CROWN CASTLE INC. General Overview Overview We own, operate and lease shared communications infrastructure. See "Item 1. Business" for a further discussion of our business, including our long-term strategy, our REIT status, certain key terms of our tenant contracts and growth trends in the demand for data. Site rental revenues represented 88% of our 2019 consolidated net revenues. The vast majority of our site rental revenues is of a recurring nature and has been contracted for in a prior year. See "Explanatory Note" immediately preceding Item 1 of this Annual Report on Form 10-K and note 2 to our consolidated financial statements for further information on the restatement of previously issued financial statements. Business Fundamentals and Results The following are certain highlights of our business fundamentals and results: • We operate as a REIT forU.S. federal income tax purposes (see "Item 1.
Business-Company Developments, REIT Status and Industry Overview-REIT
Status" and note 11 to our consolidated financial statements).
• Potential growth resulting from the increasing demand for data
• We expect existing and potential new tenant demand for our
communications infrastructure will result from (1) new technologies,
(2) increased usage of mobile entertainment, mobile internet, and
machine-to-machine applications, (3) adoption of other emerging and
embedded wireless devices (including smartphones, laptops, tablets,
wearables and other devices), (4) increasing smartphonepenetration,
(5) wireless carrier focus on expanding both network quality and
capacity, including the use of both towers and small cells, (6) the
adoption of other bandwidth-intensive applications (such as cloud
services and video communications) and (7) the availability of
additional spectrum.
• We expect U.S. wireless carriers will continue to focus on improving
network quality and expanding capacity (including through 5G
initiatives) by utilizing a combination of towers and small cells. We
believe our product offerings of towers and small cells provide a
comprehensive solution to our wireless tenants' growingcommunications
infrastructure needs.
• We expect organizations will continue to increase the usage of
high-bandwidth applications that will require the utilization of more
fiber infrastructure and fiber solutions, such as those we provide.
• Within our Fiber segment, we are able to generate growth and returns
for our stockholders by deploying our fiber for both small cells and
fiber solutions tenants.
• Tenant additions on our existing communications infrastructure are
achieved at a low incremental operating cost, delivering high
incremental returns.
• Substantially all of our communications infrastructure can
accommodate additional tenancy, either as currentlyconstructed or
with appropriate modifications.
• Returning cash flows provided by operations to stockholders in the formof dividends (see also "Item 1. Business-Strategy")
• During 2019, we paid common stock dividends totaling approximately
$1.9 billion . See "Item 7. MD&A-General Overview-Common Stock Dividend" for a discussion of the increase to our quarterly dividend in the fourth quarter of 2019.
• Investing capital efficiently to grow long-term dividends per share
• Discretionary capital expenditures of$1.9 billion ,
predominately
resulting from the construction of new communications
infrastructure and improvements to existing communications
infrastructure in order to support additional tenants.
• We expect to continue to construct and acquire newcommunications
infrastructure based on our tenants' needs and generate attractive
long-term returns by adding additional tenants over time.
• Site rental revenues under long-term tenant contracts
• Initial terms of five to 15 years for site rental revenues derived
from wireless tenants, with contractual escalations and multiple
renewal periods of five to 10 years each, exercisable at the option of
the tenant.
• Initial terms that generally vary between three to 20 years for site
rental revenues derived from our fiber solutions tenants (including
from organizations with high-bandwidth and multi-locationdemands). • Weighted-average remaining term of approximately five years, exclusive
of renewals exercisable at the tenants' option, currentlyrepresenting
approximately $24 billion of expected future cash inflows.• Majority of our revenues from large wireless carriers
• Approximately 75% of our site rental revenues were derived from
T-Mobile, AT&T, Verizon Wireless and Sprint. See also "Item 1A. Risk
Factors" and note 16 to our consolidated financial statements for a
further discussion of our largest customers.
27--------------------------------------------------------------------------------
• Majority of land interests under our towers under long-term control
• Approximately 90% of our Towers site rental gross margin and
approximately 80% of our Towers site rental gross margin is derived
from towers that reside on land that we own or control for greater
than 10 and 20 years, respectively. The aforementionedpercentages
include towers that reside on land interests that are owned, including
through fee interests and perpetual easements, which represent
approximately 40% of our Towers site rental gross margin.
• Majority of our fiber assets are located in major metropolitan areas and
are on public rights-of-way.
• Minimal sustaining capital expenditure requirements
• Sustaining capital expenditures represented approximately 2% of net revenues.
• Debt portfolio with long-dated maturities extended over multiple years,
with the vast majority of such debt having a fixed rate (see "Item 7A.
Quantitative and Qualitative Disclosures About Market Risk" for a further
discussion of our debt)
• During 2019, we completed several debt transactions to refinance andextend the maturities of certain of our debt. See "Item 7. MD&A-Liquidity
and Capital Resources-Financing Activities" for further discussion of our
debt transactions.
• As of
interest rate of 3.8% and weighted average maturity of approximately
six years (assuming anticipated repayment dates where applicable).
• 83% of our debt has fixed rate coupons.
• Our debt service coverage and leverage ratios are comfortably within
their respective financial maintenance covenants. See "Item 7.
