| ● | We are subject to a complexOrganizing our sales and uncertain regulatory environment,marketing activities around our three customer channels: consumer, commercial and we face compliance costs and restrictions greater than those of many of our competitors. Our businesses are subject to regulation by the FCC and other federal, state and local entities. Rapid changes in technology and market conditions have resulted in changes in how the government addresses telecommunications, video programming and Internet services. Many businesses that compete with our Incumbent Local Exchange Carrier (“ILEC”) and non-ILEC subsidiaries are comparatively less regulated. Some of our competitors are either not subject to utilities regulation or are subject to significantly fewer regulations. In contrast to our subsidiaries regulated as cable operators and satellite video providers, competing on-demand and OTT providers and motion picture and DVD firms have almost no regulation of their video activities. Recently, federal and state authorities have become more active in seeking to address critical issues in each of our product and service markets. The adoption of new laws or regulations, or changes to the existing regulatory framework at the federal, state or local level, could require significant and costly adjustments that could adversely affect our business plans. New regulations could impose additional costs or capital requirements, require new reporting, impair revenue opportunities, potentially impede our ability to provide services in a manner that would be attractive to our customers and potentially create barriers to enter new markets or to acquire new lines of business. We face continued regulatory uncertainty in the immediate future. Not only are these governmental entities continuing to move forward on these matters, their actions remain subject to reconsideration, appeal and legislative modification over an extended period of time, and it is unclear how their actions will ultimately impact our business. We cannot predict future developments or changes to the regulatory environment or the impact such developments or changes may have on us.
Increased regulation of the Internet could increase our cost of doing business. Current laws and regulations governing access to, or commerce on, the Internet are limited. As the significance of the Internet continues to expand, federal, state and local governments may adopt new rules and regulations applicable to, or apply existing laws and regulations to, the Internet. During 2017, the FCC adopted an order eliminating its previous classification of Internet service as a telecommunications service regulated under Title II of the Telecommunications Act of 1996. This effectively limits the FCC’s authority over Internet Service Providers. The FCC retained rules requiring Internet Service Providers to disclose practices associated with blocking, throttling and paid prioritization of Internet traffic. The FCC order has been challenged in court and the outcome of the challenge cannot be determined at this time.
The outcome of pending matters before the FCC and the Federal Trade Commission (“FTC”) and any potential congressional action cannot be determined at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and could affect our ability to compete in the markets we serve.
We are subject to extensive laws and regulations relating to the protection of the environment, natural resources and worker health and safety. Our operations and properties are subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability in connection with the management, storage and disposal of hazardous materials, asbestos and petroleum products. We are also subject to laws and regulations governing air emissions from our fleet vehicles. As a result, we face several risks, including:
| ● | Hazardous materials may have been released at properties that we currently own or formerly owned (perhaps through our predecessors). Under certain environmental laws, we could be held liable, without regard to fault, for the costs of investigating and remediating any actual or threatened contamination at these properties and for contamination associated with disposal by us, or by our predecessors, of hazardous materials at third-party disposal sites;carrier customers; |
| ● | We could incur substantial costs in the future if we acquire businesses or properties subject to environmental requirements or affected by environmental contamination. In particular, environmental laws regulating wetlands, endangered species and other land use and natural resources may increase the costs associated with future business or expansion or delay, alter or interfere with such plans;●Providing customers with a broad array of broadband, voice and communication solutions; | ● | Identifying and broadening our commercial customer needs by developing solutions and providing integrated service offerings; |
| ● | Offering digital self-service tools and apps including an enhanced website, automated consumer online orders, appointment reminders, robust Wifi apps, user guides and troubleshooting tools and videos; |
| ● | Providing excellent customer service, including 24/7 centralized customer support to coordinate installation of new services, repair and maintenance functions and creating more self-service tools through our online customer portal; |
| ● | Developing and delivering new services to meet evolving customer needs and market demands; |
| ● | Building our Fidium Fiber brand as our leading consumer and small business fiber service with a differentiated customer service; and |
| ● | Leveraging our local presence and strong reputation across our market areas. |
| ● | The presence of contamination can adversely affect the value of our properties and make it difficult to sell any affected property or to use it as collateral; and |
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We currently offer our services through customer service call centers, our website, commissioned sales representatives and third-party sales agents. Our customer service call centers and dedicated sales teams serve as the primary sales channels for consumer, commercial and carrier services. Our sales efforts are supported by digital media, direct mail, bill inserts, radio, television and internet advertising, public relations activities, community events and customer promotions. We sell our Gigabit consumer fiber broadband service in select markets using the brand known as Fidium Fiber, which launched in November 2021. In February 2023, we launched Fidium@Work and expanded our Fidium Fiber service to small businesses everywhere Fidium internet is available. In addition to our customer service call centers, customers can contact us through our website, online chat and social media channels. Our online customer portal enables customers to pay their bills, manage their accounts, order new services and utilize self-service help and support. Our priority is to continue enhancing our comprehensive customer care system in order to produce a high level of customer satisfaction and loyalty, which is important to our ability to reduce churn and generate recurring revenues. Business Strategies Transform our Company into a dominant fiber, gigabit broadband provider In 2020, in connection with the Searchlight investment, we announced plans to upgrade and expand our fiber network through a multi-year build plan with construction beginning in early 2021. The build plan includes the upgrade of approximately 1.6 million passings to fiber enabling multi Gigabit-capable services to over 70% of our passings by 2026. The ultimate total passings upgraded to fiber will be dependent upon, amongst other things, our ability to secure Public Private Partnership grant arrangement opportunities. During the years ended December 31, 2022 and 2021, we built fiber to approximately 403,000 and 330,000 passings, respectively, enabling faster broadband speeds and in 2023, we plan to upgrade at least 225,000 locations. This marks the biggest fiber deployment project in our Company’s history. Our strategy is to meaningfully upgrade our residential and small business network in those service territories with a predominantly copper-based infrastructure to a FTTP network. Of the planned upgrades, we expect that more than 1.1 million passings will be upgraded within the northern New England service areas. We believe that the upgraded network will be capable of providing up to 10 Gbps of symmetrical broadband, which we believe will make us the only broadband provider in these markets capable of delivering 10 Gbps symmetrical broadband to consumers. In addition to best-in-class upload and download speeds, we believe the resulting network will offer better reliability, improved speed consistency, and a lower operating cost relative to competing broadband network technologies. Given these benefits, we believe that our fiber deployment strategy will allow us to realize meaningful improvements in average revenue per user (“ARPU”), broadband subscriber penetration and customer retention. Continue to grow and invest in commercial and carrier services Our commercial and carrier strategy is built on leveraging our dense fiber network in key markets to offer IP-based products and services to our small and medium-sized business (“SMB”), enterprise and carrier customers. We will continue transitioning our customer base away from legacy TDM-based products to fiber and IP-based data and transport services, where we see significant opportunity to increase market share in our footprint. We will also make strategic network investments in both existing markets and edge-out locations to enhance our footprint and increase on-net and near-net opportunities. These builds will be focused on projects with high revenue visibility and attractive payback periods. Our carrier strategy entails leveraging our dense fiber network and long-term relationships in key markets to expand our carrier partnerships and grow small cell and fiber-to-the-tower connections. Investing not just in the network, but in these customer relationships, has been core to our success. Our growth strategy is also supported by the continuous evolution of our product offerings. We are regularly developing and enhancing our suite of managed and cloud services, increasing efficiency and enabling greater scalability and reliability for our business customers. We believe that by developing and investing in next-generation fiber-based products, we will be able to further support our customer needs for networking, communications, and collaboration services. Improve the overall customer experience We continue to evaluate our operations in order to improve and enhance the overall customer experience for all customers. In conjunction with the multi-year fiber build plan, we also expect to make significant investments in our back-office infrastructure. We expect our full transformation to occur over a multi-year period. Our planned enhancements include an improved customer portal where customers can manage all aspects of their service. We plan to launch expanded e-commerce, omnichannel customer service and self-service capabilities for all customer groups. We believe that our digital transformation projects will improve our order and install processes making the transition to our services more seamless than ever. Our sales process is also being redesigned in order to provide personalized sales channels and a dedicated care team for our fiber customers. We have a culture of delivering the highest quality customer service experience possible and plan to continue to make investments in our platforms in order to create a truly differentiated customer experience. | ● | We could be held responsible for third-party property damage claims, personal injury claims or natural resource damage claims relating to contamination found at any of our current or past properties.Competition The telecommunications industry is subject to extensive competition, which has increased significantly in recent years. Technological advances have expanded the types and uses of services and products available. In addition, changes in the regulatory and legislative environment applicable to comparable alternative services have lowered costs for these competitors. As a result, we face heightened competition but also have new opportunities to grow our broadband business. Our competitors vary by market and may include other incumbent and competitive local telephone companies; cable operators offering video, data and VoIP products; wireless carriers; long distance providers; satellite companies; Internet service providers, including fixed wireless Internet service providers (“WISPs”); online video providers; and in some cases new forms of providers that are able to offer a broad range of competitive services. We expect competition to remain a significant factor affecting our operating results and that the nature and extent of that competition will continue to increase in the future. See Part I - Item 1A – “Risk Factors – Risks Relating to Our Business.” Depending on the market area, we compete against Comcast, Charter, AT&T, Mediacom, Armstrong, Optimum, First Light, NewWave Communications and a number of other carriers, in both the commercial and consumer markets. Our competitors offer traditional telecommunications services as well as IP-based services and other emerging data-based services. Our competitors continue to add features and adopt aggressive pricing and packaging for services comparable to the services we offer. We continue to face competition from cable, wireless and other fiber data providers as the demand for substitute communication services, such as wireless phones and data devices, continues to increase. Customers are increasingly foregoing traditional telephone services and land-based Internet service and relying exclusively on wireless service. Wireless companies are aggressively developing networks using next-generation data technologies, including 5G and beyond, in order to provide increasingly faster data speeds to their customers. A growing number of companies are also building and enhancing their fiber networks in order to provide 1 Gbps or multi Gigabit-capable broadband services within many of our service areas. Broadband-deployment funding initiatives from federal and state agencies, including federal infrastructure legislation enacted in 2021, may also result in other service providers deploying new subsidized fiber networks within our service territories. In addition, the expanded availability of free or lower cost services, such as video over the Internet, complimentary Wi-Fi service and other streaming devices have increased competition among other providers. In order to offer competitive services, we continue to invest in our network and business operations in order to offer new and enhanced services including faster broadband speeds and cloud-enabled services. In our rural markets, services are more costly to provide than services in urban areas as a lower customer density necessitates higher capital expenditures on a per-customer basis. As a result, it may not be economically viable for new entrants to overlap existing networks in rural territories; however, federal and state funding initiatives may enable new entrants to deploy new subsidized networks in our rural markets. Despite the barriers to entry, rural telephone companies still face significant competition from wireless and video providers and, to a lesser extent, competitive telephone companies. Our other lines of business are subject to substantial competition from local, regional and national competitors. In particular, our wholesale and transport business serves other interexchange carriers and we compete with a variety of service providers, including incumbent and competitive local telephone companies and other fiber data companies. These services are subject to additional competitive pressures from the development of new technologies, which may result in price compression as customers migrate from legacy data products to lower priced alternatives. For our business systems products, we compete with other equipment providers or value added resellers, network providers, incumbent and competitive local telephone companies, and with cloud and data hosting service providers. We expect that competition across all of our customer channels will continue to intensify as new technologies develop and new competition emerges. Human Capital Resources As of December 31, 2022, we employed approximately 3,200 employees, including part-time employees. We also use temporary and contract employees in the normal course of our business. Approximately 49% of our employees were covered by collective bargaining agreements as of December 31, 2022. For a more detailed discussion regarding how the collective bargaining agreements could affect our business, see Part I - Item 1A – Risk Factors – “Risks Relating to Our Business.” Compensation and Benefits Our employees are the cornerstone of our success. We are committed to providing meaningful, challenging work and opportunities for professional growth in a positive environment. To attract and retain qualified and experienced employees, we offer competitive compensation and benefit packages, which we believe are competitive within the industry and the local markets in which we operate. Our benefit packages may include, among other items, incentive compensation based on the achievement of financial targets, healthcare and insurance benefits, health savings and flexible spending accounts, a 401(k) savings plan with an employer match, paid time off, and wellness and employee assistance programs. Additionally, for certain eligible directors and employees, we provide long-term incentive compensation, in the form of restricted stock awards. In addition, we are committed to providing employees continuing education and training programs in order for employees to achieve career goals and professional growth. Diversity and Inclusion We embrace diversity and inclusion and seek to hire and retain high-quality employees of all backgrounds and experiences. Honoring our employees as individuals is key to our culture. We believe diversity of backgrounds contributes to different ideas, which in turn drives better results for customers. We respect differences and diversity as qualities that enhance our efforts as a team and believe embracing diversity and a culture of inclusion makes our company a better place to work. We believe in and support the principles incorporated in all anti-discrimination and equal employment laws. We offered leadership Diversity, Equity and Inclusion (“DEI”) training to senior leaders across the Company and our DEI Council, which we formed in 2021, meets regularly as part of an enhanced and comprehensive employee engagement initiative. Our employees complete training each year on discrimination and harassment prevention on topics that include ageism, anti-bullying and respect for people from other racial, ethnic and religious groups. We continue to expand our DEI initiatives and are actively working to help advance our diversity journey and build upon our practices on diversity, inclusion and fairness. Safety, Health and Security We also strive to create and provide a safe, healthful and secure workplace that is free from discrimination or harassment. Our workplace policies and procedures protect against behavior that creates an offensive, hostile, or intimidating work environment. Safety is top priority and we have a strong, ongoing commitment to ensure employees are properly trained and have appropriate safety and emergency equipment. Regulatory Environment The following summary does not describe all existing and proposed legislation and regulations affecting the telecommunications industry. Regulation can change rapidly and ongoing proceedings and hearings could alter the manner in which the telecommunications industry operates. We cannot predict the outcome of any of these developments, nor their potential impact on us. See Part I – Item 1A – “Risk Factors—Risks Related to the Regulation of Our Business”. Overview Our revenues, which include revenues from such telecommunications services as local telephone service, network access service and toll service are subject to broad federal and/or state regulations. The telecommunications industry is subject to extensive federal, state and local regulation. Under the Communications Act of 1934 (the “Communications Act” and the Telecommunications Act of 1996 (the “Telecommunications Act”), federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices. At the federal level, the FCC generally exercises jurisdiction over facilities and services of local exchange carriers, such as our rural telephone companies, to the extent they are used to provide, originate or terminate interstate or international communications. The FCC has the authority to condition, modify, cancel, terminate or revoke our operating authority for failure to comply with applicable federal laws or FCC rules, regulations and policies. Fines or penalties also may be imposed for any of these violations. State regulatory commissions generally exercise jurisdiction over carriers’ facilities and services to the extent they are used to provide, originate or terminate intrastate communications. In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks. State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations. Federal Regulation Our incumbent local exchange companies and competitive local exchange companies must comply with the Communications Act, which requires, among other things, that telecommunications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. The 1996 amendments to the Communications Act (contained in the Telecommunications Act discussed below) dramatically changed, and likely will continue to change, the landscape of the industry. Access Charges On November 18, 2011, the FCC released its comprehensive order on inter-carrier compensation (“ICC”) and universal service reform (“Transformation Order”), which required terminating state access charges to mirror terminating interstate access charges, and as of July 1, 2013, all terminating switched intrastate access charges mirror interstate access charges. The access charge portion of the Transformation Order systematically reduced minute-of-use-based interstate access, intrastate access and reciprocal compensation rates over a six to nine-year period to an end state of “bill-and-keep,” in which each carrier recovers the costs of its network through charges to its own subscribers, rather than through ICC. The reductions apply to terminating access rates and usage, with originating access to be addressed by the FCC in a later proceeding. To help with the transition to bill-and-keep, the FCC created two subsidy mechanisms. The first is an Access Recovery Mechanism (“ARM”), which is funded from the Connect America Fund (“CAF”), and the second is an Access Recovery Charge (“ARC”), which is recovered from end users. The universal service portion of the Transformation Order redirected support from voice services to broadband services, and is now called the CAF. In December 2014, the FCC released a report and order that addressed, among other things, the transition to CAF Phase II funding for price cap carriers and the acceptance criteria for CAF Phase II funding. Companies are required to commit to a statewide build out requirement of 10 Mbps downstream and 1 Mbps upstream in funded locations. Our annual support through the FCC’s CAF Phase II funding was $48.1 million through 2021 as described below. The specific obligations associated with CAF Phase II funding included the obligation to serve approximately 124,500 locations by December 31, 2020 (with interim milestones of 40%, 60% and 80% completion by December 2017, 2018 and 2019, respectively); to provide broadband service with speeds of 10 Mbps downstream and 1 Mbps upstream; to achieve latency of less than 100 milliseconds; to provide data of at least 100 gigabytes per month; and to offer pricing reasonably comparable to pricing in urban areas. The Company met the buildout milestones and performance metrics requirements for 2017 through 2020 for all states where it received funding. In April 2019, the FCC announced plans for the Rural Digital Opportunity Fund (“RDOF”), the next phase of the CAF program. The RDOF is a $20.4 billion fund to bring speeds of 25 Mbps downstream and 3 Mbps upstream to unserved and underserved areas of America. The RDOF program prioritizes terrestrial broadband as a bridge to rural 5G networks by providing a significant weight advantage to traditional broadband providers. Funding will occur in two phases with the first phase auctioning $16.0 billion and the second phase (which is not certain to occur) auctioning $4.4 billion, each to be distributed over 10 years. The minimum speed required to receive funding is 25 Mbps downstream and 3 Mbps upstream. CAF Phase II funding was extended through December 31, 2021 for price cap holding companies. The FCC issued the final census block groups with locations and reserve price. We filed our RDOF short form application on July 14, 2020 and were listed as a qualified bidder by the FCC on October 13, 2020 and participated in the auction. The auction began on October 29, 2020 and ended on November 24, 2020. Consolidated won 246 census block groups serving in seven states. The bids we won are at the 1 Gbps downstream and 500 Mbps upstream speed tier to approximately 27,000 locations at an annual funding level of $5.9 million, beginning January 1, 2022 through December 31, 2031, which resulted in a reduction of approximately $42.2 million in annual support as of January 1, 2022. Consolidated filed its long form application with supporting documents on January 29, 2021 and received final FCC approval on December 14, 2021. Consolidated began receiving RDOF funding in January 2022. Unbundled Network Element Rules In 2019, the FCC issued two orders that eliminated certain obligations that require incumbent telecommunications carriers to lease Unbundled Network Element (“UNE”) to competitors. The first order addressed wholesale discounts on resold services and Voice Grade analog UNE loops and the second order (“Transport Order”), addressed UNE transport between competitive wire centers. Both orders provided a three-year transition period. The Transport Order addresses two separate but related topics. One is the relief from transport UNEs and the other is to respond to a remand of the FCC’s Business Data Services (“BDS”) order. BDS were previously known as Special Access services. The FCC broadly deregulated BDS services in 2017. This decision was appealed and a U.S. Court of Appeals upheld the order but vacated the BDS transport relief because the Court decided that the FCC had not provided sufficient notice intended to deregulate all BDS transport services. On remand, the FCC addressed this issue in the same order used to provide forbearance relief on UNE transport. The FCC has signaled its intent to continue evaluating various aspects of its UNE and related resale rules, and to forbear from or otherwise modernize them where necessary in light of evolving market conditions. In 2020, Consolidated renegotiated its Wholesale Performance Plans (“WPP”) in Maine, New Hampshire and Vermont to comply with the FCC’s UNE forbearance order issued in 2019. Promotion of Universal Service In general, telecommunications service in rural areas is costlier to provide than service in urban areas. The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain. By supporting the high cost of operations in rural markets, Universal Service Fund (“USF”) subsidies promote widely available, quality telephone service at affordable prices in rural areas. Revenues from federal and certain states’ USFs totaled $33.4 million, $69.8 million and $72.0 million in 2022, 2021 and 2020, respectively. State Regulation We are subject to regulation by state governments in the jurisdictions in which we operate. State regulatory commissions generally exercise jurisdiction over our provision of intrastate telecommunications services. In recent years, most states have reduced their regulation of ILECs, including our ILEC operations. Nonetheless, state regulatory commissions generally continue to (i) set the rates that telecommunication companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) regulate ILECs’ financing activities including their ability to borrow against and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various quality of service standards. In many states, BDS and switched interconnection services are subject to price regulation, although the extent of such regulation varies by type of service and geographic region. We operate in states where traditional cost recovery mechanisms, including state USF, are under evaluation or have been modified. As states continue to assess their laws and implement various regulatory changes, there can be no assurance that these mechanisms will continue to provide us with the same level of cost recovery we historically have received. Local Government Authorizations In the various states we operate in, we operate under a structure in which municipalities and other local governmental authorities may impose various fees, such as for the privilege of originating and terminating messages and placing facilities within the relevant area, for obtaining permits for street opening and construction, and/or for operating franchises to install and expand fiber optic facilities. Regulation of Video and Internet Services Video Services Our cable television subsidiaries each require a state or local franchise or other similar authorization in order to provide cable television service to customers. Each of these subsidiaries is subject to regulation under Title VI of the Communications Act. Under this framework, the responsibilities and obligations of franchising bodies and cable operators have been carefully defined. The law addresses such issues as the use of local streets and rights-of-way; the carriage of public, educational and governmental channels; the provision of channel space for leased commercial access; the amount and payment of franchise fees; consumer protection and similar issues. In addition, federal laws place limits on the common ownership of cable systems and competing multichannel video distribution systems, and on the common ownership of cable systems and local telephone systems in the same geographic area. Many such provisions of federal law have been implemented through FCC regulations. The FCC has expanded its oversight and regulation of certain aspects of the provision of cable television over time. For example, it has acted to assure that new competitors in the cable television business are able to gain access to potential customers and can also obtain licenses to carry certain types of video programming. Internet Services The provision of Internet access services is currently not significantly regulated by either the FCC or the state commissions (with the exception of the California Public Utilities Commission). The Federal Trade Commission (“FTC”) has authority to regulate Internet Service Providers with respect to privacy and competitive practices. In 2017, the FCC adopted an order rescinding its previous classification of Internet service as a telecommunications service regulated under Title II of the Communications Act effectively limiting the FCC’s authority over Internet Service Providers. However, the FCC retained rules requiring Internet Service Providers to disclose practices associated with blocking, throttling and paid prioritization of Internet traffic. The FCC order was challenged in court and in 2019, a U.S. Court of Appeals upheld the FCC’s decision reclassifying Internet access services as an information service. However, the ruling invalidated the FCC’s decision that state regulators may not impose obligations similar to the federal network neutrality obligations. Several states have adopted rules similar to the network neutrality requirements that were eliminated by the FCC and new state legislation may be adopted in the future. The outcome of pending matters before the FCC and the FTC and any potential congressional action cannot be determined at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and could affect our ability to compete in the markets we serve. COVID-19 and Broadband Adoption Initiatives Federal and state governments have adopted initiatives to assist with the impacts of the COVID-19 pandemic and to provide funding programs to assist in the deployment of broadband in order to support access to high speed broadband services in underserved or unserved areas. The awards may include a number of regulatory requirements including the completion of construction by certain dates. We are evaluating each of these programs and expect to continue to pursue funding opportunities available to us. We cannot predict what funding we will receive, the ultimate requirements that will be adopted or the impact of these programs on our business. Coronavirus Aid, Relief, and Economic Security Act Funding States received opportunities to use federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) funding to assist in the deployment of broadband to unserved and underserved areas within their respective states. In 2020, New Hampshire allocated $50.0 million of CARES Act funding to fund broadband expansion to unserved and underserved locations throughout the state. Consolidated was granted up to $3.5 million to build high-speed Internet networks for homes and businesses in New Hampshire for the towns of Danbury, Springfield and Mason. The state funded 10% upfront with the remainder received upon completion of projects in December 2020. American Rescue Plan Act Funding President Biden signed the American Rescue Plan Act of 2021 (“ARPA”) on March 11, 2021. States have been allocated federal funds to be utilized for capital infrastructure, including broadband deployment, and are in various stages of implementation. We are working with the states and municipalities in which we operate, to participate in this broadband grant program. COVID-19 On March 13, 2020, the FCC introduced the Keep Americans Connected pledge, which was in effect through June 30, 2020. The pledge asked all communications providers to not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the COVID-19 pandemic; to waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and to open their Wi-Fi hotspots to any American who needs them. Consolidated signed on to the pledge through June 30, 2020. Several states took the FCC pledge a step further by prohibiting carriers from disconnecting service within their state during the respective Governors’ declared states of emergency, which Consolidated also supported. Certain states such as Washington and New York were extended to July 31, 2021 and December 31, 2021, respectively. The state moratoriums on disconnections have since expired. In February 2021, the FCC created the Emergency Broadband Benefit Program (“EBB”), a temporary program to help low income households stay connected during the COVID-19 pandemic by providing broadband service discounts for eligible households. Consolidated was a participant in this program. The EBB ended on December 31, 2021. EBB recipients fully enrolled as of December 31, 2021 automatically continued to receive their current monthly benefit until March 1, 2022, when the Affordable Connectivity Program took its place. Affordable Connectivity Program The Affordable Connectivity Program (“ACP”) is a permanent broadband affordability program set up to replace the EBB. The ACP program helps ensure that households can afford the broadband they need for work, school, healthcare and more. The benefit provides a discount of up to $30 per month toward internet service for eligible households and up to $75 per month for households on qualifying Tribal lands. Eligible households can also receive a one-time discount of up to $100 to purchase a laptop, desktop computer, or tablet from participating providers if they contribute more than $10 and less than $50 toward the purchase price. The ACP is limited to one monthly service discount and one device discount per household. The program began distributing funds on March 1, 2022. Consolidated is participating in this program. Infrastructure Investment and Jobs Act The Infrastructure Investment and Jobs Act (“Infrastructure Act”) passed on March 31, 2021 included $65.0 billion to support broadband infrastructure deployment and access across the United States. The broadband internet portion of the Infrastructure Act is aimed at increasing internet coverage for more universal access, including for rural, low-income, and tribal communities. 65% of this funding is set aside specifically for underserved communities. Additionally, this measure is designed to help make internet access more affordable and increase digital literacy. The Infrastructure Act set aside $42.5 billion for Broadband Equity, Access and Deployment grants (“BEAD”). The National Telecommunications and Information Administration administers the BEAD program and has awarded grants to jurisdictions across the country, which in turn will use the funding to support service providers’ broadband deployment and access initiatives. The FCC currently is undertaking a broadband availability and quality mapping project, the results of which may impact the ultimate distribution of BEAD funding. Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.consolidated.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website also contains copies of our Corporate Governance Principles, Code of Business Conduct and Ethics and charter of each committee of our Board of Directors. The information found on our website is not part of this report or any other report we file with or furnish to the SEC. The public may read and copy reports, proxy and information statements and other information we file with the SEC at the SEC’s website at www.sec.gov. Item 1A. Risk Factors. Our operations and financial results are subject to various risks and uncertainties, including but not limited to those described below, that could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. Risks Relating to Our Business We expect to continue to face significant competition in all parts of our business and the level of competition could intensify among our customer channels. The telecommunications industry is highly competitive. We face actual and potential competition from many existing and emerging companies, including wireline and wireless companies, long-distance carriers and resellers, Internet service providers, including fixed wireless Internet service providers (“WISPs”), satellite companies and cable television companies, and, in some cases, new forms of providers that are able to offer competitive services through software applications requiring a comparatively small initial investment. Due to consolidations and strategic alliances within the industry, we cannot predict the number of competitors we will face at any given time. The wireless business has expanded significantly and has caused many subscribers with traditional telephone and land-based Internet access services to give up those services and rely exclusively on wireless service. Wireless companies are aggressively developing networks using next-generation data technologies, including 5G wireless broadband services, in order to provide increasingly faster data speeds to their customers. A growing number of telecommunications companies are also building and enhancing their fiber networks within many of our service areas. Broadband-deployment funding initiatives from federal and state agencies, including federal infrastructure legislation enacted in 2021, may also result in other service providers deploying new subsidized fiber networks within our service territories. In addition, our video service faces increased competition as consumers’ options for viewing television shows have expanded as content becomes increasingly available through alternative sources. Some providers, including television and cable television content owners, provide streaming and other Over-The-Top (“OTT”) services that deliver video content to televisions, computers and other devices over the Internet. Newer products and services will likely continue to be developed, further increasing the number of competitors that all our services face. We may not be able to successfully anticipate and respond to many of the various competitive factors affecting the industry, including regulatory changes that may affect our competitors and us differently, new technologies, services and applications that may be introduced, changes in consumer preferences, demographic trends, and discount or bundled pricing strategies by competitors. The incumbent telephone carriers in the markets we serve enjoy certain business advantages, including size, financial resources, a favorable regulatory position, a more diverse product mix, brand recognition and connection to virtually all of our customers and potential customers. The largest cable operators also enjoy certain business advantages, including size, financial resources, ownership of or superior access to desirable programming and other content, a more diverse product mix, brand recognition and first-in-field advantages with a customer base that generates positive cash flow for their operations. Our competitors continue to add features, increase data speeds and adopt aggressive pricing and packaging for services comparable to the services we offer. Their success in selling services that are competitive with ours among our various customer channels could lead to revenue erosion in our business. We face intense competition in our markets for long-distance, Internet access, video service and other ancillary services that are important to our business and to our growth strategy. If we do not compete effectively we could lose customers, revenue and market share. We must adapt to rapid technological changes. If we are unable to take advantage of technological developments, or if we adopt and implement them at a slower rate than our competitors, we may experience a decline in the demand for our services. Our industry operates in a technologically complex environment. New technologies are continually developed and existing products and services undergo constant improvement. Emerging technologies offer consumers a variety of choices for their communications and broadband needs. To remain competitive, we will need to adapt to future changes in technology to enhance our existing offerings and to introduce new or improved offerings that anticipate and respond to the varied and continually changing demands of our various customer channels. Our business and results of operations could be adversely affected if we are unable to match the benefits offered by competing technologies on a timely basis and at an acceptable cost, or if we fail to employ technologies desired by our customers before our competitors do so. New technologies, particularly alternative methods for the distribution, access and viewing of content, have been, and will likely continue to be, developed that will further increase the number of competitors that we face and drive changes in consumer behavior. Consumers seek more control over when, where and how they consume content and are increasingly interested in communications services outside of the home and in newer services in wireless Internet technology and devices such as tablets, smartphones and mobile wireless routers that connect to such devices. These new technologies, distribution platforms and consumer behaviors may have a negative impact on our business. In addition, evolving technologies can reduce the costs of entry for others, resulting in greater competition and significant new advantages for competitors. Technological developments could require us to make significant new capital investments in order to remain competitive with other service providers. We expect to continue to incur additional costs as we execute on our technological developments including our fiber network expansion plan. If we do not replace or upgrade our network and its technology on a timely basis, we may not be able to compete effectively and could lose customers. We may also be placed at a cost disadvantage in offering our services. Wireless companies are aggressively developing networks using next-generation data technologies, which are capable of delivering high-speed Internet service via wireless technology to a large geographic footprint. In addition, a growing number of telecommunications companies are building advanced fiber networks to significantly increase broadband speeds. Although we use fiber optics in parts of our networks and are continuing to expand and enhance our fiber network, we continue to rely on coaxial cable and copper transport media to serve customers in certain areas. If we cannot develop new services and products to keep pace with technological advances, or if such services and products are not widely embraced by our customers, our results of operations could be adversely impacted. Shifts in our product mix may result in a decline in operating profitability. Margins vary among our products and services. Our profitability may be impacted by technological changes, customer demands, regulatory changes, the competitive nature of our business and changes in the product mix of our sales. These shifts may also result in our long-lived assets becoming impaired or our inventory becoming obsolete. We review long-lived assets for potential impairment if certain events or changes in circumstances indicate that impairment may be present. We currently manage potential inventory obsolescence through reserves, but future technology changes may cause inventory obsolescence to exceed current reserves. Public health threats, such as the recent outbreak of COVID-19, could have a material adverse effect on our business, results of operations, cash flows and stock price. We may face risks associated with public health threats or outbreaks of epidemic, pandemic or communicable diseases, such as the outbreak of the coronavirus (“COVID-19”) and its variants. The severity, magnitude and duration of global or regional pandemics are uncertain and hard to predict. Although the domestic and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted, certain adverse consequences of the pandemic continue to impact the economy, including disruptions in the supply chain, labor shortages, rising inflationary pressures and interest rates, and the risk of a recession. As a critical infrastructure provider, we continued to operate our business and provide services to our customers. A future resurgence in the transmission of current or new variants of COVID-19 or other pandemic conditions that result in any preventive or protective actions implemented by governmental authorities may have a material adverse effect on our operations, customers and suppliers. Adverse economic and market conditions as a result of COVID-19 or other pandemics could adversely affect the demand for our products and services and may also impact the ability of our customers to satisfy their obligations to us. In addition, volatility in financial and other capital markets may adversely affect the market price of our common stock and our ability to access capital markets. In response to the COVID-19 pandemic, we have transitioned a substantial number of our employees to telecommuting and remote work arrangements, which may increase the risk of a security breach or cybersecurity attack on our information technology systems that could impact our business. We receive support from various funds established under federal and state laws, and the continued receipt of that support is not assured. A significant portion of our revenues come from network access and subsidies. An order adopted by the FCC in 2011 (the “Transformation Order”) significantly impacted the amount of support revenue we receive from the Universal Service Fund (“USF”), Connect America Fund (“CAF”) and intercarrier compensation (“ICC”). The Transformation Order reformed core parts of the USF, broadly recast the existing ICC scheme, established the CAF to replace support revenues provided by the USF and redirected support from voice services to broadband services. In 2012, CAF funding was implemented, which froze USF support to price cap carriers until the FCC implemented a broadband cost model to shift support from voice services to broadband services. In 2020, the FCC adopted an order establishing the Rural Digital Opportunity Fund (“RDOF”), the next phase of the CAF program, which resulted in a reduction of approximately $42.2 million in the annual support we receive as of January 1, 2022. See Part I – Item 1 – “Regulatory Environment” above for statistics of current funding levels. We must comply with numerous FCC and state requirements to continue receiving the RDOF funding. Any failure to comply with the requirements could impact our current funding, which could adversely impact our results of operations and financial condition. We receive subsidy payments from various federal and state universal service support programs, including high-cost support, Lifeline, which reduces the cost of communications services for low-income consumers, and E-Rate, which subsidizes the purchase of communications services by schools and libraries. The total cost of the various federal universal service programs has increased significantly in recent years, putting pressure on regulators to reform the programs and to limit both eligibility and support. We cannot predict future changes that may impact the subsidies we receive. However, a reduction in subsidies support may directly affect our profitability and cash flows. A disruption in our networks and infrastructure could cause service delays or interruptions, which could cause us to lose customers and incur additional expenses. Our customers depend on reliable service over our network. The primary risks to our network infrastructure include physical damage to lines, security breaches, capacity limitations, power surges or outages, software defects and disruptions beyond our control, such as natural disasters and acts of terrorism. From time to time in the ordinary course of business, we experience short disruptions in our service due to factors such as physical damage, inclement weather and service failures of our third-party service providers. We could experience more significant disruptions in the future. For example, climate change may increase the intensity and frequency of various natural disasters, as well as contribute to chronic changes in the physical environment (such as changes to ambient temperature and precipitation patterns or sea-level rise) that may impair the operating conditions of our infrastructure or otherwise adversely impact our operations. Disruptions may cause service interruptions or reduced capacity for customers, either of which could cause us to lose customers and incur unexpected expenses. A cyber-attack may lead to unauthorized access to confidential customer, personnel and business information that could adversely affect our business. We utilize our information technology infrastructure to manage and store various proprietary information and sensitive or confidential data relating to our operations. We routinely process, store and transmit large amounts of data for our customers, including sensitive and personally identifiable information. We depend on our information technology infrastructure to conduct business operations and provide customer services. We may be subject to data breaches and disruptions of the information technology systems we use for these purposes. Attempts by others to gain unauthorized access to organizations' information technology systems by hackers and other malicious actors such as foreign governments, criminals, hacktivists, terrorists and insider threats are becoming more frequent and sophisticated, and are sometimes successful. These attempts may include covertly introducing malware to companies' computers and networks, impersonating authorized users or "hacking" into systems. Hackers and other malicious actors may be able to penetrate our network security and misappropriate or compromise our confidential, sensitive, personal or proprietary information, or that of third parties, and engage in the unauthorized use or dissemination of such information. They may be able to create system disruptions, or cause shutdowns. Hackers and other malicious actors may be able to develop and deploy viruses, worms, ransomware and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our systems. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs,” cybersecurity vulnerabilities and other problems that could unexpectedly interfere with the operation or security of our systems. We seek to prevent, detect and investigate all security incidents that do occur, however we may be unable to prevent or detect a significant attack in the future. Significant information technology security failures could result in the theft, loss, damage, unauthorized use or publication of our confidential business information, which could harm our competitive position, subject us to additional regulatory scrutiny, expose us to litigation or otherwise adversely affect our business. To date, interruptions of our information technology infrastructure and third party suppliers have been infrequent and have not had a material impact on our operations. However, because technology is increasingly complex and cyber-attacks are increasingly sophisticated and more frequent, there can be no assurance that such incidents will not have a material adverse effect on us in the future. The consequences of a breach of our security measures or those of a third-party provider, a cyber-related service or operational disruption, or a breach of personal, confidential, proprietary or sensitive data caused by a hacker or other malicious actor could be significant for us, our customers and other affected third parties. For example, the consequences could include damage to infrastructure and property, impairment of business operations, disruptions to customer service, financial costs and harm to our liquidity, costs associated with remediation, loss of revenues, loss of customers, competitive disadvantage, legal expenses associated with litigation, regulatory action, fines or penalties or damage to our brand and reputation. In addition, the costs to us to eliminate or address the foregoing security challenges and vulnerabilities before or after a cyber-incident could be significant. In addition, our remediation efforts may not be successful and could result in interruptions, delays or cessation of service. We could also lose existing or potential customers for our services in connection with any actual or perceived security vulnerabilities in the services. We are subject to laws, rules and regulations relating to the collection, use and security of user data. Our operations are also subject to federal and state laws governing information security. In the event of a data breach or operational disruption caused by an information security incident, such rules may require consumer and government agency notification and may result in regulatory enforcement actions with the potential of monetary forfeitures as well as civil litigation. We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards and contractual obligations. Our operations require substantial capital expenditures and our business, financial condition, results of operations and liquidity may be impacted if funds for capital expenditures are not available when needed. We require significant capital expenditures to maintain, upgrade and enhance our network facilities and operations. While we have historically been able to fund capital expenditures from cash generated from operations and borrowings under our revolving credit facility, the other risk factors described in this section could materially reduce cash available from operations or significantly increase our capital expenditure requirements, which may result in our inability to fund the necessary level of capital expenditures to maintain, upgrade or enhance our network. This could adversely affect our business, financial condition, results of operations and liquidity. If we cannot obtain and maintain necessary rights-of-way for our network, our operations may be interrupted and we could be faced with increased costs. We are dependent on easements, franchises and licenses from state and local governmental authorities, including highway and transit authorities, as well as from various private parties, such as telephone companies, including long-distance companies, and other utilities, and railroads for access to aerial pole space, underground conduits and other rights-of-way in order to construct and operate our networks. Some agreements relating to rights-of-way may be short-term or revocable at will, and we cannot be certain that we will continue to have access to existing rights-of-way after the governing agreements terminate or expire. If any of our right-of-way agreements were terminated or could not be renewed, we may be forced to remove, relocate or abandon our network facilities in the affected areas, which could interrupt our operations, force us to find alternative rights-of-way and incur unexpected capital expenditures. We may be unable to obtain necessary hardware, software and operational support from third-party vendors. We depend on third-party vendors to supply us with a significant amount of hardware, software and operational support necessary to provide certain of our services, to maintain, upgrade and enhance our network facilities and operations, and to support our information and billing systems. Some of our third-party vendors are our primary source of supply for certain products and services for which there are few substitutes. The global supply chains have been and may continue to be impacted by the COVID-19 pandemic, which has caused a delay in the development, manufacturing and shipping of products and in some cases an increase in product costs. If any of these vendors should experience financial difficulties, experience supply chain issues, have demand that exceeds their capacity or can no longer meet our specifications or provide products or services we need or at reasonable prices, our ability to provide some services may be hindered, in which case our business, financial condition and results of operations may be adversely affected. Video content costs are substantial and continue to increase. We expect video content costs to continue to be one of our largest operating costs associated with providing video service. Video programming content includes network programming designed to be shown in linear channels, as well as the programming of local over-the-air television stations that we retransmit. The cable industry has experienced continued increases in the cost of programming, especially the cost of sports programming and local broadcast station retransmission content. Programming costs are generally assessed on a per-subscriber basis, and therefore, are directly related to the number of subscribers to which the programming is provided. Our relatively small subscriber base limits our ability to negotiate lower per-subscriber programming costs. Larger providers can often qualify for discounts based on the number of their subscribers. This cost difference can cause us to experience reduced operating margins, while our competitors with a larger subscriber base may not experience similar margin compression. In addition, escalators in existing content agreements can result in cost increases that exceed general inflation. While we expect video content costs to continue to increase, we may not be able to pass such cost increases on to our customers, especially as an increasing amount of programming content becomes available via the Internet at little or no cost. Also, some competitors or their affiliates own programming in their own right and we may not be able to secure license rights to that programming. As our programming contracts with content providers expire, there is no assurance that they will be renewed on acceptable terms or that they will be renewed at all, in which case we may not be able to provide such programming as part of our video services packages and our business and results of operations may be adversely affected. We have employees who are covered by collective bargaining agreements. If we are unable to enter into new agreements or renew existing agreements timely, we could experience work stoppages or other labor actions that could materially disrupt our business of providing services to our customers. As of December 31, 2022, approximately 49% of our employees were covered by collective bargaining agreements. These employees are hourly workers throughout our service territories and are represented by various unions and locals. Our existing collective bargaining agreements expire between 2023 through 2026, of which contracts covering 2% of our employees will expire in 2023. We cannot predict the outcome of the negotiations related to the collective bargaining agreements covering our employees. If we are unable to reach new agreements or renew existing agreements, employees subject to collective bargaining agreements may engage in strikes, work stoppages or slowdowns, or other labor actions, which could materially disrupt our ability to provide services to our customers. New labor agreements, or the renewal of existing agreements, may impose significant new costs on us, which could adversely affect our financial condition and result of operations. While we believe our relations with the unions representing these employees are good, any protracted labor disputes or labor disruptions by our employees could negatively impact our business. Our ability to attract and/or retain certain key management and other personnel in the future could have an adverse effect on our business. We rely on the talents and efforts of key management personnel, many of whom have been with our company or in our industry for decades. While we maintain long-term and emergency transition plans for key management personnel and believe we could either identify internal candidates or attract outside candidates to fill any vacancy created by the loss of any key management personnel, the loss of one or more of our key management personnel could have a negative impact on our business. Acquisitions present many risks and we may be unable to realize the anticipated benefits of acquisitions. From time to time, we make acquisitions and investments or enter into other strategic transactions. In connection with these types of transactions, we may incur unanticipated expenses; fail to realize anticipated benefits; have difficulty integrating the acquired businesses; disrupt relationships with current and new employees, customers and vendors; incur significant indebtedness or have to delay or not proceed with announced transactions. The occurrence of any of the foregoing events could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may face significant challenges in combining the operations of an acquired business with ours in a timely and efficient manner. The failure to successfully integrate an acquired business and to successfully manage the challenges presented by the integration process may result in our inability to achieve anticipated benefits of the acquisition, including operational and financial synergies. Even if we are successful in integrating acquired businesses, we cannot guarantee that the integration will result in the complete realization of anticipated financial synergies or that they will be realized within the expected time frames. Increasing attention to, and evolving expectations for, environmental, social, and governance (“ESG”) initiatives could increase our costs, harm our reputation, or otherwise adversely impact our business. Companies across industries are facing increasing scrutiny from a variety of stakeholders related to their ESG practices. Expectations regarding voluntary ESG initiatives and disclosures may result in increased costs (including but not limited to increased costs related to compliance, stakeholder engagement, contracting and insurance), changes in demand for certain offerings, enhanced compliance or disclosure obligations, or other adverse impacts to our business, financial condition, or results of operations. While we may at times engage in voluntary initiatives (such as voluntary disclosures, certifications, or goals, among others) to improve the ESG profile of our company and/or offerings or to respond to stakeholder demands, such initiatives may be costly and may not have the desired effect. Expectations around companies’ management of ESG matters continues to evolve rapidly, in many instances due to factors that are out of our control. While we commit to certain initiatives or goals, we may not ultimately be able to achieve them due to cost, technological, or other constraints. Moreover, actions or statements that we may take based on based on expectations, assumptions, or third-party information that we currently believe to be reasonable may subsequently be determined to be erroneous or be subject to misinterpretation. Even if this is not the case, our current actions may subsequently be determined to be insufficient by various stakeholders, and we may be subject to investor or regulator engagement on our ESG initiatives and disclosures, even if such initiatives are currently voluntary. Certain market participants, including major institutional investors and capital providers, use third-party benchmarks and scores to assess companies’ ESG profiles in making investment or voting decisions. Unfavorable ESG ratings could lead to increased negative investor sentiment towards us, which could negatively impact our share price as well as our access to and cost of capital. To the extent ESG matters negatively impact our reputation, it may also impede our ability to compete as effectively to attract and retain employees, customers, or business partners, which may adversely impact our operations. In addition, we expect there will likely be increasing levels of regulation, disclosure-related and otherwise, with respect to ESG matters, which will likely lead to increased costs as well as scrutiny that could heighten all of the risks identified in this risk factor. Additionally, many of our customers and suppliers may be subject to similar expectations, which may augment or create additional risks, including risks that may not be known to us. Risks Relating to Current Economic Conditions Unfavorable changes in financial markets could adversely affect pension plan investments resulting in material funding requirements to meet our pension obligations. We expect that we will continue to make future cash contributions to our pension plans, the amount and timing of which will depend on various factors including funding regulations, future investment performance, changes in future discount rates and mortality tables and changes in participant demographics. Unfavorable fluctuations or adverse changes in any of these factors, most of which are outside our control, could impact the funded status of the plans and increase future funding requirements. Returns generated on plan assets have historically funded a large portion of the benefits paid under these plans. If the financial markets experience a downturn and returns fall below the estimated long-term rate of return, our future funding requirements could increase significantly, which could adversely affect our cash flows from operations. Weak economic conditions may have a negative impact on our business, results of operations and financial condition. Downturns in the economic conditions in the markets and industries we serve, including the impacts of inflation and the ongoing war between Russia and Ukraine, could adversely affect demand for our products and services and have a negative impact on our results of operations. Economic weakness or uncertainty may make it difficult for us to obtain new customers and may cause our existing customers to reduce or discontinue their services to which they subscribe. This risk may be worsened by the expanded availability of free or lower cost services, such as streaming or OTT services or substitute services, such as wireless phones and public Wi-Fi networks. In addition, recent inflationary pressures may also have an adverse impact on our cost structure and result in increased costs for materials, labor and other operating expenses. If such impacts are prolonged and substantial, it could have a negative impact on our results of operations and capital expenditures. Weak economic conditions may also impact the ability of our customers and third parties to satisfy their obligations to us. Risks Relating to Our Common and Preferred Stock The price of our common stock may be volatile and may fluctuate substantially, which could negatively affect holders of our common stock. The market price of our common stock may fluctuate widely as a result of various factors including, but not limited to, period-to-period fluctuations in our operating results, the volume of sales of our common stock, the limited number of holders of our common stock and the resulting limited liquidity in our common stock, dilution, developments in the communications industry, the failure of securities analysts to cover our common stock, changes in financial estimates by securities analysts, short interests in our common stock, competitive factors, regulatory developments, labor disruptions, general market conditions and market conditions affecting the stock of communications companies. Communications companies have, in the past, experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating performance. High levels of market volatility may have a significant adverse effect on the market price of our common stock. In addition, in the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert management's attention and resources, which could have a material adverse impact on our business, financial condition, results of operations, liquidity and/or the market price of our common stock. Our organizational documents could limit or delay another party’s ability to acquire us and, therefore, could deprive our investors of a possible takeover premium for their shares. A number of provisions in our amended and restated certificate of incorporation and bylaws could make it difficult for another company to acquire us. Among other things, these provisions: | ● | Provide that directors may only be removed for cause and then only upon the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock; |
The cost
| ● | Require the affirmative vote of complyingholders of two-thirds or more of the voting power of our outstanding common stock to amend, alter, change or repeal specified provisions of our amended and restated certificate of incorporation and bylaws; |
| ● | Require stockholders to provide us with environmental requirementsadvance notice if they wish to nominate any candidates for election to our Board of Directors or if they intend to propose any matters for consideration at an annual stockholders meeting; and |
| ● | Authorize the issuance of so-called “blank check” preferred stock without stockholder approval upon such terms as the Board of Directors may determine. |
We also are subject to laws that may have a similar effect. For example, federal and certain state telecommunications laws and regulations generally prohibit a direct or indirect transfer of control over our business without prior regulatory approval. Similarly, Section 203 of the Delaware General Corporation Law restricts our ability to engage in a business combination with an “interested stockholder”. These laws and regulations make it difficult for another company to acquire us, and therefore, could limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, the rights of our common stockholders are subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that we may issue in the future. The rights of our Series A Preferred Stock could negatively impact our cash flows. The terms of our Series A Preferred Stock provide rights to holders that could negatively impact us. Holders of our Series A Preferred Stock are entitled to receive cumulative dividends on the liquidation preference at a rate of 9% per annum payable semi-annually, until October 2, 2027 at our election, either in cash or in-kind through an accrual of unpaid dividends, which are automatically added to the liquidation preference; and after October 2, 2027, solely in cash. In addition, upon a liquidation event, holders of the Series A Preferred Stock will have the right to require the Company to repurchase all or any part of the outstanding Series A Preferred Stock for cash at a price equal to the liquidation preference plus any accrued and unpaid dividends. The existence of senior securities such as the Series A Preferred Stock could have an adverse effect on the value of our common stock. The Series A Preferred Stock ranks senior to our common stock with respect to dividend distribution payments upon liquidation. The rights of holders of our Series A Preferred Stock rank senior to the rights of holders of our common stock. Before dividends, if any, can be paid to holders of our common stock, any dividends, including accrued and unpaid dividends, must first be paid to holders of our Series A Preferred Stock. In addition, upon a liquidation event, holders of Series A Preferred Stock are entitled to receive full payment for their shares before any payment can be made to holders of our common stock. The existence of senior securities such as the Series A Preferred Stock could have an adverse effect on the value of our common stock. Risks Relating to Our Indebtedness and Our Capital Structure We have a substantial amount of debt outstanding, which could adversely affect our business and restrict our ability to fund working capital and planned capital expenditures. As of December 31, 2022, we had $2.1 billion of debt outstanding. Our substantial level of indebtedness could adversely impact our business, including: | ● | We may be significant. Similarly, the adoptionrequired to use a substantial portion of new environmental laws or regulations, orour cash flow from operations to make principal and interest payments on our debt, which will reduce funds available for operations, capital expenditures, future business opportunities and strategic initiatives; |
| ● | We may have limited flexibility to react to changes in existing lawsour business and our industry; |
| ● | It may be more difficult for us to satisfy our other obligations; |
| ● | We may have a limited ability to borrow additional funds or regulationsto sell assets to raise funds if needed for working capital, capital expenditures, acquisitions or their interpretations, could resultother purposes; |
| ● | We may become more vulnerable to general adverse economic and industry conditions, including changes in significant compliance costs or unanticipated environmental liabilities.interest rates; and |
| ● | We may be at a disadvantage compared to our competitors that have less debt. |
We cannot guarantee that we will generate sufficient revenues to service our debt and have adequate funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our markets. Our credit agreement and the indentures governing our Senior Notes contain covenants that limit management’s discretion in operating our business and could prevent us from capitalizing on opportunities and taking other corporate actions. Among other things, our credit agreement limits or restricts our ability (and the ability of certain of our subsidiaries), and the separate indenture governing the Senior Notes limits the ability of our subsidiary, Consolidated Communications, Inc., and its restricted subsidiaries to: incur or guarantee additional indebtedness or issue preferred stock; make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock; make investments and prepay or redeem debt; enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans or transfer assets to us; create liens; sell or otherwise dispose of assets, including capital stock of, or other ownership interests in subsidiaries; engage in transactions with affiliates; engage in sale and leaseback transactions; make capital expenditures; engage in a business other than telecommunications; and consolidate, merge or transfer all or substantially all of the assets of the Company. In addition, our credit agreement, with respect to the revolving credit facility only, requires us to comply with specified financial ratios, including a financial covenant based on a maximum consolidated first lien leverage ratio. Our ability to comply with these ratios may be affected by events beyond our control. These restrictions limit our ability to plan for or react to market conditions, meet capital needs or otherwise constrain our activities or business plans. They also may adversely affect our ability to finance our operations, enter into acquisitions or engage in other business activities that would be in our interest. A breach of any of the covenants contained in our credit agreement, in any future credit agreement, or in the separate indentures governing the Senior Notes, or our inability to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all borrowings outstanding to be due and payable. If the amounts outstanding under our credit facilities were to be accelerated, we cannot assure that our assets would be sufficient to repay in full the money owed. In such a situation, the lenders could foreclose on the assets and capital stock pledged to them. We may not be able to refinance our existing debt if necessary, or we may only be able to do so at a higher interest rate. We may be unable to refinance or renew our credit facilities and our failure to repay all amounts due on the maturity dates would cause a default under the credit agreement. Alternatively, any renewal or refinancing may occur on less favorable terms. If we refinance our credit facilities on terms that are less favorable to us than the terms of our existing debt, our interest expense may increase significantly, which could impact our results of operations and impair our ability to use our funds for other purposes. Our variable-rate debt subjects us to interest rate risk, which could impact our cost of borrowing and operating results. Certain of our debt obligations are at variable rates of interest and expose us to interest rate risk. Increases in interest rates could negatively impact our results of operations and operating cash flows. We utilize interest rate swap agreements to convert a portion of our variable-rate debt to a fixed-rate basis. However, we do not maintain interest rate hedging agreements for all of our variable-rate debt and our existing hedging agreements may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks. Changes in fair value of cash flow hedges that have been de-designated or determined to be ineffective are recognized in earnings. Significant increases or decreases in the fair value of these cash flow hedges could cause favorable or adverse fluctuations in our results of operations. In addition, a substantial portion of our variable-rate debt bears interest based on the London Interbank Offering Rate (“LIBOR”). In 2017, the Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to stop requiring banks to submit rates for the calculation of LIBOR after 2021. In November 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, extended the cessation date for submission and publication of rates for all LIBOR tenors until June 30, 2023, except for the one-week and two-month LIBOR tenors, which ceased on December 31, 2021. As of January 1, 2022, regulated U.S. financial institutions are no longer permitted to enter into new contracts referencing any LIBOR settings. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee (“ARRC”), has proposed replacing LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index based on trading in overnight repurchase agreements. The Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), enacted in March 2022, provides a framework for certain contracts to replace LIBOR with a benchmark rate based on SOFR. While the LIBOR Act effectively established SOFR as the default replacement rate for LIBOR, it is not possible to predict at this time whether SOFR will become the most prevalent alternative reference rate in the market or what impact the transition from LIBOR to alternative reference rates may have on the interest rates for our current and future debt obligations as well as our interest rate swap agreements, which may be adversely affected. In addition, any transition process from LIBOR to an alternative rate could cause, among other things, LIBOR to perform differently than in the past, a disruption in the financial markets, or increases in benchmark rates, any of which could adversely affect our results of operations, cash flows and liquidity. We currently expect to complete the transition from LIBOR to SOFR or an alternate base rate for our variable rate debt and interest rate swap agreements during the second quarter of 2023. Our business may be impacted by new or changing tax laws or regulations and actions by federal, state, and/or local agencies, or by how judicial authorities apply tax laws. Our operations are subject to various federal, state and local tax laws and regulations. In connection with the products and services we sell, we calculate, collect, and remit various federal, state, and local taxes, surcharges and regulatory fees (“tax” or “taxes”) to numerous federal, state and local governmental authorities. In many cases, the application of tax laws is uncertain and subject to differing interpretations, especially when evaluated against new technologies and telecommunications services, such as broadband Internet access and cloud related services. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. Changes in tax laws, or changes in interpretations of existing laws, could materially affect our financial position, results of operations and cash flows. For example, the Tax Cuts and Jobs Act of 2017, a major federal tax reform, that had a significant impact on our tax obligations and effective income tax rate.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We own our corporate headquarters, which are currently located at 2116 S. 17th Street, Mattoon, Illinois. We also own and lease office facilities and related equipment for administrative personnel, central office buildings and operations in many of the states in which we operate.
