ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report. The following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business, actions of regulatory authorities and competitors and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements,
see
"Item 1A. Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report. Our discussion and analysis of financial condition and results of operations are presented in the following sections:
•
Overview
•
Executive Summary
•
Proposed Merger with Consolidated Communications Holdings, Inc.
•
Labor Matters
•
Regulatory and Legislative
•
Basis of Presentation
•
Results of Operations
•
Non-GAAP Financial Measures
•
Liquidity and Capital Resources
•
Off-Balance Sheet Arrangements
•
Summary of Contractual Obligations
•
Critical Accounting Policies and Estimates
•
New Accounting Standards
•
Inflation
Overview
We are a leading provider of advanced communications services to business, wholesale and residential customers within our service territories. We offer our customers a suite of advanced services including Ethernet, SIP-Trunking, hosted PBX, managed services, data center colocation services, high capacity data transport and other IP-based services over our fiber-based network, in addition to Internet access, HSD and local and long distance voice services. Our service territory spans
17
states where we are the incumbent communications provider primarily serving rural communities and small urban markets. Many of our LECs have served their respective communities for more than
80
years. As of
December 31, 2016
, we operated with approximately
306,600
broadband subscribers, approximately
15,700
Ethernet circuits and approximately
366,100
residential voice lines.
We own and operate an extensive fiber-based Ethernet network with more than
22,000
miles of fiber optic cable, including approximately
18,000
miles of fiber optic cable in Maine, New Hampshire and Vermont, giving us capacity to support more HSD services and extend our fiber reach into more communities across the region. The IP/MPLS network architecture of our fiber-based network allows us to provide Ethernet, transport and other IP-based services with the highest level of reliability at a lower cost of service. This fiber-based Ethernet network also supplies critical infrastructure for wireless carriers serving the region as their bandwidth needs increase, driven by mobile data from smartphones, tablets and other wireless devices. As of
December 31, 2016
, we provide cellular transport, also known as backhaul, through over
1,900
mobile Ethernet backhaul connections. We have fiber connectivity to approximately
1,300
cellular communications towers in our service footprint.
Executive Summary
Our mission is to empower businesses, consumers and communities with advanced data, IT and voice services by leveraging our network, technology and operational expertise to exceed their expectations. Our vision includes operating and technology platforms that will meet our customers' technology needs by providing them with reliable and secure connections and ready access to what matters most to them.
Our executive management team is focused on utilizing our network assets, our outstanding operating platform and our proven ability to develop and deploy market-driven products to build brand awareness, aid in generating new revenue and sustain existing revenue. We will enhance our network to bring new services and more robust technologies to our markets, enable effective and secure technology to ensure our product and service offerings remain competitive, and provide excellent customer service to create a loyal customer base, all while maintaining a sharp focus on managing costs.
Our objective is to transform our revenue by continuing to add advanced data products and services such as Ethernet, high capacity data transport and other IP-based services over our fiber-based network in addition to HSD services, to minimize our dependence on voice access lines. Communications companies, including us, continue to experience a decline in access lines due to increased competition from wireless carriers, cable television operators and CLECs and increased availability of alternative communications services, including wireless and voice over IP ("VoIP"). We will continue our efforts to retain customers to mitigate the loss of voice access lines through bundled packages, including video and other value added services. We believe access lines as a measure of the business are increasingly less meaningful measures of trend and are being replaced by revenue generating broadband subscribers and Ethernet circuits.
Over the past few years, we have made significant capital investments in our fiber-based Ethernet network to expand our business service offerings to meet the growing data needs of our customers and to increase broadband speeds and capacity in our consumer markets. We have also focused our sales and marketing efforts on these advanced data solutions. Specifically, within the last few years, we built and launched high capacity Ethernet services to allow us to meet the capacity needs of our business customers as well as supply high capacity infrastructure to our wholesale customers. In the past year, Ethernet demand has remained strong amid increased price pressure. We continue to see a market trend, largely led by cable companies, of reduced Ethernet prices to business and wholesale customers. We continue to see growth in Ethernet units and speeds amid declining prices in the market. Ethernet high-capacity transport data services are our flagship product and are laying the foundation not only for new business but also for additional IP-based advanced services in the future.
We believe that our extensive fiber network, with more than
22,000
miles of fiber optic cable, including approximately
18,000
miles of fiber optic cable in northern New England and approximately
1,300
cellular communications towers currently served with fiber, puts us in an excellent position to serve the cellular backhaul needs in our markets. We further believe the bandwidth needs of cellular backhaul will grow with the continued adoption of bandwidth-intensive technology. As a result, we expect to see wireless carriers developing new technologies as demand increases on existing fiber-connected towers, including the use of "small cell" architecture. By satisfying additional demand for bandwidth, both traditionally and through new and evolving technology, we expect to partially offset the decline we have seen, and expect to continue to see, in legacy wholesale offerings, including TDM transport services, DS1s, DS3s and wholesale switched access.
Coupled with recent regulatory reform in the states of Maine, New Hampshire and Vermont that will serve to promote fair competition among communications service providers in the region, we believe that there is a significant organic growth opportunity within the business and wholesale markets given our extensive fiber network and IP-based product suite, combined with our relative low market share in these areas.
Proposed Merger with Consolidated Communications Holdings, Inc.
On December 3, 2016, FairPoint Communications entered into the Merger Agreement with Consolidated and Merger Sub, which provides for, among other things, a business combination whereby Merger Sub will merge with and into FairPoint Communications, with FairPoint Communications as the surviving entity. As a result of the Merger, the separate corporate existence of Merger Sub will cease, and FairPoint Communications will survive as a wholly owned subsidiary of Consolidated. Consolidated is a leading business and broadband communications provider throughout its 11-state service area.
If the Merger is completed, under the terms of the Merger Agreement, stockholders of FairPoint Communications will receive 0.7300 shares of common stock of Consolidated for each share of FairPoint Communications common stock that they own immediately before this transaction. The Merger is expected to close around the middle of 2017 and is subject to standard closing conditions, including federal and state regulatory approvals and the approval of both Consolidated’s and FairPoint Communications’ stockholders. The required waiting period under the HSR Act was terminated on January 11, 2017.
For the year ended December 31, 2016, we recognized
$4.5 million
of merger related expenses, primarily for legal and financial advisory costs.
The award agreements under the Long Term Incentive Plan provide that upon the occurrence of a change in control, unvested benefits will be accelerated and vest in full.
Labor Matters
Two of our collective bargaining agreements in northern New England were ratified on February 22, 2015 by their respective unions. Members of these two labor unions initiated a work stoppage on October 17, 2014 and returned to work on February 25, 2015. The respective collective bargaining agreements expire in August 2018. For the year ended December 31, 2015, we recognized $48.9 million of labor negotiation related expenses, primarily for contracted services, contingent workforce expenses (including training) and legal, communications and public relations expenses.
See
notes (11) "Employee Benefit Plans" and (12) "Income Taxes" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report for further information, as well as "Results of Operations" herein.
Regulatory and Legislative
We are generally subject to common carrier regulation primarily by federal and state governmental agencies. At the federal level, the FCC generally exercises jurisdiction over common carriers, such as us, to the extent those carriers provide, originate or terminate interstate or international communications. State regulatory commissions generally exercise jurisdiction over common carriers to the extent those carriers provide, originate or terminate intrastate telecommunications. In addition, pursuant to the Communications Act, state and federal regulators share responsibility for implementing and enforcing the domestic pro-competitive policies introduced by that legislation.
We are required to comply with the Communications Act which requires, among other things, that common carriers offer communications services at just and reasonable rates and on terms and conditions that are not unreasonably discriminatory. The Communications Act also contains requirements intended to promote competition in the provision of local services and lead to deregulation as markets become more competitive.
For a detailed description of the federal and state regulatory environment in which we operate and the FCC's recently promulgated CAF/ICC Order and other recent regulatory changes, as well as the effects and potential effects of such regulation on us,
see
"Item 1. Business—Regulatory and Legislative" included elsewhere in this Annual Report. The impact of these changes for
2016
is described further below. However, in the long run, we are uncertain of the ultimate impact as federal and state regulations continue to evolve.
Basis of Presentation
We view our business of providing data, voice and communications services to business, wholesale and residential customers as one reportable segment.
Results of Operations
The following table sets forth our consolidated operating results reflected in our consolidated statements of operations for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The comparisons of financial results are not necessarily indicative of future results (in thousands, except for operating metrics):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Revenues:
|
|
|
|
|
|
Voice services
|
$
|
297,441
|
|
|
$
|
323,412
|
|
|
$
|
362,491
|
|
Access
|
239,761
|
|
|
256,617
|
|
|
267,938
|
|
Data and Internet services
|
187,268
|
|
|
178,620
|
|
|
175,490
|
|
Regulatory funding
|
51,411
|
|
|
53,818
|
|
|
45,556
|
|
Other
|
48,562
|
|
|
46,998
|
|
|
49,921
|
|
Total revenues
|
824,443
|
|
|
859,465
|
|
|
901,396
|
|
Operating expenses:
|
|
|
|
|
|
Cost of services and sales, excluding depreciation and amortization
|
389,316
|
|
|
430,308
|
|
|
440,979
|
|
Other post-employment benefit and pension (benefit)/expense
|
(213,760
|
)
|
|
(170,338
|
)
|
|
75,282
|
|
Selling, general and administrative expense, excluding depreciation and amortization
|
197,239
|
|
|
206,046
|
|
|
257,627
|
|
Depreciation and amortization
|
222,303
|
|
|
223,819
|
|
|
220,678
|
|
Reorganization related expense
|
—
|
|
|
38
|
|
|
104
|
|
Total operating expenses
|
595,098
|
|
|
689,873
|
|
|
994,670
|
|
Income/(loss) from operations
|
229,345
|
|
|
169,592
|
|
|
(93,274
|
)
|
Other income/(expense):
|
|
|
|
|
|
Interest expense
|
(82,697
|
)
|
|
(80,718
|
)
|
|
(80,371
|
)
|
Other, net
|
296
|
|
|
485
|
|
|
7,548
|
|
Total other expense
|
(82,401
|
)
|
|
(80,233
|
)
|
|
(72,823
|
)
|
Income/(loss) before income taxes
|
146,944
|
|
|
89,359
|
|
|
(166,097
|
)
|
Income tax (expense)/benefit
|
(42,849
|
)
|
|
1,057
|
|
|
29,778
|
|
Net income/(loss)
|
$
|
104,095
|
|
|
$
|
90,416
|
|
|
$
|
(136,319
|
)
|
|
|
|
|
|
|
|
As of December 31,
|
Select Operating Metrics:
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Broadband subscribers
|
306,624
|
|
|
311,130
|
|
|
319,915
|
|
|
|
|
|
|
|
Ethernet circuits
|
15,691
|
|
|
14,507
|
|
|
12,614
|
|
|
|
|
|
|
|
Residential voice lines
|
366,111
|
|
|
409,852
|
|
|
466,682
|
|
Voice Services Revenues
We receive revenues through the provision of local calling services to business and residential customers, generally for a fixed monthly charge and service charges for special calling features. We also generate revenue through long distance services within our service areas on our network and through resale agreements with national interexchange carriers. For the years ended
December 31, 2016
,
2015
and
2014
, residential voice lines in service decreased
10.7%
,
12.2%
and
11.4%
year-over-year, respectively, which directly impacts local voice services revenues and our opportunity to provide long distance services to our customers, resulting in a decrease of minutes of use. The decline in residential voice lines in 2015 and 2014 may have been partially due to the impact of the strike on service levels. Evolving competition, including reduced voice pricing from cable competitors as well as cellular adoption, has contributed to the decrease in residential voice lines. There are very few areas within our northern New England footprint where cable voice service and cellular are not alternatives for our customers. In addition, business voice services revenue also declined in part because of reduced access lines as businesses shifted from traditional voice products to our Ethernet or other advanced services. We expect the trend of decline in voice lines in service, and thereby a decline in aggregate voice services revenue, to continue as customers continue to turn to the use of alternative communication services as a result of ever-increasing competition.
Effective June 1, 2015, the Performance Assurance Plan ("PAP") that was previously adopted in each of the states of Maine, New Hampshire and Vermont was retired and we began measuring and reporting certain wholesale local service performance results pursuant to the terms of a simplified measurement plan. The new plan, called the Wholesale Performance Plan ("WPP"), was developed collaboratively with CLECs over several years and was approved by the Maine, New Hampshire and Vermont regulatory commissions. Under the WPP, we are subject to significantly fewer performance criteria and our annual service penalty
exposure was reduced from a maximum of $87 million to a maximum of $12 million ($4.75 million in each of Maine and New Hampshire and $2.5 million in Vermont). A portion of the service credits resulting from these commitments were recorded to voice services revenues; however, the majority were recorded to access revenues.
The following table reflects the primary drivers of year-over-year changes in voice services revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 vs. December 31, 2015
|
|
Year ended December 31, 2015 vs. December 31, 2014
|
|
|
Increase (Decrease)
|
%
|
|
Increase (Decrease)
|
%
|
Local voice services revenues, excluding:
|
$
|
(20.6
|
)
|
|
$
|
(30.8
|
)
|
|
Long distance services revenues
|
|
(5.6
|
)
|
|
|
(8.4
|
)
|
|
Increase in accrual of PAP/WPP service credits
(1)
|
|
0.2
|
|
|
|
0.1
|
|
|
Total change in voice services revenues
|
$
|
(26.0
|
)
|
(8
|
)%
|
$
|
(39.1
|
)
|
(11
|
)%
|
|
|
(1)
|
There was an insignificant amount of PAP/WPP service credits during the year ended
December 31, 2016
. During the years ended
December 31, 2015
and
2014
, PAP/WPP service credits resulted in a decrease of $0.2 million and $0.3 million, respectively, to local voice services revenues.
|
Access Revenues
We receive revenues for the provision of network access through carrier Ethernet based products and legacy access products to end user customers and long distance and other competing carriers who use our local exchange facilities to provide interexchange services to their customers. Network access can be provided to carriers and end users that buy dedicated local and interexchange capacity to support their private networks (i.e. special access) or it can be derived from fixed and usage-based charges paid by carriers for access to our local network (i.e. switched access).
Carriers are migrating from legacy access products, such as DS1, DS3, frame relay, ATM and private line, to carrier Ethernet based products. During the years ended
December 31, 2016
,
2015
and
2014
, wholesale Ethernet circuits grew by
12.3%
,
17.1%
and
44.4%
year-over-year, respectively. These carrier Ethernet based products are more sustainable, but generally, at the outset, have lower average revenue per user of broadband capacity than the legacy products they are replacing, resulting in a decline in access revenues. We expect the decline in access revenues to continue with customer migration. This decline in legacy access products is expected to be partially offset with the increasing need for bandwidth, including cellular backhaul and demand for carrier Ethernet based products, both of which are expected to increase over time. With the entry of cable competitors into the wholesale market, we continue to experience an increased decline in access lines due to this new competition. However, our extensive fiber-based Ethernet network with more than
22,000
miles of fiber optic cable (of which approximately
18,000
miles are in Maine, New Hampshire and Vermont), including approximately
1,300
cellular communications towers currently served with fiber, puts us in a position to grow our revenue base as demand for cellular backhaul and other Ethernet services expands. We also construct new fiber routes to cellular communications towers when the business case presents itself. Additionally, we continue to evaluate new services to provide to carriers, including the selective use of dark fiber and professional services, to continue to meet carrier access needs.
As described above, we adopted a separate PAP for certain services provided on a wholesale basis to CLECs in each of the states of Maine, New Hampshire and Vermont, pursuant to which we are required to issue service credits in the event we are unable to meet the provisions of the respective PAP. These PAPs were retired effective June 1, 2015 and replaced with the WPP. Our maximum exposure to wholesale service credits has been reduced through the implementation of the WPP. The service credits are allocated to access revenues or voice services revenues based on services provided to the wholesale carrier.
In June 2014, Maine established a new POLR SQI standard, which may subject us to future SQI penalties.
The following table reflects the primary drivers of year-over-year changes in access revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 vs. December 31, 2015
|
|
Year ended December 31, 2015 vs. December 31, 2014
|
|
|
Increase (Decrease)
|
%
|
|
Increase (Decrease)
|
%
|
Carrier Ethernet services
(1)
|
$
|
1.6
|
|
|
$
|
9.3
|
|
|
Legacy access services
(2)
|
|
(19.3
|
)
|
|
|
(20.8
|
)
|
|
Decrease in accrual of PAP/WPP service credits
(3)
|
|
0.8
|
|
|
|
0.2
|
|
|
Total change in access revenues
|
$
|
(16.9
|
)
|
(7
|
)%
|
$
|
(11.3
|
)
|
(4
|
)%
|
|
|
(1)
|
We offer carrier Ethernet services throughout our market to our business and wholesale customers, which include Ethernet virtual circuit technology for cellular backhaul. As of
December 31, 2016
, we provide cellular transport on our fiber-
|
based Ethernet network through over
1,900
fiber-to-the-tower connections compared to over 1,900 and 1,700 as of
December 31, 2015
and
2014
, respectively.
|
|
(2)
|
Legacy access services include products such as DS1, DS3, frame relay, ATM and private line.
|
|
|
(3)
|
During the years ended
December 31, 2016
,
2015
and
2014
, PAP/WPP service credits resulted in a decrease of $0.2 million, $1.0 million and $1.2 million to access revenues, respectively.
|
Data and Internet Services Revenues
We receive revenues from monthly recurring charges for the provision of data and Internet services to residential and business customers through DSL technology, fiber-to-the-home technology, retail Ethernet, Internet dial-up, high speed cable modem and wireless broadband.
We have invested in our broadband network to extend the reach and capacity of the network to customers who did not previously have access to data and Internet products and to offer more competitive services to existing customers, including retail Ethernet products. During the years ended
December 31, 2016
,
2015
and
2014
, retail Ethernet circuits grew by
2.8%
,
12.4%
, and
20.5%
respectively. Our broadband subscribers decreased by
1.4%
,
2.7%
and
2.5%
during the years ended
December 31, 2016
,
2015
and
2014
, respectively, which directly impacts data and Internet services revenues. We expect to continue our investment in our broadband network to further grow data and Internet services revenues in the coming years.
The following table reflects the primary drivers of year-over-year changes in data and Internet services revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 vs. December 31, 2015
|
|
Year ended December 31, 2015 vs. December 31, 2014
|
|
|
Increase (Decrease)
|
%
|
|
Increase (Decrease)
|
%
|
Retail Ethernet services
(1)
|
$
|
0.6
|
|
|
$
|
4.9
|
|
|
Other data and Internet technology based services
(2)
|
|
8.0
|
|
|
|
(1.8
|
)
|
|
Total change in data and Internet services revenues
|
$
|
8.6
|
|
5
|
%
|
$
|
3.1
|
|
2
|
%
|
|
|
(1)
|
Retail Ethernet services revenue is comprised of data services provided through E-LAN, E-LINE and E-DIA technology on our fiber-based Ethernet network. During the years ended
December 31, 2016
,
2015
and
2014
, we recognized $43.0 million, $42.4 million and $37.5 million, respectively, of retail Ethernet revenues.
|
|
|
(2)
|
Includes all other services such as DSL, dial-up, high speed cable modem and wireless broadband.
|
Regulatory Funding Revenues
We receive certain federal and state government funding that we classify as regulatory funding, which is further described in “Regulatory and Legislative” herein, including: CAF Phase II support effective January 1, 2015 to build and operate broadband services; CAF Phase II transition funding; CAF Phase I frozen support (for Kansas and Colorado and until a reverse auction is completed); CAF funding under the CAF/ICC Order; and universal service fund support from certain states in which we operate. During the years ended
December 31, 2016
,
2015
and
2014
, we recognized
$51.4 million
,
$53.8 million
and
$45.6 million
, respectively, of regulatory funding revenues. The year-over-year changes are primarily due to the timing of CAF Phase II transitional revenue. CAF Phase II support revenue does not include any funding for Colorado and Kansas. We expect the amount of regulatory funding revenue to decline as the amount of CAF Phase II transition funding decreases in 2016 and is phased out through 2018.
Other Services Revenues
We receive revenues from other services, including special purpose projects on behalf of third parties, video services (including cable television and video-over-DSL), billing and collection, directory services, the sale and maintenance of customer premise equipment and certain other miscellaneous revenues. Other services revenues also include revenue we receive from late payment charges to end users and interexchange carriers. Due to the composition of other services revenues, it is difficult to predict future trends.
The following table reflects the primary drivers of year-over-year changes in other services revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 vs. December 31, 2015
|
|
Year ended December 31, 2015 vs. December 31, 2014
|
|
|
Increase (Decrease)
|
%
|
|
Increase (Decrease)
|
%
|
Special purpose projects
(1)
|
$
|
0.4
|
|
|
$
|
(3.8
|
)
|
|
Late payment fees
(2)
|
|
—
|
|
|
|
0.4
|
|
|
Other
(3)
|
|
1.2
|
|
|
|
0.5
|
|
|
Total change in other services revenues
|
$
|
1.6
|
|
3
|
%
|
$
|
(2.9
|
)
|
(6
|
)%
|
|
|
(1)
|
Special purpose projects are completed on behalf of third party requests.
|
|
|
(2)
|
Late payment fees are related to customers who have not paid their bills in a timely manner.
|
|
|
(3)
|
Other revenues were primarily attributable to revenue from value added reseller of unified communications, data networking and cabling infrastructure solutions, in addition to fluctuations in directory services, billing and collections and in various other miscellaneous services revenues.
|
Supplementary revenue information.
