PART I [Business](index=3&type=section&id=Item%201.%20Business) Consolidated Communications provides broadband and business communication services across 23 states, leveraging a 37,000-mile fiber network, with growth focused on commercial and carrier services despite declines in traditional voice - Consolidated Communications operates as a broadband and business communications provider across a 23-state service area, featuring an advanced fiber network spanning approximately **37,000 route miles**[18](index=18&type=chunk)[235](index=235&type=chunk) - The company generates the majority of its revenue from subscriptions to broadband, data, and transport services, with commercial and carrier services identified as key future growth areas[19](index=19&type=chunk)[20](index=20&type=chunk)[236](index=236&type=chunk) - The acquisition of FairPoint Communications in July 2017 significantly increased the company's scale and expanded its fiber network, creating new growth opportunities and synergies expected to reach **$75.0 million** over two years[13](index=13&type=chunk)[15](index=15&type=chunk)[244](index=244&type=chunk) Operating Revenues by Segment (2016-2018) | (In millions) | 2018 $ | 2018 % | 2017 $ | 2017 % | 2016 $ | 2016 % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Commercial and carrier** | | | | | | | | Data and transport services | 349.4 | 25.0% | 274.2 | 25.9% | 202.3 | 27.2% | | Voice services | 202.9 | 14.5% | 152.7 | 14.4% | 94.2 | 12.7% | | Other | 56.4 | 4.0% | 33.9 | 3.2% | 12.5 | 1.7% | | *Subtotal* | *608.7* | *43.5%* | *460.8* | *43.5%* | *309.0* | *41.6%* | | **Consumer** | | | | | | | | Broadband (Data and VoIP) | 253.1 | 18.1% | 183.6 | 17.3% | 115.2 | 15.5% | | Video services | 88.4 | 6.3% | 91.4 | 8.6% | 94.2 | 12.6% | | Voice services | 202.0 | 14.4% | 137.7 | 13.0% | 55.8 | 7.5% | | *Subtotal* | *543.5* | *38.8%* | *412.7* | *38.9%* | *265.2* | *35.6%* | | **Other Revenues** | | | | | | | | Subsidies | 83.4 | 6.0% | 62.3 | 5.9% | 48.3 | 6.5% | | Network access | 152.6 | 10.9% | 110.2 | 10.4% | 63.8 | 8.6% | | Other products and services | 10.9 | 0.8% | 13.6 | 1.3% | 13.8 | 1.9% | | Equipment sales and service | — | — | — | — | 43.1 | 5.8% | | **Total operating revenues** | **1,399.1** | **100.0%** | **1,059.6** | **100.0%** | **743.2** | **100.0%** | Key Operating Statistics (2016-2018) | As of December 31, | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Consumer customers | 628,649 | 671,300 | 253,203 | | Voice connections | 902,414 | 972,178 | 457,315 | | Data connections | 778,970 | 783,682 | 473,403 | | Video connections | 93,065 | 103,313 | 106,343 | | **Total connections** | **1,774,449** | **1,859,173** | **1,037,061** | [Wireless Partnerships](index=9&type=section&id=Wireless%20Partnerships) The company generates income and cash distributions from five wireless partnerships managed by Cellco Partnership, a Verizon subsidiary - The company holds investments in five wireless partnerships, all managed by Cellco Partnership, an indirect subsidiary of Verizon Communications Inc[41](index=41&type=chunk)[43](index=43&type=chunk) Wireless Partnership Income and Distributions (2016-2018) | (In millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Income Recognized | $39.3 | $31.4 | $32.6 | | Cash Distributions Received | $39.1 | $30.0 | $32.1 | [Network Architecture and Technology](index=12&type=section&id=Network%20Architecture%20and%20Technology) The company operates a 37,000-mile fiber network, investing in FTTH/FTTN expansion, upgrading broadband speeds for over 500,000 homes, and supporting 3,391 cell sites - The company's fiber-optic network consists of approximately **37,000 route-miles** across its service areas, including significant networks in northern New England, Minnesota, Texas, and California[55](index=55&type=chunk) - In 2018, the company upgraded broadband speeds for over **500,000 homes and small businesses** in the northern New England service area, enabling speeds up to three times faster than previously available[56](index=56&type=chunk) - The company supports wireless carriers through fiber backhaul services, with **3,391 cell sites** in service as of year-end 2018 and an additional **316** scheduled for completion in 2019[57](index=57&type=chunk) [Business Strategies](index=13&type=section&id=Business%20Strategies) Core strategies include diversifying revenue towards broadband and commercial services, increasing revenue per customer, improving efficiency, disciplined capital spending, and selective acquisitions - Key strategies include diversifying revenues by focusing on broadband and commercial services, increasing revenue per customer, improving operating efficiency, maintaining capital discipline, and pursuing selective acquisitions[59](index=59&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk) [Competition](index=13&type=section&id=Competition) The company faces intense competition across all services from various providers, driven by wireless substitution and the rise of Over-The-Top (OTT) video content - The telecommunications industry is highly competitive, with threats from incumbent and competitive local telephone companies, cable operators, wireless carriers, satellite companies, and internet service