The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Description of Business
Uniti Group Inc. (the “Company,” “Uniti,” “we,” “us,” or “our”), formerly known as Communications Sales and Leasing, Inc., was incorporated in the state of Maryland on September 4, 2014. We are an independent, internally managed real estate investment trust (“REIT”) engaged in the acquisition and construction of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic broadband networks, wireless communications towers, copper and coaxial broadband networks and data centers. Effective the first quarter of 2017, we commenced managing our operations in
four
separate lines of business: Uniti Fiber, Uniti Towers, Uniti Leasing, and the Consumer CLEC Business.
The Company operates through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”), that we control as general partner,
with the only significant difference between the financial position and results of operations of the Operating Partnership and its subsidiaries compared to the consolidated financial position and consolidated results of operations of Uniti is that the results for the Operating Partnership and its subsidiaries do not include Uniti’s Consumer CLEC segment, which consists of Talk America Services.
The up-REIT structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of September 30, 2017, we are the sole general partner of the Operating Partnership and own approximately 97.7% of the partnership interests in the Operating Partnership.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying Condensed Consolidated Financial Statements include all accounts of the Company, its wholly-owned and/or controlled subsidiaries, which consist of the Operating Partnership, which the Company has determined itself to be the primary beneficiary. Under the Accounting Standards Codification 810 (“ASC 810”),
Consolidation
, the Operating Partnership is considered a variable interest entity the Company and is consolidated in the Company’s Condensed Consolidated Financial Statements of Uniti Group Inc.
All material intercompany balances and transactions have been eliminated.
ASC 810 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance: and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results from any interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 (“Annual Report”), filed with the SEC on February 23, 2017. Accordingly, significant accounting policies and other disclosures normally provided have been omitted from the accompanying Condensed Consolidated Financial Statements and related notes since such items are disclosed in our Annual Report.
10
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Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Income Taxes
—We currently have recorded a $5.3 million liability for unrecognized tax benefits which was assumed in connect
ion with the acquisition of Network Management Holdings, LTD (“NMS”).
S
ee Note 3
.
We have filed our initial U.S. federal and state income tax returns which are subject to examination.
Customer List Intangible Assets
—Customer list intangible assets are presented in the financial statements at cost less accumulated amortization and are amortized using the straight-line method over their estimated useful lives with the exception of the customer list intangible assets related to our Consumer CLEC Business, which were brought over at carry-over basis at the time of the Company’s spin-off from Windstream Holdings, Inc. in 2015, and are amortized using the sum-of-the-digits method over their estimated useful lives.
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets
—We review long-lived assets and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable from future undiscounted net cash flows we expect the asset group to generate. If the asset group is not fully recoverable, an impairment loss would be recognized for the difference between the carrying value of the asset group and its estimated fair value based on discounted net future cash flows.
Reclassifications
—Certain amounts have been reclassified to conform with current year presentation.
Following the acquisition of NMS in the first quarter of 2017, the Company manages and reports our operations in four reportable business segments: Leasing, Fiber Infrastructure, Towers and Consumer CLEC. Prior year information, including revenues on the Consolidated Statement of Income, has been recast to conform to the current year presentation.
See Note 12
.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”), in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2017-01 effective January 1, 2017, with prospective application. As a result of the adoption of ASU 2017-01, the Company’s acquisition of NMS (
see Note 3
) was determined to be an asset acquisition. Transaction costs associated with asset acquisitions, which includes our real property interest investments, are now capitalized as opposed to be recorded as an expense as was required prior to adoption of ASU 2017-01.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 provides guidance on reducing the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In addition to other specific cash flow issues, ASU 2016-15 provides clarification on when an entity should separate cash receipts and cash payments into more than one class of cash flows and when an entity should classify those cash receipts and payments into one class of cash flows on the basis of predominance. The new guidance is effective for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact the adoption of this accounting standard will have on our financial statements.
In August 2017, the FASB issued
Accounting Standards Update (“ASU”) No.
2017-12
, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
(“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is
effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods
, and earlier adoption is permitted. The Company is currently evaluating the impacts the adoption of this accounting standard will have on our financial statements.
In February 2017, the FASB issued
ASU No.
2017-05,
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, and is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The Company is currently evaluating the impacts the adoption of this accounting standard will have on our financial statements, but it is not expected to have a material impact.
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Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment
(“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price
allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim period
s beginning January 1, 2020, with early adoption permitted, and applied prospectively.
We adopted ASU 2017-04 effective January 1, 2017, and there was no material impact on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). This
update outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted for public companies for annual periods beginning after December 15, 2016. The Company intends to adopt the revenue recognition guidance on January 1, 2018 using the modified retrospective approach. The Company’s implementation efforts include reviewing revenue contracts and the identification of revenue within the scope of the guidance. As ASU 2014-09 does not impact lessor accounting, the Company believes our accounting for leasing revenues will not be significantly impacted. While the Company currently has not identified any material changes in the timing of revenue recognition, we do anticipate an impact to our Fiber Infrastructure costs, primarily related to the capitalization of commission expense under ASU 2014-09, and are currently in the process of quantifying such impacts.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASC 842”),
which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The provisions of this guidance are effective for annual periods beginning after December 31, 2018, and for interim periods therein. The Company is currently evaluating this guidance to determine the impact it will have on our financial statements by reviewing its existing operating lease contracts, where we are the lessee and service contracts that may include embedded leases. The Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets, the extent of the impact of a gross-up is under evaluation. The Company does not anticipate material changes to the recognition of operating lease expense in its Consolidated Statements of Income.
Note 3. Business Combinations and Asset Acquisitions
Asset Acquisitions
Network Management Holdings LTD
On January 31, 2017, we completed the previously announced acquisition of NMS. The Company accounted for the acquisition of NMS as an asset purchase. At close, NMS owned and operated 366 wireless communications towers in Latin America with an additional 105 build to suit tower sites under development. The NMS portfolio spans three Latin American countries with 212 towers in Mexico, 54 towers in Nicaragua, and 100 towers in Colombia. The consideration for the 366 wireless towers in operation as of the transaction close date was $62.6 million, which was funded through cash on hand, and is presented in NMS asset acquisition on the Condensed Consolidated Statements of Cash Flows. NMS conducts its operations through three non-U.S. subsidiaries and the Company has determined that the functional currencies for the Mexican, Nicaraguan and Colombian subsidiaries are the Mexican Peso, US Dollar and Colombian Peso, respectively. The non-U.S. subsidiaries in which NMS conducts its operations are subject to income tax in the jurisdictions in which they operate. The acquisition did not result in a step up in tax basis under local law. The Company recorded a net deferred tax liability of $18.4 million and a liability for unrecognized tax benefits of $5.3 million in connection with the acquisition. The deferred tax liability is primarily related to the excess of the recorded amounts for Property, Plant
12
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Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
& Equipment and Intangibles over their respective historical tax bases. Under the terms of the purchase agreement, we will acquire the towers under development w
hen construction is completed. The NMS towers are reflected in our Towers segment.
