The Securities and Exchange Commission ("SEC") encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. Certain statements in
this Quarterly Report on Form 10-Q, including those which relate 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
communications markets, are forward-looking statements and are made pursuant to
the safe harbor provisions of the 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 our actual results
to differ materially from those expressed or implied by these forward-looking
statements including the impact of the ongoing novel coronavirus ("COVID-19")
pandemic and our response to it. 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. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of Consolidated Communications
Holdings, Inc. and its subsidiaries ("Consolidated," the "Company," "we" or
"our") to be different from those expressed or implied in the forward-looking
statements. 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 our 2020
Annual Report on Form 10-K filed with the SEC and in Item 1A - "Risk Factors" of
this report. Furthermore, undue reliance should not be placed on
forward-looking statements, which speak only as of the date they are made.
Except as required under federal securities laws or the rules and regulations
of the SEC, we disclaim any intention or obligation to update or revise publicly
any forward-looking statements. Management's Discussion and Analysis ("MD&A")
should be read in conjunction with our unaudited condensed consolidated
financial statements and accompanying notes to the financial statements
("Notes") as of and for the quarter ended March 31, 2021 included in Item 1 of
Part I of this Quarterly Report on Form 10-Q.
Throughout this MD&A, we refer to certain measures that are not measures 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 23-state service area. We operate an advanced fiber network spanning
approximately 47,400 fiber route miles across many rural areas and metro
communities. 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 offer
residential high-speed Internet, video, phone and home security services as well
as multi-service residential and small business bundles.
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 business and residential
customers. Commercial and carrier services represent the largest source of our
operating revenues and are expected to be key growth areas in the future. 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. We leverage our advanced fiber network and tailor our
services for business customers by developing solutions to fit their specific
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needs. Additionally, we are continuously enhancing our suite of managed and
cloud services, 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.
We market our residential services by leading with a competitive broadband
service. As consumer demands for bandwidth continue to increase, our focus is
on significantly enhancing our broadband services and upgrading data speeds. We
offer data speeds of up to 1 Gbps in select markets, and up to 100 Mbps in
markets where 1 Gbps is not yet available, depending on the geographical
region. As of March 31, 2021, approximately 59% of the homes we serve on our
legacy Consolidated network had availability to broadband speeds of up to 100
Mbps or greater. The majority of the homes in our northern New England service
areas have availability to broadband speeds of 20 Mbps or less. As we continue
to increase broadband speeds, we are also able to simultaneously expand the
array of services and content offerings that the network provides.
Our investment in more competitive broadband speeds is critical to our long-term
success. The strategic investment with Searchlight Capital Partners L.P.
("Searchlight") combined with the refinancing of our capital structure, as
described below, provides us additional capital to accelerate our fiber
expansion plans and provide significant benefits to our consumer, commercial and
carrier customers. With the 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 will be able to significantly increase data speeds, expand our
multi-Gig coverage and strategically extend our network across our strong
existing commercial and carrier footprint to attract more on-net and near-net
opportunities. As part of our fiber expansion plan, we plan to upgrade
approximately 1.6 million passings over the next five years across select
service areas to enable multi-Gig capable services to these homes and small
businesses including more than 1 million passings within our northern New
England service areas. Our fiber build plan includes the upgrade of
approximately 300,000 homes and small businesses in 2021. During the quarter
ended March 31, 2021, we upgraded 45,800 passings.
Our competitive broadband speeds enable us to meet the need for higher bandwidth
from the growing consumer demand for streaming live programming or in-demand
content on any device. The consumers demand for streaming services, either to
augment their current video subscription plan or to entirely replace their 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 10% as of March 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. In 2019, we launched in our northern
New England markets, CCiTV, which is a customizable, cloud-enabled video service
that supports a wide variety of viewing habits. Content can be delivered in
high-definition quality to a big-screen TV, as well as to tablets and mobile
devices. CCiTV helps align our product offering with consumer habits using an
app-based approach to video as well as reduce our operating costs. We expanded
CCiTV to customers in our Texas markets in June 2020 and in our California and
Illinois markets in October 2020.
Operating revenues also continue to be impacted by the anticipated 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 6% as of March 31, 2021 compared to 2020.
Competition from wireless providers, Competitive Local Exchange Carriers and
cable television providers has increased in recent years in the markets we
serve. We have been able to mitigate some of the access line losses through
marketing initiatives and product offerings, such as our VoIP service.