In addition to the revenue information discussed above, we are providing the following additional strategic revenue categorization
information. Management believes that providing this additional revenue information will afford better visibility into our revenue trends as a result of product and service evolution within our industry. Management believes these metrics will enhance investors' ability to evaluate our business and assist investors in their understanding of the changing composition of our revenue (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Growth (1)
|
|
|
|
|
|
Broadband (1a)
|
$
|
141.8
|
|
|
$
|
135.6
|
|
|
$
|
138.7
|
|
Ethernet (1b)
|
98.1
|
|
|
95.9
|
|
|
81.6
|
|
Hosted and Advanced Services (1c)
|
17.9
|
|
|
13.4
|
|
|
12.5
|
|
Subtotal Growth
|
257.8
|
|
|
244.9
|
|
|
232.8
|
|
Growth as a % of Total Revenue
|
31.3
|
%
|
|
28.5
|
%
|
|
25.8
|
%
|
|
|
|
|
|
|
Convertible (2)
|
|
|
|
|
|
Non-Ethernet Special Access (2a)
|
66.6
|
|
|
79.9
|
|
|
94.7
|
|
Business Voice (2b)
|
119.0
|
|
|
127.7
|
|
|
134.1
|
|
Other Convertible (2c)
|
20.5
|
|
|
23.9
|
|
|
28.9
|
|
Subtotal Convertible
|
206.1
|
|
|
231.5
|
|
|
257.7
|
|
Convertible as a % of Total Revenue
|
25.0
|
%
|
|
26.9
|
%
|
|
28.6
|
%
|
|
|
|
|
|
|
Legacy (3)
|
|
|
|
|
|
Residential Voice (3a)
|
212.1
|
|
|
226.0
|
|
|
245.6
|
|
Switched Access and Other (3b)
|
65.9
|
|
|
74.7
|
|
|
83.7
|
|
Subtotal Legacy
|
278.0
|
|
|
300.7
|
|
|
329.3
|
|
Legacy as a % of Total Revenue
|
33.7
|
%
|
|
35.0
|
%
|
|
36.5
|
%
|
|
|
|
|
|
|
Regulatory funding (4)
|
51.4
|
|
|
53.8
|
|
|
45.5
|
|
Regulatory funding as a % of Total Revenue
|
6.2
|
%
|
|
6.3
|
%
|
|
5.0
|
%
|
|
|
|
|
|
|
Miscellaneous (5)
|
31.1
|
|
|
28.6
|
|
|
36.1
|
|
Miscellaneous as a % of Total Revenue
|
3.8
|
%
|
|
3.3
|
%
|
|
4.1
|
%
|
|
|
|
|
|
|
Total Revenue
|
$
|
824.4
|
|
|
$
|
859.5
|
|
|
$
|
901.4
|
|
(1) Growth revenue is comprised of products and services that are generally viewed as in-demand by communications consumers over the medium- to long-term and are expected to increase over time.
a) Broadband revenue is comprised of both residential and business customers delivered through DSL, ADSL, VDSL or other similar services.
b) Ethernet revenue includes Ethernet over copper ("EOC") or Ethernet over fiber ("EOF") services delivered to end-users or to wholesalers, who then sell to their end-users.
c) Hosted and Advanced Services includes VoIP and other digital voice services including unified messaging and other IP features as well as revenue generated from our various advanced services including our value added reseller of unified communications, data networking and cabling infrastructure solutions, the next-generation emergency 9-1-1 contracts in several of our service territories as well as data center and managed services.
(2) Convertible revenues are revenues that could move from TDM-based technologies to Ethernet or other advanced services.
a) Non-Ethernet Special Access includes high-capacity circuits. The revenues are primarily comprised of business revenue from T1's, DS3's and SONET products.
b) Business Voice is traditional voice, long distance, ISDN and Centrex services for a business customer.
c) Other Convertible primarily includes Unbundled Network Element ("UNE"), Asynchronous Transfer Mode ("ATM"), Frame Relay, ISDN, Analog Private Line and Internet services such as dial-up.
(3) Legacy revenues are TDM-based voice related consumer revenue largely related to residential customers.
a) Residential Voice is comprised of TDM voice services to residential customers.
b) Switched Access and Other primarily includes Switched Transport, Local Switching, NECA pooling elements and colocation of miscellaneous equipment.
(4) Refer to the definition of "Regulatory Funding Revenues" above.
(5) Miscellaneous is comprised of special purpose projects, late payment fees from our customers and pole rental revenues among other various service revenues.
The primary drivers of the year-over-year changes in the strategic revenue categorization for the year ended
December 31, 2016
compared to
2015
were:
|
|
•
|
Growth revenue
increased
$12.9 million
as we experienced growth in broadband revenue as speed upgrades and rate increases helped offset a decline in broadband subscribers as well as increased hosted and advanced services revenue and increased Ethernet revenue due to customer growth.
|
|
|
•
|
Convertible revenue
decreased
$25.4 million
as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products.
|
|
|
•
|
Legacy revenue
decreased
$22.7 million
resulting from a decline in voice access lines due to fewer lines in service and lower legacy switched access revenue versus a year ago.
|
|
|
•
|
Regulatory funding revenue
decreased
$2.4 million
primarily due to the timing of CAF Phase II transitional revenue.
|
|
|
•
|
Miscellaneous revenue
increased
$2.5 million
due to lower PAP/WPP service credits, revenue assurance activities and higher special purpose projects.
|
The primary drivers of the year-over-year changes in the strategic revenue categorization for the year ended
December 31, 2015
compared to
2014
were:
|
|
•
|
Growth revenue increased $12.1 million as we experienced growth in Ethernet while price increases for broadband services and speed upgrades helped offset a decline in broadband subscribers.
|
|
|
•
|
Convertible revenue decreased $26.2 million as customers migrated from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products.
|
|
|
•
|
Legacy revenue decreased $28.6 million resulting from the loss of voice access lines versus a year ago combined with lower long distance usage.
|
|
|
•
|
Regulatory funding revenue increased $8.3 million due to our acceptance of CAF Phase II and the corresponding transitional revenue of $8.8 million associated with that program.
|
|
|
•
|
Miscellaneous revenue decreased $7.5 million due to higher special purpose projects in the first quarter of 2014 and revenue assurance.
|
Cost of Services and Sales
Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits (including stock based compensation, but excluding the net periodic benefit cost of other post-employment benefit plans and qualified pension plans), materials and supplies, contracted services, network access and transport costs, customer provisioning costs, computer systems support and cost of products sold. Aggregate customer care costs, which include billing and service provisioning, are allocated between cost of services and sales and selling, general and administrative expenses. We expect the cost of services and sales to fluctuate with revenue and decrease due to lower employee expenses from a reduction in headcount, partially offset by expected merger related expenses in 2017, including increased stock-based compensation expense described in "Proposed Merger with Consolidated Communications Holdings, Inc." herein.
The following table reflects the primary drivers of year-over-year changes in cost of services and sales (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 vs. December 31, 2015
|
|
Year ended December 31, 2015 vs. December 31, 2014
|
|
|
Increase (Decrease)
|
%
|
|
Increase (Decrease)
|
%
|
Employee expense
(1)
|
$
|
2.8
|
|
|
$
|
(1.7
|
)
|
|
Labor negotiation related expense
(2)
|
|
(40.3
|
)
|
|
|
1.9
|
|
|
Severance expense
(3)
|
|
1.0
|
|
|
|
1.7
|
|
|
Network and access expense
(4)
|
|
0.9
|
|
|
|
(10.9
|
)
|
|
Other
(5)
|
|
(5.4
|
)
|
|
|
(1.7
|
)
|
|
Total change in cost of services and sales
|
$
|
(41.0
|
)
|
(10
|
)%
|
$
|
(10.7
|
)
|
(2
|
)%
|
|
|
(1)
|
For the years ended
December 31, 2016
,
2015
and
2014
, we recognized $163.5 million, $160.7 million and $162.4 million, respectively, of employee expense as cost of services and sales. The increase for 2016 compared to 2015 is primarily due to the work stoppage described in "Labor Matters" herein partially offset by a reduction in headcount. The decrease for 2015 compared to 2014 is primarily due to the work stoppage described in "Labor Matters" herein as well as a reduction in headcount, partially offset by a decrease in capitalized labor associated with a reduction in labor intensive capital projects in 2015 versus 2014.
|
|
|
(2)
|
Labor negotiation related expense is related primarily to contracted services incurred during the years ended December 31, 2015 and 2014 as a result of the work stoppage described in "Labor Matters" herein.
|
|
|
(3)
|
For the years ended
December 31, 2016
,
2015
and
2014
, we recognized $3.7 million, $2.7 million and $1.0 million of severance expense, respectively, attributed to the reduction in our workforce.
|
|
|
(4)
|
Network and access expense continues to decrease primarily due to lower revenue as well as cost management efforts.
|
|
|
(5)
|
Other cost of services and sales has decreased primarily due to lower provisioning and lower back-office expenses.
|
Other Post-Employment Benefit and Pension (Benefit)/Expense
We expect other post-employment benefit and pension (benefit)/expense to increase in 2017 compared to 2016 since the prior service credit was fully amortized during 2016.
The following table reflects the primary drivers of year-over-year changes in other post-employment benefit and pension (benefit)/expense (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 vs. December 31, 2015
|
|
Year ended December 31, 2015 vs. December 31, 2014
|
|
|
Increase (Decrease)
|
%
|
|
Increase (Decrease)
|
%
|
Other post-employment benefits expense/(benefit)
(1)
|
$
|
(43.7
|
)
|
|
$
|
(236.1
|
)
|
|
Pension expense
(2)
|
|
0.3
|
|
|
|
(9.5
|
)
|
|
Total change in other post-employment benefit and pension (benefit)/expense
|
$
|
(43.4
|
)
|
25
|
%
|
$
|
(245.6
|
)
|
(326
|
)%
|
|
|
(1)
|
The decrease in the
2016
net periodic benefit cost compared to
2015
for our other post-employment benefit plans is primarily attributable to the decrease in amortization expense of the net actuarial loss of $31.6 million and additional amortization of the net prior service credits of $4.0 million as well as decreases in service and interest costs resulting from the lower benefit obligation.
|
The decrease in the 2015 net periodic benefit cost compared to 2014 for our other post-employment benefit plans is primarily attributable to the benefit recognized from amortization of net prior service credits of $304.6 million partially offset by the amortization expense of the net actuarial loss of $113.4 million in 2015, a decrease in interest cost resulting from the lower obligation and a decrease in service cost due to elimination of benefits for active represented employees.
At December 31, 2015, we recognized actuarial losses of
$32.8 million
, which resulted in a decrease in the amount of actuarial losses being amortized in 2016 compared to 2015. At December 31, 2014, we recognized actuarial losses of $148.4 million, which resulted in an increase in the amount of actuarial losses being amortized in 2015 compared to 2014. The actuarial gains/losses can be attributed primarily to the change in discount rates.
See
note (11) "Employee Benefit Plans" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report for further information on our other post-employment benefit plans.
|
|
(2)
|
The increase in the
2016
net periodic benefit cost compared to
2015
for our qualified pension plans is primarily attributable to a plan curtailment recognized in the third quarter of 2015 as a result of a workforce reduction partially offset by a decrease in service cost, a decrease in the amortization of actuarial losses and an increase in return on assets.
|
The decrease in the 2015 net periodic benefit cost compared to 2014 for our qualified pension plans is primarily attributable to a decrease in service cost, amortization of prior service credit and a plan curtailment recognized in the third quarter of 2015 as a result of a workforce reduction partially offset by an increase in amortization of actuarial losses. The prior service credit is related to pension bands that were frozen under the terms of the collective bargaining agreements.
The decrease in service cost in 2016 compared to 2015 resulted from a reduction in the projected benefit obligation. The reduction in the projected benefit obligation used to measure service cost in 2016 and 2015 is primarily the result of the collective bargaining agreements described in “Labor Matters” herein.
At December 31, 2015, we recognized actuarial gains of
$31.7 million
, which resulted in a decrease in the amount of actuarial losses being amortized in 2016 compared to 2015. At December 31, 2014, we recognized actuarial losses of $66.7 million, which resulted in an increase in the amount of actuarial losses being amortized in 2015 compared to 2014. The actuarial gains/losses can be attributed primarily to the change in discount rates and the gains/losses incurred on payment of significant lump sums in each of those years.
See
note (11) "Employee Benefit Plans" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report for further information on our company-sponsored qualified pension plans.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense includes salaries and wages and benefits (including stock based compensation, but excluding the net periodic benefit cost of other post-employment benefit plans and qualified pension plans) not directly attributable to a service or product, bad debt charges, taxes other than income, advertising and sales commission costs, customer billing, call center and information technology costs, professional service fees and rent for administrative space. We expect SG&A expense to increase primarily due to expected merger related expenses in 2017, including increased stock-based compensation expense described in "Proposed Merger with Consolidated Communications Holdings, Inc." herein.
The following table reflects the primary drivers of year-over-year changes in SG&A expense (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 vs. December 31, 2015
|
|
Year ended December 31, 2015 vs. December 31, 2014
|
|
|
Increase (Decrease)
|
%
|
|
Increase (Decrease)
|
%
|
Employee expense
(1)
|
$
|
0.1
|
|
|
$
|
(9.1
|
)
|
|
Labor negotiation related expense
(2)
|
|
(7.8
|
)
|
|
|
(26.0
|
)
|
|
Operating taxes
|
|
(0.2
|
)
|
|
|
(5.7
|
)
|
|
Bad debt expense
(3)
|
|
(5.2
|
)
|
|
|
(3.4
|
)
|
|
Severance expense
(4)
|
|
(0.2
|
)
|
|
|
0.3
|
|
|
Merger related expense
(5)
|
|
4.5
|
|
|
|
—
|
|
|
Other
(6)
|
|
—
|
|
|
|
(7.7
|
)
|
|
Total change in SG&A expense
|
$
|
(8.8
|
)
|
(4
|
)%
|
$
|
(51.6
|
)
|
(20
|
)%
|
|
|
(1)
|
For the years ended
December 31, 2016
,
2015
and
2014
, we recognized $101.9 million, $101.8 million and $110.9 million, respectively, of employee expense in SG&A expense. The increase in 2016 compared to 2015 is primarily due to the work stoppage described in "Labor Matters" herein partially offset by a reduction in headcount. The decrease in 2015 compared to 2014 is primarily attributable to the work stoppage described in "Labor Matters" herein and reduction in headcount.
|
|
|
(2)
|
Labor negotiation related expense is primarily related to contingent workforce expenses as well as communications and public relations, legal and training expenses during the years ended December 31, 2015 and 2014.
|
|
|
(3)
|
For the years ended
December 31, 2016
,
2015
and
2014
, we recognized $0.6 million, $5.8 million and $9.2 million of bad debt expense, respectively.
|
|
|
(4)
|
For the years ended
December 31, 2016
,
2015
and
2014
, we recognized $1.1 million, $1.3 million and $1.0 million of severance expense, respectively.
|
|
|
(5)
|
Merger related expense is primarily related to legal and financial advisory costs during the year ended December 31, 2016 in connection with the Merger described in "Proposed Merger with Consolidated Communications Holdings, Inc." herein.
|
|
|
(6)
|
The change in other expenses is primarily due to the timing of spending for contracted services and advertising costs.
|
Depreciation and Amortization
Depreciation and amortization includes depreciation of our communications network and equipment and amortization of intangible assets. We require significant capital expenditures to maintain, upgrade and enhance our network facilities and operations. We expect our capital expenditures and depreciation expense to remain consistent in the coming years. We expect amortization expense to remain consistent throughout the remainder of our intangible assets' useful lives.
For the years ended
December 31, 2016
,
2015
and
2014
, we recognized
$211.3 million
,
$212.8 million
and
$209.7 million
of depreciation expense, respectively. The decrease in depreciation expense for the year ended
December 31, 2016
compared to
December 31, 2015
was primarily due to higher retirements than additions. The increase in depreciation expense for the year ended
December 31, 2015
compared to
December 31, 2014
was primarily due to higher additions than retirements. We recognized
$11.0 million
,
$11.0 million
and
$11.0 million
of amortization expense in the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Interest Expense
The following table reflects a summary of interest expense recorded during the years ended
December 31, 2016
,
2015
and
2014
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Credit Agreement Loans (as defined hereinafter)
|
$
|
48.7
|
|
$
|
49.0
|
|
$
|
49.5
|
|
Notes (as defined hereinafter)
|
|
26.3
|
|
|
26.3
|
|
|
26.3
|
|
Amortization of debt issue costs
|
|
1.2
|
|
|
1.2
|
|
|
1.1
|
|
Amortization of debt discount
|
|
3.3
|
|
|
3.1
|
|
|
2.9
|
|
Interest rate swap agreements
|
|
2.4
|
|
|
0.6
|
|
|
—
|
|
Other interest expense
|
|
0.8
|
|
|
0.5
|
|
|
0.6
|
|
Total interest expense
|
$
|
82.7
|
|
$
|
80.7
|
|
$
|
80.4
|
|
Interest expense increased $2.0 million (2.5%) in the year ended
December 31, 2016
compared to the year ended
December 31, 2015
primarily due to interest rate swap agreements, with an effective date of September 30, 2015. Interest expense increased $0.3 million (0.4%) in the year ended
December 31, 2015
compared to the year ended
December 31, 2014
.
For further information regarding the Credit Agreement Loans and the Notes,
see
"Liquidity and Capital Resources—Debt" herein and note (8) "Long-term Debt" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.
Other Income, Net
Other income generally includes non-operating gains and losses. During the years ended
December 31, 2016
,
2015
and
2014
, net other income was
$0.3 million
,
$0.5 million
and
$7.5 million
, respectively.
As required by the Plan, the FairPoint Litigation Trust (the "Trust") was created and the Company transferred to the Trust the "Litigation Trust Claims", as defined in the FairPoint Litigation Trust Agreement among the Company, its subsidiaries and the trustee. The Trust thereafter settled the "Litigation Trust Claims" against Verizon Communications Inc. During 2014, we received payment from the settlement proceeds and recorded one-time, non-operating income of $6.7 million.
Income Taxes
The Company recorded tax expense on the pre-tax net income for the year ended
December 31, 2016
of
$42.8 million
and a tax benefit on the pre-tax net income/(loss) for the years ended
December 31, 2015
and
2014
of
$1.1 million
and
$29.8 million
, respectively, which equates to an effective tax rate of
29.2%
,
(1.2)%
and
17.9%
, respectively. For
2016
, the effective tax rate differs from the 35% federal statutory rate primarily due to a tax benefit associated with a decrease in the valuation allowance offset by tax expense related to state taxes. For
2015
, the effective tax rate differs from the statutory rate primarily due to a decrease in the valuation allowance as well as a tax benefit related to state taxes. A tax benefit recorded on pre-tax income for the year ended December 31, 2015 resulted in a negative effective tax rate. For
2014
, the effective tax rate differs from the statutory rate primarily due an increase to the valuation allowance offset by a tax benefit related to state taxes.
For further information,
see
note (12) "Income Taxes" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.
Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The table below includes certain non-GAAP financial measures and the adjustments to the most directly comparable GAAP measure used to determine the non-GAAP measures. Management believes that the non-GAAP measures may be useful to investors in understanding period-to-period operating performance and in identifying historical and prospective trends that may not otherwise be apparent when relying solely on GAAP financial measures. In addition, management believes the non-GAAP measures are useful for investors because they enable them to view performance in a manner similar to the method used by the Company's management. Management believes earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted to exclude the effect of items that are further described below ("Adjusted EBITDA"), provides a useful measure of covenant compliance and Unlevered Free Cash Flow (as defined below) may be useful to investors in assessing the Company's ability to generate cash and meet its debt service requirements. The maintenance covenants contained in the Company's credit facility are based on Consolidated EBITDA, which is consistent with the calculation of Adjusted EBITDA below.
For purposes of calculating Adjusted EBITDA (in accordance with the definition of Consolidated EBITDA in our Credit Agreement), costs, expenses and charges related to the renegotiation of labor contracts including, but not limited to, expenses for third-party vendors and losses related to disruption of operations (including any associated penalties under service level agreements and regulatory performance plans) are permitted to be excluded from the calculation. We believe this includes, among others, the costs paid to third-parties for the contingent workforce and service quality penalties due to the disruption of operations. On October 17, 2014, two of our labor unions in northern New England initiated a work stoppage and returned to work on February 25, 2015. As a result, significant union employee and vehicle and other related expenses related to northern New England were not incurred between October 17, 2014 and February 24, 2015 (the "work stoppage period"). Therefore, to assist in the evaluation of the Company's operating performance without the impact of the work stoppage, we estimated the union employee and vehicle and other related expenses using historical data for the work stoppage period that we believe would have been incurred absent the work stoppage ("Estimated Avoided Costs"). Estimated Avoided Costs is a pro forma estimate only. Actual costs absent the strike may have been different. In 2014 and 2015, had our incumbent workforce been in place, actual labor costs during the work stoppage period may have been higher than the $33 million and $27 million, respectively, recorded as Estimated Avoided Costs due to significant winter storm activity that increased our service demands; however, those incremental storm-related costs would have been an allowed add back to Adjusted EBITDA under the Credit Agreement. Estimated employee expenses avoided during the work stoppage period include salaries and wages, bonus, overtime, capitalized labor, benefits, payroll taxes, travel expenses and other employee related costs based on a trailing 12-month average calculated per striking employee per day during the work stoppage period less any actual expense incurred. Estimated vehicle fuel and maintenance expense savings, which resulted from the contingent workforce utilizing their own vehicles, for the work stoppage period were estimated based on a trailing 12-month average of historical costs less actual expense incurred. Management believes "Adjusted EBITDA minus Estimated Avoided Costs" and "Unlevered Free Cash Flow minus Estimated Avoided Costs" may be useful to investors in understanding our operating performance without the impact of the two unions' work stoppage in northern New England as described elsewhere in this Annual Report.