In addition to land and structures, our property consists of equipment necessary for the provision of communication services, including central office equipment, customer premises equipment and connections, pole lines, video head-end, remote terminals, aerial and underground cable and wire facilities, vehicles, furniture and fixtures, computers and other equipment. We also own certain other communications equipment held as inventory for sale or lease.
In addition to plant and equipment that we wholly-own, we utilize poles, towers and cable and conduit systems jointly-owned with other entities and lease space on facilities to other entities. These arrangements are in accordance with written agreements customary in the industry. We also have appropriate easements, rights-of-way and other arrangements for the accommodation of our pole lines, underground conduits, aerial and underground cables and wires.
Item 3. Legal Proceedings.
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. See Note 15 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and Supplementary Data” for a discussion of recent developments related to these legal proceedings.
Item 4. Mine Safety Disclosures.
Not Applicable.
| | | | | | | |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Securities | | Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “CNSL”. As of February 28, 2022, there were approximately 4,018 stockholders of record of the Company’s common stock. 26
| Share Repurchases
| During the quarter ended December 31, 2021, we repurchased 219,067 common shares surrendered by employees in the administration of employee share-based compensation plans. The following table summarizes the share repurchase activity:
| | | | | | | | | | | | | | | | | Total number of | | Maximum number | | | | | | | | shares purchased | | of shares that may | | | | | | | | as part of publicly | | yet be purchased | | | | Total number of | | Average price | | announced plans | | under the plans | | Purchase period | | shares purchased | | paid per share | | or programs | | or programs | | October 1-October 31, 2021 | | — | | — | | — | | — | | November 1-November 30, 2021 | | — | | — | | — | | — | | December 1-December 31, 2021 | | 219,067 | | $ 7.85 | | — | | — | |
| | Performance GraphItem 6.
| Reserved | | The following graph shows a five-year comparison of cumulative total shareholder return of our common stock (assuming reinvestment of dividends) with the S&P 500 Index and the NASDAQ Telecommunications Index. The comparison of total return on investment (change in year-end stock price plus reinvested dividends) for each of the periods assumes that $100 was invested on December 31, 2016 in each index. The stock performance shown on the graph below is not necessarily indicative of future price performance.27
| COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Consolidated Communications Holdings, the S&P 500 Index and the NASDAQ Telecommunications Index
| 
| | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | (In dollars) | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Consolidated Communications Holdings | | $ | 100.00 | | $ | 48.70 | | $ | 44.82 | | $ | 18.86 | | $ | 23.78 | | $ | 36.37 | | S&P 500 | | $ | 100.00 | | $ | 121.83 | | $ | 116.49 | | $ | 153.17 | | $ | 181.35 | | $ | 233.41 | | NASDAQ Telecommunications | | $ | 100.00 | | $ | 117.62 | | $ | 108.29 | | $ | 137.49 | | $ | 166.70 | | $ | 174.78 | |
| Sale of Unregistered Securities
During the year ended December 31, 2021, the Company issued shares of common and preferred stock exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to Searchlight by virtue of the exemption provided by Section 4(a)(2) of the Securities Act for the Searchlight investment. See Note 4 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and Supplementary Data” for a discussion of the Searchlight investment.
Item 6. Reserved.
| Table of ContentsItem 7.
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Reference is made to Part I – Item 1 – “Note About Forward-Looking Statements” and Part I – Item 1A – “Risk Factors” which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Consolidated Communications Holdings, Inc. (“Consolidated,” the “Company,” “we,” “our” or “us”). MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to the consolidated financial statements (“Notes”) as of and for each of the three years in the period ended December 31, 2021 included elsewhere in this Annual Report on Form 10-K.
| | Throughout MD&A, we refer to certain measures that are not a measure of financial performance in accordance with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”). We believe the use of these non-GAAP measures on a consolidated basis provides the reader with additional information that is useful in understanding our operating results and trends. These measures should be viewed in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. See the Non-GAAP Measures section below for a more detailed discussion on the use and calculation of these measures.28
| | | | | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | | 51 | | | | | Item 8. | Financial Statements and Supplementary Data | | 51 | | | | | Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | | 51 | | | | | Item 9A. | Controls and Procedures | | 51 | | | | | Item 9B. | Other Information | | 54 | | | | | Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | | 54 | | | | | OverviewPART III
| | | | | | | | Item 10. | Directors, Executive Officers and Corporate Governance | | 54 | | | | | Item 11. | Executive Compensation | | 54 | | | | | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 54 | | | | | Item 13. | Certain Relationships and Related Transactions, and Director Independence | | 54 | | | | | Item 14. | Principal Accounting Fees and Services | | 54 | | | | | PART IV | | | | | | | | Item 15. | Exhibits and Financial Statement Schedules | | 55 | | | | | Item 16. | Form 10-K Summary | | 59 | | | | | SIGNATURES | | 60 |
Cautionary Note Regarding Forward-Looking Statements Certain statements in this Annual Report on Form 10-K, including those relating to the impact on future revenue sources, pending and future regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new markets, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect, among other things, our current expectations, plans, strategies and anticipated financial results. There are a number of risks, uncertainties and conditions that may cause the actual results of Consolidated Communications Holdings, Inc. and its subsidiaries (“Consolidated,” the “Company,” “we,” “our” or “us”) to differ materially from those expressed or implied by these forward-looking statements. Many of these circumstances are beyond our ability to control or predict. Moreover, forward-looking statements necessarily involve assumptions on our part. These forward-looking statements generally are identified by the words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “should,” “may,” “will,” “would,” “will be,” “will continue” or similar expressions. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements that appear throughout this report. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Part I – Item 1A – “Risk Factors”. Furthermore, undue reliance should not be placed on forward-looking statements, which are based on the information currently available to us and speak only as of the date they are made. Except as required under federal securities laws or the rules and regulations of the Securities and Exchange Commission (the “SEC”), we disclaim any intention or obligation to update or revise publicly any forward-looking statements. PART I Item 1. Business. Consolidated Communications Holdings, Inc. is a Delaware holding company with operating subsidiaries that provide a wide range of communication solutions to consumer, commercial and carrier channels across a service area in over 20 states. We were founded in 1894 as the Mattoon Telephone Company. After several acquisitions, the Mattoon Telephone Company was incorporated as the Illinois Consolidated Telephone Company in 1924. We were incorporated under the laws of Delaware in 2002, and through our predecessors, we have been providing communication services in many of the communities we serve for more than 125 years. In addition to our focus on organic growth, we have achieved business growth and a diversification of revenue and cash flow streams through our acquisitions over a 15-year period from 2002 to 2017 that have created a strong platform and expanded network for future expansion. Through this strategic expansion, we have positioned our business to provide competitive services in rural, suburban and metropolitan markets spanning the country. Marking a pivotal moment for Consolidated, in 2020, we entered into a strategic investment with an affiliate of Searchlight Capital Partners L.P. (“Searchlight”) and also completed a global debt refinancing, which in combination provided us with greater flexibility to support our fiber expansion and growth plans. The strategic investment offered an immediate capital infusion, delivering significant benefits to the customers and communities we serve, and creating a stronger company that is well-positioned to further expand and grow broadband services to meet ever-evolving customer needs. Description of Our Business Consolidated is a broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers by leveraging our advanced fiber network, which spans approximately 57,800 fiber route miles across many rural areas and metro communities. We offer residential high-speed Internet, video, phone and home security services as well as multi-service residential and small business bundles. Our business product suite includes: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services. We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections. Consolidated is dedicated to moving people, businesses and communities forward by delivering the most reliable fiber communications solutions. We generate the majority of our consolidated operating revenues primarily from monthly subscriptions to our broadband, data and transport services (collectively “broadband services”) marketed to residential and business customers. As consumer demands for bandwidth continue to increase, our focus is on expanding our fiber broadband services and upgrading data speeds in order to offer a highly competitive fiber product. Our investment in more competitive broadband speeds is critical to our long-term success. With the initial investment from Searchlight and the concurrent debt refinancing in 2020, we launched our largest-ever fiber infrastructure project in 2021 with the goal of upgrading approximately 1.6 million residential and small business premises to fiber-to-the-home/premise (“FTTP”) over six years, enabling multi-Gig symmetrical speeds. The fiber network investments will be made across eight states, including more than 1 million passings within our northern New England service areas. During the years ended 2022 and 2021, we upgraded approximately 403,000 and 330,000 homes and small businesses, respectively, and in 2021, we launched Fidium Fiber, our new Gigabit consumer fiber internet product. We plan to upgrade at least 225,000 passings in 2023 and expand Fidium Fiber further into our footprint as well as to small business customers. By leveraging our existing dense core fiber network and an accelerated build plan, we will be able to significantly increase broadband speeds, expand our multi-Gig coverage and strategically extend our network across our strong existing commercial and carrier footprint to attract more on-net and near-net opportunities. As we invest in network upgrades, we believe we will see stable-to-improved trends in revenue growth and increased broadband penetration. We believe these fiber investments will help us future-proof our network and facilitate the continued transformation of Consolidated into a leading super-regional fiber communications service provider. Searchlight is a strategic partner in our execution of this investment and brings a differentiated perspective to our broadband-first strategy. They are an experienced broadband and fiber infrastructure investor and they bring significant experience investing in FTTP and broadband expansion. Through our partnership with Searchlight, we have and will continue to pursue targeted investments in our business and future growth opportunities as we transform our company into a leading broadband and solutions provider and create long-term value for our investors, customers and employees. A discussion of factors potentially affecting our operations is set forth in Part I – Item 1A – “Risk Factors.” Recent Business Developments Discontinued Operations - Sale of Investment in Wireless Partnerships On September 13, 2022, we completed the sale of all of our limited partnership interests in GTE Mobilnet of South Texas Limited Partnership (“Mobilnet South Partnership”), GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), Pennsylvania RSA No. 6(I) Limited Partnership (“RSA 6(I)”) and Pennsylvania RSA No. 6(II) Limited Partnership (“RSA 6(II)”) to Cellco Partnership (“Cellco”) for an aggregate purchase price of $490.0 million, other than a portion of the interest in one of the partnerships which was sold to a limited partner of such partnership pursuant to its right of first refusal. Cellco is the general partner for each of the five wireless partnerships and is an indirect, wholly-owned subsidiary of Verizon Communications, Inc. In accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements –Discontinued Operations, the sale of the limited partnership interests met the criteria for reporting as discontinued operations. As a result, the financial results of the limited partnership interests have been classified as discontinued operations in our consolidated financial statements for all periods presented. Refer to Note 6 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and Supplementary Data” for additional information on the transaction and the partnership interests. Sources of Revenue The following tables summarize our sources of revenue and key operating statistics for the last three fiscal years: | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | | | | | | % of | | | | | % of | | | | | % of | | (In millions, except for percentages) | | $ | | Revenues | | $ | | Revenues | | $ | | Revenues | | Consumer: | | | | | | | | | | | | | | | | | Broadband (Data and VoIP) | | $ | 272.1 | | 22.8 | % | $ | 269.3 | | 21.0 | % | $ | 263.1 | | 20.1 | % | Voice services | | | 144.8 | | 12.2 | | | 160.7 | | 12.5 | | | 170.5 | | 13.1 | | Video services | | | 54.2 | | 4.5 | | | 65.1 | | 5.1 | | | 74.3 | | 5.7 | | | | | 471.1 | | 39.5 | | | 495.1 | | 38.6 | | | 507.9 | | 38.9 | | Commercial: | | | | | | | | | | | | | | | | | Data services (includes VoIP) | | | 228.5 | | 19.2 | | | 228.9 | | 17.9 | | | 225.3 | | 17.3 | | Voice services | | | 142.3 | | 12.0 | | | 154.6 | | 12.1 | | | 161.2 | | 12.4 | | Other | | | 43.1 | | 3.6 | | | 40.0 | | 3.1 | | | 43.4 | | 3.3 | | | | | 413.9 | | 34.8 | | | 423.5 | | 33.1 | | | 429.9 | | 33.0 | | Carrier: | | | | | | | | | | | | | | | | | Data and transport services | | | 137.4 | | 11.5 | | | 133.4 | | 10.4 | | | 136.8 | | 10.5 | | Voice services | | | 14.7 | | 1.2 | | | 17.2 | | 1.4 | | | 20.5 | | 1.6 | | Other | | | 1.7 | | 0.2 | | | 1.6 | | 0.1 | | | 1.7 | | 0.1 | | | | | 153.8 | | 12.9 | | | 152.2 | | 11.9 | | | 159.0 | | 12.2 | | | | | | | | | | | | | | | | | | | Subsidies | | | 33.4 | | 2.8 | | | 69.8 | | 5.4 | | | 72.0 | | 5.5 | | Network access | | | 104.7 | | 8.8 | | | 120.5 | | 9.4 | | | 125.3 | | 9.6 | | Other products and services | | | 14.4 | | 1.2 | | | 21.1 | | 1.6 | | | 9.9 | | 0.8 | | Total operating revenues | | $ | 1,191.3 | | 100.0 | % | $ | 1,282.2 | | 100.0 | % | $ | 1,304.0 | | 100.0 | % |
Key Operating Statistics | | | | | | | | | | As of December 31, | | | | 2022 | | 2021 | | 2020 | | Consumer customers | | 484,669 | | 516,949 | | 554,763 | | | | | | | | | | Fiber Gig+ capable | | 122,872 | | 86,122 | | 70,610 | | DSL/Copper | | 244,586 | | 298,442 | | 330,747 | | Consumer data connections | | 367,458 | | 384,564 | | 401,357 | | | | | | | | | | Consumer voice connections | | 276,779 | | 328,849 | | 370,660 | | Video connections | | 35,039 | | 63,447 | | 76,041 | |
We completed the sale of substantially all of the assets of our non-core, rural ILEC business located in Ohio (the “Ohio operations”) and our business located in the Kansas City market (the “Kansas City operations”) on January 31, 2022 and November 30, 2022, respectively. For the year ended December 31, 2021, operating revenues for the Ohio operations and the Kansas City operations were $8.9 million and $51.3 million, or 0.7% and 4.0% of consolidated operating revenues, respectively. The sale of substantially all of the net assets of our Kansas City operations and Ohio operations resulted in a reduction of approximately 3,325 fiber consumer data connections, 14,505 DSL/Copper consumer data connections and 14,800 video connections in 2022. Prior period amounts have not been adjusted to reflect the sales. The telecommunications industry continues to experience increased competition as a result of technology changes, new and emerging providers, and legislative and regulatory developments. Our focus is on expanding our fiber broadband services and upgrading data speeds in order to offer a highly competitive fiber product. We expect our broadband services revenue to continue to grow as we make increased investments in our fiber infrastructure and consumer demand for data-based services and faster speeds increases. In addition, we continue to focus on commercial growth opportunities and are continually expanding our commercial product offerings for small, medium and large businesses to capitalize on industry technological advances. The expected growth in fiber broadband services will mitigate, in part, the anticipated declines in traditional voice services impacted by the ongoing industry-wide reduction in access lines. Consumer Broadband Services Broadband services include revenues from residential customers for subscriptions to our data products. We offer high-speed Internet access at speeds of up to 2 Gbps, depending on the network facilities that are available, the level of service selected and the location. Our data service plans also include wireless internet access, email and internet security and protection. Our fiber internet product offers symmetrical speeds from 50 Mbps to 2 Gbps over the latest WiFi 6 technology with no data caps. Customers have the ability to view and manage their WiFi network through our Attune WiFi app, which enables customers to create individual profiles, turn on parental controls, manage devices and provide guest access. Our Voice over Internet Protocol (“VoIP”) digital phone service is also available in certain markets as an alternative to the traditional telephone line. We offer multiple voice service plans with options for unlimited local and long distance calls and customizable calling features and voicemail including voicemail to email options. Video Services Depending on geographic market availability, our video services range from limited basic service to advanced digital television, which includes several plans, each with hundreds of local, national and music channels including premium and Pay-Per-View channels as well as video on-demand service. Certain customers may also subscribe to our advanced video services, which consist of high-definition television, digital video recorders (“DVR”) and/or a whole home DVR. Our Whole Home DVR allows customers the ability to watch recorded shows on any television in the home, record multiple shows simultaneously and utilize an intuitive on-screen guide and user interface. Our video subscribers can also watch their favorite shows, movies and livestreams on any device. In addition, we offer several on-demand streaming TV services, which provide endless entertainment options. As the consumer demand for streaming services increases, we continue to de-emphasize our linear video services and transition customers to streaming TV packages offered through our streaming partnerships. Voice Services We offer several different basic local phone service packages and long-distance calling plans, including unlimited flat-rate calling plans. The plans include options for voicemail and other custom calling features such as caller ID, call forwarding and call waiting. The number of local access lines in service directly affects the recurring revenue we generate from end users and continues to be impacted by the industry-wide decline in access lines. We expect to continue to experience erosion in voice connections due to competition from alternative technologies, including our own competing VoIP product. Commercial Data Services We provide a variety of business communication solutions to commercial customers of all sizes, including voice and data services over our advanced fiber network. The services we offer include scalable high-speed broadband Internet access, SIP trunking and VoIP phone services, which range from basic service plans to virtual hosted systems. Our hosted VoIP package utilizes soft switching technology and enables our customers to have the flexibility of employing new telephone advances and features without investing in a new telephone system. The package bundles local service, calling features, Internet protocol (“IP”) business telephones and unified messaging, which integrates multiple messaging technologies into a single system and allows the customer to receive and listen to voice messages through email. In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; private line data services; software defined wide area network (“SD-WAN”), a software-based network technology that provides a simplified management and automation of wide area network connections; and multi-protocol label switching. Our networking services include point-to-point and multi-point deployments from 2.5 Mbps to 10 Gbps to accommodate the growth patterns of our business customers. We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer’s on-site phone systems and data networks, managed network security services and data protection services. Data center and disaster recovery solutions provide a reliable and local colocation option for commercial customers. Voice Services Voice services include basic local phone and long-distance service packages for business customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller ID, call forwarding, speed dialing and call waiting. Services can be charged at a fixed monthly rate or a measured rate or can be bundled with selected services at a discounted rate. Other Other services include business equipment sales and related hardware and maintenance support, video services and other miscellaneous revenues, including 911 service revenues. We are a full service 911 provider and have installed and currently maintain a turn-key, state of the art statewide next-generation emergency 911 system located in Maine. As of October 29, 2020, we were no longer the 911 service provider in Vermont. These systems have processed several million calls relying on the caller's location information for routing. Next-generation emergency 911 systems are an improvement over traditional 911 and are expected to provide the foundation to handle future communication modes such as texting and video. Carrier We provide high-speed fiber data transmission services to regional and national interexchange and wireless carriers including Ethernet, cellular backhaul, dark fiber and colocation services. The demand for backhaul services continues to grow as wireless carriers are faced with escalating consumer and commercial demands for wireless data. Voice services include basic local phone service packages with customized features for resell by wholesale customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features. Subsidies Subsidies consist of both federal and state funding designed to promote widely available, quality broadband services at affordable prices with higher data speeds in rural areas and for low-income consumers across the country. Some subsidies are funded by end user surcharges to which telecommunications providers, including local, long-distance and wireless carriers, contribute on a monthly basis, while others are components of broader economic stimulus or recovery legislation. Certain subsidies are allocated and distributed to participating carriers monthly based upon their respective costs for providing local service. In other cases, subsidies are awarded to carriers periodically over a predetermined number of years to support their deployment of high-speed broadband infrastructure in underserved or unserved areas. Similar to access charges, subsidies are regulated by the federal and state regulatory commissions. See Part I – Item 1 – “Regulatory Environment” below and Item 1A – “Risk Factors – Risks Related to the Regulation of Our Business” for further discussion regarding the subsidies we receive. Network Access Services Network access services include interstate and intrastate switched access, network special access and end user access. Switched access revenues include access services to other communications carriers to terminate or originate long-distance calls on our network. Special access circuits provide dedicated lines and trunks to business customers and interexchange carriers. Certain of our network access revenues are based on rates set or approved by the federal and state regulatory commissions or as directed by law that are subject to change at any time. Other Products and Services Other products and services include revenues from telephone directory publishing, video advertising, billing and support services and other miscellaneous revenues such as revenue from our Public Private Partnership arrangements. We have entered into numerous Public Private Partnership agreements with several towns in New Hampshire to build new FTTP Internet networks. The new town networks provide multi-gigabit broadband speeds to residential and commercial customers. Public Private Partnerships are a key component of Consolidated’s commitment to expand rural broadband access. Wireless Partnerships In addition to our core business, we derived a portion of our cash flow and earnings from investments in five wireless partnerships: Mobilnet South Partnership, RSA #17, Pittsburgh SMSA, RSA 6(I) and RSA 6(II). Cellco is the general partner for each of the five cellular partnerships. Cellco is an indirect, wholly-owned subsidiary of Verizon Communications Inc. As the general partner, Cellco is responsible for managing the operations of each partnership. On September 13, 2022, we completed the sale of all of our limited partnership interests in the five wireless partnerships to Cellco for an aggregate purchase price of $490.0 million, other than a portion of the interest in one of the partnerships which was sold to a limited partner of such partnership pursuant to its right of first refusal. We intend to use the proceeds from the sale to support our fiber expansion plan. The financial results of the limited partnership interests have been reported as discontinued operations in our consolidated financial statements for all periods presented. Prior to classification as discontinued operations, wireless partnership investment income was included as a component of other income in the consolidated statements of operations. We owned 2.34% of the Mobilnet South Partnership. The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston and Beaumont, Texas metropolitan areas. We accounted for this investment at our initial cost less any impairment because fair value was not readily available for this investment. Income was recognized only upon cash distributions of our proportionate earnings in the partnership. We owned 20.51% of RSA #17, which serves areas in and around Conroe, Texas. This investment was accounted for under the equity method. Income was recognized on our proportionate share of earnings and cash distributions were recorded as a reduction in our investment. We owned 3.60% of Pittsburgh SMSA, 16.67% of RSA 6(I) and 23.67% of RSA 6(II). These partnerships cover territories that almost entirely overlap the markets served by our Pennsylvania Incumbent Local Exchange Carrier (“ILEC”) and Competitive Local Exchange Carrier operations. Because of our limited influence over Pittsburgh SMSA, we accounted for this investment at our initial cost less any impairment because fair value was not readily available for this investment. RSA 6(I) and RSA 6(II) were accounted for under the equity method. For the years ended December 31, 2022, 2021 and 2020, we recognized income of $23.5 million, $41.8 million and $40.7 million, respectively, and received cash distributions of $29.2 million, $43.0 million and $41.5 million, respectively, from these wireless partnerships. Network Architecture and Technology We have made significant investments in our telecommunications networks and continue to enhance and expand our network by deploying technologies to provide additional capacity to our customers. As a result, we are able to deliver high-quality, reliable data, video and voice services in the markets we serve. Our wide-ranging network and extensive use of fiber provide an easy reach into existing and new areas. By bringing the fiber network closer to the customer premise, we can increase our service offerings, quality and bandwidth. Our existing network enables us to efficiently respond and adapt to changes in technology and is capable of supporting the rising customer demand for bandwidth in order to support the growing amount of wireless data devices in our customers’ homes and businesses. Our networks are supported by advanced 100% digital switches, with a core fiber network connecting all remote exchanges. We continue to enhance our copper network to increase bandwidth in order to provide additional products and services to our marketable homes. In addition to our copper plant enhancements, we have deployed fiber-optic cable extensively throughout our network, resulting in a 100% fiber backbone network that supports all of the inter-office and host-remote links, as well as the majority of business parks within our service areas. In addition, this fiber infrastructure provides the connectivity required to provide broadband and long-distance services to our residential and commercial customers. Our fiber network utilizes FTTP and fiber-to-the-node (“FTTN”) networks to offer bundled residential and commercial services. We operate advanced fiber networks which we own or have entered into long-term leases for fiber network access. At December 31, 2022, our fiber-optic network consisted of over 57,800 route-miles, which includes approximately 17,000 miles of FTTP deployments, approximately 22,000 route miles of fiber located in the northern New England area, approximately 3,950 miles of fiber network in Minnesota and surrounding areas, approximately 4,790 miles of fiber network in Texas including parts of the greater Dallas/Fort Worth market, approximately 1,830 route-miles of fiber-optic facilities in the Pittsburgh metropolitan area, approximately 2,300 miles of fiber network in Illinois and approximately 1,150 route-miles of fiber optic facilities in California that cover large parts of the greater Sacramento metropolitan area. Our remaining network includes approximately 4,850 route-miles spanning across various states including portions of Alabama, Colorado, Florida, Georgia, Kansas, Massachusetts, New York, Pennsylvania and Washington. As of December 31, 2022, we passed more than 2.6 million homes and have direct fiber connections to 14,427 on-net commercial building locations. We intend to continue to make strategic enhancements to our network including improvements in overall network reliability and increases to our broadband speeds. We offer data speeds of up to 2 Gbps in select markets, and up to 100 Mbps in markets where 2 Gbps is not yet available, depending on the geographical region. As part of our multi-year fiber build plan, we plan to extend fiber coverage enabling multi-Gig data speeds to over 70% of our passings by 2026. The upgrades will be made primarily across ten states including more than 1.1 million passings within the northern New England service areas to significantly enhance our broadband speeds. The ultimate total passings will be dependent upon, amongst other things, our ability to secure Public Private Partnership grant arrangement opportunities.Further network investments will enable us to continue to meet consumer demand for faster broadband speeds, symmetrical broadband and more bandwidth consumption as well as more effectively serve our commercial customers. Through our extensive fiber network, we also expect to be able to support the increased demand on wireless carriers for high-capacity transport services, and intend to also leverage our investments to grow commercial data services. In all the markets we serve, we have launched initiatives to support fiber backhaul services to cell sites. As of December 31, 2022, we had 3,805 cell sites in service and an additional 304 additional cell sites pending completion. Sales and Marketing The key components of our overall marketing strategy include: | ● | Organizing our sales and marketing activities around our three customer channels: consumer, commercial and carrier customers acrosscustomers; |
●Providing customers with a broad array of broadband, voice and communication solutions; | ● | Identifying and broadening our commercial customer needs by developing solutions and providing integrated service area in over 20 states. We operateofferings; |
| ● | Offering digital self-service tools and apps including an advanced fiber network spanning approximately 52,400 fiber route miles across many rural areasenhanced website, automated consumer online orders, appointment reminders, robust Wifi apps, user guides and metro communities. We offer residential high-speed Internet, video, phonetroubleshooting tools and home securityvideos; |
| ● | Providing excellent customer service, including 24/7 centralized customer support to coordinate installation of new services, repair and maintenance functions and creating more self-service tools through our online customer portal; |
| ● | Developing and delivering new services to meet evolving customer needs and market demands; |
| ● | Building our Fidium Fiber brand as well as multi-service residentialour leading consumer and small business bundles. Our business product suite includes: datafiber service with a differentiated customer service; and Internet solutions, voice, data center services, security services, managed |
| ● | Leveraging our local presence and IT services, and an expanded suite of cloud services. We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections. We generate the majority of our consolidated operating revenues primarily from monthly subscriptions to our broadband, data and transport services (collectively “broadband services”) marketed to residential and business customers. As consumer demands for bandwidth continue to increase, our focus is on expanding our fiber broadband services and upgrading data speeds in order to offer a highly competitive fiber product. Our investment in more competitive broadband speeds is critical to our long-term success. Our strategic investment with Searchlight Capital Partners L.P. (“Searchlight”) combined with the refinancing of our capital structure, as described below, has provided us with additional capital that has enabled us to accelerate our fiber expansion plans and provided significant benefits to our consumer, commercial and carrier customers. With this strategic investment, we intend to enhance our fiber infrastructure and accelerate our investments in high-growth and competitive areas. By leveraging our existing dense core fiber network and an accelerated build plan, we expect to be able to significantly increase data speeds, expand our multi-Gig coverage and strategically extend our networkstrong reputation across our strong existing commercial and carrier footprint to attract more on-net and near-net opportunities. As part of our fiber expansion plan, we plan to upgrade approximately 1.6 million passings to fiber over five years across select service areas to enable multi-Gig capable services to these homes and small businesses including market areas.more than 1 million passings within our northern New England service areas.
During the year ended December 31, 2021, we upgraded approximately 330,000 passings and added approximately 15,500 consumer fiber Gig-capable subscribers. As of December 31, 2021, approximately 41% of the homes we serve on our legacy Consolidated network had availability to broadband speeds of up to 1 Gbps compared to 17% at December 31, 2020. In our northern New England service areas, approximately 14% of the homes we serve were 1 Gig capable as of December 31, 2021 compared to 4% at December 31, 2020. Our fiber build plan includes the upgrade of an additional 400,000 homes and small businesses in 2022. In November 2021, we launched Fidium Fiber, our new Gigabit consumer fiber internet product available in select northern New England markets, reinforcing our broadband-first strategy. We expect to launch Fidium Fiber in other regions in 2022.
As we continue to increase broadband speeds, we believe that we will also be able to simultaneously expand the array of services and content offerings that our network provides. Commercial and carrier services represent the largest source of our operating revenues and we are focused on expanding our broadband and commercial product suite and are continually enhancing our commercial product offerings to meet the needs of our business customers. By leveraging our advanced
fiber network, we can tailor our services for business customers by developing solutions to fit their specific needs. Additionally, we are continuously enhancing our suite of managed and cloud services by adding new functionality and support, which increases efficiency and enables greater scalability and reliability for businesses. We anticipate future momentum in commercial and carrier services as these products gain traction as well as from the demand from customers for additional bandwidth and data-based services.
However, operating revenues continue to be impacted by the industry-wide trend of declines in voice services, access lines and related network access revenue. Many customers are choosing to subscribe to alternative communication services, and competition for these subscribers continues to increase. Total voice connections decreased 8% as of December 31, 2021 compared to 2020. We have been able to mitigate some of the access line losses through alternative product offerings, such as our VoIP service.
Our competitive broadband speeds enable us to meet consumer demand for higher bandwidth for streaming programming or on-demand content on any device. The consumers demand for streaming services, either to augment their current video subscription plan or to entirely replace their linear video subscription may impact our future video subscriber base and, accordingly, reduce our video revenue as well as our video programing costs. Total video connections decreased 17% as of December 31, 2021 compared to 2020. We believe the trend in changing consumer viewing habits will continue to impact our business results and complement our strategy of providing consumers with higher broadband speeds to facilitate streaming content including services offered through our streaming partnerships.
Our operating revenues are impacted by legislative or regulatory changes at the federal and state levels, which could reduce or eliminate the current subsidies revenue we receive. A number of proceedings and recent orders relate to universal service reform, inter-carrier compensation (“ICC”) and network access charges. Recent orders adopted in 2020 will result in a reduction in the federal subsidies we receive of approximately $42.2 million annually beginning January 1, 2022. See the “Regulatory Matters” section below for a further discussion of the subsidies we receive.
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We currently offer our services through customer service call centers, our website, commissioned sales representatives and third-party sales agents. Our customer service call centers and dedicated sales teams serve as the primary sales channels for consumer, commercial and carrier services. Our sales efforts are supported by digital media, direct mail, bill inserts, radio, television and internet advertising, public relations activities, community events and customer promotions. We sell our Gigabit consumer fiber broadband service in select markets using the brand known as Fidium Fiber, which launched in November 2021. In February 2023, we launched Fidium@Work and expanded our Fidium Fiber service to small businesses everywhere Fidium internet is available. In addition to our customer service call centers, customers can contact us through our website, online chat and social media channels. Our online customer portal enables customers to pay their bills, manage their accounts, order new services and utilize self-service help and support. Our priority is to continue enhancing our comprehensive customer care system in order to produce a high level of customer satisfaction and loyalty, which is important to our ability to reduce churn and generate recurring revenues. Business Strategies Transform our Company into a dominant fiber, gigabit broadband provider In 2020, in connection with the Searchlight investment, we announced plans to upgrade and expand our fiber network through a multi-year build plan with construction beginning in early 2021. The build plan includes the upgrade of approximately 1.6 million passings to fiber enabling multi Gigabit-capable services to over 70% of our passings by 2026. The ultimate total passings upgraded to fiber will be dependent upon, amongst other things, our ability to secure Public Private Partnership grant arrangement opportunities. During the years ended December 31, 2022 and 2021, we built fiber to approximately 403,000 and 330,000 passings, respectively, enabling faster broadband speeds and in 2023, we plan to upgrade at least 225,000 locations. This marks the biggest fiber deployment project in our Company’s history. Our strategy is to meaningfully upgrade our residential and small business network in those service territories with a predominantly copper-based infrastructure to a FTTP network. Of the planned upgrades, we expect that more than 1.1 million passings will be upgraded within the northern New England service areas. We believe that the upgraded network will be capable of providing up to 10 Gbps of symmetrical broadband, which we believe will make us the only broadband provider in these markets capable of delivering 10 Gbps symmetrical broadband to consumers. In addition to best-in-class upload and download speeds, we believe the resulting network will offer better reliability, improved speed consistency, and a lower operating cost relative to competing broadband network technologies. Given these benefits, we believe that our fiber deployment strategy will allow us to realize meaningful improvements in average revenue per user (“ARPU”), broadband subscriber penetration and customer retention. Continue to grow and invest in commercial and carrier services Our commercial and carrier strategy is built on leveraging our dense fiber network in key markets to offer IP-based products and services to our small and medium-sized business (“SMB”), enterprise and carrier customers. We will continue transitioning our customer base away from legacy TDM-based products to fiber and IP-based data and transport services, where we see significant opportunity to increase market share in our footprint. We will also make strategic network investments in both existing markets and edge-out locations to enhance our footprint and increase on-net and near-net opportunities. These builds will be focused on projects with high revenue visibility and attractive payback periods. Our carrier strategy entails leveraging our dense fiber network and long-term relationships in key markets to expand our carrier partnerships and grow small cell and fiber-to-the-tower connections. Investing not just in the network, but in these customer relationships, has been core to our success. Our growth strategy is also supported by the continuous evolution of our product offerings. We are regularly developing and enhancing our suite of managed and cloud services, increasing efficiency and enabling greater scalability and reliability for our business customers. We believe that by developing and investing in next-generation fiber-based products, we will be able to further support our customer needs for networking, communications, and collaboration services. Improve the overall customer experience We continue to evaluate our operations in order to improve and enhance the overall customer experience for all customers. In conjunction with the multi-year fiber build plan, we also expect to make significant investments in our back-office infrastructure. We expect our full transformation to occur over a multi-year period. Our planned enhancements include an improved customer portal where customers can manage all aspects of their service. We plan to launch expanded e-commerce, omnichannel customer service and self-service capabilities for all customer groups. We believe that our digital transformation projects will improve our order and install processes making the transition to our services more seamless than ever. Our sales process is also being redesigned in order to provide personalized sales channels and a dedicated care team for our fiber customers. We have a culture of delivering the highest quality customer service experience possible and plan to continue to make investments in our platforms in order to create a truly differentiated customer experience. Competition The telecommunications industry is subject to extensive competition, which has increased significantly in recent years. Technological advances have expanded the types and uses of services and products available. In addition, changes in the regulatory and legislative environment applicable to comparable alternative services have lowered costs for these competitors. As a result, we face heightened competition but also have new opportunities to grow our broadband business. Our competitors vary by market and may include other incumbent and competitive local telephone companies; cable operators offering video, data and VoIP products; wireless carriers; long distance providers; satellite companies; Internet service providers, including fixed wireless Internet service providers (“WISPs”); online video providers; and in some cases new forms of providers that are able to offer a broad range of competitive services. We expect competition to remain a significant factor affecting our operating results and that the nature and extent of that competition will continue to increase in the future. See Part I - Item 1A – “Risk Factors – Risks Relating to Our Business.” Depending on the market area, we compete against Comcast, Charter, AT&T, Mediacom, Armstrong, Optimum, First Light, NewWave Communications and a number of other carriers, in both the commercial and consumer markets. Our competitors offer traditional telecommunications services as well as IP-based services and other emerging data-based services. Our competitors continue to add features and adopt aggressive pricing and packaging for services comparable to the services we offer. We continue to face competition from cable, wireless and other fiber data providers as the demand for substitute communication services, such as wireless phones and data devices, continues to increase. Customers are increasingly foregoing traditional telephone services and land-based Internet service and relying exclusively on wireless service. Wireless companies are aggressively developing networks using next-generation data technologies, including 5G and beyond, in order to provide increasingly faster data speeds to their customers. A growing number of companies are also building and enhancing their fiber networks in order to provide 1 Gbps or multi Gigabit-capable broadband services within many of our service areas. Broadband-deployment funding initiatives from federal and state agencies, including federal infrastructure legislation enacted in 2021, may also result in other service providers deploying new subsidized fiber networks within our service territories. In addition, the expanded availability of free or lower cost services, such as video over the Internet, complimentary Wi-Fi service and other streaming devices have increased competition among other providers. In order to offer competitive services, we continue to invest in our network and business operations in order to offer new and enhanced services including faster broadband speeds and cloud-enabled services. In our rural markets, services are more costly to provide than services in urban areas as a lower customer density necessitates higher capital expenditures on a per-customer basis. As a result, it may not be economically viable for new entrants to overlap existing networks in rural territories; however, federal and state funding initiatives may enable new entrants to deploy new subsidized networks in our rural markets. Despite the barriers to entry, rural telephone companies still face significant competition from wireless and video providers and, to a lesser extent, competitive telephone companies. Our other lines of business are subject to substantial competition from local, regional and national competitors. In particular, our wholesale and transport business serves other interexchange carriers and we compete with a variety of service providers, including incumbent and competitive local telephone companies and other fiber data companies. These services are subject to additional competitive pressures from the development of new technologies, which may result in price compression as customers migrate from legacy data products to lower priced alternatives. For our business systems products, we compete with other equipment providers or value added resellers, network providers, incumbent and competitive local telephone companies, and with cloud and data hosting service providers. We expect that competition across all of our customer channels will continue to intensify as new technologies develop and new competition emerges. Human Capital Resources As of December 31, 2022, we employed approximately 3,200 employees, including part-time employees. We also use temporary and contract employees in the normal course of our business. Approximately 49% of our employees were covered by collective bargaining agreements as of December 31, 2022. For a more detailed discussion regarding how the collective bargaining agreements could affect our business, see Part I - Item 1A – Risk Factors – “Risks Relating to Our Business.” Compensation and Benefits Our employees are the cornerstone of our success. We are committed to providing meaningful, challenging work and opportunities for professional growth in a positive environment. To attract and retain qualified and experienced employees, we offer competitive compensation and benefit packages, which we believe are competitive within the industry and the local markets in which we operate. Our benefit packages may include, among other items, incentive compensation based on the achievement of financial targets, healthcare and insurance benefits, health savings and flexible spending accounts, a 401(k) savings plan with an employer match, paid time off, and wellness and employee assistance programs. Additionally, for certain eligible directors and employees, we provide long-term incentive compensation, in the form of restricted stock awards. In addition, we are committed to providing employees continuing education and training programs in order for employees to achieve career goals and professional growth. Diversity and Inclusion We embrace diversity and inclusion and seek to hire and retain high-quality employees of all backgrounds and experiences. Honoring our employees as individuals is key to our culture. We believe diversity of backgrounds contributes to different ideas, which in turn drives better results for customers. We respect differences and diversity as qualities that enhance our efforts as a team and believe embracing diversity and a culture of inclusion makes our company a better place to work. We believe in and support the principles incorporated in all anti-discrimination and equal employment laws. We offered leadership Diversity, Equity and Inclusion (“DEI”) training to senior leaders across the Company and our DEI Council, which we formed in 2021, meets regularly as part of an enhanced and comprehensive employee engagement initiative. Our employees complete training each year on discrimination and harassment prevention on topics that include ageism, anti-bullying and respect for people from other racial, ethnic and religious groups. We continue to expand our DEI initiatives and are actively working to help advance our diversity journey and build upon our practices on diversity, inclusion and fairness. Safety, Health and Security We also strive to create and provide a safe, healthful and secure workplace that is free from discrimination or harassment. Our workplace policies and procedures protect against behavior that creates an offensive, hostile, or intimidating work environment. Safety is top priority and we have a strong, ongoing commitment to ensure employees are properly trained and have appropriate safety and emergency equipment. Regulatory Environment The following summary does not describe all existing and proposed legislation and regulations affecting the telecommunications industry. Regulation can change rapidly and ongoing proceedings and hearings could alter the manner in which the telecommunications industry operates. We cannot predict the outcome of any of these developments, nor their potential impact on us. See Part I – Item 1A – “Risk Factors—Risks Related to the Regulation of Our Business”. Overview Our revenues, which include revenues from such telecommunications services as local telephone service, network access service and toll service are subject to broad federal and/or state regulations. The telecommunications industry is subject to extensive federal, state and local regulation. Under the Communications Act of 1934 (the “Communications Act” and the Telecommunications Act of 1996 (the “Telecommunications Act”), federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices. At the federal level, the FCC generally exercises jurisdiction over facilities and services of local exchange carriers, such as our rural telephone companies, to the extent they are used to provide, originate or terminate interstate or international communications. The FCC has the authority to condition, modify, cancel, terminate or revoke our operating authority for failure to comply with applicable federal laws or FCC rules, regulations and policies. Fines or penalties also may be imposed for any of these violations. State regulatory commissions generally exercise jurisdiction over carriers’ facilities and services to the extent they are used to provide, originate or terminate intrastate communications. In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks. State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations. Federal Regulation Our incumbent local exchange companies and competitive local exchange companies must comply with the Communications Act, which requires, among other things, that telecommunications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. The 1996 amendments to the Communications Act (contained in the Telecommunications Act discussed below) dramatically changed, and likely will continue to change, the landscape of the industry. Access Charges On November 18, 2011, the FCC released its comprehensive order on inter-carrier compensation (“ICC”) and universal service reform (“Transformation Order”), which required terminating state access charges to mirror terminating interstate access charges, and as of July 1, 2013, all terminating switched intrastate access charges mirror interstate access charges. The access charge portion of the Transformation Order systematically reduced minute-of-use-based interstate access, intrastate access and reciprocal compensation rates over a six to nine-year period to an end state of “bill-and-keep,” in which each carrier recovers the costs of its network through charges to its own subscribers, rather than through ICC. The reductions apply to terminating access rates and usage, with originating access to be addressed by the FCC in a later proceeding. To help with the transition to bill-and-keep, the FCC created two subsidy mechanisms. The first is an Access Recovery Mechanism (“ARM”), which is funded from the Connect America Fund (“CAF”), and the second is an Access Recovery Charge (“ARC”), which is recovered from end users. The universal service portion of the Transformation Order redirected support from voice services to broadband services, and is now called the CAF. In December 2014, the FCC released a report and order that addressed, among other things, the transition to CAF Phase II funding for price cap carriers and the acceptance criteria for CAF Phase II funding. Companies are required to commit to a statewide build out requirement of 10 Mbps downstream and 1 Mbps upstream in funded locations. Our annual support through the FCC’s CAF Phase II funding was $48.1 million through 2021 as described below. The specific obligations associated with CAF Phase II funding included the obligation to serve approximately 124,500 locations by December 31, 2020 (with interim milestones of 40%, 60% and 80% completion by December 2017, 2018 and 2019, respectively); to provide broadband service with speeds of 10 Mbps downstream and 1 Mbps upstream; to achieve latency of less than 100 milliseconds; to provide data of at least 100 gigabytes per month; and to offer pricing reasonably comparable to pricing in urban areas. The Company met the buildout milestones and performance metrics requirements for 2017 through 2020 for all states where it received funding. In April 2019, the FCC announced plans for the Rural Digital Opportunity Fund (“RDOF”), the next phase of the CAF program. The RDOF is a $20.4 billion fund to bring speeds of 25 Mbps downstream and 3 Mbps upstream to unserved and underserved areas of America. The RDOF program prioritizes terrestrial broadband as a bridge to rural 5G networks by providing a significant weight advantage to traditional broadband providers. Funding will occur in two phases with the first phase auctioning $16.0 billion and the second phase (which is not certain to occur) auctioning $4.4 billion, each to be distributed over 10 years. The minimum speed required to receive funding is 25 Mbps downstream and 3 Mbps upstream. CAF Phase II funding was extended through December 31, 2021 for price cap holding companies. The FCC issued the final census block groups with locations and reserve price. We filed our RDOF short form application on July 14, 2020 and were listed as a qualified bidder by the FCC on October 13, 2020 and participated in the auction. The auction began on October 29, 2020 and ended on November 24, 2020. Consolidated won 246 census block groups serving in seven states. The bids we won are at the 1 Gbps downstream and 500 Mbps upstream speed tier to approximately 27,000 locations at an annual funding level of $5.9 million, beginning January 1, 2022 through December 31, 2031, which resulted in a reduction of approximately $42.2 million in annual support as of January 1, 2022. Consolidated filed its long form application with supporting documents on January 29, 2021 and received final FCC approval on December 14, 2021. Consolidated began receiving RDOF funding in January 2022. Unbundled Network Element Rules In 2019, the FCC issued two orders that eliminated certain obligations that require incumbent telecommunications carriers to lease Unbundled Network Element (“UNE”) to competitors. The first order addressed wholesale discounts on resold services and Voice Grade analog UNE loops and the second order (“Transport Order”), addressed UNE transport between competitive wire centers. Both orders provided a three-year transition period. The Transport Order addresses two separate but related topics. One is the relief from transport UNEs and the other is to respond to a remand of the FCC’s Business Data Services (“BDS”) order. BDS were previously known as Special Access services. The FCC broadly deregulated BDS services in 2017. This decision was appealed and a U.S. Court of Appeals upheld the order but vacated the BDS transport relief because the Court decided that the FCC had not provided sufficient notice intended to deregulate all BDS transport services. On remand, the FCC addressed this issue in the same order used to provide forbearance relief on UNE transport. The FCC has signaled its intent to continue evaluating various aspects of its UNE and related resale rules, and to forbear from or otherwise modernize them where necessary in light of evolving market conditions. In 2020, Consolidated renegotiated its Wholesale Performance Plans (“WPP”) in Maine, New Hampshire and Vermont to comply with the FCC’s UNE forbearance order issued in 2019. Promotion of Universal Service In general, telecommunications service in rural areas is costlier to provide than service in urban areas. The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain. By supporting the high cost of operations in rural markets, Universal Service Fund (“USF”) subsidies promote widely available, quality telephone service at affordable prices in rural areas. Revenues from federal and certain states’ USFs totaled $33.4 million, $69.8 million and $72.0 million in 2022, 2021 and 2020, respectively. State Regulation We are subject to regulation by state governments in the jurisdictions in which we operate. State regulatory commissions generally exercise jurisdiction over our provision of intrastate telecommunications services. In recent years, most states have reduced their regulation of ILECs, including our ILEC operations. Nonetheless, state regulatory commissions generally continue to (i) set the rates that telecommunication companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) regulate ILECs’ financing activities including their ability to borrow against and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various quality of service standards. In many states, BDS and switched interconnection services are subject to price regulation, although the extent of such regulation varies by type of service and geographic region. We operate in states where traditional cost recovery mechanisms, including state USF, are under evaluation or have been modified. As states continue to assess their laws and implement various regulatory changes, there can be no assurance that these mechanisms will continue to provide us with the same level of cost recovery we historically have received. Local Government Authorizations In the various states we operate in, we operate under a structure in which municipalities and other local governmental authorities may impose various fees, such as for the privilege of originating and terminating messages and placing facilities within the relevant area, for obtaining permits for street opening and construction, and/or for operating franchises to install and expand fiber optic facilities. Regulation of Video and Internet Services Video Services Our cable television subsidiaries each require a state or local franchise or other similar authorization in order to provide cable television service to customers. Each of these subsidiaries is subject to regulation under Title VI of the Communications Act. Under this framework, the responsibilities and obligations of franchising bodies and cable operators have been carefully defined. The law addresses such issues as the use of local streets and rights-of-way; the carriage of public, educational and governmental channels; the provision of channel space for leased commercial access; the amount and payment of franchise fees; consumer protection and similar issues. In addition, federal laws place limits on the common ownership of cable systems and competing multichannel video distribution systems, and on the common ownership of cable systems and local telephone systems in the same geographic area. Many such provisions of federal law have been implemented through FCC regulations. The FCC has expanded its oversight and regulation of certain aspects of the provision of cable television over time. For example, it has acted to assure that new competitors in the cable television business are able to gain access to potential customers and can also obtain licenses to carry certain types of video programming. Internet Services The provision of Internet access services is currently not significantly regulated by either the FCC or the state commissions (with the exception of the California Public Utilities Commission). The Federal Trade Commission (“FTC”) has authority to regulate Internet Service Providers with respect to privacy and competitive practices. In 2017, the FCC adopted an order rescinding its previous classification of Internet service as a telecommunications service regulated under Title II of the Communications Act effectively limiting the FCC’s authority over Internet Service Providers. However, the FCC retained rules requiring Internet Service Providers to disclose practices associated with blocking, throttling and paid prioritization of Internet traffic. The FCC order was challenged in court and in 2019, a U.S. Court of Appeals upheld the FCC’s decision reclassifying Internet access services as an information service. However, the ruling invalidated the FCC’s decision that state regulators may not impose obligations similar to the federal network neutrality obligations. Several states have adopted rules similar to the network neutrality requirements that were eliminated by the FCC and new state legislation may be adopted in the future. The outcome of pending matters before the FCC and the FTC and any potential congressional action cannot be determined at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and could affect our ability to compete in the markets we serve. COVID-19 and Broadband Adoption Initiatives Federal and state governments have adopted initiatives to assist with the impacts of the COVID-19 pandemic and to provide funding programs to assist in the deployment of broadband in order to support access to high speed broadband services in underserved or unserved areas. The awards may include a number of regulatory requirements including the completion of construction by certain dates. We are evaluating each of these programs and expect to continue to pursue funding opportunities available to us. We cannot predict what funding we will receive, the ultimate requirements that will be adopted or the impact of these programs on our business. Coronavirus Aid, Relief, and Economic Security Act Funding States received opportunities to use federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) funding to assist in the deployment of broadband to unserved and underserved areas within their respective states. In 2020, New Hampshire allocated $50.0 million of CARES Act funding to fund broadband expansion to unserved and underserved locations throughout the state. Consolidated was granted up to $3.5 million to build high-speed Internet networks for homes and businesses in New Hampshire for the towns of Danbury, Springfield and Mason. The state funded 10% upfront with the remainder received upon completion of projects in December 2020. American Rescue Plan Act Funding President Biden signed the American Rescue Plan Act of 2021 (“ARPA”) on March 11, 2021. States have been allocated federal funds to be utilized for capital infrastructure, including broadband deployment, and are in various stages of implementation. We are working with the states and municipalities in which we operate, to participate in this broadband grant program. COVID-19 On March 13, 2020, the FCC introduced the Keep Americans Connected pledge, which was in effect through June 30, 2020. The pledge asked all communications providers to not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the COVID-19 pandemic; to waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and to open their Wi-Fi hotspots to any American who needs them. Consolidated signed on to the pledge through June 30, 2020. Several states took the FCC pledge a step further by prohibiting carriers from disconnecting service within their state during the respective Governors’ declared states of emergency, which Consolidated also supported. Certain states such as Washington and New York were extended to July 31, 2021 and December 31, 2021, respectively. The state moratoriums on disconnections have since expired. In February 2021, the FCC created the Emergency Broadband Benefit Program (“EBB”), a temporary program to help low income households stay connected during the COVID-19 pandemic by providing broadband service discounts for eligible households. Consolidated was a participant in this program. The EBB ended on December 31, 2021. EBB recipients fully enrolled as of December 31, 2021 automatically continued to receive their current monthly benefit until March 1, 2022, when the Affordable Connectivity Program took its place. Affordable Connectivity Program The Affordable Connectivity Program (“ACP”) is a permanent broadband affordability program set up to replace the EBB. The ACP program helps ensure that households can afford the broadband they need for work, school, healthcare and more. The benefit provides a discount of up to $30 per month toward internet service for eligible households and up to $75 per month for households on qualifying Tribal lands. Eligible households can also receive a one-time discount of up to $100 to purchase a laptop, desktop computer, or tablet from participating providers if they contribute more than $10 and less than $50 toward the purchase price. The ACP is limited to one monthly service discount and one device discount per household. The program began distributing funds on March 1, 2022. Consolidated is participating in this program. Infrastructure Investment and Jobs Act The Infrastructure Investment and Jobs Act (“Infrastructure Act”) passed on March 31, 2021 included $65.0 billion to support broadband infrastructure deployment and access across the United States. The broadband internet portion of the Infrastructure Act is aimed at increasing internet coverage for more universal access, including for rural, low-income, and tribal communities. 65% of this funding is set aside specifically for underserved communities. Additionally, this measure is designed to help make internet access more affordable and increase digital literacy. The Infrastructure Act set aside $42.5 billion for Broadband Equity, Access and Deployment grants (“BEAD”). The National Telecommunications and Information Administration administers the BEAD program and has awarded grants to jurisdictions across the country, which in turn will use the funding to support service providers’ broadband deployment and access initiatives. The FCC currently is undertaking a broadband availability and quality mapping project, the results of which may impact the ultimate distribution of BEAD funding. Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.consolidated.