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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended March 31, 2011

 

OR

 

o         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

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

02-0636095

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

121 South 17th Street

 

 

Mattoon, Illinois

 

61938-3987

(Address of Principal Executive Offices)

 

(Zip Code)

 

(217) 235-3311

(Registrant’s Telephone Number, including Area Code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  YES o  NO o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

Indicate the number of shares outstanding of each class of Common Stock, as of the latest practicable date

 

Class

 

Outstanding as of May 6, 2011

Common Stock, $0.01 Par Value

 

29,940,939 Shares

 

 

 



Table of Contents

 

FORM 10-Q

 

QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

 

PART I

 

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Statements of Operations (Unaudited) -
Three month periods ended March 31, 2011 and 2010

1

 

Condensed Consolidated Balance Sheets – March 31, 2011
(Unaudited) and December 31, 2010

2

 

Condensed Consolidated Statement of Changes in Stockholders’
Equity (Unaudited) – Three months ended March 31, 2011

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three month periods ended March 31, 2011 and 2010

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

PART II

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 3.

Defaults Upon Senior Securities

34

 

 

 

Item 4.

[Removed and Reserved]

34

 

 

 

Item 5.

Other Information

34

 

 

 

Item 6.

Exhibits

35

 


 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Three months ended March 31,

 

(In thousands, except per share amounts)

 

2011

 

2010

 

 

 

 

 

 

 

Net revenues

 

$

95,441

 

$

98,302

 

Operating expense:

 

 

 

 

 

Cost of services and products (exclusive of depreciation and amortization shown separately below)

 

35,684

 

35,940

 

Selling, general and administrative expenses

 

20,699

 

22,803

 

Depreciation and amortization

 

22,158

 

21,542

 

Operating income

 

16,900

 

18,017

 

Other income (expense):

 

 

 

 

 

Interest expense, net of interest income

 

(11,939

)

(12,905

)

Investment income

 

6,917

 

6,302

 

Other, net

 

227

 

64

 

Income before income taxes

 

12,105

 

11,478

 

Income tax expense

 

4,608

 

4,427

 

Net income

 

7,497

 

7,051

 

Less: net income attributable to noncontrolling interest

 

132

 

131

 

Net income attributable to common stockholders

 

$

7,365

 

$

6,920

 

 

 

 

 

 

 

Net income per common share—basic

 

$

0.25

 

$

0.23

 

 

 

 

 

 

 

Net income per common share—diluted

 

$

0.25

 

$

0.23

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.39

 

$

0.39

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

(In thousands, except share and per share amounts)

 

March 31,
2011
(Unaudited)

 

December 31,
2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

77,241

 

$

67,654

 

Accounts receivable, net of allowance for doubtful accounts of $2,871 in 2011 and $2,694 in 2010

 

39,285

 

42,012

 

Inventories

 

8,732

 

7,972

 

Income tax receivable

 

4,679

 

6,490

 

Deferred income taxes

 

5,736

 

5,672

 

Prepaid expenses and other current assets

 

8,126

 

6,450

 

Total current assets

 

143,799

 

136,250

 

 

 

 

 

 

 

Property, plant and equipment, net

 

350,206

 

356,057

 

Investments

 

98,969

 

99,105

 

Goodwill

 

520,562

 

520,562

 

Customer lists, net

 

74,415

 

79,950

 

Tradenames

 

12,347

 

12,347

 

Deferred debt issuance costs, net and other assets

 

4,907

 

5,275

 

Total assets

 

$

1,205,205

 

$

1,209,546

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

10,777

 

$

9,972

 

Advance billings and customer deposits

 

22,997

 

22,088

 

Dividends payable

 

11,599

 

11,530

 

Accrued expense

 

19,746

 

22,649

 

Current portion of capital lease obligations

 

160

 

132

 

Current portion of derivative liability

 

4,344

 

6,374

 

Current portion of pension and postretirement benefit obligations

 

2,847

 

2,847

 

Total current liabilities

 

72,470

 

75,592

 

Long-term portion of capital lease obligation

 

4,666

 

3,993

 

Senior secured long-term debt

 

880,000

 

880,000

 

Deferred income taxes

 

75,986

 

73,628

 

Pension and other postretirement obligations

 

79,213

 

80,621

 

Other long-term liabilities

 

21,138

 

23,837

 

Total liabilities

 

1,133,473

 

1,137,671

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized, 29,940,939 and 29,763,122, shares outstanding as of March 31, 2011 and December 31, 2010, respectively

 

299

 

298

 

Additional paid-in capital

 

94,402

 

98,126

 

Retained earnings

 

 

 

Accumulated other comprehensive loss, net

 

(28,023

)

(31,471

)

Noncontrolling interest

 

5,054

 

4,922

 

Total stockholders’ equity

 

71,732

 

71,875

 

Total liabilities and stockholders’ equity

 

$

1,205,205

 

$

1,209,546

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Additional
Paid-in

 

Retained

 

Other
Comprehensive

 

Non-
controlling

 

 

 

(In thousands, except share amounts)

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss, net

 

Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2010

 

29,763,122

 

$

298

 

$

98,126

 

$

 

$

(31,471

)

$

4,922

 

$

71,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

(4,234

)

(7,365

)

 

 

(11,599

)

Shares issued under employee plan, net of forfeitures

 

177,817

 

1

 

(1

)

 

 

 

 

Non-cash, stock-based compensation

 

 

 

511

 

 

 

 

511

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,365

 

 

132

 

7,497

 

Change in prior service cost and net loss, net of tax of $287

 

 

 

 

 

492

 

 

492

 

Change in fair value of cash flow hedges, net of tax of $1,703

 

 

 

 

 

2,956

 

 

2,956

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

10,945

 

Balance - March 31, 2011

 

29,940,939

 

$

299

 

$

94,402

 

$

 

$

(28,023

)

$

5,054

 

$

71,732

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three months ended March 31,

 

 (In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

7,497

 

$

7,051

 

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

 

 

 

 

 

Depreciation and amortization

 

22,158

 

21,542

 

Deferred income taxes

 

298

 

80

 

Loss on disposal of assets

 

4

 

4

 

Cash distributions from wireless partnerships in excess of earnings

 

2

 

705

 

Stock-based compensation expense

 

511

 

503

 

Amortization of deferred financing costs

 

324

 

324

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

2,727

 

(510

)

Income tax receivable

 

1,811

 

(1,163

)

Inventories

 

(760

)

(708

)

Other assets

 

(1,646

)

(2,126

)

Accounts payable

 

805

 

(952

)

Accrued expenses and other liabilities

 

(2,652

)

(961

)

Net cash provided by operating activities

 

31,079

 

23,789

 

Investing Activities

 

 

 

 

 

Additions to property, plant and equipment, net

 

(10,043

)

(10,935

)

Proceeds from the sale of assets

 

115

 

 

Proceeds from the sale of investments

 

 

514

 

Net cash used for investing activities

 

(9,928

)

(10,421

)

Financing Activities

 

 

 

 

 

Payment of capital lease obligation

 

(34

)

(241

)

Dividends on common stock

 

(11,530

)

(11,546

)

Net cash used for financing activities

 

(11,564

)

(11,787

)

Net increase in cash and equivalents

 

9,587

 

1,581

 

Cash and equivalents at beginning of year

 

67,654

 

42,758

 

Cash and equivalents at end of period

 

$

77,241

 

$

44,339

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 


Table of Contents

 

Consolidated Communications Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

1.             Nature of Operations

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Consolidated Communications Holdings, Inc. and its subsidiaries, which are collectively referred to as “Consolidated”, the “Company”, “we”, “our” or “us”, unless the context otherwise requires.  All significant intercompany transactions have been eliminated in consolidation.

