ | 3,353 | |
| | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2015 | | | | Parent | | Subsidiary Issuer | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | Net revenues | | $ | — | | $ | 121 | | $ | 728,910 | | $ | 60,094 | | $ | (13,388) | | $ | 775,737 | | Operating expenses: | | | | | | | | | | | | | | | | | | | | Cost of services and products (exclusive of depreciation and amortization) | | | — | | | — | | | 328,714 | | | 12,567 | | | (12,881) | | | 328,400 | | Selling, general and administrative expenses | | | 3,160 | | | 150 | | | 156,380 | | | 19,044 | | | (507) | | | 178,227 | | Acquisition and other transaction costs | | | 1,413 | | | — | | | — | | | — | | | — | | | 1,413 | | Depreciation and amortization | | | — | | | — | | | 171,232 | | | 8,690 | | | — | | | 179,922 | | Operating income (loss) | | | (4,573) | | | (29) | | | 72,584 | | | 19,793 | | | — | | | 87,775 | | Other income (expense): | | | | | | | | | | | | | | | | | | | | Interest expense, net of interest income | | | (104) | | | (79,680) | | | 154 | | | 12 | | | — | | | (79,618) | | Intercompany interest income (expense) | | | (153,713) | | | 166,838 | | | (15,917) | | | 2,792 | | | — | | | — | | Loss on extinguishment of debt | | | — | | | (41,242) | | | — | | | — | | | — | | | (41,242) | | Investment income | | | — | | | 326 | | | 36,364 | | | — | | | — | | | 36,690 | | Equity in earnings of subsidiaries, net | | | 93,391 | | | 64,812 | | | 567 | | | — | | | (158,770) | | | — | | Other, net | | | — | | | (26) | | | (1,346) | | | (129) | | | — | | | (1,501) | | Income (loss) before income taxes | | | (64,999) | | | 110,999 | | | 92,406 | | | 22,468 | | | (158,770) | | | 2,104 | | Income tax expense (benefit) | | | (64,118) | | | 17,608 | | | 40,346 | | | 8,939 | | | — | | | 2,775 | | Net income (loss) | | | (881) | | | 93,391 | | | 52,060 | | | 13,529 | | | (158,770) | | | (671) | | Less: net income attributable to noncontrolling interest | | | — | | | — | | | 210 | | | — | | | — | | | 210 | | Net income (loss) attributable to Consolidated Communications Holdings, Inc. | | $ | (881) | | $ | 93,391 | | $ | 51,850 | | $ | 13,529 | | $ | (158,770) | | $ | (881) | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income (loss) attributable to common shareholders | | $ | (4,940) | | $ | 89,332 | | $ | 48,434 | | $ | 13,105 | | $ | (150,871) | | $ | (4,940) | |
Condensed Consolidating Statements of Cash Flows
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | | Parent | | Subsidiary Issuer | | Guarantors | | Non-Guarantors | | Consolidated | | Net cash (used in) provided by operating activities | | $ | (23,237) | | $ | (25,625) | | $ | 235,810 | | $ | 23,079 | | $ | 210,027 | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Business acquisition, net of cash acquired | | | (862,385) | | | — | | | — | | | — | | | (862,385) | | Purchases of property, plant and equipment | | | — | | | — | | | (167,187) | | | (13,998) | | | (181,185) | | Proceeds from sale of assets | | | — | | | — | | | 829 | | | 30 | | | 859 | | Net cash used in investing activities | | | (862,385) | | | — | | | (166,358) | | | (13,968) | | | (1,042,711) | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Proceeds from issuance of long-term debt | | | — | | | 1,052,325 | | | — | | | — | | | 1,052,325 | | Payment of capital lease obligation | | | — | | | — | | | (7,746) | | | (187) | | | (7,933) | | Payment on long-term debt | | | — | | | (111,337) | | | — | | | — | | | (111,337) | | Payment of financing costs | | | — | | | (16,732) | | | — | | | — | | | (16,732) | | Share repurchases for minimum tax withholding | | | (571) | | | — | | | — | | | — | | | (571) | | Dividends on common stock | | | (94,138) | | | — | | | — | | | — | | | (94,138) | | Transactions with affiliates, net | | | 980,681 | | | (916,776) | | | (54,981) | | | (8,924) | | | — | | Other | | | (350) | | | — | | | — | | | — | | | (350) | | Net cash provided by (used in) financing activities | | | 885,622 | | | 7,480 | | | (62,727) | | | (9,111) | | | 821,264 | | Increase (decrease) in cash and cash equivalents | | | — | | | (18,145) | | | 6,725 | | | — | | | (11,420) | | Cash and cash equivalents at beginning of period | | | — | | | 27,064 | | | 13 | | | — | | | 27,077 | | Cash and cash equivalents at end of period | | $ | — | | $ | 8,919 | | $ | 6,738 | | $ | — | | $ | 15,657 | |
| | | | | | | | | | | | | | | | | | | Year Ended December 31, 2016 | | | | Parent | | Subsidiary Issuer | | Guarantors | | Non-Guarantors | | Consolidated | | Net cash (used in) provided by operating activities | | $ | (23,634) | | $ | 13,315 | | $ | 200,098 | | $ | 28,454 | | $ | 218,233 | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Business acquisition, net of cash acquired | | | (13,422) | | | — | | | — | | | — | | | (13,422) | | Purchases of property, plant and equipment | | | — | | | — | | | (111,389) | | | (13,803) | | | (125,192) | | Proceeds from sale of assets | | | — | | | — | | | 198 | | | 10 | | | 208 | | Proceeds from business disposition | | | 30,119 | | | — | | | — | | | — | | | 30,119 | | Net cash provided by (used in) investing activities | | | 16,697 | | | — | | | (111,191) | | | (13,793) | | | (108,287) | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Proceeds from issuance of long-term debt | | | — | | | 936,750 | | | — | | | — | | | 936,750 | | Payment of capital lease obligation | | | — | | | — | | | (2,743) | | | (142) | | | (2,885) | | Payment on long-term debt | | | — | | | (943,050) | | | — | | | — | | | (943,050) | | Payment of financing costs | | | — | | | (9,912) | | | — | | | — | | | (9,912) | | Share repurchases for minimum tax withholding | | | (1,231) | | | — | | | — | | | — | | | (1,231) | | Dividends on common stock | | | (78,419) | | | — | | | — | | | — | | | (78,419) | | Transactions with affiliates, net | | | 86,587 | | | 24,084 | | | (93,780) | | | (16,891) | | | — | | Net cash provided by (used in) financing activities | | | 6,937 | | | 7,872 | | | (96,523) | | | (17,033) | | | (98,747) | | Increase (decrease) in cash and cash equivalents | | | — | | | 21,187 | | | (7,616) | | | (2,372) | | | 11,199 | | Cash and cash equivalents at beginning of period | | | — | | | 5,877 | | | 7,629 | | | 2,372 | | | 15,878 | | Cash and cash equivalents at end of period | | $ | — | | $ | 27,064 | | $ | 13 | | $ | — | | $ | 27,077 | |
| | | | | | | | | | | | | | | | | | | Year Ended December 31, 2015 | | | | | | | Subsidiary | | | | | | | | | | | | | Parent | | Issuer | | Guarantors | | Non-Guarantors | | Consolidated | | Net cash (used in) provided by operating activities | | $ | (119,472) | | $ | 76,962 | | $ | 240,372 | | $ | 21,317 | | $ | 219,179 | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Purchases of property, plant and equipment | | | — | | | — | | | (126,168) | | | (7,766) | | | (133,934) | | Proceeds from sale of assets | | | — | | | — | | | 13,535 | | | 13 | | | 13,548 | | Proceeds from sale of investments | | | — | | | — | | | 846 | | | — | | | 846 | | Net cash used in investing activities | | | — | | | — | | | (111,787) | | | (7,753) | | | (119,540) | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Proceeds from bond offering | | | — | | | 294,780 | | | — | | | — | | | 294,780 | | Proceeds from issuance of long-term debt | | | — | | | 69,000 | | | — | | | — | | | 69,000 | | Payment of capital lease obligation | | | — | | | — | | | (1,029) | | | (78) | | | (1,107) | | Payment on long-term debt | | | — | | | (107,100) | | | — | | | — | | | (107,100) | | Redemption of senior notes | | | — | | | (261,874) | | | — | | | — | | | (261,874) | | Payment of financing costs | | | — | | | (4,805) | | | — | | | — | | | (4,805) | | Share repurchases for minimum tax withholding | | | (1,125) | | | — | | | — | | | — | | | (1,125) | | Dividends on common stock | | | (78,209) | | | — | | | — | | | — | | | (78,209) | | Transactions with affiliates, net | | | 198,806 | | | (66,026) | | | (120,747) | | | (12,033) | | | — | | Net cash provided by (used in) financing activities | | | 119,472 | | | (76,025) | | | (121,776) | | | (12,111) | | | (90,440) | | Increase in cash and cash equivalents | | | — | | | 937 | | | 6,809 | | | 1,453 | | | 9,199 | | Cash and cash equivalents at beginning of period | | | — | | | 4,940 | | | 820 | | | 919 | | | 6,679 | | Cash and cash equivalents at end of period | | $ | — | | $ | 5,877 | | $ | 7,629 | | $ | 2,372 | | $ | 15,878 | |
Report of Independent Certified Public Accountants
The Partners of Pennsylvania RSA No. 6 (II)
Limited Partnership
We have audited the accompanying financial statements of Pennsylvania RSA No. 6(II) Limited Partnership, which comprise the statements of income and comprehensive income, changes in partners’ capital and cash flows for the year ended December 31, 2015, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Pennsylvania RSA No. 6(II) Limited Partnership for the year ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Orlando, FL
February 26, 2016
Pennsylvania RSA No. 6(II) Limited Partnership
Balance Sheets - As of December 31, 2017 and 2016
(Dollars in Thousands)
| | | | | | | | | | 2017 | | 2016 | | | | (Unaudited) | | (Unaudited) | | ASSETS | | | | | | | | | | | | | | | | CURRENT ASSETS: | | | | | | | | Due from affiliate | | $ | 4,468 | | $ | 5,199 | | Accounts receivable, net of allowances of $594 and $713 | | | 22,162 | | | 22,311 | | Unbilled revenue | | | 1,201 | | | 958 | | Prepaid expenses | | | 653 | | | 768 | | Total current assets | | | 28,484 | | | 29,236 | | | | | | | | | | PROPERTY, PLANT AND EQUIPMENT - NET | | | 20,255 | | | 17,568 | | OTHER ASSETS - NET | | | 6,709 | | | 6,927 | | TOTAL ASSETS | | $ | 55,448 | | $ | 53,731 | | | | | | | | | | LIABILITIES AND PARTNERS’ CAPITAL | | | | | | | | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | Accounts payable and accrued liabilities | | $ | 4,668 | | $ | 4,772 | | Advance billings and other | | | 4,130 | | | 4,076 | | Financing obligation | | | 48 | | | 47 | | Deferred rent | | | 13 | | | 13 | | Total current liabilities | | | 8,859 | | | 8,908 | | | | | | | | | | LONG TERM LIABILITIES: | | | | | | | | Financing obligation | | | 419 | | | 421 | | Deferred rent | | | 1,106 | | | 1,076 | | Other liabilities | | | 189 | | | — | | Total long term liabilities | | | 1,714 | | | 1,497 | | Total liabilities | | | 10,573 | | | 10,405 | | | | | | | | | | PARTNERS’ CAPITAL | | | | | | | | General Partner's interest | | | 22,944 | | | 22,153 | | Limited Partners' interest | | | 21,931 | | | 21,173 | | Total partners' capital | | | 44,875 | | | 43,326 | | | | | | | | | | TOTAL LIABILITIES AND PARTNERS’ CAPITAL | | $ | 55,448 | | $ | 53,731 | |
See notes to financial statements.