providers[66](index=66&type=chunk) - Competition is intensifying due to technological advances, such as the expansion of wireless services causing customers to forgo traditional landlines, and the rise of Over-The-Top (OTT) video services[68](index=68&type=chunk)[153](index=153&type=chunk) [Regulatory Environment](index=14&type=section&id=Regulatory%20Environment) The company operates under complex federal and state regulations, facing reforms in universal service (CAF) and intercarrier compensation that impact subsidies and access revenues, alongside state-specific commitments - The company is subject to extensive federal (FCC) and state regulation, which impacts revenues from local telephone service, network access, and subsidies[73](index=73&type=chunk)[75](index=75&type=chunk) - The FCC's Universal Service Fund (USF) and Connect America Fund (CAF) programs are significant sources of revenue, providing **$83.4 million** in 2018. The company has accepted CAF Phase II funding, which requires specific broadband build-out commitments through 2020[92](index=92&type=chunk)[99](index=99&type=chunk)[100](index=100&type=chunk) - FCC reforms are transitioning intercarrier compensation (ICC) to a "bill-and-keep" model, which has steadily reduced the company's network access revenue[93](index=93&type=chunk)[95](index=95&type=chunk) - As part of the FairPoint acquisition, the company has state-level regulatory commitments requiring specific capital investments for network and service quality improvements through 2020, particularly in Maine, New Hampshire, and Vermont[128](index=128&type=chunk) [Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) Significant risks include intense competition, rapid technological change, operational disruptions, substantial debt, and regulatory uncertainty impacting subsidies and internet services [Risks Relating to Our Business](index=27&type=section&id=Risks%20Relating%20to%20Our%20Business) Business risks include intense competition, rapid technological change requiring significant investment, cyber-attacks, third-party reliance, rising video costs, and potential labor disruptions - The company faces significant and intensifying competition from a wide range of providers, including wireless and OTT services, which could lead to loss of customers, revenue, and market share[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk) - Rapid technological change requires continuous adaptation and significant capital investment to upgrade networks and services; failure to keep pace could lead to a competitive disadvantage[157](index=157&type=chunk)[159](index=159&type=chunk) - Approximately **47%** of employees are covered by collective bargaining agreements, and an inability to renew these agreements could lead to work stoppages or other labor actions, disrupting service[171](index=171&type=chunk) - The business is vulnerable to cyber-attacks, which could lead to unauthorized access to confidential information, and disruptions in its network infrastructure, which could cause service interruptions and customer loss[164](index=164&type=chunk)[165](index=165&type=chunk) [Risks Relating to Our Indebtedness and Our Capital Structure](index=33&type=section&id=Risks%20Relating%20to%20Our%20Indebtedness%20and%20Our%20Capital%20Structure) Substantial debt of **$2.3 billion** restricts financial flexibility, with covenants limiting operations and exposing the company to interest rate risk on variable-rate debt - As of December 31, 2018, the company had **$2.3 billion** of debt outstanding, which requires a substantial portion of cash flow for service payments and restricts financial flexibility[187](index=187&type=chunk) - Debt agreements contain restrictive covenants that limit the ability to incur more debt, make investments, pay dividends, and require compliance with financial ratios like total leverage and interest coverage[190](index=190&type=chunk)[191](index=191&type=chunk) - A significant portion of the company's debt is at variable rates, exposing it to interest rate risk. The potential phase-out of LIBOR after 2021 adds uncertainty to future interest costs[194](index=194&type=chunk)[195](index=195&type=chunk) [Risks Related to the Regulation of Our Business](index=34&type=section&id=Risks%20Related%20to%20the%20Regulation%20of%20Our%20Business) The company faces complex regulatory risks, including potential reduction of federal and state subsidies (USF, CAF) and increased costs from internet regulation - The business is subject to a complex and changing regulatory environment at the federal, state, and local levels, which could impose significant costs and restrictions[196](index=196&type=chunk)[198](index=198&type=chunk) - A significant portion of revenues comes from network access and subsidies, and the continued receipt of this support is not assured due to ongoing reforms of the Universal Service Fund (USF) and Connect America Fund (CAF)[199](index=199&type=chunk)[200](index=200&type=chunk) - Potential new rules and regulations governing the internet could increase the cost of doing business and affect the company's ability to compete in the market for internet services[201](index=201&type=chunk)[202](index=202&type=chunk) [Properties](index=37&type=section&id=Item%202.