As discussed in the "Regulatory Matters" section below, 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, intercarrier compensation ("ICC") and network access charges. There are
various ongoing legal challenges to the orders that have been issued. As a
result, it is not yet possible to fully determine the impact of the regulatory
changes on our operations.
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Recent Developments
Searchlight Investment
On September 13, 2020, we entered into an investment agreement (the "Investment
Agreement") with Searchlight. In connection with the Investment Agreement,
affiliates of Searchlight have committed to invest up to an aggregate of $425.0
million in the Company. The investment commitment is 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 is 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 will receive the
right to an unsecured subordinated note with an aggregate principal amount of
approximately $395.5 million (the "Note").
In the second stage of the transaction, Searchlight will invest an additional
$75.0 million and will be issued 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. The Note may be issued to Searchlight
prior to the closing of the second stage of the transaction upon the occurrence
of certain events. The Note bears interest at 9.0% per annum from the date of
the closing of the first stage of the transaction and is payable semi-annually
in arrears. Upon conversion of the Note, dividends on the preferred stock will
accrue daily on the liquidation preference at a rate of 9.0% per annum, payable
semi-annually in arrears. In addition, following shareholder approval and the
receipt of applicable regulatory approvals, the CPR will be convertible into an
additional 15,115,899 shares, or an additional 10.1%, of the Company's common
stock. Upon completion of both stages, the common stock and CPR issued to
Searchlight will represent approximately 35% of the Company's common stock on an
as-converted basis. The closing of the second stage of the transaction is
subject to the receipt of FCC and Hart Scott Rodino approvals and the
satisfaction of certain other customary closing conditions. We have received
approval under the Hart-Scott-Rodino Act and on April 26, 2021, the Company's
shareholders approved the issuance to Searchlight of the additional shares of
common stock equal to 20% or more of the Company's outstanding common stock. We
expect the closing of the second stage to be completed in the third quarter of
2021. The strategic investment with Searchlight provides us a valued partner
with significant experience 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-own 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 the "Liquidity and Capital Resources"
section, 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. The recent refinancings 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.
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COVID-19 Pandemic
We are closely monitoring the impact on our business of the outbreak of the
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. We are proactively monitoring and
augmenting our network capacity, to meet the higher demands for data usage
during the pandemic as a result of increased usage from work from home and
remote learning applications. As a result of the pandemic, the demand for
bandwidth upgrades has increased for our consumer, commercial and carrier
customers. Our existing network enables us to efficiently respond and adapt to
the increase in internet traffic during this time.
While we have not seen a significant 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. Capital markets
and the US economy have also been significantly impacted by the pandemic and an
economic recession. Adverse economic and market conditions as a result of
COVID-19 could also adversely affect the demand for our products and services
and may also impact the ability of our customers to satisfy their obligations to
us. If the pandemic continues 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, the deferral of certain
employer payroll tax payments and certain income tax law changes. In 2020, we
deferred the payment of approximately $12.0 million for the employer portion of
Social Security taxes otherwise due in 2020 will be deferred with 50% due by
December 31, 2021 and the remaining 50% by December 31, 2022. On March 11,
2021, the American Rescue Plan Act of 2021 was enacted and provides further
economic relief to address the continued economic impact of COVID-19. These
Acts are not expected to have a material impact on our consolidated financial
statements and we will continue to monitor the impact of any effects from these
Acts and other future legislation.
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Results of Operations
The following tables reflect our financial results on a consolidated basis and
key operating metrics as of and for the quarters ended March 31, 2021 and 2020.