MD&A-Liquidity and Capital Resources-Debt Covenants" for a further
discussion of our debt covenants.
• Significant cash flows from operations
• Net cash provided by operating activities was
• In addition to the positive impact of contractual escalators, we
expect to grow our core business of providing access to our
communications infrastructure as a result of future anticipated
additional demand for our communications infrastructure.
Common Stock Dividend
In the aggregate, we paid approximately $1.9 billion in common stock dividends
in 2019. During each of the first three quarters of 2019, we paid a quarterly
common stock dividend of $1.125 per share, totaling approximately $1.4 billion .
In October 2019 , our board of directors declared a quarterly common stock cash
dividend of $1.20 per share, which represents an increase of approximately 7%
from the quarterly common stock dividend declared during each of the first three
quarters of 2019. We currently expect our common stock dividends over the next
12 months to be a cumulative amount of at least $4.80 per share, or an aggregate
amount of approximately $2.0 billion . Over time, we expect to increase our
dividend per share generally commensurate with our realized growth in cash
flows. Any future common stock dividends are subject to declaration by our board
of directors. See notes 12 and 19 to our consolidated financial statements.
Outlook Highlights
The following are certain highlights of our 2020 outlook that impact our
business fundamentals described above.
• We expect that, when compared to full year 2019, our full year 2020 site
rental revenue growth will be positively impacted by higher tenant
additions, as large wireless carriers and fiber solutions tenants attempt
to meet the increasing demand for data. See note 5 to our consolidated
financial statements.
• We expect discretionary capital expenditures for 2020 to remain
relatively consistent with 2019 levels as we continue to construct new
small cells and fiber as a result of the anticipated returns on suchdiscretionary investments. We also expect sustaining capital expenditures
of approximately 2% of net revenues for full year 2020.
28-------------------------------------------------------------------------------- Results of Operations The following discussion of our results of operations should be read in conjunction with the "Explanatory Note" immediately preceding Item 1 of this Annual Report on Form 10-K, "Item 1. Business," "Item 7. MD&A-Liquidity and Capital Resources" and our consolidated financial statements, including note 2 to our consolidated financial statements. Amounts for the years endedDecember 31, 2018 and 2017, and any discussion relating to those amounts, give effect to the impact of the Historical Adjustments as described in the "Explanatory Note." The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with GAAP, which require us to make estimates and judgments that affect the reported amounts (see "Item 7. MD&A-Accounting and Reporting Matters-Critical Accounting Policies and Estimates" and note 3 to our consolidated financial statements). Our operating segments consist of (1) Towers and (2) Fiber. See note 16 to our consolidated financial statements for further discussion of our operating segments. See "Item 7. MD&A-Accounting and Reporting Matters-Non-GAAP and Segment Financial Measures" for a discussion of our use of (1) segment site rental gross margin, (2) segment services and other gross margin, (3) segment operating profit, including their respective definitions and (4) Adjusted EBITDA, including its definition and a reconciliation to net income. Highlights of our results of operations for 2019, 2018 and 2017 are depicted below: Years Ended December 31, Percent Change 2019 2018 vs. vs. (In millions of dollars) 2019 2018 2017 2018 2017 (As Restated)(c) Site rental revenues: Towers site rental revenues$ 3,389 $ 3,196 $ 2,965 6 % 8 % Fiber site rental revenues 1,704 1,600 769 7 % 108 % Total site rental revenues 5,093 4,796 3,734 6 % 28 % Site rental gross margin: Towers site rental gross margin(a) 2,525 2,348 2,120 8 % 11 % Fiber site rental gross margin(a) 1,145 1,075 505 7 % 113 % Services and other gross margin: Towers services and other gross margin(a) 147 143 118 3 % 21 % Fiber services and other gross margin(a) 6 5 9 20 % (44 )% Segment operating profit: Towers operating profit(a) 2,576 2,381 2,144 8 % 11 % Fiber operating profit(a) 956 901 425 6 % 112 % Net income (loss) attributable to CCIC common stockholders 747 509 308 47 % 65 % Adjusted EBITDA(b) 3,299 3,091 2,402 7 % 29 %
(a) See note 16 to our consolidated financial statements for our definitions of
segment site rental gross margin, segment services and other gross margin and
segment operating profit.
(b) See reconciliation of this non-GAAP financial measure to net income (loss)
and definition included in "Item 7. MD&A-Accounting and Reporting
Matters-Non-GAAP and Segment Financial Measures."
(c) See "Explanatory Note" immediately preceding Item 1 of this Annual Report on
Form 10-K and note 2 to our consolidated financial statements for further
information regarding the restatement.
29-------------------------------------------------------------------------------- 2019 and 2018 Total site rental revenues for 2019 grew by$297 million , or 6%, from 2018. This increase was predominately comprised of the factors depicted in the chart below: (In millions of dollars) [[Image Removed: chart-cb7a1cf51dcf5100b7b.jpg]]
(a) As restated.
(b) Includes amortization of upfront payments received from long-term tenants and
other deferred credits (commonly referred to as prepaid rent).
