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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

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

(I.R.S. Employer

of incorporation or organization)

Identification No.)

121 South 17th Street, Mattoon, Illinois

61938-3987

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code (217) 235-3311

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes No 

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 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 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

Smaller reporting company

Accelerated filer

Emerging growth company

Non-accelerated filer 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

Yes No 

As of June 30, 2020, the aggregate market value of the shares held by non-affiliates of the registrant’s common stock was $485,618,951 based on the closing price as reported on the NASDAQ Global Select Market. The market value calculations exclude shares held on the stated date by registrant’s directors and officers on the assumption such shares may be shares owned by affiliates. Exclusion from these public market value calculations does not necessarily conclude affiliate status for any other purpose.

On February 22, 2021, the registrant had 79,213,100 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2020.

Table of Contents

TABLE OF CONTENTS

PAGE

PART I

Item 1.

Business

1

Item 1A.

Risk Factors

14

Item 1B.

Unresolved Staff Comments

23

Item 2.

Properties

23

Item 3.

Legal Proceedings

23

Item 4.

Mine Safety Disclosures

23

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6.

Selected Financial Data

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

48

Item 9A.

Controls and Procedures

48

Item 9B.

Other Information

51

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

51

Item 11.

Executive Compensation

51

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

51

Item 13.

Certain Relationships and Related Transactions, and Director Independence

51

Item 14.

Principal Accountant Fees and Services

51

PART IV

Item 15.

Exhibits and Financial Statement Schedules

52

Item 16.

Form 10-K Summary

55

SIGNATURES

56

Table of Contents

PART I

Note About Forward-Looking Statements

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions.  Certain statements in this Annual Report on Form 10-K, including those relating to the impact on future revenue sources, pending and future regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new markets, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements reflect, among other things, our current expectations, plans, strategies and anticipated financial results.  There are a number of risks, uncertainties and conditions that may cause the actual results of Consolidated Communications Holdings, Inc. and its subsidiaries (“Consolidated,” the “Company,” “we,” “our” or “us”) to differ materially from those expressed or implied by these forward-looking statements.  Many of these circumstances are beyond our ability to control or predict.  Moreover, forward-looking statements necessarily involve assumptions on our part.  These forward-looking statements generally are identified by the words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “should,” “may,” “will,” “would,” “will be,” “will continue” or similar expressions.  All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements that appear throughout this report.  A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Part I – Item 1A – “Risk Factors”.  Furthermore, undue reliance should not be placed on forward-looking statements, which are based on the information currently available to us and speak only as of the date they are made.  Except as required under federal securities laws or the rules and regulations of the SEC, we disclaim any intention or obligation to update or revise publicly any forward-looking statements.  

Item 1. Business.

Consolidated Communications Holdings, Inc. is a Delaware holding company with operating subsidiaries that provide a wide range of communication solutions to consumer, commercial and carrier channels across a 23-state service area.  We were founded in 1894 as the Mattoon Telephone Company.  After several acquisitions, the Mattoon Telephone Company was incorporated as the Illinois Consolidated Telephone Company in 1924.  We were incorporated under the laws of Delaware in 2002, and through our predecessors, we have been providing communication services in many of the communities we serve for more than 125 years.

In addition to our focus on organic growth in our commercial and carrier channels, we have achieved business growth and diversification of revenue and cash flow streams that have created a strong platform for future growth through our acquisitions over the last 15 years.  Through this strategic expansion, we have positioned our business to provide competitive services in rural, suburban and metropolitan markets spanning the country. Marking a pivotal moment for Consolidated, in 2020, we entered into a strategic investment with an affiliate of Searchlight Capital Partners L.P. (“Searchlight”). We also completed a global debt refinancing, as described below, which in combination provides us with greater flexibility to support our fiber expansion and growth plans. This strategic investment offered an immediate capital infusion. It will deliver significant benefits to the customers and communities we serve, and create a stronger and more resilient company that is well-positioned to further expand and grow broadband services to meet ever-evolving customer needs.

We are closely monitoring the impact on our business of the coronavirus (“COVID-19”) pandemic. For a discussion of the risks related to COVID-19, refer to Part I - Item 1A – “Risk Factors” and for a discussion of the impacts of COVID-19 on our business, refer to Part II - Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and Supplementary Data”.

Recent Business Developments

On September 13, 2020, we entered into an investment agreement (the “Investment Agreement”) with Searchlight, a global private equity firm.  In connection with the Investment Agreement, affiliates of Searchlight have committed to invest up to an aggregate of $425.0 million, which will enable Consolidated to accelerate our growth plan, expand the Company’s fiber infrastructure and invest in high-growth and competitive areas of our business.  The investment commitment is

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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 8% of the Company’s common stock. In addition, Searchlight has received a contingent payment right (“CPR”) convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 16.9% of the Company’s common stock, and the right to receive an unsecured subordinated note with a principal amount of approximately $395.5 million. In the second stage, upon receipt of Federal Communications Commission (“FCC”) and Hart Scott Rodino approvals and the satisfaction of certain other customary closing conditions, Searchlight will invest an additional $75.0 million and will be issued the note, which will be convertible into shares of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the note at that time. In addition, in the second stage and following shareholder approval, the CPR will be convertible into an additional 10.1% of the Company’s common stock. We expect the closing of the second stage to be completed in mid-2021. Upon completion of both stages, the common stock and CPR issued to Searchlight will represent approximately 35% of the Company’s common stock on an as-converted basis.

In addition, on October 2, 2020, the Company and certain of its wholly-owned subsidiaries completed a global refinancing of our long-term debt through the issuance of $2,250.0 million in new secured debt and retired all of its then outstanding debt.  The new credit agreement consists of a five-year $250.0 million revolving credit facility and a seven-year term loan in the aggregate amount of $1,250.0 million. The Company also raised $750.0 million aggregate principal amount of 6.50% senior secured notes due 2028. On January 15, 2021, the Company issued an additional $150.0 million aggregate principal amount of incremental term loans under the credit agreement.

See Notes 4 and 7 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and Supplementary Data” for a more detailed discussion of these transactions and the debt refinancing.

Description of Our Business

Consolidated is a broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers across a 23-state service area by leveraging our advanced fiber network, which spans over 46,600 fiber route miles across many rural areas and metro communities.  Our business product suite includes: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services.  We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections.  We offer residential high-speed Internet, video, phone and home security services as well as multi-service residential and small business bundles.  Consolidated is dedicated to turning technology into solutions, connecting people and enriching how our customers work and live.

We generate the majority of our consolidated operating revenues primarily from subscriptions to our broadband, data and transport services (collectively “broadband services”) marketed to consumer, commercial and carrier customers.  Commercial and carrier services represent the largest source of our operating revenues and are expected to be key growth areas in the future.  We are focused on enhancing our broadband and commercial product suite and are continually enhancing our commercial product offerings to meet the needs of our business customers.  We leverage our advanced fiber network and tailor our services for business customers by developing solutions to fit their specific needs.  Additionally, we are continuously enhancing our suite of managed and cloud services, which increases efficiency and enables greater scalability and reliability for businesses.  We anticipate future momentum in commercial and carrier services as these products gain traction as well as from the demand from customers for additional bandwidth and data-based services.  

We market our residential services by leading with a competitive broadband service.  As consumer demands for bandwidth continue to increase, our focus is on enhancing our broadband services, and progressively increasing speeds.  We offer data speeds of up to 1 Gigabits per second (“Gbps”) in select markets, and up to 100 Mbps in markets where 1 Gbps is not yet available, depending on the geographical region.  As we continue to increase broadband speeds, we are also able to simultaneously expand the array of services and content offerings that the network provides.

Our investment in more competitive broadband speeds is critical to our long-term success. With the investment from Searchlight and the concurrent debt refinancing, we can immediately accelerate the investment in our network, most notably to upgrade over the next five years approximately 1.6 million residential and small business premises to fiber-to-the-home/premise (“FTTP”) enabling multi-Gig symmetrical speeds.  The network investments will be made across seven states including more than 1 million passings within our northern New England service areas. Our fiber build plan includes

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the upgrade of approximately 300,000 homes and small businesses in 2021. By leveraging our existing dense core fiber network and an accelerated build plan, we will be able to significantly increase data speeds, expand our multi-Gig coverage and strategically extend our network across our strong existing commercial and carrier footprint to attract more on-net and near-net opportunities. As we invest in network upgrades, we believe we will see stable-to-improved trends in revenue growth and increased broadband penetration. We believe these fiber investments will help us future-proof our network and facilitate the continued transformation of Consolidated into a leading super-regional fiber communications service provider.

Searchlight is a value-added partner in our execution of this investment and brings a differentiated perspective to our broadband-first strategy. They are an experienced broadband and fiber infrastructure investor and they bring significant experience investing in FTTP and broadband expansion. Through our partnership with Searchlight, we will enhance our ability to invest in our business and pursue future growth opportunities as we transform our company in order to create long-term value.

A discussion of factors potentially affecting our operations is set forth in Part I – Item 1A – “Risk Factors”, which is incorporated herein by reference.

Sources of Revenue

The following tables summarize our sources of revenue and key operating statistics for the last three fiscal years:

2020

2019

2018

% of

% of

% of

(In millions, except for percentages)

    

$

 

Revenues

$

  

Revenues

    

$

   

Revenues

Commercial and carrier:

Data and transport services (includes VoIP)

$

362.1

27.8

$

355.3

26.6

$

349.4

25.0

%

Voice services

 

181.7

13.9

 

188.3

14.1

 

202.9

14.5

Other

 

45.1

3.5

 

52.9

4.0

 

56.4

4.0

588.9

45.2

596.5

44.6

608.7

43.5

Consumer:

Broadband (Data and VoIP)

 

263.1

20.1

 

257.1

19.2

 

253.1

18.1

Video services

 

74.3

5.7

 

81.4

6.1

 

88.4

6.3

Voice services

 

170.5

13.1

 

180.8

13.5

 

202.0

14.4

507.9

38.9

519.3

38.9

543.5

38.8

Subsidies

72.0

5.5

72.4

5.4

83.4

6.0

Network access

125.3

9.6

138.1

10.3

152.6

10.9

Other products and services

 

9.9

0.8

 

10.2

0.8

 

10.9

0.8

Total operating revenues

$

1,304.0

100.0

$

1,336.5

100.0

$

1,399.1

100.0

%

Key Operating Statistics

As of December 31,

 

    

2020

    

2019

    

2018

 

Consumer customers

 

554,763

582,818

628,649

Voice connections

779,590

835,997

902,414

Data connections

 

792,200

784,165

778,970

Video connections

 

76,041

84,171

93,065

Total connections

1,647,831

1,704,333

1,774,449

All telecommunications providers continue to face increased competition as a result of technology changes and legislative and regulatory developments in the industry.  We continue to focus on commercial growth opportunities and are continually expanding our commercial product offerings for small, medium and large businesses to capitalize on industry technological advances.  In addition, we expect our broadband services revenue to continue to grow as consumer and commercial demands for data-based services and higher speeds increase, which will offset, in part, the anticipated decline in traditional voice services impacted by the ongoing industry-wide reduction in residential access lines.

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Commercial and Carrier

Data and Transport Services

We provide a variety of business communication solutions to business customers of all sizes, including many services over our advanced fiber network.  The services we offer include scalable high-speed broadband Internet access and Voice over Internet Protocol (“VoIP”) phone services, which range from basic service plans to virtual hosted systems. Our hosted VoIP package utilizes soft switching technology and enables our customers to have the flexibility of employing new telephone advances and features without investing in a new telephone system.  The package bundles local service, calling features, Internet protocol (“IP”) business telephones and unified messaging, which integrates multiple messaging technologies into a single system and allows the customer to receive and listen to voice messages through email.

In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; software defined wide area network (“SD-WAN”), a software-based network technology that provides a simplified management and automation of wide area network (“WAN”) connections; multi-protocol label switching (“MPLS”); and private line services to provide high bandwidth connectivity across point-to-point and multiple site networks.  Our networking services are available at a variety of speeds up to 10 Gbps.  We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer’s on-site phone systems and data networks, managed network security services and data protection services.

Data center and disaster recovery solutions provide a reliable and local colocation option for commercial customers.  We also offer wholesale services to regional and national interexchange and wireless carriers, including cellular backhaul and other fiber transport solutions with speeds up to 100 Gbps.  The demand for backhaul services continue to grow as wireless carriers are faced with escalating consumer and commercial demands for wireless data.  