 

We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.  These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

The accompanying unaudited condensed consolidated financial statements presented herewith reflect all adjustments (consisting of only normal and recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results of operations for the three month periods ended March 31, 2011 and 2010.  The results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from those estimates.

 

As of March 31, 2011, the Company’s Summary of Critical Accounting Policies for the year ended December 31, 2010, which are detailed in the Company’s Annual Report on Form 10-K, have not changed.

 

The Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements are issued.

 

2.             Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06 (“ASU 2010-06”), Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements.  The ASU amends Accounting Standards Codification (“ASC”) Topic 820-10 to require a number of additional disclosures regarding fair value measurements.  The update requires new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis.  ASU 2010-06 also clarifies disclosures required about inputs, valuation techniques and the level of disaggregation applied to each class of assets and liabilities.  These updates are effective for interim and annual reporting periods beginning after December 15, 2009.  ASU 2010-06 had no material impact on the Company’s financial results given that the update is related to disclosure and presentation only.

 

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Table of Contents

 

3.             Prepaid and other current assets

 

Prepaid and other current assets are as follows:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Prepaid maintenance

 

$

2,168

 

$

2,242

 

Prepaid taxes

 

1,833

 

182

 

Deferred charges

 

759

 

961

 

Prepaid insurance

 

879

 

392

 

Prepaid expense - other

 

2,369

 

2,603

 

Current portion of swap assets

 

5

 

 

Other current assets

 

113

 

70

 

Total

 

$

8,126

 

$

6,450

 

 

4.             Property, plant and equipment

 

Property, plant and equipment are as follows:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Land and buildings

 

$

66,520

 

$

66,499

 

Network and outside plant facilities

 

872,578

 

869,565

 

Furniture, fixtures and equipment

 

81,321

 

81,920

 

Assets under capital lease

 

10,014

 

9,279

 

Less: accumulated depreciation

 

(689,923

)

(675,390

)

 

 

340,510

 

351,873

 

Construction in progress

 

9,696

 

4,184

 

Totals

 

$

350,206

 

$

356,057

 

 

Depreciation expense totaled $16.6 million and $16.0 million for the three month periods ended March 31, 2011 and 2010, respectively.

 

Effective March 1, 2011, we renewed a lease for approximately 4,800 square feet of space in Pittsburgh, PA which we have treated as a capital lease in accordance with ASC Topic 840, Leases.  The expiration date of this capital lease is February 2021.  As of March 31, 2011, the present value of the minimum lease payments was $0.7 million, $19 thousand of which is due and payable within the next twelve months.  The lease requires total rental payments to the lessor of approximately $1.6 million over the term of the lease.

 

5.             Investments

 

We own 2.34% of GTE Mobilnet of South Texas Limited Partnership (the “Mobilnet South Partnership”).  The principal activity of the Mobilnet South Partnership is providing cellular service in the Houston, Galveston, and Beaumont, Texas metropolitan areas.  We also own 3.60% of Pittsburgh SMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular service in and around the Pittsburgh metropolitan area.  Because of our limited influence over these partnerships, we use the cost method to account for both of these investments.  For each of the three month periods ended March 31, 2011 and 2010, we received cash distributions from these partnerships totaling $3.0 million.

 

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Table of Contents

 

We also own 17.02% of GTE Mobilnet of Texas RSA #17 Limited Partnership (“RSA 17”), 16.6725% of Pennsylvania RSA 6(I) Limited Partnership (“RSA 6(I)”), and 23.67% of Pennsylvania RSA 6(II) Limited Partnership (“RSA 6(II)”).  RSA 17 provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) provide cellular service in and around our Pennsylvania service territory.  Because we have some influence over the operating and financial policies of these three entities, we account for the investments using the equity method.  For each of the three month periods ended March 31, 2011 and 2010, we received cash distributions from these partnerships totaling $3.9 million.

 

Our investments are as follows:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Cash surrender value of life insurance policies

 

$

1,764

 

$

1,960

 

Cost method investments:

 

 

 

 

 

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

 

21,450

 

21,450

 

Pittsburgh SMSA Limited Partnership (3.60% interest)

 

22,950

 

22,950

 

CoBank, ACB Stock

 

3,209

 

3,148

 

Other

 

25

 

25

 

Equity method investments:

 

 

 

 

 

GTE Mobilnet of Texas RSA #17 Limited Partnership (17.02% interest)

 

19,077

 

19,253

 

Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest)

 

7,131

 

7,191

 

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

 

23,206

 

22,971

 

Boulevard Communications, LLP (50% interest)

 

157

 

157

 

Total

 

$

98,969

 

$

99,105

 

 

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

 

Because the income from our investment in RSA 6(II) for the first quarter of 2011 exceeds 10% of our pretax income, below is a summary of unaudited summarized income statement information of RSA 6(II):

 

 

 

Three months ended March 31,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Total revenues

 

$

31,061

 

$

28,973

 

Income from operations

 

7,853

 

7,871

 

Net income before taxes

 

7,862

 

8,045

 

Net income

 

7,862

 

8,045

 

 

6.             Fair Value Measurements

 

The Company’s derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis.  The fair values of the interest rate swaps are determined using an internal valuation model which relies on the expected LIBOR based yield curve and estimates of counterparty and Consolidated’s non-performance risk as the most significant inputs.  Because each

 

7



Table of Contents

 

of these inputs are directly observable or can be corroborated by observable market data, we have categorized these interest rate swaps as Level 2 within the fair value hierarchy.

 

The Company’s swap assets and liabilities measured at fair value on a recurring basis subject to disclosure requirements at March 31, 2011 and December 31, 2010 were as follows:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

March 31, 2011

 

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Current interest rate swap assets

 

$

5

 

 

$

5

 

 

Current interest rate swap liabilities

 

(4,344

)

 

(4,344

)

 

Long-term interest rate swap liabilities

 

(19,072

)

 

(19,072

)

 

Totals

 

$

(23,411

)

$

 

$

(23,411

)

$

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

December 31,
2010

 

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Current interest rate swap assets

 

$

20

 

 

$

20

 

 

Current interest rate swap liabilities

 

(6,374

)

 

(6,374

)

 

Long-term interest rate swap liabilities

 

(21,751

)

 

(21,751

)

 

Totals

 

$

(28,105

)

$

 

$

(28,105

)

$

 

 

The change in the fair value of the derivatives is primarily a result of a change in market expectations for future interest rates.

 

We have not elected the fair value option for any of our financial assets or liabilities. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.  The following table presents the other financial instruments that are not carried at fair value but which require fair value disclosure as of March 31, 2011 and December 31, 2010.

 

 

 

As of March 31, 2011

 

As of December 31, 2010

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Investments, equity basis

 

$

49,571

 

n/a

 

$

49,572

 

n/a

 

Investments, at cost

 

$

47,634

 

n/a

 

$

47,573

 

n/a

 

Long-term debt

 

$

880,000

 

$

880,000

 

$

880,000

 

$

880,000

 

 

The Company’s investments at March 31, 2011 and December 31, 2010 accounted for under both the equity and cost methods consist of minority positions in various cellular telephone limited partnerships.  These investments are recorded using either the equity or cost methods.

 

Our long-term debt allows us to select a one month LIBOR repricing option, which we have elected.  As such, the fair value of this debt approximates its carrying value.

 

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Table of Contents

 

7.             Goodwill and Other Intangible Assets

 

In accordance with the applicable accounting guidance, goodwill and tradenames are not amortized but are subject to impairment testing—no less than annually or more frequently if circumstances indicate potential impairment.