Financial Data
Quarter Ended March 31,
$ %
(In millions, except for percentages) 2021 2020 Change Change
Operating Revenues
Commercial and carrier:
Data and transport services (includes VoIP) $ 90.3 $ 89.6 $ 0.7 1 %
Voice services 44.3 45.7 (1.4) (3)
Other 9.7 11.7 (2.0) (17)
144.3 147.0 (2.7) (2)
Consumer:
Broadband (Data and VoIP) 65.8 64.1 1.7 3
Video services 16.8 19.1 (2.3) (12)
Voice services 40.4 43.2 (2.8) (6)
123.0 126.4 (3.4) (3)
Subsidies 17.4 18.4 (1.0) (5)
Network access 31.6 31.5 0.1 0
Other products and services 8.5 2.4 6.1 254
Total operating revenues 324.8 325.7 (0.9) (0)
Operating Expenses
Cost of services and products (exclusive of
depreciation and amortization) 144.0 137.8 6.2 4
Selling, general and administrative costs 66.9 67.8 (0.9) (1)
Depreciation and amortization 75.6 82.7 (7.1) (9)
Total operating expenses 286.5 288.3 (1.8) (1)
Income from operations 38.3 37.4 0.9 2
Interest expense, net (48.4) (32.1) 16.3 51
Gain (loss) on extinguishment of debt (12.0) 0.2 (12.2) (6,100)
Change in fair value of contingent payment
rights (57.6) - (57.6) 100
Other income, net 12.3 15.2 (2.9) (19)
Income tax expense (benefit) (5.3) 5.1 (10.4) (204)
Net income (loss) (62.1) 15.6 (77.7) (498)
Net income attributable to noncontrolling
interest - 0.1 (0.1) (100)
Net income (loss) attributable to common
shareholders $ (62.1) $ 15.5 $ (77.6) (501)
Adjusted EBITDA (1) $ 126.6 $ 131.6 $ (5.0) (4) %
(1) A non-GAAP measure. See the "Non-GAAP Measures" section below for additional
information and reconciliation to the most directly comparable GAAP measure.
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Key Operating Statistics
As of March 31,
2021 2020 Change % Change
Consumer customers 545,061 574,597 (29,536) (5) %
Voice connections 768,083 820,620 (52,537) (6)
Data connections 794,224 786,125 8,099 1
Video connections 73,986 82,633 (8,647) (10)
Total connections 1,636,293 1,689,378 (53,085) (3) %
Operating Revenues
Commercial and Carrier
Data and Transport Services
We provide a variety of business communication services to business customers of
all sizes, including many 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 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 $0.7 million during the quarter
ended March 31, 2021 compared to the same period in 2020 primarily due to
continued growth in Metro Ethernet and VoIP 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 $1.4 million
during the quarter ended March 31, 2021 compared to the same period in 2020
primarily due to a 7% decline in access lines as 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
9-1-1 service revenues. We are a full service 9-1-1 provider and have installed
and maintained two turn-key, state of the art statewide next-generation
emergency 9-1-1 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 9-1-1 service provider
in Vermont. Next-generation emergency 9-1-1 systems are an improvement over
traditional 9-1-1 and are expected to provide the foundation to handle future
communication modes such as texting and video.
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Other services revenues decreased $2.0 million during the quarter ended March
31, 2021 compared to the same period in 2020 primarily due the expiration of our
9-1-1 service contract in Vermont as well as declines in custom construction
projects and business system sales.
Consumer
Broadband Services
Broadband services include revenues from residential customers for subscriptions
to our VoIP and data products. We offer high-speed Internet access at speeds of
up to 1 Gbps, depending on the nature of the network facilities that are
available, the level of service selected and the location. Our VoIP digital
phone service is also available in certain markets as an alternative to the
traditional telephone line. CCiTV, which is a customizable, cloud-enabled video
service, supports a wide variety of viewing habits and provides an app-based
approach to video services. Content can be delivered in high-definition quality
to a big-screen TV, as well as to tablets and mobile devices.
Broadband services revenues increased $1.7 million during the quarter ended
March 31, 2021 compared to the same period in 2020 despite a decrease in data
and VoIP connections of 4% and 16%, respectively, primarily as a result of price
increases implemented during 2020 and the first quarter of 2021 as well as
growth in revenue for CCiTV, which was launched in additional markets during
2020.
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 TV Everywhere service allows our video subscribers to watch their
favorite shows, movies and livestreams on any device. In addition, we offer
other in-demand streaming content including: ATT TV, fuboTV, Philo and HBO NOW®.
Video services revenues decreased $2.3 million during the quarter ended March
31, 2021 compared to the same period in 2020 primarily due to an 11% decrease in
connections as consumers are choosing to subscribe to alternative video services
such as over-the-top streaming services.
Voice Services
We offer several different basic local phone service packages and long-distance
calling plans, including unlimited flat-rate calling plans. The plans include
options for voicemail and other custom calling features such as caller ID, call
forwarding and call waiting. Voice services revenues decreased $2.8 million
during the quarter ended March 31, 2021 compared to the same period in 2020
primarily due to an 8% decline in access lines. 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.