Voice Services

Voice services include local phone and long-distance service packages for business customers.  The plans include options for voicemail, conference calling, linking multiple office locations and other custom calling features such as caller ID, call forwarding, speed dialing and call waiting.  Services can be charged at a fixed monthly rate, a measured rate or can be bundled with selected services at a discounted rate.  We are also a full service 9-1-1 provider and have installed and maintained two turn-key, state of the art statewide next-generation emergency 9-1-1 systems.  These systems, located in Maine and Vermont, have processed several million calls relying on the caller's location information for routing.  As of October 29, 2020, we are no longer the 9-1-1 service provider in Vermont.  Next-generation emergency 9-1-1 systems are an improvement over traditional 9-1-1 and are expected to provide the foundation to handle future communication modes such as texting and video.

Other

Other services include business equipment sales and related hardware and maintenance support, video services and other miscellaneous revenues.

Consumer

Broadband Services

Broadband services include revenues from residential customers for subscriptions to our VoIP and data products.  We offer high-speed Internet access at speeds of up to 1 Gbps, depending on the nature of the network facilities that are available, the level of service selected and the location.  Our data service plans also include wireless internet access, email and internet security and protection. Our VoIP digital phone service is also available in certain markets as an alternative to the traditional telephone line.  We offer multiple voice service plans with customizable calling features and voicemail including voicemail to email options.  

Video Services

Depending on geographic market availability, our linear video services range from limited basic service to advanced digital television, which includes several plans, each with hundreds of local, national and music channels including premium and

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Pay-Per-View channels as well as video On-Demand service.  Certain customers may also subscribe to high-definition television, digital video recorders (“DVR”) and/or a whole home DVR.  Our Whole Home DVR allows customers the ability to watch recorded shows on any television in the home, record multiple shows simultaneously and utilize an intuitive on-screen guide and user interface.  Our TV Everywhere service available in certain markets, allows our video subscribers to watch their favorite shows, movies and livestreams on any device.  In addition, we offer in-demand streaming content, including: ATT TV, fuboTV, Philo and HBO NOW®.

Voice Services

We offer several different basic local phone service packages and long-distance calling plans, including unlimited flat-rate calling plans.  The plans include options for voicemail and other custom calling features such as caller ID, call forwarding and call waiting.  The number of local access lines in service directly affects the recurring revenue we generate from end users and continues to be impacted by the industry-wide decline in access lines.  We expect to continue to experience erosion in voice connections due to competition from alternative technologies, including our own competing VoIP product.

Subsidies

Subsidies consist of both federal and state subsidies, which are designed to promote widely available, quality broadband services at affordable prices with higher data speeds in rural areas.  Subsidies are funded by end user surcharges to which telecommunications providers, including local, long-distance and wireless carriers, contribute on a monthly basis. Subsidies are allocated and distributed to participating carriers monthly based upon their respective costs for providing local service. Similar to access charges, subsidies are regulated by the federal and state regulatory commissions. See Part I – Item 1 – “Regulatory Environment” below and Item 1A – “Risk Factors – Risks Related to the Regulation of Our Business” for further discussion regarding the subsidies we receive.

Network Access Services

Network access services include interstate and intrastate switched access, network special access and end user access.  Switched access revenues include access services to other communications carriers to terminate or originate long-distance calls on our network.  Special access circuits provide dedicated lines and trunks to business customers and interexchange carriers.  Certain of our network access revenues are based on rates set or approved by the federal and state regulatory commissions or as directed by law that are subject to change at any time.

Other Products and Services

Other products and services include revenues from telephone directory publishing, video advertising, billing and support services and other miscellaneous revenues.

No one customer accounted for more than 10% of our consolidated operating revenues during the years ended December 31, 2020, 2019 and 2018.

Wireless Partnerships

In addition to our core business, we also derive a portion of our cash flow and earnings from investments in five wireless partnerships.  Wireless partnership investment income is included as a component of other income in the consolidated statements of operations.  Our wireless partnership investment consists of five cellular partnerships: GTE Mobilnet of South Texas Limited Partnership (“Mobilnet South Partnership”), GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA #17”), Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), Pennsylvania RSA No. 6(I) Limited Partnership (“RSA 6(I)”) and Pennsylvania RSA No. 6(II) Limited Partnership (“RSA 6(II)”).  

Cellco Partnership (“Cellco”) is the general partner for each of the five cellular partnerships.  Cellco is an indirect, wholly-owned subsidiary of Verizon Communications Inc.  As the general partner, Cellco is responsible for managing the operations of each partnership.

We own 2.34% of the Mobilnet South Partnership.  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston and Beaumont, Texas metropolitan areas.  We account for this investment at

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our initial cost less any impairment because fair value is not readily available for this investment.  Income is recognized only upon cash distributions of our proportionate earnings in the partnership.

We own 20.51% of RSA #17, which serves areas in and around Conroe, Texas.  This investment is accounted for under the equity method.  Income is recognized on our proportionate share of earnings and cash distributions are recorded as a reduction in our investment.

We own 3.60% of Pittsburgh SMSA, 16.67% of RSA 6(I) and 23.67% of RSA 6(II).  These partnerships cover territories that almost entirely overlap the markets served by our Pennsylvania Incumbent Local Exchange Carrier (“ILEC”) and Competitive Local Exchange Carrier operations.  Because of our limited influence over Pittsburgh SMSA, we account for this investment at our initial cost less any impairment because fair value is not readily available for this investment.  RSA 6(I) and RSA 6(II) are accounted for under the equity method.

For the years ended December 31, 2020, 2019 and 2018, we recognized income of $40.7 million, $37.7 million and $39.3 million, respectively, and received cash distributions of $41.5 million, $35.8 million and $39.1 million, respectively, from these wireless partnerships.

Network Architecture and Technology

We have made significant investments in our technologically advanced telecommunications networks and continue to enhance and expand our network by deploying technologies to provide additional capacity to our customers.  As a result, we are able to deliver high-quality, reliable data, video and voice services in the markets we serve.  Our wide-ranging network and extensive use of fiber provide an easy reach into existing and new areas.  By bringing the fiber network closer to the customer premise, we can increase our service offerings, quality and bandwidth services.  Our existing network enables us to efficiently respond and adapt to changes in technology and is capable of supporting the rising customer demand for bandwidth in order to support the growing amount of wireless data devices in our customers’ homes and businesses.

Our networks are supported by advanced 100% digital switches, with a core fiber network connecting all remote exchanges.  We continue to enhance our copper network to increase bandwidth in order to provide additional products and services to our marketable homes.  In addition to our copper plant enhancements, we have deployed fiber-optic cable extensively throughout our network, resulting in a 100% fiber backbone network that supports all of the inter-office and host-remote links, as well as the majority of business parks within our service areas.  In addition, this fiber infrastructure provides the connectivity required to provide broadband and long-distance services to our residential and commercial customers.  Our fiber network utilizes FTTP and fiber-to-the-node (“FTTN”) networks to offer bundled residential and commercial services.  

We operate advanced fiber networks which we own or have entered into long-term leases for fiber network access.  At December 31, 2020, our fiber-optic network consisted of over 46,600 route-miles, which includes approximately 8,130 miles of FTTP deployments, approximately 19,900 route miles of fiber located in the northern New England area, approximately 3,880 miles of fiber network in Minnesota and surrounding areas, approximately 4,310 miles of fiber network in Texas including an expansion into the greater Dallas/Fort Worth market, approximately 1,730 route-miles of fiber-optic facilities in the Pittsburgh metropolitan area, approximately 2,240 miles of fiber network in Illinois, approximately 1,100 route-miles of fiber optic facilities in California that cover large parts of the greater Sacramento metropolitan area and approximately 1,110 route-miles of fiber optic facilities in Kansas City that service the greater Kansas City area, including both Kansas and Missouri.  Our remaining network includes approximately 4,260 route-miles spanning across various states including portions of Alabama, Colorado, Florida, Georgia, Massachusetts, New York, Ohio, Pennsylvania and Washington.  

As of December 31, 2020, we passed more than 2.7 million homes and have direct fiber connections to 13,564 on-net commercial building locations. We intend to continue to make strategic enhancements to our network including improvements in overall network reliability and increases to our broadband speeds.  We offer data speeds of up to 1 Gbps in select markets, and up to 100 Mbps in markets where 1 Gbps is not yet available, depending on the geographical region.  The majority of the homes in our recently acquired northern New England service territories have availability to broadband speeds of 20 Mbps or less.  As part of the strategic investment and equity partnership with Searchlight, we plan to accelerate our fiber build plan and extend fiber coverage enabling multi-Gig data speeds to over 70% of our passings by 2025. The upgrades will be made primarily across seven states including more than 1 million passings within the

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northern New England service areas to significantly enhance our broadband speeds. Further network investments will enable us to continue to meet consumer demand for faster broadband speeds, symmetrical broadband and more bandwidth consumption as well as more effectively serve our commercial customers.

Through our extensive fiber network, we are also able to support the increased demand on wireless carriers for data bandwidth.  In all the markets we serve, we have launched initiatives to support fiber backhaul services to cell sites.  As of December 31, 2020, we had 3,589 cell sites in service and an additional 260 future sites pending completion.

Sales and Marketing

The key components of our overall marketing strategy include:

Organizing our sales and marketing activities around our three customer channels: consumer, commercial and carrier customers;

Positioning ourselves as a single point of contact for our customers’ communications needs;

Providing customers with a broad array of data, voice and communication solutions;

Identifying and broadening our commercial customer needs by developing solutions and providing integrated service offerings;

Providing excellent customer service, including 24/7 centralized customer support to coordinate installation of new services, repair and maintenance functions and creating more self-service tools through our online customer portal;

Developing and delivering new services to meet evolving customer needs and market demands; and

Leveraging our local presence and strong reputation across our market areas.

We currently offer our services through customer service call centers, our website, commissioned sales representatives and third-party sales agents.  Our customer service call centers and dedicated sales teams serve as the primary sales channels for consumer, commercial and carrier services.  Our sales efforts are supported by digital media, direct mail, bill inserts, radio, television and internet advertising, public relations activities, community events and customer promotions.

In addition to our customer service call centers, customers can contact us through our website, online chat and social media.  Our online customer portal enables customers to pay their bills, manage their accounts, order new services and utilize self-service help and support. Our priority is to continue enhancing our comprehensive customer care system in order to produce a high level of customer satisfaction and loyalty, which is important to our ability to reduce churn and generate recurring revenues.

Business Strategies

Transform our Company into a dominate fiber gigabit broadband provider

In 2020, in connection with the Searchlight investment, we announced plans to upgrade and expand our fiber network through a five-year build plan with construction beginning in early 2021. The build plan will include the upgrade of approximately 1.6 million passings to fiber enabling multi gigabit-capable services to over 70% of our passings by 2025. In 2021, we plan to upgrade more than 300,000 homes and small businesses with fiber services and faster broadband speeds. This marks the biggest fiber deployment project in our Company’s history. Our strategy, supported by the Searchlight investment, is to meaningfully upgrade our residential and small business network in those service territories with a predominantly copper-based infrastructure to a FTTP network.  Of the planned upgrades, more than 1 million passings will be upgraded within the northern New England service areas.  The upgraded network will be capable of providing up to 10 Gbps of symmetrical broadband, which we believe will make us the only broadband provider in these markets capable of delivering 10 Gbps symmetrical broadband to consumers. In addition to best-in-class upload and download speeds, we believe the resulting network will offer better reliability, improved speed consistency, and a lower operating cost relative to competing broadband network technologies.  Given these benefits, we believe that our fiber

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deployment strategy will allow us to realize meaningful improvements in ARPU, broadband subscriber penetration and customer retention.

Continue to grow and invest in commercial and carrier services

Our commercial and carrier strategy is built on leveraging our dense fiber network in key markets to offer IP-based products and services to our small and medium-sized business (“SMB”), enterprise and carrier customers. We will continue transitioning our customer base away from legacy TDM-based products to fiber and IP-based data and transport services, where we see significant opportunity to increase market share in our footprint. We will also make strategic network investments in both existing markets and edge-out locations to enhance our footprint and increase on-net and near-net opportunities. These builds will be focused on projects with high revenue visibility and attractive payback periods. Our carrier strategy entails leveraging our dense fiber network and long-term relationships in key markets to expand our carrier partnerships and grow small cell and fiber-to-the-tower connections. Investing not just in the network, but in these customer relationships, has been core to our success. Our growth strategy is also supported by the continuous evolution of our product offerings. We are regularly developing and enhancing our suite of managed and cloud services, increasing efficiency and enabling greater scalability and reliability for our business customers. We believe that by developing and investing in next-generation fiber-based products, we will be able to further support our customer needs for networking, communications, and collaboration services.

