10-Q 1 cnsl-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

or

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-51446

Graphic

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

02-0636095

(State or other jurisdiction

(IRS Employer

of incorporation or organization)

Identification No.)

2116 South 17th Street, MattoonIllinois

61938

(Address of principal executive offices)

(Zip Code)

  (217) 235-3311   

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock - $0.01 par value

CNSL

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ____

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes X No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     Accelerated filer

Non-accelerated filer___ Smaller reporting company ____ Emerging growth company ____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

On May 2, 2022, the registrant had 115,395,668 shares of Common Stock outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands except per share amounts)

Quarter Ended

March 31,

    

2022

    

2021

 

Net revenues

$

300,278

$

324,766

Operating expense:

Cost of services and products (exclusive of depreciation and amortization)

 

135,895

 

143,979

Selling, general and administrative expenses

 

73,285

 

66,850

Loss on impairment of assets held for sale

 

126,490

 

Depreciation and amortization

 

72,350

 

75,611

Income (loss) from operations

 

(107,742)

 

38,326

Other income (expense):

Interest expense, net of interest income

 

(29,515)

 

(48,415)

Loss on extinguishment of debt

 

 

(11,980)

Investment income

 

8,250

 

9,556

Change in fair value of contingent payment rights

(57,588)

Other, net

 

3,155

 

2,718

Loss before income taxes

 

(125,852)

 

(67,383)

Income tax benefit

 

(10,303)

 

(5,300)

Net loss

 

(115,549)

 

(62,083)

Less: dividends on Series A preferred stock

9,598

Less: net income attributable to noncontrolling interest

 

115

 

16

Net loss attributable to common shareholders

$

(125,262)

$

(62,099)

Net loss per basic and diluted common shares attributable to common shareholders

$

(1.12)

$

(0.80)

See accompanying notes

1

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; Amounts in thousands)

Quarter Ended

March 31,

    

2022

    

2021

 

Net loss

$

(115,549)

$

(62,083)

Pension and post-retirement obligations:

Amortization of actuarial loss (gain) and prior service cost (credit) to earnings, net of tax

 

(52)

 

162

Derivative instruments designated as cash flow hedges:

Change in fair value of derivatives, net of tax

 

4,638

 

313

Reclassification of realized loss to earnings, net of tax

 

1,339

 

3,436

Comprehensive loss

 

(109,624)

 

(58,172)

Less: comprehensive income attributable to noncontrolling interest

 

115

 

16

Total comprehensive loss attributable to common shareholders

$

(109,739)

$

(58,188)

See accompanying notes

2

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands except share and per share amounts)

March 31,

December 31,

    

2022

    

2021

 

ASSETS

Current assets:

Cash and cash equivalents

$

74,171

$

99,635

Short-term investments

 

85,767

 

110,801

Accounts receivable, net of allowance for credit losses

 

118,596

 

133,362

Income tax receivable

 

2,733

 

1,134

Prepaid expenses and other current assets

 

61,319

 

56,831

Assets held for sale

 

94,368

 

26,052

Total current assets

 

436,954

 

427,815

Property, plant and equipment, net

 

1,983,819

 

2,019,444

Investments

 

109,034

 

109,578

Goodwill

 

929,570

 

1,013,243

Customer relationships, net

 

66,226

 

73,939

Other intangible assets

 

10,557

 

10,557

Other assets

 

59,288

 

58,116

Total assets

$

3,595,448

$

3,712,692

LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

39,807

$

40,953

Advance billings and customer deposits

 

53,002

 

53,028

Accrued compensation

 

63,951

 

68,272

Accrued interest

35,020

17,819

Accrued expense

 

97,243

 

97,417

Current portion of long-term debt and finance lease obligations

 

8,379

 

7,959

Liabilities held for sale

 

5,021

 

97

Total current liabilities

 

302,423

 

285,545

Long-term debt and finance lease obligations

 

2,120,930

 

2,118,853

Deferred income taxes

 

185,985

 

194,458

Pension and other post-retirement obligations

 

205,350

 

214,671

Other long-term liabilities

 

51,923

 

62,789

Total liabilities

 

2,866,611

 

2,876,316

Commitments and contingencies (Note 15)