%20Properties) The company's properties include leased headquarters, various owned/leased facilities, central office equipment, customer premises equipment, and over **37,000 miles** of fiber and copper cable across its 23-state area - The company's property includes central office equipment, customer premises equipment, pole lines, and an extensive network of aerial and underground cable and wire facilities[210](index=210&type=chunk) [Legal Proceedings](index=38&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine litigation, but management does not anticipate any material adverse impact on its business or financial condition - The company states that while it is involved in some litigation, it does not expect the outcome of any current legal proceedings to have a material adverse impact on its business or financial condition[214](index=214&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=38&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under "CNSL", with **4,468** stockholders of record, and **48,649** shares repurchased in Q4 2018 for share-based compensation - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "**CNSL**"[216](index=216&type=chunk) - In Q4 2018, **48,649 common shares** were repurchased from employees to cover tax obligations related to share-based compensation plans[217](index=217&type=chunk) [Selected Financial Data](index=40&type=section&id=Item%206.%20Selected%20Financial%20Data) Operating revenues reached **$1.40 billion** in 2018, driven by the FairPoint acquisition, but the company reported a **net loss of $50.8 million**, with **Adjusted EBITDA at $537.3 million** and total debt at **$2.33 billion** Selected Financial Data (2014-2018) | (In millions, except per share amounts) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Operating revenues** | **$1,399.1** | **$1,059.6** | **$743.2** | **$775.7** | **$635.7** | | Income from operations | $19.0 | $39.0 | $89.5 | $84.6 | $84.7 | | **Net income (loss) attributable to common shareholders** | **$(50.8)** | **$64.9** | **$14.9** | **$(0.9)** | **$15.1** | | Net income (loss) per common share - basic and diluted | $(0.73) | $1.07 | $0.29 | $(0.02) | $0.35 | | Cash dividends per common share | $1.55 | $1.55 | $1.55 | $1.55 | $1.55 | | Cash flows from operating activities | $357.3 | $210.0 | $218.2 | $219.2 | $187.8 | | Capital expenditures | $244.8 | $181.2 | $125.2 | $133.9 | $109.0 | | Total assets | $3,535.3 | $3,719.1 | $2,092.8 | $2,138.5 | $2,211.8 | | Total debt (including current portion) | $2,334.1 | $2,341.2 | $1,391.7 | $1,388.8 | $1,351.2 | | **Adjusted EBITDA** | **$537.3** | **$414.1** | **$305.8** | **$328.9** | **$288.4** | Reconciliation of Net Income (Loss) to Adjusted EBITDA (2018) | (In millions) | 2018 | | :--- | :--- | | Net income (loss) | $(50.5) | | Interest expense, net | 134.5 | | Income tax benefit | (24.1) | | Depreciation and amortization | 432.6 | | **EBITDA** | **492.5** | | Adjustments (Other, net, Investment distributions, etc.) | 44.8 | | **Adjusted EBITDA** | **$537.3** | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=42&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) MD&A details **32% revenue growth** in 2018 from the FairPoint acquisition, a **net loss of $50.5 million**, **$2.3 billion** debt, **$210-$220 million** projected 2019 capital expenditures, and the impact of regulatory reforms [Results of Operations](index=45&type=section&id=Results%20of%20Operations) Total operating revenues increased **32% to $1.4 billion** in 2018 due to the FairPoint acquisition, but operating expenses rose **35%**, resulting in a **net loss of $50.5 million** compared to **$65.3 million** net income in 2017 Year-over-Year Revenue Changes (2018 vs 2017) | (In millions) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | **Total operating revenues** | **$1,399.1** | **$1,059.6** | **32%** | | Commercial and carrier | $608.7 | $460.8 | 32% | | Consumer | $543.5 | $412.7 | 32% | | Subsidies | $83.4 | $62.3 | 34% | | Network access | $152.6 | $110.2 | 38% | Year-over-Year Expense and Income Changes (2018 vs 2017) | (In millions) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Total operating expenses | $1,380.1 | $1,020.6 | 35% | | Income from operations | $19.0 | $39.0 | (51)% | | **Net income (loss)** | **$(50.5)** | **$65.3** | **(177)%** | | Adjusted EBITDA | $537.3 | $414.1 | 30% | - The increase in 2018 revenue was primarily due to the acquisition of FairPoint, which contributed an additional six months of revenue compared to 2017[262](index=262&type=chunk) - The 2018 net loss was heavily influenced by higher operating and depreciation expenses from the FairPoint acquisition, whereas 2017 net income was significantly boosted by a **$112.9 million** non-cash tax benefit from the 2017 Tax Act[322](index=322&type=chunk) [Liquidity and Capital Resources](index=57&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is driven by **$357.3 million** cash from operations, with major uses including **$244.8 million** in 2018 capital expenditures, debt service on **$2.3 billion** total debt, and **$110.2 million** in dividends, while projecting **$210-$220 million** for 2019 capital expenditures Cash Flow Summary (2016-2018) | (In millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Cash from