Improve the overall customer experience

We continue to evaluate our operations in order to improve and enhance the overall customer experience for all customers. In conjunction with the five-year fiber build plan, we will also make significant investments in our back-office infrastructure. We expect our full transformation to occur over a multi-year period, with significant consumer customer-facing enhancements to be revealed later in 2021. Our planned enhancements include an improved customer portal where customers can manage all aspects of their service. We will launch expanded e-commerce, omnichannel customer service and self-service capabilities for all customer groups. Our digital transformation projects will improve our order and install processes making the transition to our services more seamless than ever. Our sales process is also being redesigned in order to provide personalized sales channels and a dedicated care team for our fiber customers. We have a culture of delivering the highest quality customer service experience possible and will continue to make investments in our platforms in order to create a truly differentiated customer experience.

Competition

The telecommunications industry is subject to extensive competition, which has increased significantly in recent years.  Technological advances have expanded the types and uses of services and products available.  In addition, differences in the regulatory environment applicable to comparable alternative services have lowered costs for these competitors.  As a result, we face heightened competition but also have new opportunities to grow our broadband business.  Our competitors vary by market and may include other incumbent and competitive local telephone companies; cable operators offering video, data and VoIP products; wireless carriers; long distance providers; satellite companies; Internet service providers, fixed wireless Internet service providers (“WISPs”), online video providers and in some cases new forms of providers who are able to offer a broad range of competitive services.  We expect competition to remain a significant factor affecting our operating results and that the nature and extent of that competition will continue to increase in the future.  See Part I - Item 1A – “Risk Factors – Risks Relating to Our Business”.

Depending on the market area, we compete against Comcast, Charter, AT&T, Mediacom, Armstrong, Suddenlink, First Light, NewWave Communications and a number of other carriers, in both the commercial and consumer markets. Our competitors offer traditional telecommunications services as well as IP-based services and other emerging data-based services. Our competitors continue to add features and adopt aggressive pricing and packaging for services comparable to the services we offer.

We continue to face competition from cable, wireless and other fiber data providers as the demand for substitute communication services, such as wireless phones and data devices, continues to increase.  Customers are increasingly foregoing traditional telephone services and land-based Internet service and relying exclusively on wireless service.  Wireless companies are aggressively developing networks using next-generation data technologies in order to provide increasingly faster data speeds to their customers.  In addition, the expanded availability for free or lower cost services, such as video over the Internet, complimentary Wi-Fi service and other streaming devices has increased competition among other providers.  In order to offer competitive services, we continue to invest in our network and business operations

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in order to offer new and enhanced services including faster broadband speeds, cloud-enabled services and additional over-the-top video content.

In our rural markets, services are more costly to provide than services in urban areas as a lower customer density necessitates higher capital expenditures on a per-customer basis.  As a result, it generally is not economically viable for new entrants to overlap existing networks in rural territories.  Despite the barriers to entry, rural telephone companies still face significant competition from wireless and video providers and, to a lesser extent, competitive telephone companies.

Our other lines of business are subject to substantial competition from local, regional and national competitors.  In particular, our wholesale and transport business serves other interexchange carriers and we compete with a variety of service providers including incumbent and competitive local telephone companies and other fiber data companies.  For our business systems products, we compete with other equipment providers or value added resellers, network providers, incumbent and competitive local telephone companies, and with cloud and data hosting service providers.

We expect that competition across all of our customer channels will continue to intensify as new technologies develop and new competition emerges.

Human Capital Resources

As of December 31, 2020, we employed approximately 3,200 employees, including part-time employees.  We also use temporary employees in the normal course of our business.  Approximately 50% of our employees were covered by collective bargaining agreements as of December 31, 2020.  For a more detailed discussion regarding how the collective bargaining agreements could affect our business, see Part I - Item 1A – Risk Factors – “Risks Relating to Our Business”.

Our employees are the cornerstone of our success.  We are committed to providing meaningful, challenging work and opportunities for professional growth in a positive environment. To attract and retain qualified and experienced employees, we offer competitive compensation and benefit packages, which we believe are competitive within the industry and the local markets in which we operate. Our benefit packages, may include, among other items, incentive compensation based on the achievement of financial targets, healthcare and insurance benefits, health savings and flexible spending accounts, a 401(k) savings plan with an employer match, paid time off, and wellness and employee assistance programs. Additionally, for certain eligible directors and employees, we provide long-term incentive compensation, in the form of restricted stock awards. In addition, we are committed to providing employees continuing education and training programs in order for employees to achieve career goals and professional growth.  

We seek high-quality employees of all backgrounds and experiences. Honoring our employees as individuals is key to our culture. We believe diversity of backgrounds contributes to different ideas, which in turn drives better results for customers. We respect differences and diversity as qualities that enhance our efforts as a team and believe in and support the principles incorporated in all anti-discrimination and equal employment laws.

We are committed to workplace health and safety. In 2020, in response to the COVID-19 pandemic, we implemented safety protocols and procedures to protect our employees, customers and business partners. These procedures included transitioning as many employees as possible to remote work-from-home arrangements, providing additional safety training and personal protective equipment for customer-facing employees, and complying with social distancing and other health and safety measures as required by federal, state and local governmental agencies.

Regulatory Environment

The following summary does not describe all existing and proposed legislation and regulations affecting the telecommunications industry.  Regulation can change rapidly and ongoing proceedings and hearings could alter the manner in which the telecommunications industry operates.  We cannot predict the outcome of any of these developments, nor their potential impact on us.  See Part I – Item 1A – “Risk Factors—Risks Related to the Regulation of Our Business”.

Overview

Our revenues, which include revenues from such telecommunications services as local telephone service, network access service and toll service are subject to broad federal and/or state regulations.  The telecommunications industry is subject to extensive federal, state and local regulation.  Under the Telecommunications Act of 1996 (the “Telecommunications

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Act”), federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices.

 

At the federal level, the FCC generally exercises jurisdiction over facilities and services of local exchange carriers, such as our rural telephone companies, to the extent they are used to provide, originate or terminate interstate or international communications.  The FCC has the authority to condition, modify, cancel, terminate or revoke our operating authority for failure to comply with applicable federal laws or FCC rules, regulations and policies.  Fines or penalties also may be imposed for any of these violations.

 

State regulatory commissions generally exercise jurisdiction over carriers’ facilities and services to the extent they are used to provide, originate or terminate intrastate communications.  In particular, state regulatory agencies have substantial oversight over interconnection and network access by competitors of our rural telephone companies.  In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks.  State regulators can sanction our rural telephone companies or revoke our certifications if we violate relevant laws or regulations.

Federal Regulation

Our incumbent local exchange companies and competitive local exchange companies must comply with the Communications Act of 1934, which requires, among other things, that telecommunications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions.  The 1996 amendments to the Communications Act (contained in the Telecommunications Act discussed below) dramatically changed, and likely will continue to change, the landscape of the industry.

Access Charges

On November 18, 2011, the FCC released its comprehensive order on intercarrier compensation (“ICC”) and universal service reform.  Intrastate network access charges are regulated by state commissions.  The FCC order on ICC and universal service reform required terminating state access charges to mirror terminating interstate access charges, and as of July 1, 2013, all terminating switched intrastate access charges mirror interstate access charges.

The FCC has structured these prices as a combination of flat monthly charges paid by customers and both usage-sensitive (per-minute) charges and flat monthly charges paid by long-distance or other carriers.

The FCC regulates interstate network access charges by imposing price caps on Regional Bell Operating Companies (“RBOCs”) and other large incumbent telephone companies.  Some of our properties operate as RBOCs under price cap regulation while some operate under rate of return regulation for interstate purposes.  These price caps can be adjusted based on various formulas, such as inflation and productivity, and otherwise through regulatory proceedings.  Incumbent telephone companies, such as our incumbent local exchange companies, may elect to base network access charges on price caps, but are not required to do so.  

We believe that price cap regulation gives us greater pricing flexibility for interstate services, especially in the increasingly competitive special access market.  It also provides us with the potential to increase our net earnings by becoming more productive and introducing new services.  As we have acquired new properties, we have converted them to federal price cap regulation.

In recent years, carriers have become more aggressive in disputing the FCC’s interstate access charge rates and the application of access charges to their telecommunications traffic.  We believe these disputes have increased, in part, because advances in technology have made it more difficult to determine the identity and jurisdiction of traffic, giving carriers an increased opportunity to challenge access costs for their traffic.  We cannot predict what other actions other long-distance carriers may take before the FCC or with their local exchange carriers, including our incumbent local exchange companies, to challenge the applicability of access charges.  Due to the increasing deployment of VoIP services and other technological changes, we believe these types of disputes and claims are likely to continue to increase.

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Unbundled Network Element Rules

In 2019, the FCC issued two orders on Unbundled Network Element (“UNE”) forbearance.  The first order addressed wholesale discounts on resold services and Voice Grade analog UNE loops and the second order (“Transport Order”), addressed UNE transport between competitive wire centers.  Both orders provide a three-year transition period.

The Transport Order addresses two separate but related topics.  One is the relief from transport UNEs and the other is to respond to a remand on its Business Data Services (“BDS”) order.  BDS was previously known as Special Access and like services.   The FCC broadly deregulated BDS services in 2017.  This decision was appealed and the Court upheld the order but vacated the BDS transport relief because the Court decided that the FCC had not provided sufficient notice intended to deregulate all BDS transport services.  The Court was convinced not to act on the vacated rules since the ILECs could not easily restore the regulated services.  The FCC addressed this issue in the same order used to provide forbearance relief on UNE transport.

In 2020, Consolidated renegotiated its Wholesale Performance Plans (“WPP”) in Maine, New Hampshire and Vermont to comply with the FCC’s UNE forbearance order issued in 2019.

Promotion of Universal Service

In general, telecommunications service in rural areas is costlier to provide than service in urban areas.  The lower customer density means that switching and other facilities serve fewer customers and loops are typically longer, requiring greater expenditures per customer to build and maintain.  By supporting the high cost of operations in rural markets, Universal Service Fund (“USF”) subsidies promote widely available, quality telephone service at affordable prices in rural areas.  Revenues from federal and certain states’ USFs totaled $72.0 million, $72.4 million and $83.4 million in 2020, 2019 and 2018, respectively.  

FCC Access Charge and Universal Service Reform Order

In November 2011, the FCC released a comprehensive order on access charge and universal service reform (the “Order”).  The access charge portion of the Order systematically reduces minute-of-use-based interstate access, intrastate access and reciprocal compensation rates over a six to nine-year period to an end state of bill-and-keep, in which each carrier recovers the costs of its network through charges to its own subscribers, rather than through ICC.  The reductions apply to terminating access rates and usage, with originating access to be addressed by the FCC in a later proceeding.  To help with the transition to bill-and-keep, the FCC created two mechanisms.  The first is an Access Recovery Mechanism (“ARM”) which is funded from the Connect America Fund (“CAF”), and the second is an Access Recovery Charge (“ARC”) which is recovered from end users.  The universal service portion of the Order redirects support from voice services to broadband services, and is now called the CAF.  

The Order requires rate of return study areas associated with holding companies to be treated as price cap carriers for universal service funding.  For ICC purposes, these rate of return carriers fall under the rate of return ICC transition plan.  Price cap study areas fall under the price cap rules for both universal service reform and ICC reform.

In December 2014, the FCC released a report and order that addressed, among other things, the transition to CAF Phase II funding for price cap carriers and the acceptance criteria for CAF Phase II funding.  Companies are required to commit to a statewide build out requirement of 10 Mbps downstream and 1 Mbps upstream in funded locations.