 

The following table presents the carrying amount of goodwill by segment:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Telephone Operations

 

$

519,528

 

$

519,528

 

Other Operations

 

1,034

 

1,034

 

Totals

 

$

520,562

 

$

520,562

 

 

Our most valuable tradename is the federally registered mark CONSOLIDATED, which is used in association with our telephone communication services and is a design of interlocking circles.  The Company’s corporate branding strategy leverages a CONSOLIDATED naming structure.  All of the Company’s business units and several of our products and services incorporate the CONSOLIDATED name.  These tradenames are indefinitely renewable intangibles.  The carrying value of the tradenames was $12.3 million at both March 31, 2011 and December 31, 2010.

 

The Company’s customer lists consist of an established base of customers that subscribe to its services.  The carrying amount of customer lists is as follows:

 

 

 

Telephone Operations

 

Other Operations

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

193,124

 

$

193,124

 

$

4,405

 

$

4,405

 

Less: accumulated amortization

 

(119,480

)

(114,055

)

(3,634

)

(3,524

)

Net carrying amount

 

$

73,644

 

$

79,069

 

$

771

 

$

881

 

 

Amortization associated with customer lists totaled approximately $5.5 million in each of the three month periods ended March 31, 2011 and 2010.

 

8.             Deferred Debt Issuance Costs, Net and Other Assets

 

Deferred financing costs, net and other assets are as follows:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Deferred debt issuance costs, net

 

$

4,847

 

$

5,171

 

Other assets

 

60

 

104

 

Total

 

$

4,907

 

$

5,275

 

 

Deferred debt issuance costs are subject to amortization.  Remaining deferred debt issuance costs of $4.8 million at March 31, 2011 related to our secured credit facility will be amortized utilizing a method which approximates the effective interest method over the remaining life of 3.75 years, resulting in annual amortization expense of $1.3 million unless the facility is extinguished earlier.

 

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9.             Accrued Expenses

 

Accrued expenses are as follows:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

9,260

 

$

9,438

 

Taxes payable

 

1,936

 

5,035

 

Accrued interest

 

127

 

104

 

Other accrued expenses

 

8,423

 

8,072

 

Total accrued expenses

 

$

19,746

 

$

22,649

 

 

10.          Debt

 

Long-term debt consists of the following:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Senior secured credit facility - revolving loan

 

$

 

$

 

Senior secured credit facility - term loan

 

880,000

 

880,000

 

Obligations under capital lease

 

4,826

 

4,125

 

 

 

884,826

 

884,125

 

Less: current portion

 

(160

)

(132

)

Total long-term debt

 

$

884,666

 

$

883,993

 

 

Credit Agreement

 

The Company, through certain of its wholly owned subsidiaries, has outstanding a credit agreement with several financial institutions, which consists of a $50 million revolving credit facility (including a $10 million sub-limit for letters of credit) and an $880 million term loan facility.  Borrowings under the credit facility are secured by substantially all of the assets of the Company with the exception of Illinois Consolidated Telephone Company.  The term loan requires no principal reductions prior to maturity and thus matures in full on December 31, 2014.  The revolving credit facility matures on December 31, 2013.  There were no borrowings or letters of credit outstanding under the revolving credit facility as of March 31, 2011 or December 31, 2010, or at any time during the quarter ended March 31, 2011.

 

At our election, borrowings under the credit facilities bear interest at a rate equal to an applicable margin plus either a “base rate” or LIBOR.  As of March 31, 2011, the applicable margin for interest rates was 2.50% per year for the LIBOR-based term loans and 1.50% for alternative base rate loans.  The applicable margin for our $880 million term loan is fixed for the duration of the loan.  The applicable margin for borrowings on the revolving credit facility is determined via a pricing grid.  Based on our leverage ratio of 4.85:1 at March 31, 2011, borrowings under the revolving credit facility will be priced at a margin of 2.75% for LIBOR-based borrowings and 1.75% for alternative base rate borrowings for the three month period ending June 30, 2011.  The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end.

 

The weighted-average interest rate incurred on our credit facilities during the three month periods ended March 31, 2011 and 2010, including amounts paid on our interest rate swap agreements

 

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and the applicable margin, was 5.15% and 5.57% per annum, respectively.  Interest is payable at least quarterly.

 

The credit agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, issue capital stock, and commit to future capital expenditures.  We have agreed to maintain certain financial ratios, including interest coverage, and total net leverage ratios, all as defined in the credit agreement.  As of March 31, 2011, we were in compliance with the credit agreement covenants.

 

Capital Leases

 

The Company has four capital leases, all of which expire in 2021, for the lease of office, warehouse and tech center needs.  As of March 31, 2011, the present value of the minimum remaining lease commitments was approximately $4.9 million, of which $0.2 million is due and payable within the next 12 months.  The leases require total remaining rental payments of approximately $9.2 million over the remaining term of the leases.

 

11.                               Derivatives

 

In order to manage the risk associated with changes in interest rates, we have entered into interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  We account for these transactions as cash flow hedges under the FASB’s ASC Topic 815 (“ASC 815”), Derivatives and Hedging.  The swaps are designated as cash flow hedges of our expected future interest payments.  In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

 

We currently have in place interest rate swap agreements whereby we receive 3-month LIBOR-based interest payments from the swap counterparties and pay a fixed rate.  We also have interest rate swap agreements whereby we make 3-month LIBOR-based payments, less a fixed percentage to a counterparty and receive 1-month LIBOR.  The combination effectively hedges the interest payments based on 1-month LIBOR resets on a portion of our credit facility.  During the first quarter of 2011, the net effect of these swaps is that we paid a weighted-average fixed rate of 3.64% to our swap counterparties on $430 million of notional amount and received 1-month LIBOR less a fixed percentage.  The weighted-average fixed percentage received was 0.06% for the first quarter of 2011.  We have outstanding $430 million notional value of these swaps in place as of March 31, 2011.

 

We also have in place $200 million notional amount of floating to fixed interest rate swap agreements.  Under these swap agreements, we will make fixed payments to the swap counterparties at a weighted-average fixed rate of 1.83% and receive 1-month LIBOR.  These swap agreements have a maturity date of March 31, 2013.

 

In addition, we also have entered into a $100 million notional amount forward starting floating to fixed interest rate swap agreement that will become effective on September 30, 2011.  For this swap agreement, we will make fixed payments to the swap counterparty at a weighted-average fixed rate of 1.65% and receive 1-month LIBOR.  The September 2011 forward starting swap agreement has a maturity date of September 30, 2013.

 

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At both March 31, 2011 and December 31, 2010, approximately 71.59% of our outstanding debt was fixed through the use of interest rate swaps.

 

The counterparties to our various swaps are 5 major U.S. and European banks.  None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties.  The swaps of any counterparty that is a “Lender” as defined in our credit facility are secured along with the other creditors under the credit facility.  Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties.  This provision allows us to partially mitigate the risk of non-performance by a counterparty.