Series A preferred stock, par value $0.01 per share; 10,000,000 shares authorized, 436,943 and 434,266 shares outstanding as of March 31, 2022 and December 31, 2021, respectively; liquidation preference of $446,541 and $436,943 as of March 31, 2022 and December 31, 2021, respectively

298,174

288,576

Shareholders’ equity:

Common stock, par value $0.01 per share; 150,000,000 shares authorized, 115,423,869 and 113,647,364 shares outstanding as of March 31, 2022 and December 31, 2021, respectively

 

1,154

 

1,137

Additional paid-in capital

 

733,216

 

740,746

Accumulated deficit

 

(257,263)

 

(141,599)

Accumulated other comprehensive loss, net

 

(53,646)

 

(59,571)

Noncontrolling interest

 

7,202

 

7,087

Total shareholders’ equity

 

430,663

 

547,800

Total liabilities, mezzanine equity and shareholders’ equity

$

3,595,448

    

$

3,712,692

See accompanying notes

3

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited; Amounts in thousands)

Mezzanine Equity

Shareholders' Equity

Accumulated

 

Additional 

Retained 

Other 

Non-

Preferred Stock

Common Stock

Paid-in 

Earnings

Comprehensive

controlling 

 

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

(Deficit)

  

Loss, net

  

Interest

  

Total

 

Balance at December 31, 2020

 

$

79,228

$

792

$

525,673

$

(34,514)

$

(109,418)

$

6,695

$

389,228

Shares issued under employee plan, net of forfeitures

 

755

8

 

(8)

 

 

 

Non-cash, share-based compensation

 

 

 

 

1,450

 

 

 

1,450

Other comprehensive income (loss)

 

 

 

 

 

 

3,911

 

3,911

Net income (loss)

 

 

 

 

 

(62,099)

 

16

 

(62,083)

Balance at March 31, 2021

 

$

79,983

$

800

$

527,115

$

(96,613)

$

(105,507)

$

6,711

$

332,506

Balance at December 31, 2021

 

434

$

288,576

113,647

$

1,137

$

740,746

$

(141,599)

$

(59,571)

$

7,087

$

547,800

Shares issued under employee plan, net of forfeitures

 

1,792

17

 

(17)

 

 

 

Series A preferred stock issued

3

Dividends on Series A preferred stock accrued

 

9,598

(9,598)

 

(9,598)

Non-cash, share-based compensation

 

 

 

 

2,199

 

 

 

2,199

Purchase and retirement of common stock

 

(16)

 

 

(114)

 

 

 

(114)

Other comprehensive income (loss)

 

 

 

 

 

 

5,925

 

5,925

Net income (loss)

 

 

 

 

 

(115,664)

 

115

 

(115,549)

Balance at March 31, 2022

 

437

$

298,174

115,424

$

1,154

$

733,216

$

(257,263)

$

(53,646)

$

7,202

$

430,663

See accompanying notes

4

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; Amounts in thousands)

Three Months Ended March 31,

    

2022

    

2021

 

Cash flows from operating activities:

Net loss

$

(115,549)

$

(62,083)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

 

72,350

 

75,611

Cash distributions from wireless partnerships in excess of current earnings

 

153

 

11

Pension and post-retirement contributions in excess of expense

(9,342)

(8,770)

Stock-based compensation expense

 

2,199

 

1,450

Amortization of deferred financing costs and discounts

 

1,802

 

4,283

Noncash interest expense on convertible security interest

7,875

Loss on extinguishment of debt

 

 

11,980

Loss on change in fair value of contingent payment rights

57,588

Loss on impairment of assets held for sale

126,490

Other, net

 

(189)

 

(368)

Changes in operating assets and liabilities:

Accounts receivable, net

 

12,035

 

11,969

Income tax receivable

 

(12,159)

 

(5,305)

Prepaid expenses and other assets

 

(8,398)

 

(3,992)

Accounts payable

 

(1,893)

 

1,891

Accrued expenses and other liabilities

 

14,061

 

6,350

Net cash provided by operating activities

81,560

98,490

Cash flows from investing activities:

Purchases of property, plant and equipment, net

 

(156,480)

 

(75,960)

Purchase of investments

 

(39,959)

 

Proceeds from sale and maturity of investments

65,754

1,198

Proceeds from sale of assets

 

74

 

24

Proceeds from business dispositions

 