Our current annual support through the FCC’s CAF Phase II funding is $48.1 million through 2021 as described below.  The specific obligations associated with CAF Phase II funding include the obligation to serve approximately 124,500 locations by December 31, 2020 (with interim milestones of 40%, 60% and 80% completion by December 2017, 2018 and 2019, respectively); to provide broadband service to those locations with speeds of 10 Mbps downstream and 1 Mbps upstream; to achieve latency of less than 100 milliseconds; to provide data of at least 100 gigabytes per month; and to offer pricing reasonably comparable to pricing in urban areas.  The Company met the milestones for 2017 through 2020 for all states where it operates.

We accepted CAF Phase II support in all of our operating states except Colorado and Kansas where the offered CAF Phase II support was declined.  We continued to receive annual frozen CAF Phase I support of $1.0 million in Colorado and Kansas until April 2019, when the FCC CAF Phase II auction assigned support to another provider.

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In April 2019, the FCC announced plans for the Rural Digital Opportunity Fund (“RDOF”), the next phase of the CAF program. The RDOF is a $20.4 billion fund to bring speeds of 25 Mbps downstream and 3 Mbps upstream to unserved and underserved areas of America.  The FCC issued a Notice of Proposed Rulemaking at their August 2019 Open Commission Meeting.  The order prioritizes terrestrial broadband as a bridge to rural 5G networks by providing a significant weight advantage to traditional broadband providers.  Funding will occur in two phases with the first phase auctioning $16.0 billion and the second phase auctioning $4.4 billion, each to be distributed over 10 years.  The minimum speed required to receive funding is 25 Mbps downstream and 3 Mbps upstream.  CAF Phase II funding has been extended through December 31, 2021 for price cap holding companies.  The FCC has issued the final census block groups with locations and reserve price.  We filed the RDOF short form application on July 14, 2020 and were listed as a qualified bidder by the FCC on October 13, 2020 and participated in the auction.  The auction began on October 29, 2020 and ended on November 24, 2020.  Consolidated won 246 census block groups serving in seven states.  The bids we won are at the 1 Gbps downstream and 500 Mbps upstream speed tier to approximately 27,000 locations at a funding level of $5.9 million annually over 10 years.  Consolidated filed its long form application with supporting documents on January 29, 2021.

State Regulation

We are subject to regulation by state governments in various states in which we operate.  State regulatory commissions generally exercise jurisdiction over intrastate matters and other requirements.   In recent years, most states have reduced their regulation of ILECs, including our ILEC operations. Nonetheless, state regulatory commissions generally continue to (i) set the rates that telecommunication companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) limit ILECs' ability to borrow and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various other service standards.  In most states, switched and BDS and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region.

We operate in states where traditional cost recovery mechanisms, including state USF, are under evaluation or have been modified.  As the states continue to assess their laws and implement various regulations changes, there can be no assurance that these mechanisms will continue to provide us with the same level of cost recovery we historically received.

Local Government Authorizations

In the various states we operate in, we operate under a structure in which each municipality or other regulatory agencies may impose various fees, such as for the privilege of originating and terminating messages and placing facilities within the municipality, for obtaining permits for street opening and construction, and/or for operating franchises to install and expand fiber optic facilities.  

Regulation of Broadband and Internet Services

Video Services

Our cable television subsidiaries each require a state or local franchise or other authorization in order to provide cable service to customers.  Each of these subsidiaries is subject to regulation under a framework that exists in Title VI of the Communications Act.

Under this framework, the responsibilities and obligations of franchising bodies and cable operators have been carefully defined.  The law addresses such issues as the use of local streets and rights-of-way; the carriage of public, educational and governmental channels; the provision of channel space for leased commercial access; the amount and payment of franchise fees; consumer protection and similar issues.  In addition, Federal laws place limits on the common ownership of cable systems and competing multichannel video distribution systems, and on the common ownership of cable systems and local telephone systems in the same geographic area.  Many provisions of the federal law have been implemented through FCC regulations.  The FCC has expanded its oversight and regulation of the cable television-related matters recently.  In some cases, it has acted to assure that new competitors in the cable television business are able to gain access to potential customers and can also obtain licenses to carry certain types of video programming.

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Internet Services

The provision of Internet access services is not significantly regulated by either the FCC or the state commissions.  The Federal Trade Commission (“FTC”) has authority to regulate Internet Service Providers with respect to privacy and competitive practices.  In 2017, the FCC adopted an order eliminating its previous classification of Internet service as a telecommunications service regulated under Title II of the Telecommunications Act of 1996.  This effectively limits the FCC’s authority over Internet Service Providers.  The FCC retained rules requiring Internet Service Providers to disclose practices associated with blocking, throttling and paid prioritization of Internet traffic.  The FCC order has been challenged in court and the outcome of the challenge cannot be determined at this time.  

The outcome of pending matters before the FCC and the FTC and any potential congressional action cannot be determined at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and could affect our ability to compete in the markets we serve.

FairPoint Merger Requirements

As part of our acquisition of FairPoint Communications, Inc. (“FairPoint”) in 2017, we have regulatory commitments that vary by state, some of which required capital investments in our network over several years through 2020.  The requirements included improved data speeds and other service quality improvements in select locations primarily in our northern New England, New York and Illinois markets.  In New Hampshire and Vermont, we were required to invest 13% and 14%, respectively, of total state revenues in capital improvements per year for 2018, 2019 and 2020.  For our service territory in Maine, we were required to make capital expenditures of $16.4 million per year from 2018 through 2020.  In addition, we were required to invest an incremental $1.0 million per year in each of these three states for service quality improvements.  In New York, we were required to invest $4.0 million over three years to expand the broadband network to over 300 locations.  In Illinois, we were required to invest an additional $1.0 million by the end of 2018 to increase broadband availability and speeds in areas served by the FairPoint Illinois ILECs.  We met all of the regulatory commitments for 2017 through 2020 for Maine, New Hampshire and Vermont.   We completed merger requirements for Illinois in December 2018 and New York in June 2020, both within the required time commitment.

CARES Act Funding

States are reviewing opportunities to use federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) funding to assist in the deployment of broadband to unserved and underserved areas within their respective states.  All broadband build outs were required to be completed by December 31, 2020 in order to receive funding.  New Hampshire allocated $50.0 million of CARES Act funding to fund broadband expansion to unserved and underserved locations throughout the state. Consolidated was granted up to $3.5 million to build high-speed Internet networks for homes and businesses in New Hampshire towns of Danbury, Springfield and Mason.  The state funded 10% upfront with the remainder received upon completion of projects by December 31, 2020.  

COVID-19

On March 13, 2020, the FCC issued a pledge to Keep America Connected through May 13, 2020, which was later extended to June 30, 2020.  The pledge asked all communications providers to not terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the coronavirus pandemic; to waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and to open their Wi-Fi hotspots to any American who needs them.

Consolidated signed on to the pledge through June 30, 2020.  Several states took the FCC pledge a step further by not allowing any carrier to disconnect service within their state during the Governors’ declared state of emergency, which Consolidated also supported.  

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.consolidated.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  Our website also contains copies of our Corporate Governance Principles,

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Code of Business Conduct and Ethics and charter of each committee of our Board of Directors.  The information found on our website is not part of this report or any other report we file with or furnish to the SEC.  The public may read and copy reports, proxy and information statements and other information we file with the SEC at the SEC’s website at www.sec.gov.

Item 1A.  Risk Factors.

Our operations and financial results are subject to various risks and uncertainties, including but not limited to those described below, that could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock.

Risks Relating to Our Business

We expect to continue to face significant competition in all parts of our business and the level of competition could intensify among our customer channels.  The telecommunications industry is highly competitive.  We face actual and potential competition from many existing and emerging companies, including other incumbent and competitive local telephone companies, long-distance carriers and resellers, wireless companies, Internet service providers, satellite companies and cable television companies, and, in some cases, new forms of providers who are able to offer competitive services through software applications requiring a comparatively small initial investment. Due to consolidations and strategic alliances within the industry, we cannot predict the number of competitors we will face at any given time.

The wireless business has expanded significantly and has caused many subscribers with traditional telephone and land-based Internet access services to give up those services and rely exclusively on wireless service.  In addition, consumers’ options for viewing television shows have expanded as content becomes increasingly available through alternative sources.  Some providers, including television and cable television content owners, have initiated Over-The-Top (“OTT”) services that deliver video content to televisions, computers and other devices over the Internet.  OTT services can include episodes of highly-rated television series in their current broadcast seasons.  They can also include content that is related to broadcast or sports content that we carry, but that is distinct and may be available only through the alternative source. Consumers can pursue each of these options without foregoing any of the other options.  We may not be able to successfully anticipate and respond to many of the various competitive factors affecting the industry, including regulatory changes that may affect our competitors and us differently, new technologies, services and applications that may be introduced, changes in consumer preferences, demographic trends, and discount or bundled pricing strategies by competitors.

The incumbent telephone carriers in the markets we serve enjoy certain business advantages, including size, financial resources, favorable regulatory position, a more diverse product mix, brand recognition and connection to virtually all of our customers and potential customers.  The largest cable operators also enjoy certain business advantages, including size, financial resources, ownership of or superior access to desirable programming and other content, a more diverse product mix, brand recognition and first-in-field advantages with a customer base that generates positive cash flow for its operations.  Our competitors continue to add features, increase data speeds and adopt aggressive pricing and packaging for services comparable to the services we offer.  Their success in selling services that are competitive with ours among our various customer channels could lead to revenue erosion in our business.  We face intense competition in our markets for long-distance, Internet access, video service and other ancillary services that are important to our business and to our growth strategy.  If we do not compete effectively we could lose customers, revenue and market share.

We must adapt to rapid technological changes.  If we are unable to take advantage of technological developments, or if we adopt and implement them at a slower rate than our competitors, we may experience a decline in the demand for our services.  Our industry operates in a technologically complex environment.  New technologies are continually developed and existing products and services undergo constant improvement.  Emerging technologies offer consumers a variety of choices for their communication and broadband needs.  To remain competitive, we will need to adapt to future changes in technology to enhance our existing offerings and to introduce new or improved offerings that anticipate and respond to the varied and continually changing demands of our various customer channels.  Our business and results of operations could be adversely affected if we are unable to match the benefits offered by competing technologies on a timely basis and at an acceptable cost, or if we fail to employ technologies desired by our customers before our competitors do so.

New technologies, particularly alternative methods for the distribution, access and viewing of content, have been, and will likely continue to be, developed that will further increase the number of competitors that we face and drive changes in consumer behavior.  Consumers seek more control over when, where and how they consume content and are increasingly

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interested in communication services outside of the home and in newer services in wireless Internet technology and devices such as tablets, smartphones and mobile wireless routers that connect to such devices. These new technologies, distribution platforms and consumer behaviors may have a negative impact on our business.

In addition, evolving technologies can reduce the costs of entry for others, resulting in greater competition and significant new advantages for competitors.  Technological developments could require us to make significant new capital investments in order to remain competitive with other service providers.  If we do not replace or upgrade our network and its technology on a timely basis, we may not be able to compete effectively and could lose customers.  We may also be placed at a cost disadvantage in offering our services. Technology changes are also allowing individuals to bypass telephone companies and cable operators entirely to make and receive calls, and to provide for the distribution and viewing of video programming without the need to subscribe to traditional voice and video products and services.  Increasingly, this can be done over wireless facilities and other emerging mobile technologies in addition to traditional wired networks.  Wireless companies are aggressively developing networks using next-generation data technologies, which are capable of delivering high-speed Internet service via wireless technology to a large geographic footprint.  As these technologies continue to expand in availability and reliability, they could become an effective alternative to our high-speed Internet services.  Although we use fiber optics in parts of our networks, including in some residential areas, we continue to rely on coaxial cable and copper transport media to serve customers in many areas.  The facilities we use to offer our video services, including the interfaces with customers, are undergoing a rapid evolution, and depend in part on the products, expertise and capabilities of third-parties.  If we cannot develop new services and products to keep pace with technological advances, or if such services and products are not widely embraced by our customers, our results of operations could be adversely impacted.

Shifts in our product mix may result in a decline in operating profitability.  Margins vary among our products and services.  Our profitability may be impacted by technological changes, customer demands, regulatory changes, the competitive nature of our business and changes in the product mix of our sales.  These shifts may also result in our long-lived assets becoming impaired or our inventory becoming obsolete.  We review long-lived assets for potential impairment if certain events or changes in circumstances indicate that impairment may be present.  We currently manage potential inventory obsolescence through reserves, but future technology changes may cause inventory obsolescence to exceed current reserves.