(c) The components in this chart may not sum to the total due to rounding.
Towers site rental revenues for 2019 were approximately$3.4 billion and increased by$193 million , or 6%, from approximately$3.2 billion during 2018. The increase in Towers site rental revenues was impacted by the following items, inclusive of straight-line accounting: tenant additions across our entire portfolio, renewals or extensions of tenant contracts, escalations and non-renewals of tenants contracts. Tenant additions were influenced by our tenants' ongoing efforts to improve network quality and capacity. Fiber site rental revenues for 2019 were$1.7 billion and increased by$104 million , or 7%, from$1.6 billion from 2018. The increase in Fiber site rental revenues was predominately impacted by the increased demand for small cells and fiber solutions. Increased demand for small cells was driven by our tenants' network strategy in an effort to provide capacity and relieve network congestion, and increased demand for fiber solutions was driven by increasing demand for data. The increase in Towers site rental gross margin from 2018 to 2019 was related to the previously-mentioned 6% increase in Towers site rental revenues and relatively fixed costs to operate our towers. The increase in Fiber site rental gross margins was predominately related to the previously-mentioned 7% increase in Fiber site rental revenues. Selling, general and administrative expenses for 2019 were$614 million and increased by$51 million , or 9%, from$563 million during 2018. The increase in selling, general and administrative expenses was primarily related to the growth in our business. Towers operating profit for 2019 increased by$195 million , or 8%, from 2018. The increase in Towers operating profit was primarily related to the growth in our Towers site rental revenues and relatively fixed costs to operate our towers. Fiber operating profit for 2019 increased by$55 million , or 6%, from 2018. Fiber operating profit was positively impacted by increased demand for small cells and fiber solutions and was partially offset by an increase in Fiber-related selling, general and administrative expenses. 30 -------------------------------------------------------------------------------- Depreciation, amortization and accretion was approximately$1.6 billion for 2019 and increased by$45 million , or 3%, from 2018. This increase predominately resulted from a corresponding increase in our gross property and equipment due to capital expenditures. Interest expense and amortization of deferred financing costs were$683 million for 2019 and increased by$41 million , or 6%, from$642 million during 2018. The increase predominately resulted from a corresponding increase in our outstanding indebtedness due to the financing of our discretionary capital expenditures. As a result of repaying certain of our indebtedness in conjunction with our refinancing activities, we incurred losses on retirement of long-term obligations of$2 million and$106 million for the years ended 2019 and 2018, respectively. See note 9 to our consolidated financial statements. The provisions for income taxes for 2019 and 2018 were$21 million and$19 million , respectively. For both 2019 and 2018, the effective tax rate differs from the federal statutory rate predominately due to our REIT status, including the dividends paid deduction. See "Item 1. Business--Company Developments, REIT Status and Industry Overview-REIT Status," "Item 7. MD&A-Accounting and Reporting Matters-Critical Accounting Policies and Estimates" and note 11 to our consolidated financial statements. Net income (loss) attributable to CCIC common stockholders was income of$747 million during 2019 compared to income of$509 million during 2018. The increase was predominately related to net growth in both our Towers and Fiber segments and a decrease in losses on retirement of long-term obligations, partially offset by an increase in expenses, including (1) selling, general and administrative expenses, (2) depreciation, amortization and accretion and (3) interest expense and amortization of deferred financing costs. Adjusted EBITDA increased$208 million , or 7%, from 2018 to 2019, reflecting the growth in our site rental activities in both Towers and Fiber segments. 2018 and 2017 Total site rental revenues for 2018 grew by$1.1 billion , or 28%, from 2017. This increase was predominately comprised of the factors depicted in the chart below: (In millions of dollars) [[Image Removed: chart-b04a5eda38dd52d0a37.jpg]]
(a) As restated.
(b) Includes amortization of upfront payments received from long-term tenants and
other deferred credits (commonly referred to as prepaid rent).
(c) Represents the contribution from recent acquisitions until the one-year
anniversary of the acquisition.
(d) The components in this chart may not sum to the total due to rounding.
31
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Towers site rental revenues for 2018 were approximately $3.2 billion and
increased by $231 million , or 8%, from approximately $3.0 billion during 2017.
The increase in Towers site rental revenues was impacted by the following items,
inclusive of straight-line accounting: tenant additions across our entire
portfolio, renewals or extensions of tenant contracts, escalations and
non-renewals of tenant contracts. Tenant additions were influenced by our
tenants' ongoing efforts to improve network quality and capacity.
Fiber site rental revenues for 2018 were $1.6 billion and increased by $831
million , or 108%, from $769 million in 2017. The increase in Fiber site rental
revenues was predominately impacted by the 2017 Acquisitions and the increased
demand for small cells and fiber solutions. Increased demand for small cells was
driven by our tenants' network strategy in an effort to provide capacity and
relieve network congestion, and increased demand for fiber solutions was driven
by increasing demand for data.
The increase in Towers site rental gross margin from 2017 to 2018 was related to
the previously-mentioned 8% increase in Towers site rental revenues and
relatively fixed costs to operate our towers. The increase in Fiber site rental
gross margins was predominately related to the previously-mentioned 108%
increase in Fiber site rental revenues.