 

We report the gross fair value of our derivatives in either prepaid expenses and other current assets, current portion of derivative liability or other long-term liabilities on our consolidated balance sheets.  The table below shows the balance sheet classification and fair value of our interest rate swaps designated as hedging instruments under ASC 815:

 

 

 

Fair Value

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

5

 

$

20

 

Current portion of derivative liability

 

(4,344

)

(6,374

)

Other long-term liabilities

 

(19,072

)

(21,751

)

 

At March 31, 2011 and December 31, 2010, the pretax deferred losses related to our interest rate swap agreements included in other comprehensive income totaled $23.3 million and $28.0 million, respectively.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

 

Information regarding our cash flow hedge transactions at March 31 are as follows:

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Loss/(gain) recognized in accumulated other comprehensive income (loss) (“AOCI”) (pretax)

 

$

(4,659

)

$

(144

)

Loss/(gain) arising from ineffectiveness increasing/(reducing) interest expense

 

$

(34

)

$

29

 

Deferred losses reclassed from AOCI to interest expense

 

$

483

 

$

1,582

 

 

(In thousands, except months)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Aggregate notional value of current derivatives outstanding

 

$

630,000

 

$

630,000

 

Aggregate notional value of forward derivatives outstanding

 

$

100,000

 

$

100,000

 

Period through which derivative positions currently exist

 

September 2013

 

September 2013

 

Loss in fair value of derivatives

 

$

23,411

 

$

28,105

 

Deferred losses included in AOCI (pretax)

 

$

23,304

 

$

27,963

 

Losses included in AOCI to be recognized in the next 12 months

 

$

780

 

$

1,250

 

Number of months over which loss in OCI is to be recognized

 

24

 

27

 

 

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12.          Interest Expense, Net of Interest Income

 

The following table summarizes interest expense for the three month periods end March 31:

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Interest expense – credit facility

 

$

6,087

 

$

6,020

 

Payments on swap liabilities, net

 

5,257

 

6,246

 

Interest expense- capital leases

 

156

 

2

 

Uncertain tax position interest accrual

 

12

 

118

 

Other interest

 

173

 

242

 

Amortization of deferred financing fees

 

324

 

324

 

Capitalized interest

 

(33

)

(31

)

Total interest expense

 

11,976

 

12,921

 

Less: interest income

 

(37

)

(16

)

Interest expense, net of interest income

 

$

11,939

 

$

12,905

 

 

13.          Retirement and Pension Plans

 

We have 401(k) plans covering substantially all of our employees.  Contributions made under our defined contribution plans include a match, at the Company’s discretion, of employee salaries contributed to the plans.  We recognized expense with respect to these plans of $0.7 million for each of the three month periods ended March 31, 2011 and 2010.

 

Qualified Retirement Plan

 

We sponsor a defined-benefit pension plan (“Retirement Plan”) that is non-contributory covering substantially all of our hourly employees who fulfill minimum age and service requirements.  Certain salaried employees are also covered by the Retirement Plan, although these benefits have previously been frozen.

 

The following table summarizes the components of net periodic pension cost for the qualified retirement plan for the three months ended March 31:

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Service cost

 

$

416

 

$

467

 

Interest cost

 

2,549

 

2,784

 

Expected return on plan assets

 

(2,494

)

(2,546

)

Net amortization loss

 

870

 

189

 

Prior service credit amortization

 

(51

)

(11

)

Net periodic pension cost

 

$

1,290

 

$

883

 

 

Non-qualified Pension Plan

 

The Company also has non-qualified supplemental pension plans (“Restoration Plans”), which we acquired as part of our North Pittsburgh Systems, Inc. (“North Pittsburgh”) and TXU Communications Venture Company (“TXUCV”) acquisitions.  The Restoration Plans cover certain former employees of our North Pittsburgh and TXUCV operations.  The Restoration Plans restore benefits that were precluded under the Retirement Plan by Internal Revenue Service limits on compensation and benefits applicable to qualified pension plans, and by the exclusion of bonus

 

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compensation from the Retirement Plan’s definition of earnings.  The Restoration Plans are unfunded and have no assets, and benefits paid under the Restoration Plans come from the general operating funds of the Company.

 

The following table summarizes the components of net periodic pension cost for the Restoration Plans for the three months ended March 31:

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Interest cost

 

$

14

 

$

15

 

Net amortization loss

 

12

 

8

 

Net periodic pension cost

 

$

26

 

$

23

 

 

Other Non-qualified Deferred Compensation Agreements

 

We also are liable for deferred compensation agreements with former members of the board of directors and certain other former employees of a subsidiary of TXUCV, which was acquired in 2004.  The benefits are payable for up to the life of the participant and may begin as early as age 65 or upon the death of the participant.  Participants accrue no new benefits as these plans had previously been frozen by TXUCV’s predecessor company prior to our acquisition of TXUCV.  Payments related to the deferred compensation agreements totaled approximately $0.2 million for the three month period ended March 31, 2011 and $0.1 million for the three month period ended March 31, 2010.  The net present value of the remaining obligations was approximately $2.7 million at March 31, 2011 and $2.9 million at December 31, 2010, and is included in pension and postretirement benefit obligations in the accompanying balance sheets.

 

We also maintain 40 life insurance policies on certain of the participating former directors and employees.  We did not recognize any proceeds in other income for the three month periods ended March 31, 2011 or 2010 due to the receipt of life insurance proceeds.  The excess of the cash surrender value of the remaining life insurance policies over the notes payable balances related to these policies is determined by an independent consultant, and totaled $1.8 million at March 31, 2011 and $2.0 million at December 31, 2010.  These amounts are included in investments in the accompanying balance sheets.  Cash principal payments for the policies and any proceeds from the policies are classified as operating activities in the statements of cash flows.

 

14.          Postretirement Benefit Obligation

 

We sponsor a healthcare plan and life insurance plan that provides postretirement medical benefits and life insurance to certain groups of retired employees.  Retirees share in the cost of healthcare benefits, making contributions that are adjusted periodically—either based upon collective bargaining agreements or because total costs of the program have changed.  We generally pay the covered expenses for retiree health benefits as they are incurred.  Postretirement life insurance benefits are fully insured.  Our postretirement plan is unfunded and has no assets, and the benefits paid under the postretirement plan come from the general operating funds of the Company.

 

The following table summarizes the components of the net periodic costs for postretirement benefits for the three months ended March 31:

 

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(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Service cost

 

$

223

 

$

206

 

Interest cost

 

392

 

530

 

Net prior service cost amortization

 

(47

)

(112

)

Net periodic postretirement benefit cost

 

$

568

 

$

624

 

 

15.          Other Long-term Liabilities

 

Other long-term liabilities are as follows:

 

(In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Long-term derivative liabilities

 

$

19,072

 

$

21,751

 

Uncertain tax positions

 

1,475

 

1,475

 

Accrued interest on uncertain tax positions

 

67

 

56

 

Other long-term liabilities

 

524

 

555

 

Total

 

$

21,138

 

$

23,837

 

 

16.          Stock-based Compensation Plans

 

Pretax stock-based compensation expense for the three month periods ended March 31 was as follows:

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Restricted stock

 

$

349

 

$

338

 

Performance shares

 

162

 

165

 

Total

 

$

511

 

$

503

 

 

Stock-based compensation expense is included in “selling, general and administrative expenses” in the accompanying statements of operations.

 

As of March 31, 2011, we had not yet recognized compensation expense on the following non-vested awards.

 

(In thousands)

 

Non-recognized
Compensation

 

Average Remaining
Recognition Period
(years)

 

 

 

 

 

 

 

Restricted stock

 

$

3,615

 

1.8

 

Performance shares

 

2,010

 

1.6

 

Total

 

$

5,625

 

1.7

 

 

The following table summarizes unvested restricted stock awards outstanding and changes during the three months ended March 31:

 

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Table of Contents

 

 

 

2011

 

2010

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

Non-vested restricted shares outstanding – January 1

 

101,435

 

$

17.40

 

82,375

 

$

12.08

 

Shares granted

 

127,377

 

17.92

 

115,949

 

18.65

 

Shares vested

 

 

 

(3,000

)

13.00

 

Non-vested restricted shares outstanding – March 31

 

228,812

 

$

17.69

 

195,324

 

$

15.97

 

 


(1)           Represents the weighted–average fair value on date of grant.