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website also contains copies of our Corporate Governance Principles, Code of Business Conduct and Ethics and charter of each committee of our Board of Directors. The information found on our website is not part of this report or any other report we file with or furnish to the SEC. The public may read and copy reports, proxy and information statements and other information we file with the SEC at the SEC’s website at www.sec.gov. Item 1A. Risk Factors. Our operations and financial results are subject to various risks and uncertainties, including but not limited to those described below, that could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. Risks Relating to Our Business We expect to continue to face significant competition in all parts of our business and the level of competition could intensify among our customer channels. The telecommunications industry is highly competitive. We face actual and potential competition from many existing and emerging companies, including wireline and wireless companies, long-distance carriers and resellers, Internet service providers, including fixed wireless Internet service providers (“WISPs”), satellite companies and cable television companies, and, in some cases, new forms of providers that are able to offer competitive services through software applications requiring a comparatively small initial investment. Due to consolidations and strategic alliances within the industry, we cannot predict the number of competitors we will face at any given time. The wireless business has expanded significantly and has caused many subscribers with traditional telephone and land-based Internet access services to give up those services and rely exclusively on wireless service. Wireless companies are aggressively developing networks using next-generation data technologies, including 5G wireless broadband services, in order to provide increasingly faster data speeds to their customers. A growing number of telecommunications companies are also building and enhancing their fiber networks within many of our service areas. Broadband-deployment funding initiatives from federal and state agencies, including federal infrastructure legislation enacted in 2021, may also result in other service providers deploying new subsidized fiber networks within our service territories. In addition, our video service faces increased competition as consumers’ options for viewing television shows have expanded as content becomes increasingly available through alternative sources. Some providers, including television and cable television content owners, provide streaming and other Over-The-Top (“OTT”) services that deliver video content to televisions, computers and other devices over the Internet. Newer products and services will likely continue to be developed, further increasing the number of competitors that all our services face. We may not be able to successfully anticipate and respond to many of the various competitive factors affecting the industry, including regulatory changes that may affect our competitors and us differently, new technologies, services and applications that may be introduced, changes in consumer preferences, demographic trends, and discount or bundled pricing strategies by competitors. The incumbent telephone carriers in the markets we serve enjoy certain business advantages, including size, financial resources, a favorable regulatory position, a more diverse product mix, brand recognition and connection to virtually all of our customers and potential customers. The largest cable operators also enjoy certain business advantages, including size, financial resources, ownership of or superior access to desirable programming and other content, a more diverse product mix, brand recognition and first-in-field advantages with a customer base that generates positive cash flow for their operations. Our competitors continue to add features, increase data speeds and adopt aggressive pricing and packaging for services comparable to the services we offer. Their success in selling services that are competitive with ours among our various customer channels could lead to revenue erosion in our business. We face intense competition in our markets for long-distance, Internet access, video service and other ancillary services that are important to our business and to our growth strategy. If we do not compete effectively we could lose customers, revenue and market share. We must adapt to rapid technological changes. If we are unable to take advantage of technological developments, or if we adopt and implement them at a slower rate than our competitors, we may experience a decline in the demand for our services. Our industry operates in a technologically complex environment. New technologies are continually developed and existing products and services undergo constant improvement. Emerging technologies offer consumers a variety of choices for their communications and broadband needs. To remain competitive, we will need to adapt to future changes in technology to enhance our existing offerings and to introduce new or improved offerings that anticipate and respond to the varied and continually changing demands of our various customer channels. Our business and results of operations could be adversely affected if we are unable to match the benefits offered by competing technologies on a timely basis and at an acceptable cost, or if we fail to employ technologies desired by our customers before our competitors do so. New technologies, particularly alternative methods for the distribution, access and viewing of content, have been, and will likely continue to be, developed that will further increase the number of competitors that we face and drive changes in consumer behavior. Consumers seek more control over when, where and how they consume content and are increasingly interested in communications services outside of the home and in newer services in wireless Internet technology and devices such as tablets, smartphones and mobile wireless routers that connect to such devices. These new technologies, distribution platforms and consumer behaviors may have a negative impact on our business. In addition, evolving technologies can reduce the costs of entry for others, resulting in greater competition and significant new advantages for competitors. Technological developments could require us to make significant new capital investments in order to remain competitive with other service providers. We expect to continue to incur additional costs as we execute on our technological developments including our fiber network expansion plan. If we do not replace or upgrade our network and its technology on a timely basis, we may not be able to compete effectively and could lose customers. We may also be placed at a cost disadvantage in offering our services. Wireless companies are aggressively developing networks using next-generation data technologies, which are capable of delivering high-speed Internet service via wireless technology to a large geographic footprint. In addition, a growing number of telecommunications companies are building advanced fiber networks to significantly increase broadband speeds. Although we use fiber optics in parts of our networks and are continuing to expand and enhance our fiber network, we continue to rely on coaxial cable and copper transport media to serve customers in certain areas. If we cannot develop new services and products to keep pace with technological advances, or if such services and products are not widely embraced by our customers, our results of operations could be adversely impacted. Shifts in our product mix may result in a decline in operating profitability. Margins vary among our products and services. Our profitability may be impacted by technological changes, customer demands, regulatory changes, the competitive nature of our business and changes in the product mix of our sales. These shifts may also result in our long-lived assets becoming impaired or our inventory becoming obsolete. We review long-lived assets for potential impairment if certain events or changes in circumstances indicate that impairment may be present. We currently manage potential inventory obsolescence through reserves, but future technology changes may cause inventory obsolescence to exceed current reserves. Public health threats, such as the recent outbreak of COVID-19, could have a material adverse effect on our business, results of operations, cash flows and stock price. We may face risks associated with public health threats or outbreaks of epidemic, pandemic or communicable diseases, such as the outbreak of the coronavirus (“COVID-19”) and its variants. The severity, magnitude and duration of global or regional pandemics are uncertain and hard to predict. Although the domestic and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted, certain adverse consequences of the pandemic continue to impact the economy, including disruptions in the supply chain, labor shortages, rising inflationary pressures and interest rates, and the risk of a recession. As a critical infrastructure provider, we continued to operate our business and provide services to our customers. A future resurgence in the transmission of current or new variants of COVID-19 or other pandemic conditions that result in any preventive or protective actions implemented by governmental authorities may have a material adverse effect on our operations, customers and suppliers. Adverse economic and market conditions as a result of COVID-19 or other pandemics could adversely affect the demand for our products and services and may also impact the ability of our customers to satisfy their obligations to us. In addition, volatility in financial and other capital markets may adversely affect the market price of our common stock and our ability to access capital markets. In response to the COVID-19 pandemic, we have transitioned a substantial number of our employees to telecommuting and remote work arrangements, which may increase the risk of a security breach or cybersecurity attack on our information technology systems that could impact our business. We receive support from various funds established under federal and state laws, and the continued receipt of that support is not assured. A significant portion of our revenues come from network access and subsidies. An order adopted by the FCC in 2011 (the “Transformation Order”) significantly impacted the amount of support revenue we receive from the Universal Service Fund (“USF”), Connect America Fund (“CAF”) and intercarrier compensation (“ICC”). The Transformation Order reformed core parts of the USF, broadly recast the existing ICC scheme, established the CAF to replace support revenues provided by the USF and redirected support from voice services to broadband services. In 2012, CAF funding was implemented, which froze USF support to price cap carriers until the FCC implemented a broadband cost model to shift support from voice services to broadband services. In 2020, the FCC adopted an order establishing the Rural Digital Opportunity Fund (“RDOF”), the next phase of the CAF program, which resulted in a reduction of approximately $42.2 million in the annual support we receive as of January 1, 2022. See Part I – Item 1 – “Regulatory Environment” above for statistics of current funding levels. We must comply with numerous FCC and state requirements to continue receiving the RDOF funding. Any failure to comply with the requirements could impact our current funding, which could adversely impact our results of operations and financial condition. We receive subsidy payments from various federal and state universal service support programs, including high-cost support, Lifeline, which reduces the cost of communications services for low-income consumers, and E-Rate, which subsidizes the purchase of communications services by schools and libraries. The total cost of the various federal universal service programs has increased significantly in recent years, putting pressure on regulators to reform the programs and to limit both eligibility and support. We cannot predict future changes that may impact the subsidies we receive. However, a reduction in subsidies support may directly affect our profitability and cash flows. A disruption in our networks and infrastructure could cause service delays or interruptions, which could cause us to lose customers and incur additional expenses. Our customers depend on reliable service over our network. The primary risks to our network infrastructure include physical damage to lines, security breaches, capacity limitations, power surges or outages, software defects and disruptions beyond our control, such as natural disasters and acts of terrorism. From time to time in the ordinary course of business, we experience short disruptions in our service due to factors such as physical damage, inclement weather and service failures of our third-party service providers. We could experience more significant disruptions in the future. For example, climate change may increase the intensity and frequency of various natural disasters, as well as contribute to chronic changes in the physical environment (such as changes to ambient temperature and precipitation patterns or sea-level rise) that may impair the operating conditions of our infrastructure or otherwise adversely impact our operations. Disruptions may cause service interruptions or reduced capacity for customers, either of which could cause us to lose customers and incur unexpected expenses. A cyber-attack may lead to unauthorized access to confidential customer, personnel and business information that could adversely affect our business. We utilize our information technology infrastructure to manage and store various proprietary information and sensitive or confidential data relating to our operations. We routinely process, store and transmit large amounts of data for our customers, including sensitive and personally identifiable information. We depend on our information technology infrastructure to conduct business operations and provide customer services. We may be subject to data breaches and disruptions of the information technology systems we use for these purposes. Attempts by others to gain unauthorized access to organizations' information technology systems by hackers and other malicious actors such as foreign governments, criminals, hacktivists, terrorists and insider threats are becoming more frequent and sophisticated, and are sometimes successful. These attempts may include covertly introducing malware to companies' computers and networks, impersonating authorized users or "hacking" into systems. Hackers and other malicious actors may be able to penetrate our network security and misappropriate or compromise our confidential, sensitive, personal or proprietary information, or that of third parties, and engage in the unauthorized use or dissemination of such information. They may be able to create system disruptions, or cause shutdowns. Hackers and other malicious actors may be able to develop and deploy viruses, worms, ransomware and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our systems. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs,” cybersecurity vulnerabilities and other problems that could unexpectedly interfere with the operation or security of our systems. We seek to prevent, detect and investigate all security incidents that do occur, however we may be unable to prevent or detect a significant attack in the future. Significant information technology security failures could result in the theft, loss, damage, unauthorized use or publication of our confidential business information, which could harm our competitive position, subject us to additional regulatory scrutiny, expose us to litigation or otherwise adversely affect our business. To date, interruptions of our information technology infrastructure and third party suppliers have been infrequent and have not had a material impact on our operations. However, because technology is increasingly complex and cyber-attacks are increasingly sophisticated and more frequent, there can be no assurance that such incidents will not have a material adverse effect on us in the future. The consequences of a breach of our security measures or those of a third-party provider, a cyber-related service or operational disruption, or a breach of personal, confidential, proprietary or sensitive data caused by a hacker or other malicious actor could be significant for us, our customers and other affected third parties. For example, the consequences could include damage to infrastructure and property, impairment of business operations, disruptions to customer service, financial costs and harm to our liquidity, costs associated with remediation, loss of revenues, loss of customers, competitive disadvantage, legal expenses associated with litigation, regulatory action, fines or penalties or damage to our brand and reputation. In addition, the costs to us to eliminate or address the foregoing security challenges and vulnerabilities before or after a cyber-incident could be significant. In addition, our remediation efforts may not be successful and could result in interruptions, delays or cessation of service. We could also lose existing or potential customers for our services in connection with any actual or perceived security vulnerabilities in the services. We are subject to laws, rules and regulations relating to the collection, use and security of user data. Our operations are also subject to federal and state laws governing information security. In the event of a data breach or operational disruption caused by an information security incident, such rules may require consumer and government agency notification and may result in regulatory enforcement actions with the potential of monetary forfeitures as well as civil litigation. We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards and contractual obligations. Our operations require substantial capital expenditures and our business, financial condition, results of operations and liquidity may be impacted if funds for capital expenditures are not available when needed. We require significant capital expenditures to maintain, upgrade and enhance our network facilities and operations. While we have historically been able to fund capital expenditures from cash generated from operations and borrowings under our revolving credit facility, the other risk factors described in this section could materially reduce cash available from operations or significantly increase our capital expenditure requirements, which may result in our inability to fund the necessary level of capital expenditures to maintain, upgrade or enhance our network. This could adversely affect our business, financial condition, results of operations and liquidity. If we cannot obtain and maintain necessary rights-of-way for our network, our operations may be interrupted and we could be faced with increased costs. We are dependent on easements, franchises and licenses from state and local governmental authorities, including highway and transit authorities, as well as from various private parties, such as telephone companies, including long-distance companies, and other utilities, and railroads for access to aerial pole space, underground conduits and other rights-of-way in order to construct and operate our networks. Some agreements relating to rights-of-way may be short-term or revocable at will, and we cannot be certain that we will continue to have access to existing rights-of-way after the governing agreements terminate or expire. If any of our right-of-way agreements were terminated or could not be renewed, we may be forced to remove, relocate or abandon our network facilities in the affected areas, which could interrupt our operations, force us to find alternative rights-of-way and incur unexpected capital expenditures. We may be unable to obtain necessary hardware, software and operational support from third-party vendors. We depend on third-party vendors to supply us with a significant amount of hardware, software and operational support necessary to provide certain of our services, to maintain, upgrade and enhance our network facilities and operations, and to support our information and billing systems. Some of our third-party vendors are our primary source of supply for certain products and services for which there are few substitutes. The global supply chains have been and may continue to be impacted by the COVID-19 pandemic, which has caused a delay in the development, manufacturing and shipping of products and in some cases an increase in product costs. If any of these vendors should experience financial difficulties, experience supply chain issues, have demand that exceeds their capacity or can no longer meet our specifications or provide products or services we need or at reasonable prices, our ability to provide some services may be hindered, in which case our business, financial condition and results of operations may be adversely affected. Video content costs are substantial and continue to increase. We expect video content costs to continue to be one of our largest operating costs associated with providing video service. Video programming content includes network programming designed to be shown in linear channels, as well as the programming of local over-the-air television stations that we retransmit. The cable industry has experienced continued increases in the cost of programming, especially the cost of sports programming and local broadcast station retransmission content. Programming costs are generally assessed on a per-subscriber basis, and therefore, are directly related to the number of subscribers to which the programming is provided. Our relatively small subscriber base limits our ability to negotiate lower per-subscriber programming costs. Larger providers can often qualify for discounts based on the number of their subscribers. This cost difference can cause us to experience reduced operating margins, while our competitors with a larger subscriber base may not experience similar margin compression. In addition, escalators in existing content agreements can result in cost increases that exceed general inflation. While we expect video content costs to continue to increase, we may not be able to pass such cost increases on to our customers, especially as an increasing amount of programming content becomes available via the Internet at little or no cost. Also, some competitors or their affiliates own programming in their own right and we may not be able to secure license rights to that programming. As our programming contracts with content providers expire, there is no assurance that they will be renewed on acceptable terms or that they will be renewed at all, in which case we may not be able to provide such programming as part of our video services packages and our business and results of operations may be adversely affected. We have employees who are covered by collective bargaining agreements. If we are unable to enter into new agreements or renew existing agreements timely, we could experience work stoppages or other labor actions that could materially disrupt our business of providing services to our customers. As of December 31, 2022, approximately 49% of our employees were covered by collective bargaining agreements. These employees are hourly workers throughout our service territories and are represented by various unions and locals. Our existing collective bargaining agreements expire between 2023 through 2026, of which contracts covering 2% of our employees will expire in 2023. We cannot predict the outcome of the negotiations related to the collective bargaining agreements covering our employees. If we are unable to reach new agreements or renew existing agreements, employees subject to collective bargaining agreements may engage in strikes, work stoppages or slowdowns, or other labor actions, which could materially disrupt our ability to provide services to our customers. New labor agreements, or the renewal of existing agreements, may impose significant new costs on us, which could adversely affect our financial condition and result of operations. While we believe our relations with the unions representing these employees are good, any protracted labor disputes or labor disruptions by our employees could negatively impact our business. Our ability to attract and/or retain certain key management and other personnel in the future could have an adverse effect on our business. We rely on the talents and efforts of key management personnel, many of whom have been with our company or in our industry for decades. While we maintain long-term and emergency transition plans for key management personnel and believe we could either identify internal candidates or attract outside candidates to fill any vacancy created by the loss of any key management personnel, the loss of one or more of our key management personnel could have a negative impact on our business. Acquisitions present many risks and we may be unable to realize the anticipated benefits of acquisitions. From time to time, we make acquisitions and investments or enter into other strategic transactions. In connection with these types of transactions, we may incur unanticipated expenses; fail to realize anticipated benefits; have difficulty integrating the acquired businesses; disrupt relationships with current and new employees, customers and vendors; incur significant indebtedness or have to delay or not proceed with announced transactions. The occurrence of any of the foregoing events could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may face significant challenges in combining the operations of an acquired business with ours in a timely and efficient manner. The failure to successfully integrate an acquired business and to successfully manage the challenges presented by the integration process may result in our inability to achieve anticipated benefits of the acquisition, including operational and financial synergies. Even if we are successful in integrating acquired businesses, we cannot guarantee that the integration will result in the complete realization of anticipated financial synergies or that they will be realized within the expected time frames. Increasing attention to, and evolving expectations for, environmental, social, and governance (“ESG”) initiatives could increase our costs, harm our reputation, or otherwise adversely impact our business. Companies across industries are facing increasing scrutiny from a variety of stakeholders related to their ESG practices. Expectations regarding voluntary ESG initiatives and disclosures may result in increased costs (including but not limited to increased costs related to compliance, stakeholder engagement, contracting and insurance), changes in demand for certain offerings, enhanced compliance or disclosure obligations, or other adverse impacts to our business, financial condition, or results of operations. While we may at times engage in voluntary initiatives (such as voluntary disclosures, certifications, or goals, among others) to improve the ESG profile of our company and/or offerings or to respond to stakeholder demands, such initiatives may be costly and may not have the desired effect. Expectations around companies’ management of ESG matters continues to evolve rapidly, in many instances due to factors that are out of our control. While we commit to certain initiatives or goals, we may not ultimately be able to achieve them due to cost, technological, or other constraints. Moreover, actions or statements that we may take based on based on expectations, assumptions, or third-party information that we currently believe to be reasonable may subsequently be determined to be erroneous or be subject to misinterpretation. Even if this is not the case, our current actions may subsequently be determined to be insufficient by various stakeholders, and we may be subject to investor or regulator engagement on our ESG initiatives and disclosures, even if such initiatives are currently voluntary. Certain market participants, including major institutional investors and capital providers, use third-party benchmarks and scores to assess companies’ ESG profiles in making investment or voting decisions. Unfavorable ESG ratings could lead to increased negative investor sentiment towards us, which could negatively impact our share price as well as our access to and cost of capital. To the extent ESG matters negatively impact our reputation, it may also impede our ability to compete as effectively to attract and retain employees, customers, or business partners, which may adversely impact our operations. In addition, we expect there will likely be increasing levels of regulation, disclosure-related and otherwise, with respect to ESG matters, which will likely lead to increased costs as well as scrutiny that could heighten all of the risks identified in this risk factor. Additionally, many of our customers and suppliers may be subject to similar expectations, which may augment or create additional risks, including risks that may not be known to us. Risks Relating to Current Economic Conditions Unfavorable changes in financial markets could adversely affect pension plan investments resulting in material funding requirements to meet our pension obligations. We expect that we will continue to make future cash contributions to our pension plans, the amount and timing of which will depend on various factors including funding regulations, future investment performance, changes in future discount rates and mortality tables and changes in participant demographics. Unfavorable fluctuations or adverse changes in any of these factors, most of which are outside our control, could impact the funded status of the plans and increase future funding requirements. Returns generated on plan assets have historically funded a large portion of the benefits paid under these plans. If the financial markets experience a downturn and returns fall below the estimated long-term rate of return, our future funding requirements could increase significantly, which could adversely affect our cash flows from operations. Weak economic conditions may have a negative impact on our business, results of operations and financial condition. Downturns in the economic conditions in the markets and industries we serve, including the impacts of inflation and the ongoing war between Russia and Ukraine, could adversely affect demand for our products and services and have a negative impact on our results of operations. Economic weakness or uncertainty may make it difficult for us to obtain new customers and may cause our existing customers to reduce or discontinue their services to which they subscribe. This risk may be worsened by the expanded availability of free or lower cost services, such as streaming or OTT services or substitute services, such as wireless phones and public Wi-Fi networks. In addition, recent inflationary pressures may also have an adverse impact on our cost structure and result in increased costs for materials, labor and other operating expenses. If such impacts are prolonged and substantial, it could have a negative impact on our results of operations and capital expenditures. Weak economic conditions may also impact the ability of our customers and third parties to satisfy their obligations to us. Risks Relating to Our Common and Preferred Stock The price of our common stock may be volatile and may fluctuate substantially, which could negatively affect holders of our common stock. The market price of our common stock may fluctuate widely as a result of various factors including, but not limited to, period-to-period fluctuations in our operating results, the volume of sales of our common stock, the limited number of holders of our common stock and the resulting limited liquidity in our common stock, dilution, developments in the communications industry, the failure of securities analysts to cover our common stock, changes in financial estimates by securities analysts, short interests in our common stock, competitive factors, regulatory developments, labor disruptions, general market conditions and market conditions affecting the stock of communications companies. Communications companies have, in the past, experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating performance. High levels of market volatility may have a significant adverse effect on the market price of our common stock. In addition, in the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert management's attention and resources, which could have a material adverse impact on our business, financial condition, results of operations, liquidity and/or the market price of our common stock. Our organizational documents could limit or delay another party’s ability to acquire us and, therefore, could deprive our investors of a possible takeover premium for their shares. A number of provisions in our amended and restated certificate of incorporation and bylaws could make it difficult for another company to acquire us. Among other things, these provisions: | ● | Provide that directors may only be removed for cause and then only upon the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock; |
| ● | Require the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock to amend, alter, change or repeal specified provisions of our amended and restated certificate of incorporation and bylaws; |
| ● | Require stockholders to provide us with advance notice if they wish to nominate any candidates for election to our Board of Directors or if they intend to propose any matters for consideration at an annual stockholders meeting; and |
| ● | Authorize the issuance of so-called “blank check” preferred stock without stockholder approval upon such terms as the Board of Directors may determine. |
We also are subject to laws that may have a similar effect. For example, federal and certain state telecommunications laws and regulations generally prohibit a direct or indirect transfer of control over our business without prior regulatory approval. Similarly, Section 203 of the Delaware General Corporation Law restricts our ability to engage in a business combination with an “interested stockholder”. These laws and regulations make it difficult for another company to acquire us, and therefore, could limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, the rights of our common stockholders are subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that we may issue in the future. The rights of our Series A Preferred Stock could negatively impact our cash flows. The terms of our Series A Preferred Stock provide rights to holders that could negatively impact us. Holders of our Series A Preferred Stock are entitled to receive cumulative dividends on the liquidation preference at a rate of 9% per annum payable semi-annually, until October 2, 2027 at our election, either in cash or in-kind through an accrual of unpaid dividends, which are automatically added to the liquidation preference; and after October 2, 2027, solely in cash. In addition, upon a liquidation event, holders of the Series A Preferred Stock will have the right to require the Company to repurchase all or any part of the outstanding Series A Preferred Stock for cash at a price equal to the liquidation preference plus any accrued and unpaid dividends. The existence of senior securities such as the Series A Preferred Stock could have an adverse effect on the value of our common stock. The Series A Preferred Stock ranks senior to our common stock with respect to dividend distribution payments upon liquidation. The rights of holders of our Series A Preferred Stock rank senior to the rights of holders of our common stock. Before dividends, if any, can be paid to holders of our common stock, any dividends, including accrued and unpaid dividends, must first be paid to holders of our Series A Preferred Stock. In addition, upon a liquidation event, holders of Series A Preferred Stock are entitled to receive full payment for their shares before any payment can be made to holders of our common stock. The existence of senior securities such as the Series A Preferred Stock could have an adverse effect on the value of our common stock. Risks Relating to Our Indebtedness and Our Capital Structure We have a substantial amount of debt outstanding, which could adversely affect our business and restrict our ability to fund working capital and planned capital expenditures. As of December 31, 2022, we had $2.1 billion of debt outstanding. Our substantial level of indebtedness could adversely impact our business, including: | ● | We may be required to use a substantial portion of our cash flow from operations to make principal and interest payments on our debt, which will reduce funds available for operations, capital expenditures, future business opportunities and strategic initiatives; |
| ● | We may have limited flexibility to react to changes in our business and our industry; |
| ● | It may be more difficult for us to satisfy our other obligations; |
| ● | We may have a limited ability to borrow additional funds or to sell assets to raise funds if needed for working capital, capital expenditures, acquisitions or other purposes; |
| ● | We may become more vulnerable to general adverse economic and industry conditions, including changes in interest rates; and |
| ● | We may be at a disadvantage compared to our competitors that have less debt. |
We cannot guarantee that we will generate sufficient revenues to service our debt and have adequate funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our markets. Our credit agreement and the indentures governing our Senior Notes contain covenants that limit management’s discretion in operating our business and could prevent us from capitalizing on opportunities and taking other corporate actions. Among other things, our credit agreement limits or restricts our ability (and the ability of certain of our subsidiaries), and the separate indenture governing the Senior Notes limits the ability of our subsidiary, Consolidated Communications, Inc., and its restricted subsidiaries to: incur or guarantee additional indebtedness or issue preferred stock; make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock; make investments and prepay or redeem debt; enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans or transfer assets to us; create liens; sell or otherwise dispose of assets, including capital stock of, or other ownership interests in subsidiaries; engage in transactions with affiliates; engage in sale and leaseback transactions; make capital expenditures; engage in a business other than telecommunications; and consolidate, merge or transfer all or substantially all of the assets of the Company. In addition, our credit agreement, with respect to the revolving credit facility only, requires us to comply with specified financial ratios, including a financial covenant based on a maximum consolidated first lien leverage ratio. Our ability to comply with these ratios may be affected by events beyond our control. These restrictions limit our ability to plan for or react to market conditions, meet capital needs or otherwise constrain our activities or business plans. They also may adversely affect our ability to finance our operations, enter into acquisitions or engage in other business activities that would be in our interest. A breach of any of the covenants contained in our credit agreement, in any future credit agreement, or in the separate indentures governing the Senior Notes, or our inability to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all borrowings outstanding to be due and payable. If the amounts outstanding under our credit facilities were to be accelerated, we cannot assure that our assets would be sufficient to repay in full the money owed. In such a situation, the lenders could foreclose on the assets and capital stock pledged to them. We may not be able to refinance our existing debt if necessary, or we may only be able to do so at a higher interest rate. We may be unable to refinance or renew our credit facilities and our failure to repay all amounts due on the maturity dates would cause a default under the credit agreement. Alternatively, any renewal or refinancing may occur on less favorable terms. If we refinance our credit facilities on terms that are less favorable to us than the terms of our existing debt, our interest expense may increase significantly, which could impact our results of operations and impair our ability to use our funds for other purposes. Our variable-rate debt subjects us to interest rate risk, which could impact our cost of borrowing and operating results. Certain of our debt obligations are at variable rates of interest and expose us to interest rate risk. Increases in interest rates could negatively impact our results of operations and operating cash flows. We utilize interest rate swap agreements to convert a portion of our variable-rate debt to a fixed-rate basis. However, we do not maintain interest rate hedging agreements for all of our variable-rate debt and our existing hedging agreements may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks. Changes in fair value of cash flow hedges that have been de-designated or determined to be ineffective are recognized in earnings. Significant increases or decreases in the fair value of these cash flow hedges could cause favorable or adverse fluctuations in our results of operations. In addition, a substantial portion of our variable-rate debt bears interest based on the London Interbank Offering Rate (“LIBOR”). In 2017, the Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to stop requiring banks to submit rates for the calculation of LIBOR after 2021. In November 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, extended the cessation date for submission and publication of rates for all LIBOR tenors until June 30, 2023, except for the one-week and two-month LIBOR tenors, which ceased on December 31, 2021. As of January 1, 2022, regulated U.S. financial institutions are no longer permitted to enter into new contracts referencing any LIBOR settings. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee (“ARRC”), has proposed replacing LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index based on trading in overnight repurchase agreements. The Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), enacted in March 2022, provides a framework for certain contracts to replace LIBOR with a benchmark rate based on SOFR. While the LIBOR Act effectively established SOFR as the default replacement rate for LIBOR, it is not possible to predict at this time whether SOFR will become the most prevalent alternative reference rate in the market or what impact the transition from LIBOR to alternative reference rates may have on the interest rates for our current and future debt obligations as well as our interest rate swap agreements, which may be adversely affected. In addition, any transition process from LIBOR to an alternative rate could cause, among other things, LIBOR to perform differently than in the past, a disruption in the financial markets, or increases in benchmark rates, any of which could adversely affect our results of operations, cash flows and liquidity. We currently expect to complete the transition from LIBOR to SOFR or an alternate base rate for our variable rate debt and interest rate swap agreements during the second quarter of 2023. Risks Related to the Regulation of Our Business We are subject to a complex and uncertain regulatory environment, and we face compliance costs and restrictions greater than those of many of our competitors. Our businesses are subject to regulation by the FCC and other federal, state and local governmental authorities. Rapid changes in technology and market conditions have resulted in changes in how the government regulates telecommunications, video programming and Internet services. Many businesses that compete with our Incumbent Local Exchange Carrier (“ILEC”) and non-ILEC subsidiaries are comparatively less regulated. Some of our competitors are either not subject to utilities regulation or are subject to significantly fewer regulations. In contrast to our subsidiaries regulated as cable operators and satellite video providers, competing on-demand and OTT providers and motion picture and DVD firms have almost no regulation of their video activities. Recently, federal and state authorities have become more active in seeking to address critical issues in each of our product and service markets. The adoption of new laws or regulations, or changes to the existing regulatory framework at the federal, state or local level, could require significant and costly adjustments that could adversely affect our business plans. New regulations could impose additional costs or capital requirements, require new reporting, impair revenue opportunities, potentially impede our ability to provide services in a manner that would be attractive to our customers and potentially create barriers to enter new markets or to acquire new lines of business. We face continued regulatory uncertainty in the immediate future. Not only are these governmental entities continuing to move forward on these matters, their actions remain subject to reconsideration, appeal and legislative modification over an extended period of time, and it is unclear how their actions will ultimately impact our business. We cannot predict future developments or changes to the regulatory environment or the impact such developments or changes may have on us. Increased regulation of the Internet could increase our cost of doing business. Current laws and regulations governing access to, or commerce on, the Internet are relatively limited. As the significance of the Internet continues to expand, federal, state and local governments may adopt new rules and regulations applicable to, or apply existing laws and regulations to, the Internet. In 2017, the FCC adopted an order rescinding its previous classification of Internet service as a telecommunications service regulated under Title II of the Communications Act, which has effectively limited the FCC’s authority over Internet Service Providers. However, the FCC retained rules requiring Internet Service Providers to disclose practices associated with blocking, throttling and paid prioritization of Internet traffic. The FCC order was challenged in court and in 2019, a U.S. Court of Appeals upheld the FCC’s decision reclassifying Internet access services as an information service. However, the ruling invalidated the FCC’s decision that state regulators may not impose obligations similar to the federal network neutrality obligations. Several states have adopted rules similar to the network neutrality requirements that were eliminated by the FCC and new state legislation may be adopted in the future. The outcome of pending matters before the FCC and the Federal Trade Commission (“FTC”) and any potential congressional action cannot be determined at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and could affect our ability to compete in the markets we serve. We are subject to extensive laws and regulations relating to the protection of the environment, natural resources and worker health and safety. Our operations and properties are subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability in connection with the management, storage and disposal of hazardous materials, asbestos and petroleum products. We are also subject to laws and regulations governing air emissions from our fleet vehicles. As a result, we face several risks, including: | ● | Hazardous materials may have been released at properties that we currently own or formerly owned (perhaps through our predecessors). Under certain environmental laws, we could be held jointly and severally liable, without regard to fault, for the costs of investigating and remediating any actual or threatened contamination at these properties and for contamination associated with disposal by us, or by our predecessors, of hazardous materials at third-party disposal sites; |
| ● | We could incur substantial costs in the future if we acquire businesses or properties subject to environmental requirements or affected by environmental contamination. In particular, environmental laws regulating wetlands, endangered species and other land use and natural resources may increase the costs associated with future business or expansion or delay, alter or interfere with such plans; |
| ● | The presence of contamination can adversely affect the value of our properties and make it difficult to sell any affected property or to use it as collateral; and |
| ● | We could be held responsible for third-party property damage claims, personal injury claims or natural resource damage claims relating to contamination found at any of our current or past properties. |
The cost of complying with environmental requirements could be significant. Similarly, the adoption of new environmental laws or regulations, or changes in existing laws or regulations or their interpretations, could result in significant compliance costs or unanticipated environmental liabilities. Effects of climate change may impose risk of damage to our infrastructure, our ability to provide services, and may cause changes in federal and state regulation, all of which may result in potential adverse impact to our financial results. Extreme weather events precipitated by long-term climate change have the potential to directly damage network facilities or disrupt our ability to build and maintain portions of our network. Any such disruption could delay network deployment plans, interrupt service for our customers, increase our costs and have a negative effect on our operating results. The potential physical effects of climate change, such as increased frequency and severity of storms, droughts, floods, fires, freezing conditions, sea-level rise, and other climate-related events, could adversely affect our operations, infrastructure, and financial results. Operational impacts resulting from the potential physical effects of climate change, such as damage to our network infrastructure, could result in increased costs and loss of revenue. We could incur significant costs to improve the climate resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We are not able to accurately predict the materiality of any potential losses or costs associated with the physical effects of climate change. Further, customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, water use, deforestation, plastic waste, and other sustainability concerns. Concern over climate change or other ESG matters may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment and reduce the impact of our business on climate change, which could increase our costs for monitoring and compliance. Further, climate change regulations may require us to alter our proposed business plans or increase our operating costs due to increased regulation or environmental considerations, and could adversely affect our business and reputation. In addition, in March 2022, the SEC proposed new rules relating to the disclosure of a range of climate-related data risks and opportunities, including financial impacts, physical and transition risks, related governance and strategy and greenhouse gas (GHG) emissions, for certain public companies. As part of the proposed rule, companies would have to disclose direct emissions from their operations as well as emissions created through their supply chains. We are currently assessing this rule, but at this time we cannot predict the ultimate impact of the rule on our business. The SEC originally planned to issue a final rule by October 2022, but most commentators now expect a final rule to be issued in early 2023. To the extent this rule is finalized as proposed, we could incur increased costs related to the assessment and disclosure of climate-related risks and certain emissions metrics. Our business may be impacted by new or changing tax laws or regulations and actions by federal, state, and/or local agencies, or by how judicial authorities apply tax laws. Our operations are subject to various federal, state and local tax laws and regulations. In connection with the products and services we sell, we calculate, collect, and remit various federal, state, and local taxes, surcharges and regulatory fees (“tax” or “taxes”) to numerous federal, state and local governmental authorities. In many cases, the application of tax laws is uncertain and subject to differing interpretations, especially when evaluated against new technologies and telecommunications services, such as broadband Internet access and cloud related services. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. Changes in tax laws, or changes in interpretations of existing laws, could materially affect our financial position, results of operations and cash flows. For example, the Tax Cuts and Jobs Act of 2017, a major federal tax reform, that had a significant impact on our tax obligations and effective income tax rate. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. We own our corporate headquarters, which are currently located at 2116 S. 17th Street, Mattoon, Illinois. We also own and lease office facilities and related equipment for administrative personnel, central office buildings and operations in many of the states in which we operate. In addition to land and structures, our property consists of equipment necessary for the provision of communication services, including central office equipment, customer premises equipment and connections, pole lines, video head-end, remote terminals, aerial and underground cable and wire facilities, vehicles, furniture and fixtures, computers and other equipment. We also own certain other communications equipment held as inventory for sale or lease. In addition to plant and equipment that we wholly-own, we utilize poles, towers and cable and conduit systems jointly-owned with other entities and lease space on facilities to other entities. These arrangements are in accordance with written agreements customary in the industry. We also have appropriate easements, rights-of-way and other arrangements for the accommodation of our pole lines, underground conduits, aerial and underground cables and wires. Item 3. Legal Proceedings. 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. See Note 15 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and Supplementary Data” for a discussion of recent developments related to these legal proceedings. Item 4. Mine Safety Disclosures. Not Applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock is traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “CNSL”. As of March 1, 2023, there were approximately 3,743 stockholders of record of the Company’s common stock. Share Repurchases During the quarter ended December 31, 2022, we repurchased 273,457 common shares surrendered by employees in the administration of employee share-based compensation plans. The following table summarizes the share repurchase activity: | | | | | | | | | | | | | | | | Total number of | | Maximum number | | | | | | | | shares purchased | | of shares that may | | | | | | | | as part of publicly | | yet be purchased | | | | Total number of | | Average price | | announced plans | | under the plans | | Purchase period | | shares purchased | | paid per share | | or programs | | or programs | | October 1-October 31, 2022 | | — | | — | | — | | — | | November 1-November 30, 2022 | | — | | — | | — | | — | | December 1-December 31, 2022 | | 273,457 | | $ 4.31 | | — | | — | |
Performance Graph The following graph shows a five-year comparison of cumulative total shareholder return of our common stock (assuming reinvestment of dividends) with the S&P 500 Index and the Nasdaq Telecommunications Index. The comparison of total return on investment (change in year-end stock price plus reinvested dividends) for each of the periods assumes that $100 was invested on December 31, 2017 in each index. The stock performance shown on the graph below is not necessarily indicative of future price performance. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Consolidated Communications Holdings, the S&P 500 Index and the Nasdaq Telecommunications Index 
| | | | | | | | | | | | | | | | | | | | | | As of December 31, | | (In dollars) | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Consolidated Communications Holdings | | $ | 100.00 | | $ | 92.04 | | $ | 38.74 | | $ | 48.83 | | $ | 74.69 | | $ | 35.75 | | S&P 500 | | $ | 100.00 | | $ | 95.62 | | $ | 125.72 | | $ | 148.85 | | $ | 191.58 | | $ | 156.89 | | Nasdaq Telecommunications | | $ | 100.00 | | $ | 77.39 | | $ | 91.90 | | $ | 101.16 | | $ | 103.32 | | $ | 75.55 | |
Sale of Unregistered Securities During the year ended December 31, 2022, we did not sell any equity securities of the Company which were not registered under the Securities Act of 1933, as amended. Item 6. Reserved. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Reference is made to “Note About Forward-Looking Statements” and Part I – Item 1A – “Risk Factors” which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Consolidated Communications Holdings, Inc. (“Consolidated,” the “Company,” “we,” “our” or “us”). MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to the consolidated financial statements (“Notes”) as of and for each of the three years in the period ended December 31, 2022 included elsewhere in this Annual Report on Form 10-K. Throughout MD&A, we refer to certain measures that are not a measure of financial performance in accordance with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”). We believe the use of these non-GAAP measures on a consolidated basis provides the reader with additional information that is useful in understanding our operating results and trends. These measures should be viewed in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. See the Non-GAAP Measures section below for a more detailed discussion on the use and calculation of these measures. Overview Consolidated is a broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers across a service area in over 20 states. We operate an advanced fiber network spanning approximately 57,800 fiber route miles across many rural areas and metro communities. We offer residential high-speed Internet, video, phone and home security services as well as multi-service residential and small business bundles. Our business product suite includes: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services. We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections. We generate the majority of our consolidated operating revenues primarily from monthly subscriptions to our broadband, data and transport services (collectively “broadband services”) marketed to residential and business customers. As consumer demands for bandwidth continue to increase, our focus is on expanding our fiber broadband services and upgrading data speeds in order to offer a highly competitive fiber product. Our investment in more competitive broadband speeds is critical to our long-term success. Our strategic investment with Searchlight Capital Partners L.P. (“Searchlight”), as described below, combined with the refinancing of our capital structure in 2020 provided us with additional capital that has enabled us to accelerate our fiber expansion plans and provided significant benefits to our consumer, commercial and carrier customers. With this strategic investment, we are enhancing our fiber infrastructure and accelerating our investments in high-growth and competitive areas. By leveraging our existing dense core fiber network and an accelerated build plan, we expect to be able to significantly increase data speeds, expand our multi-Gig coverage and strategically extend our network across our strong existing commercial and carrier footprint to attract more on-net and near-net opportunities. In 2021, we launched our multi-year fiber expansion plan to upgrade approximately 1.6 million passings, or more than 70% of our service area across select service areas to enable multi-Gig capable services to these homes and small businesses including more than 1.1 million passings within our northern New England service areas. The ultimate total passings will be dependent upon, amongst other things, our ability to secure Public Private Partnership grant arrangement opportunities. During the years ended December 31, 2022 and 2021, we upgraded approximately 403,000 and 330,000 passings to fiber, respectively, and total fiber passings were approximately 1,009,000 or 38% of our service area at December 31, 2022 compared to 10% at December 31, 2020. During the year ended December 31, 2022, we added approximately 40,075 consumer fiber Gig-capable subscribers. In our northern New England service areas, approximately 32% of the passings we serve were fiber Gig-capable as of December 31, 2022 compared to 17% at December 31, 2021. As of December 31, 2022, approximately 50% of the passings we serve in all other markets were fiber Gig-capable compared to 31% at December 31, 2021. Our fiber build plan includes the upgrade of at least 225,000 homes and small businesses in 2023. Fidium Fiber, our new Gigabit consumer fiber internet product with an all-new customer experience, launched in November 2021 in select northern New England markets, reinforces our broadband-first strategy. In May 2022, Fidium Fiber was expanded to additional markets in California, Illinois, Minnesota, Pennsylvania and Texas. In June 2022, we launched symmetrical 2 Gig speeds across the entire Fidium fiber network. Our Fidium plans offer symmetrical speeds from 50 Mbps to 2 Gbps over the latest WiFi 6 technology with no data caps. We expect to continue to expand the availability of Fidium Fiber further in 2023. In February 2023, we launched Fidium@Work and expanded our Fidium Fiber service to small businesses everywhere Fidium internet is available. Fidium@Work is ideal for small businesses that have outgrown residential or traditional internet service, but do not require an enterprise solution. As we continue to increase broadband speeds, we believe that we will also be able to simultaneously expand the array of services and content offerings that our network provides. We are focused on expanding our broadband and commercial product suite and are continually enhancing our commercial product offerings to meet the needs of our business customers. By leveraging our advanced fiber network, we can tailor our services for business customers by developing solutions to fit their specific needs. We are focused on driving fiber connectivity, achieving data services growth and standardizing our commercial product portfolio, which increases efficiency and enables greater scalability and reliability for businesses. Operating revenues continue to be impacted by the industry-wide trend of declines in voice services, access lines and related network access revenue. Many customers are choosing to subscribe to alternative communication services, and competition for these subscribers continues to increase. Total voice connections decreased 14% as of December 31, 2022 compared to 2021. We have been able to mitigate some of the access line losses through alternative product offerings, such as our VoIP service. Our competitive multi-gig broadband speeds enable us to meet consumer demand for higher bandwidth for streaming programming or on-demand content on any device. The consumers demand for streaming services, either to augment their current video subscription plan or to entirely replace their linear video subscription may impact our future video subscriber base and, accordingly, reduce our video revenue as well as our video programing costs. Total video connections decreased 45% as of December 31, 2022 compared to 2021 as a result of a divestiture in 2022, which accounted for approximately 21% of the decline, and our plan to de-emphasize our linear video services and transition customers to streaming and over-the-top video services. We believe the trend in changing consumer viewing habits will continue to impact our business results and complement our strategy of providing consumers with higher broadband speeds to facilitate streaming content including services offered through our streaming partnerships. Our operating revenues are impacted by legislative or regulatory changes at the federal and state levels, which could reduce or eliminate the current subsidies revenue we receive. A number of proceedings and recent orders relate to universal service reform, inter-carrier compensation (“ICC”) and network access charges. Recent orders adopted in 2020 resulted in a reduction in the federal subsidies we receive of approximately $42.2 million annually as of January 1, 2022. See the “Regulatory Matters” section below for a further discussion of the subsidies we receive. Significant Recent Developments Discontinued Operations - Sale of Investment in Wireless Partnerships On September 13, 2022, we completed the sale of our five limited wireless partnership interests to Cellco Partnership (“Cellco”) for an aggregate purchase price of $490.0 million. Cellco is the general partner for each of the five wireless partnerships and is an indirect, wholly-owned subsidiary of Verizon Communications, Inc. Our wireless partnership investment consisted of ownership in five wireless partnerships: 2.34% of GTE Mobilnet of South Texas Limited Partnership, 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership, 3.60% of Pittsburgh SMSA Limited Partnership, 16.67% of Pennsylvania RSA No. 6(I) Limited Partnership and 23.67% of Pennsylvania RSA No. 6(II) Limited Partnership. We intend to use the proceeds from the sale to support our fiber expansion plan. The financial results of the limited partnership interests have been reported as discontinued operations in our consolidated financial statements for all periods presented. In the statement of cash flows, we have elected to combine cash flows from discontinued operations with cash flows from continuing operations. In connection with the sale of the partnership interests, we recognized a pre-tax gain on sale of $389.9 million during the year ended December 31, 2022. For the years ended December 31, 2022, 2021 and 2020, we recognized income of $23.5 million, $41.8 million and $40.7 million, respectively, and received cash distributions of $29.2 million, $43.0 million and $41.5 million, respectively, from these wireless partnerships. Divestitures On March 2, 2022, we entered into a definitive agreement to sell substantially all the assets of our business located in the Kansas City market (the “Kansas City operations”). The Kansas City operations provide data, voice and video services to customers within the Kansas City metropolitan area and surrounding counties and includes approximately 17,100 consumer customers and 1,600 commercial customers. For the year ended December 31, 2021, operating revenues for the Kansas City operations were $51.3 million, or 4.0% of total consolidated operating revenues. The sale closed on November 30, 2022 for gross cash proceeds of $82.1 million, subject to the finalization of certain working capital and other post-closing purchase price adjustments. In 2022, in connection with the expected sale, the carrying value of the net assets to be sold was reduced to their estimated fair value and we recognized an impairment loss of $131.7 million during the year ended December 31, 2022. During the quarter and year ended December 31, 2022, we recognized an additional loss on the sale of $16.8 million as a result of purchase price adjustments and an increase in net assets held for sale and estimated selling costs during the period. On September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio, Consolidated Communications of Ohio Company (“CCOC” or the “Ohio operations”). CCOC provides telecommunications and data services to residential and business customers in 11 rural communities in Ohio and surrounding areas and included approximately 3,800 access lines, 3,900 data connections and 1,400 video connections. For the year ended December 31, 2021, operating revenues for the Ohio operations were $8.9 million or 0.7%, of total consolidated operating revenues. The sale was completed on January 31, 2022 for gross cash proceeds of $26.1 million, including customary working capital adjustments. As of December 31, 2021, the assets and liabilities to be disposed of were classified as held for sale in the consolidated balance sheet and consisted primarily of allocated goodwill of $16.3 million and property, plant and equipment of $9.5 million. In connection with the classification as assets held for sale, we recognized an impairment loss of $5.7 million during the year ended December 31, 2021. During the year ended December 31, 2022, we recognized an additional loss on the sale of $0.8 million, which is included in selling, general and administrative expense in the consolidated statement of operations. The asset sales align with our strategic asset review and focus on our core broadband regions. We intend to use the proceeds from the asset sales to support our fiber expansion plan. Searchlight Investment On September 13, 2020, we entered into an investment agreement (the “Investment Agreement”) with an affiliate of Searchlight. In connection with the Investment Agreement, affiliates of Searchlight have invested an aggregate of $425.0 million in the Company. The investment commitment was structured in two stages. In the first stage of the transaction, which was completed on October 2, 2020, Searchlight invested $350.0 million in the Company in exchange for 6,352,842 shares, or approximately 8%, of the Company’s common stock and a contingent payment right (“CPR”) that was convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 17,870,012 shares, or 16.9% of the Company’s common stock. In addition, Searchlight received the right to an unsecured subordinated note with an aggregate principal amount of approximately $395.5 million (the “Note”), which, will beat the time of issuance, was convertible into shares of a new series of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the Note plus accrued interest as of the date of conversion. On July 15, 2021, the Company received all required state public utility commission regulatory approvals necessary for the conversion of the CPR into 16.9% additional shares of the Company’s common stock. As a result, the CPR was converted into 17,870,012 shares of common stock, which were issued to Searchlight on July 16, 2021. In the second stage of the Investment, which was completed on December 7, 2021 following the receipt of Federal Communications Commission (“FCC”) and certain regulatory approvals and the satisfaction of certain other customary closing conditions, Searchlight invested an additional $75.0 million and was issued the Note. The Note bore interest at 9.0% per annum from the date of the closing of the first stage of the transaction and was payable semi-annually in arrears. The Note included a paid-in-kind (“PIK”) option for a five-year period beginning as of October 2, 2020. During the year ended December 31, 2021, the Company elected the PIK option and accrued interest of $38.8 million was added to the principal balance of the Note. On December 7, 2021, Searchlight elected to convert the Note into 434,266 shares of Series A Perpetual Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”). In addition, on December 7, 2021, the CPR converted into an additional 15,115,899 shares, or an additional 10.1%, of the Company’s common stock. As of December 31, 2022 and 2021, shares of common stock issued to Searchlight represent approximately 34% and 35%, respectively, of the Company’s outstanding common stock. The strategic investment with Searchlight provides us a valued partner with significant experience in deploying broadband infrastructure as we continue to execute our fiber-focused strategy and grow broadband services. Refinancing of Long-term Debt
On October 2, 2020, the Company and certain of its wholly-owned subsidiaries completed a refinancing of our long-term debt through the issuance of $2,250.0 million in new secured debt and retired all of our then existing outstanding debt obligations. As described in the “Liquidity and Capital Resources” section, we entered into a new credit agreement which consisted of term loans in the original aggregate amount of $1,250.0 million and a $250.0 million revolving credit facility. On October 2, 2020, we also issued $750.0 million aggregate principal amount of 6.50% senior secured notes due 2028. On January 15, 2021, the Company issued an additional $150.0 million aggregate principal amount of incremental term loans under the credit agreement. On March 18, 2021, we issued $400.0 million aggregate principal amount 5.00% Senior Notes and used the net proceeds from the issuance of notes to repay $397.0 million of the term loans outstanding under the credit agreement. On April 5, 2021, we entered into an amendment to the credit agreement to refinance the outstanding term loans, which reduced the combined interest rate margin and LIBOR floor by 1.5%. The refinancing extended the maturities of our debt obligations and improved our liquidity, which, combined with the strategic investment with Searchlight, provides us the immediate flexibility to support our planned expansion of our fiber network and revenue growth plan.
Divestiture
On September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio, Consolidated Communications of Ohio Company (“CCOC”), for approximately $26.0 million in cash, subject to a customary working capital adjustment. CCOC provides telecommunications and data services to residential and business customers in 11 rural communities in Ohio and surrounding areas and includes approximately 4,000 access lines and 3,900 data connections. The asset sale aligns with our strategic asset review and focus on our core broadband regions. As of December 31, 2021, the assets and liabilities to be disposed of were classified as held for sale in the condensed consolidated balance sheet and consisted primarily of allocated goodwill of $16.3 million and property, plant and equipment of $9.5 million. In connection with the classification as assets held for sale, we recognized an impairment loss of $5.7 million during the year ended December 31, 2021. Subsequent to December 31, 2021, the parties received all required regulatory approvals and the transaction closed on February 1, 2022.