See Note 12
. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:
|
|
(thousands)
|
|
Property, plant and equipment
|
|
$
|
36,417
|
|
Accounts receivable
|
|
|
2,826
|
|
Other assets
|
|
|
1,623
|
|
Intangible assets
|
|
|
52,437
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(8,895
|
)
|
Intangible liabilities
|
|
|
(3,440
|
)
|
Deferred income taxes
|
|
|
(18,403
|
)
|
Total purchase consideration
|
|
$
|
62,565
|
|
Of the $52.4 million of acquired intangible assets, $37.4 million was assigned to tenant contracts (22 year life), $13.5 million was assigned to network (22 year life) and $1.5 million was assigned to acquired above-market leases (10 year life). The acquired below-market lease intangible liability of $3.4 million has a 10 year life.
See Note 7
.
As of
September 30, 2017, construction was completed on 43 of the 105 towers that were under development at the time of the NMS acquisition, and we acquired the completed towers pursuant to the purchase agreement for approximately $4.1 million.
Business Combinations
Recent Transactions
Southern Light, LLC
On July 3, 2017, we acquired 100% of the outstanding equity of Southern Light for $638 million in cash and 2.5 million common units in the Operating Partnership with an acquisition date fair value of $64.3 million. Southern Light is a leading provider of data transport services along the Gulf Coast region serving twelve attractive Tier II and Tier III markets across Florida, Alabama, Louisiana, and Mississippi. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill within our Fiber Infrastructure segment.
See Note 12
. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:
|
|
(thousands)
|
|
Property, plant and equipment
|
|
$
|
279,658
|
|
Cash and cash equivalents
|
|
|
1,992
|
|
Accounts receivable
|
|
|
11,139
|
|
Goodwill
|
|
|
318,007
|
|
Intangible assets
|
|
|
160,100
|
|
Other assets
|
|
|
1,287
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(19,546
|
)
|
Deferred revenue
|
|
|
(38,134
|
)
|
Deferred income taxes
|
|
|
(9,004
|
)
|
Capital lease obligations
|
|
|
(3,189
|
)
|
Total purchase consideration
|
|
$
|
702,310
|
|
The above purchase price allocation is considered preliminary and is subject to revision when the valuation of assets and liabilities is finalized upon receipt of the final valuation report from a third party valuation expert, and resolution of contractual adjustments, such as working capital adjustments, set forth in the merger agreement, which is anticipated to be finalized during the first half of 2018.
13
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
The
goodwill arising from the transaction is primarily attributable to the expansion of our fiber network through the complementary nature of Southern Light’s fiber network to our existing fiber network, including anticipated incremental
sales and cost savings
.
A portion of t
he goodwill is expected to be deductible for tax purposes.
We acquired an intangible asset that was assigned to customer relationships of $160.1 million (15 year life).
The acquired business contributed revenue of $22.4 million and an operating income of $1.9 million, which excludes transaction and transition costs, to our consolidated results from the date of acquisition through September 30, 2017. We recorded transaction related costs related to the acquisition of Southern Light for the three and nine months ended September 30, 2017 of $2.1 million and $14.5 million, respectively, within transaction related costs on the Consolidated Statement of Income.
The acquisition of Southern Light was structured in a manner such that Southern Light ended up being owned by a subsidiary of ours with a pre-existing valuation allowance primarily related to deferred tax assets associated with net operating loss carryforwards. The acquisition of Southern Light also resulted in a change to our assessment of the need for a valuation allowance against these deferred tax assets, which resulted in a decrease to the valuation allowance of $8.0 million. The decrease in valuation allowance was recorded as an income tax benefit for the quarter ended September 30, 2017.
Hunt Telecommunications, LLC
On July 3, 2017, we acquired 100% of the outstanding equity of Hunt for $130.2 million in cash and 1.6 million common units in the Operating Partnership with an acquisition date fair value of $41.6 million. Additional contingent consideration of up to $17 million, with an acquisition date fair value of $16.4 million, may be paid upon the achievement of certain financial revenue milestones by delivering shares of our common stock.
See Note 4
.
Hunt is a leading provider of data transport to K-12 schools and government agencies with a dense fiber network in Louisiana. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill within our Fiber Infrastructure segment.
See Note 12
.
|
|
(thousands)
|
|
Property, plant and equipment
|
|
$
|
59,639
|
|
Cash and cash equivalents
|
|
|
2,281
|
|
Accounts receivable
|
|
|
4,905
|
|
Goodwill
|
|
|
92,275
|
|
Intangible assets
|
|
|
73,000
|
|
Other assets
|
|
|
2,875
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(2,349
|
)
|
Deferred revenue
|
|
|
(3,800
|
)
|
Deferred income taxes
|
|
|
(40,391
|
)
|
Capital lease obligations
|
|
|
(164
|
)
|
Total purchase consideration
|
|
$
|
188,271
|
|
The above purchase price allocation is considered preliminary and is subject to revision when the valuation of assets and liabilities is finalized upon receipt of the final valuation report from a third party valuation expert, which is anticipated to be finalized during the first half of 2018.
The goodwill arising from the transaction is primarily attributable to the expansion of our fiber network through the complementary nature of Hunt’s fiber network to our existing fiber network, including anticipated incremental sales and cost savings.
The goodwill is not expected to be deductible for tax purposes.
We acquired an intangible asset that was assigned to customer relationships of $73 million (18 year life).
The acquired business contributed revenue of $7.9 million and an operating income of $1.4 million, which excludes transaction and transition costs, to our consolidated results from the date of acquisition through September 30, 2017. We recorded transaction related costs related to the acquisition of Hunt for the three and nine months ended September 30, 2017 of $2.0 million and $5.7 million, respectively, within transaction related costs on the Consolidated Statement of Income.
14
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
The following table presents the unaudited pro forma summary of our financial results as if the
Southern Light and Hunt
business combination
s
had occurred on January 1, 2016. The pro forma results include additional depreciation and amortization resulting from purchase accounting adjustments, adjustments to amortized deferred revenue, and interest expense associated with debt used to fund the a
cquisition. The pro forma results do not include any synergies or other benefits of the acquisition. The pro forma results are not indicative of future results of operations, or results that might have been achieved had the acquisition been consummated on
January 1, 2016.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Pro forma revenue
|
|
$
|
245,860
|
|
|
$
|
231,545
|
|
|
$
|
733,967
|
|
|
$
|
654,475
|
|
Pro forma net income (loss) attributable to common shareholders
|
|
|
5,534
|
|
|
|
(4,633
|
)
|
|
|
(23,961
|
)
|
|
|
(1,058
|
)
|
Pro forma net income (loss) per common share
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
2016 Transactions
Tower Cloud, Inc.
On August 31, 2016, we
acquired 100% of the outstanding equity of Tower Cloud, Inc. (“Tower Cloud”) for $187.5 million in cash and 1.9 million shares of our common stock with an acquisition date fair value of $58.5 million. Additional contingent consideration of up to $130 million, with an acquisition date fair value of $98.6 million, may be paid upon the achievement of certain defined operational and financial milestones.