The non-GAAP financial measures, as used herein, are not necessarily comparable to similarly titled measures of other companies. Furthermore, these non-GAAP measures have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income or loss, operating income, cash flow or other combined income or cash flow data prepared in accordance with GAAP. Because of these limitations, Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Unlevered Free Cash Flow minus Estimated Avoided Costs should not be considered as measures of discretionary cash available to invest in business growth or reduce indebtedness. The Company compensates for these limitations by relying primarily on its GAAP results and using the non-GAAP measures only supplementally.
A reconciliation of Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Unlevered Free Cash Flow minus Estimated Avoided Costs to net income/(loss) is provided in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net income/(loss)
|
|
$
|
104,095
|
|
|
$
|
90,416
|
|
|
$
|
(136,319
|
)
|
Income tax expense/(benefit)
|
|
42,849
|
|
|
(1,057
|
)
|
|
(29,778
|
)
|
Interest expense
|
|
82,697
|
|
|
80,718
|
|
|
80,371
|
|
Depreciation and amortization
|
|
222,303
|
|
|
223,819
|
|
|
220,678
|
|
Pension expense (1a)
|
|
8,967
|
|
|
8,635
|
|
|
18,144
|
|
Other post-employment benefits expense/(benefit) (1a)
|
|
(222,727
|
)
|
|
(178,973
|
)
|
|
57,138
|
|
Compensated absences (1b)
|
|
(350
|
)
|
|
(1,645
|
)
|
|
2,848
|
|
Severance
|
|
4,863
|
|
|
4,014
|
|
|
2,005
|
|
Reorganization costs (1c)
|
|
—
|
|
|
38
|
|
|
104
|
|
Storm expenses (1d)
|
|
—
|
|
|
—
|
|
|
145
|
|
Other non-cash items, net (1e)
|
|
6,830
|
|
|
8,197
|
|
|
2,537
|
|
Labor negotiation related expense (1f)
|
|
—
|
|
|
48,933
|
|
|
73,590
|
|
All other allowed adjustments, net (1f)
|
|
4,312
|
|
|
(170
|
)
|
|
(889
|
)
|
Adjusted EBITDA (1) (4)
|
|
253,839
|
|
|
282,925
|
|
|
290,574
|
|
Estimated Avoided Costs (3)
|
|
—
|
|
|
(27,000
|
)
|
|
(33,000
|
)
|
Adjusted EBITDA minus Estimated Avoided Costs
|
|
$
|
253,839
|
|
|
$
|
255,925
|
|
|
$
|
257,574
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (1) (4)
|
|
$
|
253,839
|
|
|
$
|
282,925
|
|
|
$
|
290,574
|
|
Pension contributions
|
|
(15,475
|
)
|
|
(14,168
|
)
|
|
(28,266
|
)
|
Other post-employment benefits payments
|
|
(5,715
|
)
|
|
(5,597
|
)
|
|
(5,808
|
)
|
Capital expenditures
|
|
(117,050
|
)
|
|
(116,159
|
)
|
|
(119,489
|
)
|
Unlevered Free Cash Flow (2)
|
|
115,599
|
|
|
147,001
|
|
|
137,011
|
|
Estimated Avoided Costs (3)
|
|
—
|
|
|
(27,000
|
)
|
|
(33,000
|
)
|
Unlevered Free Cash Flow minus Estimated Avoided Costs
|
|
$
|
115,599
|
|
|
$
|
120,001
|
|
|
$
|
104,011
|
|
(1)
For purposes of calculating Adjusted EBITDA (in accordance with the definition of Consolidated EBITDA in the Credit Agreement), the Company adjusts net income/(loss) for interest, income taxes, depreciation and amortization, in addition to:
(a)
the add-back of aggregate pension and other post-employment benefits expense,
(b)
the add-back (or subtraction) of the adjustment to the compensated absences accrual to eliminate the impact of changes in the accrual,
(c)
the add-back of costs related to the reorganization, including professional fees for advisors and consultants,
(d)
the add-back of costs and expenses, including those imposed by regulatory authorities, with respect to casualty events, acts of God or force majeure to the extent they are not reimbursed from proceeds of insurance,
(e)
the add-back of other non-cash items, including stock compensation expense, except to the extent they will require a cash payment in a future period, and
(f)
the add-back (or subtraction) of other items, including facility and office closures, expenses related to permitted transactions, labor negotiation related expenses (including losses related to disruption of operations), non-cash gains/losses and non-operating dividend and interest income and other extraordinary gains/losses.
(2)
Unlevered Free Cash Flow refers to Adjusted EBITDA (calculated in accordance with the definition of Consolidated EBITDA in the Credit Agreement) minus capital expenditures, cash pension contributions and other post-employment benefits cash payments.
(3)
See paragraphs preceding the table above for information regarding the calculation of this non-GAAP measure.
(4)
On October 16, 2014, we received payment from the Trust settlement proceeds and recorded one-time, non-operating income of $6.7 million, which is included in the calculation of Adjusted EBITDA. For further information regarding this payment, see "Results of Operations—Other Income" included herein.
Liquidity and Capital Resources
Overview
Our current and future liquidity is dependent upon our operating results. We expect that our primary sources of liquidity will be net cash provided by operating activities, cash on hand and funds available under the Revolving Facility. Our short-term and long-term liquidity needs arise primarily from:
|
|
(i)
|
interest and principal payments on our indebtedness;
|
|
|
(ii)
|
capital expenditures;
|
|
|
(iii)
|
working capital requirements as may be needed to support and grow our business; and
|
|
|
(iv)
|
contributions to our qualified pension plans and payments under our other post-employment benefit plans.
|
Based on our current and anticipated levels of operations and conditions in our markets, we believe that cash on hand, the Revolving Facility and net cash provided by operating activities will enable us to meet our working capital, capital expenditure, debt service and other funding requirements for at least the next 12 months. We were in compliance with the maintenance covenants contained in the Credit Agreement (as defined hereinafter in "Debt—February 2013 Refinancing") through the end of
2016
and expect to remain in compliance for
2017
.
Cash Flows
Cash at
December 31, 2016
totaled
$34.9 million
compared to
$26.6 million
at
December 31, 2015
, excluding restricted cash of
$0.7 million
and
$0.7 million
, respectively. During
2016
, cash flows from operations of
$134.3 million
, which included outflows due to the scheduled semi-annual interest payments on the Notes and the payment of 2015 annual performance bonuses, were partially offset by cash outflows largely associated with
$117.1 million
of capital expenditures. During
2015
, cash flows from operations of
$112.0 million
, which included outflows due to the scheduled semi-annual interest payments on the Notes and the payment of 2014 annual performance bonuses, were partially offset by cash outflows largely associated with
$116.2 million
of capital expenditures.
The following table sets forth our consolidated cash flow results reflected in our consolidated statements of cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Net cash flows provided by (used in):
|
2016
|
|
2015
|
|
2014
|
Operating activities
|
$
|
134.3
|
|
|
$
|
112.0
|
|
|
$
|
121.1
|
|
Investing activities
|
(118.5
|
)
|
|
(115.9
|
)
|
|
(118.4
|
)
|
Financing activities
|
(7.4
|
)
|
|
(7.1
|
)
|
|
(7.8
|
)
|
Net increase/(decrease) in cash
|
$
|
8.4
|
|
|
$
|
(11.0
|
)
|
|
$
|
(5.1
|
)
|
Operating activities.
Net cash provided by operating activities is our primary source of funds. Net cash provided by operating activities for
2016
increased
$22.3 million
compared to
2015
, primarily due to lower labor negotiation related expenses, lower operating expenses, partially offset by a reduction in revenues.
Net cash provided by operating activities for 2015 decreased $9.1 million compared to 2014, primarily due to increased labor negotiation related expenses and a reduction in revenues partially offset by lower operating expenses as well as lower cash pension contributions.
Investing activities.
Net cash used in investing activities for
2016
increased
$2.6 million
compared to
2015
. Capital expenditures were
$117.1 million
,
$116.2 million
and
$119.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. In addition, we completed an immaterial business acquisition during 2016. Net cash used in investing activities for 2015 decreased $2.5 million compared to 2014.
Financing activities.
Net cash used in financing activities for
2016
increased
$0.3 million
compared to
2015
, primarily due to increased repayments of capital lease obligations. Net cash used in financing activities for 2015 decreased $0.7 million compared to 2014, primarily due to a reduction in repayments of capital lease obligations.
Pension Contributions and Post-Employment Benefit Plan Expenditures
During the year ended
December 31, 2016
, we contributed
$16.5 million
to our Company sponsored qualified defined benefit pension plans and funded benefit payments of
$5.7 million
under our post-employment benefit plans.
On August 8, 2014, the Highway and Transportation Funding Act (the "Act") was signed into law. This Act contained a pension funding stabilization provision which allows pension plan sponsors to use higher discount rate assumptions when determining the funded status and, accordingly, the funding obligations for its pension plans.
The provisions of the Act resulted in our 2016 minimum required pension plan contribution being lower than it would have been in the absence of this stabilization provision. We believe that the intent of the stabilization provision is to alter the timing of pension plan contributions, not to reduce the long-term funding of pension plans. Accordingly, the relief we will receive as a result of the stabilization provision may be temporary in nature in that our near-term minimum required contributions will be less than they otherwise would have been without the passage of this Act and will increase in the medium to long-term.
In 2017, we expect our aggregate cash pension contributions and cash post-employment benefit payments to be approximately $24 million.
See
"Item 1A. Risk Factors—The amount we are required to contribute to our qualified pension plans and post-employment benefit plans is impacted by several factors that are beyond our control and changes in those factors may result in a significant increase in future cash contributions."
Capital Expenditures
We require significant capital expenditures to maintain, upgrade and enhance our network facilities and operations. In
2016
, our net capital expenditures totaled
$117.1 million
, compared to
$116.2 million
in
2015
. We anticipate that we will fund future capital expenditures through cash flows from operations and cash on hand (including amounts available under the Revolving Facility). In
2017
, capital expenditures are expected to be between $110 million to $115 million. Our capital expenditures in the coming years will be impacted by our CAF Phase II elections as further described in "Regulatory and Legislative" herein.
Debt
February 2013 Refinancing.
On February 14, 2013 (the "Refinancing Closing Date"), we completed the refinancing of our old credit agreement (the "Refinancing"). In connection with the Refinancing, we (i) issued $300.0 million aggregate principal amount of 8.75% senior secured notes due in 2019 (the "Notes") in a private offering exempt from registration under the Securities Act pursuant to an indenture that we entered into on the Refinancing Closing Date (the "Indenture") and (ii) entered into a new credit agreement (the "Credit Agreement"), dated as of the Refinancing Closing Date. The Credit Agreement provides for a $75.0 million revolving credit facility, including a sub-facility for the issuance of up to $40.0 million in letters of credit (the "Revolving Facility"), and a $640.0 million term loan facility (the "Term Loan" and, together with the Revolving Facility, the " Credit Agreement Loans"). On the Refinancing Closing Date, we used the proceeds of the Notes offering, together with $640.0 million of borrowings under the Term Loan and cash on hand to (i) repay principal of $946.5 million outstanding on the old term loan, plus approximately $7.7 million of accrued interest and (ii) pay approximately $32.6 million of fees, expenses and other costs related to the Refinancing.
The Credit Agreement.
In connection with the Refinancing, we entered into the Credit Agreement, which provides for the $75.0 million Revolving Facility, including a sub-facility for the issuance of up to $40.0 million in letters of credit, and the $640.0 million Term Loan. The principal amount of the Term Loan and commitments under the Revolving Facility may be increased by an aggregate amount up to $200.0 million, subject to certain terms and conditions specified in the Credit Agreement. The Term Loan will mature on February 14, 2019 and the Revolving Facility will mature on February 14, 2018, subject in each case to extensions pursuant to the terms of the Credit Agreement. As of
December 31, 2016
, we had
$61.1 million
, net of
$13.9 million
of outstanding letters of credit, available for borrowing under the Revolving Facility.
Interest Rates and Fees.
Interest on borrowings under the Credit Agreement Loans accrue at an annual rate equal to either LIBOR or the base rate, in each case plus an applicable margin. LIBOR is the per annum rate for an interest period of one, two, three or six months (at our election), with a minimum LIBOR floor of 1.25% for the Term Loan. The base rate for any date is the per annum rate equal to the greatest of (x) the federal funds effective rate plus 0.50%, (y) the rate of interest publicly quoted from time to time by The Wall Street Journal as the United States ''Prime Rate'' and (z) LIBOR with an interest period of one month plus 1.00%. The applicable margin for the Term Loan is (a) 6.25% per annum with respect to term loans bearing interest based on LIBOR or (b) 5.25% per annum with respect to term loans bearing interest based on the base rate. The applicable rate for the Revolving Facility is, initially, (a) 5.50% with respect to revolving loans bearing interest based on LIBOR or (b) 4.50% per annum with respect to revolving loans bearing interest based on the base rate, in each case subject to adjustment based on our consolidated total leverage ratio, as defined in the Credit Agreement. We are required to pay a quarterly letter of credit fee on the average daily amount available to be drawn under letters of credit issued under the Revolving Facility equal to the applicable rate for revolving loans bearing interest based on LIBOR plus a fronting fee of 0.125% per annum on the average daily amount available to be drawn under such letters of credit. In addition, we are required to pay a quarterly commitment fee on the average daily unused portion of the Revolving Facility, which is 0.50% initially, subject to reduction to 0.375% based on our consolidated total leverage ratio. In the third quarter of 2013, we entered into interest rate swap agreements with a combined notional amount of $170.0 million with three counterparties that are effective for a two year period beginning on September 30, 2015 and maturing on September
30, 2017. Each respective swap agreement requires us to pay a fixed rate of 2.665% and provides that we will receive a variable rate based on the three month LIBOR rate, subject to a minimum LIBOR floor of 1.25%. Amounts payable by or due to us will be net settled with the respective counterparties on the last business day of each fiscal quarter, commencing December 31, 2015. For further information regarding these agreements, see note (9) "Interest Rate Swap Agreements" to our consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” included elsewhere in this Annual Report.
Security/Guarantors.
All obligations under the Credit Agreement, together with certain designated hedging obligations and cash management obligations, are unconditionally guaranteed on a senior secured basis by certain subsidiaries of FairPoint Communications (the "Subsidiary Guarantors") and secured by a first-priority lien on substantially all personal property of FairPoint Communications and the Subsidiary Guarantors, subject to certain exclusions set forth in the related security documents, pari passu with the lien securing the obligations under the Notes.
Mandatory Repayments.
We are required to make quarterly repayments of the Term Loan in a principal amount equal to $1.6 million during the term of the Credit Agreement, with such repayments being reduced based on the application of mandatory and optional prepayments of the Term Loan made from time to time. In addition, mandatory repayments are due under the Credit Agreement with (i) a percentage, initially equal to 50% and subject to reduction to 25% in subsequent fiscal years based on our consolidated total leverage ratio, of our excess cash flow, as defined in the Credit Agreement, (ii) the net cash proceeds of certain asset dispositions, insurance proceeds and condemnation awards and (iii) issuances of debt not permitted to be incurred under the Credit Agreement. No premium is required in connection with prepayments. We did not make any optional or mandatory prepayments under the Credit Agreement, excluding mandatory quarterly repayments discussed above, during the
years ended December 31, 2016 and 2015
. In addition, we were not required to make an excess cash flow payment for fiscal year 2016.
Covenants.
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants for a transaction of this type, including two financial maintenance covenants: (i) a consolidated interest coverage ratio and (ii) a consolidated total leverage ratio. The Credit Agreement also contains a covenant limiting the maximum amount of capital expenditures that we and our subsidiaries may make in any fiscal year.
Events of Default.
The Credit Agreement also contains customary events of default.
The Notes.
On the Refinancing Closing Date, we issued $300.0 million in aggregate principal amount of the Notes pursuant to the Indenture in a private offering exempt from registration under the Securities Act.
The terms of the Notes are governed by the Indenture. The Notes are senior secured obligations of FairPoint Communications and are guaranteed by the Subsidiary Guarantors. The Notes and the guarantees thereof are secured by a first-priority lien on substantially all personal property of FairPoint Communications and the Subsidiary Guarantors, subject to certain exclusions set forth in the related security documents, pari passu with the lien securing the obligations under the Credit Agreement. The Notes will mature on August 15, 2019 and accrue interest at a rate of 8.75% per annum, which is payable semi-annually in arrears on February 15 and August 15 of each year.
Notes redeemed after February 15, 2016 and prior to February 15, 2017 may be redeemed at
104.375%
of the aggregate principal amount; Notes redeemed on or after February 15, 2017 and prior to February 15, 2018 may be redeemed at
102.188%
of the aggregate principal amount; and Notes redeemed on or after February 15, 2018 may be redeemed at their par value.
The holders of the Notes have the ability to require us to repurchase all or any part of the Notes if we experience certain kinds of changes in control or engage in certain asset sales, in each case at the repurchase prices and subject to the terms and conditions set forth in the Indenture.
The Indenture contains certain covenants which are customary with respect to non-investment grade debt securities, including limitations on our ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase our capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies. These covenants are subject to a number of important limitations and exceptions.
The Indenture also provides for customary events of default, including cross defaults to other specified debt of FairPoint Communications and certain of its subsidiaries.
Off-Balance Sheet Arrangements
As of
December 31, 2016
and
December 31, 2015
we had $
13.9 million
and $
14.2 million
, respectively, in outstanding letters of credit under the Revolving Facility and $4.1 million and $4.0 million, respectively, of surety bonds. We do not have any other off-balance sheet arrangements other than our operating lease obligations, which are not reflected on our balance sheet.
See
“—Summary of Contractual Obligations” for further detail.
Summary of Contractual Obligations
The following table discloses aggregate information about our contractual obligations as of
December 31, 2016
and the periods in which payments are due (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
Contractual Obligations
|
Total
|
|
Less
than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More
than
5 years
|
Long-term debt obligations, including current maturities
(a)
|
$
|
916,000
|
|
|
$
|
6,400
|
|
|
$
|
909,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest payments on long-term debt obligations
(b)
|
170,375
|
|
|
75,763
|
|
|
94,612
|
|
|
—
|
|
|
—
|
|
Capital lease obligations, including current maturities
|
3,034
|
|
|
1,279
|
|
|
1,475
|
|
|
280
|
|
|
—
|
|
Operating lease obligations
|
17,759
|
|
|
6,644
|
|
|
7,519
|
|
|
2,857
|
|
|
739
|
|
Purchase obligations
(c)
|
19,524
|
|
|
13,471
|
|
|
5,822
|
|
|
231
|
|
|
—
|
|
Other long-term liabilities
(d)
|
269,070
|
|
|
25,569
|
|
|
20,833
|
|
|
15,715
|
|
|
206,953
|
|
Total contractual obligations
|
$
|
1,395,762
|
|
|
$
|
129,126
|
|
|
$
|
1,039,861
|
|
|
$
|
19,083
|
|
|
$
|
207,692
|
|
|
|
(a)
|
Long-term debt obligations exclude outstanding letters of credit totaling
$13.9 million
under the Revolving Facility at
December 31, 2016
. For more information,
see
note (8) "Long-term Debt" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.
|
|
|
(b)
|
Interest payments represent cash payments on the long-term debt, including payments associated with interest rate swaps, while excluding amortization of capitalized debt issuance costs.
|
|
|
(c)
|
Purchase obligations represent commitments for maintenance and support of network equipment and software, which we consider to be material.
|
|
|
(d)
|
Other long-term liabilities primarily include our qualified pension and post-employment benefit obligations, and deferred tax liabilities. For more information,
see
notes (11) "Employee Benefit Plans" and (12) "Income Taxes" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report. In addition,
|
|
|
(i)
|
The balance excludes $3.8 million of reserves for uncertain tax positions, including interest and penalties, that were included in deferred tax liabilities at
December 31, 2016
for which we are unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities will occur;
|
|
|
(ii)
|
The balance includes the current portion of our post-employment benefit obligations of
$7.1 million
presented in the current portion of other accrued liabilities at
December 31, 2016
; and
|
|
|
(iii)
|
Our
2017
pension contribution is expected to be approximately
$18 million
and has been reflected as due in less than one year. Our actual contribution could differ from this estimation. Due to uncertainties in the pension funding calculation, the amount and timing of any other pension contributions are unknown and therefore the remaining accrued pension obligation has been reflected as due in more than 5 years.
|
Critical Accounting Policies and Estimates
As disclosed in note (2) "
Significant Accounting Policies"
to our consolidated financial statements
in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report
, the preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. Our critical accounting policies as of
December 31, 2016
are as follows:
|
|
•
|
Allowance for doubtful accounts;
|
|
|
•
|
Accounting for qualified pension and other post-employment benefits;
|
|
|
•
|
Accounting for income taxes;
|
|
|
•
|
Depreciation of property, plant and equipment;
|
|
|
•
|
Stock-based compensation; and
|
|
|
•
|
Valuation of long-lived assets and indefinite-lived intangible assets.
|
Revenue Recognition.
We recognize service revenues based upon usage of our local exchange network and facilities and contract fees. Fixed fees for voice services, Internet services and certain other services are recognized in the month the service is provided. Revenue from other services that are not fixed fee or that exceed contracted amounts is recognized when those services are provided. Non-recurring customer activation fees, along with the related costs up to, but not exceeding, the activation fees, are deferred and amortized over the customer relationship period. SQI penalties and certain PAP/WPP service credits are recorded as a reduction to revenue.
We recognize certain revenues pursuant to various cost recovery programs from state and federal USF, CAF/ICC and from revenue sharing agreements with other LECs administered by the National Exchange Carrier Association ("NECA"). Revenues are calculated based on our investment in our network and other network operations and support costs. We have historically collected revenues recognized through this program; however, adjustments to estimated revenues in future periods are possible. These adjustments could be necessitated by adverse regulatory developments with respect to these subsidies and revenue sharing arrangements, changes in the allowable rates of return, the determination of recoverable costs and/or decreases in the availability of funds in the programs due to increased participation by other carriers.