Subsequent to December 31, 2021, we entered into a definitive agreement on March 2, 2022 to sell substantially all the assets of our business located in the Kansas City market (the “Kansas City operations”). The Kansas City operations provides data, voice and video services to customers within the Kansas City metropolitan area and surrounding counties and includes approximately 19,000 consumer customers and 1,900 commercial customers. The transaction is expected to close in the second half of 2022 and is subject to the receipt of all customary regulatory approvals and the satisfaction of other closing conditions. We estimate that the pre-tax impairment loss to be recognized during the quarter ended March 31, 2022 will range from $125.0 million to $130.0 million, which includes approximately $90.0 million in allocated goodwill.
COVID-19 Pandemic
We are closely monitoring the ongoing impact on our business of the coronavirus (“COVID-19”) pandemic. We are taking precautions to ensure the safety of our employees, customers and business partners, while assuring business continuity and reliable service and support to our customers. Health and safety measures implemented include transitioning to remote work-from-home policies, providing our field technicians with personal protective equipment and additional safety training, practicing social distancing and adding call aheads for work that must be performed inside customer premises. While we have not seen a material adverse impact to our financial results from COVID-19 to date, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. If the pandemic worsens or new variants of the virus become more dominant and were to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted. See Part I, Item 1A – “Risk Factors.”
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted by the U.S. government as an emergency economic stimulus package that includes spending and tax breaks to strengthen the U.S. economy and fund a nationwide effort to curtail the economic effects of COVID-19. The CARES Act included, among
other things, deferral of certain employer payroll tax payments and certain income tax law changes including modifications to the net interest deduction limitations. In 2020, we deferred the payment of approximately $12.0 million for the employer portion of Social Security taxes otherwise due in 2020 with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022. The portion of the taxes deferred until 2021 were paid during the third quarter of 2021. On March 11, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was enacted and provides further economic relief to address the continued economic impact of COVID-19. To date, these acts have not had a material impact on our consolidated financial statements, although we will continue to monitor the impact of any effects from these acts and other future legislation.
Results of Operations The following tables reflect our financial results on a consolidated basis and key operating statistics as of and for the years ended December 31, 2022, 2021 2020 and 2019.2020. Financial Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 vs. | | 2020 vs. | | | | | | | | | | | | | % Change | | (In millions, except for percentages) | | | 2021 | | 2020 | | 2019 | | 2020 | | 2019 | | | | 2022 | | 2021 | | 2020 | | 2022 vs 2021 | | 2021 vs 2020 | | Operating Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and carrier: | | | | | | | | | | | | | | | | | Data and transport services (includes VoIP) | | | $ | 362.3 | | $ | 362.1 | | $ | 355.3 | | 0 | % | 2 | % | | Consumer: | | | | | | | | | | | | | | | | | Broadband (Data and VoIP) | | | | $ | 272.1 | | $ | 269.3 | | $ | 263.1 | | 1 | % | 2 | % | Voice services | | | | | 144.8 | | | 160.7 | | | 170.5 | | (10) | | (6) | | Video services | | | | | 54.2 | | | 65.1 | | | 74.3 | | (17) | | (12) | | | | | | | 471.1 | | | 495.1 | | | 507.9 | | (5) | | (3) | | Commercial: | | | | | | | | | | | | | | | | | Data services (includes VoIP) | | | | | 228.5 | | | 228.9 | | | 225.3 | | (0) | | 2 | | Voice services | | | | 171.8 | | | 181.7 | | | 188.3 | | (5) | | (4) | | | | | 142.3 | | | 154.6 | | | 161.2 | | (8) | | (4) | | Other | | | | 41.6 | | | 45.1 | | | 52.9 | | (8) | | (15) | | | | | 43.1 | | | 40.0 | | | 43.4 | | 8 | | (8) | | | | | | 575.7 | | | 588.9 | | | 596.5 | | (2) | | (1) | | | | | 413.9 | | | 423.5 | | | 429.9 | | (2) | | (1) | | Consumer: | | | | | | | | | | | | | | | | | Broadband (Data and VoIP) | | | | 269.3 | | | 263.1 | | | 257.1 | | 2 | | 2 | | | Video services | | | | 65.1 | | | 74.3 | | | 81.4 | | (12) | | (9) | | | Carrier: | | | | | | | | | | | | | | | | | Data and transport services | | | | | 137.4 | | | 133.4 | | | 136.8 | | 3 | | (2) | | Voice services | | | | 160.7 | | | 170.5 | | | 180.8 | | (6) | | (6) | | | | | 14.7 | | | 17.2 | | | 20.5 | | (15) | | (16) | | Other | | | | | 1.7 | | | 1.6 | | | 1.7 | | 6 | | (6) | | | | | | | 153.8 | | | 152.2 | | | 159.0 | | 1 | | (4) | | | | | | 495.1 | | | 507.9 | | | 519.3 | | (3) | | (2) | | | | | | | | | | | | | | | | | Subsidies | | | | 69.8 | | | 72.0 | | | 72.4 | | (3) | | (1) | | | | | 33.4 | | | 69.8 | | | 72.0 | | (52) | | (3) | | Network access | | | | 120.5 | | | 125.3 | | | 138.1 | | (4) | | (9) | | | | | 104.7 | | | 120.5 | | | 125.3 | | (13) | | (4) | | Other products and services | | | | 21.1 | | | 9.9 | | | 10.2 | | 113 | | (3) | | | | | 14.4 | | | 21.1 | | | 9.9 | | (32) | | 113 | | Total operating revenues | | | | 1,282.2 | | | 1,304.0 | | | 1,336.5 | | (2) | | (2) | | | | | 1,191.3 | | | 1,282.2 | | | 1,304.0 | | (7) | | (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of services and products (exclusive of depreciation and amortization) | | | | 569.6 | | | 560.6 | | | 574.9 | | 2 | | (2) | | | | | 546.7 | | | 569.6 | | | 560.6 | | (4) | | 2 | | Selling, general and administrative costs | | | | 271.1 | | | 275.4 | | | 299.1 | | (2) | | (8) | | | | | 301.6 | | | 271.1 | | | 275.4 | | 11 | | (2) | | Acquisition and other transaction costs | | | | — | | | 7.6 | | | — | | (100) | | 100 | | | | | — | | | — | | | 7.6 | | — | | (100) | | Loss on impairment of assets held for sale | | | | 5.7 | | | — | | | — | | 100 | | — | | | | | 131.7 | | | 5.7 | | | — | | 2,211 | | 100 | | Loss on disposal of assets | | | | | 4.2 | | | — | | | — | | 100 | | — | | Depreciation and amortization | | | | 300.6 | | | 324.9 | | | 381.2 | | (7) | | (15) | | | | | 300.2 | | | 300.6 | | | 324.9 | | (0) | | (7) | | Total operating expenses | | | | 1,147.0 | | | 1,168.5 | | | 1,255.2 | | (2) | | (7) | | | | | 1,284.4 | | | 1,147.0 | | | 1,168.5 | | 12 | | (2) | | Income from operations | | | | 135.2 | | | 135.5 | | | 81.3 | | (0) | | 67 | | | Income (loss) from operations | | | | | (93.1) | | | 135.2 | | | 135.5 | | (169) | | (0) | | Interest expense, net | | | | (175.2) | | | (143.6) | | | (136.7) | | 22 | | 5 | | | | | (125.0) | | | (175.2) | | | (143.6) | | (29) | | 22 | | Gain (loss) on extinguishment of debt | | | | (17.1) | | | (18.3) | | | 4.5 | | (7) | | (507) | | | Loss on extinguishment of debt | | | | | — | | | (17.1) | | | (18.3) | | 100 | | (7) | | Change in fair value of contingent payment rights | | | | (86.5) | | | 23.8 | | | — | | (463) | | 100 | | | | | — | | | (86.5) | | | 23.8 | | 100 | | (463) | | Other income, net | | | | 43.2 | | | 50.8 | | | 27.2 | | (15) | | 87 | | | | | 13.4 | | | 1.3 | | | 10.1 | | 931 | | (87) | | Income tax expense (benefit) | | | | 6.3 | | | 10.9 | | | (3.7) | | (42) | | 395 | | | | | (27.0) | | | (3.2) | | | 1.6 | | (744) | | (300) | | Net income (loss) | | | | (106.7) | | | 37.3 | | | (20.0) | | (386) | | 287 | | | Income (loss) from continuing operations | | | | | (177.7) | | | (139.1) | | | 5.9 | | (28) | | (2,458) | | Income from discontinued operations, net of tax | | | | | 318.3 | | | 32.4 | | | 31.4 | | 882 | | 3 | | Dividends on Series A preferred stock | | | | 2.7 | | | — | | | — | | 100 | | — | | | | | 40.1 | | | 2.7 | | | — | | 1,385 | | 100 | | Net income attributable to noncontrolling interest | | | | 0.4 | | | 0.3 | | | 0.4 | | 33 | | (25) | | | | | 0.5 | | | 0.4 | | | 0.3 | | 25 | | 33 | | Net income (loss) attributable to common shareholders | | | $ | (109.8) | | $ | 37.0 | | $ | (20.4) | | (397) | | 281 | | | | $ | 100.0 | | $ | (109.8) | | $ | 37.0 | | 191 | | (397) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA from continuing operations (1) | | | | $ | 384.4 | | $ | 463.8 | | $ | 487.7 | | (17) | % | (5) | % | Adjusted EBITDA (1) | | | $ | 506.9 | | $ | 529.2 | | $ | 523.5 | | (4) | % | 1 | % | | | $ | 413.6 | | $ | 506.9 | | $ | 529.2 | | (18) | % | (4) | % |
| (1) | AAdjusted EBITDA from continuing operations and Adjusted EBITDA are non-GAAP measure.measures. See the “Non-GAAP Measures” section below for additional information and reconciliation to the most directly comparable GAAP measure. Adjusted EBITDA includes investment distributions from discontinued operations. |
Key Operating Statistics | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % Change | | | | | | | | | % Change | | | | | | | | | | 2021 vs. | | 2020 vs. | | | | | | | | | 2022 vs. | | 2021 vs. | | | | 2021 | | 2020 | | 2019 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | 2021 | | 2020 | | Consumer customers | | 516,949 | | 554,763 | | 582,818 | | (7) | % | (5) | % | | 484,669 | | 516,949 | | 554,763 | | (6) | % | (7) | % | | | | | | | | | | | | | | Fiber Gig+ capable | | | 122,872 | | 86,122 | | 70,610 | | 43 | | 22 | | DSL/Copper | | | 244,586 | | 298,442 | | 330,747 | | (18) | | (10) | | Consumer data connections | | 384,564 | | 401,357 | | 417,410 | | (4) | | (4) | | | 367,458 | | 384,564 | | 401,357 | | (4) | | (4) | | | | | | | | | | | | | | | Consumer voice connections | | 328,849 | | 370,660 | | 404,943 | | (11) | | (8) | | | 276,779 | | 328,849 | | 370,660 | | (16) | | (11) | | Video connections | | 63,447 | | 76,041 | | 84,171 | | (17) | | (10) | | | 35,039 | | 63,447 | | 76,041 | | (45) | | (17) | |
The sale of substantially all of the net assets of our Kansas City operations and Ohio operations in 2022 resulted in a reduction of approximately 3,325 fiber consumer data connections, 14,505 DSL/Copper consumer data connections and 14,800 video connections. Prior period amounts have not been adjusted to reflect the sales. Operating Revenues
Commercial and Carrier
Data and Transport Services
We provide a variety of business communication services to business customers of all sizes, including voice and data services over our advanced fiber network. The services we offer include scalable high-speed broadband Internet access and VoIP phone services, which range from basic service plans to virtual hosted systems. In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; private line data services; software defined wide area network (“SD-WAN”) and multi-protocol label switching. Our networking services include point-to-point and multi-point deployments from 2.5 Mbps to 10 Gbps to accommodate the growth patterns of our business customers. We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer’s on-site phone systems and data networks, managed network security services and data protection services. Data center and disaster recovery solutions provide a reliable and local colocation option for commercial customers. We also offer wholesale services to regional and national interexchange and wireless carriers, including cellular backhaul and other fiber transport solutions.
Data and transport services revenues increased $0.2 million during 2021 compared to 2020 due to continued growth in Metro Ethernet and SD-WAN services, which was largely offset by a decline in carrier services and cellular backhaul in 2021 as a result of price compression and a reduction in pricing of recent contract renewals with our wireless backhaul partners. Data and transport services revenues increased $6.8 million during 2020 compared to 2019 primarily due to growth in Metro Ethernet and VoIP services. In recent years, the growth in data and transport services revenues has been impacted by increased competition and price compression as customers are migrating from legacy data connection products to more competitive Ethernet based products, which have a lower average revenue per user. In addition, recent and ongoing contract renewals with our wireless backhaul partners have also resulted in a decline in pricing. Future declines are expected to be partially offset with the increasing demand for bandwidth and other Ethernet services.
Voice Services
Voice services include basic local phone and long-distance service packages for business customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller ID, call forwarding, speed dialing and call waiting. Services can be charged at a fixed monthly rate, a measured rate or can be bundled with selected services at a discounted rate.
Voice services revenues decreased $9.9 million during 2021 compared to 2020 primarily due to a 9% decline in access lines in 2021 compared to 2020. Voice services revenues decreased $6.6 million during 2020 compared to 2019 primarily due to a 7% decline in access lines in 2020 compared to 2019. Commercial customers are increasingly choosing alternative technologies, including our own VoIP product, and the broad range of features that Internet-based voice services can offer.
Other
Other services include business equipment sales and related hardware and maintenance support, video services and other miscellaneous revenues, including 911 service revenues. We are a full service 911 provider and have installed and maintained two turn-key, state of the art statewide next-generation emergency 911 systems. These systems, located in Maine and Vermont, have processed several million calls relying on the caller's location information for routing. As of October 29, 2020, we were no longer the 911 service provider in Vermont. Next-generation emergency 911 systems are
an improvement over traditional 911 and are expected to provide the foundation to handle future communication modes such as texting and video.
Other services revenues decreased $3.5 million during 2021 compared to 2020 primarily due to the expiration of our 911 service contract in Vermont as well as decreases in pole attachment and custom construction revenues. Other services revenues decreased $7.8 million during 2020 compared to 2019 primarily due to a decrease in business system sales in 2020.
Consumer Broadband Services Broadband services include revenues from residential customers for subscriptions to our VoIPdata and dataVoIP products. We offer high-speed Internet access at speeds of up to 12 Gbps, depending on the network facilities that are available, the level of service selected and the location. Our VoIP digital phone service is also available in certain markets as an alternative to the traditional telephone line. CCiTV, which is Broadband services revenues increased $2.8 million during 2022 compared to 2021 despite a customizable, cloud-enabled video service, supports4% decrease in broadband connections in 2022 primarily due to an increase in Internet services as a wide varietyresult of viewing habitsprice increases and provides an app-based approach to videogrowth in fiber Internet services. Content can be deliveredWe estimate that the sale of substantially all of the assets our Ohio operations and Kansas City operations in high-definition quality to a big-screen TV, as well as to tablets and mobile devices.2022 reduced revenue for 2022 by approximately $3.1 million. Broadband services revenues increased $6.2 million during 2021 compared to 2020 and $6.0 million during 2020 compared to 2019 despite a 4% decrease in broadband connections in both 2021 and 2020 primarily due to an increase in Internet services as a result of price increases as well as growth in CCiTV revenue.revenue, our cloud-enabled video service. However, the increase in broadband revenue was partially offset by a decline in VoIP revenue due to a 15% decline in connections in both 2021 as more customers continue to rely exclusively on wireless service. Voice Services We offer several different basic local phone service packages and long-distance calling plans, including unlimited flat-rate calling plans. The plans include options for voicemail and other custom calling features such as caller ID, call forwarding and call waiting. Voice services revenues decreased $15.9 million during 2022 compared to 2021 primarily due to a 17% decline in access lines during 2022 compared to 2021. Voice services revenues decreased $9.8 million during 2021 compared to 2020 primarily due to a 11% decline in access lines during 2021 compared to 2020. The number of local access lines in service directly affects the recurring revenues we generate from end users and continues to be impacted by the industry-wide decline in access lines. We expect to continue to experience erosion in voice connections due to competition from alternative technologies, including our own competing VoIP product. Video Services Depending on geographic market availability, our video services range from limited basic service to advanced digital television, which includes several plans, each with hundreds of local, national and music channels including premium and Pay-Per-View channels as well as video On-Demand service. Certain customers may also subscribe to our advanced video services, which consist of high-definition television, digital video recorders (“DVR”) and/or a whole home DVR. Our video subscribers can also watch their favorite shows, movies and livestreams on any device. In addition, we offer several in-demand streaming TV services, which provide endless entertainment options. Video services revenues decreased $10.9 million during 2022 compared to 2021 and decreased $9.2 million during 2021 compared to 2020 primarily due to a decreasethe continued decline in connections of 18% in 2021 compared to 2020. Video services revenues decreased $7.1 million during 2020 compared to 2019 primarily due to a decrease in connections of 10% in 2020 compared to 2019.connections. We expect to continue to experience a decline in video connections as consumerswe de-emphasize our linear video subscriptions and transition customers to streaming services, which may amplify the demand for higher broadband speeds to facilitate streaming content. Commercial Data Services We provide a variety of business communication services to business customers of all sizes, including voice and data services over our advanced fiber network. The services we offer include scalable high-speed broadband Internet access, SIP trunking and VoIP phone services, which range from basic service plans to virtual hosted systems. In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; private line data services; software defined wide area network (“SD-WAN”), a software-based network technology that provides a simplified management and automation of wide area network connections, and multi-protocol label switching. Our networking services include point-to-point and multi-point deployments from 2.5 Mbps to 10 Gbps to accommodate the growth patterns of our business customers. We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer’s on-site phone systems and data networks, managed network security services and data protection services. Data center and disaster recovery solutions provide a reliable and local colocation option for commercial customers. Data services revenues decreased $0.4 million during 2022 compared to 2021, of which we estimate that the sale of our Kansas City operations in late 2022 reduced revenue for 2022 by approximately $1.4 million. The remaining change was primarily due to the continued growth in dedicated Internet access, SIP trunking and SD-WAN services, which were reduced in part by declines in Metro Ethernet as a result of customer churn. Data services revenues increased $3.6 million during 2021 compared to 2020 primarily due to growth in dedicated Internet access and SD-WAN services. In recent years, the growth in data services revenues has been impacted by customer churn from increased competition and price compression as customers are choosingmigrating from legacy data connection products to subscribe to alternative video services such as over-the-top streaming services.more competitive products, which have a lower average revenue per user. Voice Services We offer several differentVoice services include basic local phone and long-distance service packages and long-distance calling plans, including unlimited flat-rate calling plans.for business customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller ID, call forwarding, speed dialing and call waiting. Services can be charged at a fixed monthly rate or a measured rate or can be bundled with selected services at a discounted rate.
Voice services revenues decreased $9.8$12.3 million during 2022 compared to 2021 primarily due to a 15% decline in access lines in 2022 compared to 2021. Voice services revenues decreased $6.6 million during 2021 compared to 2020 primarily due to a 11%9% decline in access lines in 2021 compared to 2020. Commercial customers are increasingly choosing alternative technologies and the broad range of features that Internet-based voice services can offer. Other Other services include business equipment sales and related hardware and maintenance support, video services and other miscellaneous revenues, including 911 service revenues. We are a full service 911 provider and have installed and currently maintain a turn-key, state of the art statewide next-generation emergency 911 system located in Maine. As of October 29, 2020, we were no longer the 911 service provider in Vermont. These systems, have processed several million calls relying on the caller's location information for routing. Next-generation emergency 911 systems are an improvement over traditional 911 and are expected to provide the foundation to handle future communication modes such as texting and video. Other services revenues increased $3.1 million during 2022 compared to 2021 primarily due to an increase in business equipment sales and custom construction revenues. Other services revenues decreased $3.4 million during 2021 compared to 2020.2020 primarily due to the expiration of our 911 service contract in Vermont in late 2020 as well as decreases in pole attachment and custom construction revenues. Carrier Data and Transport Services We provide high-speed fiber data transmission services to regional and national interexchange and wireless carriers including Ethernet, cellular backhaul, dark fiber and colocation services. Data and transport services revenues increased $4.0 million during 2022 compared to 2021 primarily due to an increase in dark fiber revenue as a result of a new IRU agreement entered into in 2022. Cellular backhaul revenue was consistent with prior year, however, we may recognize future declines in cellular backhaul revenue as a result of the delayed timing of new pricing in 2022 and ongoing contract renewals. Future declines are expected to be partially offset by pursing new tower opportunities and demand for other Ethernet services. Data and transport services revenues decreased $3.4 million during 2021 compared to 2020 primarily due to a decline in dark fiber revenue and cellular backhaul in 2021 as a result of a reduction in pricing of recent contract renewals with our wireless backhaul partners. Voice Services We provide basic local phone service packages with customized features for resell by wholesale customers. The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features. Voice services revenues decreased $10.3$2.5 million during 20202022 compared to 2019 primarily due to an 8% decline in access lines2021 and decreased $3.3 million during 20202021 compared to 2019. The number of local access lines in service directly affects the recurring revenue we generate from end users and continues to be impacted by the industry-wide decline in access lines. We expect to2020 as customers continue to experience erosion in voice connections due to competition fromchoose alternative technologies, including our own competing VoIP product.technology solutions. Subsidies Subsidies consist of both federal and state subsidies, which are designed to promote widely available, quality broadband services at affordable prices with higher data speeds in rural areas.areas and for low-income consumers across the country. Subsidies revenues decreased $2.2$36.4 million during 20212022 compared to 2020 and $0.4 million in 2020 compared to 20192021 primarily due to a reduction in state subsidies support. We anticipate future declines in federal subsidies support. In 2020, the FCC adopted an order establishing the Rural Digital Opportunity Fund (“RDOF”), which will resultresulted in a reduction in our annual support of approximately $42.2 million beginningas of January 1, 2022. However, state subsidies support increased $6.4 million due to a settlement recognized in 2022 for support temporarily suspended from the Texas High Cost Fund. Subsidies revenues decreased $2.2 million in 2021 compared to 2020 primarily due to a reduction in state subsidies support. See the “Regulatory Matters” section below for a further discussion of the subsidies we receive.
Network Access Services Network access services include interstate and intrastate switched access, network special access and end user access. Switched access revenues include access services to other communications carriers to terminate or originate long-distance calls on our network. Special access circuits provide dedicated lines and trunks to business customers and interexchange carriers. Network access services revenues decreased $15.8 million during 2022 compared to 2021 and $4.8 million duringin 2021 compared to 2020 and $12.8 million in 2020 compared to 2019 primarily as a result of the continuing decline in interstate rates, minutes of use, voice connections and carrier circuits; however,circuits as transition to Ethernet based transport solutions. In addition, for the year ended December 31, 2022, end user access revenue decreased due to a portionreduction in the Federal Universal Fund Contribution Factor during the first half of the decrease can be attributed to carriers shifting to our fiber Metro Ethernet product, contributing to the growth in that area.2022. Other Products and Services Other products and services include revenues from telephone directory publishing, video advertising, billing and support services and other miscellaneous revenues. We have entered into numerous Public Private Partnership agreements with several towns in New Hampshire to build new FTTPfiber to the home/premise (“FTTP”) Internet networks. The new town networks provide multi-gigabit broadband speeds of up to 1 Gbps to residential and commercial customers. Public Private Partnerships are a key component of Consolidated’s commitment to expand rural broadband access. Other products and services revenues decreased $6.7 million during 2022 compared to 2021 and increased $11.2 million during 2021 compared to 2020 primarily due to revenue recognition of Public Private Partnership construction projects during 2021. Other products2022 and services revenues decreased $0.3 million during 2020 compared to 2019 primarily due to a decline in telephone directory advertising revenues.2021. Operating Expenses Cost of Services and Products Cost of services and products, exclusive of depreciation and amortization decreased $22.9 million during 2022 compared to 2021. Video programming costs decreased as a result of a decline in video connections and the sale of the Kansas City operations in 2022. Access expense decreased related to additional fiber costs in 2021 for the Public Private Partnership agreements, as described above. Access expense also decreased as a result of access charges of $3.4 million incurred in 2021 related to the early termination of a contract obligation for fixed wireless services. In addition, required contributions to the Federal Universal Service Fund (“USF”) decreased as a result of a reduction in the annual funding rate for the first half of the year. Employee labor costs also declined due to an increase in capitalized costs for the fiber network expansion in 2022. These reductions in cost of services and products were offset in part by an increase in utility and fuel costs in the current year. In 2021, cost of services and products increased $9.0 million during 2021 compared to 2020 primarily due to an increase in access expense related to fiber costs for the Public Private Partnership agreements, as described above.agreements. In addition, during 2021, we incurred access charges of $3.4 million related to the early termination of a contract obligation for fixed wireless services. Required contributions to the Federal Universal Service Fund (“USF”)USF also increased in 2021 as a result of an increase in the annual funding rate. The increase in cost of services and products was also due to insurance recoveries received in 2020. However, employee labor costs declined due to an increase in capitalized costs for the fiber network expansion in 2021 as well as a reduction in headcount. Video programming costs decreased as a result of a decline in video connections. Contract labor costs and repair and maintenance expense also decreased as a result of operating efficiencies and a reduction in maintenance costs for utility poles.
In 2020, cost of services and products decreased $14.3 million compared to 2019 primarily due to a reduction in video programming costs as a result of a 10% decline in video connections, which was offset in part by an increase in programming costs per channel as costs continue to rise as a result of annual rate increases. Video programming costs are impacted by license fees charged by cable networks, the amount and quality of the content we provide and the number of video subscribers we serve. Cost of goods sold related to equipment sales also decreased from a decline in business system sales in 2020. Employee salaries and benefits declined in 2020 as a result of a reduction in staff through continued cost savings initiatives. Cost of services and products was also reduced by insurance recoveries received in 2020 for hurricane damage incurred in prior years. However, access expense increased due to new fiber and co-location costs as a result of an increase in commercial and carrier services.
Selling, General and Administrative Costs Selling, general and administrative costs increased $30.5 million during 2022 compared to 2021. Advertising expense increased due to greater promotional activities surrounding the continued marketing of our new fiber broadband products. In 2022, we incurred additional professional fees for various system enhancements and customer service improvement initiatives. In addition, employee labor costs were greater than prior year from additional headcount. Travel costs also increased related to the fiber network build and fewer travel restrictions as compared to the prior year. Real estate taxes increased primarily due to refunds and settlements received in 2021. Selling, general and administrative costs decreased $4.3 million during 2021 compared to 2020 primarily due to a reduction in property and real estate taxes as a result of property tax refunds and settlements received in 2021. However, advertising expense increased from additional radio and television advertising to promote our new Fidium brand and fiber broadband speeds.
Selling, general and administrative costs decreased $23.7 million during 2020 compared to 2019 primarily due a decline in integration and severance costs in connection with cost savings initiatives. Employee salaries and benefits also declined in 2020 as a result of a reduction in headcount. In addition, contract labor costs decreased as a result of operating efficiency improvements. However, customer acquisition costs increased related to the amortization of sales commissions following the adoption of ASC 606. Real estate taxes also increased due to property tax abatements received in 2019.
Acquisition and Other Transaction Costs There were no acquisition and other transaction costs incurred during 2022 or 2021. Acquisition and other transaction costs of $7.6 million includes costs incurred in 2020 were in connection with the investment agreement entered into with Searchlight in October 2020. Transaction costs consist primarily of legal, finance and other professional fees incurred in connection with the CPRs issued as part of the Searchlight transaction. Loss on Impairment of Assets Held for Sale In connection with the classification of substantially all of the assets of the Kansas City operations as held for sale in 2022, the carrying value of the net assets to be sold was reduced to their estimated fair value and we recognized an impairment loss of $131.7 million during the year ended December 31, 2022. During the year ended December 31, 2021, we recognized an impairment loss of $5.7 million related to the classification of the Ohio operations as assets held for sale. Loss on Disposal of Assets As described above, we recognized a loss of $16.8 million on the sale of substantially all of the assets of our Kansas City operations during the year ended December 31, 2022. We also recognized a loss of $8.3 million related to the potential sale of certain utility poles during the year ended December 31, 2022. However, during the year ended December 31, 2022, we completed the sale of certain non-strategic communication towers for cash proceeds of $21.0 million and recognized a pre-tax gain on the sale of $20.8 million. Depreciation and Amortization Depreciation and amortization expense decreased $0.4 million during 2022 compared to 2021 primarily due to a decline in amortization expense for customer relationships, which are amortized under the accelerated method. Depreciation expense also declined due to certain assets becoming fully depreciated during the year and the sale of the Ohio and Kansas City operations in 2022. These declines in depreciation and amortization expense were offset in part by ongoing capital expenditures related to the fiber network expansion and customer service improvements as well as success-based capital projects for consumer and commercial services. Depreciation and amortization expense decreased $24.3 million during 2021 compared to 2020 primarily due to a decline in amortization expense for customer relationships, which are amortized under the accelerated method. Depreciation expense also declined due to the expected sale of utility poles located in the state of New Hampshire in 2020 and certain acquired assets becoming fully depreciated or amortized. These declines in depreciation and amortization expense were offset in part by ongoing capital expenditures related to the fiber network expansion and customer service improvements. DepreciationReclassifications
Certain amounts in our 2021 and amortization expense decreased $56.3 million during 2020 comparedconsolidated financial statements have been reclassified to 2019 primarily due to acquired assets becoming fully depreciated or amortized. Depreciation expense also declined dueconform to the sale of utility poles located in the state of Vermont in 2019. These declines in depreciation and amortization expense were offset in part by ongoing capital expenditures2022 presentation, primarily related to CAF Phase II funding requirements and success-based capital projectsthe presentation of the financial results for consumer,our wireless partnership interests as discontinued operations. Certain operating revenues have also been reclassified to report commercial and carrier servicesrevenues separately. The change in the classification of these revenues had no impact to total operating revenues as well as network enhancements and customer service improvements. previously reported. Regulatory Matters Our revenues are subject to broad federal and/or state regulations, which include such telecommunications services as local telephone service, network access service and toll service. The telecommunications industry is subject to extensive federal, state and local regulation. Under the Communications Act and the Telecommunications Act, of 1996, federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices. At the federal level, the FCC generally exercises jurisdiction over facilities and services of local exchange carriers, such as our rural telephone companies, to the extent they are used to provide, originate or terminate interstate or international communications. The FCC has the authority to condition, modify, cancel, terminate or revoke our operating authority for failure to comply with applicable federal laws or FCC rules, regulations and policies. Fines or penalties also may be imposed for any of these violations. State regulatory commissions generally exercise jurisdiction over carriers’ facilities and services to the extent they are used to provide, originate or terminate intrastate communications. In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks. State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations. FCC Matters In general, telecommunications service in rural areas is costlier to provide than service in urban areas. The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain. By supporting the high-cost of operations in rural markets, USF subsidies promote widely available, quality telephone service at affordable prices in rural areas. Our annual support through the FCC’s Connect America Fund (“CAF”) Phase II funding was $48.1 million through 2021. The specific obligations associated with CAF Phase II funding included the obligation to serve approximately 124,500 locations by December 31, 2020 (with interim milestones of 40%, 60% and 80% completion by December 2017, 2018 and 2019, respectively); to provide broadband service with speeds of 10 Mbps downstream and 1 Mbps upstream; to achieve latency of less than 100 milliseconds; to provide data of at least 100 gigabytes per month; and to offer pricing reasonably comparable to pricing in urban areas. The Company met the buildout milestones and performance metrics requirements for 2017 through 2020 for all states where it received funding. We accepted CAF Phase II support in all of our operating states except Colorado and Kansas, where we declined the offered CAF Phase II support. We continued to receive annual frozen CAF Phase I support of $1.0 million in Colorado and Kansas until April 2019, when the FCC CAF Phase II auction assigned support to another provider.
The annual FCC price cap filing was made on June 16, 2021 and became effective on July 1, 2021. The net impact is a decrease of approximately $3.3 million in network access and CAF ICC support funding for the July 2021 through June 2022 tariff period.
In April 2019, the FCC announced plans for the RDOF, the next phase of the CAF program. The RDOF is a $20.4 billion fund to bring speeds of 25 Mbps downstream and 3 Mbps upstream to unserved and underserved areas of America. The FCC issued a Notice of Proposed Rulemaking at theirits August 2019 Open Commission Meeting. The order prioritizes terrestrial broadband as a bridge to rural 5G networks by providing a significant weight advantage to traditional broadband providers. Funding will occur in two phases with the first phase auctioning $16.0 billion and the second phase auctioning $4.4 billion, each to be distributed over 10 years. The minimum speed required to receive funding is 25 Mbps downstream and 3 Mbps upstream. CAF Phase II funding was extended through December 31, 2021 for price cap holding companies. The FCC issued the final census block groups with locations and reserve price. We filed theour RDOF short form application on July 14, 2020 and were listed as a qualified bidder by the FCC on October 13, 2020 and participated in the auction. The auction began on October 29, 2020 and ended on November 24, 2020. Consolidated won 246 census block groups serving in seven states. The bids we won are at the 1 Gbps downstream and 500 Mbps upstream speed tier to approximately 27,000 locations at an annual funding level of approximately $5.9 million, beginning January 1, 2022 through December 31, 2031, which will resultresulted in a reduction of approximately $42.2 million in annual support beginningas of January 1, 2022 through December 31, 2031.2022. Consolidated filed its long form application with supporting documents on January 29, 2021 and received final FCC approval on December 14, 2021. Consolidated began receiving RDOF funding in January 2022. The annual FCC price cap filing was made on June 16, 2022 and became effective on July 1, 2022. The net impact is an increase of approximately $2.0 million in network access and CAF ICC support funding for the July 2022 through June 2023 tariff period. State Matters
Texas
The Texas Universal Service Fund (“TUSF”) is administered by the National Exchange Carrier Association (“NECA”). The Texas Public Utilities Regulatory Act directs the Public Utilities Commission of Texas (“PUCT”) to adopt and enforce rules requiring local exchange carriers to contribute to a state universal service fund that helps telecommunications providers offer basic local telecommunications service at reasonable rates in high-cost rural areas. The TUSF is also used to reimburse telecommunications providers for revenues lost by providing lifeline service.reduced-cost services to low-income consumers. Our Texas rural telephone companies receive disbursements from this fund. Our Texas Incumbent Local Exchange Carriers (“ILECs”) have historically received support from two state funds, the small and rural incumbent local exchange company plan High Cost Fund (“HCF”) and the High Cost Assistance Fund (“HCAF”). In December 2020, the PUCT announced a TUSF funding shortfall and that it would be reducing all funded carriers support by 64% beginning January 15, 2021. The potential impact of the decision by the PUCT was a reduction in support we receive of approximately $4.0 million annually. The Texas Telephone Association (“TTA”), of which Consolidated is a member, and the Texas Statewide Telephone Cooperative, Inc. (“TSTCI”), filed a lawsuit seeking to overturn the PUCT decision as well as a temporary injunction on the funding reduction. On June 7, 2021, the court ruled in favor of the PUCT. The TTA and TSTCI filed a notice to appeal on July 2, 2021. We filed our brief on September 18, 2021, along with a Motion to Expedite. The defendant’s response was due October 21, 2021, unless the motion to expedite was granted. On June 30, 2022, the Third Court of Appeals in Austin ruled in favor of the rural phone companies requiring the state to increase the state surcharge to fully fund the TUSF and reimburse rural phone companies for the shortfall. The potential impactstate had 45 days from the ruling date to decide whether to appeal the decision. The state did not appeal the ruling and in October 2022, the TTA, TSTCI and PUCT reached an agreement on how the outstanding funding would be repaid. Monthly support payments resumed in full in October 2022 and the funding shortfall for the periods from January 2021 through September 2022 is being reimbursed to carriers evenly over a reduction15-month period. All reimbursements are expected to be completed by December 2023. During the year ended December 31, 2022, we recognized subsidy revenue of $6.3 million related to the funding owed for the shortfall period in support of approximately $4.0 million annually.accordance with the settlement agreement. Coronavirus Aid, Relief, and Economic Security Act Funding States are reviewingreceived opportunities to use federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) funding to assist in the deployment of broadband to unserved and underserved areas within their respective states. In 2020, New Hampshire allocated $50.0 million of CARES Act funding to fund broadband expansion to unserved and underserved locations throughout the state. Consolidated was granted up to $3.5 million to build high-speed Internet networks for homes and businesses in New Hampshire for the towns of Danbury, Springfield and Mason. The state funded 10% upfront with the remainder received upon completion of projects in December 2020. American Rescue Plan Act Funding President Biden signed the American Rescue Plan Act of 2021 (“ARPA”) on March 11, 2021. States have been allocated federal funds to be utilized for capital infrastructure, including broadband deployment, and are in various stages of implementation. We are working with the states and municipalities to participate in this broadband grant program. COVID-19 On March 13, 2020, the FCC issued aintroduced the Keep Americans Connected pledge to Keep America Connected through May 13, 2020, which was later extended toin effect through June 30, 2020. The pledge asked all communications providers to not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the coronavirusCOVID-19 pandemic; to waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and to open their Wi-Fi hotspots to any American who needs them. Consolidated signed on to the pledge through June 30, 2020. Several states took the FCC pledge a step further by not allowing any carrier to disconnectprohibiting carriers from disconnecting service within their state during the respective Governors’ declared statestates of emergency, which Consolidated also supported. Most state moratoriums on disconnections have expired; however, certainCertain states such as Washington and New York were extended to July 31, 2021 and December 31, 2021, respectively. The state moratoriums on disconnections have since expired. In February 2021, the FCC created the Emergency Broadband Benefit Program (“EBB”), a temporary program to help low income households stay connected during the COVID-19 pandemic by providing broadband service discounts for eligible households. Consolidated iswas a participant in this program. The EBB ended December 31, 2021. EBB recipients fully enrolled as of December 31, 2021 will automatically continuecontinued to receive their current monthly benefit until March 1, 2022 when the Affordable Connectivity Program takes its place. Affordable Connectivity Program The Affordable Connectivity Program (“ACP”) is a permanent broadband affordability program set up to replace the EBB. The ACP program helps ensure that households can afford the broadband access they need for work, school, healthcare and more. The benefit provides a discount of up to $30 per month toward internet service for eligible households and up to $75 per month for households on qualifying Tribal lands. Eligible households can also receive a one-time discount of up to $100 to purchase a laptop, desktop computer, or tablet from participating providers if they contribute more than $10 and less than $50 toward the purchase price. The ACP is limited to one monthly service discount and one device discount per household. The program begins fundingbegan distributing funds on March 1, 2022. Consolidated will beis participating in this program. Infrastructure Investment and Jobs Act The Infrastructure Investment and Jobs Act (the “Infrastucture“Infrastructure Act”) passedsigned on March 31,November 15, 2021 included $65.0 billion toward broadband.to support broadband infrastructure deployment and access across the United States. The broadband internet portion of the Infrastructure Act is aimed at increasing internet coverage for more universal access, including for rural, low-income, and tribal communities. 65% of this funding is set aside specifically for underserved communities. Additionally, this measure is designed to help make internet access more affordable and increase digital literacy. The Infrastructure Act set aside $42.5 billion for Broadband Equity, Access and Deployment (“BEAD”) grants. The National Telecommunications and Information Administration administers the grantBEAD program and has awarded grants to jurisdictions across the country, which in turn will use the funding to support service providers’ broadband deployment and access initiatives. The FCC currently is inundertaking a broadband availability and quality mapping project, the processresults of soliciting comments before issuing final rules.which may impact the ultimate distribution of BEAD funding. Other Regulatory Matters We are also subject to a number of regulatory proceedings occurring at the federal and state levels that may have a material impact on our operations. The FCC and state commissions have authority to issue rules and regulations related to our business. A number of proceedings are pending or anticipated that are related to such telecommunications issues as competition, interconnection, access charges, ICC, broadband deployment, consumer protection and universal service reform. Some proceedings may authorize new services to compete with our existing services. Proceedings that relate to our cable television operations include rulemakings on set top boxes, carriage of programming, industry consolidation and ways to promote additional competition. There are various on-going legal challenges to the scope or validity of FCC orders that have been issued. As a result, it is not yet possible to fully determine the impact of the related FCC rules and regulations on our operations. Non-Operating Items Interest Expense, Net Interest expense, net of interest income, decreased $50.2 million during 2022 compared to 2021. In 2021, we recognized interest expense, including amortized costs, of $39.3 million on the Note issued to Searchlight as part of the investment agreement entered into in October 2020. The Note was converted into perpetual preferred stock in conjunction with the closing of the second stage of the Searchlight investment in December 2021. In addition, the maturity of an interest rate swap agreement in July 2021 reduced interest expense $6.3 million during the year ended December 31, 2022 as compared to 2021. Interest expense was also reduced by an increase in interest income of $3.0 million from additional cash equivalents and short-term investments in 2022. Interest expense, net of interest income, increased $31.6 million during 2021 compared to 2020. Interest expense, including amortized costs, on the Note issued to Searchlight as part of the investment agreement entered into in October 2020 increased $29.2 million in 2021. Interest expense, net of interest income, increased $6.9 million during 2020 compared to 2019 primarily due to additional interest of $7.9 million recognized on the Note issued to Searchlight as part of the investment agreement entered into in October 2020. Interest on our outstanding senior notes also increased in 2020 due to the issuance of $750.0 million in 6.50% Senior Notes due 2028, which were used in part, to redeem the then-remaining amount of our outstanding 6.50% Senior Notes due 2022 as part of the refinancing of our long-term debt in October 2020 as described in the “Liquidity and Capital Resources” section below. However, interest expense was reduced in part by a reduction in outstanding debt under our revolving credit facility and a decline in variable interest rates in 2020.
Loss on Extinguishment of Debt As described in the “Liquidity and Capital Resources” section below, we incurred a loss on the extinguishment of debt of $17.1 million in connection with the repayment of $397.0 million of outstanding term loans under our credit agreement and the refinancing of our credit agreement during the year ended December 31, 2021. In 2020, we incurred a loss on the extinguishment of debt of $18.3 million in connection with the refinancing of our credit agreement and the redemption of our 6.50% Senior Notes due 2022 during the year ended December 31, 2020. Change in Fair Value of Contingent Payment Obligations Our contingent payment obligations were measured at fair value until they were converted into shares of the Company’s common stock. During the years ended December 31, 2021 and 2020, we recognized a loss of $86.5 million and a gain of $23.8 million, respectively, on the change in the fair value of the contingent payment rights issued to Searchlight. Other Income Other income, net, increased $12.1 million during 2022 compared to 2021. Pension and post-retirement benefit expense decreased $7.6$8.5 million as a result of a reduction in annual expense and a pension settlement charge of $5.9 million recognized during the year ended December 31, 2021. See Note 13 to the consolidated financial statements for a more detailed discussion regarding our pension and other post-retirement plans. In addition, in 2021, we recognized a loss of $3.6 million on the disposition of wireless spectrum licenses. Other income decreased $8.8 million during 2021 compared to 2020. In 2021, we recognized a loss of $3.6 million on the disposition of wireless spectrum licenses. In 2020, we recognized a gain of $3.7 million on the sale of our 39 GHz wireless spectrum licenses as part of the FCC’s efforts to reclaim broadcast TV spectrum for wireless use. Pension and post-retirement benefit expense increased $0.5 million as the reduction in annual expense was offset by a pension settlement charge of $5.9 million recognized during the year ended December 31, 2021 as a result of the transfer of the pension liability for a select group of retirees to an annuity provider. See Note 13 to the consolidated financial statements for a more detailed discussion regarding our pension and other post-retirement plans. Investment income increased $1.2 million during 2021 from our wireless partnership interests.
Other income increased $23.6 million during 2020 compared to 2019 primarily due to a decrease in pension and post-retirement benefit expense of $15.5 million. During the year ended December 31, 2019, we recognized a pension settlement charge of $6.7 million as a result of the transfer of the pension liability for a select group of retirees to an annuity provider. Investment income increased $3.0 million during 2020 from our wireless partnership interests. In addition, during 2020, we recognized a gain of $3.7 million on the sale of our 39 GHz wireless spectrum licenses as part of the FCC’s efforts to reclaim broadcast TV spectrum for wireless use.
Income Taxes Income taxes decreased $4.6$23.8 million in 2022 compared to 2021. Our effective tax rate was 13.2% for 2022 compared to 2.2% for 2021. As a result of the Kansas City and Ohio transactions, we recorded an increase of $23.2 million and $4.2 million, respectively, to our current tax expense in 2022 related to the write-down of noncash goodwill included in the transactions that is not deductible for tax purposes. For the Ohio transaction, we recorded an increase to our current tax expense of $1.5 million related to the write-down of noncash goodwill in 2021. The investment made by Searchlight in 2020 is treated as a contribution of equity for federal tax purposes. Accordingly, the impact of the non-cash PIK interest expense, discount and issuance costs, and fair value adjustments on the CPR are not recognized for federal income tax purposes, resulting in an increase of $33.1 million to our current tax expense for 2021. In 2022 and 2021, we placed additional valuation allowances on deferred tax assets related to state NOL and state tax credit carryforwards of $0.6 million and $1.7 million, respectively. We also recognized approximately $0.1 million of tax benefit in the fourth quarter of 2022 to adjust our 2021 provision to match our 2021 returns compared to $2.6 million of tax benefit in the fourth quarter of 2021 to adjust our 2020 provision to match our 2020 returns. Exclusive of these discrete adjustments, our effective tax rate for 2022 would have been approximately 25.6% compared to 25.3% for 2021. In addition, for 2022 and 2021, the effective tax rate differed from the federal and state statutory rates due to various permanent income tax differences and differences in allocable income for the Company’s state tax filings. Income taxes decreased $4.8 million in 2021 compared to 2020. Our effective tax rate was (6.3)%2.2% for 2021 compared to 22.7%22.2% for 2020. In 2021 and 2020, we placed additional valuation allowances on deferred tax assets related to state NOL and state tax credit carryforwards of $1.7 million and $1.3 million, respectively. On September 22, 2021, we entered intoAs a definitive agreement to sell substantially allresult of the assets of our non-core, rural ILEC business located in Ohio (the “Ohio transaction”). As a result,transaction, we recorded an increase to our current tax expense of $1.5 million related to the $5.7 million impairment loss of noncash goodwill that is not deductible for tax purposes. We also recognized approximately $2.6 million of tax benefit in the fourth quarter of 2021 to adjust our 2020 provision to match our 2020 returns compared to $0.5 million of tax benefit in the fourth quarter of 2020 to adjust our 2019 provision to match our 2019 returns. In addition, the investment made by Searchlight in 2020 is treated as a contribution of equity for federal tax purposes. Accordingly, the impact of the non-cash PIK interest expense, discount and issuance costs, and fair value adjustments on the CPR are not recognized for federal income tax purposes, resulting in an increase of $33.1 million and a decrease of $1.6 million to our current tax expense for 2021 and 2020, respectively. Exclusive of these discrete adjustments, our effective tax rate for 2021 would have been approximately 25.3% compared to 41.2% for 2020. In addition, for 2021 and 2020, the effective tax rate differed from the federal and state statutory rates due to various permanent income tax differences and differences in allocable income for the Company’s state tax filings. Exclusive of these discrete adjustments, our effective tax rate for 2021 would have been approximately 26.8% compared to 24.8% for 2020.
Income taxes increased $14.6 million in 2020 compared to 2019. The increase was primarily related to the change in pretax income. Our effective tax rate was 22.7% for 2020 compared to 15.7% for 2019. In 2020 and 2019, we placed additional valuation allowances on deferred tax assets related to state NOL and state tax credit carryforwards of $1.3 million and $1.1 million, respectively. The investment transaction with Searchlight on October 2, 2020 resulted in a net decrease to our tax provision of $1.6 million due to various permanent income taxes differences. In addition, for 2020 and 2019, the effective tax rate differed from the federal and state statutory rates due to various permanent income tax differences and differences in allocable income for the Company’s state tax filings. Exclusive of discrete adjustments, our effective tax rate for 2020 would have been approximately 24.8% compared to 27.1% for 2019.
Non-GAAP Measures In addition to the results reported in accordance with US GAAP, we also use certain non-GAAP measures such as EBITDA, Adjusted EBITDA from continuing operations and Adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends. These financial measures are not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute for net income (loss) as a measure of performance and net cash provided by operating activities as a measure of liquidity. They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies. Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below. EBITDA is defined as net earnings before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below. These measures are a common measure of operating performance in the telecommunications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash. The following tables are a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA for the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | Year Ended December 31, | | (In thousands, unaudited) | | 2021 | | 2020 | | 2019 | | | | 2022 | | 2021 | | 2020 | | Net income (loss) | | $ | (106,693) | | $ | 37,302 | | $ | (19,931) | | | Income (loss) from continuing operations | | | | $ | (177,704) | | $ | (139,127) | | $ | 5,874 | | Add (subtract): | | | | | | | | | | | | | | | | | | | | | | Interest expense, net of interest income | | | 175,195 | | | 143,591 | | | 136,660 | | | | | 124,978 | | | 175,195 | | | 143,591 | | Income tax expense (benefit) | | | 6,279 | | | 10,936 | | | (3,714) | | | | | (27,058) | | | (3,132) | | | 1,679 | | Depreciation and amortization | | | 300,597 | | | 324,864 | | | 381,237 | | | | | 300,166 | | | 300,597 | | | 324,864 | | EBITDA | | | 375,378 | | | 516,693 | | | 494,252 | | | | | 220,382 | | | 333,533 | | | 476,008 | | | | | | | | | | | | | | | | | | | | | | | | Adjustments to EBITDA: | | | | | | | | | | | | | | | | | | | | | | Other, net (1) | | | (30,934) | | | (30,993) | | | (8,847) | | | | | 17,347 | | | 10,911 | | | 9,692 | | Investment distributions (2) | | | 43,040 | | | 41,529 | | | 35,809 | | | Loss (gain) on extinguishment of debt | | | 17,101 | | | 18,264 | | | (4,510) | | | Loss on disposal of assets | | | | | 4,233 | | | — | | | — | | Loss on extinguishment of debt | | | | | — | | | 17,101 | | | 18,264 | | Loss on impairment | | | 5,704 | | | — | | | — | | | | | 131,698 | | | 5,704 | | | — | | Change in fair value of contingent payment rights | | | 86,476 | | | (23,802) | | | — | | | | | — | | | 86,476 | | | (23,802) | | Non-cash, stock-based compensation | | | 10,097 | | | 7,533 | | | 6,836 | | | | | 10,755 | | | 10,097 | | | 7,533 | | Adjusted EBITDA from continuing operations | | | | | 384,415 | | | 463,822 | | | 487,695 | | Investment distributions from discontinued operations | | | | | 29,165 | | | 43,040 | | | 41,529 | | Adjusted EBITDA | | $ | 506,862 | | $ | 529,224 | | $ | 523,540 | | | | $ | 413,580 | | $ | 506,862 | | $ | 529,224 | |
| (1) | Other, net includes the equity earnings from our investments, dividend income, income attributable to noncontrolling interests in subsidiaries, acquisition and transaction related costs including integration and severance, non-cash pension and post-retirement benefits and certain other miscellaneous items. |
(2) | Includes all cash dividends and other cash distributions received from our investments. |
Liquidity and Capital Resources Outlook and Overview Our operating requirements have historically been funded from cash flows generated from our business and borrowings under our credit facilities. We expect that our future operating requirements will continue to be funded from cash flows from operating activities, existing cash and cash equivalents, proceeds from sales of nonstrategic assets and, if needed, from borrowings under our revolving credit facility and our ability to obtain future external financing. We anticipate that we will continue to use a substantial portion of our cash flow to fund capital expenditures for our accelerated fiber network expansion and growth plan and to invest in future business opportunities. The following table summarizes our cash flows: | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | Years Ended December 31, | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Cash flows provided by (used in): | | | | | | | | | | | | | | | | | | | | | Operating activities | | $ | 318,867 | | $ | 364,980 | | $ | 339,096 | | | | | | | | | | | | Continuing operations | | | $ | 194,545 | | $ | 275,827 | | $ | 323,451 | | Discontinued operations | | | | 29,165 | | | 43,040 | | | 41,529 | | Investing activities | | | (586,443) | | | (210,066) | | | (217,819) | | | | | | | | | | | | Continuing operations | | | | (466,728) | | | (586,443) | | | (210,066) | | Discontinued operations | | | | 482,966 | | | — | | | — | | Financing activities | | | 211,650 | | | (11,748) | | | (118,481) | | | | (13,731) | | | 211,650 | | | (11,748) | | Increase (decrease) in cash and cash equivalents | | $ | (55,926) | | $ | 143,166 | | $ | 2,796 | | | $ | 226,217 | | $ | (55,926) | | $ | 143,166 | |
Cash Flows Provided by Operating Activities Net cash provided by operating activities from continuing operations was $318.9$194.5 million in 2021,2022, a decrease of $46.1$81.3 million compared to the same period in 2021. Cash flows provided by operating activities decreased in part due to a decline in earnings as a result of a decrease in operating revenue and a reduction in our annual federal subsidies support of approximately $42.2 million. In addition, cash paid for income taxes increased $8.7 million in 2022. These reductions in cash provided by operating activities were offset in part by a decrease in cash contributions to our defined benefit pension plan of $10.7 million in 2022 compared to 2021. In 2021, net cash provided by operating activities from continuing operations was $275.8 million, a decrease of $47.6 million compared to the same period in 2020. Cash flows provided by operating activities decreased in part due to a decline in earnings as a result of a decrease in operating revenue. In addition, in response to the potential impacts of the COVID-19 pandemic in 2020, we deferred approximately $12.0 million of certain employer payroll tax payments under the CARES Act. The portion of the taxes deferred until 2021 of approximately $6.0 million were paid during the year ended December 31, 2021. These reductions in cash provided by operating activities were offset in part by a decrease in cash paid for interest and cash contributions to our defined benefit pension plan of $6.1 million and $3.8 million, respectively, in 2021 compared to 2020. In 2020, net cash provided by operating activities was $365.0 million, an increase of $25.9 million compared to the same period in 2019 primarily as a result of an increase in earnings primarily from a reduction in operating expenses through cost management initiatives and improved operating efficiencies. Cash distributions received from our wireless partnerships also increased $5.7 million in 2020 compared to 2019. Interest payments decreased approximately $8.6 million from prior year due a decrease in variable interest rates in 2020. In response to the potential impacts of the COVID-19 pandemic, we elected the deferral of certain employer payroll tax payments under the CARES Act of approximately $12.0 million during 2020. In addition, cash contributions to our defined benefit pension plans decreased $3.5 million in 2020 compared to 2019. However, income tax refunds decreased approximately $7.8 million from 2019.