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. Subsidies revenues decreased $1.0 million
during the quarter ended March 31, 2021 compared to the same period in 2020
primarily due to a reduction in state subsidies support.
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
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interexchange carriers. Network access services revenues increased $0.1 million
during the quarter ended March 31, 2021 compared to the same period in 2020
primarily due to an increase in the Federal Universal Service Fund Contribution
Factor during the first quarter of 2021, offset by the continuing decline in
interstate rates, minutes of use, voice connections and carrier circuits.
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 multiple Public Private Partnership
agreements with several towns in New Hampshire to build new FTTP Internet
networks. When complete, the new town networks will provide broadband speeds of
up to 1 Gbps to a number of homes and businesses. Public Private Partnerships
are a key component of Consolidated's commitment to expand rural broadband
access.
Other products and services revenues increased $6.1 million during the quarter
ended March 31, 2021 compared to the same period in 2020 primarily due to
revenue recognition of Public Private Partnership construction projects during
the first quarter of 2021.
Operating Expenses
Cost of Services and Products
Cost of services and products increased $6.2 million during the quarter ended
March 31, 2021 compared to the same period in 2020 primarily due to an increase
in access expense related to fiber costs for the Public Private Partnership
agreements, as described above. Required contributions to the Federal Universal
Service Fund ("USF") increased in 2021 as a result of an increase in the annual
funding rate. Video programming costs also increased as a result of annual rate
increases and the addition of costs for CCiTV, which was expanded to certain
markets in 2020. These increases in cost of services and products were reduced
in part by a decline in employee labor costs due to an increase in capitalized
costs for the fiber network expansion in 2021. In addition, contract labor
costs and repair and maintenance expense decreased as a result of operating
efficiency improvements.
Selling, General and Administrative Costs
Selling, general and administrative costs decreased $0.9 million during the
quarter ended March 31, 2021 compared to the same period in 2020 primarily due
to a decline in employee salaries and benefits as a result of a reduction in
headcount in the current year. However, advertising expense increased from
additional radio and television advertising in the current year to promote our
new fiber broadband speeds. Customer acquisition costs also increased related to
the amortization of sales commissions.
Depreciation and Amortization
Depreciation and amortization expense decreased $7.1 million during the quarter
ended March 31, 2021 compared to the same period in 2020 primarily due to
certain acquired assets becoming fully depreciated or amortized. Amortization
expense declined for customer relationships, which are amortized under the
accelerated method. Depreciation expense also declined due to the sale of
utility poles located in the state of New Hampshire in 2020. These declines in
depreciation and amortization expense were offset in part by ongoing capital
expenditures related to success-based capital projects for consumer and
commercial services as well as the fiber network expansion and customer service
improvements.
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 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.
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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 current annual support through the FCC's Connect America Fund ("CAF") Phase
II funding is $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 to those locations 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
milestones for 2017 through 2020 for all states where it operates.
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 15, 2020 and became effective
on July 1, 2020. This filing reflects the final phase down of end office
switching rates for our rate of return companies. The net impact is a decrease
of approximately $2.0 million in network access and CAF ICC support funding for
the July 2020 through June 2021 tariff period.
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 FCC issued a Notice of Proposed Rulemaking at
their 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 has been 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 the 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 a funding level of $5.9 million
annually over 10 years. Consolidated filed its long form application with
supporting documents on January 29, 2021 and we expect to receive approval
during the third quarter of 2021.
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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. 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 would be
reducing all funded carriers support by 64% beginning January 15, 2021. The
Texas Telephone Association, which Consolidated is a member, filed a lawsuit
seeking to overturn the PUCT decision as well as a temporary injunction on the
funding reduction. We expect a court decision to be made during the second
quarter of 2021. The potential impact is a reduction in support of
approximately $4.0 million annually.
CARES Act Funding
States are reviewing opportunities to use federal 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.
COVID-19
On March 13, 2020, the FCC issued a pledge to Keep America Connected through May
13, 2020, which was later extended to June 30, 2020. The pledge asked all
communications providers to not terminate service to any residential or small
business customers because of their inability to pay their bills due to the
disruptions caused by the coronavirus pandemic; to waive any late fees that any
residential or small business customers incur because of their economic
circumstances related to the coronavirus pandemic; and to open their Wi-Fi
hotspots to any American who needs them. Consolidated signed on to the pledge
through June 30, 2020. Several states took the FCC pledge a step further by not
allowing any carrier to disconnect service within their state during the
Governors' declared state of emergency, which Consolidated also supported. Most
state moratoriums on disconnections have expired; however, certain states
including Massachusetts, New York and Washington were extended into the third
quarter of 2021.