We make estimated adjustments, as necessary, to revenue and accounts receivable for billing errors, including certain disputed amounts. If circumstances related to these adjustments change or our knowledge evolves, our estimate of the recoverability of our accounts receivable could be further reduced from the levels provided in our consolidated financial statements.
Allowance for Doubtful Accounts.
In evaluating the collectability of our accounts receivable, we assess a number of factors, including a specific customer's or carrier's ability to meet its financial obligations to us, the length of time the receivable has been past due and historical collection experience. Based on these assessments, we record both specific and general reserves for uncollectible accounts receivable to reduce the related accounts receivable to the amount we ultimately expect to collect from customers and carriers. If circumstances change or economic conditions worsen such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels reflected in our accompanying consolidated balance sheet.
Accounting for Qualified Pension and Other Post-employment Benefits.
Certain of our employees participate in our qualified pension plans and other post-employment benefit plans. In the aggregate, the projected benefit obligations of the qualified pension plans exceed the fair value of their respective assets and the post-employment benefit plans do not have plan assets, resulting in expense. Significant qualified pension and other post-employment benefit plan assumptions, including the discount rate used, the long-term rate-of-return on plan assets, and medical cost trend rates are periodically updated and impact the amount of benefit plan income, expense, assets and obligations reflected in our consolidated financial statements. The actuarial assumptions we used in determining our qualified pension and post-employment benefit plans obligations may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions might materially affect our financial position or results of operations.
Our qualified pension and post-employment benefit liabilities are highly sensitive to changes in the discount rate. We currently estimate that a movement of 1% in the discount rate would change our
December 31, 2016
qualified pension plan benefit obligations by approximately 17%. We currently estimate that a 1% fluctuation in the discount rate would change our
December 31, 2016
post-employment benefit obligations by approximately 12%.
The post-employment benefit obligations are also highly sensitive to the medical trend rate assumption. A 1% increase in the medical trend rate assumed for post-employment benefits at
December 31, 2016
would result in an increase in the post-employment benefit obligations of approximately
$10.1 million
and a 1% decrease in the medical trend rate assumed at
December 31, 2016
would result in a decrease in the post-employment benefit obligations of approximately
$8.4 million
.
For additional information on our qualified pension and post-employment benefit plans,
see
note (11) "Employee Benefit Plans" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.
Accounting for Income Taxes.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
determines its estimates of future taxable income based upon the scheduled reversal of deferred tax liabilities and tax planning strategies. The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized.
FairPoint Communications files a consolidated income tax return with its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Depreciation of Property, Plant and Equipment.
We recognize depreciation on property, plant and equipment principally on the composite group remaining life method and straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated net salvage value (if any), over the remaining asset lives. When an asset is retired, the original cost, net of salvage value, is charged against accumulated depreciation and no immediate gain or loss is recognized on the disposition of the asset. Under this method, we review depreciable lives periodically and may revise depreciation rates when appropriate. The Company utilizes straight-line depreciation for its non-telephone property, plant and equipment.
Periodically, the Company reviews the estimated remaining useful lives of its group asset categories to address continuing changes in technology, competition and the Company’s overall reduction in capital spending and increased focus on more efficient utilization of its existing assets.
Stock-based Compensation
. Compensation expense for share-based awards made to employees and directors are recognized based on the estimated fair value of each award over the award's vesting period. We estimate the fair value of share-based payment awards on the date of grant using one of the following: an option-pricing model for stock options; the closing market value of our stock for restricted stock and non-market performance share awards; and the Monte Carlo valuation model for market performance share awards. We expense the value of the portion of the award that is ultimately expected to vest over the requisite service period in the statement of operations. We assess the probability of achievement of the performance conditions for the non-market performance share awards at each period-end.
We utilize the Black-Scholes option pricing model to calculate the fair value of our stock option grants and the Monte Carlo valuation method to estimate the fair value of the market portion of the performance share awards. The key assumptions used include the expected life of the stock option, the expected dividend rate, the risk-free interest rate, expected volatility and potential total shareholder return outcomes. The expected life of the stock options granted represents the period of time that the options are expected to be outstanding. The risk-free interest rates are based on United States Treasury yields in effect at the date of grant consistent with the expected life. The expected volatility used in the Black-Scholes option pricing model reflects our historical volatility. Our assumptions of these key inputs, in addition to our assumption made about the portion of the awards that will ultimately vest, requires subjective judgment.
For additional information on share-based awards, including key assumptions used in calculating the grant date fair values,
see
note (16) "Stock-Based Compensation" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.
Valuation of Long-lived Assets and Indefinite-lived Intangible Assets.
We review our long-lived assets, which include our amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, we review non-amortizable intangible assets for impairment on at least an annual basis as of the first day of the fourth quarter of each year, or more frequently whenever indicators of impairment exist. Indicators of impairment could include, but are not limited to:
|
|
•
|
an inability to perform at levels that were forecasted;
|
|
|
•
|
a decline in planned revenues;
|
|
|
•
|
a permanent decline in market capitalization;
|
|
|
•
|
implementation of restructuring plans;
|
|
|
•
|
changes in industry trends; and/or
|
|
|
•
|
unfavorable changes in our capital structure, cost of debt, interest rates or capital expenditures levels.
|
Our only material non-amortizable intangible asset is the FairPoint trade name. An annual quantitative impairment analysis was performed on October 1, 2016. We assess the fair value of our trade name utilizing the relief from royalty method. If the carrying amount of our trade name exceeds its estimated fair value, the asset is considered impaired. For this annual impairment review, we made certain assumptions including an estimated royalty rate, long-term growth rate, effective tax rate and discount rate and applied these assumptions to projected future cash flows, exclusive of cash flows associated with wholesale and other revenues not generated through brand recognition. As of October 1, 2016, the estimated fair value exceeded the carrying value;
therefore, an impairment was not necessary. However, future changes in one or more of our assumptions discussed above may result in the recognition of an impairment loss.
For additional information on our FairPoint trade name,
see
note (6) "Other Intangible Assets" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.
New Accounting Standards
For details of recent Accounting Standards Updates and our evaluation of their adoption on our consolidated financial statements,
see
note (4) "Recent Accounting Pronouncements" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.
Inflation
There are cost of living adjustment clauses in certain of the collective bargaining agreements covering our labor union employees. Considerable fluctuations in cost of living due to inflation could result in an adverse effect on our operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
Page
|
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES:
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014:
|
|
Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
|
|
Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2016, 2015 and 2014
|
|
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2016, 2015 and 2014
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
|
|
|
|
Report of Management on Internal Control Over Financial Reporting
We, the management of FairPoint Communications, Inc., are responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management has evaluated internal control over financial reporting of the Company as of December 31,
2016
using the criteria for effective internal control established in
Internal Control–Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on such evaluation, management determined that the Company's internal control over financial reporting was effective as of December 31,
2016
.
BDO USA, LLP, our independent registered public accounting firm who audited the financial statements included in this Annual Report, has issued an attestation report on the Company's internal control over financial reporting. This report appears on the following page.
|
|
/s/ Paul H. Sunu
|
Paul H. Sunu
|
Chief Executive Officer
|
|
/s/ Karen D. Turner
|
Karen D. Turner
|
Executive Vice President and Chief Financial Officer
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
FairPoint Communications, Inc.
Charlotte, North Carolina
We have audited FairPoint Communications, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). FairPoint Communications, Inc. and subsidiaries’ 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 Report of Management 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, FairPoint Communications, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FairPoint Communications, Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for the year then ended and our report dated March 6, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Atlanta, Georgia
March 6, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
FairPoint Communications, Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheet of FairPoint Communications, Inc. and subsidiaries as of December 31, 2016 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FairPoint Communications, Inc. and subsidiaries at December 31, 2016, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FairPoint Communications, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria) and our report dated March 6, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Atlanta, Georgia
March 6, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of FairPoint Communications, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of FairPoint Communications, Inc. and subsidiaries as of December 31, 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FairPoint Communications, Inc. and subsidiaries at December 31, 2015, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 2, 2016
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2016 and 2015
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Assets:
|
|
|
|
Cash
|
$
|
34,924
|
|
|
$
|
26,560
|
|
Accounts receivable, net
|
62,395
|
|
|
60,136
|
|
Prepaid expenses
|
24,498
|
|
|
24,410
|
|
Other current assets
|
4,898
|
|
|
5,030
|
|
Total current assets
|
126,715
|
|
|
116,136
|
|
Property, plant and equipment, net
|
1,024,352
|
|
|
1,118,781
|
|
Intangible assets, net
|
75,913
|
|
|
83,879
|
|
Restricted cash
|
653
|
|
|
651
|
|
Other assets
|
3,202
|
|
|
3,079
|
|
Total assets
|
$
|
1,230,835
|
|
|
$
|
1,322,526
|
|
|
|
|
|
Liabilities and Stockholders' Deficit:
|
|
|
|
Current portion of long-term debt
|
$
|
6,400
|
|
|
$
|
6,400
|
|
Current portion of capital lease obligations
|
1,227
|
|
|
918
|
|
Accounts payable
|
27,598
|
|
|
28,157
|
|
Accrued interest payable
|
10,120
|
|
|
9,983
|
|
Accrued payroll and related expenses
|
26,187
|
|
|
24,753
|
|
Other accrued liabilities
|
47,918
|
|
|
50,018
|
|
Total current liabilities
|
119,450
|
|
|
120,229
|
|
Capital lease obligations
|
1,311
|
|
|
1,223
|
|
Accrued pension obligations
|
133,917
|
|
|
150,562
|
|
Accrued post-employment benefit obligations
|
87,629
|
|
|
94,042
|
|
Deferred income taxes, net
|
28,016
|
|
|
35,075
|
|
Other long-term liabilities
|
16,219
|
|
|
22,739
|
|
Long-term debt, net of current portion
|
898,370
|
|
|
900,145
|
|
Total long-term liabilities
|
1,165,462
|
|
|
1,203,786
|
|
Total liabilities
|
1,284,912
|
|
|
1,324,015
|
|
Commitments and contingencies (
See
Note 18)
|
|
|
|
Stockholders' deficit:
|
|
|
|
Common stock, $0.01 par value, 37,500,000 shares authorized, 27,074,398 and 26,921,066 shares issued and outstanding at December 31, 2016 and 2015, respectively
|
271
|
|
|
269
|
|
Additional paid-in capital
|
527,613
|
|
|
521,842
|
|
Accumulated deficit
|
(603,497
|
)
|
|
(707,592
|
)
|
Accumulated other comprehensive income
|
21,536
|
|
|
183,992
|
|
Total stockholders' deficit
|
(54,077
|
)
|
|
(1,489
|
)
|
Total liabilities and stockholders' deficit
|
$
|
1,230,835
|
|
|
$
|
1,322,526
|
|
See accompanying notes to consolidated financial statements.
62
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended
December 31, 2016
,
2015
and
2014
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
2015
|
2014
|
|
|
|
|
Revenues
|
$
|
824,443
|
|
$
|
859,465
|
|
$
|
901,396
|
|
Operating expenses:
|
|
|
|
Cost of services and sales, excluding depreciation and amortization
|
389,316
|
|
430,308
|
|
440,979
|
|
Other post-employment benefit and pension (benefit)/expense
|
(213,760
|
)
|
(170,338
|
)
|
75,282
|
|
Selling, general and administrative expense, excluding depreciation and amortization
|
197,239
|
|
206,046
|
|
257,627
|
|
Depreciation and amortization
|
222,303
|
|
223,819
|
|
220,678
|
|
Reorganization related expense
|
—
|
|
38
|
|
104
|
|
Total operating expenses
|
595,098
|
|
689,873
|
|
994,670
|
|
Income/(loss) from operations
|
229,345
|
|
169,592
|
|
(93,274
|
)
|
Other income/(expense):
|
|
|
|
Interest expense
|
(82,697
|
)
|
(80,718
|
)
|
(80,371
|
)
|
Other, net
|
296
|
|
485
|
|
7,548
|
|
Total other expense
|
(82,401
|
)
|
(80,233
|
)
|
(72,823
|
)
|
Income/(loss) before income taxes
|
146,944
|
|
89,359
|
|
(166,097
|
)
|
Income tax (expense)/benefit
|
(42,849
|
)
|
1,057
|
|
29,778
|
|
Net income/(loss)
|
$
|
104,095
|
|
$
|
90,416
|
|
$
|
(136,319
|
)
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
Basic
|
26,854
|
|
26,652
|
|
26,449
|
|
Diluted
|
27,119
|
|
26,973
|
|
26,449
|
|
|
|
|
|
Income/(loss) per share, basic
|
$
|
3.88
|
|
$
|
3.39
|
|
$
|
(5.15
|
)
|
|
|
|
|
|
|
Income/(loss) per share, diluted
|
$
|
3.84
|
|
$
|
3.35
|
|
$
|
(5.15
|
)
|
See accompanying notes to consolidated financial statements.
63
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income/(Loss)
Years Ended
December 31, 2016
,
2015
and
2014
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
2015
|
|
2014
|
|
|
|
|
|
Net income/(loss)
|
$
|
104,095
|
|
$
|
90,416
|
|
|
$
|
(136,319
|
)
|
Other comprehensive income/(loss), net of taxes:
|
|
|
|
|
Interest rate swaps (net of $0.7 million tax expense and $0.3 million and $0.7 million tax benefit, respectively)
|
1,106
|
|
(521
|
)
|
|
(1,037
|
)
|
Qualified pension and post-employment benefit plans (net of $49.8 million tax benefit, $10.0 million tax expense and $8.6 million tax benefit, respectively)
|
(163,562
|
)
|
503,136
|
|
|
(157,807
|
)
|
Total other comprehensive income/(loss)
|
(162,456
|
)
|
502,615
|
|
|
(158,844
|
)
|
Comprehensive income/(loss)
|
$
|
(58,361
|
)
|
$
|
593,031
|
|
|
$
|
(295,163
|
)
|
See accompanying notes to consolidated financial statements.
64
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years Ended
December 31, 2016
,
2015
, and
2014
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Additional
paid-in capital
|
|
Accumulated deficit
|
|
Accumulated
other
comprehensive income/(loss)
|
|
Total
stockholders' deficit
|
|
Shares
|
|
Amount
|
|
|
|
|
Balance at December 31, 2013
|
26,481
|
|
|
$
|
264
|
|
|
$
|
512,008
|
|
|
$
|
(661,689
|
)
|
|
$
|
(159,779
|
)
|
|
$
|
(309,196
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(136,319
|
)
|
|
—
|
|
|
(136,319
|
)
|
Stock-based compensation issued, net
|
230
|
|
|
3
|
|
|
(202
|
)
|
|
—
|
|
|
—
|
|
|
(199
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
4,274
|
|
|
—
|
|
|
—
|
|
|
4,274
|
|
Interest rate swaps other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,037
|
)
|
|
(1,037
|
)
|
Employee benefits other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(166,673
|
)
|
|
(166,673
|
)
|
Employee benefits reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,866
|
|
|
8,866
|
|
Balance at December 31, 2014
|
26,711
|
|
|
$
|
267
|
|
|
$
|
516,080
|
|
|
$
|
(798,008
|
)
|
|
$
|
(318,623
|
)
|
|
$
|
(600,284
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
90,416
|
|
|
—
|
|
|
90,416
|
|
Stock-based compensation issued, net
|
210
|
|
|
2
|
|
|
(595
|
)
|
|
—
|
|
|
—
|
|
|
(593
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
6,357
|
|
|
—
|
|
|
—
|
|
|
6,357
|
|
Interest rate swaps other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(521
|
)
|
|
(521
|
)
|
Employee benefits other comprehensive income before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
687,643
|
|
|
687,643
|
|
Employee benefits reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(184,507
|
)
|
|
(184,507
|
)
|
Balance at December 31, 2015
|
26,921
|
|
|
$
|
269
|
|
|
$
|
521,842
|
|
|
$
|
(707,592
|
)
|
|
$
|
183,992
|
|
|
$
|
(1,489
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
104,095
|
|
|
—
|
|
|
104,095
|
|
Stock-based compensation issued, net
|
153
|
|
|
2
|
|
|
(520
|
)
|
|
—
|
|
|
—
|
|
|
(518
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
6,291
|
|
|
—
|
|
|
—
|
|
|
6,291
|
|
Interest rate swaps other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(361
|
)
|
|
(361
|
)
|
Interest rate swaps reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,467
|
|
|
1,467
|
|
Employee benefits other comprehensive income before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,029
|
|
|
8,029
|
|
Employee benefits reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(171,591
|
)
|
|
(171,591
|
)
|
Balance at December 31, 2016
|
27,074
|
|
|
$
|
271
|
|
|
$
|
527,613
|
|
|
$
|
(603,497
|
)
|
|
$
|
21,536
|
|
|
$
|
(54,077
|
)
|
See accompanying notes to consolidated financial statements.
65
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended
December 31, 2016
,
2015
and
2014
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income/(loss)
|
$
|
104,095
|
|
|
$
|
90,416
|
|
|
$
|
(136,319
|
)
|
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
|
|
|
|
|
|
Deferred income taxes
|
42,609
|
|
|
(1,260
|
)
|
|
(29,864
|
)
|
Provision for uncollectible revenue
|
577
|
|
|
5,793
|
|
|
9,218
|
|
Depreciation and amortization
|
222,303
|
|
|
223,819
|
|
|
220,678
|
|
Other post-employment benefits
|
(228,442
|
)
|
|
(184,569
|
)
|
|
51,337
|
|
Qualified pension
|
(6,508
|
)
|
|
(5,534
|
)
|
|
(10,129
|
)
|
Stock-based compensation
|
6,291
|
|
|
6,357
|
|
|
4,274
|
|
Other non-cash items
|
5,265
|
|
|
4,211
|
|
|
2,137
|
|
Changes in assets and liabilities arising from operations:
|
Accounts receivable
|
(2,478
|
)
|
|
5,615
|
|
|
8,485
|
|
Prepaid and other assets
|
198
|
|
|
1,327
|
|
|
(338
|
)
|
Restricted cash
|
—
|
|
|
—
|
|
|
463
|
|
Accounts payable and accrued liabilities
|
(4,094
|
)
|
|
(36,642
|
)
|
|
5,068
|
|
Accrued interest payable
|
137
|
|
|
5
|
|
|
1
|
|
Other assets and liabilities, net
|
(5,701
|
)
|
|
2,463
|
|
|
(3,948
|
)
|
Total adjustments
|
30,157
|
|
|
21,585
|
|
|
257,382
|
|
Net cash provided by operating activities
|
134,252
|
|
|
112,001
|
|
|
121,063
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Net capital additions
|
(117,050
|
)
|
|
(116,159
|
)
|
|
(119,489
|
)
|
Acquisition of business, net of cash acquired
|
(2,729
|
)
|
|
—
|
|
|
—
|
|
Distributions from investments and proceeds from the sale of property and equipment
|
1,319
|
|
|
288
|
|
|
1,126
|
|
Net cash used in investing activities
|
(118,460
|
)
|
|
(115,871
|
)
|
|
(118,363
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Repayments of long-term debt
|
(6,400
|
)
|
|
(6,400
|
)
|
|
(6,400
|
)
|
Restricted cash
|
(2
|
)
|
|
—
|
|
|
—
|
|
Proceeds from exercise of stock options
|
12
|
|
|
13
|
|
|
32
|
|
Repayment of capital lease obligations
|
(1,038
|
)
|
|
(770
|
)
|
|
(1,445
|
)
|
Net cash used in financing activities
|
(7,428
|
)
|
|
(7,157
|
)
|
|
(7,813
|
)
|
Net change
|
8,364
|
|
|
(11,027
|
)
|
|
(5,113
|
)
|
Cash, beginning of period
|
26,560
|
|
|
37,587
|
|
|
42,700
|
|
Cash, end of period
|
$
|
34,924
|
|
|
$
|
26,560
|
|
|
$
|
37,587
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
$
|
77,153
|
|
|
$
|
75,625
|
|
|
$
|
75,520
|
|
Income tax paid, net of refunds
|
1,346
|
|
|
1,021
|
|
|
2,363
|
|
Capital additions included in accounts payable
|
8,586
|
|
|
10,902
|
|
|
13,120
|
|
Acquisition of property and equipment by capital lease
|
1,436
|
|
|
1,320
|
|
|
1,142
|
|
See accompanying notes to consolidated financial statements.
66
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Except as otherwise required by the context, references in notes to the consolidated financial statements to:
|
|
•
|
"FairPoint Communications" refers to FairPoint Communications, Inc., excluding its subsidiaries.
|
|
|
•
|
"FairPoint" or the "Company" refer to the combined business of FairPoint Communications, Inc. and all of its subsidiaries after giving effect to the merger on March 31, 2008 with Northern New England Spinco Inc., a subsidiary of Verizon Communications Inc. ("Verizon"), which transaction is referred to herein as the "Spinco Merger".
|
|
|
•
|
"Northern New England operations" refers to the local exchange business acquired from Verizon and certain of its subsidiaries after giving effect to the Spinco Merger.
|
|
|
•
|
"Telecom Group" refers to FairPoint, exclusive of the acquired Northern New England operations.
|
(1) Organization and Principles of Consolidation
Organization
FairPoint is a leading provider of advanced communications services to business, wholesale and residential customers within its service territories. FairPoint offers its customers a suite of advanced data services such as Ethernet, high capacity data transport and other IP-based services over an extensive fiber network with more than
22,000
miles of fiber optic cable, including approximately
18,000
miles of fiber optic cable in Maine, New Hampshire and Vermont, in addition to Internet access, high-speed data ("HSD") and local and long distance voice services. As of
December 31, 2016
, FairPoint's service territory spanned
17
states where it is the incumbent communications provider, primarily serving rural communities and small urban markets. Many of its local exchange carriers ("LECs") have served their respective communities for more than
80
years. As of
December 31, 2016
, the Company operated with approximately
306,600
broadband subscribers, approximately
15,700
Ethernet circuits and approximately
366,100
residential voice lines.