Pennsylvania RSA No. 6(II) Limited Partnership
Statements of Income and Comprehensive Income – For the Years Ended December 31, 2017, 2016, and 2015
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | | | (Unaudited) | | (Unaudited) | | (Audited) | | OPERATING REVENUES: | | | | | | | | | | | Service revenues | | $ | 107,517 | | $ | 114,071 | | $ | 121,247 | | Equipment revenues | | | 27,092 | | | 26,780 | | | 28,121 | | Other | | | 8,378 | | | 8,077 | | | 8,007 | | Total operating revenues | | | 142,987 | | | 148,928 | | | 157,375 | | | | | | | | | | | | | OPERATING EXPENSES: | | | | | | | | | | | Cost of service (exclusive of depreciation and amortization) | | | 52,463 | | | 51,138 | | | 47,596 | | Cost of equipment | | | 30,823 | | | 31,532 | | | 35,448 | | Depreciation and amortization | | | 3,480 | | | 3,334 | | | 3,223 | | Selling, general and administrative | | | 30,270 | | | 32,599 | | | 36,075 | | Total operating expenses | | | 117,036 | | | 118,603 | | | 122,342 | | | | | | | | | | | | | OPERATING INCOME | | | 25,951 | | | 30,325 | | | 35,033 | | | | | | | | | | | | | INTEREST INCOME, NET | | | 48 | | | 11 | | | 114 | | | | | | | | | | | | | NET INCOME AND COMPREHENSIVE INCOME | | $ | 25,999 | | $ | 30,336 | | $ | 35,147 | | | | | | | | | | | | | Allocation of Net Income: | | | | | | | | | | | General Partners | | $ | 13,292 | | $ | 15,512 | | $ | 17,969 | | Limited Partners | | $ | 12,707 | | $ | 14,824 | | $ | 17,178 | |
See notes to financial statements.
Pennsylvania RSA No. 6(II) Limited Partnership
Statements of Changes in Partners’ Capital – For the Years Ended December 31, 2017, 2016, and 2015
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | General Partner | | Limited Partners | | | | | | | | | | | | | Consolidated | | | | | | | | | | | | | | | | Communications | | Venus Cellular | | | | | | | Cellco | | Cellco | | Enterprise | | Telephone | | Total Partners’ | | | | Partnership | | Partnership | | Services, Inc. | | Company, Inc. | | Capital | | | | | | | | | | | | | | | | | | | BALANCE—January 1, 2015 | | $ | 15,029 | | $ | 2,507 | | $ | 6,957 | | $ | 4,900 | | $ | 29,393 | | | | | | | | | | | | | | | | | | | Distributions | | | (13,958) | | | (2,329) | | | (6,462) | | | (4,551) | | | (27,300) | | | | | | | | | | | | | | | | | | | Net Income | | | 17,969 | | | 2,999 | | | 8,320 | | | 5,859 | | | 35,147 | | | | | | | | | | | | | | | | | | | BALANCE— December 31, 2015 (Audited) | | | 19,040 | | | 3,177 | | | 8,815 | | | 6,208 | | | 37,240 | | | | | | | | | | | | | | | | | | | Distributions | | | (12,399) | | | (2,069) | | | (5,740) | | | (4,042) | | | (24,250) | | | | | | | | | | | | | | | | | | | Net Income | | | 15,512 | | | 2,588 | | | 7,180 | | | 5,056 | | | 30,336 | | | | | | | | | | | | | | | | | | | BALANCE— December 31, 2016 (Unaudited) | | | 22,153 | | | 3,696 | | | 10,255 | | | 7,222 | | | 43,326 | | | | | | | | | | | | | | | | | | | Distributions | | | (12,501) | | | (2,086) | | | (5,787) | | | (4,076) | | | (24,450) | | | | | | | | | | | | | | | | | | | Net Income | | | 13,292 | | | 2,218 | | | 6,154 | | | 4,335 | | | 25,999 | | | | | | | | | | | | | | | | | | | BALANCE— December 31, 2017 (Unaudited) | | $ | 22,944 | | $ | 3,828 | | $ | 10,622 | | $ | 7,481 | | $ | 44,875 | |
See notes to financial statements.
Pennsylvania RSA No. 6(II) Limited Partnership
Statements of Cash Flows – For the Years Ended December 31, 2017, 2016, and 2015
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | | | (Unaudited) | | (Unaudited) | | (Audited) | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | Net Income | | $ | 25,999 | | $ | 30,336 | | $ | 35,147 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | Depreciation and amortization | | | 3,480 | | | 3,334 | | | 3,223 | | Imputed interest on financing obligation | | | 46 | | | 45 | | | 34 | | Provision for losses on accounts receivable | | | 681 | | | 502 | | | 1,638 | | Changes in certain assets and liabilities: | | | | | | | | | | | Accounts receivable | | | (532) | | | (4,677) | | | (7,698) | | Unbilled revenue | | | (243) | | | 73 | | | (70) | | Prepaid expenses | | | 115 | | | (510) | | | (15) | | Other assets | | | 217 | | | (208) | | | (4,748) | | Accounts payable and accrued liabilities | | | (204) | | | 604 | | | 303 | | Advance billings and other | | | 54 | | | (321) | | | (724) | | Deferred rent | | | 30 | | | 46 | | | 404 | | Other liabilities | | | 189 | | | — | | | — | | Net cash provided by operating activities | | | 29,832 | | | 29,224 | | | 27,494 | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | Capital expenditures | | | (6,996) | | | (2,791) | | | (6,886) | | Fixed asset transfers out | | | 930 | | | 441 | | | 536 | | Change in due from affiliate | | | 731 | | | (2,578) | | | 5,720 | | Net cash used in investing activities | | | (5,335) | | | (4,928) | | | (630) | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | Proceeds from financing obligation | | | - | | | - | | | 474 | | Repayments of financing obligation | | | (47) | | | (46) | | | (38) | | Distributions | | | (24,450) | | | (24,250) | | | (27,300) | | Net cash used in financing activities | | | (24,497) | | | (24,296) | | | (26,864) | | | | | | | | | | | | | CHANGE IN CASH | | | - | | | - | | | - | | | | | | | | | | | | | CASH—Beginning of year | | | - | | | - | | | - | | CASH—End of year | | $ | - | | $ | - | | $ | - | | | | | | | | | | | | | NONCASH TRANSACTIONS FROM INVESTING ACTIVITIES: | | | | | | | | | | | Accruals for capital expenditures | | $ | 150 | | $ | 49 | | $ | 22 | |
See notes to financial statements
Pennsylvania RSA No. 6(II) Limited Partnership
Notes to Financial Statements - Years Ended December 31, 2017, 2016, and 2015
(Dollars in Thousands)
| 1.ORGANIZATION AND MANAGEMENT
|
Pennsylvania RSA No. 6(II) Limited Partnership (the “Partnership”) was formed in 1991. The principal activity of the Partnership is providing cellular service in the Pennsylvania Rural Service Area 6-B2. Under the terms of the partnership agreement, the partnership expires on January 1, 2091.
In accordance with the partnership agreement, Cellco Partnership (“Cellco”), doing business as Verizon Wireless, a general partner of the Partnership, is responsible for managing the operations of the Partnership (see Note 7).
The partners and their respective ownership percentages of the Partnership as of December 31, 2017, 2016, and 2015 are as follows:
| | | | General Partner:
| | | | Cellco Partnership
| | 51.13
| %
| | | | | Limited Partners:
| | | | Cellco Partnership
| | 8.53
| %
| Consolidated Communications Enterprise Services, Inc.
| | 23.67
| %
| Venus Cellular Telephone Company, Inc.
| | 16.67
| %
|
Litigation, Regulatory Proceedings and Other Contingencies Gross Receipts Tax NaN of our subsidiaries, Consolidated Communications of Pennsylvania Company LLC (“CCPA”) and Consolidated Communications Enterprise Services Inc. (“CCES”), have, at various times, received Assessment Notices and/or Audit Assessment Notices from the Commonwealth of Pennsylvania Department of Revenue (“DOR”) increasing the amounts owed for the Pennsylvania Gross Receipts Tax, and have had audits performed for the tax years 2008 through 2016. For our CCES and CCPA subsidiaries, the total additional tax liabilities calculated by the DOR auditors for the tax years 2008 through 2016, including interest, are approximately $6.1 million and $7.4 million, respectively. We filed Petitions for Reassessment with the DOR’s Board of Appeals for the tax years 2008 through 2016, contesting these audit assessments. These cases remain pending and are in various stages of appeal. In May 2017, we entered into an agreement to guarantee any potential liabilities to the DOR up to $5.0 million. We believe that certain of the DOR’s findings regarding CCPA’s and CCES’s additional tax liabilities for the tax years 2008 through 2016, for which we have filed appeals, continue to lack merit. However, in 2019, CCES and CCPA finalized a settlement of the intrastate and interstate tax liabilities for the 2008 through 2013 tax years, except for the 2010 CCPA appeals, bringing the appeals to a conclusion. The settlement resulted in a payment from us to the DOR of $2.1 million, which the Company previously reserved for. Based on the initial settlement offers for the tax years 2008 through 2013 and the Company’s best estimate of the potential additional tax liabilities for the tax years 2010 (CCPA) and 2014 through 2018 (CCPA and CCES), we have reserved $1.5 million and $0.7 million, including interest, for our CCES and CCPA subsidiaries, respectively. We expect the filings for the tax years 2014 through 2018 to be settled at a later date similar to the initial settlement. While we continue to believe a settlement of all remaining disputed claims is possible, we cannot anticipate at this time what the ultimate resolution of these cases will be, nor can we evaluate the likelihood of a favorable or unfavorable outcome or the potential losses (or gains) should such an outcome occur. We do not believe that the outcome of these claims will have a material adverse impact on our financial results or cash flows. From time to time we may be involved in litigation that we believe is of the type common to companies in our industry, including regulatory issues. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse impact on our business, results of operations, financial condition or cash flows. 14.RELATED PARTY TRANSACTIONS Richard A. Lumpkin, who was a member of our Board of Directors until April 4, 2019, had related party transactions. The following speaks to the related party transactions involving Mr. Lumpkin through April 4, 2019. As of December 31, 2020, there were no other significant related party transactions. Finance Leases Mr. Lumpkin, together with his family, beneficially owned 37.0%of Agracel, Inc. (“Agracel”), a real estate investment company, at April 4, 2019 and December 31, 2018. Mr. Lumpkin was also a director of Agracel. Agracel was the sole managing member and 50% owner of LATEL LLC (“LATEL”). Mr. Lumpkin and his immediate family had a 68.5% beneficial ownership of LATEL at April 4, 2019 and December 31, 2018. We had 3 finance lease agreements with LATEL for the occupancy of 3 buildings on a triple net lease basis. In accordance with the Company’s related person transactions policy, these leases were approved by our Audit Committee and Board of Directors (“BOD”). We accounted for these leases as finance leases in accordance with ASC 842, Leases. The finance lease agreements require us to pay substantially all expenses associated with general maintenance and repair, utilities, insurance and taxes. NaN of the lease agreements was terminated on October 31, 2019 while the remaining 2 lease agreements have a maturity date of May 31, 2021 each with 2 five-year options to extend the term of the lease after the initial expiration date. We were required to pay LATEL approximately $7.9 million over the initial terms of the lease agreements. We recognized $0.1 million through April 4, 2019 and $0.3 million in 2018 in interest expense. We also recognized $0.1 million in 2019 through April 4, 2019 and $0.4 million in 2018 in amortization expense related to the finance leases. Long-Term Debt A trust, for which Mr. Lumpkin was the beneficiary of, owned $5.0 million of the 2022 Senior Notes. We recognized approximately $0.1 million through April 4, 2019 and $0.3 million in 2018 in interest expense for the 2022 Senior Notes owned by the related party. Other Services Mr. Lumpkin also had a minority ownership interest in First Mid Bank & Trust (“First Mid”). We provided telecommunications products and services to First Mid and in return received approximately $0.2 million through April 4, 2019 and $0.9 million in 2018 for these services. 15.QUARTERLY FINANCIAL INFORMATION (UNAUDITED) | | | | | | | | | | | | | | | | Quarter Ended | | 2020 | | March 31, | | June 30, | | September 30, | | December 31, | | | | | (In thousands, except per share amounts) | | Net revenues | | $ | 325,662 | | $ | 325,176 | | $ | 327,066 | | $ | 326,124 | | Operating income | | $ | 37,352 | | $ | 39,780 | | $ | 37,352 | | $ | 21,029 | | Net income (loss) attributable to common stockholders | | $ | 15,547 | | $ | 13,840 | | $ | 14,510 | | $ | (6,920) | | Basic and diluted earnings (loss) per share | | $ | 0.22 | | $ | 0.19 | | $ | 0.20 | | $ | (0.09) | |
| | | | | | | | | | | | | | | | Quarter Ended | | 2019 | | March 31, | | June 30, | | September 30, | | December 31, | | | | | (In thousands, except per share amounts) | | Net revenues | | $ | 338,649 | | $ | 333,532 | | $ | 333,326 | | $ | 331,035 | | Operating income | | $ | 16,720 | | $ | 14,300 | | $ | 23,542 | | $ | 26,719 | | Net loss attributable to common stockholders | | $ | (7,265) | | $ | (7,387) | | $ | 257 | | $ | (5,988) | | Basic and diluted loss per share | | $ | (0.11) | | $ | (0.10) | | $ | — | | $ | (0.08) | |
In connection with the Investment Agreement entered into with Searchlight in October 2020 as discussed in Note 4, we recognized transaction costs of $7.6 million during the quarter ended December 31, 2020 associated with the CPRs issued as part of the transaction. We also incurred additional interest expense of $7.9 million on the Note issued to Searchlight in the fourth quarter of 2020. During the quarter ended December 31,2020, we recognized a gain of $23.8 million on the decline in the fair value of contingent payment rights issued to Searchlight as part of the Investment Agreement. We incurred a loss on the extinguishment of debt of $18.5 million in connection with the refinancing of our credit agreement and redemption of our 2022 Senior Notes during the quarter ended December 31, 2020. We recognized a gain on extinguishment of debt from the partial repurchase of our 2022 Senior Notes of $0.2 million during the quarter ended March 31, 2020 and $0.3 million, $1.1 million and $3.1 million during the quarters ended June 30, 2019, September 30, 2019, and December 31, 2019, respectively. As part of continued cost saving initiatives, we incurred severance costs of $7.5 million and $8.7 million during the quarters ended December 31, 2020 and 2019, respectively. During the quarter ended December 31, 2019, we purchased a group annuity contract to transfer the pension benefit obligations and annuity administration for a select group of retirees or their beneficiaries to an annuity provider. As a result of the transfer of the pension liability to the annuity provider and other lump sum payments to participants of the Pension Plans, we recognized a non-cash pension settlement charge of $6.7 million during the quarter ended December 31, 2019. | 2.SIGNIFICANT ACCOUNTING POLICIES
|
Use of estimates – The financial statements are prepared using U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful accounts, the recoverability of property, plant and equipment, unbilled revenues, fair values of financial instruments, accrued expenses and contingencies.