26,042

 

Net cash used in investing activities

 

(104,569)

 

(74,738)

Cash flows from financing activities:

Proceeds from bond offering

 

 

400,000

Proceeds from issuance of long-term debt

 

 

150,000

Payment of finance lease obligations

 

(2,341)

 

(1,598)

Payment on long-term debt

 

 

(397,000)

Payment of financing costs

 

 

(5,573)

Share repurchases for minimum tax withholding

 

(114)

 

Net cash provided by (used in) financing activities

 

(2,455)

 

145,829

Change in cash and cash equivalents

 

(25,464)

 

169,581

Cash and cash equivalents at beginning of period

 

99,635

 

155,561

Cash and cash equivalents at end of period

$

74,171

$

325,142

See accompanying notes

5

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Accounting

Consolidated Communications Holdings, Inc. (the “Company,” “we,” “our” or “us”) is a holding company with operating subsidiaries (collectively “Consolidated”) that provide communication solutions to consumer, commercial and carrier customers across a 22-state service area.

Leveraging our advanced fiber network spanning approximately 54,200 fiber route miles, we offer residential high-speed Internet, video, phone and home security services as well as a comprehensive business product suite including: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services.  

In the opinion of management, the accompanying unaudited condensed consolidated balance sheets and related condensed consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods.  Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the date of issuance.  Management believes that the disclosures made are adequate to make the information presented not misleading.  Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the accompanying notes to the financial statements (“Notes”) thereto included in our 2021 Annual Report on Form 10-K filed with the SEC.

Recent Developments

Searchlight Investment

On December 7, 2021, we closed on the final stage of the investment agreement (the “Investment Agreement”) entered into on September 13, 2020 with an affiliate of Searchlight Capital Partners, L.P. (“Searchlight”).  In connection with the Investment Agreement, affiliates of Searchlight have invested an aggregate of $425.0 million in the Company and hold a combination of Series A perpetual preferred stock and approximately 34% of the Company’s outstanding common stock as of March 31, 2022. For a more complete discussion of the transaction, refer to Note 4. With the strategic investment from Searchlight, we intend to enhance our fiber infrastructure and accelerate the investment in our network, which will include the upgrade over five years of approximately 1.6 million passings across select service areas to enable multi-Gig capable services to these homes and small businesses. Our fiber build plan includes the upgrade of approximately 400,000 homes and small businesses in 2022.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable (“AR”) consists primarily of amounts due to the Company from normal business activities.  We maintain an allowance for credit losses (“ACL”) based on our historical loss experience, current conditions and forecasted changes including but not limited to changes related to the economy, our industry and business.  Uncollectible accounts are written-off (removed from AR and charged against the ACL) when internal collection efforts have been unsuccessful.  Subsequently, if payment is received from the customer, the recovery is credited to the ACL.

6

The following table summarizes the activity in ACL for the quarters ended March 31, 2022 and 2021:

Three Months Ended

March 31,

(In thousands)

    

2022

    

2021

    

Balance at beginning of year

$

9,961

$

9,136

Provision charged to expense

 

2,085

2,246

Write-offs, less recoveries

 

(1,927)

(1,760)

Balance at end of year

$

10,119

$

9,622

Recent Accounting Pronouncements

Effective January 1, 2022, we adopted the Accounting Standards Update No. 2021-10 (“ASU 2021-10”), Disclosures by Business Entities about Government Assistance. ASU 2021-10 requires disclosure by business entities of the types of government assistance received, the method of accounting for such assistance and the effects of the assistance on its financial statements. The adoption of this guidance did not have a material impact on our related disclosures.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04 (“ASU 2020-04”), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU No. 2021-01 (“ASU 2021-01”), Reference Rate Reform (Topic 848): Scope. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2020-04 and ASU 2021-01 are both elective and are effective upon issuance through December 31, 2022. We are currently evaluating the impact these updates will have on our condensed consolidated financial statements and related disclosures.

2.  REVENUE

Nature of Contracts with Customers

Our revenue contracts with customers may include a promise or promises to deliver goods such as equipment and/or services such as broadband, video or voice services.  Promised goods and services are considered distinct as the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer and the Company’s promise to transfer a good or service to the customer is separately identifiable from other promises in the contract.  The Company accounts for goods and services as separate performance obligations.  Each service is considered a single performance obligation as it is providing a series of distinct services that are substantially the same and have the same pattern of transfer.