Principles of Consolidation
The consolidated financial statements include all majority-owned subsidiaries of the Company. Partially owned equity affiliates are accounted for under the cost method or equity method when the Company demonstrates significant influence, but does not have a controlling financial interest. Intercompany accounts and transactions have been eliminated upon consolidation.
(2) Significant Accounting Policies
(a) Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"), which require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items.
The Company reclassified "Claims payable and estimated claims accrual" to "Other accrued liabilities" in the December 31, 2015 consolidated balance sheet to be consistent with current period presentation.
Examples of significant estimates include the allowance for doubtful accounts, revenue reserves, the depreciation of property, plant and equipment, valuation of intangible assets, qualified pension and other post-employment benefit plan assumptions, stock-based compensation and income taxes.
(b) Revenue Recognition
Revenues are recognized as services are rendered and are primarily derived from the usage of the Company's networks and facilities or under revenue-sharing arrangements with other communications carriers. Revenues are primarily derived from: voice services, access (including pooling), certain Connect America Fund ("CAF") receipts, Internet and broadband services and other miscellaneous services. Local access charges are billed to local end users under tariffs approved by each state's Public Utilities Commission ("PUC") or by rates, terms and conditions determined by the Company. Access revenues are derived for the intrastate jurisdiction by billing access charges to interexchange carriers and to other LECs. These charges are billed based on toll or access tariffs approved by the local state's PUC. Access charges for the interstate jurisdiction are billed in accordance with tariffs filed
by the National Exchange Carrier Association ("NECA") or by the individual company and approved by the Federal Communications Commission (the "FCC"). On July 14, 2016, the FCC adopted a Declaratory Order that classifies switched access services provided by Incumbent LECs as non-dominant services. This change in classification will not impact rates or revenues as the rates continue to be subject to rules established for all access providers pursuant to the Intercarrier Compensation transition rules adopted in 2011.
Revenues are determined on a bill-and-keep basis or a pooling basis. If on a bill-and-keep basis, the Company bills the charges to the customer and keeps the revenue. If the Company participates in a pooling environment (interstate or intrastate), the revenue from the covered services is contributed to a revenue pool. The revenue is then distributed to individual companies based on their company-specific revenue requirement or similar distribution methods. This distribution is based on individual state PUCs' (intrastate) or the FCC's (interstate) approved settlement mechanisms, separation rules and rates of return. Distribution from these pools can change relative to changes made to expenses, plant investment or rate-of-return. Some companies participate in federal and certain state universal service programs that are pooling in nature but are regulated by rules separate from those described above. These rules vary by state. Revenues earned through the various pooling arrangements are initially recorded based on the Company's estimates.
On November 18, 2011, the FCC released its comprehensive landmark order to modify the nationwide system of universal support and the CAF/intercarrier compensation ("ICC") system (the "CAF/ICC Order"). Rule changes associated with the FCC's CAF/ICC Order impact the NECA interstate pooling, in that a portion of the Company's interstate Universal Service Fund ("USF") revenues, which are administered through the NECA pools and which prior to January 1, 2012 were based on costs, are now based on rules from the FCC's CAF/ICC Order, including CAF Phase II support where FairPoint accepted CAF Phase II support, continued CAF Phase I frozen support where FairPoint did not accept CAF Phase II support and CAF/ICC rules in states where FairPoint is eligible for such support under the ICC Transition Rules for price cap and rate-of-return carriers. FairPoint accepted CAF Phase II support in all states except Kansas and Colorado. The CAF Phase II revenue is being recognized on a straight-line basis, ratably over the
six
-year period in which the funding will be received. The accepted transition funding is being recognized monthly as received over the three-year transition period ending in July 2018. The Company is required to meet certain interim milestones over the
six
-year period of CAF Phase II and the Company performs a quarterly assessment of its progress.
Revenue from long distance switched retail and wholesale services can be recurring due to coverage under an unlimited calling plan or can be usage sensitive. In either case, they are billed in arrears and recognized when earned. Internet and data services revenues are substantially all recurring revenues and are billed one month in advance and deferred until earned.
As of
December 31, 2016
and
2015
, unearned revenue of
$18.2 million
and
$19.9 million
, respectively, was included in other accrued liabilities and unearned revenue of
$4.8 million
and
$7.6 million
, respectively, was included in other long-term liabilities on the consolidated balance sheets.
The majority of the Company's other miscellaneous services revenue is generated from ancillary special projects at the request of third parties, video services, directory services and late payment charges to end users and wholesale carriers. The Company generally requires customers to pay for ancillary special projects in advance. As of
December 31, 2016
and
2015
, customer deposits of
$3.3 million
and
$2.1 million
, respectively, were included in other accrued liabilities on the consolidated balance sheets. Once the ancillary special project is completed or substantially complete and all project costs have been accumulated for proper accounting recognition, the advance payment is recognized as revenue with any overpayments refunded to the customer, as appropriate. The Company recognizes revenue upon the provision of video services in certain markets by reselling DirecTV and providing cable and IP television video-over-digital subscriber line services. The Company also publishes telephone directories in some of its Telecom Group markets and recognizes revenues associated with these publications evenly over the time period covered by the directory, which is typically twelve months. The Company bills late payment fees to customers who have not paid their bills in a timely manner. In general, late payment fee revenue is recognized based on collection of these charges.
Non-recurring customer activation fees, along with the related costs up to, but not exceeding, the activation fees, are deferred and amortized over the customer relationship period.
Under the Maine Public Utilities Commission ("MPUC") rules (Chapter 201), which went into effect August 1, 2014, the MPUC may open an investigation regarding the failure to meet any of the established SQI benchmarks and has the authority to impose penalties. The MPUC opened an investigation into the Company's failure to meet some third quarter 2014 SQI benchmarks and subsequently opened an investigation into the fourth quarter of 2014 and then with respect to each of the quarterly periods in 2015. On March 29, 2016, the MPUC consolidated the investigations of the six quarters into one investigation. On September 14, 2016, a hearing examiner for the MPUC issued a report recommending that the MPUC find that FairPoint had failed to meet SQI benchmarks for the period under review and impose a
$500,000
penalty as allowed by statute, and provided until October 7, 2016 for comments or exceptions to be filed by interested parties. This recommendation did not constitute MPUC action. The Company promptly filed a motion to implement adjudicatory procedures prior to entry of any final order. After the Company’s motion to implement adjudicatory procedures was briefed by the parties, the Hearing Examiner issued an order on November 30, 2016 granting the Company’s motion in part and permanently withdrawing the Examiner’s September 14, 2016 report. A case schedule
was established by the Hearing Examiner, and a hearing is currently scheduled to begin May 11, 2017. Subsequent legislation in Maine has superseded the SQI benchmarks applied in the examiner’s report. Effective with the new legislation, the reporting of service quality will be required only in the areas of the state where Provider of Last Resort ("POLR") is still required and will be filed and treated as confidential. The number of SQI reporting metrics has been reduced and the benchmarks are less stringent than under previous Commission rules.
The Company also adopted a separate performance assurance plan ("PAP") for certain services provided on a wholesale basis to competitive local exchange carriers ("CLECs") in each of the states of Maine, New Hampshire and Vermont. Pursuant to the PAPs, FairPoint was required to provide service credits in the event the Company was unable to meet the provisions of the respective PAP.
Effective June 1, 2015, the PAP was retired and the Company began measuring and reporting certain wholesale local service performance results pursuant to the terms of a simplified measurement plan. The new plan, called the Wholesale Performance Plan ("WPP"), was developed collaboratively with CLECs over several years and was approved by the Maine, New Hampshire and Vermont regulatory commissions. Under the WPP, the Company is subject to significantly fewer performance criteria and its annual service credit exposure was reduced.
In evaluating the presentation of taxes and surcharges, such as USF charges, sales, use, value added and some excise taxes, the Company determines whether it is the primary obligor or principal taxpayer. In jurisdictions where the Company deems that it is the principal taxpayer, the Company records these taxes and surcharges on a gross basis and include them in its revenues and costs of services and sales. In jurisdictions where the Company determines that it is a pass through agent for the government authority, it records the taxes on a net basis through the consolidated balance sheets.
Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the elements are deemed separable and separate earnings processes exist, the revenue associated with each element is allocated to each element based on the relative estimated selling price of the separate elements. The Company has estimated the selling prices of each element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized as earned.
Management makes estimated adjustments, as necessary, to revenue and accounts receivable for billing errors, including certain disputed amounts.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
(d) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is recorded as a contra-asset of accounts receivable and represents the Company's best estimate of probable credit losses in the Company's existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Accounts receivable balances are reviewed on an aged basis and account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The following is activity in the Company's allowance for doubtful accounts receivable for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
8,333
|
|
|
$
|
9,894
|
|
|
$
|
13,142
|
|
Provision charged to expense
|
577
|
|
|
5,793
|
|
|
9,218
|
|
Provision charged to other accounts
(a)
|
—
|
|
|
(18
|
)
|
|
(43
|
)
|
Amounts written off, net of recoveries
|
(5,273
|
)
|
|
(7,336
|
)
|
|
(12,423
|
)
|
Balance, end of period
|
$
|
3,637
|
|
|
$
|
8,333
|
|
|
$
|
9,894
|
|
|
|
(a)
|
Provision charged to other accounts includes accruals charged to accounts payable for anticipated uncollectible charges on purchase of accounts receivable from others which were billed by the Company.
|
(e) Credit Risk
The financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and gross accounts receivable existing at
December 31, 2016
. The Company places its cash with high-quality financial institutions. Concentrations of credit risk with respect to accounts receivable are principally related to trade receivables from other interexchange carriers and are otherwise limited to the Company's large number of customers in several states.
The Company sponsors qualified pension plans for certain employees. Plan assets associated with these qualified pension plans are held by third party trustees and investments are comprised principally of debt and equity securities. The fair value of these plan assets is dependent on the financial condition of those entities issuing the debt and equity securities. A significant decline in the fair value of plan assets could result in additional Company contributions to the qualified pension plans in order to meet funding requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). For additional information regarding the plan assets of the Company's qualified pension plans, including the
December 31, 2016
balance at risk,
see
note (11) "Employee Benefit Plans" herein.
(f) Property, Plant and Equipment
Given that a majority of the Company's property, plant and equipment is plant used in the Company's wireline and fiber-based Ethernet networks, depreciation is principally based on the composite group remaining life method and straight-line composite rates. This methodology provides for the recognition of the cost of the remaining net investment in telephone plant, property and equipment less anticipated positive net salvage value, over the remaining asset lives. When depreciable telephone plant is replaced or retired, the carrying amount of such plant is deducted from the respective accounts and charged to accumulated depreciation. No gain or loss is generally recognized on disposition of assets. Use of this methodology requires the periodic revision of depreciation rates. In the evaluation of asset lives, multiple factors are considered, including, but not limited to, the ongoing network deployment, technology upgrades and enhancements, planned retirements and the adequacy of reserves. The Company utilizes straight-line depreciation for its non-telephone property, plant and equipment.
Periodically, the Company reviews the estimated remaining useful lives of its group asset categories to address continuing changes in technology, competition and the Company’s overall reduction in capital spending and increased focus on more efficient utilization of its existing assets.
Network software purchased or developed in connection with related plant assets is capitalized. The Company also capitalizes interest associated with the acquisition or construction of network related assets. Capitalized interest is reported as part of the cost of the network related assets and as a reduction in interest expense.
See
"(i) Computer Software and Interest Costs" herein for additional information.
(g) Long-Lived Assets
Property, plant and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. An impairment charge is recognized for the amount, if any, by which the carrying value of the asset exceeds its fair value.
As of
December 31, 2016
, the Company performed its routine review of impairment triggering events and concluded that it does not believe a triggering event has occurred with respect to property, plant and equipment and intangible assets subject to amortization.
(h) Asset Retirement Obligations
The Company records the estimated fair value of an asset retirement obligation when incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset's estimated useful life. The Company has asset retirement obligations related to battery, fuel tank and chemically-treated pole disposal as well as soil remediation at leased facilities. Considerable management judgment is required in estimating these obligations. Important assumptions include estimates of retirement costs, the timing of the future retirement activities and the likelihood or retirement provisions being enforced. Changes in these assumptions based on future information could result in adjustments to estimated liabilities.
(i) Computer Software and Interest Costs
The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software which has a useful life in excess of one year. Capitalized costs include direct development costs associated with internal use software, including direct labor costs and external costs of materials and services.
Subsequent additions, modifications or upgrades to internal-use 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.
In addition, the Company capitalizes the interest cost associated with the period of time over which the Company's internal use software is developed or obtained.
During the years ended
December 31, 2016
,
2015
and
2014
, the Company recorded the following with regards to software costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Capitalized software costs
|
$
|
10,282
|
|
|
$
|
22,768
|
|
|
$
|
17,984
|
|
Capitalized interest costs
|
$
|
148
|
|
|
$
|
99
|
|
|
$
|
70
|
|
Amortization expense on capitalized software
|
$
|
16,610
|
|
|
$
|
14,669
|
|
|
$
|
11,415
|
|
A summary of capitalized software is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
Gross carrying amount
|
$
|
167,986
|
|
|
$
|
176,778
|
|
Less: accumulated amortization
|
(128,758
|
)
|
|
(131,031
|
)
|
Net capitalized software
|
$
|
39,228
|
|
|
$
|
45,747
|
|
Estimated future amortization on capitalized software for each of the five years subsequent to
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
|
2017
|
$
|
14,856
|
|
2018
|
$
|
11,670
|
|
2019
|
$
|
7,731
|
|
2020
|
$
|
4,528
|
|
2021
|
$
|
443
|
|
(j) Impairment of Other Intangible Assets
Indefinite-lived Intangible Asset.
Non-amortizable intangible assets are assessed for impairment at least annually. The Company performs its annual impairment test as of the first day of the fourth fiscal quarter of each year and assesses the fair value of the trade name based on the relief from royalty method. If the carrying amount of the trade name exceeds its estimated fair value, the asset is considered impaired.
For its non-amortizable intangible asset impairment assessments of the FairPoint trade name, the Company makes certain assumptions including an estimated royalty rate, a long-term growth rate, an effective tax rate and a discount rate, and applies these assumptions to projected future cash flows, exclusive of cash flows associated with wholesale revenues and other revenues not generated through brand recognition. As of October 1,
2016
, the estimated fair value exceeded the carrying value in the Company's quantitative analysis; therefore, an impairment was not necessary. However, future changes in one or more of the assumptions discussed above may result in the recognition of an impairment loss.
Amortizable Intangible Assets.
Amortizable intangible assets must be reviewed for impairment as part of long-lived assets whenever indicators of impairment exist.
See
"(g) Long-Lived Assets" herein for additional information.
(k) Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management determines its estimates of future taxable income based upon the scheduled reversal of deferred tax liabilities and tax planning strategies. The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized.
FairPoint Communications files a consolidated income tax return with its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
(l) Stock-Based Compensation
The Company accounts for employee awards which are expected to vest. Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period, which generally begins on the date the award is granted through the date the award vests.
(m) Employee Benefit Plans
The Company recognizes the overfunded or underfunded status of its qualified defined benefit plans and post-employment benefit plans as either an asset or liability, respectively, on the consolidated balance sheets. 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. These gains and losses are amortized over future years as a component of the net periodic benefit cost.
(n) Operating Segments
Management views its business of providing data, video and voice communications services to residential, wholesale and business customers as
one
operating segment
.
The Company's services consist of retail and wholesale communications and data services, including voice and HSD in
17
states. The Company's chief operating decision maker assesses operating performance and allocates resources based on the consolidated results.
(o) Other Liabilities
Accrued Bonuses.
As of
December 31, 2016
and
2015
, accrued bonuses of
$12.7 million
and
$12.6 million
, respectively, were included in accrued payroll and related liabilities on the consolidated balance sheets.
(p) Advertising Costs
Advertising costs are expensed as they are incurred. During the years ended
December 31, 2016
,
2015
and
2014
, advertising costs were
$6.5 million
,
$6.6 million
and
$9.8 million
, respectively.
(q) Interest Rate Swap Agreements
In the third quarter of 2013, the Company entered into interest rate swap agreements. For further information regarding these interest rate swap agreements,
see
note (9) "Interest Rate Swap Agreements." The interest rate swap agreements, at their inception, qualified for and were designated as cash flow hedging instruments. The Company records its interest rate swaps on the consolidated balance sheets at fair value. The effective portion of changes in fair value are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion is recognized in earnings. Both at inception and on a quarterly basis, the Company performs an effectiveness test.
(3) Proposed Merger with Consolidated Communications Holdings, Inc.
On December 3, 2016, FairPoint Communications entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Consolidated Communications Holdings, Inc. ("Consolidated"), a Delaware Corporation, and Falcon Merger Sub, Inc., a newly formed Delaware corporation and wholly-owned subsidiary of Consolidated (“Merger Sub”), which provides for, among other things, a business combination whereby Merger Sub will merge with and into FairPoint Communications, with FairPoint Communications as the surviving entity (the “Merger”). As a result of the Merger, the separate corporate existence of Merger Sub will cease, and FairPoint Communications will survive as a wholly owned subsidiary of Consolidated. Consolidated is a leading business and broadband communications provider throughout its
11
-state service area.
If the Merger is completed, under the terms of the Merger Agreement, stockholders of FairPoint Communications will receive
0.7300
shares of common stock of Consolidated for each share of FairPoint Communications common stock that they own immediately before this transaction. If the Merger is not completed, FairPoint Communications may be required to pay a termination fee of
$18.9 million
under certain circumstances set forth in the Merger Agreement. The Merger is expected to close around the middle of 2017 and is subject to standard closing conditions, including federal and state regulatory approvals and the approval of both Consolidated’s and FairPoint Communications’ stockholders.
For the year ended December 31, 2016, the Company recognized
$4.5 million
of merger related expenses, primarily for legal and financial advisory costs included in selling, general and administrative expense, excluding depreciation and amortization, on the consolidated statement of operations.
The award agreements granted under the FairPoint Communications, Inc. Amended and Restated 2010 Long Term Incentive Plan (the "Long Term Incentive Plan") provide that upon the occurrence of a change in control, unvested benefits will be accelerated and vest in full.
(4) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which is designed to clarify the principles used to recognize revenue for entities. The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. While ASU 2014-09 is primarily associated with guidance for revenue from contracts with customers, it also includes new accounting principles related to deferral and amortization of contract acquisition and fulfillment costs. In 2016, the Company performed an assessment of its revenues, acquisition and fulfillment costs from contracts to understand any potential differences to its current accounting policies and business processes. The Company expects to have an impact concerning the deferral of acquisition costs as its current policy is to expense these costs as incurred. At this time, the Company continues to assess and determine data and system requirements necessary to quantify the impacts of this standard as well as to develop and provide the enhanced disclosures required by the new guidance.
In July 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09. Subsequently, the FASB has issued several additional ASUs to clarify the implementation guidance on principal versus agent considerations, identifying performance obligations, assessing collectability, presentation of sales taxes and other similar taxes collected from customers, non-cash considerations, contract modifications and completed contracts at transition. The new pronouncements will be effective for annual and interim periods beginning on or after December 15, 2017. The Company intends to adopt the new standard effective January 1, 2018.
The standard allows for two methods of adoption: (1) "full retrospective" adoption, meaning the standard is applied to all periods presented, or (2) "modified retrospective" adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the fiscal year 2018 opening retained earnings balance. Currently, the Company is evaluating the available adoption methods and plans to select an adoption method in the second half of 2017.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual periods beginning after December 15, 2016. The Company adopted this pronouncement for its year ended December 31, 2016 and it did not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, whereby, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the potential impact of this pronouncement.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment award transactions, including, but not limited to: (a) income
tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. The Company does not believe the adoption of this pronouncement will have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash,
which requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. ASU 2016-18 is to be applied through a retrospective transition method to each period presented. The Company does not believe that the adoption of this pronouncement will have a significant impact on its consolidated statements of cash flows.
(5) Dividends
The Company currently does not pay a dividend on its common stock and has no plans to pay dividends.
(6) Other Intangible Assets
Indefinite-lived Intangible Assets
At
December 31, 2016
and
2015
, the Company's trade name is recorded at
$39.2 million
. In addition, the Company completed an immaterial business acquisition during 2016 and recorded goodwill of
$2.5 million
. On October 1,
2016
and October 1,
2015
, the Company performed its annual non-amortizable intangible asset quantitative analysis and concluded that there was
no
impairment at that time. As of
December 31, 2016
, the Company performed its routine review of impairment indicators and concluded that it did not believe a triggering event had occurred.
Other Amortizable Intangible Assets
The Company's amortizable intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Customer lists
(weighted average 9.0 years)
:
|
|
|
|
Gross carrying amount
|
$
|
99,410
|
|
|
$
|
99,000
|
|
Less: accumulated amortization
|
(65,312
|
)
|
|
(54,290
|
)
|
Net customer lists
|
$
|
34,098
|
|
|
$
|
44,710
|
|
|
|
|
|
Other net amortizable intangible assets
|
$
|
184
|
|
|
$
|
—
|
|
|
|
|
|
Total amortizable intangible assets
|
$
|
34,282
|
|
|
$
|
44,710
|
|
Amortization expense of the Company's amortizable intangible assets was
$11.0 million
,
$11.0 million
and
$11.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, and is expected to be approximately
$11.1 million
in
2017
,
2018
,
2019
, respectively,
$0.8 million
in
2020
and
$0.1 million
in
2021
.