Revenue recognition – The Partnership offers products and services to customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.
The Partnership earns revenue primarily by providing access to and usage of its network as well as the sale of equipment. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in
arrears and recognized when service is rendered. Equipment revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and accepted by the customer, as equipment sales is considered to be a separate earnings process from providing wireless services. For agreements involving the resale of third-party services in which the Partnership is considered the primary obligor in the arrangements, the revenue is recorded gross at the time of sale.
Under the Verizon device payment plan program, eligible wireless customers purchase wireless devices under a device payment plan agreement. The Partnership may offer certain promotions that allow a customer to trade in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, the Partnership may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. The Partnership recognizes a liability for the trade-in device measured at fair value, which is approximated by considering several factors, including the weighted-average selling prices obtained in recent resales of devices eligible for trade-in. Future credits are recognized when earned by the customer.
From time to time, the Partnership offers certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of their required device payment plan agreement amount and trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, the Partnership accounts for this trade-in right as a guarantee obligation. The full amount of the trade-in right’s fair value (not an allocated value) is recognized as a guarantee liability and the remaining allocable consideration is allocated to the device. The value of the guarantee liability effectively results in a reduction to the revenue recognized for the sale of the device.
In multiple element arrangements that bundle devices and monthly wireless service, revenue is allocated to each unit of accounting using a relative selling price method. At the inception of the arrangement, the amount allocable to the delivered units of accounting is limited to the amount that is not contingent upon the delivery of the monthly wireless service (the noncontingent amount). The Partnership effectively recognizes revenue on the delivered device at the lesser of the amount allocated based on the relative selling price of the device or the noncontingent amount owed when the device is sold.
Roaming revenue reflects service revenue earned by the Partnership when customers not associated with the Partnership operate in the service area of the Partnership and use the Partnership’s network. The roaming rates with third party carriers associated with those customers are based on agreements with such carriers. The roaming rates and methodology to determine roaming volumes charged by the Partnership to Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 7).
Other revenues primarily consist of certain fees billed to customers for surcharges and elected services. The Partnership reports taxes imposed by governmental authorities on revenue-producing transactions between the Partnership and its customers which is passed through to the customers on a net basis. Other revenues resulting from a cell sharing agreement, which excludes sharing of site expenses, with Cellco are recognized based upon a rate per minute of use (see Note 7).
Operating expenses – Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of selling, general and administrative, and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide services on behalf of the Partnership. These employees are not employees of the Partnership, therefore operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. Cellco believes such allocations, principally based on the Partnership’s total subscribers, are calculated in accordance with the Partnership agreement and are a reasonable method of allocating such costs (see Note 7). In 2016 and 2015, allocations were principally based on the Partnership’s percentage of certain revenue streams, total subscribers and customer gross additions or minutes-of-use; in 2017, allocations were principally based on total subscribers. The impact of the change in allocation factors was insignificant.
Cost of roaming, included in the cost of service, reflects costs incurred by the Partnership when customers associated with the Partnership operate in a service area not associated with the Partnership and use a network not associated with the Partnership. The roaming rates with third party carriers are based on agreements with such carriers. The roaming rates and methodology to determine roaming volumes charged to the Partnership by Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 7).
Cost of equipment is recorded upon sale of the related equipment at Cellco’s cost basis. Inventory is wholly owned by Cellco until the moment of sale and is not recorded in the financial statements of the Partnership.
Maintenance and repairs – The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged principally to Cost of service as these costs are incurred.
Advertising costs –Costs for advertising products and services as well as other promotional and sponsorship costs are charged to Selling, general and administrative expense in the periods in which they are incurred (See Note 7).
Comprehensive income –Comprehensive income is the same as net income as presented in the accompanying statements of income and comprehensive income.
Income taxes – On December 22, 2017 the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA significantly revised the U.S. federal corporate income tax by, among other things, lowering the corporate income tax rate to 21% and imposing limitations on the deduction of interest expense. The Partnership is treated as a pass
through entity for income tax purposes and, therefore, is not subject to federal, state, or local taxes. Accordingly, no provision has been recorded for income taxes in the Partnership’s financial statements. The results of operations, including taxable income, gains, losses, deductions and credits, are allocated to and reflected on the income tax returns of the respective partners.
The Partnership files partnership income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Partnership remains subject to examination by tax authorities for tax years as early as 2014. It is reasonably possible that various current tax examinations will conclude or required reevaluations of the Partnership’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.
Due to/from affiliate – Due to/from affiliate principally represents the Partnership’s cash position with Cellco. Cellco manages, on behalf of the Partnership, all cash, investing and financing activities of the Partnership. As such, the change in due to/from affiliate is reflected as an investing activity or a financing activity in the statements of cash flows depending on whether it represents a net asset or net liability for the Partnership.
Additionally, cost of equipment, administrative and operating costs incurred by Cellco on behalf of the Partnership, as well as property, plant and equipment and wireless license transactions with affiliates, are charged to the Partnership through this account. Interest income on due from affiliate is based on the Applicable Federal Rate which was approximately 1.2%, 0.7%, and 0.5% for the years ended December 31, 2017, 2016, and 2015, respectively. Interest expense on due to affiliate is calculated by applying Cellco’s average cost of borrowing from Verizon Communications Inc., which was approximately 4.7%, 4.8%, and 4.8% for the years ended December 31, 2017, 2016, and 2015 respectively, to the outstanding due to/from affiliate balance. Included in Interest income, net is interest income of $77 (Unaudited), $41 (Unaudited), and $29 for the years ended December 31, 2017, 2016, and 2015, respectively, related to due to/from affiliate.
Allowance for doubtful accounts – Accounts receivable are recorded in the financial statements at cost, net of allowance for credit losses, with the exception of device payment plan agreement receivables which are initially recorded at fair value based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. The Partnership maintains allowances for uncollectible accounts receivable, including device payment plan agreement receivables, for estimated losses resulting from the failure or inability of customers to make required payments. The allowance for uncollectible accounts receivable is based on Cellco’s assessment of the collectability of each Partnership’s specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. The Partnership records an allowance to reduce the receivables to the amount that is reasonably believed to be collectible. The Partnership also records an allowance for all other receivables based on multiple factors including historical experience with
bad debts, the general economic environment and the aging of such receivables. Similar to traditional service revenue accounting treatment, bad debt expense related to device payment plan agreement receivables is recorded based on an estimate of the percentage of device payment plan agreement receivables that will not be collected. This estimate is based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. Due to the device payment plan agreement being incorporated in the standard Verizon Wireless bill, the collection and risk strategies continue to follow historical practices. The Partnership monitors the aging of accounts with device payment plan agreement receivables and writes off account balances if collection efforts are unsuccessful and future collection is unlikely.
Property, plant and equipment and Depreciation – Property, plant and equipment are recorded at cost. Property, plant and equipment are generally depreciated on a straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.
When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the property, plant and equipment accounts and any gains or losses on disposition are recognized in income. Transfers of property, plant and equipment between Cellco and affiliates are recorded at net book value on the date of the transfer with an offsetting entry included in due to/from affiliate.
Interest associated with the construction of network-related assets is capitalized. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of the network-related assets.
In connection with the ongoing review of estimated useful lives of property, plant and equipment during 2016, Cellco determined that the average useful lives of certain leasehold improvements would be increased from 5 to 7 years. This change was immaterial to the Partnerships in 2016. Cellco determined that changes were also necessary to the remaining estimated useful lives of certain assets as a result of technology upgrades, enhancements, and planned retirements. While the timing and extent of current deployment plans are subject to ongoing analysis and modification, Cellco and the Partnership believe the current estimates of useful lives are reasonable.
Other assets – Other assets - net primarily include long term device payment plan agreement receivables, net of allowances of $233 (Unaudited), $214 (Unaudited), and $317 at December 31, 2017, 2016, and 2015, respectively (see Note 3).
Impairment – All long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications were to become present, the Partnership would test
for recoverability by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, the next step would be to determine the fair value of the asset and record an impairment, if any. The Partnership re-evaluates the useful life determinations for these long-lived assets each year to determine whether events and circumstances warrant a revision to their remaining useful lives.
Wireless licenses – Cellco maintains wireless licenses that provide the Partnership with the exclusive right to utilize designated radio frequency spectrum to provide wireless communications services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). License renewals, which are managed by Cellco, have historically occurred routinely and at nominal cost. Moreover, Cellco management has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of wireless licenses. As a result, wireless licenses are treated as an indefinite-lived intangible asset. The useful life determination for wireless licenses is re-evaluated each year to determine whether events and circumstances continue to support an indefinite useful life. When evaluating for impairment, Cellco aggregates wireless licenses into one single unit of accounting, as they are utilized on an integrated basis.
The Partnership owns a wireless license in the rural service area which has no carrying value. The average remaining renewal period of the Partnership’s wireless license portfolio was 2.8 years as of December 31, 2017.
Cellco on behalf of the Partnership tests the wireless licenses balance for potential impairment annually or more frequently if impairment indicators are present. In 2017 and 2016, Cellco performed a qualitative impairment assessment to determine whether it is more likely than not that the fair value of the wireless licenses was less than the carrying amount. As part of the assessment, several qualitative factors were considered including market transactions, the business enterprise value of Cellco, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA (Earnings before interest, taxes, depreciation and amortization) margin projections), the projected financial performance of Cellco, as well as other factors. In 2015, Cellco performed a quantitative impairment assessment for its aggregate wireless licenses which consisted of comparing the estimated fair value of its aggregate wireless licenses to the aggregated carrying amount as of the test date.