We receive cash distributions from our wireless partnership interests.  The amount and continued receipt of such future distributions is not guaranteed.  We own five wireless partnership interests consisting of 2.34% of GTE Mobilnet of South Texas Limited Partnership, which provides cellular service in the Houston, Galveston and Beaumont, Texas metropolitan areas; 3.60% of Pittsburgh SMSA Limited Partnership, which provides cellular service in and around the Pittsburgh metropolitan area; 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.

In 2020, 2019 and 2018, we received cash distributions from these partnerships of $41.5 million, $35.8 million and $39.1 million, respectively.  The cash distributions we receive from these partnerships are based on our percentage of ownership, the partnerships’ operating results, cash availability and financing needs as determined by the General Partner at the date of the distribution.  We cannot control the timing, amount or certainty of any future cash distributions from these partnerships.  If cash distributions from these partnerships are reduced or eliminated, our results of operations could be adversely affected, and as a result, our ability to fulfill our long-term obligations may be restricted.  

A disruption in our networks and infrastructure could cause service delays or interruptions, which could cause us to lose customers and incur additional expenses.  Our customers depend on reliable service over our network.  The primary risks to our network infrastructure include physical damage to lines, security breaches, capacity limitations, power surges or outages, software defects and disruptions beyond our control, such as natural disasters and acts of terrorism.  From time to time in the ordinary course of business, we experience short disruptions in our service due to factors such as physical damage, inclement weather and service failures of our third-party service providers.  We could experience more significant disruptions in the future.  Disruptions may cause service interruptions or reduced capacity for customers, either of which could cause us to lose customers and incur unexpected expenses.

A cyber-attack may lead to unauthorized access to confidential customer, personnel and business information that could adversely affect our business.  Attempts by others to gain unauthorized access to organizations' information

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technology systems are becoming more frequent and sophisticated, and are sometimes successful. These attempts may include covertly introducing malware to companies' computers and networks, impersonating authorized users or "hacking" into systems.  We seek to prevent, detect and investigate all security incidents that do occur, however we may be unable to prevent or detect a significant attack in the future.  Significant information technology security failures could result in the theft, loss, damage, unauthorized use or publication of our confidential business information, which could harm our competitive position, subject us to additional regulatory scrutiny, expose us to litigation or otherwise adversely affect our business.  If a security breach results in misuse of our customers' confidential information, we may incur liability as a result.

Our operations require substantial capital expenditures and our business, financial condition, results of operations and liquidity may be impacted if funds for capital expenditures are not available when needed.  We require significant capital expenditures to maintain, upgrade and enhance our network facilities and operations.  While we have historically been able to fund capital expenditures from cash generated from operations and borrowings under our revolving credit facility, the other risk factors described in this section could materially reduce cash available from operations or significantly increase our capital expenditure requirements, which may result in our inability to fund the necessary level of capital expenditures to maintain, upgrade or enhance our network.  This could adversely affect our business, financial condition, results of operations and liquidity.

If we cannot obtain and maintain necessary rights-of-way for our network, our operations may be interrupted and we could be faced with increased costs.  We are dependent on easements, franchises and licenses from various private parties, such as established telephone companies and other utilities, railroads, long-distance companies, state highway authorities, local governments and transit authorities for access to aerial pole space, underground conduits and other rights-of-way in order to construct and operate our networks.  Some agreements relating to rights-of-way may be short-term or revocable at will, and we cannot be certain that we will continue to have access to existing rights-of-way after the governing agreements terminate or expire.  If any of our right-of-way agreements were terminated or could not be renewed, we may be forced to remove, relocate or abandon our network facilities in the affected areas, which could interrupt our operations, force us to find alternative rights-of-way and incur unexpected capital expenditures.

We may be unable to obtain necessary hardware, software and operational support from third-party vendors.  We depend on third-party vendors to supply us with a significant amount of hardware, software and operational support necessary to provide certain of our services, to maintain, upgrade and enhance our network facilities and operations, and to support our information and billing systems.  Some of our third-party vendors are our primary source of supply for certain products and services for which there are few substitutes.  If any of these vendors should experience financial difficulties, have demand that exceeds their capacity or can no longer meet our specifications, our ability to provide some services may be hindered, in which case our business, financial condition and results of operations may be adversely affected.

Video content costs are substantial and continue to increase.  We expect video content costs to continue to be one of our largest operating costs associated with providing video service. Video programming content includes network programming designed to be shown in linear channels, as well as the programming of local over-the-air television stations that we retransmit.  The cable industry has experienced continued increases in the cost of programming, especially the cost of sports programming and local broadcast station retransmission content.  Programming costs are generally assessed on a per-subscriber basis, and therefore, are directly related to the number of subscribers to which the programming is provided.  Our relatively small subscriber base limits our ability to negotiate lower per-subscriber programming costs.  Larger providers can often qualify for discounts based on the number of their subscribers.  This cost difference can cause us to experience reduced operating margins, while our competitors with a larger subscriber base may not experience similar margin compression.  In addition, escalators in existing content agreements can result in cost increases that exceed general inflation.  While we expect video content costs to continue to increase, we may not be able to pass such cost increases on to our customers, especially as an increasing amount of programming content becomes available via the Internet at little or no cost.  Also, some competitors or their affiliates own programming in their own right and we may not be able to secure license rights to that programming.  As our programming contracts with content providers expire, there is no assurance that they will be renewed on acceptable terms or that they will be renewed at all, in which case we may not be able to provide such programming as part of our video services packages and our business and results of operations may be adversely affected.

We have employees who are covered by collective bargaining agreements.  If we are unable to enter into new agreements or renew existing agreements timely, we could experience work stoppages or other labor actions that could materially disrupt our business of providing services to our customers.  As of December 31, 2020, approximately 50% of our

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employees were covered by collective bargaining agreements.  These employees are hourly workers throughout our service territories and are represented by various unions and locals.  Our existing collective bargaining agreements expire between 2021 through 2023, of which contracts covering 77% of our employees will expire in 2021.

We cannot predict the outcome of the negotiations related to the collective bargaining agreements covering our employees.  If we are unable to reach new agreements or renew existing agreements, employees subject to collective bargaining agreements may engage in strikes, work stoppages or slowdowns, or other labor actions, which could materially disrupt our ability to provide services to our customers.  New labor agreements, or the renewal of existing agreements, may impose significant new costs on us, which could adversely affect our financial condition and result of operations.  While we believe our relations with the unions representing these employees are good, any protracted labor disputes or labor disruptions by our employees could negatively impact our business.

Our ability to attract and/or retain certain key management and other personnel in the future could have an adverse effect on our business.  We rely on the talents and efforts of key management personnel, many of whom have been with our company or in our industry for decades.  While we maintain long-term and emergency transition plans for key management personnel and believe we could either identify internal candidates or attract outside candidates to fill any vacancy created by the loss of any key management personnel, the loss of one or more of our key management personnel could have a negative impact on our business.

Acquisitions present many risks and we may be unable to realize the anticipated benefits of acquisitions.  From time to time, we make acquisitions and investments or enter into other strategic transactions.  In connection with these types of transactions, we may incur unanticipated expenses; fail to realize anticipated benefits; have difficulty integrating the acquired businesses; disrupt relationships with current and new employees, customers and vendors; incur significant indebtedness or have to delay or not proceed with announced transactions.  The occurrence of any of the foregoing events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may face significant challenges in combining the operations of an acquired business with ours in a timely and efficient manner.  The failure to successfully integrate an acquired business and to successfully manage the challenges presented by the integration process may result in our inability to achieve anticipated benefits of the acquisition, including operational and financial synergies.  Even if we are successful in integrating acquired businesses, we cannot guarantee that the integration will result in the complete realization of anticipated financial synergies or that they will be realized within the expected time frames.

Public health threats, such as the recent outbreak of COVID-19, could have a material adverse effect on our business, results of operations, cash flows and stock price.  We may face risks associated with public health threats or outbreaks of epidemic, pandemic or communicable diseases, such as the outbreak of the coronavirus (“COVID-19”) and its variants.  The COVID-19 pandemic has negatively impacted the global economy, financial markets and supply chains and has resulted in increased unemployment levels.  The outbreak has resulted in federal, state and local governments implementing mitigation measures, including shelter-in-place orders, travel restrictions, limitations on business, school closures and other measures.  Governments have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

As a critical infrastructure provider, we have continued to operate our business and provide services to our customers.  Although we are considered an essential business, the outbreak of COVID-19 and any preventive or protective actions implemented by governmental authorities may have a material adverse effect on our operations, customers and suppliers and could do so for an indefinite period of time.  Adverse economic and market conditions as a result of COVID-19 could also adversely affect the demand for our products and services and may also impact the ability of our customers to satisfy their obligations to us. In addition, concerns regarding the economic impact of COVID-19 have caused volatility in financial and other capital markets which has and may continue to adversely affect the market price of our common stock and our ability to access capital markets.  In response to the COVID-19 pandemic, we have transitioned a substantial number of our employees to telecommuting and remote work arrangements, which may increase the risk of a security breach or cybersecurity attack on our information technology systems that could impact our business.

We cannot reasonably estimate at this time the resulting future financial impact of COVID-19 on our business, but it could have a material adverse effect to our results of operations, financial condition and liquidity.  The extent to which the COVID-19 pandemic may adversely impact our business, results of operations, financial condition and liquidity will depend on future developments, which are highly uncertain and unpredictable, including the severity and duration of the

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outbreak, the effectiveness of actions taken to contain or mitigate its effects and any resulting economic downturn, recession or depression in the markets we serve.

Risks Relating to Current Economic Conditions

Unfavorable changes in financial markets could adversely affect pension plan investments resulting in material funding requirements to meet our pension obligations.  We expect that we will continue to make future cash contributions to our pension plans, the amount and timing of which will depend on various factors including funding regulations, future investment performance, changes in future discount rates and mortality tables and changes in participant demographics.  Unfavorable fluctuations or adverse changes in any of these factors, most of which are outside our control, could impact the funded status of the plans and increase future funding requirements.  Returns generated on plan assets have historically funded a large portion of the benefits paid under these plans.  If the financial markets experience a downturn and returns fall below the estimated long-term rate of return, our future funding requirements could increase significantly, which could adversely affect our cash flows from operations.

Weak economic conditions may have a negative impact on our business, results of operations and financial condition.  Downturns in the economic conditions in the markets and industries we serve could adversely affect demand for our products and services and have a negative impact on our results of operations.  Economic weakness or uncertainty may make it difficult for us to obtain new customers and may cause our existing customers to reduce or discontinue their services to which they subscribe.  This risk may be worsened by the expanded availability of free or lower cost services, such as video over the Internet or substitute services, such as wireless phones and data devices.  Weak economic conditions may also impact the ability of third parties to satisfy their obligations to us.

Risks Relating to Our Common Stock

The price of our common stock may be volatile and may fluctuate substantially, which could negatively affect holders of our common stock.  The market price of our common stock may fluctuate widely as a result of various factors including, but not limited to, period-to-period fluctuations in our operating results, the volume of sales of our common stock, the limited number of holders of our common stock and the resulting limited liquidity in our common stock, dilution, developments in the communications industry, the failure of securities analysts to cover our common stock, changes in financial estimates by securities analysts, short interests in our common stock, competitive factors, regulatory developments, labor disruptions, general market conditions and market conditions affecting the stock of communications companies.  Communications companies have, in the past, experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating performance.  High levels of market volatility may have a significant adverse effect on the market price of our common stock.  In addition, in the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price.  This type of litigation could result in substantial costs and divert management's attention and resources, which could have a material adverse impact on our business, financial condition, results of operations, liquidity and/or the market price of our common stock.

Our organizational documents could limit or delay another party’s ability to acquire us and, therefore, could deprive our investors of a possible takeover premium for their shares.  A number of provisions in our amended and restated certificate of incorporation and bylaws could make it difficult for another company to acquire us.  Among other things, these provisions:

Divide our Board of Directors into three classes, which results in roughly one-third of our directors being elected each year;

Provide that directors may only be removed for cause and then only upon the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock;

Require the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock to amend, alter, change or repeal specified provisions of our amended and restated certificate of incorporation and bylaws;

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Require stockholders to provide us with advance notice if they wish to nominate any candidates for election to our Board of Directors or if they intend to propose any matters for consideration at an annual stockholders meeting; and

Authorize the issuance of so-called “blank check” preferred stock without stockholder approval upon such terms as the Board of Directors may determine.