Selling, general and administrative expenses for 2018 were $563 million and
increased by $137 million , or 32%, from $426 million during 2017. The increase
in selling, general and administrative expenses was primarily related to the
growth in our Fiber business, including the Lightower Acquisition and Wilcon
Acquisition.
Towers operating profit for 2018 increased by $237 million , or 11%, from 2017.
The increase in Towers operating profit was primarily related to the growth in
our Towers site rental revenues and relatively fixed costs to operate our
towers.
Fiber operating profit for 2018 increased by $476 million , or 112%, from 2017
and was positively impacted by the previously-mentioned Lightower Acquisition
and Wilcon Acquisition and the increased demand for small cells and fiber
solutions described above.
Depreciation, amortization and accretion was approximately $1.5 billion for 2018
and increased by $286 million , or 23%, from approximately $1.2 billion during
2017. This increase predominately resulted from a corresponding increase in our
gross property and equipment due to capital expenditures and acquisitions,
including the Lightower Acquisition and Wilcon Acquisition discussed above.
Interest expense and amortization of deferred financing costs were $642 million
for 2018 and increased by $51 million , or 9%, from $591 million during 2017.
This increase predominately resulted from the full year impact of 2017 financing
activities used to partially fund our 2017 Acquisitions and the financing of our
discretionary capital expenditures. See notes 4 and 9 to our consolidated
financial statements.
As a result of repaying certain of our indebtedness in conjunction with our
refinancing activities, we incurred losses on retirement of long-term
obligations of $106 million and $4 million for 2018 and 2017, respectively. For
a further discussion of the debt refinancings, see note 9 to our consolidated
financial statements, "Item 7. MD&A-Liquidity and Capital Resources" and "Item
7A. Quantitative and Qualitative Disclosures About Market Risk."
The provisions for income taxes for 2018 and 2017 were $19 million and $26
million , respectively. For both 2018 and 2017, the effective tax rate differs
from the federal statutory rate predominately due to our REIT status, including
the dividends paid deduction. In addition to our REIT status, in 2017 the
effective rate differs from the federal statutory rate due to a non-cash tax
provision of $15 million as a result of the enactment of the Tax Reform Act. See
"Item 1. Business--Company Developments, REIT Status and Industry Overview-REIT
Status," "Item 7. MD&A-Accounting and Reporting Matters-Critical Accounting
Policies and Estimates" and note 11 to our consolidated financial statements.
Net income (loss) attributable to CCIC common stockholders for 2018 was income
of $509 million compared to income of $308 million during 2017. The increase was
predominately related to net growth in both our Towers and Fiber segments,
partially offset by an increase in expenses, including (1) depreciation,
amortization and accretion, (2) selling, general and administrative expenses,
(3) losses on the retirement of long-term obligations, and (4) interest expense
and amortization of deferred financing costs.
Adjusted EBITDA increased by $689 million , or 29%, from 2017 to 2018 reflecting
the growth in our site rental activities in both Towers and Fiber, including the
Lightower Acquisition and the Wilcon Acquisition discussed above.
32
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Liquidity and Capital Resources
Overview
General. Our core business generates revenues under long-term tenant contracts
(see "Item 1. Business-Overview" and "Item 7. MD&A-General Overview-Overview")
from (1) the largest U.S. wireless carriers and (2) fiber solutions tenants. As
a leading provider of shared communications infrastructure in the U.S. , our
strategy is to create long-term stockholder value via a combination of (1)
growing cash flows generated from our portfolio of communications
infrastructure, (2) returning a meaningful portion of our cash generated by
operating activities to our stockholders in the form of dividends, and (3)
investing capital efficiently to grow cash flows and long-term dividends per
share. Our strategy is based, in part, on our belief that the U.S. is the most
attractive market for shared communications infrastructure investment with the
greatest long-term growth potential. We measure our efforts to create "long-term
stockholder value" by the combined payment of dividends to stockholders and
growth in our per share results. See "Item 1. Business-Strategy" for a further
discussion of our strategy.
We have engaged, and expect to continue to engage, in discretionary investments
that we believe will maximize long-term stockholder value. Our historical
discretionary investments include (in no particular order): constructing
communications infrastructure, acquiring communications infrastructure,
acquiring land interests (which primarily relate to land assets under towers),
improving and structurally enhancing our existing communications infrastructure,
purchasing shares of our common stock, and purchasing, repaying, or redeeming
our debt. We have recently spent, and expect to continue to spend, a significant
percentage of our discretionary investments on the construction of small cells
and fiber. We seek to fund our discretionary investments with both net cash
generated by operating activities and cash available from financing capacity,
such as the use of our undrawn availability from the 2016 Revolver, issuances
under our CP Program, debt financings and issuances of equity or equity-related
securities, including under our 2018 ATM Program.