See Note 4
. At the Company’s discretion, a combination of cash and shares of our common stock may be used to satisfy the contingent consideration payments, provided that at least 50% of the aggregate amount of payments is satisfied in cash. Tower Cloud provides data transport services, with particular focus on providing infrastructure solutions to the wireless and enterprise sectors, including fiber-to-the-tower backhaul, small cell networks, and dark fiber deployments. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill within our Fiber Infrastructure segment.
See Note 12
. During the first quarter of 2017, certain contractual working capital adjustments resulted in a $0.2 million reduction of the purchase price and goodwill.
See Note 7
. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:
|
|
(thousands)
|
|
Property, plant and equipment
|
|
$
|
163,680
|
|
Cash and cash equivalents
|
|
|
14,346
|
|
Accounts receivable
|
|
|
3,043
|
|
Goodwill
|
|
|
117,032
|
|
Intangible assets
|
|
|
116,218
|
|
Other assets
|
|
|
2,595
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(16,782
|
)
|
Deferred revenue
|
|
|
(23,900
|
)
|
Deferred income taxes
|
|
|
(24,866
|
)
|
Capital lease obligations
|
|
|
(6,750
|
)
|
Total purchase consideration
|
|
$
|
344,616
|
|
|
|
|
|
|
|
|
|
|
|
PEG Bandwidth, LLC
On May 2, 2016, we acquired 100% of the outstanding equity of PEG Bandwidth for $322.5 million in cash, the issuance of 87,500 shares of our 3.00% Series A Convertible Preferred Stock with a fair value of $78.6 million and 1 million shares of our common stock with an acquisition date fair value of $23.2 million. PEG Bandwidth is a leading provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry. The acquisition was recorded by allocating the costs of the assets
15
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded a
s goodwill within our Fiber Infrastructure segment.
See Note 12
.
The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:
|
|
(thousands)
|
|
Property, plant and equipment
|
|
$
|
293,030
|
|
Cash and cash equivalents
|
|
|
7,003
|
|
Accounts receivable
|
|
|
6,584
|
|
Goodwill
|
|
|
145,054
|
|
Intangible assets
|
|
|
38,000
|
|
Other assets
|
|
|
5,161
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(8,643
|
)
|
Deferred revenue
|
|
|
(12,700
|
)
|
Capital lease obligations
|
|
|
(49,195
|
)
|
Total purchase consideration
|
|
$
|
424,294
|
|
Note 4. Fair Value of Financial Instruments
FASB ASC 820,
Fair Value
Measurements
, establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:
Level 1
– Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date
Level 2
– Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3
– Unobservable inputs for the asset or liability
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, a derivative liability, our outstanding notes and other debt, contingent consideration and accounts, interest and dividends payable.
The following table summarizes the fair value of our financial instruments at September 30, 2017 and December 31, 2016:
(Thousands)
|
|
Total
|
|
Quoted Prices in Active Markets
(Level 1)
|
|
Prices with Other Observable Inputs
(Level 2)
|
|
Prices with Unobservable Inputs (Level 3)
|
|
At September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured term loan B - variable rate, due October 24, 2022
|
|
$
|
1,935,245
|
|
$
|
-
|
|
$
|
1,935,245
|
|
$
|
-
|
|
Senior secured notes - 6.00%, due April 15, 2023
|
|
|
523,188
|
|
|
-
|
|
|
523,188
|
|
|
-
|
|
Senior unsecured notes - 8.25%, due October 15, 2023
|
|
|
979,575
|
|
|
-
|
|
|
979,575
|
|
|
-
|
|
Senior unsecured notes - 7.125%, due December 15, 2024
|
|
|
505,500
|
|
|
-
|
|
|
505,500
|
|
|
-
|
|
Senior secured revolving credit facility, variable rate, due April 24, 2020
|
|
|
159,984
|
|
|
-
|
|
|
159,984
|
|
|
-
|
|
Derivative liability
|
|
|
10,442
|
|
|
-
|
|
|
10,442
|
|
|
-
|
|
Contingent consideration
|
|
|
104,117
|
|
|
-
|
|
|
-
|
|
|
104,117
|
|
Total
|
|
$
|
4,218,051
|
|
$
|
-
|
|
$
|
4,113,934
|
|
$
|
104,117
|
|
16
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
(Thousands)
|
|
Total
|
|
Quoted Prices in Active Markets
(Level 1)
|
|
Prices with Other Observable Inputs
(Level 2)
|
|
Prices with Unobservable Inputs (Level 3)
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured term loan B - variable rate, due October 24, 2022
|
|
$
|
2,139,586
|
|
$
|
-
|
|
$
|
2,139,586
|
|
$
|
-
|
|
Senior secured notes - 6.00%, due April 15, 2023
|
|
|
569,250
|
|
|
-
|
|
|
569,250
|
|
|
-
|
|
Senior unsecured notes - 8.25%, due October 15, 2023
|
|
|
1,176,600
|
|
|
-
|
|
|
1,176,600
|
|
|
-
|
|
Senior unsecured notes - 7.125%, due December 15, 2024
|
|
|
404,000
|
|
|
-
|
|
|
404,000
|
|
|
-
|
|
Derivative liability
|
|
|
6,102
|
|
|
-
|
|
|
6,102
|
|
|
-
|
|
Contingent consideration
|
|
|
98,600
|
|
|
-
|
|
|
-
|
|
|
98,600
|
|
Total
|
|
$
|
4,394,138
|
|
$
|
-
|
|
$
|
4,295,538
|
|
$
|
98,600
|
|
The carrying value of cash and cash equivalents, accounts and other receivables, and accounts, interest and dividends payable approximate fair values due to the short-term nature of these financial instruments.
The total principal balance of our outstanding notes and other debt was $4.5 billion at September 30, 2017, with a fair value of $4.1 billion. The estimated fair value of our outstanding notes and other debt was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy. Derivative liabilities are carried at fair value.
See Note 6
. The fair value of an interest rate swap is determined based on the present value of expected future cash flows using observable, quoted LIBOR swap rates for the full term of the swap and also incorporate credit valuation adjustments to appropriately reflect both Uniti’s own non-performance risk and non-performance risk of the respective counterparties. The Company has determined that the majority of the inputs used to value its derivative liabilities fall within Level 2 of the fair value hierarchy; however the associated credit valuation adjustments utilized Level 3 inputs, such as estimates of credit spreads, to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall value of the derivatives. As such, the Company classifies its derivative liabilities valuation in Level 2 of the fair value hierarchy.
As part of the acquisition of Hunt on July 3, 2017, we may be obligated to pay contingent consideration (the “Hunt Contingent Consideration”) upon the achievement of certain defined revenue milestones; therefore, we have recorded the estimated fair value of contingent consideration of approximately $9.5 million as of September 30, 2017.
See Note 3
. In accordance with the Hunt merger agreement, Uniti common shares will be used to satisfy the contingent consideration payment. The fair value of the Hunt Contingent Consideration at September 30, 2017 was determined using the closing price of our common shares in the active market and probability estimates of future earnings and is classified as Level 3.