Operating Activities | $357.3 | $210.0 | $218.2 | | Cash used for Investing Activities | $(221.5) | $(1,042.7) | $(108.3) | | Cash (used for) provided by Financing Activities | $(141.9) | $821.3 | $(98.7) | - Capital expenditures were **$244.8 million** in 2018 and are projected to be between **$210.0 million** and **$220.0 million** for 2019[338](index=338&type=chunk)[370](index=370&type=chunk) - As of December 31, 2018, total debt outstanding was approximately **$2.3 billion**, consisting primarily of **$1.8 billion** in term loans and **$497 million** in 6.50% Senior Notes[344](index=344&type=chunk)[606](index=606&type=chunk) - The company paid **$110.2 million** in dividends in 2018 and maintains a quarterly dividend of **$0.38738 per share**. As of year-end 2018, it had **$322.2 million** in dividend availability under its credit facility covenant[365](index=365&type=chunk)[619](index=619&type=chunk) [Critical Accounting Estimates](index=66&type=section&id=Critical%20Accounting%20Estimates) Critical accounting estimates involve annual impairment testing of **$1.04 billion** goodwill, valuation of deferred tax assets, and actuarial assumptions for pension and post-retirement benefits, including discount rates and expected returns - Goodwill, with a carrying value of **$1.035 billion**, is tested for impairment annually. The 2018 qualitative assessment concluded it was not impaired[395](index=395&type=chunk)[397](index=397&type=chunk) - Accounting for pension and post-retirement benefits relies on critical assumptions including the discount rate (**4.39%** for pensions in 2018) and the expected long-term rate of return on plan assets (**7.03%** in 2018)[403](index=403&type=chunk)[404](index=404&type=chunk)[405](index=405&type=chunk) - The determination of deferred tax assets and liabilities and any necessary valuation allowances requires significant management judgment regarding future taxable income[402](index=402&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=68&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuations on variable-rate debt, managed by interest rate swaps, with a **1.00%** rate change impacting annual interest expense by approximately **$6.6 million** - The company's main market risk is from interest rate changes on its variable-rate debt obligations[410](index=410&type=chunk) - A **1.00%** change in market interest rates would impact annual interest expense by approximately **$6.6 million**, based on debt outstanding at December 31, 2018[411](index=411&type=chunk) [Financial Statements and Supplementary Data](index=68&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for fiscal year 2018, including statements of operations, comprehensive income, balance sheets, shareholders' equity, cash flows, and accompanying notes - This item incorporates by reference the full consolidated financial statements and supplementary data, which are located on pages F-1 to F-53 of the report[413](index=413&type=chunk) [Controls and Procedures](index=68&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, a conclusion affirmed by Ernst & Young LLP's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[415](index=415&type=chunk) - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2018. This was audited and confirmed by Ernst & Young LLP[418](index=418&type=chunk)[419](index=419&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=71&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement - Required information for this item is incorporated by reference from the company's definitive proxy statement, to be filed within 120 days of the fiscal year-end[434](index=434&type=chunk) [Executive Compensation](index=71&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation information is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement - Required information for this item is incorporated by reference from the company's definitive proxy statement[435](index=435&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=71&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership details for beneficial owners and management are incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement - Required information for this item is incorporated by reference from the company's definitive proxy statement[435](index=435&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=71&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related party transactions, and director independence is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement - Required information for this item is incorporated by reference from the company's definitive proxy statement[436](index=436&type=chunk) [Principal Accountant Fees and Services](index=71&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Principal accountant fees and services information is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement - Required information for this item is incorporated by reference from the company's definitive proxy statement[437](index=437&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=72&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements and corporate documents - This item provides a comprehensive list of all exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications[444](index=444&type=chunk)