In addition, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for licenses included in Cellco’s national footprint. Cellco evaluated its wireless licenses for potential impairment as of December 15, 2017 and 2016. These evaluations resulted in no impairment of wireless licenses.
Financial instruments – The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.
Fair value measurements – Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 - No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy. As of December 31, 2017 and 2016, the Partnership does not have any assets or liabilities measured at fair value on a recurring basis.
Distributions – The Partnership is required to make distributions to its partners based upon the Partnership’s operating results, due to/from affiliate status, and financing needs as determined by the General Partner at the date of the distribution, which are typically made a quarter in arrears.
Recent accounting standards – In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. This standard update is effective as of the first quarter of 2020; however early adoption is permitted. The Partnership is currently evaluating the impact that this standard update will have on the financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This standard update intends to increase transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, through improved disclosure requirements, the standard update will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from
leases. This standard update is effective as of the first quarter of 2019; however early adoption is permitted. The Partnership’s current operating lease portfolio is primarily comprised of spectrum, network, real estate, and equipment leases. Upon adoption of this standard, the Partnership expects the balance sheet to include a right of use asset and liability related to substantially all operating lease arrangements. At Cellco, a cross-functional coordinated implementation team has been established to implement the standard update related to leases. The Partnership is in the process of determining the scope of arrangements that will be subject to this standard as well as assessing the impact to its systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This standard, update along with related subsequently issued updates clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP. The standard provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provides more useful information to users of financial statements through improved disclosure requirements. The standard update also amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the standard is applied only to the most current period presented and the cumulative effect of applying the standard would be recognized at the date of initial application. In August 2015, an accounting standard update was issued that delayed the effective date of this standard until the first quarter of 2018, at which time the Partnership will adopt the standard using the modified retrospective approach to open contracts. At Cellco, a cross-functional coordinated team has been established to implement this standard. Summarized below are the key impacts and areas requiring significant judgement arising from the initial adoption of Topic 606.
The ultimate impact on revenue resulting from the application of the new standard is subject to assessments that are dependent on many variables, including, but not limited to, the terms of the contractual arrangements and mix of business. The Partnership expects the allocation of revenue between equipment and service for wireless subsidy contracts will result in more revenue allocated to equipment and recognized upon delivery, and less service revenue recognized over the contract term than under current GAAP. Total revenue over the full contract term will be unchanged and there will be no change to customer billing, the timing of cash flows or the presentation of cash flows.
Additionally, the new standard requires the deferral of incremental costs to obtain a customer contract, which are then amortized to expense, as part of Selling, general and administrative expense, over the respective periods of expected benefit. As a result, a significant amount of our sales commission costs, which would have historically been expensed as incurred will be deferred and amortized.
In addition, for certain contractual arrangements, the device may be sold by one Cellco entity but the service contract is the performance obligation of another Cellco entity. In contractual arrangements where another Cellco entity sells the device on behalf of the Partnership, the Partnership with compensate the other Cellco entity for obtaining the service contract. This represents an incremental cost to obtain the service contract and will be deferred by the Partnership and recognized over the expected benefit period. The Partnership will recognize service revenue for the wireless service that it provides to the customer. In contractual arrangements where the Partnership sells the device on behalf of another Cellco entity, the equipment revenue associated with the transaction will be recognized by the Partnership, and the Partnership will also recognize commission revenue as compensation for obtaining the service contract on behalf of the other Cellco entity.
Subsequent events – Events subsequent to December 31, 2017 have been evaluated through February 28, 2018, the date the financial statements were issued.
| 3.
| | WIRELESS DEVICE PAYMENT PLANS
|
Under the Verizon device payment program, eligible wireless customers purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under fixed-term service plans, and their device payment plan charge is included on their standard wireless monthly bill. As of January 2017, the Partnership no longer offers consumers new fixed-term service plans for phones, however the Partnership continues to service existing plans as consumers move to unsubsidized pricing driven by the activation of devices purchased under the Verizon device payment program.
Wireless device payment plan agreement receivables– The following table displays device payment plan agreement receivables, net, that continue to be recognized in the accompanying consolidated balance sheets:
| | | | | | | | | 2017 | | 2016 | | | (Unaudited) | | (Unaudited) | Device payment plan agreement receivables, gross | | $ | 24,620 | | $ | 24,528 | Unamortized imputed interest | | | (1,137) | | | (1,017) | Device payment plan agreement receivables, net of | | | 23,483 | | | 23,511 | unamortized imputed interest | | | | | | | Allowance for credit losses | | | (729) | | | (708) | Device payment plan agreement receivables, net | | $ | 22,754 | | $ | 22,803 | | | | | | | | Classified on the balance sheets: | | | | | | | Accounts receivable, net | | $ | 16,108 | | $ | 15,950 | Other assets, net | | | 6,646 | | | 6,853 | Device payment plan agreement receivables, net | | $ | 22,754 | | $ | 22,803 |
The Partnership may offer customers certain promotions that allow a customer to trade in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, the Partnership may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. The Partnership recognizes a liability for the trade-in device measured at fair value, which is determined by considering several factors, including the weighted-average selling prices obtained in recent resales of similar devices eligible for trade-in. Future credits are recognized when earned by the customer. Device payment plan agreement receivables, net does not reflect the trade-in device liability. At December 31, 2017 and 2016, the amount of trade-in liability was insignificant.
From time to time, the Partnership offers certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of the required device payment plan agreement amount as well as trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, the Partnership accounts for this trade-in right as a guarantee obligation. At December 31, 2017 and 2016, the amount of the guarantee obligation was insignificant. The amount of the guarantee obligation was included in Advance billings and other on the accompanying balance sheets.
At the time of sale, the Partnership imputes risk adjusted interest on the device payment plan agreement receivables. Imputed interest is recorded as a reduction to the related accounts receivable. Interest income, which is included within Other revenues on the statements of income and comprehensive income, is recognized over the financed device payment term.
When originating device payment plan agreements, the Partnership uses internal and external data sources to create a credit risk score to measure the credit quality of a customer and to determine eligibility for the device payment program. If a customer is either new to the Partnership or has less than 210 days of customer tenure (a new customer), the credit decision process relies more heavily on external data sources. If the customer has 210 days or more of customer tenure (an existing
customer), the credit decision process relies on internal data sources. The Partnership’s experience has been that the payment attributes of longer tenured customers are highly predictive in estimating their ability to pay in the future. External data sources include obtaining a credit report from a national consumer credit reporting agency, if available. Internal data and/or credit data obtained from the credit reporting agencies is used to create a custom credit risk score. The custom credit risk score is generated automatically (except with respect to a small number of applications where the information needs manual intervention) from the applicant’s credit data using Verizon Wireless proprietary custom credit models, which are empirically derived and demonstrably and statistically sound. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment.For a small portion of new customer applications, a traditional credit report is not available from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternate credit data is used for the risk assessment.
Based on the custom credit risk score, each customer is assigned to a credit class, each of which has a specified required down payment percentage, which ranges from zero to 100%, and specified credit limits. Device payment plan agreement receivables originated from customers assigned to credit classes requiring no down payment represent the lowest risk. Device payment plan agreement receivables originated from customers assigned to credit classes requiring a down payment represent a higher risk.
Subsequent to origination, the Partnership monitors delinquency and write-off experience as key credit quality indicators for its portfolio of device payment plan agreements and fixed-term service plans. The extent of collection efforts with respect to a particular customer are based on the results of proprietary custom empirically derived internal behavioral scoring models that analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These customer scoring models assess a number of variables, including origination characteristics, customer account history and payment patterns. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. The Partnership continuously monitors collection performance results and the credit quality of device payment plan agreement receivables based on a variety of metrics, including aging. The Partnership considers an account to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date.
As of December 31, 2017 and 2016, the balance and aging of the device payment plan agreement receivables on a gross basis was as follows:
| | | | | | | | | 2017 | | 2016 | | | (Unaudited) | | (Unaudited) | Unbilled | | $ | 23,023 | | $ | 23,043 | Billed: | | | | | | | Current | | | 1,373 | | | 1,269 | Past due | | | 224 | | | 216 | Device payment plan agreement receivables, gross | | $ | 24,620 | | $ | 24,528 | | | | | | | |
Activity in the allowance for credit losses for the device payment plan agreement receivables was as follows:
| | | | | | | | | 2017 | | 2016 | | | (Unaudited) | | (Unaudited) | Balance at January 1 | | $ | 708 | | $ | 906 | Bad debt expenses | | | 537 | | | 203 | Write-offs | | | (485) | | | (401) | Other | | | (31) | | | — | Balance at December 31 | | $ | 729 | | $ | 708 |
| 4.
| | PROPERTY, PLANT AND EQUIPMENT, NET
|
Property, plant and equipment consist of the following at December 31, 2017 and 2016:
| | | | | | | | | | 2017 | | 2016 | | | | (Unaudited) | | (Unaudited) | | Buildings and improvements (15-45 years) | | $ | 10,287 | | $ | 9,883 | | Wireless plant and equipment (3-50 years) | | | 34,003 | | | 29,049 | | Furniture, fixtures and equipment (3-10 years) | | | 486 | | | 482 | | Leasehold improvements (5-7 years) | | | 2,754 | | | 2,466 | | | | | 47,530 | | | 41,880 | | Less: accumulated depreciation | | | (27,275) | | | (24,312) | | Property, plant and equipment, net | | $ | 20,255 | | $ | 17,568 | | | | | | | | | |
Capitalized network engineering costs of $242 (Unaudited), $164 (Unaudited), and $376, were recorded during the years ended December 31, 2017, 2016, and 2015, respectively. Construction in progress included in certain classifications shown above, principally consists of wireless plant and equipment, amounted to $762 (Unaudited), $334 (Unaudited), and $1,067, as of December 31, 2017, 2016, and 2015, respectively. Depreciation expense of $3,480 (Unaudited), $3,329 (Unaudited), and $3,220 was incurred during the years ended December 31, 2017, 2016 and 2015.
| 5.
| | TOWER MONETIZATION TRANSACTION
|
During March 2015, Verizon Communications, the parent company of Cellco, entered into an agreement with American Tower Corporation (ATC) giving ATC
exclusive rights to lease and operate approximately 11,300 wireless towers owned and operated by Cellco and its subsidiaries for an upfront payment of $5.0 billion (not in thousands). Verizon Communications also sold 162 towers to ATC for an upfront payment of $0.1 billion (not in thousands). Under the terms of the lease agreements, ATC has exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, ATC has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. The Partnership has subleased capacity on the towers from ATC for a minimum of 10 years at current market rates, with options to renew. The Partnership participated in this arrangement and has leased 2 towers to ATC for an upfront payment of $849. The upfront payment was accounted for as deferred rent and as a financing obligation. The $375 accounted for as deferred rent was included in cash flows provided by operating activities and relates to the portion of the towers for which the right-of-use has passed to ATC. The deferred rent is being recognized on a straight-line basis over the Partnership’s average lease term of 30 years. As of December 31, 2015, a financing obligation in the amount of $474 was included in cash flows provided by financing activities, which relates to the portion of the towers that continue to be occupied and used for the Partnership’s network operations. The Partnership makes a sublease payment to ATC for $1.9 per month per site, with annual increases of 2 percent. During 2017 and 2016, the Partnership made $47 and $46, respectively, of sublease payments to ATC, which are recorded as Repayments of financing obligation.
At December 31, 2017 and 2016, the balance of deferred rent was $339 (Unaudited) and $352 (Unaudited), respectively. At December 31, 2017 and 2016, the balance of the financing obligation was $467 (Unaudited) and $468 (Unaudited), respectively.