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.
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Non-Operating Items
Interest Expense, Net
Interest expense, net of interest income, increased $16.3 million during the
quarter ended March 31, 2021 compared to the same period in 2020. During the
quarter ended March 31, 2021, we recognized interest expense, including
amortized costs, of $10.2 million on the Note issued to Searchlight as part of
the investment agreement entered into in October 2020. Interest expense on our
outstanding senior notes also increased during the quarter ended March 31, 2021
as part of the refinancing of our long-term debt in October 2020 as described in
the "Liquidity and Capital Resources" section below.
Gain on Extinguishment of Debt
As described in the "Liquidity and Capital Resources" section below, we incurred
a loss on the extinguishment of debt of $12.0 million in connection with the
repayment of $397.0 million of outstanding term loans under our credit agreement
during the quarter ended March 31, 2021.
During the quarter ended March 31, 2020, we repurchased $4.5 million of the
aggregate principal amount of our 6.50% Senior Notes due 2022 and recognized a
gain on extinguishment of debt of $0.2 million in connection with the partial
repurchase of the notes.
Change in Fair Value of Contingent Payment Rights
We are required to measure our contingent payment rights at fair value until
they are converted into shares of the Company's common stock. During the
quarter ended March 31, 2021, we recognized a loss of $57.6 million on the
increase in the fair value of the contingent payment rights issued to
Searchlight.
Other Income
Other income decreased $2.9 million during the quarter ended March 31, 2021
compared to the same period in 2020. Investment income decreased $1.0 million
during the quarter ended March 31, 2021 from our wireless partnership interests.
In addition, during the quarter ended March 31, 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. However,
pension and post-retirement expense decreased $1.9 million. See Note 11 to the
condensed consolidated financial statements for a more detailed discussion
regarding our pension and post-retirement plans.
Income Taxes
Income taxes decreased $10.4 million during the quarter ended March 31, 2021
compared to the same period in 2020. Our effective tax rate was 7.9% and 24.4%
for the quarters ended March 31, 2021 and 2020, respectively. The effective tax
rate differed from the federal and state statutory rates primarily due to
various permanent income tax differences related to the Searchlight transaction,
other various permanent differences, and differences in allocable income for the
Company's state tax filings. Exclusive of these adjustments, our effective tax
rate for the quarters ended March 31, 2021 and 2020 would have been
approximately 26.0% and 24.4%, respectively.
Non-GAAP Measures
In addition to the results reported in accordance with US GAAP, we also use
certain non-GAAP measures such as EBITDA and adjusted EBITDA to evaluate
operating performance and to facilitate the comparison of our historical results
and trends. These financial measures are not measures of financial performance
under US GAAP and should not be considered in isolation or as a substitute for
net income as a measure of performance and net cash provided by operating
activities as a measure of liquidity. They are not, on their own, necessarily
indicative of cash available to fund cash needs as determined in accordance with
GAAP. The calculation of these non-GAAP measures may not be comparable to
similarly titled measures used by other companies. Reconciliations of these
non-GAAP measures to the most directly comparable financial measures presented
in accordance with GAAP are provided below.
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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 table is a reconciliation of net income (loss) to adjusted EBITDA
for the quarters ended March 31, 2021 and 2020:
Quarter Ended
March 31,
(In thousands, unaudited) 2021 2020
Net income (loss) $ (62,083) $ 15,623
Add (subtract):
Interest expense, net of interest income 48,415 32,095
Income tax expense (benefit) (5,300) 5,041
Depreciation and amortization 75,611 82,738
EBITDA 56,643 135,497
Adjustments to EBITDA:
Other, net (1) (10,409) (14,639)
Investment distributions (2) 9,377 10,064
(Gain) loss on extinguishment of debt 11,980 (234)
Change in fair value of contingent payment rights 57,588 -
Non-cash, stock-based compensation 1,450 890
Adjusted EBITDA $ 126,629 $ 131,578
Includes the equity earnings from our investments, dividend income, income
(1) 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 and, if
needed, 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 invest in future
business opportunities.