We seek to maintain a capital structure that we believe drives long-term
stockholder value and optimizes our weighted-average cost of capital. We target
a leverage ratio of approximately five times Adjusted EBITDA and interest
coverage of Adjusted EBITDA to interest expense of approximately three times,
subject to various factors, such as the availability and cost of capital and the
potential long-term return on our discretionary investments. We may choose to
increase or decrease our leverage or coverage from these targets for various
periods of time. We have no significant contractual debt maturities until 2021
(other than principal payments on certain outstanding debt).
We operate as a REIT for U.S. federal income tax purposes. We expect to continue
to pay minimal cash income taxes as a result of our REIT status and our NOLs.
See "Item 1. Business-Company Developments, REIT Status and Industry
Overview-REIT Status," "Item 7. MD&A-General Overview" and note 11 to our
consolidated financial statements.
Liquidity Position. The following is a summary of our capitalization and
liquidity position as of December 31, 2019 . See "Item 7A. Quantitative and
Qualitative Disclosures About Market Risk" and note 9 to our consolidated
financial statements for additional information regarding our debt as well as
note 12 to our consolidated financial statements for additional information
regarding our 2018 ATM Program.
(In millions of dollars)
Cash, cash equivalents and restricted cash(a) $ 338
Undrawn 2016 Revolver availability(b) 4,455
Debt and other long-term obligations (current and non-current)(c) 18,121 Total equity
10,489
(a) Inclusive of
assets, net on our consolidated balance sheet.
(b) Availability at any point in time is subject to certain restrictions based on
the maintenance of financial covenants contained in the 2016 Credit Facility.
At any point in time, we intend to maintain available commitments under our
2016 Revolver in an amount at least equal to the amount of Commercial Paper
Notes outstanding. See "Item 7. MD&A-Liquidity and Capital
Resources-Financing Activities" and "Item 7. MD&A-Liquidity and Capital
Resources-Debt Covenants."
(c) See "Item 7. MD&A-Liquidity and Capital Resources-Financing Activities" and
note 9 to our consolidated financial statements for further information
regarding the CP Program.
Over the next 12 months: • Our liquidity sources may include (1) cash on hand, (2) net cash generated
by our operating activities, (3) undrawn availability under our 2016
Revolver, (4) issuances under our CP Program, and (5) issuances of equity
pursuant to our 2018 ATM Program. Our liquidity uses over the next 12
months are expected to include (1) debt service obligations of $100
million (principal payments), (2) cumulative common stock dividend
payments expected to be at least
of approximately
Stock Dividend"), (3) prior to the automatic conversion of our 6.875%
Convertible Preferred Stock in August 2020 , dividend
33-------------------------------------------------------------------------------- payments related to such preferred stock of approximately$57 million and (4) capital expenditures. Additionally, amounts available under the CP Program may be repaid and re-issued from time to time. During the next 12 months, while our liquidity uses are expected to exceed our net cash provided by operating activities, we expect that our liquidity sources described above should be sufficient to cover our expected uses. Historically, from time to time, we have accessed the capital markets to issue debt and equity. • We have no scheduled contractual debt maturities other than principal
payments on amortizing debt. See "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk" for a tabular presentation of our debt
maturities and a discussion of anticipated repayment dates.
Summary Cash Flows Information
Years Ended December 31,
(In millions of dollars) 2019 2018 2017
(As Restated)
Net increase (decrease) in cash, cash
equivalents and restricted cash
Operating activities $ 2,698 $ 2,500 $ 2,032
Investing activities (2,081 ) (1,793 ) (10,482 )
Financing activities (692 ) (733 ) 8,192
Net increase (decrease) in cash, cash
equivalents and restricted cash (75 ) (26 ) (258 )
Operating Activities. The increase in net cash provided by operating activities of$198 million for 2019 from 2018 was due primarily to growth in our core business offset by a net decrease from changes in working capital. The increase in net cash provided by operating activities of$468 million for 2018 from 2017 was due primarily to growth in our core business, including as a result of the Lightower Acquisition and Wilcon Acquisition, offset by a net decrease from changes in working capital. Changes in working capital contribute to variability in net cash provided by operating activities, largely due to the timing of advanced payments by us and advanced receipts from tenants. We expect to grow our net cash provided by operating activities in the future (exclusive of changes in working capital) if we realize expected growth in our core business. Investing Activities. Net cash used for investing activities for 2019 increased$288 million from 2018 primarily as a result of increased discretionary capital expenditures due to the construction of small cells and fiber. Our capital expenditures have been categorized as discretionary, sustaining or integration as described below. • Discretionary capital expenditures are made with respect to activities
which we believe exhibit sufficient potential to enhance long-term
stockholder value. They primarily consist of expansion or development of
communications infrastructure (including capital expenditures related to
(1) enhancing communications infrastructure in order to add new tenants
for the first time or support subsequent tenant equipment augmentations or
(2) modifying the structure of a communications infrastructure asset to
accommodate additional tenants) and construction of new communications
infrastructure. Discretionary capital expenditures also include purchases
of land interests (which primarily relates to land assets under towers as
we seek to manage our interests in the land beneath our towers), certain
technology-related investments necessary to support and scale future
customer demand for our communications infrastructure, and other capital
projects. The expansion or development of existing communications
infrastructure to accommodate new leasing typically varies based on, among
other factors: (1) the type of communications infrastructure, (2) the
scope, volume, and mix of work performed on the communications
infrastructure, (3) existing capacity prior to installation, or (4)changes in structural engineering regulations and standards. Currently,
construction of new communications infrastructure is predominately
comprised of the construction of small cells and fiber. Our decisions
regarding discretionary capital expenditures are influenced by the
availability and cost of capital and expected returns on alternative uses
of cash, such as payments of dividends and investments.