As part of the acquisition of Tower Cloud on August 31, 2016, we may be obligated to pay contingent consideration upon achievement of certain defined operational and financial milestones; therefore, we recorded the estimated fair value of future contingent consideration of $94.6 million as of September 30, 2017. The fair value of the contingent consideration as of September 30, 2017, was determined using a discounted cash flow model and probability adjusted estimates of the future earnings and is classified as Level 3. During the three and nine months ended September 30, 2017, we paid $1.2 million and $20.0 million, respectively, for the achievement of certain milestones in accordance with the Tower Cloud merger agreement.
Changes in the fair value of contingent consideration arrangements are recorded in our Condensed Consolidated Statement of Income in the period in which the change occurs. For the three months ended September 30, 2017, there was a $3.9 million decrease in the fair value of the contingent consideration that was recorded in Other (income) expense on the Condensed Consolidated Statements of Income. For the nine months ended September 30, 2017, there was a $9.1 million increase in the fair value of the contingent consideration that was recorded in Other (income) expense on the Condensed Consolidated Statements of Income.
The following is a roll forward of our liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3):
17
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
(Thousand
s)
|
|
December 31, 2016
|
|
|
Transfers into Level 3
|
|
|
(Gain)/Loss included in earnings
|
|
|
Settlements
|
|
|
September 30, 2017
|
|
Contingent consideration
|
|
$
|
98,600
|
|
|
$
|
16,425
|
|
|
$
|
9,091
|
|
|
$
|
(19,999
|
)
|
|
$
|
104,117
|
|
Note 5. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
(Thousands)
|
|
Depreciable Lives
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Land
|
|
Indefinite
|
|
|
$
|
26,898
|
|
|
$
|
26,833
|
|
Building and improvements
|
|
3 - 40 years
|
|
|
|
324,692
|
|
|
|
318,967
|
|
Real property interests
|
|
50 - 99 years
|
|
|
|
26,782
|
|
|
|
12,265
|
|
Poles
|
|
13 - 40 years
|
|
|
|
242,248
|
|
|
|
234,393
|
|
Fiber
|
|
7 - 40 years
|
|
|
|
2,587,647
|
|
|
|
2,243,822
|
|
Equipment
|
|
5 - 7 years
|
|
|
|
200,542
|
|
|
|
130,945
|
|
Copper
|
|
7 - 40 years
|
|
|
|
3,626,505
|
|
|
|
3,538,566
|
|
Conduit
|
|
13 - 47 years
|
|
|
|
91,179
|
|
|
|
90,540
|
|
Tower assets
|
|
20 - 49 years
|
|
|
|
59,162
|
|
|
|
4,307
|
|
Capital lease assets
|
|
|
(1
|
)
|
|
|
97,283
|
|
|
|
89,723
|
|
Other assets
|
|
15 - 20 years
|
|
|
|
6,806
|
|
|
|
5,299
|
|
Corporate assets
|
|
3 - 7 years
|
|
|
|
2,888
|
|
|
|
2,731
|
|
Construction in progress
|
|
|
(1
|
)
|
|
|
126,082
|
|
|
|
52,685
|
|
|
|
|
|
|
|
|
7,418,714
|
|
|
|
6,751,076
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(4,381,245
|
)
|
|
|
(4,081,039
|
)
|
Net property, plant and equipment
|
|
|
|
|
|
$
|
3,037,469
|
|
|
$
|
2,670,037
|
|
(1)
See our Annual Report for property, plant and equipment accounting policies.
Depreciation expense for the three and nine months ended September 30, 2017 was $107.1 million and $305.8 million, respectively. Depreciation expense for the three and nine months ended September 30, 2016 was $95.0 million and $271.7 million, respectively.
Note 6. Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate the effects of interest rate volatility inherent in our variable rate debt, which could unfavorably impact our future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.
On April 27, 2015, we entered into fixed for floating interest rate swap agreements to mitigate the interest rate risk inherent in our variable rate Senior Secured Term Loan B facility. These interest rate swaps are designated as cash flow hedges and have a notional value of $2.12 billion and mature on October 24, 2022. The weighted average fixed rate paid is 2.105%, and the variable rate received resets monthly to the one-month LIBOR subject to a minimum rate of 1.0%. The Company does not currently have any master netting arrangements related to its derivative contracts.
The following table summarizes the fair value and the presentation in our Condensed Consolidated Balance Sheet:
(Thousands)
|
|
Location on Condensed Consolidated Balance Sheet
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Interest rate swaps
|
|
Derivative liability
|
|
$
|
10,442
|
|
|
$
|
6,102
|
|
As of September 30, 2017 and December 31, 2016, all of the interest rate swaps were valued in net unrealized loss positions and recognized as liability balances within the derivative liability balance.
For the three and nine months ended September 30, 2017, the amount recorded in other comprehensive income related to the unrealized loss on derivative instruments was $2.9 million and
18
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
$
20.6
million, respectively. The amount reclassified out of other comprehensive income into interest expense on our Condensed Consolidated Statement of Income for the three and
nine
months ended
September
30, 2017 was $
4.7
million and $
16.3
million, respectively
. For the three and
nine
months ended
September
30, 2016, the amount recorded in other comprehensive income related to the unrealized loss on derivative instruments was $
7.8
million and $
81.2
million, respectively. The amount reclassified out of other comp
rehensive income into interest expense on our Condensed Consolidated Statement of Income for the three and
nine
months ended
September
30, 2016 was $
6.0
million and $
17.8
million, respectively.
For the three and
nine
months ended
September
30, 2017, there
was no ineffective portion of the change in fair value derivatives. For the three and
nine
months ended
September
30, 2016, there was no ineffective portion of the change in fair value derivatives.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, beginning October 1, 2017, we estimate that $21.7 million will be reclassified as an increase to interest expense.
Note 7. Goodwill and Intangible Assets and Liabilities
Changes in the carrying amount of goodwill occurring during the nine months ended September 30, 2017, are as follows:
(Thousands)
|
|
Fiber Infrastructure
|
|
|
Total
|
|
Goodwill at December 31, 2016
|
|
$
|
262,334
|
|
|
$
|
262,334
|
|
Goodwill purchase accounting adjustments
|
|
|
(248
|
)
|
|
|
(248
|
)
|
Goodwill associated with 2017 acquisitions
|
|
|
410,282
|
|
|
|
410,282
|
|
Goodwill at September 30, 2017
|
|
|
672,368
|
|
|
|
672,368
|
|
The carrying value of the intangible assets is as follows:
(Thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
Indefinite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
$
|
2,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
421,744
|
|
|
|
(40,120
|
)
|
|
|
188,642
|
|
|
|
(30,058
|
)
|
Tenant contracts
|
|
|
40,117
|
|
|
|
(1,216
|
)
|
|
|
-
|
|
|
|
-
|
|
Network
(1)
|
|
|
14,526
|
|
|
|
(440
|
)
|
|
|
-
|
|
|
|
-
|
|
Acquired below-market leases
|
|
|
1,509
|
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
479,896
|
|
|
|
|
|
|
|
190,642
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
(41,877
|
)
|
|
|
|
|
|
|
(30,058
|
)
|
|
|
|
|
Total intangible assets, net
|
|
$
|
438,019
|
|
|
|
|
|
|
$
|
160,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired above-market leases
|
|
$
|
3,571
|
|
|
$
|
(238
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired above-market leases
|
|
|
3,571
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
(238
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total intangible liabilities, net
(2)
|
|
$
|
3,333
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
(1)
|
Reflects the potential to lease additional tower capacity on the existing towers due to their geographical location and capacity that currently exists on these towers as of the valuation date.
|
19
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
(2)
|
Recorded in
accounts payable, accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet.
|
Amortization expense for the three and nine months ended September 30, 2017 was $6.3 million and $11.6 million, respectively. Amortization expense for the three and nine months ended September 30, 2016 was $1.7 million and $3.7 million, respectively.