 

The following table summarizes unvested performance share-based restricted stock awards outstanding and changes during the three months ended March 31:

 

 

 

2011

 

2010

 

 

 

# of
Shares

 

Price(1)

 

# of
Shares

 

Price(1)

 

 

 

 

 

 

 

 

 

 

 

Non-vested performance shares outstanding – January 1

 

68,880

 

$

15.74

 

46,578

 

$

11.72

 

Shares granted

 

50,440

 

18.65

 

98,002

 

9.05

 

Shares vested

 

 

 

 

 

Non-vested performance shares outstanding – March 31

 

119,320

 

$

16.66

 

144,580

 

$

16.42

 

 


(1)          Represents the weighted–average fair value on date of grant.

 

17.          Income Taxes

 

There have been no changes to the balance of our unrecognized tax benefits as reported at December 31, 2010.  As of March 31, 2011 and December 31, 2010, the amount of unrecognized tax benefits was $1.5 million.  The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is $1.0 million.  A decrease in unrecognized tax benefits of $0.3 million and less than $0.1 million of related accrued interest is expected in the third quarter of 2011 due to the expiration of a state statute of limitations.  The tax benefit attributable to the $0.3 million decrease in unrecognized tax benefits will not have a significant effect on the Company’s effective tax rate.

 

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  At March 31, 2011, we had recorded $67 thousand of interest and penalties relating to uncertain tax positions, of which $12 thousand was recorded during the three months ended March 31, 2011.

 

The only periods subject to examination for our federal return are years 2007 through 2009.  The periods subject to examination for our state returns are years 2005 through 2009.  We are not currently under examination by federal taxing authorities.  We are currently under examination by state taxing authorities.  We do not expect any settlement or payment that may result from the audit to have a material effect on our results of operations or cash flows.

 

Our effective tax rate was 38.1% and 38.6%, for the three months ended March 31, 2011 and 2010, respectively.  The effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses and a change in the Illinois state income tax rate.

 

In January 2011, Illinois’ Governor signed into law PA. 96-1496.  Included as part of the law was an increase in the corporate income tax rate.  This resulted in an increase of our net deferred tax liabilities and corresponding increase to our state tax provision of $0.3 million recognized in the first

 

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quarter of 2011.  Exclusive of this adjustment, our effective tax rate for the first quarter of 2011 would have been approximately 35.6%.

 

18.          Accumulated Other Comprehensive Loss, Net

 

Accumulated other comprehensive loss, net is comprised of the following components:

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Fair value of cash flow hedges

 

$

(23,304

)

$

(27,962

)

Prior service credits and net losses on postretirement plans

 

(20,925

)

(21,709

)

 

 

(44,229

)

(49,672

)

Deferred taxes

 

16,206

 

18,201

 

Totals

 

$

(28,023

)

$

(31,471

)

 

The following table summarizes total comprehensive income for the three month periods ended March 31:

 

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Net income

 

$

7,497

 

$

7,051

 

Other comprehensive income:

 

 

 

 

 

Prior service cost and net loss, net of tax

 

492

 

47

 

Change in fair value of cash flow hedges, net of tax

 

2,956

 

90

 

Total comprehensive income

 

10,945

 

7,188

 

Less: comprehensive income attributable to noncontrolling interest

 

132

 

131

 

Comprehensive income attributable to common stockholders

 

$

10,813

 

$

7,057

 

 

19.          Environmental Remediation Liabilities

 

Environmental remediation liabilities were $0.3 million at March 31, 2011 and December 31, 2010, and are included in other long-term liabilities.  These liabilities relate to anticipated remediation and monitoring costs with respect to two small vacant sites and are undiscounted.  The Company believes the amount accrued is adequate to cover the remaining anticipated costs of remediation.

 

20.          Litigation and Contingencies

 

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania alleging that we have prevented Salsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs.  It claims to have sustained losses of approximately $125 million, but does not request a specific dollar amount in damages.  We believe that these claims are without merit and that the alleged losses are completely unfounded.  We intend to defend against these claims vigorously.  In the third quarter of 2008, we filed preliminary objections and responses to Salsgiver’s complaint.  However, the court ruled against our preliminary objections.  On November 3, 2008, we responded to Salsgiver’s amended complaint and filed a counter-claim for trespass, alleging that Salsgiver attached cables to our poles without an authorized agreement and in an unsafe manner.  We are currently in the discovery and deposition stage.  In addition, we have asked the FCC Enforcement Bureau to address Salsgiver’s unauthorized pole attachments and safety

 

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violations on those attachments.  We believe that these are violations of an FCC order regarding Salsgiver’s complaint against us.  We do not believe that these claims will have a material adverse impact on our financial results.

 

We are from time to time involved in various other legal proceedings and regulatory actions arising out of our operations.  We do not believe that any of these, individually or in the aggregate, will have a material adverse effect upon our business, operating results or financial condition

 

21.          Net Income per Common Share

 

The following illustrates the earnings allocation method as required by the FASB’s authoritative guidance on the treatment of participating securities in the calculation of earnings per share which we utilize in the calculation of basic and diluted earnings per share.

 

 

 

For the Three Months
Ended March 31,

 

(In thousands, except per share amounts)

 

2011

 

2010

 

 

 

 

 

 

 

Basic Earnings Per Share Using Two-class Method:

 

 

 

 

 

Net income

 

$

7,497

 

$

7,051

 

Less: net income attributable to noncontrolling interest

 

132

 

131

 

Net income attributable to common shareholders before allocation of earnings to participating securities

 

7,365

 

6,920

 

Less: earnings allocated to participating securities

 

127

 

43

 

Net income attributable to common stockholders

 

$

7,238

 

$

6,877

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

29,593

 

29,483

 

 

 

 

 

 

 

Net income per common share attributable to common stockholders - basic

 

$

0.25

 

$

0.23

 

 

 

 

 

 

 

Diluted Earnings Per Share Using Two-class Method:

 

 

 

 

 

Net income

 

$

7,497

 

$

7,051

 

Less: net income attributable to noncontrolling interest

 

132

 

131

 

Net income attributable to common shareholders before allocation of earnings to participating securities

 

7,365

 

6,920

 

Less: earnings allocated to participating securities

 

127

 

43

 

Net income attributable to common stockholders

 

$

7,238

 

$

6,877

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

29,593

 

29,483

 

 

 

 

 

 

 

Net income per common share attributable to common stockholders - diluted

 

$

0.25

 

$

0.23

 

 

We had additional potential dilutive securities including unvested restricted shares and performance shares outstanding representing 0.3 million common shares that were not included in the computation of potentially dilutive securities at March 31, 2011 and 2010 because they were anti-dilutive or the achievement of performance conditions had not been met at the end of the period.

 

22.          Business Segments

 

The Company is viewed and managed as two separate, but highly integrated, reportable business segments: “Telephone Operations” and “Other Operations.”  Telephone Operations consists of a wide range of telecommunications services, including local and long-distance service, high-speed broadband Internet access, standard and high-definition digital television, digital telephone service

 

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(“VOIP”), custom calling features, private line services, carrier access services, network capacity services over a regional fiber optic network, directory publishing and Competitive Local Exchange Carrier (“CLEC”) services.  We also operate two non-core complementary businesses that comprise our “Other Operations” segment, including telephone services to correctional facilities and equipment sales.  Management evaluates the performance of these business segments based upon net revenue, operating income, and income before extraordinary items.