• Integration capital expenditures consist of those capital expenditures
made as a result of integrating acquired companies into our business.
• Sustaining capital expenditures consist of those capital expenditures not
otherwise categorized as discretionary or integration capital
expenditures, such as (1) maintenance capital expenditures on our
communications infrastructure assets that enable our tenants' ongoing
quiet enjoyment of the communications infrastructure and (2) ordinary
corporate capital expenditures.
34--------------------------------------------------------------------------------
A summary of our capital expenditures for the last three years is as follows (in millions of dollars):
[[Image Removed: finalcapextable.jpg]]
(a) Includes
incurred during the years ended
respectively, in connection with customer installations and upgrades on our
towers.
(b) Prior to
within sustaining capital expenditures.
(c) As restated.
Capital expenditures increased from 2018 to 2019 and were primarily impacted by the construction of small cells and fiber (including certain construction projects that may take 18 to 36 months to complete) to address our tenants' growing demand for data. Our sustaining capital expenditures were approximately 2% of net revenues in 2019, consistent with historical annual levels. See "Item 7. MD&A-General Overview-Outlook Highlights" for a discussion of our expectations surrounding 2020 capital expenditures. Acquisitions. See notes 4 and 7 to our consolidated financial statements for a discussion of our acquisitions during the year endedDecember 31, 2017 . Financing Activities. We seek to allocate cash generated by our operations in a manner that will enhance long-term stockholder value, which may include various financing activities such as (in no particular order) paying dividends on our common stock (currently expected to total at least$4.80 per share over the next 12 months, or an aggregate amount of approximately$2.0 billion ), paying dividends on our 6.875% Convertible Preferred Stock (expected to total approximately$57 million , prior to the automatic conversion of such preferred stock inAugust 2020 ), purchasing our common stock, or purchasing, repaying, or redeeming our 35 --------------------------------------------------------------------------------
debt. See "Item 7. MD&A-Liquidity and Capital Resources-Overview," "Item 7.
MD&A-General Overview-Common Stock Dividend" and notes 9 and 12 to our
consolidated financial statements.
In 2019, our financing activities predominately related to the following:
• paying an aggregate of
• paying an aggregate of
Preferred Stock;
• issuing
in
borrowings under the 2016 Revolver;
• establishing a CP Program in
short-term, unsecured commercial paper notes. Notes under the CP Program
may be issued, repaid and re-issued from time to time, with an aggregate
principal amount of Commercial Paper Notes outstanding under the CP
Program at any time not to exceed $1.0 billion . The net proceeds of the
Commercial Paper Notes are expected to be used for general corporate
purposes;
• entering into an amendment to the 2016 Credit Facility in
increase our commitments under the 2016 Revolver by
commitments of
Facility from
• issuing
in
borrowings under the 2016 Revolver and CP Program.
In 2018, our financing activities predominately related to the following:
• paying an aggregate of
• paying an aggregate of
Preferred Stock;
• issuing
in January 2018 , the proceeds of which we used to repay (1) in full the
Senior Secured Tower Revenue Notes, Series 2010-3, Class C-2020 and payrelated fees and expenses and (2) a portion of the outstanding borrowings
under the 2016 Revolver;
• completing an offering of 8 million shares of our common stock ("March
2018 Equity Financing"), the proceeds of which we used for general
corporate purposes as well as repayment of outstanding indebtedness;
• terminating the previously outstanding "at-the-market" stock offering
program through which we had the right to issue and sell shares of our
common stock having an aggregate gross sales price of up to
million to or through sales agents ("2015 ATM Program") in
in
issue and sell shares of our common stock having an aggregate gross sales
price of up to
• entering into an amendment to the 2016 Credit Facility in
increase our commitments under the 2016 Revolver by
commitments of $4.25 billion and (2) extend the maturity of the 2016
Credit Facility from August 2022 to June 2023 ; and
• issuing
revenue notes in
cash on hand, to repay, in full, the Senior Secured Tower Revenue Notes,
Series 2010-6, Class C-2020 and pay related fees and expenses.