Amortization expense is estimated to be $18.3 million for the full year of 2017, $25.1 million in 2018, $24.5 million in 2019, $24.0 million in 2020, and $23.5 million in 2021.
Note 8. Notes and Other Debt
All debt, including the senior secured credit facility and notes described below, are obligations of the Operating Partnership and certain of its subsidiaries as discussed below. The Company is, however, a guarantor of such debt.
Notes and other debt is as follows:
(Thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Principal amount
|
|
$
|
4,512,157
|
|
|
$
|
4,167,967
|
|
Less unamortized discount, premium and debt issuance costs
|
|
|
(150,194
|
)
|
|
|
(139,753
|
)
|
Notes and other debt less unamortized discount, premium and debt issuance costs
|
|
$
|
4,361,963
|
|
|
$
|
4,028,214
|
|
Notes and other debt at September 30, 2017 and December 31, 2016 consisted of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
(Thousands)
|
|
Principal
|
|
|
Unamortized Discount, Premium and Debt Issuance Costs
|
|
|
Principal
|
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Senior secured term loan B - variable rate, due October 24, 2022
(discount is based on imputed interest rate of 5.66%)
|
|
$
|
2,092,157
|
|
|
|
(91,302
|
)
|
|
$
|
2,107,967
|
|
|
$
|
(78,699
|
)
|
Senior secured notes - 6.00%, due April 15, 2023
(discount is based on imputed interest rate of 6.29%)
|
|
|
550,000
|
|
|
|
(8,961
|
)
|
|
|
550,000
|
|
|
|
(9,817
|
)
|
Senior unsecured notes - 8.25%, due October 15, 2023
(discount is based on imputed interest rate of 9.06%)
|
|
|
1,110,000
|
|
|
|
(42,062
|
)
|
|
|
1,110,000
|
|
|
|
(45,599
|
)
|
Senior unsecured notes - 7.125% due December 15, 2024
|
|
|
600,000
|
|
|
|
(7,869
|
)
|
|
|
400,000
|
|
|
|
(5,638
|
)
|
Senior secured revolving credit facility, variable rate, due April 24, 2020
|
|
|
160,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
4,512,157
|
|
|
$
|
(150,194
|
)
|
|
$
|
4,167,967
|
|
|
$
|
(139,753
|
)
|
At September 30, 2017, notes and other debt included the following: (i) $2.1 billion under the senior secured term loan B facility that matures on October 24, 2022 (“Term Loan Facility”) pursuant to the credit agreement by and among the Operating Partnership, CSL Capital, LLC and Uniti Group Finance Inc., the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Credit Agreement”); (ii) $550.0 million aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “Secured Notes”); (iii) $1.11 billion aggregate principal amount of 8.25% Senior Notes due October 15, 2023 (the “2023 Notes”); (iv) $600 million aggregate principal amount of 7.125% Senior Unsecured Notes due December 15, 2024 (the “2024 Notes,” and together with the Secured Notes and 2023 Notes, the “Notes”), and (v) $160 million under the senior secured revolving credit facility, variable rate, that matures April 24, 2020 pursuant to the Credit Agreement (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Facilities”).
On May 9, 2017, the Company completed its previously announced reorganization (the “up-REIT Reorganization”) to operate through a customary “up-REIT” structure. Under this structure, the Operating Partnership now holds substantially all of the Company’s assets and is the parent company of, among others, CSL Capital, LLC, Uniti
Group
Finance Inc. and Uniti Fiber Holdings Inc. In connection with the up-REIT Reorganization, the Operating Partnership replaced the Company and assumed its obligations as an obligor under the Notes and Facilities. The Company subsequently became a guarantor of the Notes and Facilities. Because the Operating
20
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Partnership is not a corporation, a corporate co-obligor that is a subsidiary of the Operating Partnership was also added to the Notes and Credit Agreement as part of the up-REIT Reorganization.
As dis
cussed below, Uniti Group Finance Inc. is the corporate co-obligor under the Credit Agreement and co-issuer of the Secured Notes and the 2023 Notes, and Uniti Fiber Holdings Inc. is the co-issuer of the 2024 Notes.
Separate financial statements of the Ope
rating Partnership have not been included since the Operating Partnership is not a registrant.
Credit Agreement
The Operating Partnership and its wholly-owned subsidiaries, CSL Capital, LLC, and Uniti Group Finance Inc. (collectively, the “Borrowers”) are party to the Credit Agreement, which provides for the Term Loan Facility (in an initial principal amount of $2.14 billion) and the Revolving Credit Facility. The term loans bear interest at a rate equal to LIBOR, subject to a 1.0% floor, plus an applicable margin equal to 3.00%, and are subject to amortization of 1.0% per annum. All obligations under the Credit Agreement are guaranteed by (i) the Company and (ii) certain of the Operating Partnership’s wholly-owned subsidiaries (the “Subsidiary Guarantors”), and are secured by substantially all of the assets of the Borrowers and the Subsidiary Guarantors, which assets also secure the Secured Notes. The Revolving Credit Facility bears interest at a rate equal to LIBOR plus 1.75% to 2.25% based on our consolidated secured leverage ratio, as defined in the Credit Agreement. On April 28, 2017, we amended the Credit Agreement to increase the commitments under our Revolving Credit Facility from $500 million to $750 million. Other terms of the Revolving Credit Facility remain unchanged.
The Borrowers are subject to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to customary conditions, to incur (i) incremental term loan borrowings and/or increased commitments under the Credit Agreement in an unlimited amount, so long as, on a pro forma basis after giving effect to any such borrowings or increases, our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00 and (ii) other indebtedness, so long as, on a pro forma basis after giving effect to any such indebtedness, our consolidated total leverage ratio, as defined in the Credit Agreement, does not exceed 6.50 to 1.00 and our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00. In addition, the Credit Agreement contains customary events of default, including a cross default provision whereby the failure of the Borrowers or certain of their subsidiaries to make payments under other debt obligations, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement. In particular, a repayment obligation could be triggered if (i) the Borrowers or certain of their subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $75.0 million or more, or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $75.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of September 30, 2017, the Borrowers were in compliance with all of the covenants under the Credit Agreement.