Cash Flows Used In Investing Activities Net cash used in investing activities for continuing operations was $466.7 million and $586.4 million in 2022 and 2021, respectively, and consisted primarily of cash used for capital expenditures, the purchase and maturity of short-term investments and proceeds received from business dispositions and the purchasesale of short-term investments. assets. Capital expenditures continue to be our primary recurring investing activity and were $620.0 million, $480.3 million and $217.6 million in 2022, 2021 and $232.2 million in 2021, 2020, and 2019, respectively. Our fiber expansion plan contributed to the increase in capital expenditures in 2022 and 2021, which included the upgrade of more than 403,000 and 330,000 fiber passings, respectively, with multi-Gig data speeds. Capital expenditures for 20222023 are expected to be $475.0$425.0 million to $495.0$445.0 million, which will be used to support success-based capital projects for commercial, carrier and consumer initiatives and for our planned fiber projects and broadband network expansion, which will include the upgrade in 20222023 of approximately 400,000at least 225,000 fiber passings. We expect to continue to invest in the enhancement and expansion of our fiber network in order to retain and acquire more customers through a broader set of products and an expanded network footprint. In 2021,2022, we purchased $175.8received $327.4 million of proceeds from the maturity and sale of investments, which was offset in part by the purchase of $302.9 million in short-term investments consisting primarily of held-to-maturity debt securities with original maturities of three to twelve months,months. In 2021, we purchased $175.8 million in short-term investments, offset by the maturity of investments of $66.2 million. In 2022, we completed the sale of substantially all of the assets of CCOC, our non-core, rural ILEC business located in Ohio, for cash proceeds, net of selling costs, of $25.2 million. We also received net cash proceeds of approximately $80.6 million from the sale of substantially all the assets of our Kansas City operations. Cash proceeds from the sale of assets decreased $3.6increased $19.4 million in 20212022 compared to 2020. In 2020, we received2021, primarily from cash proceeds of $3.7approximately $21.0 million onfor the sale of certain non-strategic communication towers in 2022. Net cash provided by discontinued operations of $483.0 million consists of the net proceeds from the sale of our 39 GHzfive limited wireless spectrum licenses as part ofpartnership interests in 2022. The proceeds from the FCC’s spectrum recovery efforts.sale are expected to be used to support the fiber expansion plan. Cash Flows Provided by (Used In) Financing Activities Net cash used in financing activities consists primarily of our proceeds from and principal payments on long-term borrowings and repurchases of debt. Long-term Debt The following table summarizes our indebtedness as of December 31, 2021:2022: | | | | | | | | | | | | | | | | | (In thousands) | | Balance | | Maturity Date | | Rate(1) | | | Balance | | Maturity Date | | Rate(1) | | 6.50% Senior Notes | | $ | 750,000 | | October 1, 2028 | | 6.50 | % | | $ | 750,000 | | October 1, 2028 | | 6.50 | % | 5.00% Senior Notes | | | 400,000 | | October 1, 2028 | | 5.00 | % | | | 400,000 | | October 1, 2028 | | 5.00 | % | Term loans, net of discount | | | 989,567 | | October 2, 2027 | | LIBOR plus 3.50 | % | | | 991,176 | | October 2, 2027 | | LIBOR plus 3.50 | % | Finance leases | | | 24,990 | | | | 5.55 | % (2) | | | 35,746 | | | | 6.60 | % (2) | | | $ | 2,164,557 | | | | | | | $ | 2,176,922 | | | | | |
(1)At December 31, 2021,2022, the 1-month LIBOR applicable to our borrowings was 0.10%4.38%. The term loans are subject to a 0.75% LIBOR floor. (2)Weighted-average rate. Credit Agreement On October 2, 2020, the Company, through certain of its wholly-owned subsidiaries, entered into a Credit Agreement with various financial institutions (the “Credit Agreement”) to replace the Company’s previous credit agreement in its entirety. The Credit Agreement consisted of term loans in the aggregate amount of $1,250.0 million (the “Initial Term Loans”) and a revolving loan facility of $250.0 million. The Credit Agreement also includes an incremental loan facility which provides the ability to borrow, subject to certain terms and conditions, incremental loans in an aggregate amount of up to the greater of (a) $300.0 million plus (b) an amount which would not cause its senior secured leverage ratio not to exceed 3.70:1.00 (the “Incremental Facility”). Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its subsidiaries, subject to certain exceptions. The Term Loans were issued in an original aggregate principal amount of $1,250.0 million with a maturity date of October 2, 2027 and contained an original issuance discount of 1.5% or $18.8 million, which is being amortized over the term of the loan. Prior to amendments to the Credit Agreement, as described below, the Initial Term Loans required quarterly principal payments of $3.1 million, which commenced December 31, 2020, and bore interest at a rate 4.75% plus the London Interbank Offered Rate (“LIBOR”) subject to a 1.00% LIBOR floor. On January 15, 2021, the Company entered into Amendment No. 1 to the Credit Agreement in which we borrowed an additional $150.0 million aggregate principal amount of incremental term loans (the “Incremental Term Loans”). The Incremental Term Loans have terms and conditions identical to the Initial Term Loans including the same maturity date and interest rate. The Initial Term Loans and Incremental Term Loans, collectively (the “Term Loans”) will comprise a single class of term loans under the Credit Agreement. On March 18, 2021, the Company repaid $397.0 million of the outstanding Term Loans with the net proceeds received from the issuance of $400.0 million aggregate principal amount of 5.00% senior secured notes due 2028 (the “5.00% Senior Notes”), as described below. The repayment of the Term Loans was applied to the remaining principal payments in direct order of maturity, thereby eliminating the required quarterly principal payments through the remaining term of the loan. In connection with the repayment of the Term Loans, we recognized a loss on extinguishment of debt of $12.0 million during the year ended December 31, 2021. On April 5, 2021, the Company, entered into a second amendment to the Credit Agreement (the “Second Amendment”) to refinance the outstanding Term Loans of $999.9 million. The terms and conditions of the Credit Agreement remain substantially similar and unchanged except with respect to the interest rate applicable to the Term Loans and certain other provisions. As a result of the Second Amendment, the interest rate of the Term Loans was reduced to 3.50% plus LIBOR subject to a 0.75% LIBOR floor. The maturity date of the Term Loans of October 2, 2027 remains unchanged. In connection with entering into the Second Amendment, we recognized a loss of $5.1 million on the extinguishment of debt during the year ended December 31, 2021. The revolving credit facility has a maturity date of October 2, 20252027 and an applicable margin (at our election) of 4.00% for LIBOR-basedSOFR-based borrowings or 3.00% for alternate base rate borrowings, with a 0.25% reduction in each case if the consolidated first lien leverage ratio, as defined in the Credit Agreement, does not exceed 3.20 to 1.00. As of December 31, 20212022 and 2020,2021, there were no borrowings outstanding under the revolving credit facility. Stand-by letters of credit of $25.1$24.5 million were outstanding under our revolving credit facility as of December 31, 2021.2022. The stand-by letters of credit are renewable annually and reduce the borrowing availability under the revolving credit facility. As of December 31, 2021, $224.92022, $225.5 million was available for borrowing under the revolving credit facility. On November 22, 2022, the Company, entered into Amendment No. 3 to the Credit Agreement (the “Third Amendment”) to, among other things, extend the maturity of the revolving credit facility by two years from October 2, 2025 to October 2, 2027, subject to springing maturity on April 2, 2027 if the Term Loans, as of April 1, 2027, are scheduled to mature earlier than March 31, 2028. The Third Amendment also relaxed the revolving credit facility’s consolidated first lien leverage maintenance covenant, as described below, through June 30, 2025 to 6.35:1.00 from 5.85:1.00. In connection and simultaneously with the effectiveness of the Third Amendment, Searchlight III CVL, L.P., an affiliate of Searchlight and the sole holder of shares of the Company's Series A Preferred Stock, delivered a waiver to the Company waiving, until October 2, 2027, the restriction under the Certificate of Designations of Series A Perpetual Preferred Stock, dated December 7, 2021 precluding the Company from electing not to declare and pay any cash dividends with respect to the Series A Preferred Stock after October 2, 2025, provided that any dividend not declared and fully paid in cash, whether during the period of such waiver or otherwise, shall accrue as set forth in the Certificate of Designations. The weighted-average interest rate on outstanding borrowings under our credit facilities was 4.25%7.63% and 5.75%4.25% at December 31, 20212022 and 2020,2021, respectively. Interest is payable at least quarterly.
Financing Costs
In connection with entering into the Credit Agreement in October 2020, fees of $29.1 million were capitalized as deferred debt issuance costs. These capitalized costs are amortized over the term of the debt and are included as a component of interest expense in the consolidated statements of operations. We also incurred a loss on the extinguishment of debt of $12.3 million during the year ended December 31, 2020 related to the repayment of the outstanding term loan under the previous credit agreement.
Credit Agreement Covenant Compliance The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue certain capital stock. We have agreed to maintain certain financial ratios, including a maximum consolidated first lien leverage ratio, as defined in the Credit Agreement. Among other things, it will be an event of default, with respect to the revolving credit facility only, if our consolidated first lien leverage ratio is greater than 6.35:1.00 as of the end of any fiscal quarter, if on such date the testing threshold is greater than 5.85:1.00.met. The testing threshold is met if the aggregate amount of our borrowings outstanding under the revolving credit facility exceeds 35%. As of December 31, 2021,2022, the testing threshold was not met and our consolidated first lien leverage ratio under the Credit Agreement was 4.14:4.40:1.00. As of December 31, 2021,2022, we were in compliance with the Credit Agreement covenants. Senior Notes
6.50% Senior Notes due 2028
On October 2, 2020, we completed an offering of $750.0 million aggregate principal amount of 6.50% unsubordinated secured notes due 2028 (the “6.50% Senior Notes”). The 6.50% Senior Notes were priced at par and bear interest at a rate of 6.50%, payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2021. The 6.50% Senior Notes mature on October 1, 2028. Deferred debt issuance costs of $17.0 million incurred in connection with the issuance of the 6.50% Senior Notes in 2020 are being amortized using the effective interest method over the term of the Senior Notes. The net proceeds from the issuance of the 6.50% Senior Notes were used to redeem our then outstanding $440.5 million aggregate principal amount of 6.50% Senior Notes due in October 2022 at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest through the redemption date, to repay a portion of the outstanding borrowings under the previous credit agreement as part of the refinancing in October 2020 and to pay related fees and expenses. On March 18, 2021, we issued $400.0 million aggregate principal amount 5.00% Senior Notes, together with the 6.50% Senior Notes (the “Senior Notes”). The 5.00% Senior Notes were priced at par and bear interest at a rate of 5.00% per year, payable semi-annually on April 1 and October 1 of each year, beginning on October 1, 2021. The 5.00% Senior Notes will mature on October 1, 2028. Deferred debt issuance costs of $3.8 million incurred in connection with the issuance of the 5.00% Senior Notes are being amortized using the effective interest method over the term of the Senior Notes. The net proceeds from the issuance of the 5.00% Senior Notes were used to repay $397.0 million of the Term Loans outstanding under the Credit Agreement. Senior Notes Covenant Compliance Subject to certain exceptions and qualifications, the indenture governing the Senior Notes contains customary covenants that, among other things, limits the Company and its restricted subsidiaries’ ability to: incur additional debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions. The indenture also contains customary events of default. At December 31, 2021,2022, the Company was in compliance with all terms, conditions and covenants under the indenture governing the Senior Notes.
Redemption of 6.50% Senior Notes due 2022
On October 2, 2020, a notice of redemption was issued to holders of our then outstanding $440.5 million aggregate principal amount of 6.50% Senior Notes due in October 2022 (the “2022 Notes”) to redeem all outstanding 2022 Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest through the redemption date. A portion of the proceeds from the issuance of the Senior Notes was deposited with the trustee to pay and discharge the entire indebtedness under the 2022 Notes. The 2022 Notes were redeemed on November 2, 2020, in accordance with the notice of redemption.
In connection with the redemption of the 2022 Notes, we recognized a loss on extinguishment of debt of $5.9 million during the year ended December 31, 2020. During the year ended December 31, 2019, we repurchased $55.0 million of the aggregate principal amount of the 2022 Notes for $49.8 million and recognized a gain on extinguishment of debt of $4.5 million.
Finance Leases We lease certain facilities and equipment under various finance leases which expire between 20222023 and 2040. As of December 31, 2021,2022, the present value of the minimum remaining lease commitments was approximately $25.0$35.7 million, of which $8.0$12.8 million was due and payable within the next twelve months. The leases require total remaining rental payments of $27.9$39.7 million as of December 31, 2021.2022. Searchlight Investment In connection with the Investment Agreement entered into in September 2020, Searchlight invested a total of $425.0 million in Consolidated and holds a combination of perpetual Series A preferred stock and approximately 35%34% of the Company’s outstanding common stock.stock as of December 31, 2022. On October 2, 2020, we closed on the first stage of the strategic investment of $350.0 million with Searchlight. The second stage of the investment was completed on December 7, 2021 and we received the additional investment of $75.0 million from Searchlight. On December 7, 2021, we issued 434,266 shares of Series A Preferred Stock to Searchlight. Dividends on each share of Series A Preferred Stock accrue daily on the liquidation preference at a rate of 9.0% per annum and will be payable semi-annually in arrears on January 1 and July 1 of each year. Dividends are payable until October 2, 20252027 at our election, either in cash or in-kind through an accrual of unpaid dividends, which are automatically added to the liquidation preference; and after October 2, 2025,2027, solely in cash. The liquidation preference at any given time is $1,000 per share. As of December 31, 2022 and 2021, the liquidation preference of the Series A Preferred Stock was $477.0 million and $436.9 million, respectively, which includes accrued and unpaid dividends of $20.7 million and $2.7 million.million, respectively. The Company intends to exercise the PIK dividend option on the Series A Preferred Stock through at least 2022.2025. Dividends We paid $55.4 million in dividend payments to shareholders during 2019. On April 25, 2019, we announced the elimination of the payment of quarterly dividends on our stock beginning in the second quarter of 2019 in order to focus on deleveraging, fiber network investments and create long-term value for our stockholders. Future dividend payments, if any, are at the discretion of our Board of Directors. Changes in our dividend program will depend on our earnings, capital requirements, financial condition, debt covenant compliance, expected cash needs and other factors considered relevant by our Board of Directors.
Sufficiency of Cash Resources The following table sets forth selected information regarding our financial condition: | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | (In thousands, except for ratio) | | 2021 | | 2020 | | | 2022 | | 2021 | | Cash and cash equivalents and short-term investments | | $ | 210,436 | | $ | 155,561 | | | $ | 413,803 | | $ | 210,436 | | Working capital | | | 142,270 | | | 70,191 | | | | 331,240 | | | 142,270 | | Current ratio | | | 1.50 | | | 1.26 | | | | 2.24 | | | 1.50 | |
Our net working capital position improved $72.1$189.0 million as of December 31, 20212022 compared to December 31, 20202021. Cash, cash equivalents and short-term investments increased $203.4 million primarily as a result of an increasethe net cash proceeds from the sale of our limited wireless partnership interests and the Kansas City operations, which was reduced in cash, cash equivalents and short-term investmentspart by capital expenditures for the fiber build plan in 2022. Working capital also improved from a decrease in accounts payable of $54.9 million. At$7.9 million primarily related to the timing of capital expenditures for the fiber build plan. Accrued compensation also declined $7.4 million as of the result of the payment in 2022 of certain employer payroll taxes of $6.0 million which were deferred under the CARES Act in 2020. However, working capital at December 31, 2021 working capital also included net assets classified as held for sale of $25.9$26.0 million related to the sale of substantially all of the assets of our ILEC business located in Ohio. Prepaid expenses and other current assets increased $10.4 million. Working capital also improved from a declineOhio, which was completed in the current portionfirst quarter of long-term debt and finance lease obligations of $9.6 million as a result of the prepayment in March 2021 of $397.0 million of the outstanding Term Loans, which eliminated the required quarterly principal payments through the remaining term of the loan. However, working capital was reduced by an increase in accounts payable of $15.7 million and accrued expense of $15.5 million at December 31, 2021 related to the timing of capital expenditures for the fiber build plan. 2022. Our most significant use of funds in 20222023 is expected to be for: (i) capital expenditures of between $425.0 million and $445.0 million; and (ii) interest payments on our indebtedness of between $123.0$145.0 million and $127.0 million; and (ii) capital expenditures of between $475.0 million and $495.0$155.0 million. The recent refinancing of our capital structure including the availability of approximately $225.5 million on our revolving credit facility combined with the Searchlight investmentnet proceeds from asset divestitures in 2022 provides us the capital and financial flexibility to fundre-invest in our accelerated fiber network expansion and growth plans. In the future, our ability to use cash may be limited by our other expected uses of cash and our ability to incur additional debt will be limited by our existing and future debt agreements. On March 27, 2020, the CARES Act was enacted by the U.S. government as an emergency economic stimulus package that includes spending and tax breaks to strengthen the US economy and fund a nationwide effort to curtail the economic effects of COVID-19. The CARES Act included, among other things, deferral of certain employer payroll tax payments. In 2020, we deferred the payment of approximately $12.0 million for the employer portion of Social Security taxes otherwise due in 2020 with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022. The portion of the taxes deferred until 2021 were paid during the third quarter of 2021 and we paid the remaining portion during the fourth quarter of 2022. We believe that cash flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for at least the next twelve months to fund our current anticipated uses of cash. After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance, cash flow and cash flow.potential additional divestitures of non-core assets. Our ability to fund these expected uses from the results of future operations will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control. Due to the uncertainty and unpredictability related to the potential impacts of the COVID-19 pandemic on our business, we will continue to closely manage our cash and liquidity. To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities. There can be no assurance that we will be able to generate sufficient cash flows from operations in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash. Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures, which could have a material adverse effect on our financial condition and the results of operations. We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries’ ability to pay dividends or advance cash in any other manner to us. Surety Bonds In the ordinary course of business, we enter into surety, performance and similar bonds as required by certain jurisdictions in which we provide services. As of December 31, 2021,2022, we had approximately $6.4$6.6 million of these bonds outstanding. Contractual Obligations As of December 31, 2021,2022, our most significant contractual obligations include the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In thousands) | | Short-Term | | Long-Term | | Total | | | Short-Term | | Long-Term | | Total | | Long-term debt | | $ | — | | $ | 2,149,875 | | $ | 2,149,875 | | | $ | — | | $ | 2,149,875 | | $ | 2,149,875 | | Interest on long-term debt obligations | | | 122,523 | | | 626,364 | | | 748,887 | | | | 144,788 | | | 651,423 | | | 796,211 | | Finance leases | | | 9,020 | | | 18,890 | | | 27,910 | | | | 14,742 | | | 24,953 | | | 39,695 | | Operating leases | | | 7,726 | | | 24,402 | | | 32,128 | | | | 6,659 | | | 28,687 | | | 35,346 | | Purchase obligations | | | 93,122 | | | 24,276 | | | 117,398 | | | | 134,138 | | | 29,566 | | | 163,704 | |
Our long-term debt obligations represent our most significant contractual obligations. The partial repayment of the Term Loans in March 2021 eliminated all future required quarterly principal payments for the remaining term of the loan. We currently have no maturities on our outstanding long-term debt until 2027. The long-term debt obligation represents the maturity of the Term Loans in 2027 and the Senior Notes in 2028. Interest on long-term debt includes amounts due on fixed and variable rate debt. As the rates on our variable debt are subject to change, the rates in effect at December 31, 20212022 were used in determining our future interest obligations. Other contractual obligations consist primarily of purchase obligations and finance and operating leases for facilities, land, underground conduit, colocations, and equipment used in our operations. Unrecorded purchase obligations include binding commitments for future capital expenditures and service and maintenance agreements to support various computer hardware and software applications and certain equipment. If we terminate any of the contracts prior to their expiration date, we wouldmay be liable for minimum commitment payments as defined by the terms of the contracts. For additional information, see Note 10 and Note 15 to the consolidated financial statements. Defined Benefit Pension Plans As required, we contribute to qualified defined pension plans and non-qualified supplemental retirement plans (collectively the “Pension Plans”) and other post-retirement benefit plans, which provide retirement benefits to certain eligible employees. Contributions are intended to provide for benefits attributed to service to date. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations. The cost to maintain our Pension Plans and future funding requirements are affected by several factors including the expected return on investment of the assets held by the Pension Plans, changes in the discount rate used to calculate pension expense and the amortization of unrecognized gains and losses. Returns generated on the Pension Plans assets have historically funded a significant portion of the benefits paid under the Pension Plans. We used a weighted-average expected long-term rate of return of 6.00% in 2022 and 6.25% in 2021 and 2020, respectively.2021. As of January 1, 2022,2023, we estimate the long-term rate of return of Plan assets will be 6.00%7.00%. The Pension Plans invest in marketable equity securities which are exposed to changes in the financial markets. If the financial markets experience a downturn and returns fall below our estimate, we could be required to make material contributions to the Pension Plans, which could adversely affect our cash flows from operations. Net pension and post-retirement (benefit)/costs werebenefit was $(12.3) million, $(3.8) million $(4.1) million and $11.5$(4.1) million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively. We contributed $10.1 million, $20.8 million and $24.0 million in 2022, 2021 and $27.5 million in 2021, 2020, and 2019, respectively to our Pension Plans. For our other post-retirement plans, we contributed $8.6 million, $9.2 million and $8.5 million in 2021, 2020 and 2019, respectively. In 2022, we expect to make contributions totaling approximately $20.5 million to our Pension Plans and $8.2 million to our other post-retirement benefit plans. Our contribution amounts meet the minimum funding requirements as set forth in employee benefit and tax laws. We elected to participate in ARPA beginning with the 2021 plan year. ARPA, which was signed into law in March 2021, included changes to the employer funding requirements and is designed to reduce the amounts of required contributions as a relief. ForDuring 2021 and the six months ended June 30, 2022, we have elected not to reducefund our required pension contributions at the pre-ARPA levels, which has created a pre-funded balance. We expect that for 2023 and 2024, no pension contributions will be required under the ARPA minimum required contributions and we intend use our current pre-funded balance to satisfy the minimum funding requirements under ARPAcontribution requirements. For our other post-retirement plans, we contributed $6.9 million, $8.6 million and our expected contributions for 2022 are based on historical minimum funding requirements of approximately $20.5$9.2 million in order2022, 2021 and 2020, respectively. In 2023, we expect to increase the Pension Plan’s funded status.make contributions totaling approximately $6.2 million to our other post-retirement benefit plans. See Note 13 to the consolidated financial statements for a more detailed discussion regarding our pension and other post-retirement plans. Income Taxes The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. For example, tax laws in effect regarding accelerated or “bonus” depreciation for tax reporting resultedmay result in less cash payments than the GAAP tax expense. Acceleration of tax deductions could eventually result in situations where cash payments will exceed GAAP tax expense. Regulatory Matters
In 2020, the FCC adopted an order establishing the RDOF, the next phase of the CAF program, which will result in a reduction of approximately $42.2 million in the annual support we receive beginning January 1, 2022 through December 31, 2031.
Critical Accounting Estimates Our significant accounting policies and estimates are discussed in the Notes to our consolidated financial statements. We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of our accounting policies. Our judgments are based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and the related effects cannot be determined with certainty, actual results may differ from our estimates and assumptions and such differences could be material. Management believes that the following accounting estimates are the most critical to understanding and evaluating our reported financial results. Indefinite-Lived Intangible Assets Our indefinite-lived intangible assets are not subject to amortization and are tested for impairment annually or more frequently when events or changes in circumstances indicate that the asset might be impaired. We evaluate the carrying value of our indefinite-lived assets as of November 30 of each year. Goodwill As discussed more fully in Note 1 to the consolidated financial statements, goodwill is not amortized but instead evaluated for impairment annually, or more frequently if an event occurs or circumstances change that would indicate potential impairment. At December 31, 20212022 and 2020,2021, the carrying value of our goodwill was $1,013.2$929.6 million and $1,035.3$1,013.2 million, respectively. Goodwill decreased $22.1$83.6 million during 20212022 as a result of allocated goodwill for a divestiture, classified as held for sale at December 31, 2021, as described in Note 5 to the consolidated financial statements. The evaluation of goodwill may first include a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Events and circumstances integrated into the qualitative assessment process include a combination of macroeconomic conditions affecting equity and credit markets, significant changes to the cost structure, overall financial performance and other relevant events affecting the reporting unit. Functional management within the organization evaluates the operations of our single reporting unit on a consolidated basis rather than at a geographic level or on any other component basis. In general, product managers and cost managers are responsible for managing costs and services across territories rather than treating the territories as separate business units. All of the properties are managed at a functional level. As a result, we evaluate the operations for all our service territories as a single reporting unit. For the 2021 assessment, we evaluated the fair value of the goodwill compared to the carrying value using the qualitative approach. The results of the qualitative approach concluded that it was more likely than not that the fair value was greater than the carrying value, and therefore, we did not perform the calculation of fair value for our single reporting unit as described below. For the 2022 assessment, we evaluated the fair value of goodwill compared to the carrying value using the quantitative approach and we concluded that the fair value of the reporting unit exceeded the carrying value at November 30, 2022 and that there was no impairment of goodwill. When we use the quantitative approach to assess the goodwill carrying value and the fair value of our single reporting unit, the fair value of our reporting unit is compared to its carrying amount, including goodwill. We would expect to use the quantitative approach at least every third year or more frequently if an event or if circumstances change that may indicate a potential impairment of goodwill has occurred. The estimated fair value of the reporting unit is determined using a combination of market-based approaches and a discounted cash flow (“DCF”) model and reconciled to our market capitalization plus an estimated control premium. The assumptions used in the estimate of fair value are based upon a combination of historical results and trends, new industry developments and future cash flow projections using a discount rate of 9.7%, as well as relevant comparable company earnings multiples for the market-based approaches. Significant assumptions used in the analysis include a long-term growth rate and the weighted average cost of capital which is used to discount estimates of projected future results and cash flows. Such assumptions are judgmental and subject to change as a result of changing economic and competitive conditions. Based on our assessment at November 30, 2020, using the quantitative approach, we concluded that the fair value of the reporting unit exceeded the carrying value at November 30, 2020 by approximately 120% and that there was no impairment of goodwill. Trade Name As discussed more fully in Note 1 to the consolidated financial statements, trade names are generally not amortized, but instead evaluated annually, or more frequently if an event occurs or circumstances change that would indicate potential impairment using a preliminary qualitative assessment and a quantitative process, if deemed necessary. The carrying value of our trade name, excluding any finite livedfinite-lived trade names, was $10.6 million at December 31, 20212022 and 2020.2021. When we use the quantitative approach to estimate the fair value of our trade name, we use DCFsDCF models based on a relief from royaltyrelief- from-royalty method. If the fair value of our trade name was less than the carrying amount, we would recognize an impairment charge for the difference between the estimated fair value and the carrying value of the asset. We perform our impairment testing of our trade name as a single unit of accounting based on its use in our single reporting unit. For the 20212022 assessment, we used the qualitative approach to evaluate the fair value compared to the carrying value of the trade name. Based on our assessment, we concluded that the fair value of the trade name continued to exceed the carrying value. Income Taxes Our current and deferred income taxes and associated valuation allowances are impacted by events and transactions arising in the normal course of business as well as in connection with the adoption of new accounting standards, acquisitions of businesses and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual amounts may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances. We account for tax benefits taken or expected to be taken in our tax returns in accordance with the accounting guidance applicable for uncertainty in income taxes, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. Pension and Post-Retirement Benefits The amounts recognized in our financial statements for pension and post-retirement benefits are determined on an actuarial basis utilizing several critical assumptions. We make significant assumptions in regards to our pension and post-retirement plans, including the expected long-term rate of return on plan assets, the discount rate used to value the periodic pension expense and liabilities, future salary increases and actuarial assumptions relating to mortality rates and healthcare trend rates. Changes in these estimates and other factors could significantly impact our benefit cost and obligations to maintain pension and post-retirement plans. Our pension investment strategy is to maximize long-term returns on invested plan assets while minimizing the risk of volatility. Accordingly, we target our allocation percentage at approximately 70 - 90% in return seeking assets consisting primarily of equity and fixed income funds with the remainder in hedge funds. Our assumed rate considers this investment mix as well as past trends. We used a weighted-average expected long-term rate of return of 6.00% in 2022 and 6.25% in 2021 and 2020, respectively.2021. As of January 1, 2022,2023, we estimate that the expected long-term rate of return of pension plan assets will be 6.00%7.00%. In determining the appropriate discount rate, we consider the current yields on high-quality corporate fixed-income investments with maturities that correspond to the expected duration of our pension and post-retirement benefit plan obligations. For our 20212022 and 20202021 projected benefit obligations, we used a weighted-average discount rate of 3.05%5.63% and 2.81%3.05%, respectively, for our pension plans and 2.93%5.64% and 2.56%2.93%, respectively, for our other post-retirement plans. Our Pension Plans are sensitive to changes in the discount rate and the expected long-term rate of return on plan assets. A one percentage-point increase or decrease in the discount rate and expected long-term rate of return would have the following effects on net periodic pension cost of the Pension Plans: | | | | | | | | | | | | | | | | | | 1-Percentage- | | 1-Percentage- | | | | 1-Percentage- | | 1-Percentage- | | (In thousands) | | | Point Increase | | Point Decrease | | | | Point Increase | | Point Decrease | | | | | | | | | | | | | | | | | Discount rate | | $ | 1,841 | | $ | (1,075) | | | $ | 2,879 | | $ | (933) | | Expected long-term rate of return on plan assets | | $ | (6,166) | | $ | 6,166 | | | $ | (6,089) | | $ | 6,089 | |
Our post-retirement benefit plans are sensitive to the healthcare cost trend rate assumption. For purposes of determining the cost and obligation for post-retirement medical benefits, a 6.25%6.50% healthcare cost trend rate was assumed for 2021,2022, declining to the ultimate trend rate of 5.00% in 2027.2029. A 1.00% increase in the assumed healthcare cost trend rate would result in increases of approximately $3.0$1.2 million and $0.2 million in the post-retirement benefit obligation and total service and interest cost, respectively. A 1.00% decrease in the assumed healthcare cost trend would result in decreases of approximately $3.1$1.4 million and $0.2 million in the post-retirement benefit obligation and in the total service and interest cost, respectively. Recent Accounting Pronouncements For information regarding the impact of certain recent accounting pronouncements, see Note 1 “Business Description & Summary of Significant Accounting Policies” to the consolidated financial statements included in this report in Part II -Item 8 “Financial Statements and Supplementary Data”.Data.” Item 7A. Quantitative and Qualitative Disclosures about Market Risk Our exposure to market risk is primarily related to the impact of interest rate fluctuations on our debt obligations. Market risk is the potential loss arising from adverse changes in market interest rates on our variable rate obligations. In order to manage the volatility relating to changes in interest rates, we utilize derivative financial instruments such as interest rate swaps to maintain a mix of fixed and variable rate debt. We do not use derivatives for trading or speculative purposes. Our interest rate swap agreements effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments. We calculate the potential change in interest expense caused by changes in market interest rates by determining the effect of the hypothetical rate increase on the portion of our variable rate debt that is not subject to a variable rate floor or hedged through the interest rate swap agreements.
At December 31, 2021, the majority of our variable rate debt was subject to a 0.75% London Interbank Offered Rate (“LIBOR”) floor. Based on our variable rate debt outstanding as of December 31, 2021,2022, a 1.00% increasechange in market interest rates would increase or decrease annual interest expense by approximately $1.8$7.1 million. A 1.00% decrease in current interest rates would not impact annual interest expense on our variable rate debt due to the 0.75% LIBOR floor.
As of December 31, 2021,2022, the fair value of our interest rate swap agreements amounted to a liabilitynet asset of $12.8$6.0 million. Total pre-tax deferred lossesgains related to our interest rate swap agreements included in accumulated other comprehensive loss was $10.1$6.9 million at December 31, 2021. 2022. Our current interest rate swap agreements mature on July 31, 2023. Item 8. Financial Statements and Supplementary Data For information pertaining to our Financial Statements and Supplementary Data, refer to pages F-1 to F-43F-45 of this report, which are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. In connection with the filing of this Form 10-K, management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design to provide reasonable assurance of achieving their objectives and operation of our disclosure controls and procedures as of December 31, 2021.2022. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of December 31, 2021.2022. Inherent Limitation of the Effectiveness of Internal Control A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a–15(f). Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2021.2022. In making this assessment, management used the framework set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, our management concluded that, as of December 31, 2021,2022, our internal control over financial reporting was effective to provide reasonable assurance that the desired control objectives were achieved. The effectiveness of internal control over financial reporting has been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report which is included elsewhere in this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting Based upon the evaluation performed by our management, which was conducted with the participation of our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during the quarter ended December 31, 20212022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Consolidated Communications Holdings, Inc. Opinion on Internal Control over Financial Reporting We have audited Consolidated Communications Holdings, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2021,2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Consolidated Communications Holdings, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20212022 and 2020,2021, the related consolidated statements of operations, comprehensive income (loss), changes in mezzanine equity and shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021,2022, and the related notes and our report dated March 4, 20223, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP St. Louis, Missouri March 4, 20223, 2023 Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance Our Board of Directors adopted a Code of Business Conduct and Ethics (“the code”) that applies to all of our employees, officers and directors, including our principal executive officer, principal financial officer and principal accounting officer. A copy of the code is posted on our investor relations website at www.consolidated.com. Information contained on the website is not incorporated by reference in, or considered to be a part of, this document. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our code, as well as Nasdaq’s requirement to disclose waivers with respect to directors and executive officers, by posting such information on our website at the address and location specified above. Additional information required by this Item is incorporated herein by reference to our proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2021.2022. Item 11. Executive Compensation Incorporated herein by reference to our proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2021.2022. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated herein by reference to our proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2021.2022. Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated herein by reference to our proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2021.2022. Item 14. Principal AccountantAccounting Fees and ServicesServices Incorporated herein by reference to our proxy statement for the annual meeting of our shareholders to be filed pursuant to Regulation 14A within 120 days after our fiscal year-end of December 31, 2021.2022. PART IV Item 15. Exhibits and Financial Statement Schedules | | (3) Exhibits | | | | | | | | | | | | The exhibits listed below on the accompanying Index to Exhibits are filed, or furnishedexcept as otherwise indicated, as part of this report. | | | |
Exhibit
No. | Description | 2.1 | Partnership Interest Purchase Agreement, dated as of August 1, 2022, by and among Cellco Partnership, Clio Subsidiary, LLC and, solely for the purposes of certain provisions specified therein, Consolidated Communications Enterprise Services, Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated August 1, 2022) | 3.1 | Form of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 7 to Form S-1 dated July 19, 2005) | 3.2 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Consolidated Communications Holdings, Inc., as filed with the Secretary of State of the State of Delaware on May 3, 2011 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated May 4, 2011) | 3.3 | Certificate of Amendment of the Amended and Restated BylawsCertificate of Incorporation of Consolidated Communications Holdings, Inc., as amended as of June 29, 2014April 26, 2021 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated April 26, 2021) | 3.4 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Consolidated Communications Holdings, Inc., as amended as of April 26, 2021 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K dated June 29, 2014)April 26, 2021) | 3.5 | Amended and Restated Bylaws of Consolidated Communications Holdings Inc., as amended as of April 26, 2021 (incorporated by reference to Exhibit 3.3 to our Current Report on Form 8-K dated April 26, 2021) |
4.1 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 7 to Form S-1 dated July 19, 2005) | 4.2 | Indenture, dated as of October 2, 2020, by and among Consolidated Communications, Inc., Consolidated Communications Holdings, Inc., the other Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (the “2020 Indenture”) (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated October 2, 2020) | 4.3 | Form of 6.500% Senior Secured Note due 2028 (incorporated by reference to Exhibit A to Exhibit 4.1 to our Current Report on Form 8-K dated October 2, 2020) | 4.4 | Indenture, dated as of March 18, 2021, by and among Consolidated Communications, Inc., Consolidated Communications Holdings, Inc., the other Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Notes Collateral Agent (the “2021 Indenture”) (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated March 18, 2021) | 4.5 | Form of 5.000% Senior Secured Note due 2028 (incorporated by reference to Exhibit A to Exhibit 4.1 to our Current Report on Form 8-K dated March 18, 2021) | 4.6 | Joinder Agreement to Guaranty Agreement, dated as of February 1, 2021, by and among Consolidated Communications, Inc., the subsidiaries of Consolidated Communications Holdings, Inc. party thereto and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated February 1, 2021) |
4.5*4.7*
| Supplement No. 1 to Security Agreement, dated as of February 1, 2021, among the subsidiaries of Consolidated Communications Holdings, Inc. party thereto and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K dated February 1, 2021) | 4.6*4.8*
| Supplement No. 1 to Pledge Agreement, dated as of February 1, 2021, among Consolidated Communications, Inc., the subsidiaries of Consolidated Communications Holdings, Inc. party thereto and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K dated February 1, 2021) | 4.74.9
| First Supplemental Indenture to the 2020 Indenture, dated as of February 1, 2021, among Consolidated Communications, Inc., the subsidiaries of Consolidated Communications Holdings, Inc. party thereto and Wells Fargo Bank, National Association, as Trustee and Notes Collateral Agent (incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K dated February 1, 2021) | 4.84.10
| Joinder Agreement to Guaranty Agreement, dated as of April 12, 2021, by and among Consolidated Communications, Inc., Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated April 12, 2021) | 4.94.11
| Supplement No. 2 to Security Agreement, dated as of April 12, 2021, between Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K dated April 12, 2021) | 4.104.12
| Supplement No. 2 to Pledge Agreement, dated as of April 12, 2021, between Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K dated April 12, 2021) | 4.114.13
| Second Supplement to 2020 Indenture, dated as of April 12, 2021, among Consolidated Communications, Inc., Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Trustee and Notes Collateral Agent (incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K dated April 12, 2021) |
4.124.14
| Supplement No. 2 to Security Agreement, dated as of April 12, 2021, among the Consolidated Communications, Inc., Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Notes Collateral Agent (incorporated by reference to Exhibit 4.5 to our Current Report on Form 8-K dated April 12, 2021) | 4.134.15
| Supplement No. 2 to Pledge Agreement, dated as of April 12, 2021, between Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Notes Collateral Agent (incorporated by reference to Exhibit 4.6 to our Current Report on Form 8-K dated April 12, 2021) | 4.144.16
| First Supplement to 2021 Indenture, dated as of April 12, 2021, among Consolidated Communications, Inc., Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Trustee and Notes Collateral Agent (incorporated by reference to Exhibit 4.7 to our Current Report on Form 8-K dated April 12, 2021) | 4.154.17
| Supplement No. 21 to Security Agreement, dated as of April 12, 2021, among Consolidated Communications, Inc., Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Notes Collateral Agent (incorporated by reference to Exhibit 4.8 to our Current Report on Form 8-K dated April 12, 2021) | 4.164.18
| Supplement No. 21 to Pledge Agreement, dated as of April 12, 2021, between Consolidated Communications of Pennsylvania Company, LLC and Wells Fargo Bank, National Association, as Notes Collateral Agent (incorporated by reference to Exhibit 4.9 to Form 8-K dated April 12, 2021) |
4.174.19
| Description of the Company’s securities registered pursuant to Section 12(b) of the Securities Exchange Act Form of Employment Security Agreement with the Company’s and its subsidiaries vice president and director level employees (incorporated by reference to Exhibit 4.14 to our Annual Report on Form 10-K for the period ended December 31, 2019) | 10.1* | Investment Agreement, dated as of September 13, 2020, by and between Consolidated Communications Holdings, Inc. and Searchlight III CVL, L.P. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated September 13, 2020) | 10.2 | Governance Agreement, dated as of September 13, 2020, by and between Consolidated Communications Holdings, Inc. and Searchlight III CVL, L.P. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated September 13, 2020) | 10.3* | Contingent Payment Right Agreement, dated as of October 2, 2020, by and between Consolidated Communications Holdings, Inc. and Searchlight III CVL, L.P. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated October 2, 2020) | 10.4 | Registration Rights Agreement, dated as of October 2, 2020, by and between Consolidated Communications Holdings, Inc. and Searchlight III CVL, L.P. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated October 2, 2020) | 10.5* | Credit Agreement, dated as of October 2, 2020, among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., the Lenders and other parties referred to therein, Wells Fargo Bank, National Association, as Administrative Agent, Issuing Bank and Swingline Lender (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K dated October 2, 2020) | 10.6 | Amendment No. 1, dated as of January 15, 2021, to the Credit Agreement among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., JPMorgan Chase Bank, N.A., as incremental term loan lender, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated January 15, 2021) | 10.7*10.7
| Amendment No. 2, dated as of April 5, 2021, to the Credit Agreement among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., JPMorgan Chase Bank, N.A., as incremental term loan lender, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated April 5, 2021) |
10.8 | Amendment No. 3, dated as of November 22, 2022, to the Credit Agreement among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., JPMorgan Chase Bank, N.A., as incremental term loan lender, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated November 22, 2022) | 10.9 | Waiver, dated as of November 22, 2022, made by Searchlight III CVL, L.P. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated November 22, 2022) | 10.10 | Separation Agreement, dated December 22, 2022, by and between Consolidated Communications, Inc. and Steven L. Childers | 10.11** | Offer Letter, dated November 11, 2022, by and between Consolidated Communications, Inc. and Fred A. Graffam III | 10.12** | Amended and Restated Consolidated Communications Holdings, Inc. Restricted Share Plan (incorporated by reference to Exhibit 10.11 to Amendment No. 7 to Form S-1 dated July 19, 2005) | 10.8*10.13**
| Consolidated Communications Holdings, Inc. 2005 Long-Term Incentive Plan (as amended and restated effective May 5, 2009, as amended by amendments effective as of May 4, 2015 and amendments effective as of April 30, 2018)February 21, 2021) (incorporated by reference to Exhibit AC to our definitive proxy statement on Schedule 14A filed with the SEC on March 16, 2018)17, 2021) | 10.9**
| Fifth Amendment to the Consolidated Communications Holdings, Inc. 2005 Long-Term Incentive Plan, dated October 29, 2018 (incorporated by reference to Exhibit 10.9 to our Annual Report on Form 10-K for the period ended December 31, 2018)
| 10.10*10.14**
| Form of Employment Security Agreement with the CEO of the Company (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated October 25, 2020) | 10.11*10.15*
| Form of Employment Security Agreement with the CFO of the Company (incorporated by reference to Exhibit 10.210.3 to our Current Report on Form 8-K dated October 25, 2020)November 28, 2022) | 10.12*10.16**
| Form of Employment Security Agreement with certain of the Company’s employees (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012) | 10.13*10.17**
| Form of Employment Security Agreement with certain of the Company’s other executive officers (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated December 4, 2009) | 10.14*10.18**
| Form of Employment Security Agreement with the Company’s and its subsidiaries vice president and director level employees (incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the period ended December 31, 2007) | 10.15*10.19**
| Executive Long-Term Incentive Program, as revised March 12, 2007 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated March 12, 2007) |
31.2 | Certificate of Chief Financial Officer of Consolidated Communications Holdings, Inc. pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934 | 32.132.1***
| Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 101 | The following financial information from Consolidated Communications Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 2021,2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Changes in Mezzanine Equity and Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements | 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
*Schedules and other attachments are omitted. The Company agrees to furnish, as a supplement, a copy of any schedule or other attachment to the Securities and Exchange Commission upon request. **CompensatoryIndicates management contract or compensatory plan or arrangement. ***Furnished herewith. Item 16.Form 10-K Summary Not Applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Mattoon, Illinois on March 4, 2022.3, 2023. | | | | CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. | | By: | /s/ C. ROBERT UDELL JR. | | | C. Robert Udell Jr. | | | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | | | Signature | | Title | | Date | | | | | | By: | /s/ C. ROBERT UDELL JR. | | | President and | | March 4, 20223, 2023 | | | C. Robert Udell Jr. | | Chief Executive Officer, Director | | | | | (Principal Executive Officer) | | | | | | | | By: | /s/ STEVEN L. CHILDERSFRED A. GRAFFAM III | | | Chief Financial Officer (Principal | | March 4, 20223, 2023 | | | Steven L. ChildersFred A. Graffam III
| | Financial and Accounting Officer) | | | | | | | | By: | /s/ ROBERT J. CURREY | | | Chairman of the Board | | March 4, 20223, 2023 | | | Robert J. Currey | | | | | | | | | | By: | /s/ ANDREW S. FREY | | | Director | | March 4, 20223, 2023 | | | Andrew J. Frey | | | | | | | | | | By: | /s/ DAVID G. FULLER | | | Director | | March 4, 20223, 2023 | | | David G. Fuller | | | | | | | | | | By: | /s/ THOMAS A. GERKE | | | Director | | March 4, 20223, 2023 | | | Thomas A. Gerke | | | | | | | | | | By: | /s/ ROGER H. MOORE | | | Director | | March 4, 20223, 2023 | | | Roger H. Moore | | | | | | | | | | By: | /s/ MARIBETH S. RAHE | | | Director | | March 4, 20223, 2023 | | | Maribeth S. Rahe | | | | | | | | | | By: | /s/ MARISSA M. SOLIS | | | Director | | March 4, 20223, 2023 | | | Marissa M. Solis | | | | |
REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Consolidated Communications Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Consolidated Communications Holdings, Inc. and subsidiaries (the Company) as of December 31, 20212022 and 2020,2021, the related consolidated statements of operations, comprehensive income (loss), changes in mezzanine equity and shareholders’ equity and cash flows for each of the three years in the period ended December 31, 20212022 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021,2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 4, 20223, 2023, expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit mattermatters communicated below is a matterare matters arising from the current period audit of the financial statements that waswere communicated or required to be communicated to the audit committee and that: (1) relatesrelate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit mattermatters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattermatters below, providing a separate opinionopinions on the critical audit mattermatters or on the accounts or disclosures to which it relates.they relate. | | | Defined Benefit Pension and Other Post-Retirement Benefit Obligations | Description of the Matter | The Company sponsors several pension plans and other postretirement benefit plans. At December 31, 2021,2022, the Company's aggregate defined benefit pension obligation was $744$539 million and exceeded the fair value of pension plan assets of $617$465 million, resulting in an unfunded defined benefit pension obligation of $127$74 million. Also, at December 31, 2021,2022, the other postretirement benefits obligation was approximately $96$56 million. As explained in Note 13 of the consolidated financial statements, the |
| Company updates the assumptions used to measure the defined benefit pension and postretirement benefit obligations, including discount rates, at December 31 or upon a remeasurement event to reflect updated actuarial assumptions. The Company determines the discount rates used to measure the obligations based upon an analysis of a hypothetical portfolio of bonds that match the expected cash flow of its pension |
| and other postretirement benefit plans. Auditing the post-retirement benefit obligations is complex and required the involvement of specialists due to the highly judgmental nature of assumptions used in the measurement process, primarily the discount rate assumptions, which had a significant effect on the projected benefit obligations. | How we addressed the Matter in our audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the post-retirement benefits obligation valuation process. For example, we tested controls over management's review of the benefit obligation calculations and the significant actuarial assumptions, including the discount rates. To test the determination of the discount rate used in the calculation of the pension and post-retirement benefit obligations, we performed audit procedures that focused on evaluating, with the assistance of our actuarial specialists, the determination of the discount rates, among other procedures. For example, we assessed the appropriateness of the bonds included in the analysis used by management by evaluating the criteria used to select bonds, and by testing the characteristics and investment grade of the bonds selected, and we tested the mathematical accuracy of the analysis used by management through recalculation of the present value of cash flows and compared to the disclosed obligation.
| | |
| | | Goodwill Impairment Test | Description of the Matter | At December 31, 2022, the Company’s goodwill balance was $929.6 million. As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. The operations of the Company comprise a single reporting unit. Auditing management’s annual goodwill impairment test is complex and highly judgmental due to the significant estimation required in determining the fair value of the Company. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the future cash flow projections, weighted average cost of capital, control premium, and guideline company revenue and EBITDA multiples, which are affected by expectations about future market and economic conditions. | How we addressed the Matter in our audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. To test the estimated fair value of the Company, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We evaluated the sensitivity of the estimated fair value to changes in the significant assumptions and reviewed market data relative to implied control premiums. To evaluate management’s weighted average cost of capital assumptions, we involved EY valuation specialists to assess the methodology and selected assumptions. Our |
| specialists also evaluated the estimated fair value of the Company using guideline company revenue and EBITDA multiples. We also tested management’s reconciliation of the fair value of the Company to the market capitalization of the Company and evaluated the implied control premium for reasonableness against observable transactions in the industry. | | |
/s/ Ernst & Young LLP We have served as the Company’s auditor since 2002. St. Louis, Missouri March 4, 2022 3, 2023
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share amounts) | | | | | | | | | | | | | Year Ended December 31, | | | | 2021 | | 2020 | | 2019 | | Net revenues | | $ | 1,282,233 | | $ | 1,304,028 | | $ | 1,336,542 | | | | | | | | | | | | | Operating expense: | | | | | | | | | | | Cost of services and products (exclusive of depreciation and amortization) | | | 569,629 | | | 560,644 | | | 574,936 | | Selling, general and administrative expenses | | | 271,125 | | | 275,361 | | | 299,088 | | Acquisition and other transaction costs | | | — | | | 7,646 | | | — | | Loss on impairment of assets held for sale | | | 5,704 | | | — | | | — | | Depreciation and amortization | | | 300,597 | | | 324,864 | | | 381,237 | | Income from operations | | | 135,178 | | | 135,513 | | | 81,281 | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | Interest expense, net of interest income | | | (175,195) | | | (143,591) | | | (136,660) | | Gain (loss) on extinguishment of debt | | | (17,101) | | | (18,264) | | | 4,510 | | Investment income | | | 42,307 | | | 41,062 | | | 38,088 | | Change in fair value of contingent payment rights | | | (86,476) | | | 23,802 | | | — | | Other, net | | | 873 | | | 9,716 | | | (10,864) | | Income (loss) before income taxes | | | (100,414) | | | 48,238 | | | (23,645) | | | | | | | | | | | | | Income tax expense (benefit) | | | 6,279 | | | 10,936 | | | (3,714) | | | | | | | | | | | | | Net income (loss) | | | (106,693) | | | 37,302 | | | (19,931) | | Less: dividends on Series A preferred stock | | | 2,677 | | | — | | | — | | Less: net income attributable to noncontrolling interest | | | 392 | | | 325 | | | 452 | | Net income (loss) attributable to common shareholders | | $ | (109,762) | | $ | 36,977 | | $ | (20,383) | | | | | | | | | | | | | Net income (loss) per basic and diluted common shares attributable to common shareholders | | $ | (1.26) | | $ | 0.47 | | $ | (0.29) | | | | | | | | | | | | | Dividends declared per common share | | $ | — | | $ | — | | $ | 0.39 | |
| | | | | | | | | | | | | Year Ended December 31, | | | | 2022 | | 2021 | | 2020 | | Net revenues | | $ | 1,191,263 | | $ | 1,282,233 | | $ | 1,304,028 | | | | | | | | | | | | | Operating expense: | | | | | | | | | | | Cost of services and products (exclusive of depreciation and amortization) | | | 546,661 | | | 569,629 | | | 560,644 | | Selling, general and administrative expenses | | | 301,667 | | | 271,125 | | | 275,361 | | Acquisition and other transaction costs | | | — | | | — | | | 7,646 | | Loss on impairment of assets held for sale | | | 131,698 | | | 5,704 | | | — | | Loss on disposal of assets | | | 4,233 | | | — | | | — | | Depreciation and amortization | | | 300,166 | | | 300,597 | | | 324,864 | | Income (loss) from operations | | | (93,162) | | | 135,178 | | | 135,513 | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | Interest expense, net of interest income | | | (124,978) | | | (175,195) | | | (143,591) | | Loss on extinguishment of debt | | | — | | | (17,101) | | | (18,264) | | Change in fair value of contingent payment rights | | | — | | | (86,476) | | | 23,802 | | Other, net | | | 13,378 | | | 1,335 | | | 10,093 | | Income (loss) from continuing operations before income taxes | | | (204,762) | | | (142,259) | | | 7,553 | | | | | | | | | | | | | Income tax expense (benefit) | | | (27,058) | | | (3,132) | | | 1,679 | | Income (loss) from continuing operations | | | (177,704) | | | (139,127) | | | 5,874 | | | | | | | | | | | | | Discontinued operations: | | | | | | | | | | | Income from discontinued operations | | | 23,467 | | | 41,845 | | | 40,685 | | Gain on sale of discontinued operations | | | 389,885 | | | — | | | — | | Income tax expense | | | 94,999 | | | 9,411 | | | 9,257 | | Income from discontinued operations | | | 318,353 | | | 32,434 | | | 31,428 | | | | | | | | | | | | | Net income (loss) | | | 140,649 | | | (106,693) | | | 37,302 | | Less: dividends on Series A preferred stock | | | 40,104 | | | 2,677 | | | — | | Less: net income attributable to noncontrolling interest | | | 564 | | | 392 | | | 325 | | Net income (loss) attributable to common shareholders | | $ | 99,981 | | $ | (109,762) | | $ | 36,977 | | | | | | | | | | | | | Net income (loss) per common share - basic and diluted | | | | | | | | | | | Income (loss) from continuing operations | | $ | (1.90) | | $ | (1.63) | | $ | 0.07 | | Income from discontinued operations | | | 2.77 | | | 0.37 | | | 0.40 | | Net income (loss) per basic and diluted common shares attributable to common shareholders | | $ | 0.87 | | $ | (1.26) | | $ | 0.47 | | | | | | | | | | | | |
See accompanying notes. CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | 2021 | | 2020 | | 2019 | | | Year Ended December 31, | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | Net income (loss) | | | $ | (106,693) | | $ | 37,302 | | $ | (19,931) | | | $ | 140,649 | | $ | (106,693) | | $ | 37,302 | | Pension and post-retirement obligations: | | | | | | | | | | | | | | | | | | | | | | Change in net actuarial loss and prior service cost, net of tax of $11,903, $(9,710) and $(5,875) | | | | 33,344 | | | (27,007) | | | (16,738) | | | Amortization of actuarial loss (gain) and prior service cost (credit) to earnings, net of tax of $1,950, $140 and $2,842 | | | | 5,444 | | | 436 | | | 7,936 | | | Change in net actuarial loss and prior service cost, net of tax of $16,744, $11,903 and $(9,710) | | | | 47,123 | | | 33,344 | | | (27,007) | | Amortization of actuarial loss (gain) and prior service cost (credit) to earnings, net of tax $(269), $1,950 and $140 | | | | (762) | | | 5,444 | | | 436 | | Derivative instruments designated as cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | Change in fair value of derivatives, net of tax of $306, $(4,797) and $(6,776) | | | | 868 | | | (13,601) | | | (19,237) | | | Cumulative adjustment upon adoption of ASU 2017-12, net of tax of $(203) | | | | — | | | — | | | (576) | | | Reclassification of realized loss to earnings, net of tax of $3,773, $4,061 and $149 | | | | 10,191 | | | 11,622 | | | 959 | | | Change in fair value of derivatives, net of tax of $3,847, $306 and $(4,797) | | | | 10,879 | | | 868 | | | (13,601) | | Reclassification of realized loss to earnings, net of tax of $607, $3,773 and $4,061 | | | | 1,721 | | | 10,191 | | | 11,622 | | Comprehensive income (loss) | | | | (56,846) | | | 8,752 | | | (47,587) | | | | 199,610 | | | (56,846) | | | 8,752 | | Less: comprehensive income attributable to noncontrolling interest | | | | 392 | | | 325 | | | 452 | | | | 564 | | | 392 | | | 325 | | Total comprehensive income (loss) attributable to common shareholders | | | $ | (57,238) | | $ | 8,427 | | $ | (48,039) | | | $ | 199,046 | | $ | (57,238) | | $ | 8,427 | |
See accompanying notes. CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share and per share amounts) | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2021 | | 2020 | | | 2022 | | 2021 | | ASSETS | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 99,635 | | $ | 155,561 | | | $ | 325,852 | | $ | 99,635 | | Short-term investments | | | 110,801 | | | — | | | | 87,951 | | | 110,801 | | Accounts receivable, net of allowance for credit losses | | | 133,362 | | | 137,646 | | | | 119,675 | | | 133,362 | | Income tax receivable | | | 1,134 | | | 1,072 | | | | 1,670 | | | 1,134 | | Prepaid expenses and other current assets | | | 56,831 | | | 46,382 | | | | 62,996 | | | 56,831 | | Assets held for sale | | | 26,052 | | | — | | | | — | | | 26,052 | | Total current assets | | | 427,815 | | | 340,661 | | | | 598,144 | | | 427,815 | | | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 2,019,444 | | | 1,760,152 | | | | 2,234,122 | | | 2,019,444 | | Investments | | | 109,578 | | | 111,665 | | | | 10,297 | | | 10,799 | | Goodwill | | | 1,013,243 | | | 1,035,274 | | | | 929,570 | | | 1,013,243 | | Customer relationships, net | | | 73,939 | | | 113,418 | | | | 43,089 | | | 73,939 | | Other intangible assets | | | 10,557 | | | 10,557 | | | | 10,557 | | | 10,557 | | Assets of discontinued operations | | | | — | | | 98,779 | | Other assets | | | 58,116 | | | 135,573 | | | | 61,315 | | | 58,116 | | Total assets | | $ | 3,712,692 | | $ | 3,507,300 | | | $ | 3,887,094 | | $ | 3,712,692 | | | | | | | | | | | | | | | | | LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | Accounts payable | | $ | 40,953 | | $ | 25,283 | | | $ | 33,096 | | $ | 40,953 | | Advance billings and customer deposits | | | 53,028 | | | 49,544 | | | | 46,664 | | | 53,028 | | Accrued compensation | | | 68,272 | | | 74,957 | | | | 60,903 | | | 68,272 | | Accrued interest | | | 17,819 | | | 21,194 | | | | 18,201 | | | 17,819 | | Accrued expense | | | 97,417 | | | 81,931 | | | | 95,206 | | | 97,417 | | Current portion of long-term debt and finance lease obligations | | | 7,959 | | | 17,561 | | | | 12,834 | | | 7,959 | | Liabilities held for sale | | | 97 | | | — | | | | — | | | 97 | | Total current liabilities | | | 285,545 | | | 270,470 | | | | 266,904 | | | 285,545 | | | | | | | | | | | | | | | | | Long-term debt and finance lease obligations | | | 2,118,853 | | | 1,932,666 | | | | 2,129,462 | | | 2,118,853 | | Deferred income taxes | | | 194,458 | | | 171,021 | | | | 274,309 | | | 194,458 | | Pension and other post-retirement obligations | | | 214,671 | | | 300,373 | | | | 123,644 | | | 214,671 | | Convertible security interest | | | — | | | 238,701 | | | Contingent payment rights | | | — | | | 123,241 | | | Other long-term liabilities | | | 62,789 | | | 81,600 | | | | 47,326 | | | 62,789 | | Total liabilities | | | 2,876,316 | | | 3,118,072 | | | | 2,841,645 | | | 2,876,316 | | | | | | | | | | | | | | | | | Commitments and contingencies (Note 15) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series A preferred stock, par value $0.01 per share; 10,000,000 shares authorized, 434,266 shares outstanding | | | | | | | | | as of December 31, 2021; liquidation preference of $436,943 as of December 31, 2021 | | | 288,576 | | | — | | | Series A preferred stock, par value $0.01 per share; 10,000,000 shares authorized, 456,343 and 434,266 shares outstanding as of December 31, 2022 and December 31, 2021, respectively; liquidation preference of $477,047 and $436,943 as of December 31, 2022 and December 31, 2021, respectively | | | | 328,680 | | | 288,576 | | | | | | | | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | | | | | | Common stock, par value $0.01 per share; 150,000,000 and 100,000,000 shares authorized as of December 31, 2021 and December 31, 2020, respectively, 113,647,364 and 79,227,607 shares outstanding as of December 31, 2021 and December 31, 2020, respectively | | | 1,137 | | | 792 | | | Common stock, par value $0.01 per share; 150,000,000 shares authorized, 115,167,193 and 113,647,364 shares outstanding as of December 31, 2022 and December 31, 2021, respectively | | | | 1,152 | | | 1,137 | | Additional paid-in capital | | | 740,746 | | | 525,673 | | | | 720,442 | | | 740,746 | | Accumulated deficit | | | (141,599) | | | (34,514) | | | Retained earnings (accumulated deficit) | | | | (11,866) | | | (141,599) | | Accumulated other comprehensive loss, net | | | (59,571) | | | (109,418) | | | | (610) | | | (59,571) | | Noncontrolling interest | | | 7,087 | | | 6,695 | | | | 7,651 | | | 7,087 | | Total shareholders’ equity | | | 547,800 | | | 389,228 | | | | 716,769 | | | 547,800 | | Total liabilities, mezzanine equity and shareholders’ equity | | $ | 3,712,692 | | $ | 3,507,300 | | | $ | 3,887,094 | | $ | 3,712,692 | |
See accompanying notes.