The transaction price is determined at contract inception and reflects the amount of consideration to which we expect to be entitled in exchange for transferring a good or service to the customer.  This amount is generally equal to the market price of the goods and/or services promised in the contract and may include promotional discounts.  The transaction price excludes amounts collected on behalf of third parties such as sales taxes and regulatory fees. Conversely, nonrefundable upfront fees, such as service activation and set-up fees, are included in the transaction price.  In determining the transaction price, we consider our enforceable rights and obligations within the contract. We do not consider the possibility of a contract being cancelled, renewed or modified.

The transaction price is allocated to each performance obligation based on the standalone selling price of the good or service, net of the related discount, as applicable.

Revenue is recognized when or as performance obligations are satisfied by transferring control of the good or service to the customer.

7

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the quarters ended March 31, 2022 and 2021:

Quarter Ended

March 31,

(In thousands)

    

2022

    

2021

 

Operating Revenues

Consumer:

 

 

Broadband (Data and VoIP)

$

65,911

$

65,755

Voice services

 

37,452

 

40,420

Video services

14,366

16,781

117,729

122,956

Commercial:

 

 

Data services (includes VoIP)

57,895

57,071

Voice services

 

36,339

 

39,753

Other

11,560

9,328

105,794

106,152

Carrier:

Data and transport services

33,485

33,277

Voice services

3,852

4,526

Other

391

391

37,728

38,194

Subsidies

6,583

17,339

Network access

26,213

31,603

Other products and services

6,231

8,522

Total operating revenues

$

300,278

$

324,766

Contract Assets and Liabilities

The following table provides information about receivables, contract assets and contract liabilities from our revenue contracts with customers:

March 31,

(In thousands)

    

2022

    

2021

Accounts receivable, net

$

118,596

$

125,677

Contract assets

 

24,280

 

21,016

Contract liabilities

 

61,615

 

55,646

Contract assets include costs that are incremental to the acquisition of a contract.  Incremental costs are those that result directly from obtaining a contract or costs that would not have been incurred if the contract had not been obtained, which primarily relate to sales commissions. These costs are deferred and amortized over the expected customer life.  We determined that the expected customer life is the expected period of benefit as the commission on the renewal contract is not commensurate with the commission on the initial contract. During the quarters ended March 31, 2022 and 2021, the Company recognized expense of $3.1 million and $2.6 million, respectively, related to deferred contract acquisition costs.  

Contract liabilities include deferred revenues related to advanced payments for services and nonrefundable, upfront service activation and set-up fees, which are generally deferred and amortized over the expected customer life as the option to renew without paying an upfront fee provides the customer with a material right.  During the quarters ended March 31, 2022 and 2021, the Company recognized previously deferred revenues of $121.6 million and $116.2 million, respectively.  

A receivable is recognized in the period the Company provides goods or services when the Company’s right to consideration is unconditional.  Payment terms on invoiced amounts are generally 30 to 60 days.

8

Performance Obligations

ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), requires that the Company disclose the aggregate amount of the transaction price that is allocated to remaining performance obligations that are unsatisfied as of March 31, 2022.  The guidance provides certain practical expedients that limit this requirement.  The service revenue contracts of the Company meet the following practical expedients provided by ASC 606:

1.The performance obligation is part of a contract that has an original expected duration of one year or less.
2.Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18.

The Company has elected these practical expedients.  Performance obligations related to our service revenue contracts are generally satisfied over time.  For services transferred over time, revenue is recognized based on amounts invoiced to the customer as the Company has concluded that the invoice amount directly corresponds with the value of services provided to the customer.  Management considers this a faithful depiction of the transfer of control as services are substantially the same and have the same pattern of transfer over the life of the contract.  As such, revenue related to unsatisfied performance obligations that will be billed in future periods has not been disclosed.

3.  EARNINGS (LOSS) PER SHARE

Basic and diluted earnings (loss) per common share (“EPS”) are computed using the two-class method, which is an earnings allocation method that determines EPS for each class of common stock and participating securities considering dividends declared and participation rights in undistributed earnings.  Common stock related to certain of the Company’s restricted stock awards are considered participating securities because holders are entitled to receive non-forfeitable dividends, if declared, during the vesting term.  