Accounts payable and accrued liabilities consist of the following at December 31, 2017 and 2016:
| | | | | | | | | | | | | | | | | 2017 | | 2016 | | | | (Unaudited) | | (Unaudited) | | | | | | | | | | Accounts payable | | $ | 2,667 | | $ | 2,713 | | Non-income based taxes and regulatory fees | | | 604 | | | 590 | | Accrued commissions | | | 1,397 | | | 1,469 | | Accounts payable and accrued liabilities | | $ | 4,668 | | $ | 4,772 | |
Advance billings and other consist of the following at December 31, 2017 and 2016:
| | | | | | | | | | 2017 | | 2016 | | | | (Unaudited) | | (Unaudited) | | | | | | | | | | Advance billings | | $ | 3,311 | | $ | 3,524 | | Customer deposits | | | 743 | | | 437 | | Guarantee liability | | | 76 | | | 115 | | Advance billings and other | | $ | 4,130 | | $ | 4,076 | |
| 7.
| | TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
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In addition to fixed asset purchases and right to use licenses substantially all of service revenues, equipment revenues, other revenues, cost of service, cost of equipment, and selling, general and administrative expenses represent transactions processed by affiliates (Cellco and its related parties) on behalf of the Partnership or represent transactions with affiliates. These transactions consist of (1) revenues and expenses that pertain to the Partnership which are processed by Cellco and directly attributed to or directly charged to the Partnership; (2) roaming revenue by customers of other Cellco affiliated markets within the Partnership market or Partnership customers’ cost when roaming in other Cellco affiliated markets; (3) certain revenues and expenses that are processed or incurred by Cellco which are allocated to the Partnership based on factors such as the Partnership’s percentage of revenue streams, customers, gross customer additions, or minutes of use in 2015 and 2016 and on total subscribers in 2017; (4) certain costs of operating switches which are allocated to the Partnership; and (5) lease agreements with Cellco, whereas the Partnership has the right to use certain spectrum. These transactions do not necessarily represent arm’s length transactions and may not represent all revenues and costs that would be present if the Partnership operated on a standalone basis. Cellco periodically reviews the methodology and allocation bases for allocating certain revenues, operating costs, selling, general and administrative expenses to the Partnership. Resulting changes, if any, in the allocated amounts have historically not been significant.
Service revenues– Service revenues include monthly customer billings processed by Cellco on behalf of the Partnership and roaming revenues relating to customers of other affiliated markets that are specifically identified to the Partnership. For the years ended December 31, 2017, 2016, and 2015 roaming revenues were $24,618 (Unaudited), $25,198 (Unaudited), and $25,063, respectively. During 2017, Cellco updated its roaming rates and methodology for determining roaming volumes charged for postpaid, prepaid and reseller revenue, resulting in a net decrease of $5,346 (Unaudited) to roaming revenue as compared to prior periods. Service revenues also include long distance, data, and certain revenue reductions including revenue concessions that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Equipment revenues– Equipment revenues include equipment sales processed by Cellco and specifically identified to the Partnership, as well as certain handset and accessory revenues, contra-revenues including equipment concessions, and coupon
rebates that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Other revenues–Other revenues include cell sharing revenue and other fees and surcharges charged to the customer that are specifically identified to the Partnership.
Cost of service– Cost of service includes roaming costs relating to the Partnership’s customers roaming in other affiliated markets and switch costs that are incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. For the years ended December 31, 2017, 2016, and 2015 roaming costs were $40,725 (Unaudited), $39,340 (Unaudited), and $36,313 and switch costs were $3,003 (Unaudited), $3,484 (Unaudited), and $3,408, respectively. During 2017, Cellco updated its roaming rates and methodology for determining roaming volumes charged for postpaid, prepaid and reseller cost, resulting in a net decrease of $9,497 (Unaudited) to roaming cost as compared to prior periods. Cost of service also includes cost of telecom, long distance and application content that are incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership has lease agreements for the right to use additional spectrum owned by Cellco. See Notes 2 and 8 for further information regarding these arrangements.
Cost of equipment– Cost of equipment is recorded at Cellco’s cost basis (see Note 2). Cost of equipment also includes certain costs related to handsets, accessories and other costs incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Selling, general and administrative– Selling, general and administrative expenses include commissions, customer billing, office telecom, customer care, salaries, sales and marketing and advertising expenses that are specifically identified to the Partnership as well as incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership was allocated $2,381 (Unaudited), $2,627 (Unaudited), and $2,344 in advertising costs for the years ended December 31, 2017, 2016, and 2015, respectively.
Property, plant and equipment– Property, plant and equipment includes assets purchased by Cellco and directly charged to the Partnership as well as assets transferred between Cellco and the Partnership (see Note 2).
Cellco, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities, and equipment used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably
assured of occurring. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellable lease term. For the years ended December 31, 2017, 2016, and 2015, the Partnership incurred a total of $2,150 (Unaudited), 2,279 (Unaudited), and $1,823 respectively, as rent expense related to these operating leases, which is included in Cost of service and Selling, general and administrative expenses in the accompanying statements of income and comprehensive income depending on the nature of the facility. Aggregate future minimum rental commitments under noncancellable operating leases, excluding renewal options that are not reasonably assured of occurring for the years shown are as follows:
| | | | | | | Amount | | Years | | (Unaudited) | | 2018 | | $ | 1,923 | | 2019 | | | 1,749 | | 2020 | | | 1,642 | | 2021 | | | 1,534 | | 2022 | | | 1,413 | | 2023 and thereafter | | | 3,181 | | | | | | | Total minimum payments | | $ | 11,442 | |
The Partnership has also entered into certain agreements with Cellco, whereas the Partnership leases certain spectrum from Cellco that overlaps the Pennsylvania Rural Service Area 6-B2. Total rent expense under these spectrum leases amounted to $659 (Unaudited) in 2017, $659 (Unaudited) in 2016, and $658 in 2015, which is included in Cost of service in the accompanying statements of income and comprehensive income.
Based on the terms of these leases as of December 31, 2017, future spectrum lease obligations are as follows:
| | | | | | | Amount | | Years | | (Unaudited) | | | | | | | 2018 | | $ | 660 | | 2019 | | | 518 | | 2020 | | | 376 | | 2021 | | | 377 | | 2022 | | | 377 | | 2023 and thereafter | | | 3,230 | | | | | | | Total minimum payments | | $ | 5,538 | |
The General Partner currently expects that any renewal option in the leases will be exercised.
Cellco and the Partnership are subject to lawsuits and other claims including class actions, product liability, patent infringement, intellectual property, antitrust,
partnership disputes, and claims involving relations with resellers and agents. Cellco is also currently defending lawsuits filed against it and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco violated certain state consumer protection laws and other statutes and defrauded customers through misleading billing practices or statements. These matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and the outcomes are not currently predictable.
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. The Partnership has no accrual for any pending matters. An estimate of the reasonably possible loss or range of loss with respect to these matters as of December 31, 2017 cannot be made at this time due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. Cellco and the Partnership continuously monitors these proceedings as they develop and will adjust any accrual or disclosure as needed. It is not expected that the ultimate resolution of any pending regulatory or legal matter in future periods will have a material effect on the financial condition of the Partnership, but it could have a material effect on the results of operations for a given reporting period.
| 10.
| | RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
| | | | | | | | | | | | | | | | Balance at | | Additions | | Write-offs | | Balance at | | | | Beginning | | Charged to | | Net of | | End | | | | of the Year | | Expenses | | Recoveries | | of the Year (a) | | | | | | | | | | | | | | | | Accounts Receivable Allowances: | | | | | | | | | | | | | | 2017 (Unaudited) | | $ | 927 | | $ | 681 | | $ | (781) | | $ | 827 | | 2016 (Unaudited) | | | 1,255 | | | 502 | | | (830) | | | 927 | | 2015 (Audited) | | | 498 | | | 1,638 | | | (881) | | | 1,255 | |
a) Allowance for Uncollectible Accounts Receivable includes approximately $233 (Unaudited), $214 (Unaudited), and $317, at December 31, 2017, 2016, and 2015, respectively, related to long-term device payment plan receivables.
Report of Independent Certified Public Accountants
The Partners of GTE Mobilnet of Texas RSA #17
Limited Partnership
We have audited the accompanying financial statements of GTE Mobilnet of Texas RSA #17
Limited Partnership, which comprise the balance sheets as of December 31, 2016, and the related statements of income and comprehensive income, changes in partners’ capital and cash flows for each of the two years in the period ended December 31, 2016, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GTE Mobilnet of Texas RSA #17 at December 31, 2016, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2016 in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Orlando, FL
February 28, 2017
GTE Mobilnet of Texas RSA #17 Limited Partnership
Balance Sheets - As of December 31, 2017 and 2016
(Dollars in Thousands)
| | | | | | | | | | 2017 | | 2016 | | | | | (Unaudited) | | | (Audited) | | ASSETS | | | | | | | | | | | | | | | | CURRENT ASSETS: | | | | | | | | Due from affiliate | | $ | 23,640 | | $ | 13,086 | | Accounts receivable, net of allowance of $1,015 and $1,122 | | | 10,084 | | | 9,028 | | Unbilled revenue | | | 3,371 | | | 2,287 | | Prepaid expenses | | | 344 | | | 425 | | Total current assets | | | 37,439 | | | 24,826 | | | | | | | | | | PROPERTY, PLANT AND EQUIPMENT - NET | | | 49,621 | | | 48,462 | | | | | | | | | | WIRELESS LICENSES | | | 441 | | | 441 | | | | | | | | | | OTHER ASSETS - NET | | | 2,670 | | | 2,252 | | TOTAL ASSETS | | $ | 90,171 | | $ | 75,981 | | | | | | | | | | LIABILITIES AND PARTNERS’ CAPITAL | | | | | | | | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | Accounts payable and accrued liabilities | | $ | 5,495 | | $ | 4,389 | | Advance billings and other | | | 1,159 | | | 1,740 | | Financing obligation | | | 2,460 | | | 2,412 | | Deferred rent | | | 702 | | | 702 | | Total current liabilities | | | 9,816 | | | 9,243 | | | | | | | | | | LONG TERM LIABILITIES: | | | | | | | | Financing obligation | | | 21,202 | | | 21,356 | | Deferred rent | | | 19,532 | | | 19,857 | | Other liabilities | | | 51 | | | — | | Total long term liabilities | | | 40,785 | | | 41,213 | | Total liabilities | | | 50,601 | | | 50,456 | | | | | | | | | | PARTNERS’ CAPITAL | | | | | | | | General Partner's interest | | | 7,914 | | | 5,105 | | Limited Partners' interest | | | 31,656 | | | 20,420 | | Total partners' capital | | | 39,570 | | | 25,525 | | | | | | | | | | TOTAL LIABILITIES AND PARTNERS’ CAPITAL | | $ | 90,171 | | $ | 75,981 | |
See notes to financial statements.
GTE Mobilnet of Texas RSA #17 Limited Partnership
Statements of Income and Comprehensive Income – For the Years Ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | | | (Unaudited) | | (Audited) | | (Audited) | | OPERATING REVENUES: | | | | | | | | | | | Service revenues | | $ | 134,403 | | $ | 113,816 | | $ | 117,289 | | Equipment revenues | | | 8,686 | | | 7,119 | | | 7,011 | | Other | | | 5,684 | | | 5,613 | | | 4,900 | | Total operating revenues | | | 148,773 | | | 126,548 | | | 129,200 | | | | | | | | | | | | | OPERATING EXPENSES: | | | | | | | | | | | Cost of service (exclusive of depreciation and amortization) | | | 53,794 | | | 40,711 | | | 39,702 | | Cost of equipment | | | 10,248 | | | 10,040 | | | 10,606 | | Depreciation and amortization | | | 9,549 | | | 10,364 | | | 11,348 | | Selling, general and administrative | | | 17,815 | | | 20,662 | | | 23,356 | | Total operating expenses | | | 91,406 | | | 81,777 | | | 85,012 | | | | | | | | | | | | | OPERATING INCOME | | | 57,367 | | | 44,771 | | | 44,188 | | | | | | | | | | | | | OTHER EXPENSE: | | | | | | | | | | | Interest expense, net | | | (1,322) | | | (1,391) | | | (914) | | Other | | | - | | | - | | | (392) | | Total other interest expense | | | (1,322) | | | (1,391) | | | (1,306) | | | | | | | | | | | | | NET INCOME AND COMPREHENSIVE INCOME | | $ | 56,045 | | $ | 43,380 | | $ | 42,882 | | | | | | | | | | | | | Allocation of Net Income: | | | | | | | | | | | General Partner | | $ | 11,209 | | $ | 8,676 | | $ | 8,576 | | Limited Partners | | $ | 44,836 | | $ | 34,704 | | $ | 34,306 | |
See notes to financial statements.