 

 

 

Three Months Ended
March 31,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Telephone operations

 

$

87,394

 

$

88,783

 

Other operations

 

8,047

 

9,519

 

Total net revenue

 

95,441

 

98,302

 

 

 

 

 

 

 

Operating expense – telephone operations

 

48,945

 

49,974

 

Operating expense – other operations

 

7,438

 

8,769

 

Total operating expense

 

56,383

 

58,743

 

 

 

 

 

 

 

Depreciation and amortization expense – telephone operations

 

21,947

 

21,326

 

Depreciation and amortization expense – other operations

 

211

 

216

 

Total depreciation expense

 

22,158

 

21,542

 

 

 

 

 

 

 

Operating income – telephone operations

 

16,502

 

17,483

 

Operating income - other operations

 

398

 

534

 

Total operating income

 

16,900

 

18,017

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(11,939

)

(12,905

)

Investment income

 

6,917

 

6,302

 

Other, net

 

227

 

64

 

Income before taxes

 

$

12,105

 

$

11,478

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

Telephone operations

 

$

9,987

 

$

10,912

 

Other operations

 

56

 

23

 

Total

 

$

10,043

 

$

10,935

 

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Goodwill:

 

 

 

 

 

Telephone operations

 

$

519,528

 

$

519,528

 

Other operations

 

1,034

 

1,034

 

Total

 

$

520,562

 

$

520,562

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

Telephone operations (1)

 

$

1,197,967

 

$

1,201,545

 

Other operations

 

7,238

 

8,001

 

Total

 

$

1,205,205

 

$

1,209,546

 

 


(1)  Included within the telephone operations segment assets are our equity method investments totaling $49.6 million at both March 31, 2011 and December 31, 2010.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our consolidated operating results and financial condition for the three month periods ended March 31, 2011 and 2010 should be read in conjunction with the unaudited condensed consolidated financial statements and related notes contained elsewhere in this report.

 

“Consolidated Communications” or the “Company” refers to Consolidated Communications Holdings, Inc. alone or with its wholly owned subsidiaries as the context requires.  When this report uses the words “we,” “our,” or “us,” they refer to the Company and its subsidiaries.

 

Forward-Looking Statements

 

Any statements contained in this Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words “anticipates”, “believes”, “expects”, “intends”, “plans”, “estimates”, “targets”, “projects”, “should”, “may”, “will” and similar words and expressions are intended to identify forward-looking statements.  These forward-looking statements are contained throughout this Report, including, but not limited to, statements found in this Part I — Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Part I — Item 3 — “Quantitative and Qualitative Disclosures about Market Risk” and Part II — Item 1 — “Legal Proceedings”.  Such forward-looking statements reflect, among other things, our current expectations, plans, strategies, and anticipated financial results and involve a number of known and unknown risks, uncertainties, and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:

 

·                  various risks to stockholders of not receiving dividends and risks to our ability to pursue growth opportunities if we continue to pay dividends according to our current dividend policy;

·                  the current volatility in economic conditions and the financial markets;

·                  adverse changes in the value of assets or obligations associated with our employee benefit plans;

·                  various risks to the price and volatility of our common stock;

·                  our substantial amount of debt and our ability to refinance it or to incur additional debt in the future;

·                  our need for a significant amount of cash to service our debt and to pay dividends on our common stock;

·                  restrictions contained in our debt agreements that limit the discretion of our management in operating our business;

·                  the ability to refinance our existing debt as necessary;

·                  rapid development and introduction of new technologies and intense competition in the telecommunications industry;

·                  risks associated with our possible pursuit of future acquisitions;

·                  the length and severity of weakened economic conditions in our service areas in Illinois, Texas and Pennsylvania;

·                  system failures;

·                  loss of large customers or government contracts;

·                  risks associated with the rights-of-way for our network;

·                  disruptions in our relationship with third party vendors;

·                  loss of key management personnel and the inability to attract and retain highly qualified management and personnel in the future;

 

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·                  changes in the extensive governmental legislation and regulations governing telecommunications providers, the provision of telecommunications services and access charges and subsidies, which are a material part of our revenues;

·                  telecommunications carriers disputing and/or avoiding their obligations to pay network access charges for use of our network;

·                  high costs of regulatory compliance;

·                  the competitive impact of legislation and regulatory changes in the telecommunications industry;

·                  liability and compliance costs regarding environmental regulations; and

·                  the additional risk factors outlined in Part I — Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and the other documents that we file with the SEC from time to time that could cause our actual results to differ from our current expectations and from the forward-looking statements discussed in this Report.

 

Many of these risks are beyond our ability to control or predict.  All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Report.  Because of these risks, uncertainties, and assumptions, you should not place undue reliance on these forward-looking statements.  Furthermore, forward-looking statements speak only as of the date they are made.   Except as required under the federal securities laws or the rules and regulations of the U.S. Securities and Exchange Commission, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

 

Overview

 

We are an established rural local exchange carrier that provides communications services to residential and business customers in Illinois, Texas and Pennsylvania. We offer a wide range of telecommunications services, including local and long-distance service, high-speed broadband Internet access (“DSL”), standard and high-definition digital television (“IPTV”), digital telephone service (“VOIP”), custom calling features, private line services, carrier access services, network capacity services over our regional fiber optic network, directory publishing and Competitive Local Exchange Carrier (“CLEC”) services.  We also operate two non-core complementary businesses:  telephone services to correctional facilities and equipment sales.

 

Executive Summary

 

We generated net income attributable to common stockholders of $7.4 million, or $0.25 per diluted share, in the first three months of 2011, as compared to net income attributable to common stockholders of $6.9 million, or $0.23 per diluted share, in the first three months of 2010.  The improvement in net income in 2011 is primarily related to lower interest expense and increased earnings from our wireless partnerships.  However, we were also able to continue our focus of reducing operating expenditures (excluding those associated with the sale of our telemarketing and operator services businesses) as a result of previous and ongoing cost reduction efforts which helped us offset revenue declines.  During the first quarter of 2011, reductions in salaries, professional fees, supplies, occupancy costs and SG&A taxes were partially offset by higher depreciation, pension, advertising and video programming costs, along with higher commission payments to the State of Illinois necessitated by an increase in revenue from our prison services business.

 

Revenue in the first quarter of 2011 decreased to $95.4 million as compared to $98.3 million in the first quarter of 2010.  Revenue declines in the first three months of 2011 relating to the sale late in

 

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the first quarter of 2010 of our telemarketing business and from the sale of our operator services business in the fourth quarter of 2010 totaled approximately $2.3 million.  We also experienced revenue declines in our traditional wireline business, which was offset partially by increases in DSL and IPTV subscriptions and increased revenue from our prison services business.

 

We completed the sale of our telemarketing business late in the first quarter of 2010 and our operator services business in the fourth quarter of 2010, the assets and revenues of which were immaterial to our overall results of operations.

 

General

 

The following general factors should be considered in analyzing our results of operations:

 

Revenues

 

Our revenues are derived primarily from the sale of voice and data communication services to residential and business customers in our rural telephone companies’ service areas.  Because we operate primarily in rural service areas, we do not anticipate significant growth in revenues in either of our two operating segments except through acquisitions.  However, we do expect to maintain relatively consistent cash flow from year to year as demand for our data and Internet services grows, and we continue to gain efficiencies and take costs out of our business.

 

Local access lines and bundled services. An “access line” is the telephone line connecting a home or business to the public switched telephone network.  The number of local access lines in service directly affects the monthly recurring revenue we generate from end users, the amount of traffic on our network, the access charges we receive from other carriers, the federal and state subsidies we receive, and most other revenue streams.  We had 234,928, 237,141 and 244,696 local access lines in service as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively.

 

Most wireline telephone companies have experienced a loss of local access lines due to increased competition from wireless providers, competitive local exchange carriers and, in some cases, cable television operators, along with challenging economic conditions.  We have not been immune to these conditions.  Cable competitors in all of our markets offer a competing voice product.  We estimate that cable companies offer voice service to all of their addressable customers, covering 85% of our entire service territory.