(7) Property, Plant and Equipment
A summary of property, plant and equipment is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Life
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(in years)
|
|
|
|
|
Land
|
—
|
|
|
$
|
35,217
|
|
|
$
|
35,632
|
|
Buildings
|
40
|
|
|
215,897
|
|
|
211,115
|
|
Central office equipment
|
7 – 10
|
|
|
662,042
|
|
|
635,208
|
|
Outside communications plant
|
15 – 35
|
|
|
1,191,142
|
|
|
1,161,042
|
|
Furniture, vehicles and other work equipment
|
5 – 15
|
|
|
257,337
|
|
|
258,749
|
|
Plant under construction
|
—
|
|
|
99,568
|
|
|
81,096
|
|
Other
|
—
|
|
|
16,029
|
|
|
17,144
|
|
Total property, plant and equipment
|
|
|
2,477,232
|
|
|
2,399,986
|
|
Less: Accumulated depreciation
|
|
|
(1,452,880
|
)
|
|
(1,281,205
|
)
|
Net property, plant and equipment
|
|
|
$
|
1,024,352
|
|
|
$
|
1,118,781
|
|
Depreciation expense, excluding amortization of intangible assets, for the years ended
December 31, 2016
,
2015
and
2014
was
$211.3 million
,
$212.8 million
and
$209.7 million
, respectively. Depreciation expense includes amortization of assets recorded under capital leases.
The Company recorded
$0.6 million
of asset retirement obligations during the year ended
December 31, 2015
. Net accretion expense, revisions in cash flow estimates and liability settlements were insignificant during the year. The Company's asset retirement obligations are included as a component of other accrued liabilities or other long-term liabilities in the consolidated balance sheets based on the expected timing of the obligation. As of
December 31, 2016
, the Company's asset retirement liability of
$4.8 million
consisted of
$0.3 million
in other accrued liabilities and
$4.5 million
in other long-term liabilities. As of
December 31, 2015
, the Company's asset retirement liability of
$4.9 million
consisted of
$0.8 million
in other accrued liabilities and
$4.1 million
in other long-term liabilities.
(8) Long-term Debt
Long-term debt for the Company at
December 31, 2016
and
2015
is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
Term Loan, due 2019
(weighted average rate of 7.50%)
|
$
|
616,000
|
|
|
$
|
622,400
|
|
Discount on Term Loan
(a)
|
(7,834
|
)
|
|
(11,138
|
)
|
Debt issuance costs
|
(3,396
|
)
|
|
(4,717
|
)
|
Notes, 8.75%, due 2019
|
300,000
|
|
|
300,000
|
|
Total long-term debt
|
904,770
|
|
|
906,545
|
|
Less: current portion
|
(6,400
|
)
|
|
(6,400
|
)
|
Total long-term debt, net of current portion
|
$
|
898,370
|
|
|
$
|
900,145
|
|
|
|
(a)
|
The
$7.8 million
and
$11.1 million
discount on the Term Loan (as defined below) as of
December 31, 2016
and
2015
, respectively, is being amortized using the effective interest method over the life of the Term Loan.
|
As of
December 31, 2016
, the Company had
$61.1 million
, net of
$13.9 million
outstanding letters of credit, available for additional borrowing under the Revolving Facility (as defined below).
The approximate aggregate maturities of long-term debt, excluding the debt discount on the Term Loan, for each of the three years subsequent to
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
Balance Due
|
2017
|
$
|
6,400
|
|
2018
|
6,400
|
|
2019
|
903,200
|
|
Total long-term debt, including current portion
|
$
|
916,000
|
|
Refinancing.
On February 14, 2013 (the "Refinancing Closing Date"), FairPoint Communications refinanced its old credit agreement (the "Refinancing"). In connection with the Refinancing, FairPoint Communications (i) issued
$300.0 million
aggregate principal amount of its
8.75%
senior secured notes due 2019 (the "Notes") in a private offering exempt from registration under the Securities Act pursuant to an indenture (the "Indenture") that FairPoint Communications entered into on the Refinancing Closing Date with certain of its subsidiaries that guarantee the indebtedness under the Credit Agreement (as defined herein) (the "Subsidiary Guarantors") and U.S. Bank National Association, as trustee and collateral agent, and (ii) entered into a credit agreement (the "Credit Agreement"), dated as of the Refinancing Closing Date, with the lenders party thereto from time to time and Morgan Stanley Senior Funding, Inc., as administrative agent and letter of credit issuer. The Credit Agreement provides for a
$75.0 million
revolving credit facility (the ''Revolving Facility''), which has a sub-facility providing for the issuance of up to
$40.0 million
in letters of credit, and a
$640.0 million
term loan facility (the ''Term Loan'' and, together with the Revolving Facility, the ''Credit Agreement Loans"). On the Refinancing Closing Date, FairPoint Communications used the proceeds of the Notes offering, together with
$640.0 million
of borrowings under the Term Loan and cash on hand to (i) repay principal of
$946.5 million
outstanding on the old term loan, plus approximately
$7.7 million
of accrued interest and (ii) pay approximately
$32.6 million
of fees, expenses and other costs related to the Refinancing.
The Credit Agreement.
The principal amount of the Term Loan and commitments under the Revolving Facility may be increased by an aggregate amount of up to
$200.0 million
, subject to certain terms and conditions specified in the Credit Agreement. The Term Loan will mature on February 14, 2019 and the Revolving Facility will mature on February 14, 2018, subject in each case to extensions pursuant to the terms of the Credit Agreement.
Interest Rates and Fees
. Interest on borrowings under the Credit Agreement Loans accrue at an annual rate equal to either a British Bankers Association London Inter-Bank Offered Rate ("LIBOR") or the base rate, in each case plus an applicable margin. LIBOR is a per annum rate for dollar deposits with an interest period of one, two, three or six months (at FairPoint Communication's election), subject to a minimum
LIBOR
floor of
1.25%
for the Term Loan. The base rate is the per annum rate equal to the greatest of (x) the federal funds effective rate plus
0.50%
, (y) the rate of interest publicly quoted from time to time by The Wall Street Journal as the United States ''Prime Rate'' and (z) LIBOR with an interest period of one month plus
1.00%
. The applicable margin for the Term Loan is (a)
6.25%
per annum with respect to term loans bearing interest based on LIBOR or (b)
5.25%
per annum with respect to term loans bearing interest based on the base rate. The applicable interest rate for the Revolving Facility is, initially, (a)
5.50%
with respect to revolving loans bearing interest based on LIBOR or (b)
4.50%
per annum with respect to revolving loans bearing interest based on the base rate, in each case subject to adjustment based on FairPoint Communication's consolidated total leverage ratio, as defined in the Credit Agreement. FairPoint Communications is required to pay a quarterly letter of credit fee on the average daily amount available to be drawn under letters of credit issued under the Revolving Facility equal to the applicable interest rate for revolving loans bearing interest based on LIBOR, plus a fronting fee of
0.125%
per annum on the average daily amount available to be drawn under such letters of credit. In addition, FairPoint Communications is required to pay a quarterly commitment fee on the average daily unused portion of the New Revolving Facility, which is
0.50%
initially, subject to reduction to
0.375%
based on FairPoint Communication's consolidated total leverage ratio.
Security/Guarantors.
All obligations under the Credit Agreement, together with certain designated hedging obligations and cash management obligations, are unconditionally guaranteed on a senior secured basis by certain subsidiaries of FairPoint Communications (the "Subsidiary Guarantors") and secured by a first-priority lien on substantially all personal property of FairPoint Communications and the Subsidiary Guarantors, subject to certain exclusions set forth in the related security documents, pari passu with the lien securing the obligations under the Notes.
Mandatory Repayments
. FairPoint Communications is required to make quarterly repayments of the Term Loan in a principal amount of
$1.6 million
during the term of the Credit Agreement. In addition, mandatory repayments are required under the Credit Agreement with (i) a percentage, initially equal to
50%
and subject to reduction to
25%
based on FairPoint Communication's consolidated total leverage ratio, of FairPoint Communication's excess cash flow, as defined in the Credit Agreement, (ii) the net cash proceeds of certain asset dispositions, insurance proceeds and condemnation awards and (iii) issuances of debt not permitted to be incurred under the Credit Agreement.
No
premium is required in connection with prepayments.
Covenants
. The Credit Agreement contains customary representations and warranties and affirmative and negative covenants for a transaction of this type, including
two
financial maintenance covenants: (i) a consolidated interest coverage ratio and (ii) a consolidated total leverage ratio. The Credit Agreement also contains a covenant limiting the amount of capital expenditures that FairPoint Communications and its subsidiaries may make in any fiscal year. As of
December 31, 2016
, FairPoint Communications was in compliance with all covenants under the Credit Agreement.
Events of Default
. The Credit Agreement also contains customary events of default.
The Notes.
On the Refinancing Closing Date, FairPoint Communications issued
$300.0 million
of the Notes pursuant to the Indenture in a private offering exempt from registration under the Securities Act.
The terms of the Notes are governed by the Indenture. The Notes are senior secured obligations of FairPoint Communications and are guaranteed by the Subsidiary Guarantors. The Notes and the guarantees thereof are secured by a first-priority lien on substantially all personal property of FairPoint Communications and the Subsidiary Guarantors, subject to certain exclusions set forth in the related security documents, pari passu with the lien securing the obligations under the Credit Agreement. The Notes will mature on August 15, 2019 and accrue interest at a rate of
8.75%
per annum, which is payable semi-annually in arrears on February 15 and August 15 of each year.
Notes redeemed after February 15, 2016 and prior to February 15, 2017 may be redeemed at
104.375%
of the aggregate principal amount; Notes redeemed on or after February 15, 2017 and prior to February 15, 2018 may be redeemed at
102.188%
of the aggregate principal amount; and Notes redeemed on or after February 15, 2018 may be redeemed at their par value.
The holders of the Notes have the ability to require FairPoint Communications to repurchase all or any part of the Notes if FairPoint Communications experiences certain kinds of changes in control or engages in certain asset sales, in each case at the repurchase prices and subject to the terms and conditions set forth in the Indenture.
The Indenture contains certain covenants which are customary with respect to non-investment grade debt securities, including limitations on FairPoint Communication's ability to incur additional indebtedness, pay dividends on or make other distributions or repurchase FairPoint Communication's capital stock, make certain investments, enter into certain types of transactions with affiliates, create liens and sell certain assets or merge with or into other companies. These covenants are subject to a number of important limitations and exceptions. As of
December 31, 2016
, FairPoint Communications was in compliance with all covenants under the Indenture.
The Indenture also provides for customary events of default, including cross defaults to other specified debt of FairPoint Communications and certain of its subsidiaries.
(9) Interest Rate Swap Agreements
The Company uses interest rate swap agreements to protect the Company against future adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company's interest rate swaps, which are designated as cash flow hedges, involve the receipt of variable amounts from counterparties in exchange for the Company making fixed-rate payments over the effective term of the agreements without exchange of the underlying notional amount. The Company does not hold or issue any derivative financial instruments for speculative trading purposes.
In the third quarter of 2013, the Company entered into interest rate swap agreements with a combined notional amount of
$170.0 million
with
three
counterparties that are effective for a
two
year period. Such swaps became effective on September 30, 2015 and mature on September 30, 2017. Each respective swap agreement requires the Company to pay a fixed rate of
2.665%
and provides that the Company will receive a variable rate based on the three month LIBOR rate subject to a minimum
LIBOR
floor of
1.25%
. Amounts payable by or due to the Company are net settled with the respective counterparties on the last business day of each fiscal quarter.
The effect of the Company’s interest rate swap agreements on the consolidated balance sheets at
December 31, 2016
and
2015
is shown below (in thousands):
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Derivatives designated as hedging instruments:
|
Balance Sheet Location
|
|
Fair Value
|
Interest rate swaps, Current
|
Other accrued liabilities
|
|
$
|
1,762
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
Derivatives designated as hedging instruments:
|
Balance Sheet Location
|
|
Fair Value
|
Interest rate swaps, Current
|
Other accrued liabilities
|
|
$
|
2,375
|
|
Interest rate swaps, Long-term
|
Other long-term liabilities
|
|
$
|
1,232
|
|
The gross effect of the Company’s interest rate swap agreements on the consolidated statements of comprehensive income/(loss) for the years ended
December 31, 2016
,
2015
and
2014
is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Recognized in Interest Expense (Pre-Tax)
|
Amount of Loss/(Gain) Recognized in Other Comprehensive Income on Derivative (Effective Portion) (Pre-Tax)
|
|
Year Ended December 31, 2016
|
Year Ended December 31, 2015
|
Year Ended December 31, 2014
|
Year Ended December 31, 2016
|
Year Ended December 31, 2015
|
Year Ended December 31, 2014
|
Interest rate swaps
|
$
|
2,446
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,845
|
)
|
$
|
865
|
|
$
|
1,737
|
|
Amounts reported in accumulated other comprehensive income related to interest rate swaps will be reclassified to interest expense as interest payments are made on the Term Loan. The Company estimates that approximately
$1.8 million
will be reclassified as an increase to interest expense in the next 12 months.
Each interest rate swap agreement contains a provision whereby if the Company defaults on any of its indebtedness, the Company may also be declared in default under the interest rate swap agreements.
(10) Fair Value
In determining fair value, the Company uses a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
|
|
Level 1 -
|
Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
|
|
|
Level 2 -
|
Valuations based on quoted prices for similar instruments in active markets or quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
|
Level 3 -
|
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The Company's non-financial assets and liabilities, including its long-lived assets and indefinite-lived intangible assets, are measured and subsequently adjusted, if necessary, to fair value on a non-recurring basis. The Company periodically performs routine reviews of triggering events and/or an impairment test, as applicable. Based on these procedures, the Company did not require an adjustment to fair value to be recorded to these assets in
2016
or
2015
.
The Company's financial instruments, other than interest rate swap agreements and long-term debt, consist primarily of cash, restricted cash, accounts receivable and accounts payable. The carrying amounts of these financial instruments are estimated to approximate fair value due to the relatively short period of time to maturity for these instruments. As of
December 31, 2016
, interest rate swap agreements are carried at their fair value and measured on a recurring basis as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Interest rate swaps, Current
(a)
|
$
|
—
|
|
|
$
|
1,762
|
|
|
$
|
—
|
|
As of
December 31, 2015
, interest rate swap agreements are carried at their fair value and measured on a recurring basis as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Interest rate swaps, Current
(a)
|
$
|
—
|
|
|
$
|
2,375
|
|
|
$
|
—
|
|
Interest rate swaps, Long-term
(a)
|
$
|
—
|
|
|
$
|
1,232
|
|
|
$
|
—
|
|
|
|
(a)
|
The fair value is determined using valuation models which rely on the expected LIBOR based yield curve and estimates of counterparty and the Company’s non-performance risk. Because each of these inputs are directly observable or can be corroborated by observable market data, the Company has categorized these interest rate swaps as Level 2 within the fair value hierarchy.
|
The estimated fair values of the Company's long-term debt as of
December 31, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Carrying Amount
|
|
Fair Value
(a)
|
|
Carrying Amount
|
|
Fair Value
(a)
|
Term Loan, due 2019
(b)
|
$
|
608,166
|
|
|
$
|
620,620
|
|
|
$
|
611,262
|
|
|
$
|
616,954
|
|
Notes, 8.75%, due 2019
|
300,000
|
|
|
312,375
|
|
|
300,000
|
|
|
295,500
|
|
Total
|
$
|
908,166
|
|
|
$
|
932,995
|
|
|
$
|
911,262
|
|
|
$
|
912,454
|
|
|
|
(a)
|
The Company estimated fair value based on market prices of the Company's debt securities at the balance sheet dates, which falls within Level 2 of the fair value hierarchy.
|
|
|
(b)
|
The carrying amount of the Term Loan is net of the unamortized discount of
$7.8 million
and
$11.1 million
as of
December 31, 2016
and
2015
, respectively.
|
For a discussion of the fair value measurement of the Company's pension plan assets,
see
note (11) "Employee Benefit Plans—Plan Assets, Obligations and Funded Status—Qualified Pension Plan Assets".
(11) Employee Benefit Plans
The Company sponsors noncontributory qualified defined benefit pension plans ("qualified pension plans") and post-employment benefit plans which provide certain cash payments and medical, dental and life insurance benefits to eligible retired employees and their beneficiaries and covered dependents. The qualified pension plans and certain post-employment benefit plans were created as part of the acquisition of the Northern New England operations from Verizon and mirrored the prior Verizon plans.
The qualified pension plan available to represented employees was closed to new participants and benefits under the prior formula were frozen as of October 14, 2014. For existing participants, future benefit accruals for service on and after February 22, 2015 are at
50%
of prior rates and are capped at
30 years
of total credited service. The qualified pension plan available to non-represented employees remains frozen.
The post-employment benefit plan provides medical, dental and life insurance benefits to eligible non-represented employees and former represented employees and, in some instances, to their spouses and families. Effective August 28, 2014, active represented employees are no longer eligible for this post-employment benefit plan. Upon ratification of the collective bargaining agreements on February 22, 2015 and for
30 months
thereafter, active represented employees who retire and meet the eligibility requirements and their spouses are eligible to receive certain monthly reimbursements of medical insurance premiums until the retired employee reaches age 65 or dies, at which time the benefit will cease for the spouse as well.
The Company makes contributions to the qualified pension plans to meet minimum funding requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and has the ability to elect to make additional discretionary contributions. The other post-employment benefit plans are unfunded and the Company funds the benefits that are paid. Annually, and as necessary, the Company remeasures the net liabilities of its qualified pension and other post-employment benefit plans.
Plan Assets, Obligations and Funded Status
A summary of plan assets, projected benefit obligation and funded status of the plans are as follows for the years ended
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Qualified Pension Plans
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
Fair value of plan assets:
|
|
|
|
Beginning fair value of plan assets
|
$
|
197,062
|
|
|
$
|
195,410
|
|
Actual return on plan assets
|
15,745
|
|
|
(3,677
|
)
|
Plan settlements
|
(2,510
|
)
|
|
(4,472
|
)
|
Employer contributions
|
16,501
|
|
|
14,980
|
|
Benefits paid
|
(3,898
|
)
|
|
(5,179
|
)
|
Ending fair value of plan assets
|
222,900
|
|
|
197,062
|
|
Projected benefit obligation:
|
|
|
|
Beginning projected benefit obligation
|
$
|
347,624
|
|
|
$
|
408,216
|
|
Service cost
|
6,880
|
|
|
8,391
|
|
Interest cost
|
15,079
|
|
|
14,879
|
|
Plan amendment
(a)
|
—
|
|
|
(40,049
|
)
|
Plan settlements
|
(2,510
|
)
|
|
(4,472
|
)
|
Plan curtailment
|
—
|
|
|
(2,426
|
)
|
Benefits paid
|
(3,898
|
)
|
|
(5,179
|
)
|
Actuarial loss
|
(6,358
|
)
|
|
(31,736
|
)
|
Ending projected benefit obligation
|
356,817
|
|
|
347,624
|
|
Funded status
|
$
|
(133,917
|
)
|
|
$
|
(150,562
|
)
|
|
|
|
|
Accumulated benefit obligation
|
$
|
356,807
|
|
|
$
|
347,619
|
|
|
|
|
|
Net amount recognized in long-term liabilities in the consolidated balance sheets
|
$
|
(133,917
|
)
|
|
$
|
(150,562
|
)
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income:
|
|
|
|
Prior service credit
|
$
|
29,867
|
|
|
$
|
32,909
|
|
Net actuarial loss
|
(93,953
|
)
|
|
(106,704
|
)
|
Net amount recognized in accumulated other comprehensive income
|
$
|
(64,086
|
)
|
|
$
|
(73,795
|
)
|
|
|
(a)
|
In the first quarter of 2015, the Company recognized a prior service credit for a negative plan amendment at remeasurement of the represented employees pension plan related to the elimination of prospective future increase in pension bands that were reduced under the terms of the collective bargaining agreements.
|
|
|
|
|
|
|
|
|
|
|
Post-employment Benefit Plans
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
Fair value of plan assets:
|
|
|
|
Beginning fair value of plan assets
|
$
|
—
|
|
|
$
|
—
|
|
Employer contributions
|
5,715
|
|
|
5,597
|
|
Benefits paid
|
(5,715
|
)
|
|
(5,597
|
)
|
Ending fair value of plan assets
|
—
|
|
|
—
|
|
Projected benefit obligation:
|
|
|
|
Beginning projected benefit obligation
|
$
|
100,154
|
|
|
$
|
741,372
|
|
Service cost
|
121
|
|
|
4,541
|
|
Interest cost
|
3,927
|
|
|
7,688
|
|
Plan amendments
(a)
|
—
|
|
|
(609,619
|
)
|
Plan curtailment
|
—
|
|
|
(5,409
|
)
|
Benefits paid
|
(5,715
|
)
|
|
(5,597
|
)
|
Actuarial loss
|
(3,720
|
)
|
|
(32,822
|
)
|
Ending projected benefit obligation
|
94,767
|
|
|
100,154
|
|
Funded status
|
$
|
(94,767
|
)
|
|
$
|
(100,154
|
)
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
Current liabilities
|
$
|
(7,138
|
)
|
|
$
|
(6,112
|
)
|
Long-term liabilities
|
(87,629
|
)
|
|
(94,042
|
)
|
Net amount recognized in the consolidated balance sheets
|
$
|
(94,767
|
)
|
|
$
|
(100,154
|
)
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income:
|
|
|
|
Net prior service credit
|
$
|
41,690
|
|
|
$
|
350,322
|
|
Net actuarial loss
|
$
|
(16,508
|
)
|
|
$
|
(102,085
|
)
|
Net amount recognized in accumulated other comprehensive income
|
$
|
25,182
|
|
|
$
|
248,237
|
|
|
|
(a)
|
In the first quarter of 2015, the Company recognized a net prior service credit for a negative plan amendment at remeasurement of the post-employment benefit plan for represented employees primarily related to the elimination of the post-employment benefits for active represented employees under the terms of the collective bargaining agreements.
|
Qualified Pension Plan Assets.