The potentially dilutive impact of the Company’s restricted stock awards is determined using the treasury stock method.  Under the treasury stock method, if the average market price during the period exceeds the exercise price, these instruments are treated as if they had been exercised with the proceeds of exercise used to repurchase common stock at the average market price during the period.  Any incremental difference between the assumed number of shares issued and repurchased is included in the diluted share computation.

Diluted EPS includes securities that could potentially dilute basic EPS during a reporting period.  Dilutive securities are not included in the computation of loss per share when a company reports a net loss from continuing operations as the impact would be anti-dilutive.

9

The computation of basic and diluted EPS attributable to common shareholders computed using the two-class method is as follows:

Quarter Ended

March 31,

(In thousands, except per share amounts)

    

2022

    

2021

 

Net loss

$

(115,549)

$

(62,083)

Less: dividends on Series A preferred stock

9,598

Less: net income attributable to noncontrolling interest

 

115

 

16

Loss attributable to common shareholders before allocation of earnings to participating securities

 

(125,262)

 

(62,099)

Less: earnings allocated to participating securities

 

 

Net loss attributable to common shareholders, after earnings allocated to participating securities

$

(125,262)

$

(62,099)

Weighted-average number of common shares outstanding

 

111,691

 

78,029

Net loss per common share attributable to common shareholders - basic and diluted

$

(1.12)

$

(0.80)

Diluted EPS attributable to common shareholders for the quarter ended March 31, 2022 excludes 2.4 million potential common shares related to our share-based compensation plan because the inclusion of the potential common shares would have an antidilutive effect.  Diluted EPS attributable to common shareholders for the quarter ended March 31, 2021 excludes 19.4 million potential common shares that could be issued under our share-based compensation plan and the contingent payment right (“CPR”) issued to Searchlight on October 2, 2020, as described in Note 4.

4.  SEARCHLIGHT INVESTMENT

In connection with the Investment Agreement entered into on September 13, 2020, affiliates of Searchlight committed to invest up to an aggregate of $425.0 million in the Company. The investment commitment was structured in two stages.  In the first stage of the transaction, which was completed on October 2, 2020, Searchlight invested $350.0 million in the Company in exchange for 6,352,842 shares, or approximately 8%, of the Company’s common stock and was issued a CPR that was convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 17,870,012 shares, or 16.9%, of the Company’s common stock.  In addition, Searchlight received the right to an unsecured subordinated note with an aggregate principal amount of approximately $395.5 million (the “Note”), which was convertible into shares of a new series of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the Note plus accrued interest as of the date of conversion.

On July 15, 2021, the Company received all required state public utility commission regulatory approvals necessary for the conversion of the CPR into 16.9% additional shares of the Company’s common stock. As a result, the CPR was converted into 17,870,012 shares of common stock, which were issued to Searchlight on July 16, 2021.

In the second stage of the transaction, which was completed on December 7, 2021 following the receipt of Federal Communications Commission (“FCC”) and certain regulatory approvals and the satisfaction of certain other customary closing conditions, Searchlight invested an additional $75.0 million and was issued the Note. On December 7, 2021, Searchlight elected to convert the Note into 434,266 shares of Series A Perpetual Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”). In addition, the CPR converted into an additional 15,115,899 shares, or an additional 10.1%, of the Company’s common stock.  As of March 31, 2022 and December 31, 2021, the total shares of common stock issued to Searchlight represent approximately 34% and 35%, respectively, of the Company’s outstanding common stock.

Prior to conversion, the CPR was reported at its estimated fair value within long-term liabilities in the consolidated balance sheets. Subsequent changes in fair value were reflected in earnings within other income and expense in the condensed consolidated statements of operations. During the quarter ended March 31, 2021, we recognized a loss of $57.6 million on the change in the fair value of the CPR.