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mezzanine Equity | | Shareholders' Equity | | | Mezzanine Equity | | Shareholders' Equity | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | Additional | | Retained | | Other | | Non- | | | | | | | | | | | | | | | | Additional | | Retained | | Other | | Non- | | | | | | | Preferred Stock | | Common Stock | | Paid-in | | Earnings | | Comprehensive | | controlling | | | | | | Preferred Stock | | Common Stock | | Paid-in | | Earnings | | Comprehensive | | controlling | | | | | | | Shares | | Amount | | Shares | | Amount | | Capital | | (Deficit) | | Loss, net | | Interest | | Total | | | Shares | | Amount | | Shares | | Amount | | Capital | | (Deficit) | | Loss, net | | Interest | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2018 | | — | | $ | — | | 71,187 | | $ | 712 | | $ | 513,070 | | $ | (50,834) | | $ | (53,212) | | $ | 5,918 | | $ | 415,654 | | | Cash dividends on common stock | | — | | | — | | — | | | — | | | (27,289) | | | (576) | | | — | | | — | | | (27,865) | | | Shares issued under employee plan, net of forfeitures | | — | | | — | | 870 | | | 9 | | | (9) | | | — | | | — | | | — | | | — | | | Non-cash, share-based compensation | | — | | | — | | — | | | — | | | 6,836 | | | — | | | — | | | — | | | 6,836 | | | Purchase and retirement of common stock | | — | | | — | | (96) | | | (1) | | | (362) | | | — | | | — | | | — | | | (363) | | | Other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | (27,656) | | | — | | | (27,656) | | | Cumulative adjustment upon adoption of ASU 2017-12 | | — | | | — | | — | | | — | | | — | | | 576 | | | — | | | — | | | 576 | | | Net income (loss) | | — | | | — | | — | | | — | | | — | | | (20,383) | | | — | | | 452 | | | (19,931) | | | Balance at December 31, 2019 | | — | | $ | — | | 71,961 | | $ | 720 | | $ | 492,246 | | $ | (71,217) | | $ | (80,868) | | $ | 6,370 | | $ | 347,251 | | | — | | $ | — | | 71,961 | | $ | 720 | | $ | 492,246 | | $ | (71,217) | | $ | (80,868) | | $ | 6,370 | | $ | 347,251 | | Shares issued under employee plan, net of forfeitures | | — | | | — | | 1,061 | | | 11 | | | (11) | | | — | | | — | | | — | | | — | | | — | | | — | | 1,061 | | | 11 | | | (11) | | | — | | | — | | | — | | | — | | Shares issued to Searchlight | | — | | | — | | 6,353 | | | 63 | | | 26,716 | | | — | | | — | | | — | | | 26,779 | | | — | | | — | | 6,353 | | | 63 | | | 26,716 | | | — | | | — | | | — | | | 26,779 | | Non-cash, share-based compensation | | — | | | — | | — | | | — | | | 7,533 | | | — | | | — | | | — | | | 7,533 | | | — | | | — | | — | | | — | | | 7,533 | | | — | | | — | | | — | | | 7,533 | | Purchase and retirement of common stock | | — | | | — | | (147) | | | (2) | | | (811) | | | — | | | — | | | — | | | (813) | | | — | | | — | | (147) | | | (2) | | | (811) | | | — | | | — | | | — | | | (813) | | Other comprehensive income (loss) | | — | | | — | | — | | | — | | | | | | — | | | (28,550) | | | — | | | (28,550) | | | — | | | — | | — | | | — | | | — | | | — | | | (28,550) | | | — | | | (28,550) | | Cumulative adjustment: adoption of ASU 2016-13 | | — | | | — | | — | | | — | | | — | | | (274) | | | — | | | — | | | (274) | | | — | | | — | | — | | | — | | | — | | | (274) | | | — | | | — | | | (274) | | Net income (loss) | | — | | | — | | — | | | — | | | — | | | 36,977 | | | — | | | 325 | | | 37,302 | | | — | | | — | | — | | | — | | | — | | | 36,977 | | | — | | | 325 | | | 37,302 | | Balance at December 31, 2020 | | — | | $ | — | | 79,228 | | $ | 792 | | $ | 525,673 | | $ | (34,514) | | $ | (109,418) | | $ | 6,695 | | $ | 389,228 | | | — | | $ | — | | 79,228 | | $ | 792 | | $ | 525,673 | | $ | (34,514) | | $ | (109,418) | | $ | 6,695 | | $ | 389,228 | | Shares issued under employee plan, net of forfeitures | | — | | | — | | 1,652 | | | 17 | | | (17) | | | — | | | — | | | — | | | — | | | — | | | — | | 1,652 | | | 17 | | | (17) | | | — | | | — | | | — | | | — | | Shares issued to Searchlight | | — | | | — | | 32,986 | | | 330 | | | 209,387 | | | — | | | — | | | — | | | 209,717 | | | — | | | — | | 32,986 | | | 330 | | | 209,387 | | | — | | | — | | | — | | | 209,717 | | Series A preferred stock issued | | 434 | | | 285,899 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 434 | | | 285,899 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Dividends on Series A preferred stock accrued | | — | | | 2,677 | | — | | | — | | | (2,677) | | | — | | | — | | | — | | | (2,677) | | | — | | | 2,677 | | — | | | — | | | (2,677) | | | — | | | — | | | — | | | (2,677) | | Non-cash, share-based compensation | | — | | | — | | — | | | — | | | 10,097 | | | — | | | — | | | — | | | 10,097 | | | — | | | — | | — | | | — | | | 10,097 | | | — | | | — | | | — | | | 10,097 | | Purchase and retirement of common stock | | — | | | — | | (219) | | | (2) | | | (1,717) | | | — | | | — | | | — | | | (1,719) | | | — | | | — | | (219) | | | (2) | | | (1,717) | | | — | | | — | | | — | | | (1,719) | | Other comprehensive income (loss) | | — | | | — | | — | | | — | | | | | | — | | | 49,847 | | | — | | | 49,847 | | | — | | | — | | — | | | — | | | | | | — | | | 49,847 | | | — | | | 49,847 | | Net income (loss) | | — | | | — | | — | | | — | | | — | | | (107,085) | | | — | | | 392 | | | (106,693) | | | — | | | — | | — | | | — | | | — | | | (107,085) | | | — | | | 392 | | | (106,693) | | Balance at December 31, 2021 | | 434 | | $ | 288,576 | | 113,647 | | $ | 1,137 | | $ | 740,746 | | $ | (141,599) | | $ | (59,571) | | $ | 7,087 | | $ | 547,800 | | | 434 | | $ | 288,576 | | 113,647 | | $ | 1,137 | | $ | 740,746 | | $ | (141,599) | | $ | (59,571) | | $ | 7,087 | | $ | 547,800 | | Shares issued under employee plan, net of forfeitures | | | — | | | — | | 1,809 | | | 17 | | | (17) | | | — | | | — | | | — | | | — | | Series A preferred stock issued | | | 22 | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Dividends on Series A preferred stock accrued | | | — | | | 40,104 | | — | | | — | | | (29,752) | | | (10,352) | | | — | | | — | | | (40,104) | | Non-cash, share-based compensation | | | — | | | — | | — | | | — | | | 10,755 | | | — | | | — | | | — | | | 10,755 | | Purchase and retirement of common stock | | | — | | | — | | (289) | | | (2) | | | (1,290) | | | — | | | — | | | — | | | (1,292) | | Other comprehensive income (loss) | | | — | | | — | | — | | | — | | | — | | | — | | | 58,961 | | | — | | | 58,961 | | Net income (loss) | | | — | | | — | | — | | | — | | | — | | | 140,085 | | | — | | | 564 | | | 140,649 | | Balance at December 31, 2022 | | | 456 | | $ | 328,680 | | 115,167 | | $ | 1,152 | | $ | 720,442 | | $ | (11,866) | | $ | (610) | | $ | 7,651 | | $ | 716,769 | |
See accompanying notes. CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) | | | | | | | | | | | | | Year Ended December 31, | | | | 2021 | | 2020 | | 2019 | | Cash flows from operating activities: | | | | | | | | | | | Net income (loss) | | $ | (106,693) | | $ | 37,302 | | $ | (19,931) | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | Depreciation and amortization | | | 300,597 | | | 324,864 | | | 381,237 | | Deferred income taxes | | | 5,504 | | | 8,386 | | | (5,249) | | Cash distributions from wireless partnerships in excess of (less than) current earnings | | | 1,195 | | | 844 | | | (1,901) | | Pension and post-retirement contributions in excess of expense | | | (33,208) | | | (37,301) | | | (24,507) | | Stock-based compensation expense | | | 10,097 | | | 7,533 | | | 6,836 | | Amortization of deferred financing costs and discounts | | | 15,622 | | | 7,871 | | | 4,932 | | Noncash interest expense on convertible security interest | | | 30,927 | | | 7,875 | | | — | | Loss (gain) on extinguishment of debt | | | 17,101 | | | 10,629 | | | (4,510) | | Loss (gain) on change in fair value of contingent payment rights | | | 86,476 | | | (23,802) | | | — | | Loss on impairment of assets held for sale | | | 5,704 | | | — | | | — | | Other, net | | | 3,226 | | | (2,501) | | | 1,487 | | Changes in operating assets and liabilities: | | | | | | | | | | | Accounts receivable, net | | | 4,103 | | | (4,993) | | | 13,120 | | Income tax receivable | | | (62) | | | 3,103 | | | 9,908 | | Prepaid expenses and other assets | | | (12,863) | | | (7,457) | | | (1,546) | | Accounts payable | | | (189) | | | (5,653) | | | (1,566) | | Accrued expenses and other liabilities | | | (8,670) | | | 38,280 | | | (19,214) | | Net cash provided by operating activities | | | 318,867 | | | 364,980 | | | 339,096 | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | Purchases of property, plant and equipment, net | | | (480,346) | | | (217,563) | | | (232,203) | | Purchase of investments | | | (175,764) | | | — | | | — | | Proceeds from sale of assets | | | 3,469 | | | 7,071 | | | 14,718 | | Proceeds from sale and maturity of investments | | | 66,198 | | | 426 | | | 329 | | Other | | | — | | | — | | | (663) | | Net cash used in investing activities | | | (586,443) | | | (210,066) | | | (217,819) | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from bond offering | | | 400,000 | | | 750,000 | | | — | | Proceeds from issuance of long-term debt | | | 150,000 | | | 1,271,250 | | | 195,000 | | Proceeds from issuance of common stock | | | 75,000 | | | 350,000 | | | — | | Payment of finance lease obligations | | | (6,365) | | | (9,020) | | | (12,519) | | Payment on long-term debt | | | (397,000) | | | (1,867,838) | | | (195,350) | | Retirement of senior notes | | | — | | | (444,717) | | | (49,804) | | Payment of financing costs | | | (8,266) | | | (59,139) | | | — | | Share repurchases for minimum tax withholding | | | (1,719) | | | (812) | | | (363) | | Dividends on common stock | | | — | | | — | | | (55,445) | | Other | | | — | | | (1,472) | | | — | | Net cash provided by (used in) financing activities | | | 211,650 | | | (11,748) | | | (118,481) | | Change in cash and cash equivalents | | | (55,926) | | | 143,166 | | | 2,796 | | Cash and cash equivalents at beginning of period | | | 155,561 | | | 12,395 | | | 9,599 | | Cash and cash equivalents at end of period | | $ | 99,635 | | $ | 155,561 | | $ | 12,395 | |
| | | | | | | | | | | | | Year Ended December 31, | | | | 2022 | | 2021 | | 2020 | | Cash flows from operating activities: | | | | | | | | | | | Net income (loss) | | $ | 140,649 | | $ | (106,693) | | $ | 37,302 | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | Depreciation and amortization | | | 300,166 | | | 300,597 | | | 324,864 | | Deferred income taxes | | | 58,894 | | | 5,504 | | | 8,386 | | Cash distributions from wireless partnerships in excess of current earnings | | | 5,697 | | | 1,195 | | | 844 | | Pension and post-retirement contributions in excess of expense | | | (29,205) | | | (33,208) | | | (37,301) | | Stock-based compensation expense | | | 10,755 | | | 10,097 | | | 7,533 | | Amortization of deferred financing costs and discounts | | | 7,331 | | | 15,622 | | | 7,871 | | Noncash interest expense on convertible security interest | | | — | | | 30,927 | | | 7,875 | | Loss on extinguishment of debt | | | — | | | 17,101 | | | 10,629 | | Loss (gain) on change in fair value of contingent payment rights | | | — | | | 86,476 | | | (23,802) | | Loss on impairment of assets held for sale | | | 131,698 | | | 5,704 | | | — | | Gain on sale of partnership interests | | | (389,885) | | | — | | | — | | Loss on disposal of assets | | | 4,233 | | | — | | | — | | Other, net | | | (367) | | | 3,226 | | | (2,501) | | Changes in operating assets and liabilities: | | | | | | | | | | | Accounts receivable, net | | | 5,167 | | | 4,103 | | | (4,993) | | Income tax receivable | | | (536) | | | (62) | | | 3,103 | | Prepaid expenses and other assets | | | (7,699) | | | (12,863) | | | (7,457) | | Accounts payable | | | (909) | | | (189) | | | (5,653) | | Accrued expenses and other liabilities | | | (12,279) | | | (8,670) | | | 38,280 | | Net cash provided by operating activities | | | 223,710 | | | 318,867 | | | 364,980 | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | Purchases of property, plant and equipment, net | | | (619,981) | | | (480,346) | | | (217,563) | | Purchase of investments | | | (302,907) | | | (175,764) | | | — | | Proceeds from sale and maturity of investments | | | 327,419 | | | 66,198 | | | 426 | | Proceeds from sale of assets | | | 22,918 | | | 3,469 | | | 7,071 | | Proceeds from business dispositions | | | 105,823 | | | — | | | — | | Proceeds from sale of partnership interests | | | 482,966 | | | — | | | — | | Net cash provided by (used in) investing activities | | | 16,238 | | | (586,443) | | | (210,066) | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from bond offering | | | — | | | 400,000 | | | 750,000 | | Proceeds from issuance of long-term debt | | | — | | | 150,000 | | | 1,271,250 | | Proceeds from issuance of common stock | | | — | | | 75,000 | | | 350,000 | | Payment of finance lease obligations | | | (9,836) | | | (6,365) | | | (9,020) | | Payment on long-term debt | | | — | | | (397,000) | | | (1,867,838) | | Retirement of senior notes | | | — | | | — | | | (444,717) | | Payment of financing costs | | | (2,603) | | | (8,266) | | | (59,139) | | Share repurchases for minimum tax withholding | | | (1,292) | | | (1,719) | | | (812) | | Other | | | — | | | — | | | (1,472) | | Net cash provided by (used in) financing activities | | | (13,731) | | | 211,650 | | | (11,748) | | Change in cash and cash equivalents | | | 226,217 | | | (55,926) | | | 143,166 | | Cash and cash equivalents at beginning of period | | | 99,635 | | | 155,561 | | | 12,395 | | Cash and cash equivalents at end of period | | $ | 325,852 | | $ | 99,635 | | $ | 155,561 | |
See accompanying notes. CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2022, 2021 2020 AND 20192020 1.BUSINESS DESCRIPTION & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Basis of Accounting Consolidated Communications Holdings, Inc. (the “Company,” “we,” “our” or “us”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communication solutions to consumer, commercial and carrier customers across a service area in over 20 states. Leveraging our advanced fiber network spanning approximately 52,40057,800 fiber route miles, we offer residential high-speed Internet, video, phone and home security services as well as a comprehensive business product suite including: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services. Use of Estimates Preparation of the financial statements in conformity with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from those estimates. Our critical accounting estimates include (i) impairment evaluations associated with indefinite-lived intangible assets (Note 1), (ii) the determination of deferred tax asset and liability balances (Notes 1 and 14) and (iii) pension plan and other post-retirement costs and obligations (Notes 1 and 13). Principles of Consolidation Our consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries and subsidiaries in which we have a controlling financial interest. All significant intercompany transactions have been eliminated. Recent Business Developments Discontinued Operations – Sale of Investment in Wireless Partnerships On September 13, 2022, we completed the sale of our five limited wireless partnership interests to Cellco Partnership (“Cellco”) for an aggregate purchase price of $490.0 million, other than a portion of the interest in one of the partnerships which was sold to a limited partner of such partnership pursuant to its right of first refusal. Cellco is the general partner for each of the five wireless partnerships and is an indirect, wholly-owned subsidiary of Verizon Communications, Inc. In accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements –Discontinued Operations, the sale of the limited partnership interests met the criteria for reporting as discontinued operations. As a result, the financial results of the limited partnership interests have been classified as discontinued operations in our consolidated financial statements for all periods presented. Refer to Note 6 for additional information on the transaction and the partnership interests. Searchlight Investment On December 7, 2021, we closed on the final stage of the investment agreement (the “Investment Agreement”) entered into on September 13, 2020 with an affiliate of Searchlight Capital Partners, L.P. (“Searchlight”). In connection with the Investment Agreement, affiliates of Searchlight have invested an aggregate of $425.0 million in the Company and hold a combination of Series A perpetual preferred stock and approximately 35%34% of the Company’s outstanding common stock.stock as of December 31, 2022. For a more complete discussion of the transaction, refer to Note 4. With the strategic investment from Searchlight, we intendlaunched our fiber build plan to enhance our fiber infrastructure and accelerate the investment in our network, which will include the upgrade over fivesix years of approximately 1.6 million passings across select service areas to enable multi-Gig capable services to these homes and small businesses. Our fiber build plan included the upgrade of approximately 330,000 homes and small businesses in 2021.
Refinancing of Long-term Debt
On October 2, 2020, the Company and certain of its wholly-owned subsidiaries completed a refinancing of our long-term debt through the issuance of $2,250.0 million in new secured debt and retired all of our existing then outstanding debt obligations. As described in Note 8, we entered into a new credit agreement and issued $750.0 million aggregate principal amount of 6.50% senior secured notes due 2028. On January 15, 2021, the Company issued an additional $150.0 million aggregate principal amount of incremental term loans under the credit agreement. On March 18, 2021, we issued $400.0 million aggregate principal amount 5.00% Senior Notes and used the net proceeds from the issuance of notes to repay $397.0 million of the term loans outstanding under the credit agreement. On April 5, 2021, we entered into an amendment
to enable multi-Gig capable services to these homes and small businesses. During the credit agreement to refinance the outstanding term loans. For a more complete discussion of the refinancing, refer to Note 8.
COVID-19
We are closely monitoring the ongoing impact on our business of the novel strain of coronavirus (“COVID-19”) and its variants. We are taking precautions to ensure the safety of our employees, customers and business partners, while assuring business continuity and reliable service and support to our customers. While we have not seen a material adverse impact to our financial results from COVID-19 to date, if the pandemic worsens or new variants of the virus become more dominant and were to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted by the U.S. government as an emergency economic stimulus package that includes spending and tax breaks to strengthen the US economy and fund a nationwide effort to curtail the economic effects of COVID-19. The CARES Act included, among other things, deferral of certain employer payroll tax payments and certain income tax law changes including modifications to the net interest deduction limitations. In 2020, we deferred the payment of approximately $12.0 million for the employer portion of Social Security taxes otherwise due in 2020 with 50% due byyears ended December 31, 2022 and 2021, we upgraded approximately 403,000 and the remaining 50% by December 31, 2022. The portion of the taxes deferred until 2021 were paid during the third quarter of 2021. On March 11, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was enacted and provides further economic relief330,000 passings to address the continued economic impact of COVID-19. To date, these acts have not had a material impact on our consolidated financial statements, although we will continue to monitor the impact of any effects from these acts and other future legislation.fiber, respectively.
Cash and Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Our cash equivalents consist primarily of money market funds and commercial paper. The carrying amounts of our cash equivalents approximate their fair values. Accounts Receivable and Allowance for Credit Losses
Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments, using the modified retrospective method. The adoption of the new standard did not result in a material impact to the Company. As part of the adoption, we recorded a cumulative effect adjustment of $0.3 million, net of tax, which decreased retained earnings during the year ended December 31, 2020. Of this amount, $0.2 million was related to the decrease in the value of our partnership interests as a result of the adoption of ASU 2016-13 by our equity method partnerships. The following disclosures have been made in accordance with ASU 2016-13.
Accounts receivable (“AR”) consists primarily of amounts due to the Company from normal business activities. We maintain an allowance for credit losses (“ACL”) based on our historical loss experience, current conditions and forecasted changes including but not limited to changes related to the economy, our industry and business. Uncollectible accounts are written-off (removed from AR and charged against the ACL) when internal collection efforts have been unsuccessful. Subsequently, if payment is received from the customer, the recovery is credited to the ACL. The following table summarizes the activity in the ACL for the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Balance at beginning of year | | $ | 9,136 | | $ | 4,549 | | $ | 4,421 | | | $ | 9,961 | | $ | 9,136 | | $ | 4,549 | | Cumulative adjustment upon adoption of ASU 2016-13 | | | — | | | 144 | | | — | | | | — | | | — | | | 144 | | Provision charged to expense | | | 7,752 | | | 11,573 | | | 9,347 | | | | 8,684 | | | 7,752 | | | 11,573 | | Write-offs, less recoveries | | | (6,927) | | | (7,130) | | | (9,219) | | | | (7,175) | | | (6,927) | | | (7,130) | | Balance at end of year | | $ | 9,961 | | $ | 9,136 | | $ | 4,549 | | | $ | 11,470 | | $ | 9,961 | | $ | 9,136 | |
Investments Investments in debt securities that we have the positive intent and ability to hold until maturity are classified as held-to-maturity. We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments with original maturities of more than three months and less than one year are classified as short-term investments. Held-to maturity debt securities are recorded at amortized cost, which approximates fair value, and realized gains or losses are recognized in earnings. Our long-term investments are primarily accounted for under either the equity method or at cost. If we have the ability to exercise significant influence over the operations and financial policies of an affiliated company, the investment in the affiliated company is accounted for using the equity method. If we do not have control and also cannot exercise significant influence, we account for these investments at our initial cost less impairment because fair value is not readily available for these investments. We review our investment portfolio periodically to determine whether there are identified events or circumstances that would indicate there is a decline in the fair value that is considered to be other than temporary. If we believe the decline is other than temporary, we evaluate the financial performance of the business and compare the carrying value of the investment to quoted market prices (if available) or the fair value of similar investments. If an investment is deemed to have experienced an impairment that is considered other-than temporary, the carrying amount of the investment is reduced to its quoted or estimated fair value, as applicable, and an impairment loss is recognized in other income (expense). Fair Value of Financial Instruments We account for certain assets and liabilities at fair value. Fair value is 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. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A financial asset or liability’s classification within a three-tiered value hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The hierarchy prioritizes the inputs to valuation techniques into three broad levels in order to maximize the use of observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are as follows: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. | Level 2 – | Inputs that reflect quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and inputs other than quoted prices that are directly or indirectly observable in the marketplace. |
| Level 3 – | Unobservable inputs which are supported by little or no market activity. |
Property, Plant and Equipment Property, plant and equipment are recorded at cost. We capitalize additions and substantial improvements and expense repairs and maintenance costs as incurred. We capitalize the cost of internal-use network and non-network software which has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal-use network and non-network software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. Also, we capitalize interest associated with the development of internal-use network and non-network software. Property, plant and equipment consisted of the following as of December 31, 20212022 and 2020:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | December 31, | | Estimated | | | December 31, | | December 31, | | Estimated | | (In thousands) | | 2021 | | 2020 | | Useful Lives | | | 2022 | | 2021 | | Useful Lives | | Land and buildings | | $ | 276,027 | | $ | 274,535 | | 18 | - | 40 | years | | | $ | 270,708 | | $ | 276,027 | | 18 | - | 40 | years | | Central office switching and transmission | | | 1,590,510 | | | 1,475,590 | | 3 | - | 25 | years | | | | 1,635,263 | | | 1,590,510 | | 3 | - | 25 | years | | Outside plant cable, wire and fiber facilities | | | 2,152,253 | | | 2,036,312 | | 3 | - | 50 | years | | | | 2,445,298 | | | 2,152,253 | | 3 | - | 50 | years | | Furniture, fixtures and equipment | | | 324,562 | | | 303,680 | | 3 | - | 15 | years | | | | 347,346 | | | 324,562 | | 3 | - | 15 | years | | Assets under finance leases | | | 44,495 | | | 40,407 | | 2 | - | 20 | years | | | | 58,081 | | | 44,495 | | 2 | - | 20 | years | | Total plant in service | | | 4,387,847 | | | 4,130,524 | | | | | | | | | 4,756,696 | | | 4,387,847 | | | | | | | Less: accumulated depreciation and amortization | | | (2,698,421) | | | (2,466,407) | | | | | | | | | (2,754,587) | | | (2,698,421) | | | | | | | Plant in service | | | 1,689,426 | | | 1,664,117 | | | | | | | | | 2,002,109 | | | 1,689,426 | | | | | | | Construction in progress | | | 265,054 | | | 64,056 | | | | | | | | | 123,736 | | | 265,054 | | | | | | | Construction inventory | | | 64,964 | | | 31,979 | | | | | | | | | 108,277 | | | 64,964 | | | | | | | Totals | | $ | 2,019,444 | | $ | 1,760,152 | | | | | | | | $ | 2,234,122 | | $ | 2,019,444 | | | | | | |
Construction inventory, which is stated at weighted average cost, consists primarily of network construction materials and supplies that when issued are predominately capitalized as part of new customer installations and the construction of the network. We record depreciation using the straight-line method over estimated useful lives using either the group or unit method. The useful lives are estimated at the time the assets are acquired and are based on historical experience with similar assets, anticipated technological changes and the expected impact of our strategic operating plan on our network infrastructure. In addition, the ranges of estimated useful lives presented above are impacted by the accounting for business combinations as the lives assigned to these acquired assets are generally much shorter than that of a newly acquired asset. The group method is used for depreciable assets dedicated to providing regulated telecommunication services, including the majority of the network, outside plant facilities and certain support assets. A depreciation rate for each asset group is developed based on the average useful life of the group. The group method requires periodic revision of depreciation rates. When an individual asset is sold or retired, the difference between the proceeds, if any, and the cost of the asset is charged or credited to accumulated depreciation, without recognition of a gain or loss. The unit method is primarily used for buildings, furniture, fixtures and other support assets. Each asset is depreciated on the straight-line basis over its estimated useful life. When an individual asset is sold or retired, the cost basis of the asset and related accumulated depreciation are removed from the accounts and any associated gain or loss is recognized. Depreciation and amortization expense related to property, plant and equipment was $269.3 million, $261.1 million and $274.2 million in 2022, 2021 and $315.0 million in 2021, 2020, and 2019, respectively. Amortization of assets under capital leases is included in the depreciation and amortization expense in the consolidated statements of operations. We evaluate the recoverability of our property, plant and equipment whenever events or substantive changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the total of the expected future undiscounted cash flows were less than the carrying amount of the asset group, we would recognize an impairment charge for the difference between the estimated fair value and the carrying value of the asset group. Intangible Assets Indefinite-Lived Intangibles Goodwill and tradenames are evaluated for impairment annually or more frequently when events or changes in circumstances indicate that the asset might be impaired. We evaluate the carrying value of goodwill and tradenames as of November 30 of each year. Goodwill Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired. Goodwill is not amortized but instead evaluated annually for impairment. The evaluation of goodwill may first include a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Events and circumstances integrated into the qualitative assessment process include a combination of macroeconomic conditions affecting equity and credit markets, significant changes to the cost structure, overall financial performance and other relevant events affecting the reporting unit. When we use the quantitative approach to assess the goodwill carrying value and the fair value of our single reporting unit, the fair value of our reporting unit is compared to its carrying amount, including goodwill. The estimated fair value of the reporting unit is determined using a combination of market-based approaches and a discounted cash flow (“DCF”) model and reconciled to our market capitalization plus an estimated control premium. The assumptions used in the estimate of fair value are based upon a combination of historical results and trends, new industry developments and future cash flow projections, as well as relevant comparable company earnings multiples for the market-based approaches. Significant assumptions used in the analysis include a long-term growth rate and the weighted average cost of capital which is used to discount estimates of projected future results and cash flows. Such assumptions are judgmental and subject to change as a result of changing economic and competitive conditions. We use a weighting of the results derived from the valuation approaches to estimate the fair value of the reporting unit. For the 20202022 assessment, using the quantitative approach, we concluded that the fair value of the reporting unit exceeded the carrying value at November 30, 20202022 and that there was 0no impairment of goodwill. In measuring the fair value of our single reporting unit as described, we consider the fair value of our reporting unit in relation to our overall enterprise value, measured as the publicly traded stock price multiplied by the fully diluted shares outstanding plus the fair value of outstanding debt. Our reporting unit fair value models are consistent with a range in value indicated by both the preceding three-month average stock price and the stock price on the valuation date, plus an estimated acquisition premium which is based on observable transactions of comparable companies, if applicable. For the 2021 assessment, we evaluated the fair value of goodwill compared to the carrying value using the qualitative approach. The results of the qualitative approach concluded that it was more likely than not that the fair value of goodwill was greater than the carrying value as of November 30, 2021. If the carrying value of the reporting unit exceeds its fair value, a goodwill impairment is recorded for the difference in the carrying value and fair value. We did 0tnot recognize any goodwill impairment in 2022, 2021 2020 or 20192020 as a result of the impairment tests. At December 31, 20212022 and 2020,2021, the carrying value of goodwill was $1,013.2$929.6 million and $1,035.3$1,013.2 million, respectively. Goodwill decreased $22.1$83.6 million during 20212022 as a result of allocated goodwill for a divestiture, classified as held for sale at December 31, 2021, as described in Note 5. Trade Name Our trade name is the federally registered mark CONSOLIDATED, a design of interlocking circles, which is used in association with our communication services. The Company’s corporate branding strategy leverages the CONSOLIDATED name and brand identity. All of the Company’s business units and several of our products and services incorporate the CONSOLIDATED name. Trade names with indefinite useful lives are not amortized but are tested for impairment at least annually. If facts and circumstances change relating to a trade name’s continued use in the branding of our products and services, it may be treated as a finite-lived asset and begin to be amortized over its estimated remaining life. When we use the quantitative approach to estimate the fair value of our trade names, we use DCFs based on a relief from royalty method. If the fair value of our trade names was less than the carrying amount, we would recognize an impairment charge for the difference between the estimated fair value and the carrying value of the assets. We perform our impairment testing of our trade names as single units of accounting based on their use in our single reporting unit. For the 20212022 assessment, we used the qualitative approach to evaluate the fair value compared to the carrying value of the trade name. Based on our assessment, we concluded that the fair value of the trade names continued to exceed the carrying value. The carrying value of our trade names, excluding any finite lived trade names, was $10.6 million at December 31, 20212022 and 2020.2021. Finite-Lived Intangible Assets Finite-lived intangible assets subject to amortization consist primarily of our customer lists of an established base of customers that subscribe to our services, trade names of acquired companies and other intangible assets.services. Finite-lived intangible assets are amortized using an accelerated amortization method or on a straight-line basis over their estimated useful lives. We evaluate the potential impairment of finite-lived intangible assets when impairment indicators exist. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, an impairment equal to the difference between the carrying amount and the fair value of the asset is recognized. We did not recognize any intangible impairment charges in the years ended December 31, 2022, 2021 2020 or 2019.2020. The components of finite-lived intangible assets are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2021 | | December 31, 2020 | | | | | | | | December 31, 2022 | | December 31, 2021 | | | | | | | | | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | | | | | | | | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | | (In thousands) | | Useful Lives | | Amount | | Amortization | | Amount | | Amortization | | | Useful Lives | | Amount | | Amortization | | Amount | | Amortization | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Customer relationships | | 5 | - | 11 | years | | $ | 318,498 | | $ | (244,559) | | $ | 318,921 | | $ | (205,503) | | | 7 | - | 11 | years | | $ | 318,498 | | $ | (275,409) | | $ | 318,498 | | $ | (244,559) | |
Amortization expense related to the finite-lived intangible assets for the years ended December 31, 2022, 2021 and 2020 and 2019 was $30.9 million, $39.5 million $50.7 million and $66.2$50.7 million, respectively. Expected future amortization expense of finite-lived intangible assets is as follows: | | | | | | | | | (In thousands) | | | | | | | | | 2022 | | $ | 30,850 | | | 2023 | | | 23,963 | | | $ | 23,963 | | 2024 | | | 10,617 | | | | 10,617 | | 2025 | | | 3,180 | | | | 3,180 | | 2026 | | | 2,529 | | | | 2,529 | | 2027 | | | | 1,996 | | Thereafter | | | 2,800 | | | | 804 | | Total | | $ | 73,939 | | | $ | 43,089 | |
Derivative Financial Instruments We use derivative financial instruments to manage our exposure to the risks associated with fluctuations in interest rates. Our interest rate swap agreements effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments. At the inception of a hedge transaction, we formally document the relationship between the hedging instruments including our objective and strategy for establishing the hedge. In addition, the effectiveness of the derivative instrument is assessed at inception and on an ongoing basis throughout the hedging period. Counterparties to derivative instruments expose us to credit-related losses in the event of nonperformance. We execute agreements only with financial institutions we believe to be creditworthy and regularly assess the credit worthiness of each of the counterparties. We do not use derivative instruments for trading or speculative purposes. Derivative financial instruments are recorded at fair value in our consolidated balance sheets. Fair value is determined based on projected interest rate yield curves and an estimate of our nonperformance risk or our counterparty’s nonperformance credit risk, as applicable. We do not anticipate any nonperformance by any counterparty. For derivative instruments designated as a cash flow hedge, the change in the fair value is recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and is recognized as an adjustment to earnings over the period in which the hedged item impacts earnings. When an interest rate swap agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt obligation. If a derivative instrument is de-designated, the remaining gain or loss in AOCI on the date of de-designation is amortized to earnings over the remaining term of the hedging instrument. For derivative financial instruments that are not designated as a hedge, including those that have been de-designated, changes in fair value are recognized on a current basis in earnings. Cash flows from hedging activities are classified under the same category as the cash flows from the hedged items in our consolidated statement of cash flows. See Note 9 for further discussion of our derivative financial instruments. Series A Preferred Stock Our Series A Preferred Stock is classified as mezzanine equity in the consolidated balance sheets due to a deemed liquidation feature, which gives holders the right to require the Company to redeem all or any part of the holders’ Series A Preferred Stock for cash in the event of a fundamental change or change in control. We have not adjusted the carrying value of the Series A Preferred Stock to its liquidation value since the securities are not currently redeemable nor is it probable that they will become redeemable. Subsequent adjustments to increase the carrying value to the liquidation value will be made only if and when it becomes probable that such a deemed liquidation event will occur. Share-based Compensation We recognize share-based compensation expense for all restricted stock awards (“RSAs”) and performance share awards (“PSAs”) (collectively, “stock awards”) based on the estimated fair value of the stock awards on the date of grant. We recognize the expense associated with RSAs and PSAs on a straight-line basis over the requisite service period, which generally ranges from immediate vesting to a four-year vesting period, and account for forfeitures as they occur. See Note 12 for additional information regarding share-based compensation. Pension Plan and Other Post-Retirement Benefits We maintain noncontributory defined benefit pension plans and provide certain post-retirement health care and life insurance benefits to certain eligible employees. We also maintain 2two unfunded supplemental retirement plans to provide incremental pension payments to certain former employees. See Note 13 for a more detailed discussion regarding our pension and other post-retirement benefits. We recognize pension and post-retirement benefits expense during the current period in the consolidated statement of operations using certain assumptions, including the expected long-term rate of return on plan assets, interest cost implied by the discount rate, expected health care cost trend rate and the amortization of unrecognized gains and losses. We determine expected long-term rate of return on plan assets by considering historical investment performance, plan asset allocation strategies and return forecasts for each asset class and input from its advisors. Projected returns by such advisors were based on broad equity and fixed income indices. The expected long-term rate of return is reviewed annually in conjunction with other plan assumptions and revised, if considered necessary, to reflect changes in the financial markets and the investment strategy. Our plan assets are valued at fair value as of the measurement date. Our discount rate assumption is determined annually to reflect the rate at which the benefits could be effectively settled and approximate the timing of expected future payments based on current market determined interest rates for similar obligations. We use bond matching model BOND:Link comprising of high quality corporate bonds to match cash flows to the expected benefit payments. We recognize the overfunded or underfunded status of our defined benefit pension and post-retirement plans as either an asset or liability in the consolidated balance sheet. Actuarial gains and losses that arise during the year are recognized as a component of comprehensive income (loss), net of applicable income taxes, and included in accumulated other comprehensive income (loss). These gains and losses are amortized over future years as a component of the net periodic benefit cost when the net gains and losses exceed 10% of the greater of the market-related value of the plan assets or the projected benefit obligation at the beginning of the year. The amount in excess of the corridor is amortized over the average remaining service period of participating employees expected to receive benefits under the plans. Income Taxes Our estimates of income taxes and the significant items resulting in the recognition of deferred tax assets and liabilities are disclosed in Note 14 and reflect our assessment of future tax consequences of transactions that have been reflected in our financial statements or tax returns for each taxing jurisdiction in which we operate. We base our provision for income taxes on our current period income, changes in our deferred income tax assets and liabilities, income tax rates, changes in estimates of our uncertain tax positions and tax planning opportunities available in the jurisdictions in which we operate. We recognize deferred tax assets and liabilities when there are temporary differences between the financial reporting basis and tax basis of our assets and liabilities and for the expected benefits of using net operating loss and tax credit loss carryforwards. We establish valuation allowances when necessary to reduce the carrying amount of deferred income tax assets to the amounts that we believe are more likely than not to be realized. We evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. When a change in the tax rate or tax law has an impact on deferred taxes, we apply the change when the tax law change is enacted, based on the years in which the temporary differences are expected to reverse. As we operate in more than 1one state, changes in our state apportionment factors, based on operating results, may affect our future effective tax rates and the value of our deferred tax assets and liabilities. We record a change in tax rates in our consolidated financial statements in the period of enactment. Income tax consequences that arise in connection with a business combination include identifying the tax basis of assets and liabilities acquired and any contingencies associated with uncertain tax positions assumed or resulting from the business combination. Deferred tax assets and liabilities related to temporary differences of an acquired entity are recorded as of the date of the business combination and are based on our estimate of the appropriate tax basis that will be accepted by the various taxing authorities. We record unrecognized tax benefits as liabilities in accordance with Accounting Standard Codification (“ASC”)ASC 740, Income Taxes, and adjust these liabilities in the appropriate period when our judgment changes as a result of the evaluation of new information. In certain instances, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. We classify interest and penalties, if any, associated with our uncertain tax positions as a component of interest expense and general and administrative expense, respectively. See Note 14 for further discussion on income taxes. Revenue Recognition Revenue is recognized when or as performance obligations are satisfied by transferring control of the good or service to the customer. Services Services revenues, with the exception of usage-based revenues, are generally billed in advance and recognized in subsequent periods when or as services are transferred to the customer. We offer bundled service packages that consists of high-speed Internet, video and voice services including local and long distance calling, voicemail and calling features. Each service is considered distinct and therefore accounted for as a separate performance obligation. Service revenue is recognized over time, consistent with the transfer of service, as the customer simultaneously receives and consumes the benefits provided by the Company’s performance as the Company performs. Usage-based services, such as per-minute long-distance service and access charges billed to other telephone carriers for originating and terminating long-distance calls in our network, are billed in arrears. We recognize revenue from these services when or as services are transferred to the customer. Revenue related to nonrefundable upfront fees, such as service activation and set-up fees are deferred and amortized over the expected customer life. Equipment Equipment revenue is generated from the sale of voice and data communications equipment as well as design, configuration, installation and professional support services related to such equipment. Equipment revenue generated from telecommunications systems and structured cabling projects is recognized when or as the project is completed and control is transferred to the customer. Maintenance services are provided on both a contract and time and material basis and are recognized when or as services are transferred. Subsidies and Surcharges Subsidies consist of both federal and state subsidies, which arefunding, designed to promote widely available, quality telephone serviceand broadband services at affordable prices and with higher data speeds in rural areas.areas and for low-income consumers across the country. These revenues are calculated by the administering government agency based on information we provide. There is a reasonable possibility that out-of-period subsidy adjustments may be recorded in the future, but they are expected to be immaterial to our results of operations, financial position and cash flows.
We recognize Federal Universal Service contributions on a gross basis. We account for all other taxes collected from customers and remitted to the respective government agencies on a net basis. Some subsidies are funded by end user surcharges to which telecommunications providers, including local, long-distance and wireless carriers, contribute on a monthly basis, while others are components of broader economic stimulus or recovery legislation. In other cases, subsidies are awarded to carriers periodically over a predetermined number of years to support their deployment of high-speed broadband infrastructure in underserved or unserved areas. During the year ended December 31, 2022, subsidies included federal funding from the Rural Development Opportunity Fund (“RDOF”). The RDOF provides funding to bring faster broadband speeds to unserved and underserved areas of America. In the first phase of the RDOF auction process, we were awarded annual funding of approximately $5.9 million, beginning January 1, 2022 through December 31, 2031. The specific obligations associated with the RDOF funding include the obligation to deliver 1 Gbps downstream and 500 Mbps upstream data speeds to approximately 27,000 locations in seven states. RDOF subsidies are recognized as operating revenue since the primary conditions for the funding are the upgrade and operation of the broadband network over the funding period. Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $34.5 million, $18.8 million and $11.1 million in 2022, 2021 and $11.5 million in 2021, 2020, and 2019, respectively. Statement of Cash Flows Information During 2022, 2021 2020 and 2019,2020, we made payments for interest and income taxes as follows: | | | | | | | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Interest, net of amounts capitalized ($5,590, $1,660 and $3,737 in 2021, 2020 and 2019, respectively) | | $ | 123,031 | | $ | 120,897 | | $ | 129,508 | | | Interest, net of amounts capitalized ($10,112, $5,590 and $1,660 in 2022, 2021 and 2020, respectively) | | | $ | 119,322 | | $ | 123,031 | | $ | 120,897 | | Income taxes paid (received), net | | $ | 836 | | $ | (553) | | $ | (8,374) | | | $ | 9,585 | | $ | 836 | | $ | (553) | |
In 2022, 2021 2020 and 2019,2020, we acquired equipment of $20.6 million, $13.9 million $2.5 million and $6.2$2.5 million, respectively, through finance lease agreements. In 2022, 2021 and 2020, we acquired property and equipment of $34.1 million, $52.9 million and $17.4 million, respectively, which were accrued but not yet paid. Noncontrolling Interest We have a majority-owned subsidiary, East Texas Fiber Line Incorporated (“ETFL”), which is a joint venture owned 63% by the Company and 37% by Eastex Telecom Investments, LLC. ETFL provides connectivity over a fiber optic transport network to certain customers residing in Texas. Recent Accounting Pronouncements Effective January 1, 2021,2022, we adopted ASU No. 2020-06 (“ASU 2020-06”), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies guidance on accounting for convertible instruments and contracts in an entity’s own equity including calculating diluted earnings per share. The adoption of this guidance did not have an impact on our consolidated financial statements and related disclosures.
Effective January 1, 2021, we adopted ASU No. 2019-12 (“ASU 2019-12”), Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions and adding certain requirements to the general framework in Accounting Standards Codification (“ASC”) 740, Income Taxes. The new guidance will be applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
In November 2021, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) No. 2021-10 (“ASU 2021-10”), Disclosures by Business Entities about Government Assistance. ASU 2021-10 requires disclosure by business entities of the types of government assistance received, the method of accounting for such assistance and the effects of the assistance on its financial statements. The newadoption of this guidance is effective for financial statements issued for annual periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating thedid not have a material impact this update will have on our related disclosures.