GTE Mobilnet of Texas RSA #17 Limited Partnership
Statements of Changes in Partners’ Capital – For the Years Ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | General | | | | | | | | | | | | | | | | | | | | | | Partner | | Limited Partners | | | | | | | | | | Eastex | | Consolidated | | | | | | | | | | | | | | | | | Telecom | | Communications | | ALLTEL | | | | Verizon | | Total | | | | San Antonio | | Investments, | | Enterprise | | Communications | | San Antonio | | Wireless | | Partners' | | | | MTA, L.P. | | LLC | | Services, Inc. | | LLC | | MTA, L.P. | | (VAW) LLC | | Capital | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE—January 1, 2015 | | $ | 16,313 | | $ | 16,731 | | $ | 16,731 | | $ | 13,883 | | $ | 9,718 | | $ | 8,187 | | $ | 81,563 | | | | | | | | | | | | | | | | | | | | | | | | | Distributions | | | (18,600) | | | (19,077) | | | (19,077) | | | (15,830) | | | (11,081) | | | (9,335) | | | (93,000) | | | | | | | | | | | | | | | | | | | | | | | | | Net Income | | | 8,576 | | | 8,796 | | | 8,796 | | | 7,299 | | | 5,110 | | | 4,305 | | | 42,882 | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE—December 31, 2015 (Audited) | | | 6,289 | | | 6,450 | | | 6,450 | | | 5,352 | | | 3,747 | | | 3,157 | | | 31,445 | | | | | | | | | | | | | | | | | | | | | | | | | Distributions | | | (9,860) | | | (10,113) | | | (10,113) | | | (8,391) | | | (5,874) | | | (4,949) | | | (49,300) | | | | | | | | | | | | | | | | | | | | | | | | | Net Income | | | 8,676 | | | 8,899 | | | 8,899 | | | 7,384 | | | 5,168 | | | 4,354 | | | 43,380 | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE—December 31, 2016 (Audited) | | | 5,105 | | | 5,236 | | | 5,236 | | | 4,345 | | | 3,041 | | | 2,562 | | | 25,525 | | | | | | | | | | | | | | | | | | | | | | | | | Distributions | | | (8,400) | | | (8,615) | | | (8,615) | | | (7,150) | | | (5,004) | | | (4,216) | | | (42,000) | | | | | | | | | | | | | | | | | | | | | | | | | Net Income | | | 11,209 | | | 11,496 | | | 11,496 | | | 9,540 | | | 6,678 | | | 5,626 | | | 56,045 | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE—December 31, 2017 (Unaudited) | | $ | 7,914 | | $ | 8,117 | | $ | 8,117 | | $ | 6,735 | | $ | 4,715 | | $ | 3,972 | | $ | 39,570 | |
See notes to financial statements.
GTE Mobilnet of Texas RSA #17 Limited Partnership
Statements of Cash Flows – For the Years Ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | | | (Unaudited) | | (Audited) | | (Audited) | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | Net Income | | $ | 56,045 | | $ | 43,380 | | $ | 42,882 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | Depreciation and amortization | | | 9,549 | | | 10,364 | | | 11,348 | | Imputed interest on financing obligation | | | 2,306 | | | 2,289 | | | 1,704 | | Provision for losses on accounts receivable | | | 956 | | | 2,128 | | | 1,546 | | Changes in certain assets and liabilities: | | | | | | | | | | | Accounts receivable | | | (2,012) | | | (3,200) | | | (3,337) | | Unbilled revenue | | | (1,084) | | | 24 | | | (180) | | Prepaid expenses | | | 81 | | | 19 | | | (313) | | Other assets | | | (418) | | | (298) | | | (1,327) | | Accounts payable and accrued liabilities | | | 1,020 | | | 324 | | | 315 | | Advance billings and other | | | (581) | | | (108) | | | (230) | | Deferred rent | | | (325) | | | (308) | | | 19,591 | | Other liabilities | | | 51 | | | — | | | — | | Net cash provided by operating activities | | | 65,588 | | | 54,614 | | | 71,999 | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | Capital expenditures | | | (12,334) | | | (1,980) | | | (4,734) | | Fixed asset transfers out | | | 1,712 | | | 506 | | | 1,341 | | Acquisition of wireless licenses | | | - | | | - | | | (441) | | Change in due from affiliate | | | (10,554) | | | (1,476) | | | 2,696 | | Net cash used in investing activities | | | (21,176) | | | (2,950) | | | (1,138) | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | Proceeds from financing obligation | | | - | | | - | | | 24,077 | | Repayments of financing obligation | | | (2,412) | | | (2,364) | | | (1,938) | | Distributions | | | (42,000) | | | (49,300) | | | (93,000) | | Net cash used in financing activities | | | (44,412) | | | (51,664) | | | (70,861) | | | | | | | | | | | | | CHANGE IN CASH | | | - | | | - | | | - | | | | | | | | | | | | | CASH—Beginning of year | | | - | | | - | | | - | | CASH—End of year | | $ | - | | $ | - | | $ | - | | | | | | | | | | | | | NONCASH TRANSACTIONS FROM INVESTING ACTIVITIES: | | | | | | | | | | | Accruals for capital expenditures | | $ | 328 | | $ | 242 | | $ | 71 | |
See notes to financial statements.
GTE Mobilnet of Texas RSA #17 Limited Partnership
Notes to Financial Statements - Years Ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
| 1.
| | ORGANIZATION AND MANAGEMENT
|
GTE Mobilnet of Texas RSA #17 Limited Partnership (the “Partnership”) was formed in 1989. The principal activity of the Partnership is providing cellular service in the Texas #17 rural service area.
Cellco Partnership (“Cellco”), doing business as Verizon Wireless, indirectly wholly-owns San Antonio MTA, L.P. and through such ownership, manages the operations of the Partnership (see Note 8).
The partners and their respective ownership percentages of the Partnership as of December 31, 2017, 2016 and 2015 are as follows:
| | | | General Partner:
| | | | San Antonio MTA, L.P.
| | 20.000000
| %
| | | | | Limited Partners:
| | | | Eastex Telecom Investments, LLC
| | 20.512855
| %
| Consolidated Communications Enterprise Services, Inc.
| | 20.512855
| %
| ALLTEL Communications, LLC *
| | 17.021300
| %
| San Antonio MTA, L.P.
| | 11.914800
| %
| Verizon Wireless (VAW) LLC *
| | 10.038190
| %
|
*Verizon Wireless (VAW) LLC and Alltel Communications, LLC are wholly-owned and indirectly owned, respectively, subsidiaries of Cellco.
| 2.
| | SIGNIFICANT ACCOUNTING POLICIES
|
Use of estimates – The financial statements are prepared using U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful accounts, the recoverability of property, plant and equipment, the recoverability of wireless licenses and other long-lived assets, unbilled revenues, fair values of financial instruments, accrued expenses and contingencies.
Revenue recognition – The Partnership offers products and services to customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.
The Partnership earns revenue primarily by providing access to and usage of its network as well as the sale of equipment. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in arrears and recognized when service is rendered. Equipment revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and accepted by the customer, as equipment sales is considered to be a separate earnings process from providing wireless services. For agreements involving the resale of third-party services in which the Partnership is considered the primary obligor in the arrangements, the revenue is recorded gross at the time of sale.
Under the Verizon device payment plan program, eligible wireless customers purchase wireless devices under a device payment plan agreement. The Partnership may offer certain promotions that allow a customer to trade in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, the Partnership may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. The Partnership recognizes a liability for the trade-in device measured at fair value, which is approximated by considering several factors, including the weighted-average selling prices obtained in recent resales of devices eligible for trade-in. Future credits are recognized when earned by the customer.
From time to time, the Partnership offers certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of their required device payment plan agreement amount and trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, the Partnership accounts for this trade-in right as a guarantee obligation. The full amount of the trade-in right’s fair value (not an allocated value) is recognized as a guarantee liability and the remaining allocable consideration is allocated to the device. The value of the guarantee liability effectively results in a reduction to the revenue recognized for the sale of the device.
In multiple element arrangements that bundle devices and monthly wireless service, revenue is allocated to each unit of accounting using a relative selling price method. At the inception of the arrangement, the amount allocable to the delivered units of accounting is limited to the amount that is not contingent upon the delivery of the monthly wireless service (the noncontingent amount). The Partnership effectively recognizes revenue on the delivered device at the lesser of the amount allocated based on the relative selling price of the device or the noncontingent amount owed when the device is sold.
Roaming revenue reflects service revenue earned by the Partnership when customers not associated with the Partnership operate in the service area of the Partnership and use the Partnership’s network. The roaming rates with third party carriers associated with those customers are based on agreements with such carriers. The roaming rates and methodology to determine roaming volumes
charged by the Partnership to Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 8).
Other revenues primarily consist of certain fees billed to customers for surcharges and elected services. The Partnership reports taxes imposed by governmental authorities on revenue-producing transactions between the Partnership and its customers which is passed through to the customers on a net basis.
Operating expenses – Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of selling, general and administrative, and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide services on behalf of the Partnership. These employees are not employees of the Partnership, therefore operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. Cellco believes such allocations, principally based on the Partnership’s total subscribers, are calculated in accordance with the Partnership agreement and are a reasonable method of allocating such costs (see Note 8). In 2016 and 2015, allocations were principally based on the Partnership’s percentage of certain revenue streams, total subscribers and customer gross additions or minutes-of-use; in 2017, allocations were principally based on total subscribers.The impact of the change in allocation factors was insignificant.
Cost of roaming, included in cost of service, reflects costs incurred by the Partnership when customers associated with the Partnership operate in a service area not associated with the Partnership and use a network not associated with the Partnership. The roaming rates with third party carriers are based on agreements with such carriers. The roaming rates and methodology to determine roaming volumes charged to the Partnership by Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 8).
Cost of equipment is recorded upon sale of the related equipment at Cellco’s cost basis. Inventory is wholly owned by Cellco until the moment of sale and is not recorded in the financial statements of the Partnership.
Maintenance and repairs – The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged principally to Cost of service as these costs are incurred.
Advertising costs –Costs for advertising products and services as well as other promotional and sponsorship costs are charged to Selling, general and administrative expense in the periods in which they are incurred (See Note 8).
Comprehensive income –Comprehensive income is the same as net income as presented in the accompanying statements of income and comprehensive income.
Income taxes – On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA significantly revised the U.S. federal corporate income tax by, among other things, lowering the corporate income tax rate to 21% and imposing
limitations on the deduction of interest expense. The Partnership is treated as a pass through entity for income tax purposes and, therefore, is not subject to federal, state or local income taxes. Accordingly, no provision has been recorded for income taxes in the Partnership’s financial statements. The results of operations, including taxable income, gains, losses, deductions and credits, are allocated to and reflected on the income tax returns of the respective partners.
The Partnership files partnership income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Partnership remains subject to examination by tax authorities for tax years as early as 2014. It is reasonably possible that various current tax examinations will conclude or require reevaluations of the Partnership’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.
Due to/from affiliate – Due to/from affiliate principally represents the Partnership’s cash position with Cellco. Cellco manages, on behalf of the Partnership, all cash, investing and financing activities of the Partnership. As such, the change in due to/from affiliate is reflected as an investing activity or a financing activity in the statements of cash flows depending on whether it represents a net asset or net liability for the Partnership.
Additionally, cost of equipment, administrative and operating costs incurred by Cellco on behalf of the Partnership, as well as property, plant and equipment and wireless license transactions with affiliates, are charged to the Partnership through this account. Interest income on due from affiliate is based on the Applicable Federal Rate which was approximately 1.2%, 0.7% and 0.5% for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense on due to affiliate is calculated by applying Cellco’s average cost of borrowing from Verizon Communications Inc., which was approximately 4.7%, 4.8% and 4.8% for the years ended December 31, 2017, 2016 and 2015, respectively, to the outstanding due to/from affiliate balance. Included in Interest expense, net is interest income of $162 (Unaudited), $97 and $177 for the years ended December 31, 2017, 2016 and 2015, respectively, related to due to/from affiliate.