The investment objective for the qualified pension plan assets is to achieve a rate of return sufficient to match or exceed the long-term growth rate of the plan liability, using investment vehicles that are consistent with the duration of each plan's liability. The investment objective also targets minimizing the risk of loss of principal.
The Company's strategy emphasizes a long-term equity orientation, global diversification and financial and operating risk controls. Both active and passive management investment approaches are employed depending on perceived market efficiencies and various other factors. Diversification targets of
65%
equity securities and
35%
fixed income securities for the represented employees plan seeks to minimize the concentration of market risk. For the qualified pension plan for the non-represented employees, the diversification target is
45%
equity securities and
55%
fixed income securities and is invested using primarily a liability driven investment strategy. The asset allocation at
December 31, 2016
for the Company's qualified pension plan assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
Non-Represented
Employees Plan
|
|
Represented
Employees Plan
|
|
Total Qualified
Pension Plans
|
|
|
|
|
|
|
Cash and cash equivalents
(a)
|
3.5
|
%
|
|
5.4
|
%
|
|
5.2
|
%
|
Equity securities
|
42.0
|
%
|
|
60.3
|
%
|
|
58.3
|
%
|
Fixed income securities
|
54.5
|
%
|
|
34.3
|
%
|
|
36.5
|
%
|
Plan asset portfolio allocation at December 31, 2016
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
(a)
|
Cash and cash equivalents at
December 31, 2016
include amounts pending settlement from the purchase or sale of equity or fixed income securities.
|
The fair values for the qualified pension plan assets by asset category at
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
11,619
|
|
|
$
|
11,619
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
129,937
|
|
|
129,937
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
81,344
|
|
|
53,206
|
|
|
28,138
|
|
|
—
|
|
Fair value of plan assets at December 31, 2016
|
$
|
222,900
|
|
|
$
|
194,762
|
|
|
$
|
28,138
|
|
|
$
|
—
|
|
The fair values for the qualified pension plan assets by asset category at
December 31, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,223
|
|
|
$
|
1,223
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
138,684
|
|
|
79,512
|
|
|
59,172
|
|
|
—
|
|
Fixed income securities
|
57,155
|
|
|
30,856
|
|
|
26,299
|
|
|
—
|
|
Fair value of plan assets at December 31, 2015
|
$
|
197,062
|
|
|
$
|
111,591
|
|
|
$
|
85,471
|
|
|
$
|
—
|
|
Cash and cash equivalents include short-term investment funds, primarily in diversified portfolios of investment grade money market instruments and are valued using quoted market prices, and thus classified within Level 1 of the fair value hierarchy, as outlined in note (10) "Fair Value".
Equity securities include direct holdings of equity securities and units held in mutual funds that invest in equity securities of domestic and international corporations in a variety of industry sectors. The direct holdings and units held in publicly traded mutual funds are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Fair values for units held in mutual funds that invest in equity securities that are not publicly traded are based on observable prices and are classified within Level 2 of the fair value hierarchy. The fair values of hedged equity funds are estimated using net asset value per share of the investments. The Company has the ability to redeem these investments at net asset value on a limited basis and thus has classified hedged equity funds within Level 3 of the fair value hierarchy. The Company liquidated its positions in all its hedged equity funds per the terms of its investment agreements with such hedge equity funds in 2015.
Fixed income securities are investments in corporate bonds, treasury securities, other debt instruments and mutual funds that invest in these instruments. These securities are expected to provide significant diversification benefits, in terms of asset volatility and pension funding volatility, in the portfolio and a stable source of income. Units held in corporate bonds, treasury securities and publicly traded mutual funds that invest in fixed income securities are valued using quoted market prices and are classified within Level 1 of the fair value hierarchy. Fair values of mutual funds that invest in fixed income securities that are not publicly traded are based on observable prices and are classified within Level 2 of the fair value hierarchy.
A reconciliation of the beginning and ending balance of plan assets that are measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31,
2015
is as follows (in thousands):
|
|
|
|
|
|
Hedged Equity Funds
|
Balance at December 31, 2014
|
$
|
351
|
|
Purchases, sales and settlements, net
|
(351
|
)
|
Balance at December 31, 2015
|
$
|
—
|
|
Net Periodic Benefit Cost.
The Company capitalizes a portion of net periodic benefit cost in conjunction with its use of internal labor resources utilized on capital projects. During the years ended
December 31, 2016
,
2015
and
2014
, the Company recognized settlement charges in the qualified pension plan that covers non-represented employees. The settlements were incurred when the cumulative amount of lump sums paid to participants in the respective years exceeded the expected service and interest cost for the respective years. Components of the net periodic benefit cost related to the Company's qualified pension plans and other post-employment benefit plans for the years ended
December 31, 2016
,
2015
and
2014
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension Plans
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
6,880
|
|
|
$
|
8,391
|
|
|
$
|
14,760
|
|
|
Interest cost
|
15,079
|
|
|
14,879
|
|
|
15,367
|
|
|
Expected return on plan assets
|
(15,363
|
)
|
|
(14,635
|
)
|
|
(13,525
|
)
|
|
Amortization of prior service credit
|
(3,042
|
)
|
|
(2,933
|
)
|
|
—
|
|
|
Amortization of actuarial loss
|
5,383
|
|
|
6,718
|
|
|
2,054
|
|
|
Plan curtailment
(a)
|
—
|
|
|
(4,207
|
)
|
|
—
|
|
|
Plan settlement
|
629
|
|
|
1,022
|
|
|
671
|
|
|
Net periodic benefit cost
|
9,566
|
|
|
9,235
|
|
|
19,327
|
|
|
Less capitalized portion
|
(599
|
)
|
|
(600
|
)
|
|
(1,184
|
)
|
|
Other post-employment benefit and pension (benefit)/expense
|
$
|
8,967
|
|
|
$
|
8,635
|
|
|
$
|
18,143
|
|
|
|
(a)
|
The Company recognized a curtailment gain as the result of a workforce reduction in July 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-employment Benefit Plans
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
121
|
|
|
$
|
4,541
|
|
|
$
|
24,969
|
|
|
Interest cost
|
3,927
|
|
|
7,688
|
|
|
29,908
|
|
|
Amortization of prior service credit
|
(308,632
|
)
|
|
(304,626
|
)
|
|
(948
|
)
|
|
Amortization of actuarial loss
|
81,857
|
|
|
113,424
|
|
|
6,654
|
|
|
Net periodic benefit cost
|
(222,727
|
)
|
|
(178,973
|
)
|
|
60,583
|
|
|
Less capitalized portion
|
—
|
|
|
—
|
|
|
(3,444
|
)
|
|
Other post-employment benefit and pension (benefit)/expense
|
$
|
(222,727
|
)
|
|
$
|
(178,973
|
)
|
|
$
|
57,139
|
|
Other Comprehensive Income.
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive income are as follows for the years ended
December 31, 2016
,
2015
and
2014
, respectively, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension Plans
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2014
|
|
|
Amounts recognized in other comprehensive income:
|
|
|
|
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
(40,049
|
)
|
|
$
|
—
|
|
|
Net (gain)/loss arising during the period
|
(6,739
|
)
|
|
(13,424
|
)
|
|
72,670
|
|
|
Amortization of prior service credit
|
3,042
|
|
|
2,933
|
|
|
—
|
|
|
Amortization of net actuarial loss
|
(5,383
|
)
|
|
(6,718
|
)
|
|
(2,725
|
)
|
|
Plan curtailment
|
—
|
|
|
1,781
|
|
|
—
|
|
|
Plan settlement
|
(629
|
)
|
|
(1,022
|
)
|
|
—
|
|
|
Total amount recognized in other comprehensive income
|
$
|
(9,709
|
)
|
|
$
|
(56,499
|
)
|
|
$
|
69,945
|
|
|
|
|
|
|
|
|
|
Estimated amounts that will be amortized from accumulated other comprehensive income in the next fiscal year:
|
|
|
|
|
|
|
Prior service credit
|
$
|
3,042
|
|
|
|
|
|
|
Net actuarial loss
|
(4,772
|
)
|
|
|
|
|
|
Total amount estimated to be amortized from accumulated other comprehensive income in the next fiscal year
|
$
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-employment Benefit Plans
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
Year Ended December 31, 2014
|
|
|
Amounts recognized in other comprehensive income:
|
|
|
|
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
(619,454
|
)
|
|
$
|
(46,277
|
)
|
|
Prior service cost
|
—
|
|
|
9,835
|
|
|
—
|
|
|
Plan curtailment
|
—
|
|
|
(5,409
|
)
|
|
—
|
|
|
Net (gain)/loss arising during the period
|
(3,720
|
)
|
|
(32,822
|
)
|
|
148,434
|
|
|
Amortization of prior service credit
|
308,632
|
|
|
304,626
|
|
|
948
|
|
|
Amortization of net actuarial loss
|
(81,857
|
)
|
|
(113,424
|
)
|
|
(6,654
|
)
|
|
Total amount recognized in other comprehensive income
|
$
|
223,055
|
|
|
$
|
(456,648
|
)
|
|
$
|
96,451
|
|
|
|
|
|
|
|
|
|
Estimated amounts that will be amortized from accumulated other comprehensive income in the next fiscal year:
|
|
|
|
|
|
|
Net prior service credit
|
$
|
1,819
|
|
|
|
|
|
|
Net actuarial loss
|
(1,083
|
)
|
|
|
|
|
|
Total amount estimated to be amortized from accumulated other comprehensive income in the next fiscal year
|
$
|
736
|
|
|
|
|
|
Assumptions
The determination of the net liability and the net periodic benefit cost recognized for the qualified pension plans and post-employment benefit plans by the Company are, in part, based on assumptions made by management. These assumptions include, among others, the discount rate applied to estimated future cash flows of the plans, the expected return on assets held by the qualified pension plans, certain demographic characteristics of the participants, such as expected retirement and mortality rates, and future inflation in healthcare costs. The Company also has an assumption regarding increases in the amount of post-employment benefit plans expenditures to be paid by the Company, based upon the past practice of such increases being provided to participants. These assumptions are reviewed at least annually for changes with the Company's independent actuaries.
Projected Benefit Obligation Assumptions.
The weighted average assumptions used in determining projected benefit obligations are as follows:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Qualified Pension Plans:
|
|
|
|
Discount rate
|
4.49
|
%
|
|
4.44
|
%
|
Rate of compensation increase
(a)
|
3.00
|
%
|
|
3.00
|
%
|
Post-employment Benefit Plans:
|
|
|
|
Discount rate
|
4.20
|
%
|
|
4.15
|
%
|
Rate of compensation increase
(a)
|
N/A
|
|
|
N/A
|
|
|
|
(a)
|
The rate of future increases in compensation assumption only applies to the plans for represented employees as plans for non-represented employees are frozen.
|
Net Periodic Benefit Cost Assumptions.
The weighted average assumptions used in determining net periodic cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Qualified Pension Plans:
|
|
|
|
|
|
Discount rate
|
4.48
|
%
|
|
4.39
|
%
|
|
4.92
|
%
|
Expected return on plan assets
(a)
|
7.34
|
%
|
|
7.31
|
%
|
|
7.66
|
%
|
Rate of compensation increase
(b)
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Post-employment Benefit Plans:
|
|
|
|
|
|
Discount rate
|
4.18
|
%
|
|
3.54
|
%
|
|
4.98
|
%
|
Rate of compensation increase
(b)
|
N/A
|
|
|
N/A
|
|
|
4.00
|
%
|
Healthcare cost trend rate
(c)
|
7.40
|
%
|
|
7.70
|
%
|
|
7.90
|
%
|
Rate that the cost trend rates ultimately declines to
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
Year that the rates reach the terminal rate
|
2037
|
|
|
2030
|
|
|
2030
|
|
|
|
(a)
|
The expected return on plan assets is the long-term rate-of-return the Company expects to earn on the plan assets. In developing the expected return on plan asset assumption, the Company evaluated historical investment performance, the plans' 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 return on plan assets is reviewed annually in conjunction with other plan assumptions and, if considered necessary, revised to reflect changes in the financial markets and the investment strategy. The investment strategy and target allocations of the qualified pension plans previously disclosed in "—Plan Assets, Obligations and Funded Status—Qualified Pension Plan Assets" herein were utilized.
|
|
|
(b)
|
The rate of future increases in compensation assumption only applies to the plans for represented employees as plans for non-represented employees are frozen.
|
|
|
(c)
|
The rate of healthcare cost trend assumption for 2016 and 2015 applies to the other post-employment benefit plan for management and existing represented retirees.
|
Post-employment Benefit Plans Sensitivity.
A
1%
change in the medical trend rate assumed for post-employment benefits at
December 31, 2016
would have the following effects (in thousands):
|
|
|
|
|
|
Increase (Decrease)
|
1% increase in the medical trend rate:
|
|
Effect on total service cost and interest cost components
|
$
|
420
|
|
Effect on benefit obligation
|
$
|
10,122
|
|
1% decrease in the medical trend rate:
|
|
Effect on total service cost and interest cost components
|
$
|
(349
|
)
|
Effect on benefit obligation
|
$
|
(8,423
|
)
|
Estimated Future Contributions and Benefit Payments
Legislation enacted in 2014 changed the method in determining the discount rate used for calculating a qualified pension plan’s unfunded liability. This act contained a pension funding stabilization provision which allows pension plan sponsors to use higher interest rate assumptions when determining funded status and funding obligations. As a result, the Company's 2016 and 2015 minimum required pension plan contributions are significantly lower than it would have been in the absence of this stabilization provision.
Estimated future employer contributions and benefit payments as of
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Qualified
Pension Plans
|
|
Post-employment Benefit Plans
|
|
|
|
|
Expected employer contributions for fiscal year 2017
|
$
|
18,431
|
|
|
$
|
7,138
|
|
Expected benefit payments for fiscal years:
|
|
|
|
2017
|
$
|
8,558
|
|
|
$
|
7,138
|
|
2018
|
9,919
|
|
|
6,686
|
|
2019
|
11,473
|
|
|
6,637
|
|
2020
|
11,846
|
|
|
6,455
|
|
2021
|
13,135
|
|
|
6,267
|
|
2022-2026
|
84,859
|
|
|
27,230
|
|
401(k) Savings Plans
As of
December 31, 2016
, the Company and its subsidiaries sponsor a voluntary 401(k) savings plans that cover all eligible Telecom Group employees and northern New England management employees, and a voluntary 401(k) savings plan that covers all eligible northern New England represented employees (collectively, "the 401(k) Plans"). Each 401(k) Plan year, the Company contributes an amount of matching contributions to the 401(k) Plans determined by the Company at its discretion for management employees and based on collective bargaining agreements for all other employees. For the 401(k) Plan years ended
December 31, 2016
,
2015
and
2014
, the Company generally matched
100%
of each employee's contribution up to
5%
of compensation. Total Company contributions to all 401(k) Plans were
$8.9 million
,
$8.8 million
and
$9.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
(12) Income Taxes
Income Tax (Expense)/Benefit
Income tax (expense)/benefit for the years ended
December 31, 2016
,
2015
,
2014
, respectively, consists of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State and local
|
(240
|
)
|
|
(203
|
)
|
|
(86
|
)
|
Total current income tax expense
|
(240
|
)
|
|
(203
|
)
|
|
(86
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
(35,179
|
)
|
|
(1,501
|
)
|
|
25,081
|
|
State and local
|
(7,430
|
)
|
|
2,761
|
|
|
4,783
|
|
Total deferred income tax (expense)/benefit
|
(42,609
|
)
|
|
1,260
|
|
|
29,864
|
|
Total income tax (expense)/benefit
|
$
|
(42,849
|
)
|
|
$
|
1,057
|
|
|
$
|
29,778
|
|
For the year ended
December 31, 2016
, the tax expense on
$146.9 million
of pre-tax net income equates to an effective tax rate of
29.2%
. The rate differs from the
35%
federal statutory rate primarily due to a tax benefit associated with a decrease in the valuation allowance offset by a tax expense related to state taxes.
For the year ended
December 31, 2015
, the tax benefit on
$89.4 million
of pre-tax net income equates to an effective tax rate of
(1.2)%
. The rate differs from the
35%
federal statutory rate primarily due to a tax benefit associated with a decrease in the valuation allowance as well as a tax benefit related to state taxes.
For the year ended
December 31, 2014
, the tax benefit on
$166.1 million
of pre-tax loss equates to an effective tax rate of
17.9%
. The rate differs from the
35%
federal statutory rate primarily due to tax expense associated with an increase in the valuation allowance offset by a tax benefit related to state taxes.
A reconciliation of the Company's statutory tax rate to its effective tax rate is presented below (in percentages):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Statutory federal income tax/(benefit) rate
(1)
|
35.0
|
%
|
|
35.0
|
%
|
|
(35.0
|
)%
|
State income tax benefit, net of federal income tax
|
3.3
|
|
|
(1.9
|
)
|
|
(2.1
|
)
|
Other, net
|
0.7
|
|
|
0.2
|
|
|
0.3
|
|
Valuation allowance (benefit)/expense
|
(9.8
|
)
|
|
(34.5
|
)
|
|
18.9
|
|
Effective income tax rate
|
29.2
|
%
|
|
(1.2
|
)%
|
|
(17.9
|
)%
|
(1) The statutory federal income tax is an expense in 2016 and 2015 due to pre-tax net income for those years and the statutory federal income tax is a benefit in
2014
due to pre-tax net losses for the year ended
December 31, 2014
.
The effective tax rate reflected in accumulated other comprehensive income for the year ended
December 31, 2016
is
23.2%
. This effective tax rate is due to a tax benefit on other net comprehensive loss partially offset by tax expense associated with an increase in the valuation allowance.
Deferred Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of
December 31, 2016
and
2015
are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Deferred tax assets:
|
|
|
|
Federal and state tax loss carryforwards
|
$
|
106,928
|
|
|
$
|
103,981
|
|
Employee benefits
|
107,152
|
|
|
115,531
|
|
Allowance for doubtful accounts
|
1,454
|
|
|
3,342
|
|
Alternative minimum tax and other state credits
|
4,299
|
|
|
5,094
|
|
Capitalized restructuring costs
|
2,326
|
|
|
2,739
|
|
Deferred revenue
|
3,636
|
|
|
4,414
|
|
Other, net
|
4,673
|
|
|
8,059
|
|
Total gross deferred tax assets
|
230,468
|
|
|
243,160
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant, and equipment
|
183,575
|
|
|
212,906
|
|
Goodwill and other intangible assets
|
26,184
|
|
|
29,588
|
|
Other, net
|
7,274
|
|
|
10,613
|
|
Total gross deferred tax liabilities
|
217,033
|
|
|
253,107
|
|
Net deferred tax assets (liabilities) before valuation allowance
|
13,435
|
|
|
(9,947
|
)
|
Valuation allowance
|
(41,451
|
)
|
|
(25,128
|
)
|
Net deferred tax liabilities
|
$
|
(28,016
|
)
|
|
$
|
(35,075
|
)
|
At
December 31, 2016
, the Company had gross federal NOL carryforwards of
$285.0 million
. The Company's remaining federal NOL carryforwards will expire from
2019
to
2036
. At
December 31, 2016
, the Company had a net, after attribute reduction, state NOL deferred tax asset of
$11.6 million
. The Company's remaining state NOL carryforwards will expire from
2017
to
2036
. The amount that expired in 2016 was negligible. At
December 31, 2016
, the Company had a negligible alternative minimum tax credit carryover and had
$4.3 million
in state credit carryovers. Telecom Group completed an initial public offering on February 8, 2005, which resulted in an "ownership change" within the meaning of the United States of America federal income tax laws addressing NOL carryforwards, alternative minimum tax credits and other similar tax attributes. The Spinco Merger and the
Company's emergence from Chapter 11 protection also resulted in ownership changes. As a result of these ownership changes, there are specific limitations on the Company's ability to use its NOL carryforwards and other tax attributes. The Company believes it can use the NOLs even with these restrictions in place.
Valuation Allowance.
At
December 31, 2016
and
2015
, the Company established a valuation allowance against its deferred tax assets of
$41.5 million
and
$25.1 million
, respectively, which consists of a
$29.2 million
and
$14.7 million
federal allowance, respectively, and a
$12.3 million
and
$10.4 million
state allowance, respectively. During
2016
, an increase in the Company's valuation allowance of
$35.5 million
was allocated to accumulated other comprehensive income in the consolidated balance sheet. During
2015
, a decrease in the Company's valuation allowance of
$195.5 million
was allocated to accumulated other comprehensive income in the consolidated balance sheet. During 2014, an increase in the Company's valuation allowance of
$58.3 million
was allocated to accumulated other comprehensive income in the consolidated balance sheet.
The following is activity in the Company's valuation allowance for the years ended
December 31, 2016
,
2015
and
2014
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of period
|
$
|
(25,128
|
)
|
|
$
|
(259,857
|
)
|
|
$
|
(166,773
|
)
|
(Increase) decrease allocated to other comprehensive income
|
(35,511
|
)
|
|
195,540
|
|
|
(58,254
|
)
|
(Increase) decrease allocated to continuing operations
|
19,188
|
|
|
39,189
|
|
|
(34,830
|
)
|
Balance, end of period
|
$
|
(41,451
|
)
|
|
$
|
(25,128
|
)
|
|
$
|
(259,857
|
)
|
Unrecognized Tax Benefits.