The following table summarizes our cash flows:
Three Months Ended March 31,
(In thousands) 2021 2020
Cash flows provided by (used in):
Operating activities $ 98,490 $ 84,990
Investing activities (74,738) (39,776)
Financing activities 145,829 (43,470)
Change in cash and cash equivalents $ 169,581 $ 1,744
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Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $98.5 million during the
three-month period ended March 31, 2021, an increase of $13.5 million compared
to the same period in 2020. The increase in primarily as a result of changes in
working capital and the timing of expenditures and cash receipts. Cash
contributions to our defined benefit pension plan also decreased $1.8 million
during the quarter ended March 31, 2021 compared to the same period in 2020.
Cash Flows Used In Investing Activities
Net cash used in investing activities was $74.7 million during the three-month
period ended March 31, 2021 and consisted primarily of cash used for capital
expenditures. Capital expenditures continue to be our primary recurring
investing activity and were $76.0 million and $42.4 million during the
three-month periods ended March 31, 2021 and 2020, respectively. Capital
expenditures for 2021 are expected to be $400.0 million to $420.0 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 2021 of more than 300,000
passings with multi-Gig data speeds. 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.
Cash Flows 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
Credit Agreement
On October 2, 2020, the Company, through certain of its wholly-owned
subsidiaries, entered into a Credit Agreement with various financial
institutions (as amended, the "Credit Agreement") to replace the Company's
previous credit agreement in its entirety. The Credit Agreement consisted of
term loans in an original 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 Initial 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. The Initial Term Loans required quarterly principal
payments of $3.1 million, which commenced December 31, 2020, and bore interest
at a rate of 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 quarter ended March
31, 2021.
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The revolving credit facility has a maturity date of October 2, 2025 and an
applicable margin (at our election) of 4.00% for LIBOR-based borrowings or 3.00%
for alternate base rate borrowings, with a 0.25% reduction in each case if the
consolidated first lien leverage ratio, as defined in the Credit Agreement, does
not exceed 3.20 to 1.00. At March 31, 2021 and December 31, 2020, there were no
borrowings outstanding under the revolving credit facility. Stand-by letters of
credit of $18.1 million were outstanding under our revolving credit facility as
of March 31, 2021. The stand-by letters of credit are renewable annually and
reduce the borrowing availability under the revolving credit facility. As of
March 31, 2021, $231.9 million was available for borrowing under the revolving
credit facility.
The weighted-average interest rate on outstanding borrowings under our credit
facility was 5.75% as of March 31, 2021 and December 31, 2020. Interest is
payable at least quarterly.
Credit Agreement Covenant Compliance
The Credit Agreement contains various provisions and covenants, including, among
other items, restrictions on the ability to pay dividends, incur additional
indebtedness, and issue certain capital stock. We have agreed to maintain
certain financial ratios, including 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 as of the end of any fiscal quarter is
greater than 5.85:1.00. As of March 31, 2021, our consolidated first lien
leverage ratio under the Credit Agreement was 3.90:1.00. As of March 31, 2021,
we were in compliance with the Credit Agreement covenants.
Refinancing of Credit Agreement
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 expect to recognize a loss on the extinguishment of debt, which
could range from approximately $3.0 million to $6.0 million, during the quarter
ended June 30, 2021.
Senior Notes
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 will mature on October 1,
2028. 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
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offerings of the Senior Notes have 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 indentures 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 indentures also contain customary events of default. As of
March 31, 2021, the Company was in compliance with all terms, conditions and
covenants under the indentures governing the Senior Notes.
Repurchase of Senior Notes due 2022
During the quarter ended March 31, 2020, we repurchased $4.5 million of the
aggregate principal amount of our then outstanding 6.50% Senior Notes due in
October 2022 (the "2022 Notes") for $4.2 million and recognized a gain on
extinguishment of debt of $0.2 million
Finance Leases
We lease certain facilities and equipment under various finance leases which
expire between 2021 and 2040. As of March 31, 2021, the present value of the
minimum remaining lease commitments was approximately $16.7 million, of which
$5.0 million was due and payable within the next twelve months. The leases
require total remaining rental payments of $19.6 million as of March 31, 2021.