Allowance for doubtful accounts – Accounts receivable are recorded in the financial statements at cost, net of allowance for credit losses, with the exception of device payment plan agreement receivables which are initially recorded at fair value based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. The Partnership maintains allowances for uncollectible accounts receivable, including device payment plan agreement receivables, for estimated losses resulting from the failure or inability of customers to make required payments. The allowance for uncollectible accounts receivable is based on Cellco’s assessment of the collectability of each Partnership’s specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. The Partnership records an allowance to reduce the receivables to the amount that is reasonably believed to be collectible. The Partnership also records an allowance
for all other receivables based on multiple factors including historical experience with bad debts, the general economic environment and the aging of such receivables. Similar to traditional service revenue accounting treatment, bad debt expense related to device payment plan agreement receivables is recorded based on an estimate of the percentage of device payment plan agreement receivables that will not be collected. This estimate is based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. Due to the device payment plan agreement being incorporated in the standard Verizon Wireless bill, the collection and risk strategies continue to follow historical practices. The Partnership monitors the aging of accounts with device payment plan agreement receivables and writes off account balances if collection efforts are unsuccessful and future collection is unlikely.
Property, plant and equipment, and Depreciation – Property, plant and equipment are recorded at cost. Property, plant and equipment are generally depreciated on a straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.
When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the property, plant, and equipment accounts and any gains or losses on disposition are recognized in income. Transfers of property, plant and equipment between Cellco and affiliates are recorded at net book value on the date of the transfer with an offsetting entry included in due to/from affiliate.
Interest associated with the construction of network-related assets is capitalized. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of the network-related assets.
In connection with the ongoing review of estimated useful lives of property, plant and equipment during 2016, Cellco determined that the average useful lives of certain leasehold improvements would be increased from 5 to 7 years. This change was immaterial to the Partnership in 2016. Cellco determined that changes were also necessary to the remaining estimated useful lives of certain assets as a result of technology upgrades, enhancements, and planned retirements. While the timing and extent of current deployment plans are subject to ongoing analysis and modification, Cellco and the Partnership believe the current estimates of useful lives are reasonable.
Other assets – Other assets - net primarily include long term device payment plan agreement receivables, net of allowances of $393 (Unaudited) and $289 at December 31, 2017 and 2016, respectively (See Note 3).
Impairment – All long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. If any indications were to become present, the Partnership would test for recoverability by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, the next step would be to determine the fair value of the asset and record an impairment, if any. The Partnership re-evaluates the useful life determinations for these long-lived assets each year to determine whether events and circumstances warrant a revision to their remaining useful lives.
Wireless licenses – Wireless licenses provide the Partnership with the exclusive right to utilize designated radio frequency spectrum to provide wireless communications services. In addition, Cellco maintains wireless licenses that provide the Partnership with the exclusive right to utilize designated radio frequency spectrum to provide wireless communications services (see Note 4). While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). License renewals, which are managed by Cellco, have historically occurred routinely and at nominal cost. Moreover, Cellco determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the Partnership’s wireless licenses. As a result, wireless licenses are treated as an indefinite-lived intangible asset. The useful life determination for wireless licenses is re-evaluated each year to determine whether events and circumstances continue to support an indefinite useful life. When evaluating for impairment, Cellco aggregates wireless licenses into one single unit of accounting, as they are utilized on an integrated basis.
Cellco on behalf of the Partnership tests the wireless licenses balance for potential impairment annually or more frequently if impairment indicators are present. In 2017, 2016 and 2015, Cellco performed a qualitative impairment assessment to determine whether it is more likely than not that the fair value of the Partnership’s wireless licenses was less than the carrying amount. As part of the assessment, several qualitative factors were considered including market transactions, the business enterprise value of the Partnership, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA (Earnings before interest, taxes, depreciation and amortization) margin projections), the projected financial performance, as well as other factors. In 2017 and 2016, Cellco also performed a qualitative impairment assessment similar to that described for the Partnership for its aggregate wireless licenses. In 2015, Cellco performed a quantitative impairment assessment for its aggregate wireless licenses which consisted of comparing the estimated fair value of its aggregate wireless licenses to the aggregated carrying amount as of the test date.
Interest expense incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses. The capitalization period ends when the development is discontinued or substantially complete and the license is ready for its intended use.
In addition, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for licenses included in Cellco’s national footprint. Cellco and the Partnership evaluated their wireless licenses for potential impairment as of December 15, 2017 and 2016. These evaluations resulted in no impairment of wireless licenses.
Financial instruments – The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.
Fair value measurements – Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 - No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy. As of December 31, 2017 and 2016, the Partnership does not have any assets or liabilities measured at fair value on a recurring basis.
Distributions – The Partnership is required to make distributions to its partners based upon the Partnership’s operating results, due to/from affiliate status, and financing needs as determined by the General Partner at the date of the distribution, which are typically made a quarter in arrears.
Recent accounting standards -In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. This standard update is effective as of the first quarter of 2020; however early
adoption is permitted. The Partnership is currently evaluating the impact that this standard update will have on the financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This standard update intends to increase transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, through improved disclosure requirements, the standard update will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. This standard update is effective as of the first quarter of 2019; however early adoption is permitted. The Partnership’s current operating lease portfolio is primarily comprised of spectrum, network, real estate, and equipment leases. Upon adoption of this standard, the Partnership expects the balance sheet to include a right of use asset and liability related to substantially all operating lease arrangements. At Cellco, a cross-functional coordinated implementation team has been established to implement the standard update related to leases. The Partnership is in the process of determining the scope of arrangements that will be subject to this standard as well as assessing the impact to its systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This standard, update along with related subsequently issued updates clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP. The standard provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provides more useful information to users of financial statements through improved disclosure requirements. The standard update also amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the standard is applied only to the most current period presented and the cumulative effect of applying the standard would be recognized at the date of initial application. In August 2015, an accounting standard update was issued that delayed the effective date of this standard until the first quarter of 2018, at which time the Partnership will adopt the standard using the modified retrospective approach to open contracts. At Cellco, a cross-functional coordinated team has been established to implement this standard. Summarized below are the key impacts and areas requiring significant judgement arising from the initial adoption of Topic 606.
The ultimate impact on revenue resulting from the application of the new standard is subject to assessments that are dependent on many variables, including, but not limited to, the terms of the contractual arrangements and mix of business. The
Partnership expects the allocation of revenue between equipment and service for wireless subsidy contracts will result in more revenue allocated to equipment and recognized upon delivery, and less service revenue recognized over the contract term than under current GAAP. Total revenue over the full contract term will be unchanged and there will be no change to customer billing, the timing of cash flows or the presentation of cash flows.
Additionally, the new standard requires the deferral of incremental costs to obtain a customer contract, which are then amortized to expense, as part of Selling, general and administrative expense, over the respective periods of expected benefit. As a result, a significant amount of our sales commission costs, which would have historically been expensed as incurred will be deferred and amortized.
In addition, for certain contractual arrangements, the device may be sold by one Cellco entity but the service contract is the performance obligation of anther Cellco entity. In contractual arrangements where another Cellco entity sells the device on behalf of the Partnership, the Partnership will compensate the other Cellco entity for obtaining the service contract. This represents an incremental cost to obtain the service contract and will be deferred by the Partnership and recognized over the expected benefit period. The Partnership will recognize service revenue for the wireless service that it provides to the customer. In contractual arrangements where the Partnership sells the device on behalf of another Cellco entity, the equipment revenue associated with the transaction will be recognized by the Partnership, and the Partnership will also recognize commission revenue as compensation for obtaining the service contract on behalf of the other Cellco entity.
Subsequent events – Events subsequent to December 31, 2017 have been evaluated through February 28, 2018, the date the financial statements were issued.
3.WIRELESS DEVICE PAYMENT PLANS
Under the Verizon device payment program, eligible wireless customers purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under fixed-term service plans, and their device payment plan charge is included on their standard wireless monthly bill. As of January 2017, the Partnership no longer offers consumers new fixed-term service plans for phones, however the Partnership continues to service existing plans as consumers move to unsubsidized pricing driven by the activation of devices purchased under the Verizon device payment program.
Wireless device payment plan agreement receivables– The following table displays device payment plan agreement receivables, net, that continue to be recognized in the accompanying balance sheets:
| | | | | | | | | 2017 | | 2016 | | | (Unaudited) | | (Audited) | Device payment plan agreement receivables, gross | | $ | 10,309 | | $ | 8,516 | Unamortized imputed interest | | | (484) | | | (351) | Device payment plan agreement receivables, net of | | | 9,825 | | | 8,165 | unamortized imputed interest | | | | | | | Allowance for credit losses | | | (1,235) | | | (939) | Device payment plan agreement receivables, net | | $ | 8,590 | | $ | 7,226 | | | | | | | | Classified on the balance sheets: | | | | | | | Accounts receivable, net | | $ | 5,955 | | $ | 5,011 | Other assets, net | | | 2,635 | | | 2,215 | Device payment plan agreement receivables, net | | $ | 8,590 | | $ | 7,226 |
The Partnership may offer customers certain promotions that allow a customer to trade in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, the Partnership may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. The Partnership recognizes a liability for the trade-in device measured at fair value, which is determined by considering several factors, including the weighted-average selling prices obtained in recent resales of similar devices eligible for trade-in. Future credits are recognized when earned by the customer. Device payment plan agreement receivables, net does not reflect the trade-in device liability. At December 31, 2017 and 2016, the amount of trade-in liability was insignificant.
From time to time, the Partnership offers certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of the required device payment plan agreement amount as well as trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, the Partnership accounts for this trade-in right as a guarantee obligation. At December 31, 2017 and 2016, the amount of the guarantee obligation was insignificant. The amount of the guarantee obligation was included in Advance billings and other on the accompanying balance sheets.
At the time of sale, the Partnership imputes risk adjusted interest on the device payment plan agreement receivables. Imputed interest is recorded as a reduction to the related accounts receivable. Interest income, which is included within Other revenues on the statements of income and comprehensive income, is recognized over the financed device payment term.
When originating device payment plan agreements, the Partnership uses internal and external data sources to create a credit risk score to measure the credit quality
of a customer and to determine eligibility for the device payment program. If a customer is either new to the Partnership or has less than 210 days of customer tenure (a new customer), the credit decision process relies more heavily on external data sources. If the customer has 210 days or more of customer tenure (an existing customer), the credit decision process relies on internal data sources. The Partnership’s experience has been that the payment attributes of longer tenured customers are highly predictive in estimating their ability to pay in the future. External data sources include obtaining a credit report from a national consumer credit reporting agency, if available. Internal data and/or credit data obtained from the credit reporting agencies is used to create a custom credit risk score. The custom credit risk score is generated automatically (except with respect to a small number of applications where the information needs manual intervention) from the applicant’s credit data using Verizon Wireless proprietary custom credit models, which are empirically derived and demonstrably and statistically sound. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment. For a small portion of new customer applications, a traditional credit report is not available from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternate credit data is used for the risk assessment.
Based on the custom credit risk score, each customer is assigned to a credit class, each of which has a specified required down payment percentage, which ranges from zero to 100%, and specified credit limits. Device payment plan agreement receivables originated from customers assigned to credit classes requiring no down payment represent the lowest risk. Device payment plan agreement receivables originated from customers assigned to credit classes requiring a down payment represent a higher risk.
Subsequent to origination, the Partnership monitors delinquency and write-off experience as key credit quality indicators for its portfolio of device payment plan agreements and fixed-term service plans. The extent of collection efforts with respect to a particular customer are based on the results of proprietary custom empirically derived internal behavioral scoring models that analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These customer scoring models assess a number of variables, including origination characteristics, customer account history and payment patterns. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. The Partnership continuously monitors collection performance results and the credit quality of device payment plan agreement receivables based on a variety of metrics, including aging. The Partnership considers an account to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date.