We also are subject to laws that may have a similar effect.  For example, federal and certain state telecommunications laws and regulations generally prohibit a direct or indirect transfer of control over our business without prior regulatory approval.  Similarly, Section 203 of the Delaware General Corporation Law restricts our ability to engage in a business combination with an “interested stockholder”.  These laws and regulations make it difficult for another company to acquire us, and therefore, could limit the price that investors might be willing to pay in the future for shares of our common stock.  In addition, the rights of our common stockholders are subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that we may issue in the future.

Risks Relating to Our Indebtedness and Our Capital Structure

We have a substantial amount of debt outstanding, which could adversely affect our business and restrict our ability to fund working capital and planned capital expenditures.  As of December 31, 2020, we had $2.0 billion of debt outstanding.  Our substantial level of indebtedness could adversely impact our business, including:

We may be required to use a substantial portion of our cash flow from operations to make principal and interest payments on our debt, which will reduce funds available for operations, capital expenditures, future business opportunities and strategic initiatives;

We may have limited flexibility to react to changes in our business and our industry;

It may be more difficult for us to satisfy our other obligations;

We may have a limited ability to borrow additional funds or to sell assets to raise funds if needed for working capital, capital expenditures, acquisitions or other purposes;

We may become more vulnerable to general adverse economic and industry conditions, including changes in interest rates; and

We may be at a disadvantage compared to our competitors that have less debt.

We cannot guarantee that we will generate sufficient revenues to service our debt and have adequate funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our markets.

Our credit agreement and the indentures governing our Senior Notes contain covenants that limit management’s discretion in operating our business and could prevent us from capitalizing on opportunities and taking other corporate actions.  Among other things, our credit agreement limits or restricts our ability (and the ability of certain of our subsidiaries), and the separate indenture governing the Senior Notes limits the ability of our subsidiary, Consolidated Communications, Inc., and its restricted subsidiaries to: incur or guarantee additional indebtedness or issue preferred stock; make restricted payments, including paying dividends on, redeeming, repurchasing or retiring our capital stock; make investments and prepay or redeem debt; enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans or transfer assets to us; create liens; sell or otherwise dispose of assets, including capital stock of, or other ownership interests in subsidiaries; engage in transactions with affiliates; engage in sale and leaseback transactions; make capital expenditures; engage in a business other than telecommunications; and consolidate, merge or transfer all or substantially all of the assets of the Company.

In addition, our credit agreement requires us to comply with specified financial ratios, including a financial covenant based on first lien leverage.  Our ability to comply with these ratios may be affected by events beyond our control.  These restrictions limit our ability to plan for or react to market conditions, meet capital needs or otherwise constrain our activities

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or business plans.  They also may adversely affect our ability to finance our operations, enter into acquisitions or engage in other business activities that would be in our interest.

A breach of any of the covenants contained in our credit agreement, in any future credit agreement, or in the separate indentures governing the Senior Notes, or our inability to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all borrowings outstanding to be due and payable.  If the amounts outstanding under our credit facilities were to be accelerated, we cannot assure that our assets would be sufficient to repay in full the money owed.  In such a situation, the lenders could foreclose on the assets and capital stock pledged to them.

We may not be able to refinance our existing debt if necessary, or we may only be able to do so at a higher interest rate.  We may be unable to refinance or renew our credit facilities and our failure to repay all amounts due on the maturity dates would cause a default under the credit agreement.  Alternatively, any renewal or refinancing may occur on less favorable terms.  If we refinance our credit facilities on terms that are less favorable to us than the terms of our existing debt, our interest expense may increase significantly, which could impact our results of operations and impair our ability to use our funds for other purposes.

Our variable-rate debt subjects us to interest rate risk, which could impact our cost of borrowing and operating results.  Certain of our debt obligations are at variable rates of interest and expose us to interest rate risk.  Increases in interest rates could negatively impact our results of operations and operating cash flows.  We utilize interest rate swap agreements to convert a portion of our variable-rate debt to a fixed-rate basis.  However, we do not maintain interest rate hedging agreements for all of our variable-rate debt and our existing hedging agreements may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks.  Changes in fair value of cash flow hedges that have been de-designated or determined to be ineffective are recognized in earnings.  Significant increases or decreases in the fair value of these cash flow hedges could cause favorable or adverse fluctuations in our results of operations.

In addition, a substantial portion of our variable-rate debt bears interest based on the London Interbank Offering Rate (“LIBOR”). In 2017, the Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to stop requiring banks to submit rates for the calculation of LIBOR after 2021. In November 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, announced plans to consult on ceasing publication of LIBOR on December 31, 2021 for only the one-week and two-month LIBOR tenors and extended the LIBOR transition deadline to June 30, 2023 for all other LIBOR tenors. These reforms and any future reforms may cause LIBOR to cease to exist and it is currently unclear whether LIBOR will be replaced with a new benchmark or if new methods of calculating LIBOR will be established.   If LIBOR ceases to exist or if the methods for calculating LIBOR change, interest rates on our current and future debt obligations as well as our interest rate swap agreements may be adversely affected. In addition, any transition process from LIBOR to an alternative rate could cause, among other things, LIBOR to perform differently than in the past, a disruption in the financial markets, or increases in benchmark rates, any of which could adversely affect our results of operations, cash flows and liquidity.

Risks Relating to the Searchlight Investment

Obtaining required approvals and satisfying closing conditions may delay or prevent completion of the Investment. In addition, the parties have the right to terminate the Investment Agreement under specified circumstances, in which case the Investment would not be completed.  On September 13, 2020, we entered into an investment agreement (the “Investment Agreement”) with Searchlight Capital Partners L.P. (“Searchlight”). The investment commitment is structured in two stages with the first stage of the transaction completed on October 2, 2020.  The second stage of the investment is currently expected to be completed in mid-2021 (the “Second Closing”), assuming that all the closing conditions are satisfied or waived. Certain events may delay the completion of the investment or result in a termination of the Investment Agreement. Some of these events are outside of our control. Completion of the Second Closing is conditioned upon the receipt of certain governmental consents and regulatory approvals including approval by the Federal Communications Commission (“FCC”) and the expiry of any applicable waiting periods under the Hart Scott Rodino Act and other applicable antitrust laws.  The Second Closing is also subject to the satisfaction of certain other customary closing conditions.  If the FCC denies approval, the Note will still be issued to Searchlight but will not be convertible into shares of Series A preferred stock, and Searchlight shall have no obligation to deliver the additional consideration of $75.0 million to Consolidated.

No assurance can be given that the required conditions for the Second Closing of the transaction will be fulfilled and, accordingly, the Investment may not be completed on the terms currently contemplated or at all. While we intend to pursue

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vigorously all required conditions and approvals and do not know of any reason why we would not be able to obtain them in a timely manner, the requirement to obtain these approvals prior to completion of the Investment could jeopardize or delay the completion of the transaction. In addition, if the Second Closing is not consummated by October 2, 2021 (subject to extensions up to such date that is 36 months after October 2, 2020 in certain circumstances), Searchlight or Consolidated may choose not to proceed with the Second Closing.  Moreover, the parties can mutually decide to terminate the Investment Agreement at any time prior to the consummation of the Second Closing. In addition, Searchlight and Consolidated may elect to terminate the Investment Agreement in certain other circumstances. If the Investment Agreement is terminated, Consolidated will not realize the anticipated benefits of the Investment.

The pendency of the Investment could cause disruptions in our business, which could have an adverse effect on our business, operations, and financial results.

The pendency of the Investment could cause disruptions in and create uncertainty surrounding our business, which could have an adverse effect on our business, operations and financial results, regardless of whether the Investment is completed. These risks to our business include the following, all of which could be exacerbated by a delay in completion of the Investment: litigation relating to the Investment and costs related thereto; conditions that may be imposed on Consolidated by federal or state regulators in connection with their approval of the Investment; the restrictions on the ability of Consolidated to take certain actions outside the ordinary course of business prior to the consummation of the Second Closing, which may delay or prevent Consolidated from undertaking certain actions or business opportunities that may arise prior to the consummation of the Second Closing; and the attention of management of Consolidated may be diverted from the operation of the businesses toward the completion of the Investment.

In addition, if the Investment is not completed, Consolidated may experience negative reactions from the financial markets and from its customers and employees. Consolidated also could be subject to litigation related to a failure to complete the Investment or to enforce its obligations under the Investment Agreement. If the Investment is not consummated, there can be no assurance that the risks described above will not materially affect the business, financial results and stock price of Consolidated.

Risks Related to the Regulation of Our Business

We are subject to a complex and uncertain regulatory environment, and we face compliance costs and restrictions greater than those of many of our competitors.  Our businesses are subject to regulation by the FCC and other federal, state and local entities.  Rapid changes in technology and market conditions have resulted in changes in how the government addresses telecommunications, video programming and Internet services.  Many businesses that compete with our Incumbent Local Exchange Carrier (“ILEC”) and non-ILEC subsidiaries are comparatively less regulated.  Some of our competitors are either not subject to utilities regulation or are subject to significantly fewer regulations.  In contrast to our subsidiaries regulated as cable operators and satellite video providers, competing on-demand and OTT providers and motion picture and DVD firms have almost no regulation of their video activities.  Recently, federal and state authorities have become more active in seeking to address critical issues in each of our product and service markets.  The adoption of new laws or regulations, or changes to the existing regulatory framework at the federal, state or local level, could require significant and costly adjustments that could adversely affect our business plans.  New regulations could impose additional costs or capital requirements, require new reporting, impair revenue opportunities, potentially impede our ability to provide services in a manner that would be attractive to our customers and potentially create barriers to enter new markets or to acquire new lines of business. We face continued regulatory uncertainty in the immediate future.  Not only are these governmental entities continuing to move forward on these matters, their actions remain subject to reconsideration, appeal and legislative modification over an extended period of time, and it is unclear how their actions will ultimately impact our business.  We cannot predict future developments or changes to the regulatory environment or the impact such developments or changes may have on us.

We receive support from various funds established under federal and state laws, and the continued receipt of that support is not assured.  A significant portion of our revenues come from network access and subsidies.  An order adopted by the FCC in 2011 (the “Order”) significantly impacts the amount of support revenue we receive from the Universal Service Fund (“USF”), Connect America Fund (“CAF”) and intercarrier compensation (“ICC”).  The Order reformed core parts of the USF, broadly recast the existing ICC scheme, established the CAF to replace support revenues provided by the USF and redirected support from voice services to broadband services.  In 2012, CAF funding was implemented, which froze USF support to price cap carriers until the FCC implemented a broadband cost model to shift support from voice services to broadband services.  In 2020, the FCC adopted an order establishing the Rural Digital Opportunity Fund, the

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next phase of the CAF program, which will result in a reduction to the level of funding we currently receive from the FCC as of 2022.  See Part I – Item 1 – “Regulatory Environment” above for statistics of current CAF funding levels.

We receive subsidy payments from various federal and state universal service support programs, including high-cost support, Lifeline and E-Rate programs for schools and libraries.  The total cost of the various federal universal service programs has increased significantly in recent years, putting pressure on regulators to reform the programs and to limit both eligibility and support.  We cannot predict future changes that may impact the subsidies we receive.  However, a reduction in subsidies support may directly affect our profitability and cash flows.

Increased regulation of the Internet could increase our cost of doing business.  Current laws and regulations governing access to, or commerce on, the Internet are limited.  As the significance of the Internet continues to expand, federal, state and local governments may adopt new rules and regulations applicable to, or apply existing laws and regulations to, the Internet.  During 2017, the FCC adopted an order eliminating its previous classification of Internet service as a telecommunications service regulated under Title II of the Telecommunications Act of 1996.  This effectively limits the FCC’s authority over Internet Service Providers.  The FCC retained rules requiring Internet Service Providers to disclose practices associated with blocking, throttling and paid prioritization of Internet traffic.  The FCC order has been challenged in court and the outcome of the challenge cannot be determined at this time.  

The outcome of pending matters before the FCC and the Federal Trade Commission (“FTC”) and any potential congressional action cannot be determined at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and could affect our ability to compete in the markets we serve.