 

In addition, we expect to continue to experience modest erosion in access lines both due to market forces and through our own competing VOIP product.

 

We have been able in some instances to offset the decline in local access lines with increased average revenue per access line by:

 

·                  Aggressively promoting DSL service, including selling DSL as a stand-alone offering;

·                  Value bundling services, such as DSL or IPTV, with a combination of local service and custom calling features;

·                  Maintaining excellent customer service standards; and

·                  Keeping a strong local presence in the communities we serve.

 

We have implemented a number of initiatives to gain new local access lines and retain existing lines by making bundled service packages more attractive (for example, by adding unlimited long-distance) and by announcing special promotions, like discounted second lines.  We also market a “triple

 

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play” bundle, which includes local telephone service, DSL, and IPTV.  As of March 31, 2011, IPTV was available to approximately 205,000 homes in our markets.  Our IPTV subscriber base continues to grow and totaled 30,380, 29,236 and 24,898 subscribers as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively.

 

We also continue to experience growth in the number of DSL subscribers we serve.  We had 107,634, 106,387 and 102,132 DSL lines in service as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively.  Currently, over 96% of our rural telephone companies’ local access lines are DSL-capable.

 

In addition to our access line, DSL and video initiatives, we intend to continue to integrate best practices across our markets. We also continue to look for ways to enhance current products and introduce new services to ensure that we remain competitive and continue to meet our customers’ needs. These initiatives have included:

 

·                  Hosted VOIP service in all of our markets to meet the needs of small- to medium-sized business customers that want robust functionality without having to purchase a traditional key or PBX phone system;

·                  VOIP service for residential customers, which is being offered to our customers as a growth opportunity and as an alternative to the traditional phone line for customers who are considering a switch to a cable competitor.  Since we began to more aggressively promote our VOIP service in situations in which we are attempting to save or win back customers, we estimate that the product has allowed us to reduce our residential customer loss by 10%;

·                  DSL service—even to users who do not have our access line—which expands our customer base and creates additional revenue-generating opportunities;

·                  Metro-Ethernet services delivered over our copper infrastructure with speeds of 25 mega-bits per second (“mbps”) to 40 mbps;

·                  DSL product with speeds up to 20 mbps for those customers desiring greater Internet speed; and

·                  High definition video service and digital video recorders in all of our IPTV markets.

 

These efforts may mitigate the financial impact of any access line loss we experience.

 

Expenses

 

Our primary operating expenses consist of the cost of services; selling, general and administrative expenses; and depreciation and amortization expenses.

 

Cost of services and products.  Our cost of services includes the following:

 

·                  Operating expenses relating to plant costs, including those related to the network and general support costs, central office switching and transmission costs, and cable and wire facilities;

·                  General plant costs, such as testing, provisioning, network, administration, power, and engineering;

·                  The cost of transport and termination of long-distance and private lines outside our rural telephone companies’ service area; and

·                  Costs associated with our standard and high definition video products.

 

We have agreements with various carriers to provide long-distance transport and termination services.   We believe we will meet all of our commitments in these agreements and will be able to

 

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procure services for periods after our current agreements expire.  We do not expect any material adverse effects from any changes in any new service contract.

 

Selling, general and administrative expensesSelling, general and administrative expenses include expenses associated with customer care; billing and other operating support systems; and corporate expenses, such as professional service fees and non-cash, stock-based compensation.

 

Our operating support and back-office systems enter, schedule, provision, and track customer orders; test services and interface with trouble management; and operate inventory, billing, collections, and customer care service systems for the local access lines in our operations.  We have migrated most key business processes onto a single company-wide system and platform.  We hope to improve profitability by reducing individual company costs through centralizing, standardizing, and sharing best practices.

 

Depreciation and amortization expenses.  The provision for depreciation on property and equipment is recorded using the straight-line method based upon the following useful lives:

 

Years

 

 

 

Buildings

 

18 - 40

 

Network and outside plant facilities

 

3 - 50

 

Furniture, fixtures and equipment

 

3 - 15

 

Capital leases

 

11

 

 

Amortization expenses are recognized primarily for our intangible assets considered to have finite useful lives on a straight-line basis. In accordance with the applicable authoritative guidance, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment.  Because tradenames have been determined to have indefinite lives, they are not amortized.  Customer relationships are amortized over their useful life.  The net carrying value of customer lists at March 31, 2011 is being amortized at a weighted-average life of approximately 2.6 years.

 

Results of Operations

 

Segments

 

We have two reportable business segments, Telephone Operations and Other Operations.  The discussion below covers our consolidated results and results by segment.

 

For the Three Months Ended March 31, 2011 Compared to March 31, 2010

 

The following summarizes our revenues and operating expenses on a consolidated basis for the three months ended March 31, 2011 and 2010:

 

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2011

 

2010

 

(In millions, except for percentages)

 

$

 

%

 

$

 

%

 

Revenue

 

 

 

 

 

 

 

 

 

Telephone operations

 

 

 

 

 

 

 

 

 

Local calling services

 

$

22.1

 

23.2

 

$

23.8

 

24.2

 

Network access services

 

21.4

 

22.4

 

21.2

 

21.6

 

Subsidies

 

11.5

 

12.1

 

12.2

 

12.4

 

Long-distance services

 

4.3

 

4.5

 

4.6

 

4.7

 

Data and Internet services

 

19.6

 

20.5

 

18.0

 

18.3

 

Other services

 

8.5

 

8.9

 

9.0

 

9.1

 

Total telephone operations

 

87.4

 

91.6

 

88.8

 

90.3

 

Other operations

 

8.0

 

8.4

 

9.5

 

9.7

 

 

 

 

 

 

 

 

 

 

 

Total operating revenue

 

95.4

 

100.0

 

98.3

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Telephone operations

 

48.9

 

51.3

 

50.0

 

50.9

 

Other operations

 

7.4

 

7.7

 

8.8

 

8.9

 

Depreciation and amortization

 

22.2

 

23.3

 

21.5

 

21.9

 

Total operating expense

 

78.5

 

82.3

 

80.3

 

81.7

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

16.9

 

17.7

 

18.0

 

18.3

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

11.9

 

12.5

 

12.9

 

13.1

 

Other income

 

7.1

 

7.4

 

6.3

 

6.4

 

Income tax expense

 

4.6

 

4.8

 

4.4

 

4.5

 

 

 

 

 

 

 

 

 

 

 

Net income

 

7.5

 

7.8

 

7.0

 

7.1

 

Net income attributable to noncontrolling interest

 

0.1

 

0.1

 

0.1

 

0.1

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

7.4

 

7.7

 

$

6.9

 

7.0

 

 

Revenue

 

Revenue in the first three months of 2011 declined by $2.9 million, or 3.0%, to $95.4 million from $98.3 million in the first three months of 2010.  Overall, the decline in revenue was principally due to the sales late in the first quarter of 2010 of our telemarketing business and in the fourth quarter of 2010 of operator service business.  This lowered revenue in our Other Operations segment by approximately $2.3 million quarter over quarter.  In addition to the sale of these businesses, year over year revenue was negatively impacted by a decline in revenues related to our traditional wireline telephone business, which impacted revenue for local calling services, subsidies, long-distance services and directory.  Revenue was positively impacted in 2011 by continued growth in our data and Internet services (including DSL and IPTV), and by revenue growth in our prison services business.