As of December 31, 2017 and 2016, the balance and aging of the device payment plan agreement receivables on a gross basis was as follows:
| | | | | | | | | 2017 | | 2016 | | | (Unaudited) | | (Audited) | Unbilled | | $ | 9,628 | | $ | 7,912 | Billed: | | | | | | | Current | | | 516 | | | 418 | Past due | | | 165 | | | 186 | Device payment plan agreement receivables, gross | | $ | 10,309 | | $ | 8,516 | | | | | | | |
Activity in the allowance for credit losses for the device payment plan agreement receivables was as follows:
| | | | | | | | | 2017 | | 2016 | | | (Unaudited) | | (Audited) | Balance at January 1 | | $ | 939 | | $ | 254 | Bad debt expenses | | | 779 | | | 1,182 | Write-offs | | | (464) | | | (500) | Other | | | (19) | | | 3 | Balance at December 31 | | $ | 1,235 | | $ | 939 |
4.SPECTRUM LICENSE TRANSACTION
Spectrum license transaction – On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Cellco participated in that auction and was the high bidder on the licenses covering the Partnership service area. The licenses were deemed to be right to use assets and were allocated and recorded by the Partnership as wireless licenses. The cash payment made by the Partnership of $441 is classified within Acquisition of wireless licenses on the statement of cash flows for the year ended December 31, 2015.
The average remaining renewal period of the Partnership’s wireless license portfolio was 5.6 years as of December 31, 2017.
5.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of the following at December 31, 2017 and 2016:
| | | | | | | | | | | 2017 | | 2016 | | | | | (Unaudited) | | (Audited) | | | Buildings and improvements (15-45 years) | | $ | 28,187 | | $ | 27,890 | | | Wireless plant and equipment (3-50 years) | | | 104,378 | | | 96,639 | | | Furniture, fixtures and equipment (3-10 years) | | | 295 | | | 295 | | | Leasehold improvements (5-7 years) | | | 7,402 | | | 7,259 | | | | | | 140,262 | | | 132,083 | | | Less: accumulated depreciation | | | (90,641) | | | (83,621) | | | Property, plant and equipment, net | | $ | 49,621 | | $ | 48,462 | | | | | | | | | | | |
Capitalized network engineering costs of $533 (Unaudited) and $72, were recorded during the years ended December 31, 2017 and 2016, respectively. Construction in progress included in certain classifications shown above, principally consists of wireless plant and equipment, amounted to $1,417 (Unaudited) and $1,004, as of December 31, 2017 and 2016, respectively. Depreciation expense of $9,549 (Unaudited), $10,363, and $11,346 was incurred during the years ended December 31, 2017, 2016 and 2015.
6.TOWER MONETIZATION TRANSACTION
During March 2015, Verizon Communications, the parent company of Cellco, entered into an agreement with American Tower Corporation (ATC) giving ATC exclusive rights to lease and operate approximately 11,300 wireless towers owned and operated by Cellco and its subsidiaries for an upfront payment of $5.0 billion (not in thousands). Verizon Communications also sold 162 towers to ATC for an upfront payment of $0.1 billion (not in thousands). Under the terms of the lease agreements, ATC has exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, ATC has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. The Partnership has subleased capacity on the towers from ATC for a minimum of 10 years at current market rates, with options to renew. The Partnership participated in this arrangement and has leased 102 towers to ATC for an upfront payment of $43,786. The upfront payment was accounted for as deferred rent and as a financing obligation. The $19,709 accounted for as deferred rent was included in cash flows provided by operating activities and relates to the portion of the towers for which the right-of-use has passed to ATC. The deferred rent is being recognized on a straight-line basis over the Partnership’s average lease term of 29 years. At December 31, 2015, a financing obligation in the amount of $24,077 was included in cash flows provided by financing activities, which relates to the portion of the towers that continue to be occupied and used for the Partnership’s network operations. The Partnership makes a sublease payment to ATC for $1.9 per month per site, with annual increases of 2 percent. During 2017, 2016 and 2015, the Partnership made $2,412, $2,364 and $1,938, respectively, of
sublease payments to ATC, which are recorded as Repayments of financing obligation.
At December 31, 2017 and 2016, the balance of deferred rent was $17,784 (Unaudited) and $18,483, respectively. At December 31, 2017 and 2016, the balance of the financing obligation was $23,662 (Unaudited) and $23,768, respectively.
7.CURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following at December 31, 2017 and 2016:
| | | | | | | | | | 2017 | | 2016 | | | | (Unaudited) | | (Audited) | | | | | | | | | | Accounts payable | | $ | 3,599 | | $ | 2,295 | | Non-income based taxes and regulatory fees | | | 676 | | | 888 | | Texas margin tax payable | | | 169 | | | 251 | | Accrued commissions | | | 1,051 | | | 955 | | Accounts payable and accrued liabilities | | $ | 5,495 | | $ | 4,389 | |
Advance billings and other consist of the following at December 31, 2017 and 2016:
| | | | | | | | | | 2017 | | 2016 | | | | (Unaudited) | | (Audited) | | | | | | | | | | Advance billings | | $ | 1,056 | | $ | 1,650 | | Customer deposits | | | 64 | | | 36 | | Guarantee liability | | | 39 | | | 54 | | Advance billings and other | | $ | 1,159 | | $ | 1,740 | |
8.TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
In addition to fixed asset purchases and right to use licenses substantially all of service revenues, equipment revenues, other revenues, cost of service, cost of equipment, and selling, general and administrative expenses represent transactions processed by affiliates (Cellco and its related parties) on behalf of the Partnership or represent transactions with affiliates. These transactions consist of (1) revenues and expenses that pertain to the Partnership which are processed by Cellco and directly attributed to or directly charged to the Partnership; (2) roaming revenue by customers of other Cellco affiliated markets within the Partnership market or Partnership customers’ cost when roaming in other Cellco affiliated markets; (3) certain revenues and expenses that are processed or incurred by Cellco which are allocated to the Partnership based on factors such as the Partnership’s percentage of revenue streams, customers, gross customer additions, or minutes of use in 2015 and 2016 and on total subscribers in 2017; (4) certain costs of operating switches which are allocated to the Partnership; and (5) lease agreements with Cellco, whereas the Partnership has the right to use certain spectrum. These transactions do not necessarily represent arm’s length transactions and may not represent all
revenues and costs that would be present if the Partnership operated on a standalone basis. Cellco periodically reviews the methodology and allocation bases for allocating certain revenues, operating costs, selling, general and administrative expenses to the Partnership. Resulting changes, if any, in the allocated amounts have historically not been significant, other than the roaming revenue and cost impacts discussed below.
Service revenues– Service revenues include monthly customer billings processed by Cellco on behalf of the Partnership and roaming revenues relating to customers of other affiliated markets that are specifically identified to the Partnership. For the years ended December 31, 2017, 2016, and 2015 roaming revenues were $77,223 (Unaudited), $52,832, and $53,031, respectively. During 2017, Cellco updated its roaming rates and methodology for determining roaming volumes charged for postpaid, prepaid and reseller revenue, resulting in a net increase of $954 to roaming revenue as compared to prior periods. Service revenues also include long distance, data, and certain revenue reductions including revenue concessions that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Equipment revenues– Equipment revenues include equipment sales processed by Cellco and specifically identified to the Partnership, as well as certain handset and accessory revenues, contra-revenues including equipment concessions, and coupon rebates that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Other revenues– Other revenues include other fees and surcharges charged to the customer that are specifically identified to the Partnership.
Cost of service– Cost of service includes roaming costs relating to the Partnership’s customers roaming in other affiliated markets and switch costs that are incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. For the years ended December 31, 2017, 2016, and 2015 roaming costs were $41,335 (Unaudited), $28,228, and $27,273 and switch costs were $1,653 (Unaudited), $1,857, and $1,833, respectively. During 2017, Cellco updated its roaming rates and methodology for determining roaming volumes charged for postpaid, prepaid and reseller cost, resulting in a net decrease of $1,983 to roaming cost as compared to prior periods. Cost of service also includes cost of telecom, long distance and application content that are incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership has lease agreements for the right to use additional spectrum owned by Cellco. See Notes 2 and 9 for further information regarding these arrangements.
Cost of equipment– Cost of equipment is recorded at Cellco’s cost basis (see Note 2). Cost of equipment also includes certain costs related to handsets, accessories and other costs incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Selling, general and administrative– Selling, general and administrative expenses include commissions, customer billing, office telecom, customer care, salaries, sales and marketing and advertising expenses that are specifically identified to the Partnership as well as incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership was allocated $1,328 (Unaudited), $1,875 and $1,715 in advertising costs for the years ended December 31, 2017, 2016 and 2015, respectively.
Property, plant and equipment– Property, plant and equipment includes assets purchased by Cellco and directly charged to the Partnership as well as assets transferred between Cellco and the Partnership (see Note 2).
Wireless licenses– Wireless licenses include the right to use assets that were allocated by Cellco and recorded by the Partnership in exchange for a $441 payment (see Note 4).
9.COMMITMENTS
Cellco, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities, and equipment used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured of occurring. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellable lease term. For the years ended December 31, 2017, 2016 and 2015, the Partnership incurred a total of $5,229 (Unaudited), $5,189 and $5,011 respectively, as rent expense related to these operating leases, which is included in Cost of service and in the accompanying statements of income and comprehensive income depending on the nature of the facility.
Aggregate future minimum rental commitments under noncancellable operating leases, excluding renewal options that are not reasonably assured of occurring or the years shown are as follows:
| | | | | | | Amount | | Years | | (Unaudited) | | 2018 | | $ | 3,386 | | 2019 | | | 3,357 | | 2020 | | | 2,866 | | 2021 | | | 2,634 | | 2022 | | | 2,643 | | 2023 and thereafter | | | 6,730 | | | | | | | Total minimum payments | | $ | 21,616 | |
The Partnership has also entered into certain agreements with Cellco, whereas the Partnership leases certain spectrum from Cellco that overlaps the Texas #17 rural service area. Total rent expense under these spectrum leases amounted to $935 (Unaudited), $817 and $817 in 2017, 2016 and 2015, respectively, which is included in Cost of service in the accompanying statements of income and comprehensive income.
Based on the terms of these leases as of December 31, 2017, future spectrum lease obligations are as follows:
| | | | | | | Amount | | Years | | (Unaudited) | | 2018 | | $ | 949 | | 2019 | | | 777 | | 2020 | | | 605 | | 2021 | | | 607 | | 2022 | | | 608 | | 2023 and thereafter | | | 4,876 | | | | | | | Total minimum payments | | $ | 8,422 | |
The General Partner currently expects that any renewal option in the leases will be exercised.
10.CONTINGENCIES
Cellco and the Partnership are subject to lawsuits and other claims including class actions, product liability, patent infringement, intellectual property, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also currently defending lawsuits filed against it and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco violated certain state consumer protection laws and other statutes and defrauded customers through misleading billing practices or statements. These matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and the outcomes are not currently predictable.
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. The Partnership has no accrual for any pending matters. An estimate of the reasonably possible loss or range of loss with respect to these matters as of December 31, 2017 cannot be made at this time due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. Cellco and the Partnership continuously monitors these proceedings as they develop and will adjust any accrual or disclosure as needed. It is not expected that the ultimate resolution of any pending regulatory or legal matter in future periods will have a
material effect on the financial condition of the Partnership, but it could have a material effect on the results of operations for a given reporting period.
11.RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
| | | | | | | | | | | | | | | | Balance at | | Additions | | Write-offs | | Balance at | | | | Beginning | | Charged to | | Net of | | End | | | | of the Year | | Expenses | | Recoveries | | of the Year (a) | | | | | | | | | | | | | | | | Accounts Receivable Allowances: | | | | | | | | | | | | | | 2017 (Unaudited) | | $ | 1,411 | | $ | 956 | | $ | (959) | | $ | 1,408 | | 2016 (Audited) | | | 784 | | | 2,128 | | | (1,501) | | | 1,411 | | 2015 (Audited) | | | 666 | | | 1,546 | | | (1,428) | | | 784 | |
| a)
| | Allowance for Uncollectible Accounts receivable primarily includes approximately $393, $289, and $93, at December 31, 2017, 2016 and 2015, respectively, related to long-term device payment plan receivables.
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