We are subject to extensive laws and regulations relating to the protection of the environment, natural resources and worker health and safety.  Our operations and properties are subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability in connection with the management, storage and disposal of hazardous materials, asbestos and petroleum products.  We are also subject to laws and regulations governing air emissions from our fleet vehicles.  As a result, we face several risks, including:

Hazardous materials may have been released at properties that we currently own or formerly owned (perhaps through our predecessors).  Under certain environmental laws, we could be held liable, without regard to fault, for the costs of investigating and remediating any actual or threatened contamination at these properties and for contamination associated with disposal by us, or by our predecessors, of hazardous materials at third-party disposal sites;

We could incur substantial costs in the future if we acquire businesses or properties subject to environmental requirements or affected by environmental contamination.  In particular, environmental laws regulating wetlands, endangered species and other land use and natural resources may increase the costs associated with future business or expansion or delay, alter or interfere with such plans;

The presence of contamination can adversely affect the value of our properties and make it difficult to sell any affected property or to use it as collateral; and

We could be held responsible for third-party property damage claims, personal injury claims or natural resource damage claims relating to contamination found at any of our current or past properties.

The cost of complying with environmental requirements could be significant.  Similarly, the adoption of new environmental laws or regulations, or changes in existing laws or regulations or their interpretations, could result in significant compliance costs or unanticipated environmental liabilities.

Our business may be impacted by new or changing tax laws or regulations and actions by federal, state, and/or local agencies, or by how judicial authorities apply tax laws.  Our operations are subject to various federal, state and local tax laws and regulations.  In connection with the products and services we sell, we calculate, collect, and remit various federal, state, and local taxes, surcharges and regulatory fees (“tax” or “taxes”) to numerous federal, state and local governmental authorities.  In many cases, the application of tax laws is uncertain and subject to differing interpretations, especially when evaluated against new technologies and telecommunications services, such as broadband Internet access and cloud related services.  Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued

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or applied.  Changes in tax laws, or changes in interpretations of existing laws, could materially affect our financial position, results of operations and cash flows. For example, the Tax Cuts and Jobs Act of 2017, a major federal tax reform, that had a significant impact on our tax obligations and effective income tax rate.  

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties.

Our corporate headquarters are currently located at 121 S. 17th Street, Mattoon, Illinois, a leased facility.  We also own and lease office facilities and related equipment for administrative personnel, central office buildings and operations in many of the states in which we operate.  

In addition to land and structures, our property consists of equipment necessary for the provision of communication services, including central office equipment, customer premises equipment and connections, pole lines, video head-end, remote terminals, aerial and underground cable and wire facilities, vehicles, furniture and fixtures, computers and other equipment.  We also own certain other communications equipment held as inventory for sale or lease.

In addition to plant and equipment that we wholly-own, we utilize poles, towers and cable and conduit systems jointly-owned with other entities and lease space on facilities to other entities.  These arrangements are in accordance with written agreements customary in the industry.  We also have appropriate easements, rights-of-way and other arrangements for the accommodation of our pole lines, underground conduits, aerial and underground cables and wires.  

Item 3.  Legal Proceedings.

From time to time we may be involved in litigation that we believe is of the type common to companies in our industry, including regulatory issues.  While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse impact on our business, results of operations, financial condition or cash flows.  See Note 13 to the consolidated financial statements included in this report in Part II – Item 8 – “Financial Statements and Supplementary Data” for a discussion of recent developments related to these legal proceedings.

Item 4.  Mine Safety Disclosures.

Not Applicable.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “CNSL”.  As of February 22, 2021, there were approximately 4,184 stockholders of record of the Company’s common stock.  

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Share Repurchases

During the quarter ended December 31, 2020, we repurchased 147,236 common shares surrendered by employees in the administration of employee share-based compensation plans. The following table summarizes the share repurchase activity:

    

    

    

    

    

Total number of

    

Maximum number

 

shares purchased

of shares that may

 

as part of publicly

yet be purchased

 

Total number of

Average price

announced plans

under the plans

 

Purchase period

shares purchased

paid per share

or programs

or programs

 

October 1-October 31, 2020

 

 

n/a

 

n/a

 

n/a

November 1-November 30, 2020

 

 

n/a

 

n/a

 

n/a

December 1-December 31, 2020

 

147,236

 

$ 5.61

 

n/a

 

n/a

Performance Graph

The following graph shows a five-year comparison of cumulative total shareholder return of our common stock (assuming reinvestment of dividends) with the S&P 500 Index and the NASDAQ Telecommunications Index.  The comparison of total return on investment (change in year-end stock price plus reinvested dividends) for each of the periods assumes that $100 was invested on December 31, 2015 in each index.  The stock performance shown on the graph below is not necessarily indicative of future price performance.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Consolidated Communications Holdings, the S&P 500 Index and the NASDAQ Telecommunications Index

Graphic

As of December 31,

 

(In dollars)

    

2015

    

2016

    

2017

    

2018

    

2019

    

2020

 

Consolidated Communications Holdings

$

100.00

$

136.88

$

66.66

$

61.35

$

25.82

$

32.54

S&P 500

$

100.00

$

111.96

$

136.40

$

130.42

$

171.49

$

203.04

NASDAQ Telecommunications

$

100.00

$

112.56

$

135.96

$

125.10

$

158.73

$

192.30

Sale of Unregistered Securities

During the year ended December 31, 2020, we did not sell any equity securities of the Company which were not registered under the Securities Act of 1933, as amended.

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Item 6.  Selected Financial Data.

The selected financial data set forth below should be read in conjunction with Part II - Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the related notes, and other financial data included elsewhere in this annual report.  Historical results are not necessarily indicative of the results to be expected in future periods.

Year Ended December 31,

 

(In millions, except per share amounts)

    

2020 (1)

    

2019

    

2018 (2)

    

2017 (3)

    

2016

 

Operating revenues

$

1,304.0

$

1,336.5

$

1,399.1

$

1,059.6

$

743.2

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

 

560.6

 

574.9

 

611.9

 

446.0

 

321.4

Selling, general and administrative expense

 

275.4

 

299.1

 

333.6

 

249.1

 

156.5

Acquisition and other transaction costs (4)

 

7.6

 

 

2.0

 

33.7

 

1.2

Loss on impairment

 

 

 

 

 

0.6

Depreciation and amortization

 

324.9

 

381.2

 

432.6

 

291.8

 

174.0

Income from operations

 

135.5

 

81.3

 

19.0

 

39.0

 

89.5

Interest expense, net

 

(143.6)

 

(136.7)

 

(134.5)

 

(129.8)

 

(76.8)

Gain (loss) on extinguishment of debt

 

(18.3)

 

4.5

 

 

 

(6.6)

Change in fair value of contingent payment rights

 

23.8

 

 

 

 

Other income, net

 

50.8

 

27.2

 

40.9

 

31.2

 

32.1

Income (loss) before income taxes

 

48.2

 

(23.7)

 

(74.6)

 

(59.6)

 

38.2

Income tax expense (benefit)

 

10.9

 

(3.7)

 

(24.1)

 

(124.9)

 

23.0

Net income (loss)

 

37.3

 

(20.0)

 

(50.5)

 

65.3

 

15.2

Net income of noncontrolling interest

 

0.3

 

0.4

 

0.3

 

0.4

 

0.3

Net income (loss) attributable to common shareholders

$

37.0

$

(20.4)

$

(50.8)

$

64.9

$

14.9

Net income (loss) per common share - basic and diluted

$

0.47

$

(0.29)

$

(0.73)

$

1.07

$

0.29

Weighted-average number of shares - basic and diluted

 

72,752

 

70,837

 

70,613

 

60,373

 

50,301

Cash dividends per common share

$

$

0.39

$

1.55

$

1.55

$

1.55

Consolidated cash flow data from continuing operations:

Cash flows from operating activities

$

365.0

$

339.1

$

357.3

$

210.0

$

218.2

Cash flows used for investing activities

 

(210.1)

 

(217.8)

 

(221.5)

 

(1,042.7)

 

(108.3)

Cash flows (used for) provided by financing activities

 

(11.7)

 

(118.5)

 

(141.9)

 

821.3

 

(98.7)

Capital expenditures

 

217.6

 

232.2

 

244.8

 

181.2

 

125.2

Consolidated Balance Sheet:

Cash and cash equivalents

$

155.6

$

12.4

$

9.6

$

15.7

$

27.1

Total current assets

 

340.7

 

176.9

 

198.1

 

213.7

 

133.2

Net property, plant and equipment

 

1,760.2

 

1,835.9

 

1,927.1

 

2,037.6

 

1,055.2

Total assets

 

3,507.3

 

3,390.3

 

3,535.3

 

3,719.1

 

2,092.8

Total debt (including current portion)

 

1,950.2

 

2,278.0

 

2,334.1

 

2,341.2

 

1,391.7

Stockholders’ equity

 

389.2

 

347.3

 

415.7

 

573.9

 

176.3

Other financial data (unaudited):

Adjusted EBITDA (5)

$

529.2

$

523.5

$

537.3

$

414.1

$

305.8

(1)On October 2, 2020, we closed on the first stage of the strategic investment with Searchlight and received $350.0 million and completed a global refinancing of our long-term debt through the issuance of $2,250.0 million in new secured debt and retired all of our then existing outstanding debt obligations.
(2)Effective January 1, 2018, we adopted Accounting Standards Update 2014-09 (“ASC 606”), Revenue from Contracts with Customers, using the modified retrospective method for open contracts.  Results for 2018 are presented under ASC 606, while prior period amounts have not been revised.

(3)On July 3, 2017, we acquired 100% of the issued and outstanding shares of FairPoint in exchange for shares of our common stock. The financial results for FairPoint have been included in our consolidated financial statements as of the acquisition date.

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(4)Acquisition and other transaction costs consists primarily of legal, finance and other professional fees incurred in connection with acquisitions and other strategic transactions, including costs incurred related to change-in-control payments to former employees of the acquired company.

(5)In addition to the results reported in accordance with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”), we also use certain non-GAAP measures such as EBITDA and adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends.  These financial measures are not a measure of financial performance under US GAAP and should not be considered in isolation or as a substitute for net income (loss) as a measure of performance and net cash provided by operating activities as a measure of liquidity.  They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP.  The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies.  Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below.

EBITDA is defined as net earnings before interest expense, income taxes, and depreciation and amortization.  Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below.  These measures are a common measure of operating performance in the telecommunications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash.

The following tables are a reconciliation of net income (loss) to Adjusted EBITDA:

Year Ended December 31,

 

(In millions, unaudited)

2020

2019

2018

 

2017

   

2016

 

Net income (loss)

$

37.3

$

(20.0)

$

(50.5)

$

65.3

$

15.2

Add (subtract):

Interest expense, net of interest income

 

143.6

 

136.7

 

134.5

 

129.8

 

76.8

Income tax expense (benefit)

 

10.9

 

(3.7)

 

(24.1)

 

(124.9)

 

23.0

Depreciation and amortization

 

324.9

 

381.2

 

432.6

 

291.8

 

174.0

EBITDA

 

516.7

 

494.2

 

492.5

 

362.0

 

289.0

Adjustments to EBITDA:

Other, net (a)

 

(31.0)

 

(8.8)

 

0.6

 

19.3

 

(25.5)

Investment distributions (b)

 

41.5

 

35.8

 

39.1

 

30.0

 

32.1

(Gain) loss on extinguishment of debt (c)

 

18.3

 

(4.5)

 

 

 

6.6

Change in fair value of contingent payment rights (d)

 

(23.8)

 

 

 

 

Loss on impairment (e)

 

 

 

 

 

0.6

Non-cash, stock-based compensation (f)

 

7.5

 

6.8

 

5.1

 

2.8

 

3.0

Adjusted EBITDA

$

529.2

$

523.5

$

537.3

$

414.1

$

305.8

(a)Other, net includes the equity earnings from our investments, dividend income, income attributable to noncontrolling interests in subsidiaries, acquisition and transaction related costs including severance, non-cash pension and post-retirement benefits and certain other miscellaneous items.

(b)Includes all cash dividends and other cash distributions received from our investments.

(c)Represents the redemption premium (discount) and write-off of unamortized debt issuance costs in connection with the redemption or retirement of our debt obligations.

(d)Represents the non-cash change in fair value of contingent payment obligations related to the Searchlight investment.

(e)Represents intangible asset impairment charges recognized during the period.