10

The Note bore interest at 9.0% per annum from the date of the closing of the first stage of the transaction and was payable semi-annually in arrears on April 1 and October 1 of each year. The term of the Note was 10 years and was due on October 1, 2029. The Note’s unamortized discount and issuance costs were being amortized over the contractual term of the Note using the effective interest method. The Note included a paid-in-kind (“PIK”) option for a five-year period beginning as of October 2, 2020.  During the year ended December 31, 2021, the Company elected the PIK option and accrued interest of $38.8 million was added to the principal balance of the Note. On December 7, 2021, Searchlight exercised its option to convert the Note and the net carrying value of the Note of $285.9 million, net of unamortized discount and issuance costs of $139.7 million and $8.7 million, respectively, was converted into 434,266 shares of Series A Preferred Stock at a liquidation preference of $1,000 per share.  Dividends on the Series A Preferred Stock accrue daily on the liquidation preference at a rate of 9.0% per annum, payable semi-annually in arrears. See Note 11 for more information on the terms of the Series A Preferred Stock.

5.  DIVESTITURES

On September 22, 2021, we entered into a definitive agreement to sell substantially all of the assets of our non-core, rural ILEC business located in Ohio, Consolidated Communications of Ohio Company (“CCOC”). CCOC provides telecommunications and data services to residential and business customers in 11 rural communities in Ohio and surrounding areas and included approximately 3,800 access lines and 3,900 data connections.  The sale was completed on January 31, 2022 for approximately $26.0 million in cash, subject to a customary working capital adjustment. The asset sale aligns with our strategic asset review and focus on our core broadband regions.

The major classes of assets and liabilities sold consisted of the following:

(In thousands)

    

Current assets

$

106

Property, plant and equipment

9,584

Goodwill

16,327

Total assets

$

26,017

Current liabilities

$

102

Other long-term liabilities

6

Total liabilities

$

108

In September 2021, in connection with the expected sale, the carrying value of the net assets were reduced to their estimated fair value and we recognized an impairment loss of $5.7 million during the quarter ended September 30, 2021. During the quarter ended March 31, 2022, we recognized an additional loss on the sale of $0.5 million, which is included in selling, general and administrative expense in the condensed consolidated statement of operations as a result of changes in estimated selling costs.    

On March 2, 2022, we entered into a definitive agreement to sell substantially all the assets of our business located in the Kansas City market (the “Kansas City operations”) for estimated cash consideration of approximately $90.4 million, subject to certain working capital and other purchase price adjustments. The Kansas City operations provide data, voice and video services to customers within the Kansas City metropolitan area and surrounding counties and includes approximately 19,000 consumer customers and 1,900 commercial customers. The transaction is expected to close in the second half of 2022 and is subject to the receipt of all customary regulatory approvals and the satisfaction of other closing conditions.

11

At March 31, 2022, the major classes of assets and liabilities to be sold were classified as held for sale in the condensed consolidated balance sheet and consisted of the following:

(In thousands)

    

Current assets

$

3,016

Property, plant and equipment

132,400

Goodwill

83,673

Other long-term assets

1,769

Impairment to net realizable value

(126,490)

Total assets

$

94,368

Current liabilities

$

3,627

Other long-term liabilities

1,394

Total liabilities

$

5,021

In connection with the classification as assets held for sale, the carrying value of the net assets were reduced to their estimated fair value of approximately $89.3 million, which was determined based on the estimated selling price less costs to sell and were classified as Level 2 within the fair value hierarchy. As a result, we recognized an impairment loss of $126.5 million during the quarter ended March 31, 2022.  The actual amount of net proceeds received from this divestiture could vary substantially from our current estimates, if we were to experience a delay in completing the transaction or if there are changes in other assumptions that impact our estimates.

6.  INVESTMENTS

Our investments are as follows:

March 31,

December 31,

(In thousands)

    

2022

    

2021

 

Short-term investments:

Held-to-maturity debt securities

$

85,767

$

110,801

Long-term investments:

Cash surrender value of life insurance policies

$

2,884

$

2,659

Investments at cost:

GTE Mobilnet of South Texas Limited Partnership (2.34% interest)

 

21,450

 

21,450

Pittsburgh SMSA Limited Partnership (3.60% interest)

 

22,950

 

22,950

CoBank, ACB Stock

 

7,251

 

7,867

Other

 

273

 

273

Equity method investments:

GTE Mobilnet of Texas RSA #17 Limited Partnership (20.51% interest)

 

19,833

 

19,648

Pennsylvania RSA 6(I) Limited Partnership (16.67% interest)

 

6,819

 

7,303

Pennsylvania RSA 6(II) Limited Partnership (23.67% interest)

 

27,574

 