The Notes
The Borrowers, as co-issuers, have outstanding $550 million aggregate principal amount of the Secured Notes, of which $400 million was originally issued on April 24, 2015 at an issue price of 100% of par value and the remaining $150 million was issued on June 9, 2016 at an issue price of 99.25% of the par value as an add-on to the existing Secured Notes. The Borrowers, as co-issuers, also have outstanding $1.11 billion aggregate principal amount of the 2023 Notes that were originally issued on April 24, 2015 at an issue price of 97.055% of par value. The Secured Notes and the 2023 Notes are guaranteed by the Company and the Subsidiary Guarantors.
The Operating Partnership
and its wholly-
owned
subsidiaries
, CSL Capital, LLC and Uniti Fiber Holdings Inc., as co-issuers, have outstanding $600 million aggregate principal amount of the 2024 Notes
, of which $400 million was originally issued on December 15, 2016 at an issue price of
100% of par value and the remaining $200 million of which was issued on May 8, 2017 at an issue price of 100.50% of par value under a separate indenture and was mandatorily exchanged on August 11, 2017 for 2024 Notes issued as “additional notes” under the indenture governing the 2024 Notes. The 2024 Notes are guaranteed by the Company, Uniti Group Finance Inc. and the Guarantors.
Deferred Financing Cost
Deferred financing costs were incurred in connection with the issuance of the Notes and the Facilities. These costs are amortized using the effective interest method over the term of the related indebtedness, and are included in interest expense in our Consolidated
21
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Statements of Income. For the three and
nine
months ended
September
30, 2017, we recognized $2.
9
million and $
8.0
million, respectively, of non-cash interest expense related to the amortization of deferred financing costs. For the three and
nine
months
ended
September
30, 2016, we recognized $
2.0
million and $
5.6
million, respectively, of non-cash interest expense related to the amortization of deferred financing costs.
Note 9. Capital Stock
On April 25, 2017, we issued 19.5 million shares of our common stock, par value $0.0001 per share. The shares were sold at a public offering price of $26.50, generating proceeds of approximately $518 million, before underwriter discounts and transaction costs. The Company used the proceeds from this offering to fund a portion of the cash consideration paid in connection with the acquisitions of Southern Light and Hunt that closed on July 3, 2017.
Note 10. Related Party Transactions
On
April 24, 2015, Uniti was separated and spun-off (the “Spin-Off”) from Windstream Holdings, Inc. (“Windstream Holdings” and together with its subsidiaries, “Windstream”).
In connection with the Spin-Off,
Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) and a small consumer competitive local exchange carrier (“CLEC”) business (the “Consumer CLEC Business”) and
we issued approximately 149.8 million shares of our common stock to Windstream Services as partial consideration for the contribution of the Distribution Systems and the Consumer CLEC Business.
Immediately following the Spin-Off, we entered into a long-term exclusive triple-net lease (the “Master Lease”) with Windstream pursuant to which Uniti leases the Distribution Systems to Windstream.
Windstream distributed approximately 80.4% of the Uniti shares it received to existing stockholders of Windstream Holdings and retained a passive ownership interest of approximately 19.6% of the common stock of Uniti. As a result of this ownership Windstream was deemed to be a related party.
On June 15, 2016, Windstream Holdings disposed of 14.7 million shares of our common stock, representing approximately half of its retained ownership interest. On June 24, 2016, Windstream Holdings disposed of its remaining 14.7 million shares of our common stock as part of a public offering. The Company did not receive any proceeds resulting from the disposition of these shares.
Accordingly, effective as of June 24, 2016, Windstream is no longer deemed a related party under applicable accounting regulations. Our condensed consolidated financial statements reflect the following transactions with Windstream during the periods in which Windstream was deemed a related party.
Revenues
– The Company records leasing revenue pursuant to the Master Lease. For the three and six months ended June 30, 2016, we recognized leasing revenues of $169.0 million and $337.6 million, respectively, related to the Master Lease.
General and Administrative Expenses
– We were party to a Transition Services Agreement (“TSA”) pursuant to which Windstream and its affiliates provided, on an interim basis, various services, including but not limited to information technology services, payment processing and collection services, financial and tax services, regulatory compliance and other support services. On April 1, 2016, the TSA terminated and we incurred $19,000 of related TSA expense for the three months ended March 31, 2016.
Operating Expenses
– We are party to a Wholesale Master Services Agreement (“Wholesale Agreement”) and a Master Services Agreement (the “Master Service Agreement”) with Windstream related to the Consumer CLEC Business. Under the Wholesale Agreement, Windstream provides us transport services (local and long distance telecommunications service), provisioning services (directory assistance, directory listing, service activation and service changes), and repair services (routine and emergency network maintenance, network audits and network security). Under the Master Services Agreement, Windstream provides billing and collections services to Uniti. During the three months ended June 30, 2016, we incurred expenses of $3.2 million and $0.4 million related to the Wholesale Agreement and Master Services Agreement, respectively. During the six months ended June 30, 2016, we incurred expenses of $6.6 million and $0.9 million related to the Wholesale Agreement and Master Services Agreement, respectively.
Employee Matters Agreement
– We are party to an Employee Matters Agreement (“Employee Matters Agreement”) with Windstream that governs the respective compensation and employee benefit obligations of the Company and Windstream in connection with and following the Spin-Off. Under the Employee Matters Agreement, if requested by a Windstream employee, the Company is required to withhold shares to satisfy the employee’s tax obligations arising from the recognition of income and the vesting of shares related to awards of Uniti restricted stock held by the employee that were granted in connection with the Spin-Off. In that case, the Company
22
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
must pay to Windstream an amount of cash equal to the amount required to be withheld to satisfy minimum stat
utory tax withholding obligations or, at the request of Windstream, remit such cash directly to the applicable taxing authorities. During the six months ended June 30, 2016, we withheld 91,412 common shares to satisfy these minimum statutory tax-withholdin
g obligations and delivered $1.9 million to Windstream for remittance to the applicable taxing authorities.
Lease Amendment
– During the quarter ended March 31, 2016, we amended the Master Lease with Windstream (the “Master Lease Amendment”) to allow for the transfer of ownership rights or exchanges of indefeasible rights of use (an “IRU”) and other long term rights in certain fiber and associated assets constituting leased property under the Master Lease. We will enter into such transactions pursuant to certain fiber exchange agreements under which we will grant to a third party
ownership rights in certain fiber assets or an IRU in certain fiber assets that constitute leased property under the Master Lease in exchange for Uniti receiving ownership rights in certain fiber assets or an IRU in certain fiber assets of the third party, which we will then lease to Windstream as leased property under the Master Lease
. Under the terms of the Master Lease Amendment, Windstream is responsible for any taxes imposed on Uniti related to the sale, exchange or other disposition of the fiber assets delivered to a
third party or the granting of rights to the leased property that arise from fiber exchange agreements. As of June 24, 2016, no such transactions had been consummated. The Master Lease Amendment also permits us to install, own and operate certain wireless communication towers, antennas and related equipment on designated portions of the leased property
.