Incurrences, Purchases and Repayments of Debt. See note 9 to our consolidated financial statements, "Item 7. MD&A-General Overview" and "Item 7. MD&A-Liquidity and Capital Resources-Overview-Liquidity Position" for further discussion of our recent issuances, purchases and repayments of debt. Common Stock. See notes 12 and 19 to our consolidated financial statements for further information regarding our common stock as well as dividends declared and paid. ATM Program. See note 12 to our consolidated financial statements for further information regarding our 2018 ATM Program. As ofMarch 6, 2020 , we had approximately$750 million of gross sales of common stock availability remaining on our 2018 ATM Program. 36 -------------------------------------------------------------------------------- Mandatory Convertible Preferred Stock. See note 12 to our consolidated financial statements for further information regarding our 6.875% Convertible Preferred Stock (including information related to theAugust 2020 mandatory conversion) as well as dividends declared and paid during 2019. Credit Facility. See note 9 to our consolidated financial statements for further information regarding our 2016 Credit Facility. As ofMarch 6, 2020 , there was approximately$4.4 billion in availability under the 2016 Revolver. Commercial Paper Program. See note 9 to our consolidated financial statements for further information regarding our CP Program. As ofMarch 6, 2020 , the CP Program had$360 million outstanding. Restricted Cash. Pursuant to the indentures governing certain of our operating companies' debt securities, all rental cash receipts of the issuers of these debt instruments and their subsidiaries are restricted and held by an indenture trustee. The restricted cash in excess of required reserve balances is subsequently released to us in accordance with the terms of the indentures. See also note 3 to our consolidated financial statements. Contractual Cash Obligations The following table summarizes our contractual cash obligations as ofDecember 31, 2019 . These contractual cash obligations relate primarily to our outstanding borrowings or lease obligations for land interests under our towers. The debt maturities reflect contractual maturity dates and do not consider the impact of the principal payments that will commence following the anticipated repayment dates of certain debt (see footnote (b)). (In millions of dollars) Years Ending December 31, Contractual Obligations(a) 2020 2021 2022 2023
2024 Thereafter Totals Debt and other long-term obligations(b)$ 253 (g)$ 1,675 $ 1,000 $ 3,604 $ 3,172 $ 8,531 $ 18,235 Interest payments on debt and other long-term obligations(c)(d) 682 660 614 539 417 6,187 9,099 Lease obligations(e) 534 528 524 520 517 6,357 8,980 Access agreement obligations(f) 42 34 30 24 19 154 303
Total contractual
obligations
(a) The following items are in addition to the obligations disclosed in the above
table:
• We have a legal obligation to perform certain asset retirement activities,
including requirements upon lease and easement terminations to remove
communications infrastructure or remediate the land upon which our
communications infrastructure resides. The cash obligations disclosed in
the above table, as of December 31, 2019 , are exclusive of estimated
undiscounted future cash outlays for asset retirement obligations of
approximately $1.0 billion . As of December 31, 2019 , the net present value
of these asset retirement obligations was approximately
note 8 to our consolidated financial statements.
• We are contractually obligated to pay or reimburse others for property
taxes related to certain of our communications infrastructure.
• We have the option to purchase approximately 53% of our towers that are
leased or subleased or operated and managed under master leases, subleases
and other agreements with AT&T, Sprint and T-Mobile at the end of their
respective lease terms. We have no obligation to exercise such purchase
options. See note 1 to our consolidated financial statements.
• We have legal obligations for open purchase order commitments obtained in
the ordinary course of business that have not yet been fulfilled.
(b) The impact of principal payments that will commence following the anticipated
repayment dates of our Tower Revenue Notes is not considered. The Tower
Revenue Notes have principal amounts of
million and
2025 and 2028, respectively. See note 9 to our consolidated financial
statements for our definition of and additional information regarding the
Tower Revenue Notes.
(c) If the Tower Revenue Notes are not repaid in full by the applicable
anticipated repayment dates, the applicable interest rate increases by
approximately 5% per annum and monthly principal payments commence using the
Excess Cash Flow (as defined in the indenture governing the applicable Tower
Revenue Notes) of the issuers of the Tower Revenue Notes. The Tower Revenue
Notes are presented based on their contractual maturity dates ranging from
2042 to 2048 and include the impact of an assumed 5% increase in interest
rate that would occur following the anticipated repayment dates but exclude
the impact of monthly principal payments that would commence using Excess
Cash Flow (as defined in the indenture governing the applicable Tower Revenue
Notes) of the issuers of the Tower Revenue Notes. The full year 2019 Excess
Cash Flow (as defined in the indenture governing the applicable Tower Revenue
Notes) of the issuers of the Tower Revenue Notes was approximately
million. We currently expect to refinance these notes on or prior to the
respective anticipated repayment dates.
(d) Interest payments on the floating rate debt are based on estimated rates
currently in effect.
(e) Amounts relate primarily to lease obligations for the land interests on which
our towers reside and are based on the assumption that payments will be made
for certain renewal periods exercisable at our option that are reasonably
certain to be exercised and excludes our contingent payments for operating
leases (such as payments based on revenues derived from the communications
infrastructure located on the leased asset) as such arrangements are excluded
from our operating lease liability. See note 15 to our consolidated financial
statements for further discussion of our operating lease obligations. See
also the table below summarizing remaining terms to expiration.
(f) Amounts relate primarily to access agreement obligations for rights-of-way,
franchises, pole attachments and other agreements to operate our fiber assets
and are based on the assumption that payments will be made for certain
renewal periods exercisable at our option that are reasonably certain to be
exercised and excludes our contingent payments for access agreements.
(g) Predominantly consists of outstanding indebtedness under our CP Program. Such
amounts may be issued, repaid, or re-issued from time to time.