 

Access line loss continues to moderate and is being offset by growth in our number of broadband connections. VOIP, DSL and IPTV connections all increased during the first three months of 2011 as compared to 2010. Connections by type are as follows:

 

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March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Residential access lines in service

 

139,707

 

144,855

 

Business access lines in service

 

95,221

 

99,841

 

Total local access lines in service

 

234,928

 

244,696

 

IPTV subscribers

 

30,380

 

24,898

 

ILEC DSL subscribers

 

107,634

 

102,132

 

Total broadband connections

 

138,014

 

127,030

 

 

 

 

 

 

 

VOIP subscribers

 

8,665

 

8,529

 

CLEC access line equivalents (1)

 

81,631

 

73,413

 

 

 

 

 

 

 

Total connections

 

463,238

 

453,668

 

 

 

 

 

 

 

Long-distance lines (2)

 

173,944

 

170,765

 

 


(1)  CLEC access line equivalents represent a combination of voice services and data circuits.  The calculations represent a conversion of data circuits to an access line basis.  Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line.

 

(2) Reflects the inclusion of long-distance service provided as part of our VOIP offering while excluding CLEC long-distance subscribers.

 

Telephone Operations Revenue

 

Local calling services revenue decreased by $1.7 million, or 7.1%, to $22.1 million in the first three months of 2011 compared to $23.8 million in the first three months of 2010.  The decrease is primarily due to the decline in local access lines.

 

Network access services revenue increased by $0.2 million, or 0.9%, to $21.4 million in the first three months of 2011 compared to $21.2 million in the first three months of 2010.  The increase is primarily due to a one-time increase in switched and special access revenues partially offset by a decrease in end-user subscriber line charges.

 

Subsidy revenue decreased by $0.7 million, or 5.7%, to $11.5 million in the first three months of 2011 compared to $12.2 million in the first three months of 2010.  The decrease is principally the result of a decrease in interstate high cost fund support.

 

Long-distance services revenue decreased by $0.3 million, or 6.5%, to $4.3 million in the first three months of 2011 as compared to $4.6 million in the first three months of 2010.  The decrease is primarily due to a decline in billable minutes.

 

Data and Internet revenue increased by $1.6 million, or 8.9%, to $19.6 million in the first three months of 2011 as compared to $18.0 million in the first three months of 2010.  The increase is primarily due to an increase in the number of DSL and IPTV subscribers.

 

Other services revenue declined by $0.5 million, or 5.6%, to $8.5 million in the first three months of 2011 as compared to $9.0 million in the first three months of 2010.  Declines primarily in directory revenue were partially offset by an increase in transport revenues.

 

Other Operations Revenue

 

Other Operations revenue decreased by $1.5 million, or 15.8%, to $8.0 million in the first three months of 2011 as compared to $9.5 million in the first three months of 2010.  Declines in revenue from the sale of our telemarketing business and operator services business were partially offset by an increase in revenue from our prison services business.

 

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Operating Expenses

 

Operating expenses decreased in the first three months of 2011 by $2.5 million, or 4.3%, to $56.3 million as compared to $58.8 million in the first three months of 2010.  Reductions in operating expenses by segment are discussed below.

 

Telephone Operations Operating Expenses

 

Operating expenses for Telephone Operations decreased by $1.1 million, or 2.2%, to $48.9 million in the first three months of 2011 as compared to $50.0 million in the first three months of 2010.  The overall decrease in operating expense was principally driven by previous and ongoing cost reduction efforts, including: reductions in salaries, occupancy costs, supplies, professional fees and SG&A taxes.  The benefit of these cost structure improvements were partially offset by higher costs related to our video product (as a result of both increased subscribers and higher programming costs), along with higher advertising and pension costs.

 

Other Operations Operating Expenses

 

Operating expenses for Other Operations decreased by $1.4 million, or 15.9%, to $7.4 million in the first three months of 2011 as compared to $8.8 million in the first three months of 2010.  Operating expenses in our other Operations Segment declined as a result of the elimination of costs totaling $2.5 million related to the sale of our telemarketing and operator service businesses.  This decrease in cost was partially offset by higher commission payments to the State of Illinois necessitated by an increase in revenue from our prison services business.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by $0.7 million, or 3.3%, to $22.2 million in the first three months of 2011 as compared to $21.5 million in the first three months of 2010.  The increase in depreciation expense was principally the result of increases in capitalized equipment related to the growth in video services which has a shorter life.

 

Interest Expense, Net

 

Interest expense, net of interest income, declined by $1.0 million, or 7.8%, to $11.9 million for the first three months of 2011 as compared to $12.9 million for the first three months of 2010.  Interest expense in the first quarter of 2011 benefited from the expiration at December 31, 2010 of $175 million notional amount of interest rates swaps that required fixed interest payments to our swap counterparties at a weighted-average fixed rate of 4.28%.  These higher fixed rate swaps were replaced at December 31, 2010 with $200 million notional amount of fixed interest rate swaps at a weighted-average rate of 1.83%.

 

Other Income (Expense)

 

Other income (expense) increased $0.8 million to $7.1 million in the first three months of 2011 compared to $6.3 million in the first three months of 2010.  The increase was principally due to improved earnings from our wireless partnership interests.

 

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Income Taxes

 

Our provision for income taxes in the first quarter of 2011 was $4.6 million compared to $4.4 million in the first quarter of 2010.  The effective tax rate for the three months ended March 31, 2011 and 2010 was 38.1% and 38.6%, respectively.  Our effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses and a change in Illinois state income tax rates.

 

In January 2011, Illinois’ Governor signed into law PA. 96-1496.  Included as part of the law was an increase in the corporate income tax rate.  This resulted in an increase to our net deferred tax liabilities and with a corresponding increase to our state tax provision of $0.3 million recognized in the first quarter of 2011.  Exclusive of this adjustment, our effective tax rate for the first quarter of 2011 would have been approximately 35.6%.

 

Net Income Attributable to Noncontrolling Interest

 

The net income attributable to noncontrolling interest totaled $0.1 million in the first three months of both 2011 and 2010.  The income for our East Texas Fiber Line, Inc. subsidiary (a joint venture owned 63% by the Company and 37% by Eastex Celco) was relatively stable period over period.

 

Liquidity and Capital Resources

 

Outlook and Overview

 

The following table sets forth selected information concerning our financial condition.

 

(In thousands, except for ratio)

 

March 31,
2011

 

December 31,
2010

 

Cash and cash equivalents

 

$

77,241

 

$

67,654

 

Working capital

 

71,329

 

60,658

 

Total debt

 

884,666

 

884,125

 

Current ratio

 

1.98

 

1.80

 

 

Our operating requirements have historically been funded from cash flows generated from our business and borrowings under our credit facilities.  We expect that our future operating requirements will continue to be funded from cash flows generated from our business and, if needed, from borrowings under our revolving credit facility.

 

As a general matter, we expect that our liquidity needs for the remainder of 2011 will arise primarily from: (i) dividend payments of between $34.0 million and $35.0 million; (ii) interest payments on our indebtedness of between $33.0 million and $37.0 million; (iii) capital expenditures of between $28.0 million and $31.0 million; (iv) cash income tax payments; (v) pension, 401(k) and other post retirement contributions of approximately $11.5 million; and (vi) certain other costs.  In addition, we may use cash and incur additional debt to fund selective acquisitions.  However, our ability to use cash may be limited by our other expected uses of cash, including our dividend policy, and our ability to incur additional debt will be limited by our existing and future debt agreements.

 

We believe that cash flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for approximately the next twelve months to fund our current anticipated uses of cash.  After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will

 

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depend on the results of future operations, performance and cash flow.  Our ability to do so will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control.

 

We may be unable to access the cash flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or subject to statutory or regulatory restrictions, that restrict the payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future.  In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries’ ability to pay dividends or advance cash in any other manner to us.

 

To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate.  Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities.  There can be no assurance that we will be able to generate sufficient cash flows from operations in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash.  Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures which could have a material