Note 11. Earnings Per Share
Our restricted stock awards are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as common stock. As participating securities, we included these instruments in the computation of earnings per share under the two-class method described in FASB ASC 260,
Earnings per Share
(“ASC 260”).
We also have outstanding performance-based restricted stock units that contain forfeitable rights to receive dividends. Therefore, the awards are considered non-participating restrictive shares and are not dilutive under the two-class method until performance conditions are met.
The earnings per share impact of the Company’s 3% Convertible Preferred Stock, $0.0001 par value (“Series A Shares”), issued in connection with the acquisition of PEG Bandwidth, LLC, is calculated using the net share settlement method, whereby the redemption value of the instrument is assumed to be settled in cash and only the conversion premium, if any, is assumed to be settled in shares. The Series A Shares provide Uniti the option to cash or share settle the instrument, and it is our policy to settle the instrument in cash upon conversion.
The Hunt merger agreement provides for the issuance of additional common shares
upon the achievement of certain defined revenue milestones.
See Note 3
.
The earnings per share impact of the Hunt Contingent Consideration is calculated under the method described in ASC 260 for the treatment of contingently issuable shares in weighted-average shares outstanding.
23
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
The following sets forth the computation of basic and diluted earnings per share under the two-class met
hod:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to shareholders
|
|
$
|
4,728
|
|
|
$
|
(2,343
|
)
|
|
$
|
(31,732
|
)
|
|
$
|
4,158
|
|
Less: Income allocated to participating securities
|
|
|
(388
|
)
|
|
|
(407
|
)
|
|
|
(1,156
|
)
|
|
|
(1,164
|
)
|
Dividends declared on convertible preferred stock
|
|
|
(656
|
)
|
|
|
(649
|
)
|
|
|
(1,968
|
)
|
|
|
(1,087
|
)
|
Amortization of discount on convertible preferred stock
|
|
|
(745
|
)
|
|
|
(745
|
)
|
|
|
(2,235
|
)
|
|
|
(1,241
|
)
|
Net income (loss) attributable to common shares
|
|
$
|
2,939
|
|
|
$
|
(4,144
|
)
|
|
$
|
(37,091
|
)
|
|
$
|
666
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
174,818
|
|
|
|
153,878
|
|
|
|
166,624
|
|
|
|
151,578
|
|
Basic earnings (loss) per common share
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to shareholders
|
|
$
|
4,728
|
|
|
$
|
(2,343
|
)
|
|
$
|
(31,732
|
)
|
|
$
|
4,158
|
|
Less: Income allocated to participating securities
|
|
|
(388
|
)
|
|
|
(407
|
)
|
|
|
(1,156
|
)
|
|
|
(1,164
|
)
|
Dividends declared on convertible preferred stock
|
|
|
(656
|
)
|
|
|
(649
|
)
|
|
|
(1,968
|
)
|
|
|
(1,087
|
)
|
Amortization of discount on convertible preferred stock
|
|
|
(745
|
)
|
|
|
(745
|
)
|
|
|
(2,235
|
)
|
|
|
(1,241
|
)
|
Mark-to-market gain on share settled contingent consideration arrangements
|
|
|
(6,964
|
)
|
|
|
-
|
|
|
|
(6,964
|
)
|
|
|
-
|
|
Net (loss) income attributable to common shares
|
|
$
|
(4,025
|
)
|
|
$
|
(4,144
|
)
|
|
$
|
(44,055
|
)
|
|
$
|
666
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
174,818
|
|
|
|
153,878
|
|
|
|
166,624
|
|
|
|
151,578
|
|
Contingent consideration (See Note 4)
|
|
|
581
|
|
|
|
-
|
|
|
|
192
|
|
|
|
-
|
|
Effect of dilutive non-participating securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138
|
|
Weighted-average shares for dilutive earnings per common share
|
|
|
175,399
|
|
|
|
153,878
|
|
|
|
166,816
|
|
|
|
151,716
|
|
Dilutive (loss) earnings per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
0.00
|
|
For the nine months ended September 30, 2017, 29,481 non-participating securities were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive. For the three months ended September 30, 2016, 149,087 non-participating securities were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive.
Note 12. Segment Information
Effective in the first quarter of 2017, our management, including our chief executive officer, who is our chief operating decision maker, commenced managing our operations as four reportable segments in addition to our corporate operations and include:
24
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Leasing
: Represents our REIT operations and includes the results from our leasing programs, Uniti Leasing, which is
engaged in the acquisition of mission-critical communications assets and leasing them back to anchor customers on either an exclusi
ve or shared-tenant basis.
Fiber Infrastructure
:
Represents the operations of our fiber business, Uniti Fiber, which is a leading provider of infrastructure solutions, including cell site backhaul and dark fiber, to the telecommunications industry.
Towers
: Represents the operations of our towers business, Uniti Towers, through which we acquire and construct tower and tower-related real estate in the United States and Latin America.
Consumer CLEC
: Represents the operations of Talk America Services (“Talk America”) through which we operate the Consumer CLEC Business, that prior to the Spin-Off was reported as an integrated operation within Windstream. Talk America provides local telephone, high-speed internet and long distance services to customers in the eastern and central United States.
Corporate
:
Represents our corporate and back office functions. Certain costs and expenses, primarily related to headcount, insurance, professional fees and similar charges, that are directly attributable to operations of our business segments are allocated to the respective segments.
Management evaluates the performance of each segment using Adjusted EBITDA, which is a segment performance measure defined as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, the impact, which may be recurring in nature, of transaction related expenses, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, changes in the fair value of contingent consideration and financial instruments, and other similar items.
The Company’s business segment information is presented below. Prior year information has been recast to conform to the current year presentation.
|
|
Three Months Ended September 30, 2017
|
|
(Thousands)
|
|
Leasing
|
|
|
Fiber Infrastructure
|
|
|
Towers
|
|
|
Consumer CLEC
|
|
|
Corporate
|
|
|
Subtotal of Reportable Segments
|
|
Revenues
|
|
$
|
171,673
|
|
|
$
|
66,363
|
|
|
$
|
2,796
|
|
|
$
|
4,378
|
|
|
$
|
-
|
|
|
$
|
245,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
171,215
|
|
|
$
|
28,348
|
|
|
$
|
(98
|
)
|
|
$
|
1,025
|
|
|
$
|
(5,552
|
)
|
|
$
|
194,938
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,784
|
|
Depreciation and amortization
|
|
|
87,320
|
|
|
|
24,050
|
|
|
|
1,326
|
|
|
|
652
|
|
|
|
96
|
|
|
|
113,444
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,933
|
)
|
Transaction related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,512
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,968
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,672
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
(1)
|
|
$
|
-
|
|
|
$
|
59,723
|
|
|
$
|
10,284
|
|
|
$
|
-
|
|
|
$
|
7
|
|
|
$
|
70,014
|
|
(1)
Segment capital expenditures represents capital expenditures, the NMS asset acquisition and ground lease investments as reported in the investing activities section of the Condensed Consolidated Statements of Cash Flows.