In March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2020-04 (“ASU 2020-04”),Facilitation of the Effects of Reference Rate Reform on Financial Reporting.Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.met. In January 2021, the FASB issued ASU No. 2021-01 (“ASU 2021-01”), Reference Rate Reform (Topic 848): Scope. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2020-04 and ASU 2021-01 are both elective and are effective upon issuance through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the optional relief guidance in Topic 848 from December 31, 2022 to December 31, 2024. As of December 31, 2022, we have interest rate swap agreements and variable rate long-term debt for which existing payments are based on the London Interbank Offered Rate (“LIBOR”) expected to cease as June 30, 2023. We are currently evaluatingexpect to complete the impacttransition from LIBOR to the Secured Overnight Financing Rate (“SOFR”) or an alternate base rate for these updates willagreements during the second quarter of 2023. We do not expect this adoption to have a material impact on our consolidated financial statements and related disclosures. Certain amounts in our 2021 and 2020 consolidated financial statements have been reclassified to conform to the current year presentation primarily related to the presentation of the financial results for our wireless partnership interests as discontinued operations. 2.REVENUE Nature of Contracts with Customers Our revenue contracts with customers may include a promise or promises to deliver goods such as equipment and/or services such as broadband, video or voice services. Promised goods and services are considered distinct as the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer and the Company’s promise to transfer a good or service to the customer is separately identifiable from other promises in the contract. The Company accounts for goods and services as separate performance obligations. Each service is considered a single performance obligation as it is providing a series of distinct services that are substantially the same and have the same pattern of transfer. The transaction price is determined at contract inception and reflects the amount of consideration to which we expect to be entitled in exchange for transferring a good or service to the customer. This amount is generally equal to the market price of the goods and/or services promised in the contract and may include promotional discounts. The transaction price excludes amounts collected on behalf of third parties such as sales taxes and regulatory fees. Conversely, nonrefundable upfront fees, such as service activation and set-up fees, are included in the transaction price. In determining the transaction price, we consider our enforceable rights and obligations within the contract. We do not consider the possibility of a contract being cancelled, renewed or modified. The transaction price is allocated to each performance obligation based on the standalone selling price of the good or service, net of the related discount, as applicable. Revenue is recognized when or as performance obligations are satisfied by transferring control of the good or service to the customer. Disaggregation of Revenue The following table summarizes revenue from contracts with customers for the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Operating Revenues | | | | | | | | | | | | | | | | | | | | | Commercial and carrier: | | | | | | | | | | | | Data and transport services (includes VoIP) | | $ | 362,365 | | $ | 362,078 | | $ | 355,325 | | | Consumer: | | | | | | | | | | | | Broadband (Data and VoIP) | | | $ | 272,146 | | $ | 269,323 | | $ | 263,059 | | Voice services | | | | 144,853 | | | 160,698 | | | 170,503 | | Video services | | | | 54,153 | | | 65,114 | | | 74,343 | | | | | | 471,152 | | | 495,135 | | | 507,905 | | Commercial: | | | | | | | | | | | | Data services (includes VoIP) | | | | 228,466 | | | 228,931 | | | 225,279 | | Voice services | | | 171,750 | | | 181,700 | | | 188,322 | | | | 142,274 | | | 154,567 | | | 161,179 | | Other | | | 41,624 | | | 45,155 | | | 52,894 | | | | 43,100 | | | 40,032 | | | 43,454 | | | | | 575,739 | | | 588,933 | | | 596,541 | | | | 413,840 | | | 423,530 | | | 429,912 | | Consumer: | | | | | | | | | | | | Broadband (VoIP and Data) | | | 269,323 | | | 263,059 | | | 257,083 | | | Video services | | | 65,114 | | | 74,343 | | | 81,378 | | | Carrier: | | | | | | | | | | | | Data and transport services | | | | 137,378 | | | 133,434 | | | 136,799 | | Voice services | | | 160,698 | | | 170,503 | | | 180,839 | | | | 14,772 | | | 17,183 | | | 20,521 | | Other | | | | 1,688 | | | 1,592 | | | 1,701 | | | | | 495,135 | | | 507,905 | | | 519,300 | | | | 153,838 | | | 152,209 | | | 159,021 | | Subsidies | | | 69,739 | | | 71,989 | | | 72,440 | | | | 33,382 | | | 69,739 | | | 71,989 | | Network access | | | 120,487 | | | 125,261 | | | 138,056 | | | | 104,644 | | | 120,487 | | | 125,261 | | Other products and services | | | 21,133 | | | 9,940 | | | 10,205 | | | | 14,407 | | | 21,133 | | | 9,940 | | Total operating revenues | | $ | 1,282,233 | | $ | 1,304,028 | | $ | 1,336,542 | | | $ | 1,191,263 | | $ | 1,282,233 | | $ | 1,304,028 | |
Contract Assets and Liabilities The following table provides information about receivables, contract assets and contract liabilities from our revenue contracts with customers: | | | | | | | | | | | | | | | | Year Ended
December 31, | | | Year Ended
December 31, | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | Accounts receivable, net | | $ | 133,362 | | $ | 137,646 | | | $ | 119,675 | | $ | 133,362 | Contract assets | | | 23,893 | | | 21,004 | | | | 25,322 | | | 23,893 | Contract liabilities | | | 60,503 | | | 55,942 | | | | 54,537 | | | 60,503 |
Contract assets include costs that are incremental to the acquisition of a contract. Incremental costs are those that result directly from obtaining a contract or costs that would not have been incurred if the contract had not been obtained, which primarily relate to sales commissions. These costs are deferred and amortized over the expected customer life. We determined that the expected customer life is the expected period of benefit as the commission on the renewal contract is not commensurate with the commission on the initial contract. During the years ended December 31, 2022, 2021 2020 and 2019,2020, the Company recognized expense of $12.9 million, $11.1 million $9.0 million and $6.3$9.0 million, respectively, related to deferred contract acquisition costs. Contract liabilities include deferred revenues related to advanced payments for services and nonrefundable, upfront service activation and set-up fees, which are generally deferred and amortized over the expected customer life as the option to renew without paying an upfront fee provides the customer with a material right. During the years ended December 31, 2022, 2021 2020 and 2019,2020, the Company recognized previously deferred revenues of $478.9 million, $471.7 million $443.0 million and $397.5$443.0 million, respectively. A receivable is recognized in the period the Company provides goods or services when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are generally 30 to 60 days. Performance Obligations ASC 606, Revenue from Contracts with Customers (“ASC 606”), requires that the Company disclose the aggregate amount of the transaction price that is allocated to remaining performance obligations that are unsatisfied as of December 31, 2021.2022. The guidance provides certain practical expedients that limit this requirement. The service revenue contracts of the Company meet the following practical expedients provided by ASC 606: | | | | 1. | The performance obligation is part of a contract that has an original expected duration of one year or less. | | 2. | Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18. |
The Company has elected these practical expedients. Performance obligations related to our service revenue contracts are generally satisfied over time. For services transferred over time, revenue is recognized based on amounts invoiced to the customer as the Company has concluded that the invoice amount directly corresponds with the value of services provided to the customer. Management considers this a faithful depiction of the transfer of control as services are substantially the same and have the same pattern of transfer over the life of the contract. As such, revenue related to unsatisfied performance obligations that will be billed in future periods has not been disclosed. 3.EARNINGS PER SHARE Basic and diluted earnings (loss) per common share (“EPS”) are computed using the two-class method, which is an earnings allocation method that determines EPS for each class of common stock and participating securities considering dividends declared and participation rights in undistributed earnings. Common stock related to certain of the Company’s restricted stock awards are considered participating securities because holders are entitled to receive non-forfeitable dividends, if declared, during the vesting term. The potentially dilutive impact of the Company’s restricted stock awards is determined using the treasury stock method. Under the treasury stock method, if the average market price during the period exceeds the exercise price, these instruments are treated as if they had been exercised with the proceeds of exercise used to repurchase common stock at the average market price during the period. Any incremental difference between the assumed number of shares issued and repurchased is included in the diluted share computation. Diluted EPS includes securities that could potentially dilute basic EPS during a reporting period. Dilutive securities are not included in the computation of loss per share when a company reports a net loss from continuing operations as the impact would be anti-dilutive. The computation of basic and diluted EPS attributable to common shareholders computed using the two-class method is as follows: | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands, except per share amounts) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Net income (loss) | | $ | (106,693) | | $ | 37,302 | | $ | (19,931) | | | Income (loss) from continuing operations | | | $ | (177,704) | | $ | (139,127) | | $ | 5,874 | | Less: dividends on Series A preferred stock | | | 2,677 | | | — | | | — | | | | 40,104 | | | 2,677 | | | — | | Less: net income attributable to noncontrolling interest | | | 392 | | | 325 | | | 452 | | | | 564 | | | 392 | | | 325 | | Income (loss) attributable to common shareholders before allocation of earnings to participating securities | | | (109,762) | | | 36,977 | | | (20,383) | | | Loss attributable to common shareholders before allocation of earnings to participating securities | | | | (218,372) | | | (142,196) | | | 5,549 | | Less: earnings allocated to participating securities | | | — | | | 2,844 | | | 462 | | | | (6,284) | | | — | | | 427 | | Income (loss) from continuing operations attributable to common shareholders, after earnings allocated to participating securities | | | | (212,088) | | | (142,196) | | | 5,122 | | | | | | | | | | | | | | Income from discontinued operations | | | | 318,353 | | | 32,434 | | | 31,428 | | Less: earnings allocated to participating securities | | | | 9,161 | | | — | | | 2,417 | | Income from discontinued operations attributable to common shareholders, after earnings allocated to participating securities | | | | 309,192 | | | 32,434 | | | 29,011 | | Net income (loss) attributable to common shareholders, after earnings allocated to participating securities | | $ | (109,762) | | $ | 34,133 | | $ | (20,845) | | | $ | 97,104 | | $ | (109,762) | | $ | 34,133 | | | | | | | | | | | | | | | | | | | | | | | Weighted-average number of common shares outstanding | | | 87,293 | | | 72,752 | | | 70,837 | | | | 111,754 | | | 87,293 | | | 72,752 | | | | | | | | | | | | | | | | | | | | | | | Basic and diluted earnings (loss) per common share: | | | | | | | | | | | | Income (loss) from continuing operations | | | $ | (1.90) | | $ | (1.63) | | $ | 0.07 | | Income from discontinued operations | | | | 2.77 | | | 0.37 | | | 0.40 | | Net income (loss) per common share attributable to common shareholders - basic and diluted | | $ | (1.26) | | $ | 0.47 | | $ | (0.29) | | | $ | 0.87 | | $ | (1.26) | | $ | 0.47 | |
Diluted EPS attributable to common shareholders for the year ended December 31, 2022 and 2021 excludes 3.3 million and 3.2 million potential common shares, respectively, related to our share-based compensation plan. Diluted EPS attributable to common shareholders for the year ended December 31, 2020 excludes 6.1 million potential common shares related to our share-based compensation plan and the contingent payment right (“CPR”) issued to Searchlight on October 2, 2020, as described in Note 4, because the inclusion of the potential common shares would have an antidilutive effect. Diluted EPS attributable to common shareholders for the year ended December 31, 2019 excludes 1.1 million potential common shares that could be issued under our share-based compensation plan. 4.SEARCHLIGHT INVESTMENT In connection with the Investment Agreement entered into on September 13, 2020, affiliates of Searchlight committed to invest up to an aggregate of $425.0 million in the Company. The investment commitment was structured in 2two stages. In the first stage of the transaction, which was completed on October 2, 2020, Searchlight invested $350.0 million in the Company in exchange for 6,352,842 shares, or approximately 8%, of the Company’s common stock and was issued a CPR that was convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 17,870,012 shares, or 16.9% of the Company’s common stock. In addition, Searchlight received the right to an unsecured subordinated note with an aggregate principal amount of approximately $395.5 million (the “Note”), which will be convertible into shares of a new series of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the Note plus accrued interest as of the date of conversion. On July 15, 2021, the Company received all required state public utility commission regulatory approvals necessary for the conversion of the CPR into 16.9% additional shares of the Company’s common stock. As a result, the CPR was converted into 17,870,012 shares of common stock, which were issued to Searchlight on July 16, 2021. In the second stage of the transaction, which was completed on December 7, 2021 following the receipt of Federal Communications Commission (“FCC”) and certain regulatory approvals and the satisfaction of certain other customary closing conditions, Searchlight invested an additional $75.0 million and was issued the Note. On December 7, 2021, Searchlight elected to convert the Note into 434,266 shares of Series A Perpetual Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”). In addition, the CPR converted into an additional 15,115,899 shares, or an additional 10.1%, of the Company’s common stock. As of December 31, 2022 and 2021, the total shares of common stock issued to Searchlight represent approximately 34% and 35%, respectively, of the Company’s outstanding common stock.
The total expected proceeds from the Investment Agreement were allocated among each of the individual components of the investment and recorded at their estimated fair values as of October 2, 2020. The proceeds were first allocated to the CPR at its full estimated fair value including a discount for lack of marketability and then allocated to the issuance of the common stock with the remaining proceeds allocated to the Note. The estimated fair value of the components of the Investment Agreement at October 2, 2020 were as follows:
| | | | | | (In thousands) | | | | Assets Received: | | | | | | Cash proceeds | | $ | 350,000 | | | Receivable from Searchlight, net of discount of $612 | | | 74,388 | | | Less: Issuance costs | | | (14,474) | | | Total consideration | | $ | 409,914 | | | | | | | | Assets Exchanged: | | | | | | 6,352,842 shares of common stock, par value $0.01 per share, net of issuance costs of $1,473 | | $ | 26,779 | | | CPR for 16.9% additional shares of common stock | | | 79,469 | | | CPR for 10.1% additional shares of common stock | | | 67,221 | | | Convertible security interest issued as unsecured subordinated note right, net of discount of $146,018 and issuance costs of $13,001 | | | 236,445 | | | | | $ | 409,914 | |
At December 31, 2020, the net present value of the receivable for the additional investment of $75.0 million expected to be received from Searchlight upon the closing of the second stage of the transaction was $74.7 million, net of unamortized discount of $0.3 million, and was included within other assets in the consolidated balance sheet.
Prior to conversion, the CPR was reported at its estimated fair value within long-term liabilities in the consolidated balance sheet. Subsequent changes in fair value were reflected in earnings within other income and expense in the consolidated statements of operations. As of December 31, 2020, the estimated fair value of the CPR was $123.2 million and duringDuring the years ended December 31, 2021 and 2020, we recognized a loss of $86.5 million and a gain of $23.5 million, respectively, on the change in the fair value of the CPR. Issuance costs allocated to the CPR of $7.6 million were expensed as incurred during the year ended December 31, 2020, which were included in acquisition and other transaction costs in the consolidated statements of operations. The Note bore interest at 9.0% per annum from the date of the closing of the first stage of the transaction and was payable semi-annually in arrears on April 1 and October 1 of each year. The term of the Note was 10 years and was due on October 1, 2029. The Note’s unamortized discount and issuance costs were being amortized over the contractual term of the Note using the effective interest method. The Note included a paid-in-kind (“PIK”) option for a five-year period beginning as of October 2, 2020. During the year ended December 31, 2021, the Company elected the PIK option and accrued interest of $38.8 million was added to the principal balance of the Note. At December 31, 2020, the net carrying value of the Note was $238.7 million, net of unamortized discount and issuance costs of $144.8 million and $12.0 million, respectively. The unamortized discount and issuance costs were being amortized over the contractual term of the Note using the effective interest method. On December 7, 2021, Searchlight exercised its option to convert the Note and the net carrying value of the Note of $285.9 million, net of unamortized discount and issuance costs of $139.7 million and $8.7 million, respectively, was converted into 434,266 shares of Series A Preferred Stock at a liquidation preference of $1,000 per share. Dividends on the Series A Preferred Stock will accrue daily on the liquidation preference at a rate of 9.0% per annum, payable semi-annually in arrears. See Note 11 for more information on the terms of the Series A Preferred Stock. 5.DIVESTITURES Kansas City Operations On March 2, 2022, we entered into a definitive agreement to sell substantially all the assets of our business located in the Kansas City market (the “Kansas City operations”). The Kansas City operations provides data, voice and video services to customers within the Kansas City metropolitan area and surrounding counties and includes approximately 17,100 consumer customers and 1,600 commercial customers. The sale closed on November 30, 2022 for gross cash proceeds of $82.1 million, subject to the finalization of certain working capital and other post-closing purchase price adjustments. We expect to utilize the proceeds from the sale to support our fiber expansion plan in our core regions. The major classes of assets and liabilities sold consisted of the following: | | | | | (In thousands) | | | | Current assets | | $ | 3,205 | | Property, plant and equipment | | | 138,587 | | Goodwill | | | 83,673 | | Other long-term assets | | | 1,238 | | Impairment to net realizable value | | | (148,462) | | Total assets | | $ | 78,241 | | | | | | | Current liabilities | | $ | 1,064 | | Other long-term liabilities | | | 790 | | Total liabilities | | $ | 1,854 | |
In 2022, in connection with the classification as assets held for sale, the carrying value of the net assets were reduced to their estimated fair value, which was determined based on the estimated selling price less costs to sell, and as a result, we recognized an impairment loss of $131.7 million during the year ended December 31, 2022. During the quarter and year ended December 31, 2022, we recognized an additional loss on the sale of $16.8 million as a result of purchase price adjustments and an increase in net assets held for sale and estimated selling costs during the period. Tower Assets During the year ended December 31, 2022, we completed the sale of certain non-strategic communication towers for cash proceeds of approximately $21.0 million and recognized a pre-tax gain on the sale of $20.8 million. Ohio Operations On September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio, Consolidated Communications of Ohio Company (“CCOC”), for approximately $26.0 million in cash, subject to a customary working capital adjustment.. CCOC provides telecommunications and data services to residential and business customers in 11 rural communities in Ohio and surrounding areas and includes approximately 4,0003,800 access lines and 3,900 data connections. Subsequent to DecemberThe sale was completed on January 31, 2021, the parties received all required regulatory approvals and the transaction closed on February 1, 2022.2022 for gross cash proceeds of $26.1 million, including customary working capital adjustments. The asset sale aligns with our strategic asset review and focus on our core broadband regions. The major classes of assets and liabilities sold consisted of the following: | | | | | (In thousands) | | | | Current assets | | $ | 137 | | Property, plant and equipment | | | 9,584 | | Goodwill | | | 16,327 | | Total assets | | $ | 26,048 | | | | | | | Current liabilities | | $ | 102 | | Other long-term liabilities | | | 6 | | Total liabilities | | $ | 108 | |
At December 31, 2021, the major classes of assets and liabilities to be sold were classified as held for sale in the consolidated balance sheet and consisted of the following:
| | | | | (In thousands) | | | | Current assets | | $ | 196 | | Property, plant and equipment | | | 9,529 | | Goodwill | | | 16,327 | | Total assets | | $ | 26,052 | | | | | | | Current liabilities | | $ | 91 | | Other long-term liabilities | | | 6 | | Total liabilities | | $ | 97 | |
sheet. In 2021, in connection with the classification as assets held forexpected sale, the carrying value of the net assets were reduced to their estimated fair value of approximately $25.9 million, which was determined based on the estimated selling price less costs to sell and were classified as Level 2 within the fair value hierarchy. As a result, we recognized an impairment loss of $5.7 million during the year ended December 31, 2021. During the year ended December 31, 2022, we recognized an additional loss on the sale of $0.8 million, which is included in selling, general and administrative expense in the consolidated statement of operations, as a result of changes in working capital and estimated selling costs. Subsequent to December 31, 2021, we entered into a definitive agreement on March 2, 2022 to sell substantially all the assets of our business located in the Kansas City market (the “Kansas City operations”). The Kansas City operations provides data, voice and video services to customers within the Kansas City metropolitan area and surrounding counties and includes approximately 19,000 consumer customers and 1,900 commercial customers. The transaction is expected to close in the second half of 2022 and is subject to the receipt of all customary regulatory approvals and the satisfaction of other closing conditions. We estimate that the pre-tax impairment loss to be recognized during the quarter ended March 31, 2022 will range from $125.0 million to $130.0 million, which includes approximately $90.0 million in allocated goodwill.
6.INVESTMENTS Our investments are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In thousands) | | | 2021 | | 2020 | | | | 2022 | | 2021 | | Short-term investments: | | | | | | | | | | | | | | | | | Held-to-maturity debt securities | | | $ | 110,801 | | $ | — | | | | $ | 87,951 | | $ | 110,801 | | | | | | | | | | | | | | | | | | | Long-term investments: | | | | | | | | | | | | | | | | | Cash surrender value of life insurance policies | | | $ | 2,659 | | $ | 2,536 | | | | $ | 2,774 | | $ | 2,659 | | CoBank, ACB Stock | | | | | 7,250 | | | 7,867 | | Other | | | | | 273 | | | 273 | | | | | | $ | 10,297 | | $ | 10,799 | | | | | | | | | | | | Assets of discontinued operations: | | | | | | | | | | Investments at cost: | | | | | | | | | | | | | | | | | GTE Mobilnet of South Texas Limited Partnership (2.34% interest) | | | | 21,450 | | | 21,450 | | | | $ | — | | $ | 21,450 | | Pittsburgh SMSA Limited Partnership (3.60% interest) | | | | 22,950 | | | 22,950 | | | | | — | | | 22,950 | | CoBank, ACB Stock | | | | 7,867 | | | 8,882 | | | Other | | | | 273 | | | 273 | | | Equity method investments: | | | | | | | | | | | | | | | | | GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest) | | | | 19,648 | | | 20,299 | | | | | — | | | 19,648 | | Pennsylvania RSA 6(I) Limited Partnership (16.67% interest) | | | | 7,303 | | | 7,482 | | | | | — | | | 7,303 | | Pennsylvania RSA 6(II) Limited Partnership (23.67% interest) | | | | 27,428 | | | 27,793 | | | | | — | | | 27,428 | | Totals | | | $ | 109,578 | | $ | 111,665 | | | | | | | $ | — | | $ | 98,779 | |
Held-to-Maturity Debt Securities Our held-to-maturity debt securities consist of investments in commercial paper and certificate of deposits. At December 31, 2022, we had $88.0 million of investments in commercial paper included in short-term investments. At December 31, 2021, we had $20.0 million of investments in commercial paper included in cash and cash equivalents and $40.0 million of investments in commercial paper and $70.8 million of investments in certificate of deposits included in short-term investments. The investments have original maturities of less than one year. As of December 31, 2022 and 2021, the amortized cost of the investments approximated their fair value and the gross unrecognized gains and losses were not material. Long-Term Investments at Cost
We own 2.34%of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”). The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas. We also own 3.60% of Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular service in and around the Pittsburgh metropolitan area. Because of our limited influence over these partnerships, we account for these investments at our initial cost less any impairment because fair value is not readily available for these investments. We did not evaluate any of the investments for impairment as no factors indicating impairment existed during the year. For these investments, we adjust the carrying value for any purchases or sales of our ownership interests, if any (there were none during the periods presented). We record distributions received from these investments as investment income in non-operating income (expense). In 2021, 2020 and 2019, we received cash distributions from these partnerships totaling $20.7 million, $19.1 million and $16.8 million, respectively.
CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers. Annually, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which has traditionally been a significant lender in the Company’s credit facility. The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company. Equity MethodDiscontinued Operations
Investments at Cost We ownowned 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”). The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas. We also owned 3.60% of Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular service in and around the Pittsburgh metropolitan area. Because of our limited influence over these partnerships, we accounted for these investments at our initial cost less any impairment because fair value is not readily available for these investments. We did not evaluate any of the investments for impairment as no factors indicating impairment existed during the year. For these investments, we adjusted the carrying value for any purchases or sales of our ownership interests, if any (there were none during the periods presented). Prior to classification as discontinued operations, we recorded distributions received from these investments as investment income in non-operating income (expense). In 2022, 2021 and 2020, we received cash distributions from these partnerships totaling $11.7 million, $20.7 million and $19.1 million, respectively. Equity Method We owned 20.51%of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.67% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”). RSA #17 provides cellular service to a limited rural area in Texas. RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory. Because we havehad significant influence over the operating and financial policies of these 3three entities, we accountaccounted for the investments using the equity method. Prior to classification as discontinued operations, income was recognized as investment income in non-operating income (expense) on our proportionate share of earnings and cash distributions were recorded as a reduction in our investment. In connection with the adoption of ASC 606 by our equity method partnerships, the value of our combined partnership interests increased $1.8 million, which is reflected in the cumulative effect adjustment to retained earnings during the year ended December 31, 2019. In2022, 2021 2020 and 2019,2020, we received cash distributions from these partnerships totaling $17.5 million, $22.3 million and $22.4 million and $19.0 million, respectively. The carrying value of the investments exceedsexceeded the underlying equity in net assets of the partnerships by $32.8 million as of December 31, 2021. On September 13, 2022, we completed the sale of our five limited wireless partnership interests to Cellco for an aggregate purchase price of $490.0 million. Cellco is the general partner for each of the five wireless partnerships and is an indirect, wholly-owned subsidiary of Verizon Communications, Inc. A portion of the interest in one of the partnerships was sold to a limited partner of such partnership, pursuant to its right of first refusal. We intend to use the proceeds from the sale to support our fiber expansion plan. The financial results of the limited partnership interests have been reported as discontinued operations in our consolidated financial statements for all periods presented. At December 31, 2021, the carrying value of the investments in the partnership interests of $98.8 million were reported as assets of discontinued operations in the consolidated balance sheet. The results of discontinued operations included in the consolidated statements of operations consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In thousands) | | 2022 | | 2021 | | 2020 | Investment income | | $ | 23,467 | | $ | 41,845 | | $ | 40,685 | Gain on sale of discontinued operations | | | 389,885 | | | — | | | — | Income from discontinued operations, before income taxes | | | 413,352 | | | 41,845 | | | 40,685 | Income tax expense | | | 94,999 | | | 9,411 | | | 9,257 | Net income from discontinued operations | | $ | 318,353 | | $ | 32,434 | | $ | 31,428 | | | | | | | | | | |
In connection with the sale of the partnership interests, we expect to recognize a taxable gain of approximately of $477.7 million on the transaction. For federal income tax purposes, we expect to utilize our available net operating loss carryforwards to offset the taxable gain. For state income tax purposes, we are estimating approximately $8.0 million in state tax liabilities. In the statement of cash flows, we have elected to combine cash flows from discontinued operations with cash flows from continuing operations. The following table presents cash flows from operating and 2020.investing activities for discontinued operations: | | | | | | | | | | (In thousands) | | 2022 | | 2021 | | 2020 | Cash provided by operating activities - discontinued operations | | $ | 29,165 | | $ | 43,040 | | $ | 41,529 | Cash provided by investing activities - discontinued operations | | $ | 482,966 | | $ | — | | $ | — |
7.FAIR VALUE MEASUREMENTS Financial Instruments Interest Rate Swap Agreements Our derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis. The fair values of the interest rate swaps are determined using valuation models and are categorized within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and observable market data of similar instruments. See Note 9 for further discussion regarding our interest rate swap agreements. Our interest rate swap agreements measured at fair value on a recurring basis at December 31, 20212022 and 20202021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | | | | As of December 31, 2022 | | | | | | | Quoted Prices | | Significant | | | | | | | | Quoted Prices | | Significant | | | | | | | | | In Active | | Other | | Significant | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Long-term interest rate swap liabilities | | $ | (12,813) | | $ | — | | $ | (12,813) | | $ | — | | | Interest rate swap assets | | | $ | 5,959 | | $ | — | | $ | 5,959 | | $ | — | |
| | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | Quoted Prices | | Significant | | | | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Current interest rate swap liabilities | | $ | (6,297) | | $ | — | | $ | (6,297) | | $ | — | | Long-term interest rate swap liabilities | | | (22,958) | | | — | | | (22,958) | | | — | | Total | | $ | (29,255) | | $ | — | | $ | (29,255) | | $ | — | |
Contingent Payment Obligation
The contingent payment obligation represented the CPR issued to Searchlight in connection with the Investment Agreement. The CPR was measured at its estimated fair value on a recurring basis based on a market approach utilizing observable market values and a marketability discount. As of December 31, 2020, the estimated fair value of the CPR was $123.2 million and was classified as Level 2 within the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | | | | | Quoted Prices | | Significant | | | | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Long-term interest rate swap liabilities | | $ | (12,813) | | $ | — | | $ | (12,813) | | $ | — | |
We have not elected the fair value option for any of our other assets or liabilities. The carrying value of other financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of December 31, 20212022 and 2020.2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | As of December 31, 2020 | | | As of December 31, 2022 | | As of December 31, 2021 | | (In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Long-term debt, excluding finance leases | | $ | 2,139,567 | | $ | 2,186,508 | | $ | 1,978,694 | | $ | 2,039,790 | | | $ | 2,141,176 | | $ | 1,759,430 | | $ | 2,139,567 | | $ | 2,186,508 | |
Cost & Equity Method Investments
Our investments at December 31, 20212022 and 20202021 accounted for at cost and under the equity method consisted primarily of minority positions in various cellular telephone limited partnerships and our investment in CoBank. It is impracticable to determine the fair value of these investments.this investment. Long-term Debt The fair value of our senior notes was based on quoted market prices, and the fair value of borrowings under our credit facility was determined using current market rates for similar types of borrowing arrangements. We have categorized the long-term debt as Level 2 within the fair value hierarchy. 8.LONG-TERM DEBT Long-term debt outstanding, presented net of unamortized discounts, consisted of the following as of December 31, 20212022 and 2020:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Senior secured credit facility: | | | | | | | | | | | | | | | Term loans, net of discounts of $10,308 and $18,181 at December 31, 2021 and 2020, respectively | | $ | 989,567 | | $ | 1,228,694 | | | Term loans, net of discounts of $8,699 and $10,308 at December 31, 2022 and 2021, respectively | | | $ | 991,176 | | $ | 989,567 | | 6.50% Senior notes due 2028 | | | 750,000 | | | 750,000 | | | | 750,000 | | | 750,000 | | 5.00% Senior notes due 2028 | | | 400,000 | | | — | | | | 400,000 | | | 400,000 | | Finance leases | | | 24,990 | | | 17,467 | | | | 35,746 | | | 24,990 | | | | | 2,164,557 | | | 1,996,161 | | | | 2,176,922 | | | 2,164,557 | | Less: current portion of long-term debt and finance leases | | | (7,959) | | | (17,561) | | | | (12,834) | | | (7,959) | | Less: deferred debt issuance costs | | | (37,745) | | | (45,934) | | | | (34,626) | | | (37,745) | | Total long-term debt | | $ | 2,118,853 | | $ | 1,932,666 | | | $ | 2,129,462 | | $ | 2,118,853 | |
Credit Agreement On October 2, 2020, the Company, through certain of its wholly-owned subsidiaries, entered into a Credit Agreement with various financial institutions (the “Credit Agreement”) to replace the Company’s previous credit agreement in its entirety. The Credit Agreement consisted of term loans in the aggregate amount of $1,250.0 million (the “Initial Term Loans”) and a revolving loan facility of $250.0 million. The Credit Agreement also includes an incremental loan facility which provides the ability to borrow, subject to certain terms and conditions, incremental loans in an aggregate amount of up to the greater of (a) $300.0 million plus (b) an amount which would not cause its senior secured leverage ratio not to exceed 3.70:1.00 (the “Incremental Facility”). Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its subsidiaries, subject to certain exceptions. The Term Loans were issued in an original aggregate principal amount of $1,250.0 million with a maturity date of October 2, 2027 and contained an original issuance discount of 1.5% or $18.8 million, which is being amortized over the term of the loan. Prior to amendments to the Credit Agreement, as described below, the Initial Term Loans required quarterly principal payments of $3.1 million, which commenced December 31, 2020, and bore interest at a rate 4.75% plus the London Interbank Offered Rate (“LIBOR”)LIBOR subject to a 1.00% LIBOR floor. On January 15, 2021, the Company entered into Amendment No. 1 to the Credit Agreement in which we borrowed an additional $150.0 million aggregate principal amount of incremental term loans (the “Incremental Term Loans”). The Incremental Term Loans have terms and conditions identical to the Initial Term Loans including the same maturity date and interest rate. The Initial Term Loans and Incremental Term Loans, collectively (the “Term Loans”) will comprise a single class of term loans under the Credit Agreement. On March 18, 2021, the Company repaid $397.0 million of the outstanding Term Loans with the net proceeds received from the issuance of $400.0 million aggregate principal amount of 5.00% senior secured notes due 2028 (the “5.00% Senior Notes”), as described below. The repayment of the Term Loans was applied to the remaining principal payments in direct order of maturity, thereby eliminating the required quarterly principal payments through the remaining term of the loan. In connection with the repayment of the Term Loans, we recognized a loss on extinguishment of debt of $12.0 million during the year ended December 31, 2021. On April 5, 2021, the Company, entered into a second amendmentAmendment No. 2 to the Credit Agreement (the “Second Amendment”) to refinance the outstanding Term Loans of $999.9 million. The terms and conditions of the Credit Agreement remain substantially similar and unchanged except with respect to the interest rate applicable to the Term Loans and certain other provisions. As a result of the Second Amendment, the interest rate of the Term Loans was reduced to 3.50% plus LIBOR subject to a 0.75% LIBOR floor. The maturity date of the Term Loans of October 2, 2027 remains unchanged. In connection with entering into the Second Amendment, we recognized a loss of $5.1 million on the extinguishment of debt during the year ended December 31, 2021. The revolving credit facility has a maturity date of October 2, 20252027 and an applicable margin (at our election) of 4.00% for LIBOR-basedSOFR-based borrowings or 3.00% for alternate base rate borrowings, with a 0.25% reduction in each case if the consolidated first lien leverage ratio, as defined in the Credit Agreement, does not exceed 3.20 to 1.00. As of December 31, 20212022 and 2020,2021, there were 0no borrowings outstanding under the revolving credit facility. Stand-by letters of credit of $25.1$24.5 million were outstanding under our revolving credit facility as of December 31, 2021.2022. The stand-by letters of credit are renewable annually and reduce the borrowing availability under the revolving credit facility. As of December 31, 2021, $224.92022, $225.5 million was available for borrowing under the revolving credit facility. On November 22, 2022, the Company, entered into Amendment No. 3 to the Credit Agreement (the “Third Amendment”) to, among other things, extend the maturity of the revolving credit facility by two years from October 2, 2025 to October 2, 2027, subject to springing maturity on April 2, 2027 if the Term Loans, as of April 1, 2027, are scheduled to mature earlier than March 31, 2028. The Third Amendment also relaxed the revolving credit facility’s consolidated first lien leverage maintenance covenant, as described below, through June 30, 2025 to 6.35:1.00 from 5.85:1.00. The weighted-average interest rate on outstanding borrowings under our credit facilities was 4.25%7.63% and 5.75%4.25% at December 31, 20212022 and 2020,2021, respectively. Interest is payable at least quarterly.
In connection with entering into the Credit Agreement in October 2020, feesTable of $29.1 million were capitalized as deferred debt issuance costs. These capitalized costs are amortized over the term of the debt and are included as a component of interest expense in the consolidated statements of operations. We also incurred a loss on the extinguishment of debt of $12.3 million during the year ended December 31, 2020 related to the repayment of the outstanding term loan under the previous credit agreement.Contents
Credit Agreement Covenant Compliance The Credit Agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, and issue certain capital stock. We have agreed to maintain certain financial ratios, including a maximum consolidated first lien leverage ratio, as defined in the Credit Agreement. Among other things, it will be an event of default, with respect to the revolving credit facility only, if our consolidated first lien leverage ratio is greater than 6.35:1.00 as of the end of any fiscal quarter, if on such date the testing threshold is greater than 5.85:1.00.met. The testing threshold is met if the aggregate amount of our borrowings outstanding under the revolving credit facility exceeds 35%. As of December 31, 2021,2022, the testing threshold was not met and our consolidated first lien leverage ratio under the Credit Agreement was 4.14:4.40:1.00. As of December 31, 2021,2022, we were in compliance with the Credit Agreement covenants. Senior Notes
6.50% Senior Notes due 2028
On October 2, 2020, we completed an offering of $750.0 million aggregate principal amount of 6.50% unsubordinated secured notes due 2028 (the “6.50% Senior Notes”). The 6.50% Senior Notes were priced at par and bear interest at a rate of 6.50%, payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2021. The 6.50% Senior Notes mature on October 1, 2028. Deferred debt issuance costs of $17.0 million incurred in connection with the issuance of the 6.50% Senior Notes in 2020 are being amortized using the effective interest method over the term of the Senior Notes. The net proceeds from the issuance of the 6.50% Senior Notes were used to redeem our then outstanding $440.5 million aggregate principal amount of 6.50% Senior Notes due in October 2022 at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest through the redemption date, to repay a portion of the outstanding borrowings under the previous credit agreement as part of the refinancing in October 2020 and to pay related fees and expenses. On March 18, 2021, we issued $400.0 million aggregate principal amount 5.00% Senior Notes, together with the 6.50% Senior Notes (the “Senior Notes”). The 5.00% Senior Notes were priced at par and bear interest at a rate of 5.00% per year, payable semi-annually on April 1 and October 1 of each year, beginning on October 1, 2021. The 5.00% Senior Notes will mature on October 1, 2028. Deferred debt issuance costs of $3.8 million incurred in connection with the issuance of the 5.00% Senior Notes are being amortized using the effective interest method over the term of the Senior Notes. The net proceeds from the issuance of the 5.00% Senior Notes were used to repay $397.0 million of the Term Loans outstanding under the Credit Agreement. The Senior Notes are unsubordinated secured obligations of the Company, secured by a first priority lien on the collateral that secures the Company’s obligations under the Credit Agreement. The Senior Notes are fully and unconditionally guaranteed on a first priority secured basis by the Company and the majority of our wholly-owned subsidiaries. The offering of the Senior Notes has not been registered under the Securities Act of 1933, as amended or any state securities laws. Senior Notes Covenant Compliance Subject to certain exceptions and qualifications, the indenture governing the Senior Notes contains customary covenants that, among other things, limits the Company and its restricted subsidiaries’ ability to: incur additional debt or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with its affiliates; or enter into any sale and leaseback transactions. The indenture also contains customary events of default. At December 31, 2021,2022, the Company was in compliance with all terms, conditions and covenants under the indenture governing the Senior Notes. Redemption of 6.50% Senior Notes due 2022
On October 2, 2020, a notice of redemption was issued to holders of our then outstanding $440.5 million aggregate principal amount of 6.50% Senior Notes due in October 2022 (the “2022 Notes”) to redeem all outstanding 2022 Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest through the redemption date. A portion of the proceeds from the issuance of the Senior Notes was deposited with the trustee to pay and discharge the entire indebtedness under the 2022 Notes. The 2022 Notes were redeemed on November 2, 2020, in accordance with the notice of redemption.
In connection with the redemption of the 2022 Notes, we recognized a loss on extinguishment of debt of $5.9 million during the year ended December 31, 2020. During the year ended December 31, 2019, we repurchased $55.0 million of the aggregate principal amount of the 2022 Notes for $49.8 million and recognized a gain on extinguishment of debt of $4.5 million.
Future Maturities of Debt At December 31, 2021,2022, the aggregate maturities of our long-term debt excluding finance leases were as follows: | | | | | | | | | (In thousands) | | | | | | | | | 2022 | | $ | — | | | 2023 | | | — | | | $ | — | | 2024 | | | — | | | | — | | 2025 | | | — | | | | — | | 2026 | | | — | | | | — | | 2027 | | | | 999,875 | | Thereafter | | | 2,149,875 | | | | 1,150,000 | | Total maturities | | | 2,149,875 | | | | 2,149,875 | | Less: Unamortized discount | | | (10,308) | | | | (8,699) | | | | $ | 2,139,567 | | | Carrying value | | | $ | 2,141,176 | |
See Note 10 regarding the future maturities of our obligations for finance leases. 9.DERIVATIVE FINANCIAL INSTRUMENTS We may utilize interest rate swap agreements to mitigate risk associated with fluctuations in interest rates related to our variable rate debt obligations under the Credit Agreement. Derivative financial instruments are recorded at fair value in our consolidated balance sheets. The following interest rate swaps were outstanding at December 31, 2021:2022: | | | | | | | | | | | | | | | | | | | | | Notional | | | | | | | | Notional | | | | | | | (In thousands) | | Amount | | 2021 Balance Sheet Location | | Fair Value | | | Amount | | 2022 Balance Sheet Location | | Fair Value | | Cash Flow Hedges: | | | | | | | | | | | | | | | | | | | Fixed to 1-month floating LIBOR (with floor) | | $ | 500,000 | | Other long-term liabilities | | $ | (12,813) | | | $ | 500,000 | | Prepaid expenses and other current assets | | $ | 5,959 | |
Our interest rate swap agreements mature on July 31, 2023. The following interest rate swaps were outstanding at December 31, 2020:2021: | | | | | | | | | | | | | | | | | | | | | Notional | | | | | | | | Notional | | | | | | | (In thousands) | | Amount | | 2020 Balance Sheet Location | | Fair Value | | | Amount | | 2021 Balance Sheet Location | | Fair Value | | Cash Flow Hedges: | | | | | | | | | | | | | | | | | | | Fixed to 1-month floating LIBOR (with floor) | | $ | 705,000 | | Accrued expense | | $ | (6,297) | | | $ | 500,000 | | Other long-term liabilities | | $ | (12,813) | | Fixed to 1-month floating LIBOR (with floor) | | $ | 500,000 | | Other long-term liabilities | | | (22,958) | | | Total Fair Values | | | | | | | $ | (29,255) | | |
The counterparties to our various swaps are highly rated financial institutions. NaNNone of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties. The swaps of any counterparty that is a lender, as defined in our credit facility, are secured along with the other creditors under the credit facility. Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties. At December 31, 20212022 and 2020,2021, the total pre-tax unrealized lossgain (loss) related to our interest rate swap agreements included in AOCI was $(10.1)$6.9 million and $(25.2)$(10.1) million, respectively. From the balance in AOCI as of December 31, 2021,2022, we expect to recognize a lossgain of approximately $7.1$6.9 million in earnings as a reduction to interest expense in the next twelve months. Information regarding our cash flow hedge transactions is as follows: | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Unrealized gain (loss) recognized in AOCI, pretax | | $ | 1,174 | | $ | (18,398) | | $ | (26,013) | | | $ | 14,726 | | $ | 1,174 | | $ | (18,398) | | Deferred loss reclassified from AOCI to interest expense | | $ | (13,964) | | $ | (15,683) | | $ | (1,108) | | | $ | (2,328) | | $ | (13,964) | | $ | (15,683) | |
10. LEASES We have entered into various leases for certain facilities, land, underground conduit, colocations, and equipment used in our operations. For leases with a term greater than 12 months, we recognize a right-to-use asset and a lease liability based on the present value of lease payments over the lease term. The leases have remaining lease terms of one year to 8786 years and may include one or more options to renew, which can extend the lease term from one to five years or more. Operating lease expense is recognized on a straight-line basis over the lease term. As most of our leases do not provide a readily determinable implicit rate, we use our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments. We use the implicit rate when a rate is readily determinable. Our leases may also include scheduled rent increases and options to extend or terminate the lease which is included in the determination of lease payments when it is reasonably certain that we will exercise that option. For all asset classes, we do not separate lease and nonlease components, as such we account for the components as a single lease component. Leases with an initial term of 12 months or less are not recognized on the balance sheet and the expense for these short-term leases is recognized on a straight-line basis over the lease term. Short-term lease expense, which is recognized in cost of services and products, was not material to the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019. Variable lease payments are expensed as incurred.
Leases with an initial term of 12 months or less are not recognized on the balance sheet and the expense for these short-term leases is recognized on a straight-line basis over the lease term. Short-term lease expense, which is recognized in cost of services and products, was not material to the consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020. Variable lease payments are expensed as incurred. The following table summarizes the components of our lease right-of use assets and liabilities at December 31, 20212022 and 2020:2021: | | | | | | | | | | | | | | | | | | | | | (In thousands) | | Balance Sheet Classification | | 2021 | | 2020 | | | | Balance Sheet Classification | | 2022 | | 2021 | | | Operating leases | | | | | | | | | | | | | | | | | | | | | Operating lease right-of-use assets | | Other assets | | $ | 25,072 | | $ | 25,808 | | | | Other assets | | $ | 26,548 | | $ | 25,072 | | | Current lease liabilities | | Accrued expense | | $ | (6,383) | | $ | (5,824) | | | | Accrued expense | | $ | (5,076) | | $ | (6,383) | | | Noncurrent lease liabilities | | Other long-term liabilities | | $ | (19,072) | | $ | (20,192) | | | | Other long-term liabilities | | $ | (22,249) | | $ | (19,072) | | | | | | | | | | | | | | | | | | | | | | | | Finance leases | | | | | | | | | | | | | | | | | | | | | Finance lease right-of-use assets, net of accumulated depreciation of $16,255 and $23,034 | | Property, plant and equipment, net | | $ | 28,240 | | $ | 17,373 | | | | Finance lease right-of-use assets, net of accumulated depreciation of $15,308 and $16,255 | | | Property, plant and equipment, net | | $ | 42,773 | | $ | 28,240 | | | Current lease liabilities | | Current portion of long-term debt and finance lease obligations | | $ | (7,959) | | $ | (5,061) | | | | Current portion of long-term debt and finance lease obligations | | $ | (12,834) | | $ | (7,959) | | | Noncurrent lease liabilities | | Long-term debt and finance lease obligations | | $ | (17,031) | | $ | (12,406) | | | | Long-term debt and finance lease obligations | | $ | (22,912) | | $ | (17,031) | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average remaining lease term | | | | | | | | | | | | | | | | | | | | | Operating leases | | | | | 7.1 years | | | 7.2 years | | | | | | | 7.7 years | | | 7.1 years | | | Finance leases | | | | | 4.6 years | | | 6.2 years | | | | | | | 3.5 years | | | 4.6 years | | | Weighted-average discount rate | | | | | | | | | | | | | | | | | | | | | Operating leases | | | | | 6.27 | % | | 6.43 | % | | | | | | 6.47 | % | | 6.27 | % | | Finance leases | | | | | 5.55 | % | | 6.99 | % | | | | | | 6.60 | % | | 5.55 | % | |
The components of lease expense for the years ended December 31, 2022, 2021 2020 and 20192020 consisted of the following: | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended December 31, | (In thousands) | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 | Finance lease cost: | | | | | | | | | | | | | | | | | | | Amortization of right-of-use assets | | $ | 4,152 | | $ | 7,442 | | $ | 12,031 | | $ | 4,804 | | $ | 4,152 | | $ | 7,442 | Interest on lease liabilities | | | 1,106 | | | 1,356 | | | 1,993 | | | 1,444 | | | 1,106 | | | 1,356 | Operating lease cost | | | 8,359 | | | 8,421 | | | 8,902 | | | 8,469 | | | 8,359 | | | 8,421 | Variable lease cost | | | 2,054 | | | 2,205 | | | 2,392 | | | 2,167 | | | 2,054 | | | 2,205 | Total lease cost | | $ | 15,671 | | $ | 19,424 | | $ | 25,318 | | $ | 16,884 | | $ | 15,671 | | $ | 19,424 |
The following table presents supplemental cash flow information related to leases for the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | Year Ended December 31, | (In thousands) | | 2021 | | 2020 | | 2019 | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | Operating cash flows for operating leases | | $ | 8,111 | | $ | 8,325 | | $ | 8,701 | Operating cash flows for finance leases | | | 1,106 | | | 1,356 | | | 1,993 | Financing cash flows for finance leases | | | 6,365 | | | 9,020 | | | 12,519 | Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | | | | | Operating leases | | | 5,673 | | | 6,842 | | | 2,269 | Finance leases | | | 13,888 | | | 2,534 | | | 6,227 |
| | | | | | | | | | | | Year Ended December 31, | (In thousands) | | 2022 | | 2021 | | 2020 | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | Operating cash flows for operating leases | | $ | 8,003 | | $ | 8,111 | | $ | 8,325 | Operating cash flows for finance leases | | | 1,444 | | | 1,106 | | | 1,356 | Financing cash flows for finance leases | | | 9,836 | | | 6,365 | | | 9,020 | Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | | | | | Operating leases | | | 9,261 | | | 5,673 | | | 6,842 | Finance leases | | | 20,592 | | | 13,888 | | | 2,534 |
At December 31, 2021,2022, the aggregate maturities of our lease liabilities were as follows: | | | | | | | | | | | (In thousands) | | | Operating Leases | | | Finance Leases | | | | Operating Leases | | | Finance Leases | | 2022 | | $ | 7,726 | | $ | 9,020 | | | 2023 | | | 5,646 | | | 7,150 | | | $ | 6,659 | | $ | 14,742 | | 2024 | | | 4,030 | | | 5,150 | | | | 5,684 | | | 12,903 | | 2025 | | | 3,357 | | | 1,869 | | | | 4,973 | | | 7,209 | | 2026 | | | 1,909 | | | 1,727 | | | | 3,488 | | | 1,847 | | 2027 | | | | 2,847 | | | 1,770 | | Thereafter | | | 9,460 | | | 2,994 | | | | 11,695 | | | 1,224 | | Total lease payments | | 32,128 | | | 27,910 | | | 35,346 | | | 39,695 | | Less: Interest | | | (6,673) | | | (2,920) | | | | (8,021) | | | (3,949) | | | | $ | 25,455 | | $ | 24,990 | | | $ | 27,325 | | $ | 35,746 | |
Lessor We have various arrangements for use of our network assets for which we are the lessor, including tower space, certain colocation, conduit and dark fiber arrangements. These leases meet the criteria for operating lease classification. Lease income associated with these types of leases is not material. Occasionally, we enter into arrangements where the term may be for a major part of the asset’s remaining economic life such as in indefeasible right of use (“IRU”) arrangements for dark fiber or conduit, which meet the criteria for sales-type lease classification. During the years ended December 31, 2022, 2021 2020 and 2019,2020, we entered into IRU arrangements for exclusive access to and unrestricted use of specific assets. These arrangements were recognized as sales-type leases as the term of the arrangements were for a major part of the asset’s remaining economic life. The arrangementsDuring the year ended December 31, 2022, we recognized revenue of $3.8 million and a gain of $1.5 million related to these arrangements. During years ended 2021 and 2020, we did not have aenter into any material impact on our financial statements for the respective years.dark fiber IRU arrangements. We elected the practical expedient to combine lease and non-lease components in our lessor arrangements. We have arrangements where the non-lease component associated with the lease component is the predominant component in the contract, such as in revenue contracts that involve the customer leasing equipment from us. In such cases, we account for the combined component in accordance with ASC 606 as the service component is the predominant component in the contract. 11. MEZZANINE EQUITY Series A Preferred Stock The Company is authorized to issue up to 10,000,000 shares of Series A Perpetual Preferred Stock with a par value of $0.01 per share. The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company and redemption rights. The following is a summary of certain provisions under the Certificate of Designations of the Series A Perpetual Preferred Stock.Stock (“Certificate of Designations”). Dividends Dividends on each share of Series A Preferred Stock accrue daily on the liquidation preference at a rate of 9.0% per annum and will be payable semi-annually in arrears on January 1 and July 1 of each year. DividendsSubsequent to a waiver issued by Searchlight in November 2022 as described below, dividends are payable until October 2, 20252027 at our election, either in cash or in-kind through an accrual of unpaid dividends, which are automatically added to the liquidation preference; and after October 2, 2025,2027, solely in cash. The liquidation preference at any given time is $1,000 per share. In the event that the Company’s Board of Directors fails to declare and pay dividends in cash after October 2, 2025,2027, among other conditions, the dividend rate applicable to each subsequent dividend period will increase to 11.0%. On November 22, 2022, in connection with entering into the Third Amendment to the Credit Agreement, Searchlight waived for two years, until October 2, 2027, the obligation under the Certificate of Designations to begin paying in cash after October 2, 2025 rather than being permitted to accrue dividends on the Series A Preferred Stock. Any dividend not declared and fully paid in cash during the waiver period or otherwise, will continue to accrue in accordance with the Certificate of Designations. Redemption Upon a fundamental change such as a change of control, liquidation, dissolution or winding up event, holders of the Series A Preferred Stock will have the right to require the Company to repurchase all or any part of the outstanding Series A Preferred Stock for cash at a price equal the liquidation preference and accrued and unpaid dividends through and including the fundamental change date. The Company may, at its option redeem all or any part of the outstanding shares of Series A Preferred Stock at a purchase price per share in cash equal to the sum of the liquidation preference and accrued and unpaid dividends. A premium may also be payable in connection with any such redemption. Voting Rights Holders of Series A Preferred Stock are entitled to 1one vote per share on matters specifically related to the Series A Preferred Stock. The holders do not otherwise have any voting rights. If preferred dividends have not been paid in cash in full for two dividend periods after October 2, 2025,2027, whether or not consecutive, then the holders of the Series A Preferred Stock, voting together as a single class, will be entitled to elect 2two additional directors to the board of directors. On December 7, 2021, upon the completion of the Searchlight investment as described in Note 4, we issued 434,266 shares of Series A Preferred Stock with a carrying value of $285.9 million. In accordance with ASC 480, Distinguishing Liabilities from Equity, the Series A Preferred Stock is classified as mezzanine equity in the consolidated balance sheets. As of December 31, 2021, the liquidation preference of the Series A Preferred Stock was $436.9 million, which includes accrued and unpaid dividends of $2.7 million. As of December 31, 2022, the liquidation preference of the Series A Preferred Stock was $477.0 million, which includes accrued and unpaid dividends of $20.7 million. During the year ended December 31, 2022, the Company paid dividends in-kind of $22.1 million or 22,077 shares. Searchlight is the sole holder of all of the issued and outstanding shares of the Company’s Series A Preferred Stock. The Company intends to exercise the PIK dividend option on the Series A Preferred Stock through at least 2022.2025.
12.SHAREHOLDERS’ EQUITY Common Stock Dividends
Our Board of Directors declared quarterly dividends of approximately $0.38738 per share during 2018. On February 18, 2019, the Board of Directors declared a dividend of approximately $0.38738 per share, paid on May 1, 2019 to stockholders of record on April 15, 2019.