(f)Represents compensation expenses in connection with the issuance of stock awards, which because of their non-cash nature, these expenses are excluded from Adjusted EBITDA.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Reference is made to Part I – Item 1 – “Note About Forward-Looking Statements” and Part I – Item 1A – “Risk Factors” which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein.  In addition, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Consolidated Communications Holdings, Inc. (“Consolidated,” the “Company,” “we,” “our” or “us”).  MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to the consolidated financial statements (“Notes”) as of and for each of the three years in the period ended December 31, 2020 included elsewhere in this Annual Report on Form 10-K.

Throughout MD&A, we refer to certain measures that are not a measure of financial performance in accordance with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”).  We believe the use of these non-GAAP measures on a consolidated basis provides the reader with additional information that is useful in understanding our operating results and trends.  These measures should be viewed in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP.  See the Non-GAAP Measures section below for a more detailed discussion on the use and calculation of these measures.

Overview

Consolidated is a broadband and business communications provider offering a wide range of communication solutions to consumer, commercial and carrier customers across a 23-state service area.  We operate an advanced fiber network spanning over 46,600 fiber route miles across many rural areas and metro communities.  Our business product suite includes: data and Internet solutions, voice, data center services, security services, managed and IT services, and an expanded suite of cloud services.  We provide wholesale solutions to wireless and wireline carriers and other service providers including data, voice, network connections and custom fiber builds and last mile connections.  We offer residential high-speed Internet, video, phone and home security services as well as multi-service residential and small business bundles.  

 

We generate the majority of our consolidated operating revenues primarily from monthly subscriptions to our broadband, data and transport services (collectively “broadband services”) marketed to business and residential customers.  Commercial and carrier services represent the largest source of our operating revenues and are expected to be key growth areas in the future.  We are focused on expanding our broadband and commercial product suite and are continually enhancing our commercial product offerings to meet the needs of our business customers.  We leverage our advanced fiber network and tailor our services by developing solutions to fit their specific needs and leveraging a value- based sales approach.  We continue to enhance our suite of managed and cloud services, which increases efficiency and enables greater scalability and reliability for our business customers.  In April 2020, we launched ProConnect Unified Communications to businesses in our northern New England markets.  This cloud-based collaboration solution enables users to easily make and receive calls, host video conferences and share files, message and manage features from anywhere and any device.  In October 2020, we expanded the availability of our Microsoft Productivity Suite, another cloud-based collaboration solution, across our entire service area.  This solution includes the Microsoft Teams collaboration platform that combines video meetings, chat, file storage and application integration.  We anticipate future momentum in commercial and carrier services as these products gain traction as well as from the demand from customers for additional bandwidth and data-based services.    

 

We market our residential services by leading with broadband services.  As consumer demands for bandwidth continue to increase, our focus is on enhancing our broadband services and progressively increasing broadband speeds.  We offer data speeds of up to 1 Gbps in select markets, and up to 100 Mbps in markets where 1 Gbps is not yet available, depending on the geographical region.  As of December 31, 2020, approximately 58% of the homes we serve on our legacy Consolidated network had availability to broadband speeds of up to 100 Mbps or greater.  The majority of the homes in our northern New England service areas have availability to broadband speeds of 20 Mbps or less. We continue to focus on bringing higher broadband speeds and improving customer experience by expanding the availability of multi-Gig broadband services.  As part of our fiber build plan, we plan to upgrade approximately 1.6 million passings across select service areas over the next five years to enable multi gigabit-capable services to these homes and small businesses of which 300,000 passings will be upgraded in 2021.  This will provide our residential customers with a highly competitive broadband service.  Businesses also get a boost by being able to take full advantage of higher bandwidth option and cloud-based applications.

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Our competitive broadband speeds enable us to meet the need for higher bandwidth from the growing consumer demand for streaming live programming or in-demand content on any device.  The consumers demand for streaming services, either to augment their current video subscription plan or to entirely replace their video subscription may impact our future video subscriber base and, accordingly, reduce our video revenue as well as our video programing costs.  Total video connections decreased 10% as of December 31, 2020 compared to 2019.  We believe the trend in changing consumer viewing habits will continue to impact our business results and complement our strategy of providing consumers with higher broadband speeds to facilitate streaming content.  In 2019, we launched in our northern New England markets, CCiTV, which is a customizable, cloud-enabled video service that supports a wide variety of viewing habits.  Content can be delivered in high-definition quality to a big-screen TV, as well as to tablets and mobile devices.  CCiTV helps align our product offering with consumer habits using an app-based approach to video as well as reduce our operating costs.  We expanded CCiTV to customers in our Texas markets in June 2020 and in our California and Illinois markets in October 2020.  

 

Operating revenues also continue to be impacted by the anticipated industry-wide trend of declines in voice services, access lines and related network access revenue.  Many customers are choosing to subscribe to alternative communication services and competition for these subscribers continues to increase.  Total voice connections decreased 7% as of December 31, 2020 compared to 2019.  Competition from wireless providers, Competitive Local Exchange Carriers and cable television providers has increased in recent years in the markets we serve.  We have been able to mitigate some of the access line losses through marketing initiatives and product offerings, such as our VoIP service. 

 

As discussed in the “Regulatory Matters” section below, our operating revenues are impacted by legislative or regulatory changes at the federal and state levels, which could reduce or eliminate the current subsidies revenue we receive.  A number of proceedings and recent orders relate to universal service reform, intercarrier compensation (“ICC”) and network access charges.  There are various ongoing legal challenges to the orders that have been issued.  As a result, it is not yet possible to fully determine the impact of the regulatory changes on our operations.

Significant Recent Developments

Searchlight Investment

On September 13, 2020, we entered into an investment agreement (the “Investment Agreement”) with an affiliate of Searchlight Capital Partners, L.P. (“Searchlight”).  In connection with the Investment Agreement, affiliates of Searchlight have committed to invest up to an aggregate of $425.0 million in the Company.  The investment commitment is structured in two stages.  In the first stage of the transaction, which was completed on October 2, 2020, Searchlight invested $350.0 million in the Company in exchange for 6,352,842 shares, or approximately 8%, of the Company’s common stock and a contingent payment right (“CPR”) that is convertible, upon the receipt of certain regulatory and shareholder approvals, into an additional 17,870,012 shares, or 16.9% of the Company’s common stock.  In addition, Searchlight will receive the right to an unsecured subordinated note with an aggregate principal amount of approximately $395.5 million (the “Note”).  

In the second stage of the transaction, Searchlight will invest an additional $75.0 million and will be issued the Note, which will be convertible into shares of a new series of perpetual preferred stock of the Company with an aggregate liquidation preference equal to the principal amount of the Note plus accrued interest as of the date of conversion.  The Note may be issued to Searchlight prior to the closing of the second stage of the transaction upon the occurrence of certain events.  The Note bears interest at 9.0% per annum from the date of the closing of the first stage of the transaction and is payable semi-annually in arrears.  Upon conversion of the Note, dividends on the preferred stock will accrue daily on the liquidation preference at a rate of 9.0% per annum, payable semi-annually in arrears.  In addition, following shareholder approval, if received, the CPR will be convertible into an additional 15,115,899 shares, or an additional 10.1%, of the Company’s common stock.  Upon completion of both stages, the common stock and CPR issued to Searchlight will represent approximately 35% of the Company’s common stock on an as-converted basis.  The closing of the second stage of the transaction is subject to the receipt of Federal Communications Commission (“FCC”) and Hart Scott Rodino approvals and the satisfaction of certain other customary closing conditions. We expect the closing of the second stage to be completed in mid-2021.

The proceeds from the strategic investment with Searchlight provides us additional capital to accelerate our growth plans and provide significant benefits to our consumer, commercial and carrier customers. With the strategic investment, we intend to enhance our fiber infrastructure and accelerate our investments in high-growth and competitive areas.  We will

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continue to invest in the expansion of commercial and carrier services, particularly through building fiber laterals and expanding our network in existing markets.  In addition, we will continue to focus on significantly increasing broadband speeds, expanding the availability of our multi-Gig broadband services and providing a faster and more efficient network in targeted regions.  Through the five-year expansion plan of our fiber network, we intend to upgrade approximately 1.6 million residential and small business premises to fiber-to-the-home/premise (“FTTP”). Our investment in more competitive broadband speeds is critical to our long-term success. The strategic investment with Searchlight provides us a valued partner with significant experience deploying broadband infrastructure as we continue to execute our fiber-focused strategy and grow broadband services.  

Refinancing of Long-term Debt

On October 2, 2020, the Company and certain of its wholly-owned subsidiaries completed a refinancing of our long-term debt through the issuance of $2,250.0 million in new secured debt and retired all of our then existing outstanding debt obligations.  As described in the “Liquidity and Capital Resources” section, we entered into a new credit agreement which consists of term loans in the aggregate amount of $1,250.0 million and a $250.0 million revolving credit facility. On October 2, 2020, we also issued $750.0 million aggregate principal amount of 6.50% senior secured notes due 2028. On January 15, 2021, the Company issued an additional $150.0 million aggregate principal amount of incremental term loans under the credit agreement. The refinancing extended the maturities of our debt obligations and improved our liquidity, which, combined with the strategic investment with Searchlight, provides us the immediate flexibility to support our planned expansion of our fiber network and revenue growth plan.

COVID-19 Pandemic

We are closely monitoring the impact on our business of the outbreak of the coronavirus (“COVID-19”) pandemic.  We are taking precautions to ensure the safety of our employees, customers and business partners, while assuring business continuity and reliable service and support to our customers.  Health and safety measures implemented include transitioning to remote work-from-home policies, providing our field technicians with personal protective equipment and additional safety training, practicing social distancing and adding call aheads for work that must be performed inside customer premises.  We are proactively monitoring and augmenting our network capacity, to meet the higher demands for data usage during the pandemic as a result of increased usage from work from home and remote learning applications. As a result of the pandemic, the demand for bandwidth upgrades has increased for our consumer, commercial and carrier customers. Our existing network enables us to efficiently respond and adapt to the increase in internet traffic during this time.  

While we have not seen a significant adverse impact to our financial results from COVID-19 to date, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Capital markets and the US economy have also been significantly impacted by the pandemic and an economic recession. Adverse economic and market conditions as a result of COVID-19 could also adversely affect the demand for our products and services and may also impact the ability of our customers to satisfy their obligations to us. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted.  See Part I, Item 1A – “Risk Factors”.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted by the U.S. government as an emergency economic stimulus package that includes spending and tax breaks to strengthen the US economy and fund a nationwide effort to curtail the economic effects of COVID-19.  The CARES Act includes, among other things, deferral of certain employer payroll tax payments, the delay in payment of minimum required pension contributions due in 2020 until January 1, 2021 and certain income tax law changes including modifications to the net interest deduction limitations.  In 2020, we deferred the payment of approximately $12.0 million for the employer portion of Social Security taxes otherwise due in 2020 of which 50% will be due by December 31, 2021 and the remaining 50% by December 31, 2022.  We elected not to delay the payment of our minimum required pension contributions due in 2020 and have made all scheduled quarterly pension contributions during 2020. The CARES Act is not expected to have a material impact on our consolidated financial statements.

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Results of Operations

The following tables reflect our financial results on a consolidated basis and key operating statistics as of and for the years ended December 31, 2020, 2019 and 2018.

Financial Data

% Change

2020 vs.

2019 vs.

(In millions, except for percentages)

    

2020

    

2019

    

2018

    

2019

    

2018

 

Operating Revenues

Commercial and carrier:

Data and transport services (includes VoIP)

$

362.1

$

355.3

$

349.4

2

%

2

%

Voice services

 

181.7

 

188.3

 

202.9

 

(4)

 

(7)

Other

 

45.1

 

52.9

 

56.4

 

(15)

 

(6)

588.9

596.5

608.7

(1)

(2)

Consumer:

Broadband (Data and VoIP)

263.1

257.1

253.1

2

2

Video services

74.3

81.4

88.4

(9)

(8)

Voice services

 

170.5

 

180.8

 

202.0

 

(6)

 

(10)

507.9

519.3

543.5

(2)

(4)

Subsidies

72.0

72.4

83.4

(1)

(13)

Network access

125.3

138.1

152.6

(9)

(10)

Other products and services

 

9.9

10.2

10.9

 

(3)

 

(6)

Total operating revenues

 

1,304.0

 

1,336.5

 

1,399.1

 

(2)

 

(4)

Operating Expenses