25
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
|
|
Three Months Ended September 30, 2016
|
|
(Thousands)
|
|
Leasing
|
|
|
Fiber Infrastructure
|
|
|
Towers
|
|
|
Consumer CLEC
|
|
|
Corporate
|
|
|
Subtotal of Reportable Segments
|
|
Revenues
|
|
$
|
169,366
|
|
|
$
|
25,219
|
|
|
$
|
159
|
|
|
|
5,496
|
|
|
$
|
-
|
|
|
$
|
200,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
169,075
|
|
|
$
|
9,273
|
|
|
$
|
(258
|
)
|
|
$
|
1,213
|
|
|
$
|
(3,627
|
)
|
|
$
|
175,676
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,522
|
|
Depreciation and amortization
|
|
|
86,007
|
|
|
|
9,701
|
|
|
|
106
|
|
|
|
814
|
|
|
|
95
|
|
|
|
96,723
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Transaction related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,315
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,331
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
(1)
|
|
$
|
-
|
|
|
$
|
6,877
|
|
|
$
|
2,860
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
9,752
|
|
(1)
Segment capital expenditures represents capital expenditures and ground lease investments as reported in the investing activities section of the Condensed Consolidated Statements of Cash Flows.
|
|
Nine Months Ended September 30, 2017
|
|
(Thousands)
|
|
Leasing
|
|
|
Fiber Infrastructure
|
|
|
Towers
|
|
|
Consumer CLEC
|
|
|
Corporate
|
|
|
Subtotal of Reportable Segments
|
|
Revenues
|
|
$
|
512,893
|
|
|
$
|
136,158
|
|
|
$
|
6,679
|
|
|
$
|
13,966
|
|
|
$
|
-
|
|
|
$
|
669,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
511,803
|
|
|
$
|
52,533
|
|
|
$
|
(1,075
|
)
|
|
$
|
3,514
|
|
|
$
|
(15,265
|
)
|
|
$
|
551,510
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,235
|
|
Depreciation and amortization
|
|
|
261,037
|
|
|
|
50,618
|
|
|
|
3,505
|
|
|
|
1,955
|
|
|
|
289
|
|
|
|
317,404
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,638
|
|
Transaction related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,213
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,621
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,976
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(31,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
(1)
|
|
$
|
-
|
|
|
$
|
103,497
|
|
|
$
|
89,984
|
|
|
$
|
-
|
|
|
$
|
46
|
|
|
$
|
193,527
|
|
(1)
Segment capital expenditures represents capital expenditures, the NMS asset acquisition and ground lease investments as reported in the investing activities section of the Condensed Consolidated Statements of Cash Flows.
26
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
|
|
Nine Months Ended September 30, 2016
|
|
(Thousands)
|
|
Leasing
|
|
|
Fiber Infrastructure
|
|
|
Towers
|
|
|
Consumer CLEC
|
|
|
Corporate
|
|
|
Subtotal of Reportable Segments
|
|
Revenues
|
|
$
|
506,945
|
|
|
|
38,995
|
|
|
|
271
|
|
|
|
17,277
|
|
|
$
|
-
|
|
|
$
|
563,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
505,912
|
|
|
$
|
14,773
|
|
|
$
|
(857
|
)
|
|
$
|
3,875
|
|
|
$
|
(10,678
|
)
|
|
$
|
513,025
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204,607
|
|
Depreciation and amortization
|
|
|
257,059
|
|
|
|
15,448
|
|
|
|
216
|
|
|
|
2,443
|
|
|
|
282
|
|
|
|
275,448
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Transaction related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,435
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,478
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
899
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
(1)
|
|
$
|
-
|
|
|
$
|
10,278
|
|
|
$
|
8,771
|
|
|
$
|
-
|
|
|
$
|
155
|
|
|
$
|
19,204
|
|
(1)
Segment capital expenditures represents capital expenditures and ground lease investments as reported in the investing activities section of the Condensed Consolidated Statements of Cash Flows.
Total assets by business segment as of September 30, 2017 and December 31, 2016 are as follows:
(Thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Leasing
|
|
$
|
2,140,087
|
|
|
$
|
2,238,517
|
|
Fiber Infrastructure
|
|
|
1,962,682
|
|
|
|
914,082
|
|
Towers
|
|
|
140,350
|
|
|
|
18,004
|
|
Consumer CLEC
|
|
|
14,518
|
|
|
|
14,239
|
|
Corporate
|
|
|
34,573
|
|
|
|
133,910
|
|
Total of reportable segments
|
|
$
|
4,292,210
|
|
|
$
|
3,318,752
|
|
Note 13. Commitments and Contingencies
In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
Pursuant to the Separation and Distribution Agreement entered into with Windstream in connection with the Spin-Off, Windstream has agreed to indemnify us (including our subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from or relating to legal proceedings involving Windstream's telecommunications business prior to the Spin-Off, and, pursuant to the Master Lease, Windstream has agreed to indemnify us for, among other things, any use, misuse, maintenance or repair by Windstream with respect to the Distribution Systems. Windstream is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its telecommunications business, which are subject to the indemnities provided by Windstream to us.
Under
the terms of the Tax Matters Agreement entered into with Windstream in connection with the Spin-Off, we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock,
27
Table of Contents
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
indebtedness, assets or business, or a breach of the relevant representations or
any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the private letter ruling or the representations provided
in connection with the tax opinion. We believe that the probability of u
s incurring obligations under the Tax Matters Agreement are remote; and therefore, we have recorded no such liabilities in our consolidated balance sheet.
Note 14. Accumulated Other Comprehensive (Loss) Income
Changes in accumulated other comprehensive (loss) income by component is as follows for the nine months ended September 30, 2017:
(Thousands)
|
|
Currency Translation Adjustment
|
|
|
Changes in Fair Value of Effective Cash Flow Hedge
|
|
|
Total
|
|
Beginning balance at December 31, 2016
|
|
$
|
(267
|
)
|
|
$
|
(6,102
|
)
|
|
$
|
(6,369
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
5,074
|
|
|
|
(20,591
|
)
|
|
|
(15,517
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
16,251
|
|
|
|
16,251
|
|
Net other comprehensive income (loss)
|
|
|
4,807
|
|
|
|
(10,442
|
)
|
|
|
(5,635
|
)
|
Less: Other comprehensive income attributable to noncontrolling interest
|
|
|
2
|
|
|
|
41
|
|
|
|
43
|
|
Ending balance at September 30, 2017
|
|
$
|
4,805
|
|
|
$
|
(10,483
|
)
|
|
$
|
(5,678
|
)
|
Note 15. Supplemental Guarantor Information
Pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered,” the Company historically has provided condensed consolidating financial information for CSL Capital and the Guarantors because the 2023 Notes and the guarantees thereof were previously registered with the SEC under the Securities Act of 1933, as amended. Effective as of May 9, 2017 (the effective date of the previously announced up-REIT Reorganization (
see Note 8
)),
the 2023 Notes ceased to be an obligation of the Company, and the Company was no longer required to provide supplemental guarantor information related to the 2023 Notes.
28
Table of Contents