On April 25, 2019, we announced the elimination of the payment of quarterly dividends on our stock beginning in the second quarter of 2019. Future dividend payments, if any, are at the discretion of our Board of Directors. Changes in our dividend program will depend on our earnings, capital requirements, financial condition, debt covenant compliance, expected cash needs and other factors considered relevant by our Board of Directors. Share-based Compensation Our Board of Directors may grant share-based awards from our shareholder approved Amended and Restated Consolidated Communications Holdings, Inc. 2005 Long-Term Incentive Plan, as amended and restated (the “Plan”). The Plan permits the issuance of awards in the form of stock options, stock appreciation rights, stock grants and stock unit grants and other equity-based awards to eligible directors and employees at the discretion of the Compensation Committee of the Board of Directors. On April 26, 2021, the shareholders approved an amendment to the Plan to increase by 5,400,000 shares the number of shares of our common stock authorized for issuance under the Plan and extend the term of the Plan through April 30, 2028. With the amendment, approximately 10,050,000 shares of our common stock are authorized for issuance under the Plan, provided that no more than 300,000 shares may be granted in the form of stock options or stock appreciation rights to any eligible employee or director in any calendar year. Unless terminated sooner, the Plan will continue in effect until April 30, 2028. We measure the fair value of RSAs based on the market price of the underlying common stock on the date of grant. We recognize the expense associated with RSAs on a straight-line basis over the requisite service period, which generally ranges from immediate vesting to a four-year vesting period. We implemented an ongoing performance-based incentive program under the Plan. The performance-based incentive program provides for annual grants of PSAs. PSAs are restricted stock that are issued, to the extent earned, at the end of
We implemented an ongoing performance-based incentive program under the Plan. The performance-based incentive program provides for annual grants of PSAs. PSAs are restricted stock that are issued, to the extent earned, at the end of each annual performance cycle. Under the performance-based incentive program, each participant is given a target award expressed as a number of shares, with a payout opportunity ranging from 0% to 120% of the target, depending on performance relative to predetermined goals. An estimate of the number of PSAs that are expected to vest is made, and the fair value of the PSAs is expensed utilizing the fair value on the date of grant over the requisite service period. The awards generally vest ratably over a four-year vesting period. Pursuant to the performance-based incentive program, PSAs issued to certain senior executives entitle the executives to earn shares depending on the level of attainment of the predetermined performance goals over a three-year performance period, with payouts ranging from 0% to 150% of the target for PSAs issued in 2022 and from 0% to 120% for PSAs issued in 2021 and 2020. The earned PSAs are then subject to possible adjustment based on our total shareholder return relative to our peer group over the same performance period, which may increase or decrease the number of shares actually awarded by up to 25%.The fair value of these awards are initially measured on the grant date using estimated payout levels derived from a Monte Carlo simulation model. The awards vest in the month following the end of the of the three-year performance period. The following table summarizes grants of RSAs and PSAs under the Plan during the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | | | Grant Date | | | | Grant Date | | | | Grant Date | | | | | Grant Date | | | | Grant Date | | | | Grant Date | | | | 2021 | | Fair Value | | 2020 | | Fair Value | | 2019 | | Fair Value | | | 2022 | | Fair Value | | 2021 | | Fair Value | | 2020 | | Fair Value | | RSAs Granted | | 941,748 | | $ | 7.51 | | 863,710 | | $ | 6.30 | | 551,214 | | $ | 9.87 | | | 1,031,999 | | $ | 4.70 | | 941,748 | | $ | 7.51 | | 863,710 | | $ | 6.30 | | PSAs Granted | | 788,054 | | $ | 6.31 | | 240,669 | | $ | 9.86 | | 371,672 | | $ | 12.45 | | | 904,435 | | $ | 7.52 | | 788,054 | | $ | 6.31 | | 240,669 | | $ | 9.86 | | Total | | 1,729,802 | | | | | 1,104,379 | | | | | 922,886 | | | | | | 1,936,434 | | | | | 1,729,802 | | | | | 1,104,379 | | | | |
The following table summarizes the RSA and PSA activity during the year ended December 31, 2021:2022: | | | | | | | | | | | | | | | | | | | | | RSAs | | PSAs | | | RSAs | | PSAs | | | | | | Weighted | | | | Weighted | | | | | Weighted | | | | Weighted | | | | | | Average Grant | | | | Average Grant | | | | | Average Grant | | | | Average Grant | | | | Shares | | Date Fair Value | | Shares | | Date Fair Value | | | Shares | | Date Fair Value | | Shares | | Date Fair Value | | Non-vested shares outstanding - December 31, 2020 | | 833,973 | | $ | 7.81 | | 365,040 | | $ | 11.06 | | | Non-vested shares outstanding - December 31, 2021 | | | 1,069,817 | | $ | 7.34 | | 920,010 | | $ | 7.40 | | Shares granted | | 941,748 | | $ | 7.51 | | 788,054 | | $ | 6.31 | | | 1,031,999 | | $ | 4.70 | | 904,435 | | $ | 7.52 | | Shares vested | | (670,476) | | $ | 8.12 | | (191,623) | | $ | 9.60 | | | (839,609) | | $ | 6.31 | | (309,387) | | $ | 9.18 | | Shares forfeited, cancelled or retired | | (35,428) | | $ | 8.14 | | (41,461) | | $ | 8.50 | | | (76,227) | | $ | 6.31 | | (51,000) | | $ | 8.20 | | Non-vested shares outstanding - December 31, 2021 | | 1,069,817 | | $ | 7.34 | | 920,010 | | $ | 7.40 | | | Non-vested shares outstanding - December 31, 2022 | | | 1,185,980 | | $ | 5.84 | | 1,464,058 | | $ | 7.07 | |
The total fair value of the RSAs and PSAs that vested during the years ended December 31, 2022, 2021 and 2020 and 2019 was $8.1 million, $7.3 million $6.4 million and $5.6$6.4 million, respectively. Share-based Compensation Expense The following table summarizes total compensation costs recognized for share-based payments during the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Restricted stock | | $ | 5,478 | | $ | 4,597 | | $ | 4,013 | | | $ | 5,296 | | $ | 5,478 | | $ | 4,597 | | Performance shares | | | 4,619 | | | 2,936 | | | 2,823 | | | | 5,459 | | | 4,619 | | | 2,936 | | Total | | $ | 10,097 | | $ | 7,533 | | $ | 6,836 | | | $ | 10,755 | | $ | 10,097 | | $ | 7,533 | |
Income tax benefits related to share-based compensation of approximately $2.8 million, $2.6 million $2.0 million and $1.8$2.0 million were recorded for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively. Share-based compensation expense is included in “selling, general and administrative expenses” in the accompanying consolidated statements of operations. As of December 31, 2021, total unrecognized compensation cost related to non-vested RSAs and PSAs was $15.4 million and will be recognized over a weighted-average period of approximately 1.6 years.
As of December 31, 2022, total unrecognized compensation cost related to non-vested RSAs and PSAs was $12.4 million and will be recognized over a weighted-average period of approximately 1.6 years. Accumulated Other Comprehensive Income (Loss) The following table summarizes the changes in accumulated other comprehensive income (loss), net of tax, by component during 20212022 and 2020:2021: | | | | | | | | | | | | | | | | | | | | | | | Pension and | | | | | | | | | Pension and | | | | | | | | | | Post-Retirement | | Derivative | | | | | | Post-Retirement | | Derivative | | | | | (In thousands) | | Obligations | | Instruments | | Total | | | Obligations | | Instruments | | Total | | Balance at December 31, 2019 | | $ | (64,316) | | $ | (16,552) | | $ | (80,868) | | | Other comprehensive loss before reclassifications | | | (27,007) | | | (13,601) | | | (40,608) | | | Amounts reclassified from accumulated other comprehensive loss | | | 436 | | | 11,622 | | | 12,058 | | | Net current period other comprehensive income (loss) | | | (26,571) | | | (1,979) | | | (28,550) | | | Balance at December 31, 2020 | | $ | (90,887) | | $ | (18,531) | | $ | (109,418) | | | $ | (90,887) | | $ | (18,531) | | $ | (109,418) | | Other comprehensive gain before reclassifications | | | 33,344 | | | 868 | | | 34,212 | | | | 33,344 | | | 868 | | | 34,212 | | Amounts reclassified from accumulated other comprehensive loss | | | 5,444 | | | 10,191 | | | 15,635 | | | | 5,444 | | | 10,191 | | | 15,635 | | Net current period other comprehensive income (loss) | | | | 38,788 | | | 11,059 | | | 49,847 | | Balance at December 31, 2021 | | | $ | (52,099) | | $ | (7,472) | | $ | (59,571) | | Other comprehensive gain before reclassifications | | | | 47,123 | | | 10,879 | | | 58,002 | | Amounts reclassified from accumulated other comprehensive loss | | | | (762) | | | 1,721 | | | 959 | | Net current period other comprehensive income | | | 38,788 | | | 11,059 | | | 49,847 | | | | 46,361 | | | 12,600 | | | 58,961 | | Balance at December 31, 2021 | | $ | (52,099) | | $ | (7,472) | | $ | (59,571) | | | Balance at December 31, 2022 | | | $ | (5,738) | | $ | 5,128 | | $ | (610) | |
The following table summarizes reclassifications from accumulated other comprehensive loss during 20212022 and 2020:2021: | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Affected Line Item in the | | | Year Ended December 31, | | Affected Line Item in the | | (In thousands) | | | 2021 | | 2020 | | Statement of Income | | | 2022 | | 2021 | | Statement of Income | | Amortization of pension and post-retirement items: | | | | | | | | | | | | | | | | | | | | Prior service credit (cost) | | | $ | 779 | | $ | (1,270) | | (a) | | | Prior service credit | | | $ | 777 | | $ | 779 | | (a) | | Actuarial gain (loss) | | | | (2,309) | | | 694 | | (a) | | | | 254 | | | (2,309) | | (a) | | Settlement loss | | | | (5,864) | | | — | | (a) | | | | — | | | (5,864) | | (a) | | | | | | (7,394) | | | (576) | | Total before tax | | | | 1,031 | | | (7,394) | | Total before tax | | | | | | 1,950 | | | 140 | | Tax benefit | | | | (269) | | | 1,950 | | Tax (expense) benefit | | | | | $ | (5,444) | | $ | (436) | | Net of tax | | | $ | 762 | | $ | (5,444) | | Net of tax | | | | | | | | | | | | | | | | | | | | | | Gain (Loss) on cash flow hedges: | | | | | | | | | | | | Loss on cash flow hedges: | | | | | | | | | | | Interest rate derivatives | | | $ | (13,964) | | $ | (15,683) | | Interest expense | | | $ | (2,328) | | $ | (13,964) | | Interest expense | | | | | | 3,773 | | | 4,061 | | Tax benefit | | | | 607 | | | 3,773 | | Tax benefit | | | | | $ | (10,191) | | $ | (11,622) | | Net of tax | | | $ | (1,721) | | $ | (10,191) | | Net of tax | |
| (a) | These items are included in the components of net periodic benefit cost for our pension and post-retirement benefit plans. See Note 13 for additional details. |
13.PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS Defined Benefit Plans We sponsor 3three qualified defined benefit pension plans that are non-contributory covering substantially all of our hourly employees under collective bargaining agreements who fulfill minimum age and service requirements and certain salaried employees. The defined benefit pension plans are closed to all new entrants. All of our defined benefit pension plans are now frozen to all current employees and 0no additional monthly pension benefits will accrue under those plans. We also have 2two non-qualified supplemental retirement plans (the “Supplemental Plans” and, together with the defined benefit pension plans, the “Pension Plans”). The Supplemental Plans provide supplemental retirement benefits to certain former employees by providing for incremental pension payments to partially offset the reduction of the amount that would have been payable under the qualified defined benefit pension plans if it were not for limitations imposed by federal income tax regulations. The Supplemental Plans are frozen so that 0no person is eligible to become a new participant. These plans are unfunded and have 0no assets. The benefits paid under the Supplemental Plans are paid from the general operating funds of the Company. The following tables summarize the change in benefit obligation, plan assets and funded status of the Pension Plans as of December 31, 20212022 and 2020:2021: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Change in benefit obligation | | | | | | | | | | | | | | | Benefit obligation at the beginning of the year | | $ | 826,120 | | $ | 759,821 | | | $ | 744,463 | | $ | 826,120 | | Interest cost | | | 22,758 | | | 25,971 | | | | 22,273 | | | 22,758 | | Actuarial loss (gain) | | | (19,218) | | | 75,131 | | | Actuarial gain | | | | (197,697) | | | (19,218) | | Benefits paid | | | (36,381) | | | (34,803) | | | | (30,071) | | | (36,381) | | Plan settlement | | | (48,816) | | | — | | | | — | | | (48,816) | | Benefit obligation at the end of the year | | $ | 744,463 | | $ | 826,120 | | | $ | 538,968 | | $ | 744,463 | | | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Change in plan assets | | | | | | | | | | | | | | | Fair value of plan assets at the beginning of the year | | $ | 623,826 | | $ | 556,967 | | | $ | 617,540 | | $ | 623,826 | | Employer contributions | | | 20,755 | | | 24,039 | | | | 10,055 | | | 20,755 | | Actual return on plan assets | | | 58,156 | | | 77,623 | | | | (132,767) | | | 58,156 | | Benefits paid | | | (36,381) | | | (34,803) | | | | (30,071) | | | (36,381) | | Plan settlement | | | (48,816) | | | — | | | | — | | | (48,816) | | Fair value of plan assets at the end of the year | | $ | 617,540 | | $ | 623,826 | | | $ | 464,757 | | $ | 617,540 | | Funded status at year end | | $ | (126,923) | | $ | (202,294) | | | $ | (74,211) | | $ | (126,923) | |
In the yearyears ended December 31, 2022 and 2021, the actuarial gain on the benefit obligation was primarily due to an increase in the discount rate. In the year ended December 31, 2020, the actuarial loss on the benefit obligation was primarily due to a decrease in the discount rate. Amounts recognized in the consolidated balance sheets at December 31, 20212022 and 20202021 consisted of: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Current liabilities | | $ | (242) | | $ | (244) | | | $ | (236) | | $ | (242) | | Long-term liabilities | | $ | (126,681) | | $ | (202,050) | | | $ | (73,975) | | $ | (126,681) | |
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, 20212022 and 20202021 consisted of: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Unamortized prior service cost | | $ | 808 | | $ | 930 | | | $ | 685 | | $ | 808 | | Unamortized net actuarial loss | | | 90,318 | | | 138,868 | | | | 61,193 | | | 90,318 | | | | $ | 91,126 | | $ | 139,798 | | | $ | 61,878 | | $ | 91,126 | |
The following table summarizes the components of net periodic pension cost recognized in the consolidated statements of operations for the plans for the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Service cost | | $ | — | | $ | — | | $ | 50 | | | Interest cost | | | 22,758 | | | 25,971 | | | 30,327 | | | $ | 22,273 | | $ | 22,758 | | $ | 25,971 | | Expected return on plan assets | | | (36,997) | | | (34,544) | | | (34,627) | | | | (36,535) | | | (36,997) | | | (34,544) | | Amortization of: | | | | | | | | | | | | | | | | | | | | | Net actuarial loss | | | 2,309 | | | 1,165 | | | 2,890 | | | | 730 | | | 2,309 | | | 1,165 | | Prior service cost | | | 122 | | | 123 | | | 123 | | | | 123 | | | 122 | | | 123 | | Plan settlement | | | 5,864 | | | — | | | 6,726 | | | | — | | | 5,864 | | | — | | Net periodic pension cost (benefit) | | $ | (5,944) | | $ | (7,285) | | $ | 5,489 | | | $ | (13,409) | | $ | (5,944) | | $ | (7,285) | |
The components of net periodic pension cost other than the service cost component are included in other, net within other income (expense) in the consolidated statements of operations. In 2021, 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. Upon issuance of the group annuity contract, in In 2021 and 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. Upon issuance of the group annuity contract, in 2021 the pension benefit obligation of $47.1 million for approximately 400 participants was irrevocably transferred to the annuity provider and in 2019 the pension benefit obligation of $24.4 million for approximately 500 participants was irrevocably transferred to the annuity provider. The purchase of the group annuity contracts was funded directly by the assets of the Pension Plans. During the yearsyear ended December 31, 2021, and 2019, we recognized a pension settlement charge of $5.9 million and $6.7 million, respectively, as a result of the transfer of the pension liability to the annuity provider and other lump sum payments made during the years.year.
The following table summarizes other changes in plan assets and benefit obligations recognized in other comprehensive loss, before tax effects, during 20212022 and 2020:2021: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Actuarial loss (gain), net | | $ | (40,377) | | $ | 32,052 | | | Actuarial gain, net | | | $ | (28,395) | | $ | (40,377) | | Recognized actuarial loss | | | (2,309) | | | (1,165) | | | | (730) | | | (2,309) | | Recognized prior service cost | | | (122) | | | (123) | | | | (123) | | | (122) | | Plan settlement | | | (5,864) | | | — | | | | — | | | (5,864) | | Total amount recognized in other comprehensive loss, before tax effects | | $ | (48,672) | | $ | 30,764 | | | $ | (29,248) | | $ | (48,672) | |
The weighted-average assumptions used to determine the projected benefit obligations and net periodic benefit cost for the years ended December 31, 2022, 2021 2020 and 20192020 were as follows: | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Discount rate - net periodic benefit cost | | 2.81 | % | 3.51 | % | 4.36 | % | | 3.05 | % | 2.81 | % | 3.51 | % | Discount rate - benefit obligation | | 3.05 | % | 2.81 | % | 3.51 | % | | 5.63 | % | 3.05 | % | 2.81 | % | Expected long-term rate of return on plan assets | | 6.00 | % | 6.25 | % | 6.97 | % | | 6.00 | % | 6.00 | % | 6.25 | % | Rate of compensation/salary increase | | N/A | | 2.50 | % | 2.50 | % | | N/A | | N/A | | 2.50 | % | Interest crediting rate for cash balance plans | | 2.00 | % | 2.00 | % | 3.00 | % | | 4.00 | % | 2.00 | % | 2.00 | % |
Other Non-qualifiedNon-Qualified Deferred Compensation Agreements We also are liable for deferred compensation agreements with former members of the board of directors and certain other former employees of acquired companies. Depending on the plan, benefits are payable in monthly or annual installments for a period of time based on the terms of the agreement which range from five years up to the life of the participant or to the beneficiary upon death of the participant and may begin as early as age 55. Participants accrue 0no new benefits as these plans had previously been frozen. Payments related to the deferred compensation agreements totaled approximately $0.2 million for each of the years ended December 31, 20212022 and 2020,2021, respectively. The net present value of the remaining obligations was approximately $0.6$0.5 million and $0.8$0.6 million at December 31, 20212022 and 2020,2021, respectively, and is included in pension and post-retirement benefit obligations in the accompanying balance sheets. We also maintain 22 life insurance policies on certain of the participating former directors and employees. We recognized $0.1 million and $1.4 million in life insurance proceeds as other non-operating income in 2021 and 2020, respectively.2021. We did not recognize any life insurance proceeds in 2022. The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $2.7$2.8 million and $2.5$2.7 million at December 31, 20212022 and 2020,2021, respectively. These amounts are included in investments in the accompanying consolidated balance sheets. Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the consolidated statements of cash flows. The aggregate death benefit payment payable under these policies totaled $6.2$6.3 million and $6.3$6.2 million as of December 31, 20212022 and 2020,2021, respectively. Post-retirement Benefit Obligations We sponsor various healthcare and life insurance plans (“Post-retirement Plans”) that provide post-retirement medical and life insurance benefits to certain groups of retired employees. Certain plans are frozen so that 0no person is eligible to become a new participant. Retirees share in the cost of healthcare benefits, making contributions that are adjusted periodically—either based upon collective bargaining agreements or because total costs of the program have changed. Covered expenses for retiree health benefits are paid as they are incurred. Post-retirement life insurance benefits are fully insured. A majority of the healthcare plans are unfunded and have 0no assets, and benefits are paid from the general operating funds of the Company. However, a certain healthcare plan is funded by assets that are separately designated within the Pension Plans for the sole purpose of providing payments of retiree medical benefits for this specific plan. operating funds of the Company. However, a certain healthcare plan is funded by assets that are separately designated within the Pension Plans for the sole purpose of providing payments of retiree medical benefits for this specific plan.
The following tables summarize the change in benefit obligation, plan assets and funded status of the post-retirement benefit obligations as of December 31, 20212022 and 2020:2021: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Change in benefit obligation | | | | | | | | | | | | | | | Benefit obligation at the beginning of the year | | $ | 106,704 | | $ | 107,132 | | | $ | 96,434 | | $ | 106,704 | | Service cost | | | 649 | | | 825 | | | | 658 | | | 649 | | Interest cost | | | 2,579 | | | 3,265 | | | | 2,593 | | | 2,579 | | Plan participant contributions | | | 868 | | | 218 | | | | 447 | | | 868 | | Actuarial loss (gain) | | | (4,860) | | | 6,387 | | | Actuarial gain | | | | (36,567) | | | (4,860) | | Benefits paid | | | (9,506) | | | (9,376) | | | | (7,342) | | | (9,506) | | Plan amendments | | | — | | | (1,747) | | | Benefit obligation at the end of the year | | $ | 96,434 | | $ | 106,704 | | | $ | 56,223 | | $ | 96,434 | |
| | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Change in plan assets | | | | | | | | | | | | | | | Fair value of plan assets at the beginning of the year | | $ | 3,337 | | $ | 3,164 | | | $ | 3,546 | | $ | 3,337 | | Employer contributions | | | 8,638 | | | 9,159 | | | | 6,894 | | | 8,638 | | Plan participant’s contributions | | | 868 | | | 218 | | | | 447 | | | 868 | | Actual return on plan assets | | | 209 | | | 172 | | | | (852) | | | 209 | | Benefits paid | | | (9,506) | | | (9,376) | | | | (7,342) | | | (9,506) | | Fair value of plan assets at the end of the year | | $ | 3,546 | | $ | 3,337 | | | $ | 2,693 | | $ | 3,546 | | Funded status at year end | | $ | (92,888) | | $ | (103,367) | | | $ | (53,530) | | $ | (92,888) | |
In the yearyears ended December 31, 2022 and 2021, the actuarial gain on the benefit obligation was primarily due to the underwriting gain and an increase in the discount rate. In the year ended December 31, 2020, the actuarial loss on the benefit obligation was primarily due to a decrease in the discount rate which was partially offset by the underwriting gain. Amounts recognized in the consolidated balance sheets at December 31, 20212022 and 20202021 consist of: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Current liabilities | | $ | (5,446) | | $ | (5,709) | | | $ | (4,328) | | $ | (5,446) | | Long-term liabilities | | $ | (87,442) | | $ | (97,658) | | | $ | (49,202) | | $ | (87,442) | |
Amounts recognized in accumulated other comprehensive loss for the years ended December 31, 20212022 and 20202021 consist of: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Unamortized prior service credit | | $ | (2,865) | | $ | (3,766) | | | $ | (1,965) | | $ | (2,865) | | Unamortized net actuarial loss (gain) | | | (4,585) | | | 284 | | | Unamortized net actuarial gain | | | | (39,103) | | | (4,585) | | | | $ | (7,450) | | $ | (3,482) | | | $ | (41,068) | | $ | (7,450) | |
The following table summarizes the components of the net periodic costs for post-retirement benefits for the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Service cost | | $ | 649 | | $ | 825 | | $ | 957 | | | $ | 658 | | $ | 649 | | $ | 825 | | Interest cost | | | 2,579 | | | 3,265 | | | 4,231 | | | | 2,593 | | | 2,579 | | | 3,265 | | Expected return on plan assets | | | (200) | | | (197) | | | (180) | | | | (213) | | | (200) | | | (197) | | Amortization of: | | | | | | | | | | | | | | | | | | | | | Net actuarial gain | | | — | | | (1,859) | | | (2,033) | | | | (984) | | | — | | | (1,859) | | Prior service cost (credit) | | | (901) | | | 1,147 | | | 3,072 | | | | (900) | | | (901) | | | 1,147 | | Net periodic postretirement benefit cost | | $ | 2,127 | | $ | 3,181 | | $ | 6,047 | | | $ | 1,154 | | $ | 2,127 | | $ | 3,181 | |
The components of net periodic post-retirement benefit cost other than the service cost component are included in other, net within other income (expense) in the consolidated statements of operations. The components of net periodic post-retirement benefit cost other than the service cost component are included in other, net within other income (expense) in the consolidated statements of operations.
The following table summarizes other changes in plan assets and benefit obligations recognized in other comprehensive loss, before tax effects, during 20212022 and 2020:2021: | | | | | | | | | | | | | | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Actuarial loss (gain), net | | $ | (4,869) | | $ | 6,412 | | | Actuarial gain, net | | | $ | (35,502) | | $ | (4,869) | | Recognized actuarial gain | | | — | | | 1,859 | | | | 984 | | | — | | Prior service credit | | | — | | | (1,747) | | | Recognized prior service (cost) credit | | | 901 | | | (1,147) | | | Recognized prior service credit | | | | 900 | | | 901 | | Total amount recognized in other comprehensive loss, before tax effects | | $ | (3,968) | | $ | 5,377 | | | $ | (33,618) | | $ | (3,968) | |
The weighted-average assumptions used to determine the projected benefit obligations and net periodic benefit cost for the years ended December 31, 2022, 2021 2020 and 20192020 were as follows: | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Discount rate - net periodic benefit cost | | 2.57 | % | 3.35 | % | 4.35 | % | | 2.94 | % | 2.57 | % | 3.35 | % | Discount rate - benefit obligation | | 2.93 | % | 2.56 | % | 3.34 | % | | 5.64 | % | 2.93 | % | 2.56 | % | Rate of compensation/salary increase | | 2.50 | % | 2.50 | % | 2.50 | % | | 2.50 | % | 2.50 | % | 2.50 | % |
For purposes of determining the cost and obligation for post-retirement medical benefits, a 6.25%6.50% healthcare cost trend rate was assumed for the plan in 2021,2022, declining to the ultimate trend rate of 5.00% in 2027.2029. Plan Assets Our investment strategy is designed to provide a stable environment to earn a rate of return over time to satisfy the benefit obligations and minimize the reliance on contributions as a source of benefit security. The objectives are based on a long-term (5 to 15 year) investment horizon, so that interim fluctuations should be viewed with appropriate perspective. The assets of the fund are to be invested to achieve the greatest return for the pension plans consistent with a prudent level of risk. The asset return objective is to achieve, as a minimum over time, the passively managed return earned by managed index funds, weighted in the proportions outlined by the asset class exposures identified in the pension plan’s strategic allocation. We update our long-term, strategic asset allocations every few years to ensure they are in line with our fund objectives. At December 31, 2021,2022, the target allocation of the Pension Plan assets is approximately 70 - 90% in return seeking assets consisting primarily of equity and fixed income funds with the remainder in hedge funds. Our investment policy allows the use of derivative instruments when appropriate to reduce anticipated asset volatility or to gain desired exposure to various markets and return drivers. Currently, we believe that there are no significant concentrations of risk associated with the Pension Plan assets. The following is a description of the valuation methodologies for assets measured at fair value utilizing the fair value hierarchy discussed in Note 1, which prioritizes the inputs used in the valuation methodologies in measuring fair value. The fair value measurements used to value our plan assets as of December 31, 20212022 were generated by using market transactions involving identical or comparable assets. There were no changes in the valuation techniques used during 2021.2022. Common Stocks:Stock: Includes domestic and international common stocksstock and are valued at the closing price as of the measurement date as reported on the active market on which the individual securities are traded. Common Collective Trusts and Commingled Funds: Units in the fund are valued based on the net asset value (“NAV”) of the funds, which is based on the fair value of the underlying investments held by the fund less its liabilities as reported by the issuer of the fund. The NAV per share is used as a practical expedient to estimate fair value. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported net asset value. These investments have 0no unfunded commitments, are redeemable daily, weekly, monthly, quarterly or semi-annually and have redemption notice periods of up to 180 days.
The fair values of our assets for our defined benefit pension plans at December 31, 2021 and 2020, by asset category were as follows:
| | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | | | | | Quoted Prices | | Significant | | | | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Cash and cash equivalents | | $ | 459 | | $ | 459 | | $ | — | | $ | — | | Equities: | | | | | | | | | | | | | | Stocks: | | | | | | | | | | | | | | U.S. common stocks | | | 24 | | | 24 | | | — | | | — | | International stocks | | | 1 | | | 1 | | | — | | | — | | Total plan assets in the fair value hierarchy | | | 484 | | $ | 484 | | $ | — | | $ | — | | Common Collective Trusts measured at NAV: (1) | | | | | | | | | | | | | | Short-term investments (2) | | | 6,477 | | | | | | | | | | | Equities: | | | | | | | | | | | | | | Global | | | 223,101 | | | | | | | | | | | Real estate | | | 126,980 | | | | | | | | | | | Fixed Income | | | 194,189 | | | | | | | | | | | Hedge Funds | | | 66,309 | | | | | | | | | | | Total plan assets | | $ | 617,540 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | Quoted Prices | | Significant | | | | | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Equities: | | | | | | | | | | | | | | Stocks: | | | | | | | | | | | | | | U.S. common stocks | | $ | 15 | | $ | 15 | | $ | — | | $ | — | | International stocks | | | 1 | | | 1 | | | — | | | — | | Total plan assets in the fair value hierarchy | | | 16 | | $ | 16 | | $ | — | | $ | — | | Common Collective Trusts measured at NAV: (1) | | | | | | | | | | | | | | Short-term investments (2) | | | 7,479 | | | | | | | | | | | Equities: | | | | | | | | | | | | | | Global | | | 232,933 | | | | | | | | | | | Real estate | | | 89,508 | | | | | | | | | | | Fixed Income | | | 247,479 | | | | | | | | | | | Hedge Funds | | | 46,402 | | | | | | | | | | | Other assets/(liabilities) (3) | | | 9 | | | | | | | | | | | Total plan assets | | $ | 623,826 | | | | | | | | | | |
(1) | Certain investments that are measured at fair value using NAV per share as a practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the total plan assets. |
(2) | Short-term investments include an investment in a common collective trust which is principally comprised of certificates of deposit, commercial paper, U.S. government obligations and variable rate securities with maturities less than one year. |
(3) | Other assets/(liabilities) include accrued receivables, net payables and pending settlements. |
The fair values of our assets for our defined benefit pension plans at December 31, 2022 and 2021, by asset category were as follows: | | | | | | | | | | | | | | | | | | | As of December 31, 2022 | | | | | | | Quoted Prices | | Significant | | | | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Cash and cash equivalents | | $ | 38 | | $ | 38 | | $ | — | | $ | — | | Equities: | | | | | | | | | | | | | | Stocks: | | | | | | | | | | | | | | U.S. common stocks | | | 21 | | | 21 | | | — | | | — | | International stocks | | | 2 | | | 2 | | | — | | | — | | Total plan assets in the fair value hierarchy | | | 61 | | $ | 61 | | $ | — | | $ | — | | Common Collective Trusts measured at NAV: (1) | | | | | | | | | | | | | | Short-term investments (2) | | | 4,739 | | | | | | | | | | | Equities: | | | | | | | | | | | | | | Global | | | 154,626 | | | | | | | | | | | Real estate | | | 96,641 | | | | | | | | | | | Fixed Income | | | 137,174 | | | | | | | | | | | Hedge Funds | | | 71,519 | | | | | | | | | | | Other liabilities (3) | | | (3) | | | | | | | | | | | Total plan assets | | $ | 464,757 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | | | | | Quoted Prices | | Significant | | | | | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Cash and cash equivalents | | $ | 459 | | $ | 459 | | $ | — | | $ | — | | Equities: | | | | | | | | | | | | | | Stocks: | | | | | | | | | | | | | | U.S. common stocks | | | 24 | | | 24 | | | — | | | — | | International stocks | | | 1 | | | 1 | | | — | | | — | | Total plan assets in the fair value hierarchy | | | 484 | | $ | 484 | | $ | — | | $ | — | | Common Collective Trusts measured at NAV: (1) | | | | | | | | | | | | | | Short-term investments (2) | | | 6,477 | | | | | | | | | | | Equities: | | | | | | | | | | | | | | Global | | | 223,101 | | | | | | | | | | | Real estate | | | 126,980 | | | | | | | | | | | Fixed Income | | | 194,189 | | | | | | | | | | | Hedge Funds | | | 66,309 | | | | | | | | | | | Total plan assets | | $ | 617,540 | | | | | | | | | | |
| (1) | Certain investments that are measured at fair value using NAV per share as a practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the total plan assets. |
| (2) | Short-term investments include an investment in a common collective trust which is principally comprised of certificates of deposit, commercial paper, U.S. government obligations and variable rate securities with maturities less than one year. |
| (3) | Other liabilities include net amount due from pending securities purchased and sold. |
The fair values of our assets for our post-retirement benefit plans at December 31, 20212022 and 20202021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | | | | As of December 31, 2022 | | | | | | | Quoted Prices | | Significant | | | | | | | | Quoted Prices | | Significant | | | | | | | | | In Active | | Other | | Significant | | | | | | In Active | | Other | | Significant | | | | | | | Markets for | | Observable | | Unobservable | | | | | | Markets for | | Observable | | Unobservable | | | | | | | Identical Assets | | Inputs | | Inputs | | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Cash and cash equivalents | | $ | 3 | | $ | 3 | | $ | — | | $ | — | | | $ | 1 | | $ | 1 | | $ | — | | $ | — | | Common Collective Trusts measured at NAV: (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | Short-term investments (2) | | | 39 | | | | | | | | | | | | | 28 | | | | | | | | | | | Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | Global | | | 1,330 | | | | | | | | | | | | | 917 | | | | | | | | | | | Real estate | | | 757 | | | | | | | | | | | | | 573 | | | | | | | | | | | Fixed Income | | | 1,158 | | | | | | | | | | | | | 814 | | | | | | | | | | | Hedge Funds | | | 395 | | | | | | | | | | | | | 425 | | | | | | | | | | | Total plan assets | | | 3,682 | | | | | | | | | | | | | 2,758 | | | | | | | | | | | Benefit payments payable | | | (136) | | | | | | | | | | | | | (65) | | | | | | | | | | | Net plan assets | | $ | 3,546 | | | | | | | | | | | | $ | 2,693 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | | | | | | Quoted Prices | | Significant | | | | | | | | | | | | | In Active | | Other | | Significant | | | | As of | | | | | Markets for | | Observable | | Unobservable | | | | December 31, | | | | | Identical Assets | | Inputs | | Inputs | | (In thousands) | | 2020 | | | Total | | (Level 1) | | (Level 2) | | (Level 3) | | Cash and cash equivalents | | | $ | 3 | | $ | 3 | | $ | — | | $ | — | | Common Collective Trusts measured at NAV: (1) | | | | | | | | | | | | | | | | | | Short-term investments (2) | | $ | 41 | | | 39 | | | | | | | | | | | Equities: | | | | | | | | | | | | | | | | | | Global | | | 1,288 | | | | 1,330 | | | | | | | | | | | Real estate | | | 496 | | | | 757 | | | | | | | | | | | Fixed Income | | | 1,369 | | | | 1,158 | | | | | | | | | | | Hedge Funds | | | 257 | | | | 395 | | | | | | | | | | | Total plan assets | | | 3,451 | | | | 3,682 | | | | | | | | | | | Benefit payments payable | | | (114) | | | | (136) | | | | | | | | | | | Net plan assets | | $ | 3,337 | | | $ | 3,546 | | | | | | | | | | |
| (1) | Certain investments that are measured at fair value using NAV per share as a practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the total plan assets. |
| (2) | Short-term investments include investment in a common collective trust which is principally comprised of certificates of deposit, commercial paper and U.S. government obligations with maturities less than one year. |
Cash Flows Contributions Our funding policy is to contribute annually an actuarially determined amount necessary to meet the minimum funding requirements as set forth in employee benefit and tax laws. We have elected notto participate in ARPA beginning with the 2021 plan year. ARPA, which was signed into law in March 2021, included changes to the employer funding requirements and is designed to reduce the amounts of required contributions to provide funding relief for employers. During 2021 and the six months ended June 30, 2022, we elected to fund our required pension contributions at the pre-ARPA levels, which has created a pre-funded balance. We expect that for the year ended December 31, 2023, no pension contributions will be required as we will use our current pre-funded balance to satisfy the minimum fundingcontribution requirements under ARPA and our expected contributions for 2022 are based on historical minimum funding requirements in order to increase the Pension Plan’s funded status.ARPA. We expect to contribute approximately $20.5 million to our Pension Plans and $8.2$6.2 million to our other post-retirement plans in 2022.2023. Estimated Future Benefit Payments As of December 31, 2021,2022, benefit payments expected to be paid over the next ten years are outlined in the following table: | | | | | | | | | | | | | | | | | | | | Other | | | | | | Other | | | | Pension | | Post-retirement | | | Pension | | Post-retirement | | (In thousands) | | Plans | | Plans | | | Plans | | Plans | | 2022 | | $ | 31,143 | | $ | 8,155 | | | 2023 | | | 32,136 | | | 7,710 | | | $ | 32,568 | | $ | 6,159 | | 2024 | | | 33,515 | | | 7,206 | | | | 33,866 | | | 5,558 | | 2025 | | | 34,550 | | | 6,691 | | | | 34,648 | | | 5,046 | | 2026 | | | 35,610 | | | 6,284 | | | | 35,539 | | | 4,655 | | 2027 - 2031 | | | 189,363 | | | 27,262 | | | 2027 | | | | 36,284 | | | 4,400 | | 2028 - 2032 | | | | 189,696 | | | 19,290 | |
Defined Contribution Plans We offer defined contribution 401(k) plans to substantially all of our employees. Contributions made under the defined contribution plans include a match, at the Company’s discretion, of employee contributions to the plans. We recognized expense with respect to these plans of $15.6$15.8 million, $15.6 million and $15.8$15.6 million in 2022, 2021 2020 and 2019,2020, respectively. 14.INCOME TAXES Income tax expense (benefit) consists of the following components: | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended | | | For the Year Ended | | (In thousands) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Current: | | | | | | | | | | | | | | | | | | | | | Federal | | $ | 305 | | $ | 314 | | $ | 143 | | | $ | 199 | | $ | 305 | | $ | 314 | | State | | | 470 | | | 2,236 | | | 1,392 | | | | 830 | | | 470 | | | 2,578 | | Total current expense | | | 775 | | | 2,550 | | | 1,535 | | | | 1,029 | | | 775 | | | 2,892 | | | | | | | | | | | | | | | | | | | | | | | Deferred: | | | | | | | | | | | | | | | | | | | | | Federal | | | 4,867 | | | 8,802 | | | (4,339) | | | | (20,983) | | | (3,921) | | | 187 | | State | | | 637 | | | (416) | | | (910) | | | | (7,104) | | | 14 | | | (1,400) | | Total deferred expense (benefit) | | | 5,504 | | | 8,386 | | | (5,249) | | | | (28,087) | | | (3,907) | | | (1,213) | | Total income tax expense (benefit) | | $ | 6,279 | | $ | 10,936 | | $ | (3,714) | | | $ | (27,058) | | $ | (3,132) | | $ | 1,679 | |
The following is a reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December 31, 2022, 2021 2020 and 2019:2020: | | | | | | | | | | | | | | | | | For the Year Ended | | | For the Year Ended | | (In percentages) | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 | | Statutory federal income tax rate | | 21.0 | % | 21.0 | % | 21.0 | % | | 21.0 | % | 21.0 | % | 21.0 | % | State income taxes, net of federal benefit | | 6.4 | | 1.6 | | 10.6 | | | 5.3 | | 4.7 | | 10.4 | | Searchlight investment | | (33.0) | | (3.3) | | — | | | — | | (23.3) | | (20.8) | | Other permanent differences | | (0.5) | | 2.2 | | (4.5) | | | (0.7) | | (0.4) | | 9.8 | | Change in deferred tax rate | | — | | — | | (2.9) | | | 1.5 | | 0.2 | | (5.4) | | Valuation allowance | | (1.7) | | 2.8 | | (4.7) | | | (0.3) | | (1.2) | | 17.8 | | Provision to return | | 2.6 | | (1.1) | | (0.5) | | | 0.1 | | 1.9 | | (7.0) | | Nondeductible goodwill | | (1.5) | | — | | — | | | State audit settlement | | — | | — | | (3.2) | | | Non deductible goodwill | | | (13.4) | | (1.0) | | — | | Other | | 0.4 | | (0.5) | | (0.1) | | | (0.3) | | 0.3 | | (3.6) | | | | (6.3) | % | 22.7 | % | 15.7 | % | | 13.2 | % | 2.2 | % | 22.2 | % |
Deferred Taxes The components of the net deferred tax liability are as follows: | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | (In thousands) | | 2021 | | 2020 | | | 2022 | | 2021 | | Non-current deferred tax assets: | | | | | | | | | | | | | | | Reserve for uncollectible accounts | | $ | 2,632 | | $ | 2,420 | | | $ | 3,032 | | $ | 2,632 | | Accrued vacation pay deducted when paid | | | 4,388 | | | 4,354 | | | | 4,501 | | | 4,388 | | Accrued expenses and deferred revenue | | | 15,019 | | | 16,419 | | | | 15,458 | | | 15,019 | | Net operating loss carryforwards | | | 100,402 | | | 76,198 | | | | 71,576 | | | 100,402 | | Excess interest carryforward | | | 2,402 | | | — | | | | 19,580 | | | 2,402 | | Pension and postretirement obligations | | | 57,507 | | | 79,688 | | | | 34,083 | | | 57,507 | | Share-based compensation | | | 1,706 | | | 974 | | | | 2,347 | | | 1,706 | | Derivative instruments | | | 2,633 | | | 6,582 | | | | (1,815) | | | 2,633 | | Financing costs | | | — | | | 1,177 | | | Tax credit carryforwards | | | 4,854 | | | 4,990 | | | | 4,282 | | | 4,854 | | | | | 191,543 | | | 192,802 | | | | 153,044 | | | 191,543 | | Valuation allowance | | | (8,580) | | | (7,139) | | | | (8,379) | | | (8,580) | | Net non-current deferred tax assets | | | 182,963 | | | 185,663 | | | | 144,665 | | | 182,963 | | | | | | | | | | | | | | | | | Non-current deferred tax liabilities: | | | | | | | | | | | | | | | Goodwill and other intangibles | | | (44,044) | | | (53,797) | | | | (36,384) | | | (44,044) | | Basis in investment | | | (4) | | | (12) | | | | — | | | (4) | | Partnership investments | | | (16,902) | | | (15,988) | | | | 271 | | | (16,902) | | Property, plant and equipment | | | (310,579) | | | (286,888) | | | | (377,886) | | | (310,579) | | Financing costs | | | (5,892) | | | — | | | | (4,976) | | | (5,892) | | Other | | | — | | | 1 | | | | 1 | | | — | | | | | (377,421) | | | (356,684) | | | | (418,974) | | | (377,421) | | Net non-current deferred taxes | | $ | (194,458) | | $ | (171,021) | | | $ | (274,309) | | $ | (194,458) | |
In connection to the sale of our five limited wireless partnership interests to Cellco in 2022, we have recognized a taxable gain of approximately $477.7 million. For federal income tax purposes, we expect to utilize our available net operating loss carry forwards to offset the taxable gain. For state income tax purposes, we are estimating approximately $8.0 million in state tax liabilities. The financial results of the limited partnership interests have been classified as discontinued operations in our consolidated financial statements for all periods presented. Refer to Note 6 for additional information on the transaction and the partnership interests. As a result of the Kansas City and Ohio transactions in 2022, we recorded an increase of $23.2 million and $4.2 million, respectively, to our current tax expense in 2022 related to the write-down of noncash goodwill included in the transactions that is not deductible for tax purposes. The investment made by Searchlight in 2020 is treated as a contribution of equity for federal tax purposes; therefore, the impact of the non-cash PIK interest expense, discount and issuance costs, and fair value adjustments on the CPR resulted in an increase of $33.1 million and a decrease of $1.6 million to our current tax expense for 2021 and 2020, respectively. As of December 31, 2021,2022, the American Rescue Plan Act did not have a material impact on the Company’s income tax positions. We will continue to evaluate the impact of enacted and future legislation. Deferred income taxes are provided for the temporary differences between assets and liabilities recognized for financial reporting purposes and assets and liabilities recognized for tax purposes. The ultimate realization of deferred tax assets depends upon taxable income during the future periods in which those temporary differences become deductible. To determine whether deferred tax assets can be realized, management assesses whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, taking into consideration the scheduled reversal of deferred tax liabilities, projected future taxable income and tax-planning strategies. 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, 20212022 of $423.1$295.4 million and related deferred tax assets of $88.9$62.0 million. The federal NOL carryforwards for tax years beginning after December 31, 2017 of $157.2$154.7 million and related deferred tax assets of $33.0$32.5 million can be carried forward indefinitely. The federal NOL carryforwards for the tax years prior to December 31, 2017 of $265.9$140.7 million and related deferred tax assets of $55.8$29.5 million expire in 20272030 to 2035. ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL carryforwards as of December 31, 20212022 of $0.6$0.4 million and related deferred tax assets of $0.1 million. ETFL’s federal NOL carryforwards are for the tax years prior to December 31, 2017 and expire in 20222023 to 2024. We estimate that we have available state NOL carryforwards as of December 31, 20212022 of $812.8$406.4 million and related deferred tax assets of $16.1$14.2 million. The state NOL carryforwards expire from 20222023 to 2041.2042. Management believes that it is more likely than not that we will not be able to realize state NOL carryforwards of $89.0$91.5 million and related deferred tax asset of $5.9$6.3 million and has placed a valuation allowance on this amount. The related NOL carryforwards expire from 20222023 to 2041.2042. 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 state tax credit carryforwards as of December 31, 20212022 of $6.1$5.4 million and related deferred tax assets of $4.9$4.3 million. The state tax credit carryforwards are limited annually and expire from 20222023 to 2031.2032. Management believes that it is more likely than not that we will not be able to realize state tax credit carryforwards of $3.4$2.7 million and related deferred tax asset of $2.7$2.1 million and has placed a valuation allowance on this amount. The related state tax credit carryforwards expire from 20222023 to 2031.2032. 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. Our unrecognized tax benefits as of December 31, 20212022 and 20202021 were $4.9 million. 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 $4.7 million for each of the years ended December 31, 20212022 and 2020.2021. Our practice is to recognize interest and penalties related to income tax matters in interest expense and selling, general and administrative expenses, respectively. As of December 31, 20212022 and 2020,2021, 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 20182019 through 2020.2021. The periods subject to examination for our state returns are years 20172018 through 2020.2021. 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 state taxing authorities. 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. There were no material effects on the Company’s effective tax rate. 15.COMMITMENTS AND CONTINGENCIES We have certain 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, 2021,2022, future minimum contractual obligations 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 | | | Minimum Annual Contractual Obligations | | (in thousands) | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total | | Service and support agreements (1) | | $ | 10,122 | | $ | 4,852 | | $ | 1,941 | | $ | 1,144 | | $ | 299 | | $ | 1,059 | | $ | 19,417 | | | $ | 12,552 | | $ | 10,272 | | $ | 6,350 | | $ | 299 | | $ | 307 | | $ | 753 | | $ | 30,533 | | Transport and data connectivity | | | 7,333 | | | 7,022 | | | 5,585 | | | 230 | | | 87 | | | 169 | | | 20,426 | | | | 7,392 | | | 5,624 | | | 232 | | | 87 | | | 87 | | | 82 | | | 13,504 | | Capital expenditures (2) | | | 74,991 | | | — | | | — | | | — | | | — | | | — | | | 74,991 | | | | 112,100 | | | — | | | — | | | — | | | — | | | — | | | 112,100 | | Other operating agreements (3) | | | 676 | | | 553 | | | 408 | | | 251 | | | 230 | | | 446 | | | 2,564 | | | | 2,094 | | | 1,954 | | | 1,013 | | | 575 | | | 491 | | | 1,440 | | | 7,567 | | Total | | $ | 93,122 | | $ | 12,427 | | $ | 7,934 | | $ | 1,625 | | $ | 616 | | $ | 1,674 | | $ | 117,398 | | | $ | 134,138 | | $ | 17,850 | | $ | 7,595 | | $ | 961 | | $ | 885 | | $ | 2,275 | | $ | 163,704 | |
| (1) | We have entered into service and maintenance agreements to support various computer hardware and software applications and certain equipment. |
| (2) | We have binding commitments with numerous suppliers for future capital expenditures. |
| (3) | We have entered into various non-cancelable rental agreements for certain facilities and equipment used in our operations. |
Litigation, Regulatory Proceedings and Other Contingencies Gross Receipts Tax NaNTwo 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 2018. We filed Petitions for Reassessment with the DOR’s Board of Appeals contesting these audit assessments. These cases remain pending and are in various stages of appeal. We received notification that the DOR has started audits for the tax years 2019 and 2020.
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 2018, for which we have filed appeals, continue to lack merit. However, in 2019, CCPA and CCES finalized a settlement of the intrastate and interstate tax liabilities for the tax years 2008 through 2013, except for the 2010 CCPA appeals, bringing the appeals to a conclusion. The additional tax liabilities calculated by the DOR for these tax years for CCPA and CCES were approximately $3.4 million and $4.0 million, respectively. The settlement resulted in a payment from us to the DOR of $2.1 million, including interest, which the Company previously reserved for. The additional tax liabilities calculated by the DOR for CCPA and CCES for the remaining unsettled tax years 2010 (CCPA) and 2014 through 2018 (CCPA and CCES) are approximately $4.6 million and $2.6 million, respectively. 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 remaining unsettled tax years 2010 (CCPA) and 2014 through 2018 (CCPA and CCES), we have reserved $0.8 million and $1.6 million, including interest, for our CCPA and CCES 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. In 2022, the DOR performed audits for the tax years 2019 and 2020 and we received Audit Assessment Notices for CCPA, which included additional tax liabilities calculated by the DOR of approximately $0.8 million. We intend to contest these audit assessments and file Petitions for Reassessment with the DOR’s Board of Appeals, which were filed on December 26, 2022. 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.statements. Pole Sale On December 30, 2020, the Company reached an agreement to sell to Public Service Company of New Hampshire d/b/a Eversource Energy (“Eversource”) its joint ownership interest in approximately 343,000 poles and its sole ownership interest in approximately 3,800 poles located in the Eversource electric service area. The agreement also included the settlement of all vegetation maintenance costs disputed between the Company and Eversource through December 2020. The Company recognized a net loss of $1.9 million during the quarter ended December 31, 2020 associated with the execution of this agreement. Upon the closing of the sale, the Company will become a tenant on the poles and pay pole attachment fees to Eversource. The Company will also no longer have any future obligations associated with vegetation maintenance. The purchase and sale transaction requires regulatory approval by the New Hampshire Public Utilities Commission (“NHPUC”) and was submitted for approval by the parties in 2021. Formal hearings on the transaction concluded in May 2022. The NHPUC issued its order on November 18, 2022. During the quarter ended December 31, 2022, the Company recorded an additional loss on the proposed sale of $8.3 million as a result of the November 18, 2022 NHPUC order which included certain adjustments to components of the purchase price and expense allocations between Eversource and the Company. The Company also increased its estimated closing costs necessary to complete the sale. The New England Cable and Telecommunications Alliance has filed a motion for reconsideration and both parties have filed a motion for clarification. The NHPUC has not yet issued a ruling on either of these motions. 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.statements. 16.QUARTERLY FINANCIAL INFORMATION (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | Quarter Ended | | 2021 | | March 31, | | June 30, | | September 30, | | December 31, | | | 2022 | | | March 31, | | June 30, | | September 30, | | December 31, | | | | | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | | Net revenues | | $ | 324,766 | | $ | 320,403 | | $ | 318,584 | | $ | 318,480 | | | $ | 300,278 | | $ | 298,390 | | $ | 296,619 | | $ | 295,976 | | Operating income | | $ | 38,326 | | $ | 30,015 | | $ | 32,508 | | $ | 34,329 | | | Operating income (loss) | | | $ | (107,742) | | $ | 14,449 | | $ | 20,852 | | $ | (20,721) | | Loss from continuing operations | | | $ | (119,096) | | $ | (10,591) | | $ | (7,257) | | $ | (40,760) | | Discontinued operations, net of tax | | | $ | 3,547 | | $ | 9,079 | | $ | 299,934 | | $ | 5,793 | | Net income (loss) attributable to common stockholders | | $ | (62,099) | | $ | (55,356) | | $ | (4,721) | | $ | 12,414 | | | $ | (125,262) | | $ | (11,517) | | $ | 282,250 | | $ | (45,490) | | Basic and diluted earnings (loss) per share | | $ | (0.80) | | $ | (0.71) | | $ | (0.05) | | $ | 0.12 | | | | | | | | | | | | | | | | | | Basic and diluted earnings (loss) per common share: | | | | | | | | | | | | | | | Loss from continuing operations | | | $ | (1.15) | | $ | (0.18) | | $ | (0.15) | | $ | (0.46) | | Income from discontinued operations | | | | 0.03 | | | 0.08 | | | 2.60 | | | 0.05 | | Net income (loss) per common share attributable to common shareholders - basic and diluted | | | $ | (1.12) | | $ | (0.10) | | $ | 2.45 | | $ | (0.41) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | Quarter Ended | | 2020 | | March 31, | | June 30, | | September 30, | | December 31, | | | 2021 | | | March 31, | | June 30, | | September 30, | | December 31, | | | | | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | | Net revenues | | $ | 325,662 | | $ | 325,176 | | $ | 327,066 | | $ | 326,124 | | | $ | 324,766 | | $ | 320,403 | | $ | 318,584 | | $ | 318,480 | | Operating income | | $ | 37,352 | | $ | 39,780 | | $ | 37,352 | | $ | 21,029 | | | $ | 38,326 | | $ | 30,015 | | $ | 32,508 | | $ | 34,329 | | Income (loss) from continuing operations | | | $ | (78,304) | | $ | (55,138) | | $ | (13,100) | | $ | 7,415 | | Discontinued operations, net of tax | | | $ | 16,221 | | $ | 49 | | $ | 8,619 | | $ | 7,545 | | Net income (loss) attributable to common stockholders | | $ | 15,547 | | $ | 13,840 | | $ | 14,510 | | $ | (6,920) | | | $ | (62,099) | | $ | (55,356) | | $ | (4,721) | | $ | 12,414 | | Basic and diluted loss per share | | $ | 0.22 | | $ | 0.19 | | $ | 0.20 | | $ | (0.09) | | | | | | | | | | | | | | | | | | Basic and diluted earnings (loss) per common share: | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | $ | (1.00) | | $ | (0.71) | | $ | (0.14) | | $ | 0.05 | | Income from discontinued operations | | | | 0.20 | | | - | | | 0.09 | | | 0.07 | | Net income (loss) per common share attributable to common shareholders - basic and diluted | | | $ | (0.80) | | $ | (0.71) | | $ | (0.05) | | $ | 0.12 | |
In connection with the classification of the Kansas City operations as assets held for sale, as discussed in Note 5, we recognized an impairment loss of $126.5 million and $5.2 million during the quarters ended March 31, 2022 and September 30, 2022, respectively. During the quarter ended December 31, 2022, we recognized an additional loss on the sale of $16.8 million as a result of purchase price adjustments and an increase in net assets held for sale and estimated selling costs during the period. During the quarters ended September 30, 2022 and December 31, 2022, we recognized a pre-tax gain of $19.2 million and $1.6 million, respectively, related to the sale of certain non-strategic communication towers. As discussed in Note 15, we recognized a loss of $8.3 million related to the proposed sale of certain utility poles during the quarter ended December 31, 2022. During the quarter ended December 31, 2021, 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, we recognized a non-cash pension settlement charge of $5.9 million during the quarter ended December 31, 2021. During the quartersquarter ended December 31, 2021, and 2020, we recognized a gain of $13.1 million and $23.8 million on the decline in the fair value of contingent payment rights issued to Searchlight. 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.
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.
As part of cost saving initiatives, we incurred severance costs of $7.5 million during the quarter ended December 31, 2020.
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