27,428

Totals

$

109,034

$

109,578

Held-to-Maturity Debt Securities

Investments in debt securities that we have the positive intent and ability to hold until maturity are classified as held-to-maturity. We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments with original maturities of more than three months and less than one year are classified as short-term investments.  Held-to maturity debt securities are recorded at amortized cost, which approximates fair value, and realized gains or losses are recognized in earnings. Our held-to-maturity debt securities consist of investments in commercial paper and certificate of deposits. At March 31, 2022, we had $40.0 million of investments in commercial paper and $45.8 million of investments in certificate of deposits included in short-term investments. At December 31, 2021, we had $20.0 million

12

of investments in commercial paper included in cash and cash equivalents and $40.0 million of investments in commercial paper and $70.8 million of investments in certificate of deposits included in short-term investments. The investments have original maturities of less than one year. As of March 31, 2022 and December 31, 2021, the amortized cost of the investments approximated their fair value and the gross unrecognized gains and losses were not material.    

Investments at Cost

We own 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”).  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston and Beaumont, Texas metropolitan areas.  We also own 3.60% of Pittsburgh SMSA Limited Partnership, which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we account for these investments at our initial cost less any impairment because fair value is not readily available for these investments.  No indictors of impairment existed for any of the investments during the quarters ended March 31, 2022 or 2021.  For these investments, we adjust the carrying value for any purchases or sales of our ownership interests, if any. We record distributions received from these investments as investment income in non-operating income (expense).  For the quarters ended March 31, 2022 and 2021, we received cash distributions from these partnerships of $3.8 million and $4.3 million, respectively.  

CoBank, ACB (“CoBank”) is a cooperative bank owned by its customers.  On an annual basis, CoBank distributes patronage in the form of cash and stock in the cooperative based on the Company’s outstanding loan balance with CoBank, which has traditionally been a significant lender in the Company’s credit facility. The investment in CoBank represents the accumulation of the equity patronage paid by CoBank to the Company.

Equity Method

We own 20.51% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), 16.67% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”) and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA #17 provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory.  Because we have significant influence over the operating and financial policies of these three entities, we account for the investments using the equity method. Income is recognized as investment income in non-operating income (expense) on our proportionate share of earnings and cash distributions are recorded as a reduction in our investment.  For the quarters ended March 31, 2022 and 2021, we received cash distributions from these partnerships of $4.4 million and $5.1 million, respectively.  

7.  FAIR VALUE MEASUREMENTS

Our derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using valuation models and are categorized within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and observable market data of similar instruments.  See Note 9 for further discussion regarding our interest rate swap agreements.

Our interest rate swap agreements measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 were as follows:

As of March 31, 2022

 

    

    

Quoted Prices

    

Significant

    

 

In Active

Other

Significant

 

Markets for

Observable

Unobservable

 

Identical Assets

Inputs

Inputs

 

(In thousands)

Total

(Level 1)

(Level 2)

(Level 3)

 

Long-term interest rate swap liabilities

$

(4,330)

 

$

$

(4,330)

 

$

13

As of December 31, 2021

 

    

    

Quoted Prices

    

Significant

    

 

In Active

Other

Significant

 

Markets for

Observable

Unobservable

 

Identical Assets

Inputs

Inputs

 

(In thousands)

Total

(Level 1)

(Level 2)

(Level 3)

 

Long-term interest rate swap liabilities

$

(12,813)

 

$

$

(12,813)

 

$

We have not elected the fair value option for any of our other assets or liabilities.  The carrying value of other financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.  The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of March 31, 2022 and December 31, 2021.

As of March 31, 2022

As of December 31, 2021

 

(In thousands)

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

  

Long-term debt, excluding finance leases

$

2,139,963

$

1,967,039

$

2,139,567

$

2,186,508

Cost & Equity Method Investments

Our investments as of March 31, 2022 and December 31, 2021 accounted for at cost and under the equity method consisted primarily of minority positions in various cellular telephone limited partnerships and our investment in CoBank. It is impracticable to determine the fair value of these investments.

Long-term Debt

The fair value of our senior notes was based on quoted market prices, and the fair value of borrowings under our credit facility was determined using current market rates for similar types of borrowing arrangements. We have categorized the long-term debt as Level 2 within the fair value hierarchy.