Searchlight Investment
On October 2, 2020, we closed on the first stage of the strategic investment of
$350.0 million with Searchlight. Searchlight will invest up to a total of
$425.0 million in Consolidated and, assuming satisfaction of certain conditions
set forth in the Investment Agreement will hold a combination of perpetual
Series A preferred stock and up to 35% of the Company's outstanding common
stock. The Searchlight investment will enable us to accelerate investment in our
network over a multi-year period. The Investment is structured to maximize the
proceeds to the Company in the near term so that we can invest in our network
immediately, and then the Investment converts into an equity-like structure upon
receipt of certain required regulatory approvals. We expect the closing of the
second stage of the investment to be completed in the third quarter of 2021 at
which time, we will receive the additional investment of $75.0 million from
Searchlight.
Sufficiency of Cash Resources
The following table sets forth selected information regarding our financial
condition.
March 31, December 31,
(In thousands, except for ratio) 2021 2020
Cash and cash equivalents $ 325,142 $ 155,561
Working capital 225,741 70,191
Current ratio 1.82 1.26
Our net working capital improved $155.6 million as of March 31, 2021 compared to
December 31, 2020 primarily as a result of an increase in cash and cash
equivalents of $169.6 million. As described above, on January 15, 2021, we
borrowed an additional $150.0 million aggregate principal amount of incremental
term loans under our Credit Agreement. Working capital also improved from a
decline in the current portion of long-term debt and finance lease obligations
of $12.5 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
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an increase in accrued interest of $20.2 million related to the timing of the
semi-annual interest payments for our Senior Notes and additional accrued
interest on the Searchlight Note of $7.9 million during the quarter ended March
31, 2021.
Our most significant use of funds for the remainder of 2021 is expected to be
for: (i) interest payments on our indebtedness of between $101.0 million and
$106.0 million; and (ii) capital expenditures of between $324.0 million and
$344.0 million. The recent refinancing of our capital structure combined with
the Searchlight investment provides us the capital and financial flexibility to
fund our accelerated fiber network expansion and growth plans. In the future,
our ability to use cash may be limited by our other expected uses of cash and
our ability to incur additional debt will be limited by our existing and future
debt agreements.
We believe that cash flows from operating activities, together with our existing
cash and borrowings available under our revolving credit facility, will be
sufficient for at least the next twelve months to fund our current anticipated
uses of cash. After that, our ability to fund expected uses of cash and to
comply with the financial covenants under our debt agreements will depend on the
results of future operations, performance and cash flow. Our ability to fund
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 monitor 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. In addition, the COVID-19 pandemic has caused a disruption in
the capital markets, which could make obtaining additional financing more
difficult and we may not be able to obtain financing on favorable terms or at
all.
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 are
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 March 31, 2021, we had approximately $6.1 million of these bonds
outstanding.
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 as described in the Note 11 to the Condensed Consolidated
Financial Statements, included in this report in Part I - Item 1 "Financial
Statements". 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 estimate the long-term
rate of
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return on assets will be 6.00%. The Pension Plans invest in marketable equity
securities which are exposed to changes in the financial markets. COVID-19 has
also negatively impacted the financial markets, which could significantly impact
the returns on our plan assets. If the financial markets experience a sustained
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.
In 2021, we expect to make contributions totaling approximately $20.7 million to
our Pension Plans and $8.8 million to our other post-retirement benefit plans.
As of March 31, 2021, we have contributed $4.2 million and $2.0 million to our
Pension Plans and our other post-retirement benefit plans, respectively. Our
contribution amounts meet the minimum funding requirements as set forth in
employee benefit and tax laws.
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 resulted in less cash payments than the
GAAP tax expense. Acceleration of tax deductions could eventually result in
situations where cash payments will exceed GAAP tax expense.
Critical Accounting Estimates
Our condensed consolidated financial statements and accompanying notes are
prepared in accordance with US GAAP. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates and assumptions are
affected by management's application of accounting policies. Our judgments are
based on historical experience and on 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. For a full discussion of our
accounting estimates and assumptions that we have identified as critical in the
preparation of our condensed consolidated financial statements, refer to our
2020 Annual Report on Form 10-K filed with the SEC.
Recent Accounting Pronouncements
For information regarding the impact of certain recent accounting
pronouncements, see Note 1 "Summary of Significant Accounting Policies" to the
Condensed Consolidated Financial Statements, included in this report in Part I -
Item 1 "Financial Statements".
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