As of
December 31, 2016
, the Company's total unrecognized tax benefits were
$4.0 million
, which were recorded as a reduction of the Company's federal and state NOL carryforwards. The total unrecognized tax benefits that, if recognized, would affect the effective tax rate were
$3.8 million
. The Company does not expect a significant increase or decrease in its unrecognized tax benefits during the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance as of December 31, 2014
|
$
|
4,035
|
|
Additions for tax positions of prior years
|
12
|
|
Balance as of December 31, 2015
|
$
|
4,047
|
|
Additions for tax positions of prior years
|
—
|
|
Balance as of December 31, 2016
|
$
|
4,047
|
|
The Company recognizes any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2014, the Company made payments of interest and penalties in the amount of
$0.1 million
. During the years ended
December 31, 2016
and December 31,
2015
, the Company did not make any payments of interest and penalties. There was
no
thing accrued in the consolidated balance sheets for the payment of interest and penalties at
December 31, 2016
and
2015
, respectively, as the remaining unrecognized tax benefits would only serve to reduce the Company's current federal and state NOL carryforwards, if ultimately recognized.
Income Tax Returns
The Company and its eligible subsidiaries file consolidated income tax returns in the United States of America federal jurisdiction and certain consolidated, combined and separate entity tax returns, as required, with various state and local governments. Based solely on statutes of limitations, the Company would not be subject to United States of America federal, state and local, or non-United States of America income tax examinations by tax authorities for years prior to 2012. However, tax years prior to 2012 may be subject to examination by federal or state taxing authorities if the Company's NOL carryovers from those years are utilized in the future. As of
December 31, 2016
and
2015
, the Company does not have any significant jurisdictional tax audits.
(13) Accumulated Other Comprehensive Income
Components of accumulated other comprehensive income, net of income tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Accumulated other comprehensive income, net of taxes:
|
|
|
|
Fair value of interest rate swaps
|
$
|
(1,054
|
)
|
|
$
|
(2,160
|
)
|
Qualified pension and other post-employment benefit plans
|
22,590
|
|
|
186,152
|
|
Total accumulated other comprehensive income, net of taxes
|
$
|
21,536
|
|
|
$
|
183,992
|
|
Other comprehensive income for the years ended
December 31, 2016
and
2015
, respectively, includes changes in the fair value of the Company's cash flow hedges, actuarial losses and prior service credits related to the qualified pension and other post-employment benefit plans arising during the respective periods and amortization of these actuarial losses and prior service credits. For further detail of amounts recognized in other comprehensive income related to the cash flow hedges,
see
note (9) "Interest Rate Swap Agreements" herein. For further detail of amounts recognized in other comprehensive income related to the qualified pension and other post-employment benefit plans,
see
note (11) "Employee Benefit Plans—Plan Assets, Obligations and Funded Status—Other Comprehensive Income" herein.
The following table provides a reconciliation of adjustments reclassified from accumulated other comprehensive income to the consolidated statement of operations (in thousands):
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
Employee benefits:
|
|
|
Amortization of actuarial loss (.65 years to 11.47 years)
(a)
|
|
$
|
87,240
|
|
Amortization of net prior service credit (.87 years to 23.91 years)
(a)
|
|
(311,674
|
)
|
Plan settlement
(a)
|
|
629
|
|
Total employee benefits reclassified from accumulated other comprehensive income
|
|
(223,805
|
)
|
Tax benefit
(b)
|
|
52,214
|
|
Total employee benefits reclassified from accumulated other comprehensive income, net
|
|
$
|
(171,591
|
)
|
|
|
|
Interest rate swaps:
|
|
|
Interest rate swaps reclassified from accumulated other comprehensive income
(c)
|
|
$
|
2,446
|
|
Tax expense
(b)
|
|
$
|
(979
|
)
|
Total interest rate swaps reclassified from accumulated other comprehensive income, net
|
|
$
|
1,467
|
|
|
|
|
Total amounts reclassified from accumulated other comprehensive income, net
|
|
$
|
(170,124
|
)
|
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost.
See
note (11) "Employee Benefit Plans" for details.
(b)
See
note (12) "Income Taxes" for details.
(c) These accumulated other comprehensive income components are included in interest expense.
See
note (9) "Interest Rate Swap Agreements" for details.
(14) Earnings Per Share
Basic earnings per share of the Company is computed by dividing net income/(loss) by the weighted average number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, the diluted earnings per share calculation using the treasury stock method includes the impact of stock units, shares of non-vested restricted stock and shares that could be issued under outstanding stock options.
Weighted average number of common shares used for basic earnings per share excludes weighted average shares of non-vested restricted stock of
199,222
,
232,274
and
235,462
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Non-vested restricted stock is included in common shares issued and outstanding in the consolidated balance sheets.
Potentially dilutive shares exclude warrants and stock options in accordance with the treasury stock method primarily due to exercise prices exceeding the average market value. Since the Company incurred a loss for the year ended
December 31, 2014
, all potentially dilutive securities are anti-dilutive and, therefore, are excluded from the determination of diluted earnings per share.
The following table provides a reconciliation of the common shares used for basic earnings per share and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Weighted average number of common shares used for basic earnings per share
|
26,854,396
|
|
|
26,652,240
|
|
|
26,449,408
|
|
|
Effect of potential dilutive shares
|
265,041
|
|
|
320,639
|
|
|
—
|
|
|
Weighted average number of common shares and potential dilutive shares used for diluted earnings per share
|
27,119,437
|
|
|
26,972,879
|
|
|
26,449,408
|
|
|
Weighted average number of anti-dilutive shares outstanding at period-end that are excluded from the above reconciliation
|
3,916,342
|
|
|
4,141,096
|
|
|
4,463,364
|
|
|
(15) Stockholders' Deficit
At
December 31, 2016
,
37,500,000
shares of common stock were authorized and
27,074,398
shares of common stock (including shares of non-vested restricted stock) and
3,582,402
warrants, each eligible to purchase
one
share of common stock, were outstanding.
The initial exercise price applicable to the warrants is
$48.81
per share of common stock. The exercise price applicable to the warrants is subject to adjustment upon the occurrence of certain events described in the warrant agreement. The warrants may be exercised at any time on or before January 24, 2018.
(16) Stock-Based Compensation
Stock-based compensation expense recognized in the financial statements is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Amounts charged against income, before income tax benefit
|
$
|
6,291
|
|
|
$
|
6,357
|
|
|
$
|
4,274
|
|
Amount of related income tax benefit recognized in income
|
(2,516
|
)
|
|
(2,529
|
)
|
|
(1,714
|
)
|
Total net income/loss impact
|
$
|
3,775
|
|
|
$
|
3,828
|
|
|
$
|
2,560
|
|
At
December 31, 2016
, the Company had
$5.6 million
of stock-based compensation cost related to non-vested awards that will be recognized over a weighted average period of
1.75
years, all of which is related to awards granted under the Long Term Incentive Plan.
Long Term Incentive Plan
The Long Term Incentive Plan provides for grants of up to
5,674,277
shares of common stock awards, of which stock options, restricted stock awards and performance share awards and other types of equity awards can be granted. As of
December 31, 2016
, there are
1,423,409
shares available for grant under the Long Term Incentive Plan. Each stock option granted reduces the availability under the Long Term Incentive Plan by one share. Prior to the approval of the amendment and restatement of the Long Term Incentive Plan by the Company's stockholders on May 12, 2014, each restricted stock award granted reduced the availability under the Long Term Incentive Plan by
one
share and on or after May 12, 2014 each restricted stock award granted reduces the availability by
1.35
shares. Upon the exercise of each stock option or vesting of each restricted share award,
one
new share of common stock will be issued.
For the years ended
December 31, 2016
,
2015
and
2014
, the Company granted shares of restricted stock and stock options with one of the following vesting terms: (i) vest immediately; (ii) vest
100%
on the first anniversary; (iii) vest over
three
equal annual installments, with one-third vesting on the first anniversary of the grant date and one-third on the second and third anniversaries thereafter or (iv) vest
25%
immediately and
25%
on the first, second and third anniversaries thereafter. In addition,
for the year ended
December 31, 2016
, the Company granted performance share awards that vest at the end of a
three
-year performance period based upon achievement of certain market (total shareholder return) and non-market (growth revenue) performance measures.
Stock Options.
Stock options have a term of
10 years
from the date of grant; however, vested stock options will generally expire
90 days
after an employee's termination with the Company, unless the Company is in a blackout period. Stock option activity under the Long Term Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Weighted Average
Exercise Price
Per Share
|
|
Weighted Average Remaining Contractual Life (in years)
|
Outstanding at December 31, 2013
|
1,399,123
|
|
|
$
|
16.74
|
|
|
|
Granted
(a)
|
462,374
|
|
|
13.31
|
|
|
|
Exercised
|
(51,050
|
)
|
|
6.28
|
|
|
|
Forfeited
|
(2,005
|
)
|
|
4.31
|
|
|
|
Expired
|
(33,597
|
)
|
|
23.65
|
|
|
|
Outstanding at December 31, 2014
|
1,774,845
|
|
|
$
|
16.03
|
|
|
|
Granted
(a)
|
620,843
|
|
|
14.74
|
|
|
|
Exercised
(b)
|
(210,638
|
)
|
|
10.07
|
|
|
|
Forfeited
|
(83,495
|
)
|
|
13.41
|
|
|
|
Expired
|
(70,943
|
)
|
|
24.07
|
|
|
|
Outstanding at December 31, 2015
|
2,030,612
|
|
|
$
|
16.08
|
|
|
|
Granted
(a)
|
531,975
|
|
|
14.57
|
|
|
|
Exercised
(b)
|
(178,650
|
)
|
|
10.27
|
|
|
|
Forfeited
|
(96,592
|
)
|
|
14.35
|
|
|
|
Expired
|
(115,875
|
)
|
|
23.58
|
|
|
|
Outstanding at December 31, 2016
|
2,171,470
|
|
|
$
|
15.87
|
|
|
6.5
|
|
|
|
|
|
|
Exercisable at December 31, 2016
(c)
|
1,492,405
|
|
|
$
|
16.49
|
|
|
5.6
|
Vested and Expected to Vest at December 31, 2016
(d)
|
2,148,754
|
|
|
$
|
15.88
|
|
|
6.5
|
|
|
(a)
|
During the years ended
December 31, 2016
,
2015
and
2014
, the weighted average grant date fair value of stock options granted was
$4.3 million
,
$5.4 million
and
$3.2 million
, respectively. For purposes of determining compensation expense, the grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model which requires the use of various assumptions including the expected life of the option, expected dividend rate, expected volatility and risk-free interest rate. Key assumptions used for determining the fair value of stock options granted were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Expected life
(1)
|
5.5 - 6.5 years
|
|
|
5.5 - 6.5 years
|
|
|
5.5 - 6.5 years
|
|
Expected dividend
(2)
|
—
|
|
|
—
|
|
|
—
|
|
Expected volatility
(3)
|
55.1
|
%
|
|
59.6
|
%
|
|
51.0
|
%
|
Risk-free interest rate
(4)
|
1.40% - 1.76%
|
|
|
1.35% - 2.02%
|
|
|
1.63% - 2.19%
|
|
|
|
(1)
|
The
5.5
-year and
6.5
-year expected lives (estimated period of time outstanding) of stock options granted were estimated using the ‘Simplified Method' which utilizes the midpoint between the vesting date and the end of the contractual term. This method was utilized for the stock options due to the lack of historical exercise behavior of the Company's employees.
|
|
|
(2)
|
For all stock options granted during
2016
,
2015
and
2014
,
no
dividends are planned to be paid over the contractual term of the stock options resulting in the use of a
zero
expected dividend rate.
|
|
|
(3)
|
The expected volatility rate is based on the observed historical volatilities of the Company's common stock and observed historical and implied volatilities of comparable companies, which were adjusted to account for the various differences between the comparable companies and the Company.
|
|
|
(4)
|
The risk-free interest rate is specific to the date of grant and is based on the United States Treasury constant maturity market yield in effect at the time of the grant.
|
|
|
(b)
|
During the years ended
December 31, 2016
and
2015
, the total intrinsic value of stock options that were exercised was
$0.9 million
and
$1.7 million
, respectively.
|
|
|
(c)
|
Based upon a fair market value of the common stock as of December 30, 2016 of
$18.70
per share, the stock options that are exercisable have an aggregate intrinsic value (equal to the value of in-the-money stock options above their respective exercise price) of
$6.5 million
.
|
|
|
(d)
|
Based upon a fair market value of the common stock as of December 30, 2016 of
$18.70
per share, the stock options that have vested and are expected to vest have an aggregate intrinsic value (equal to the value of in-the-money stock options above their respective exercise price) of
$9.2 million
.
|
Based upon the respective grant fair value, the aggregate fair value of stock options that vested during the years ended
December 31, 2016
,
2015
, and
2014
was
$3.2 million
,
$2.7 million
, and
$2.9 million
, respectively.
Time-Based Restricted Stock Awards.
Restricted stock award activity under the Long Term Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
Awards
Outstanding
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
Non-vested at December 31, 2013
|
264,655
|
|
|
$
|
12.64
|
|
Granted
(a)
|
216,586
|
|
|
13.21
|
|
Vested
(b)
|
(249,205
|
)
|
|
13.58
|
|
Non-vested at December 31, 2014
|
232,036
|
|
|
$
|
12.15
|
|
Granted
(a)
|
161,011
|
|
|
15.06
|
|
Vested
(b)
|
(156,445
|
)
|
|
12.52
|
|
Forfeited
|
(10,550
|
)
|
|
$
|
12.21
|
|
Non-vested at December 31, 2015
|
226,052
|
|
|
$
|
13.97
|
|
Granted
(a)
|
175,735
|
|
|
14.68
|
|
Vested
(b)
|
(158,469
|
)
|
|
13.89
|
|
Forfeited
|
(47,350
|
)
|
|
14.42
|
|
Non-vested at December 31, 2016
|
195,968
|
|
|
$
|
14.56
|
|
|
|
(a)
|
The grant date fair value per share of the restricted stock awards under the Long Term Incentive Plan was calculated as the fair market value per share of the common stock on the date of grant. During the years ended
December 31, 2016
,
2015
and
2014
, the weighted average grant date fair value of restricted stock awards granted was
$2.6 million
,
$2.4 million
, and
$2.9 million
, respectively.
|
|
|
(b)
|
Based upon the respective grant date fair value, the aggregate fair value of restricted stock which vested during the years ended
December 31, 2016
,
2015
and
2014
was
$2.2 million
,
$2.0 million
and
$3.4 million
, respectively.
|
Performance Share Awards.
Performance share awards activity under the Long Term Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
Awards
Outstanding
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
Non-vested at December 31, 2014
|
—
|
|
|
$
|
—
|
|
Granted
(a)
|
149,500
|
|
|
12.87
|
|
Forfeited
|
(18,443
|
)
|
|
12.82
|
|
Non-vested at December 31, 2015
|
131,057
|
|
|
$
|
12.87
|
|
Granted
(a)
|
126,000
|
|
|
11.88
|
|
Forfeited
|
(38,278
|
)
|
|
12.38
|
|
Non-vested at December 31, 2016
|
218,779
|
|
|
$
|
12.39
|
|
|
|
(a)
|
During the years ended
December 31, 2016
and
2015
, the weighted average grant date fair value of performance share awards granted was
$1.5 million
and
$1.9 million
, respectively. The grant date fair value of the non-market portion of the performance share awards was calculated as the fair market value of the common stock on the date of grant. For
|
purposes of determining compensation expense for the market portion of the performance share awards, the grant date fair value was estimated using the Monte Carlo valuation model.
(17) Business Concentrations
Geographic
As of
December 31, 2016
,
83%
of the Company's residential voice lines were located in Maine, New Hampshire and Vermont. As a result of this geographic concentration, the Company's financial results will depend significantly upon economic conditions in these markets. A deterioration or recession in any of these markets could result in a decrease in demand for the Company's services and a resulting loss of access line equivalents which could have a material adverse effect on the Company's business, financial condition, results of operations, liquidity and/or the market price of the Company's outstanding securities.
In addition, if state regulators in Maine, New Hampshire or Vermont were to take an action that is adverse to the Company's operations in those states, the Company could suffer greater harm from that action by state regulators than it would from action in other states because of the concentration of operations in those states.
Labor
As of
December 31, 2016
, the Company employed approximately
2,500
employees, approximately
1,500
, or
60%
, of whom were covered by
13
collective bargaining agreements.
(18) Commitments and Contingencies
(a) Leases
The Company currently leases real estate and network equipment under capital and operating leases expiring through the year ending 2039. The Company accounts for leases using the straight-line method, which amortizes contracted total payments evenly over the lease term.
Future minimum lease payments under capital leases and non-cancelable operating leases as of
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
Operating Leases
|
Year ending December 31:
|
|
|
|
2017
|
$
|
1,279
|
|
|
$
|
6,644
|
|
2018
|
921
|
|
|
4,607
|
|
2019
|
554
|
|
|
2,912
|
|
2020
|
224
|
|
|
1,895
|
|
2021
|
56
|
|
|
962
|
|
Thereafter
|
—
|
|
|
739
|
|
Total minimum lease payments
|
$
|
3,034
|
|
|
$
|
17,759
|
|
Less: interest and executory cost
|
(496
|
)
|
|
|
Present value of minimum lease payments
|
2,538
|
|
|
|
Less: current installments
|
(1,227
|
)
|
|
|
Long-term obligations at December 31, 2016
|
$
|
1,311
|
|
|
|
Total rent expense primarily for real estate, vehicles and office equipment was
$9.4 million
,
$9.4 million
and
$9.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
The Company does not have any leases with contingent rental payments or any leases with contingency renewal, purchase options, or escalation clauses.
(b) Legal Proceedings
From time to time, the Company is party to various other legal and regulatory proceedings in the ordinary course of business. The Company is a defendant in approximately
16
lawsuits filed by
two
long distance communications companies, who as plaintiffs have collectively filed over
60
lawsuits arising from switched access charges for calls originating and terminating within the same wireless major trading area. These cases have all been consolidated and transferred to federal district court (the "Court") in Dallas,
Texas. The defendants filed joint motions to dismiss these actions. On November 17, 2015, the Court granted the defendants' motions dismissing the plaintiffs' federal law based claims with prejudice. The state law based claims were allowed to be amended and refiled. The Court denied the plaintiffs' request for an immediate appeal of the dismissal of the federal law based claims. Counterclaims against the plaintiffs for the failure to pay these access charges have been filed by the Company. The Company and some of the co-defendants have filed lawsuits against a third long distance communications company for the failure to pay this same type of access charge. These additional lawsuits have also been consolidated and transferred to the Court. Additional motions have been filed by the plaintiffs and defendants, which are still pending. At this time, an estimate of the impact, if any, of these claims cannot be made.
See
also "Class Action Complaint" under note (20) "Subsequent Events" herein.
While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm the Company’s financial position, cash flows, or overall trends in results of operations, legal proceedings are inherently uncertain, and unfavorable rulings could, individually or in aggregate, have a material adverse effect on the Company’s business, financial condition, or operating results.
(c) Restricted Cash
As of
December 31, 2016
and
2015
, the Company had
$0.7 million
and
$0.7 million
, respectively, of restricted cash, which is restricted for regulatory purposes and is included in long-term restricted cash on the consolidated balance sheets.
(19) Quarterly Financial Information (Unaudited)
The quarterly information presented below represents selected quarterly financial results for the quarters ended March 31, June 30, September 30, and December 31,
2016
and
2015
(in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
206,816
|
|
|
$
|
206,557
|
|
|
$
|
207,141
|
|
|
$
|
203,929
|
|
Other post-employment benefit and pension (benefit)/expense
(1)
|
(53,228
|
)
|
|
(53,486
|
)
|
|
(67,428
|
)
|
|
(39,618
|
)
|
Net income
(2)
|
18,568
|
|
|
29,315
|
|
|
40,207
|
|
|
16,005
|
|
Income/(loss) per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.69
|
|
|
$
|
1.09
|
|
|
$
|
1.50
|
|
|
$
|
0.60
|
|
Diluted
|
$
|
0.68
|
|
|
$
|
1.08
|
|
|
$
|
1.48
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
213,974
|
|
|
$
|
214,098
|
|
|
$
|
221,569
|
|
|
$
|
209,824
|
|
Other post-employment benefit and pension (benefit)/expense
(1)
|
(6,898
|
)
|
|
(52,460
|
)
|
|
(57,568
|
)
|
|
(53,412
|
)
|
Net income/(loss)
(2)
|
(45,213
|
)
|
|
40,265
|
|
|
53,054
|
|
|
42,310
|
|
Loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(1.70
|
)
|
|
$
|
1.51
|
|
|
$
|
1.99
|
|
|
$
|
1.59
|
|
Diluted
|
$
|
(1.70
|
)
|
|
$
|
1.49
|
|
|
$
|
1.96
|
|
|
$
|
1.56
|
|
(1) Presented for comparative purposes.
(2) The Company generated net income beginning in the second quarter of 2015 largely due to the remeasurement of the employee benefit plans in the first quarter of 2015 as described further in note (11) "Employee Benefit Plans."
(20) Subsequent Events
Class Action Complaint
On February 7, 2017, an alleged class action complaint was filed by a purported stockholder of FairPoint Communications in the United States District Court for the Western District of North Carolina (Case No. 3:17-cv-51) against FairPoint Communications, its directors, Consolidated and Merger Sub. Among other things, the complaint alleges that the disclosures in the Form S-4 Registration Statement filed by Consolidated with the Securities and Exchange Commission on January 26, 2017 in connection with the Merger are materially incomplete and misleading in violation of Sections 14(a) and 20(a) of the Exchange Act. The plaintiff seeks to enjoin the defendants from consummating the Merger on the agreed-upon terms or alternatively, to rescind the Merger in the event the defendants consummate the Merger, in addition to damages and attorney fees and costs. FairPoint Communications and the other defendants have not yet filed an answer or other responsive pleading to the complaint.