37-------------------------------------------------------------------------------- The following chart summarizes our rights to the land interests under our towers, including renewal terms exercisable at our option, as ofDecember 31, 2019 . As ofDecember 31, 2019 , the leases for land interests under our towers had an average remaining life of approximately 35 years, weighted based on Towers site rental gross margin. See "Item 1A. Risk Factors" for a discussion of retaining land interests under our towers. [[Image Removed: chart-4d9d56d9cb3c5b76b26.jpg]]
(a) Inclusive of fee interests and perpetual easements.
(b) For the year ended
the tenant contract.
Debt Covenants
Our Credit Agreement contains financial maintenance covenants. We are currently
in compliance with these financial maintenance covenants and, based upon our
current expectations, we believe we will continue to comply with our financial
maintenance covenants. In addition, certain of our debt agreements also contain
restrictive covenants that place restrictions on us and may limit our ability
to, among other things, incur additional debt and liens, purchase our
securities, make capital expenditures, dispose of assets, undertake transactions
with affiliates, make other investments, pay dividends or distribute excess cash
flow. See note 9 to our consolidated financial statements for further discussion
of our debt covenants. See also "Item 1A. Risk Factors" for a discussion of
compliance with our debt covenants. The following are ratios applicable to the
financial maintenance covenants under the Credit Agreement as of December 31,
2019 .
Covenant
Financial Maintenance Level As of December
Borrower / Issuer Covenant(a)(b) Requirement 31, 2019
CCIC Total Net Leverage Ratio ? 6.50x 5.4x
CCIC Total Senior Secured Leverage
Ratio ? 3.50x 0.9x
CCIC Consolidated Interest Coverage
Ratio(c) N/A N/A
(a) Failure to comply with the financial maintenance covenants would, absent a
waiver, result in an event of default under the Credit Agreement.
(b) As defined in the Credit Agreement.
(c) Applicable solely to the extent that the senior unsecured debt rating by any
two of S&P, Moody's and Fitch is lower than BBB-, Baa3 or BBB-, respectively.
If applicable, the consolidated interest coverage ratio must be greater than
or equal to 2.50.
38-------------------------------------------------------------------------------- Off-balance Sheet Arrangements We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Accounting and Reporting Matters Critical Accounting Policies and Estimates Our critical accounting policies and estimates are those that we believe (1) are most important to the portrayal of our financial condition and results of operations or (2) require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. In many cases, the accounting treatment of a particular transaction is specifically prescribed by GAAP. In other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. The critical accounting policies and estimates for 2019 are not intended to be a comprehensive list of our accounting policies and estimates. See note 3 to our consolidated financial statements for a summary of our significant accounting policies, including information related to our adoption of the new lease accounting guidance (commonly referred to as "ASC 842" or "new lease standard") onJanuary 1, 2019 . Lease Accounting - Lessee. For our Towers segment, our lessee arrangements primarily consist of ground leases for land under our towers. Ground leases for land are specific to each site and are generally for an initial term of five to 10 years and are renewable (and cancelable after a notice period) at our option. We also enter into term easements and ground leases in which we prepay the entire term. For our Fiber segment, our lessee arrangements primarily include leases of fiber assets to facilitate our small cells and fiber solutions. The majority of our lease agreements have certain termination rights that provide for cancellation after a notice period and multiple renewal options exercisable at our option. We include certain renewal option periods in the lease term when we determine that the options are reasonably certain to be exercised. For both our Towers and Fiber segments, operating lease expense is recognized on a ratable basis, regardless of whether the payment terms require us to make payments annually, quarterly, monthly, or for the entire term in advance. Certain of our ground lease and fiber lease agreements contain fixed escalation clauses (such as fixed dollar or fixed percentage increases) or inflation-based escalation clauses (such as those tied to the change in consumer price index ("CPI")). If the payment terms include fixed escalator provisions, the effect of such increases is recognized on a straight-line basis. We calculate the straight-line expense over the contract's estimated lease term, including any renewal option periods that we deem reasonably certain to be exercised. In conjunction with the adoption of ASC 842, we recognized a right-of-use ("ROU") asset and lease liability for each of our operating leases. ROU assets represent our right to use an underlying asset for the estimated lease term, and lease liabilities represent the present value of our future lease payments. In assessing our leases and determining our lease liability at lease commencement or upon modification, we are not able to readily determine the rate implicit for our lessee arrangements and thus use our incremental borrowing rate on a collateralized basis to determine the present value of our lease payments. Our ROU assets are measured as the balance of the lease liability plus any prepaid or accrued lease payments and any unamortized initial direct costs. We review the carrying value of our ROU assets for impairment, similar to our other long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We could record impairments in the future if there are changes in (1) long-term market conditions, (2) expected future operating results or (3) the utility of the assets that negatively impact the fair value of our ROU assets. Revenue Recognition. 88% of our total revenue for 2019 consists of site rental revenues, which are recognized on a ratable basis over the fixed, non-cancelable term of the relevant tenant contract, generally ranging from five to 15 years for site rental revenues derived from wireless tenants and three to 20 years for site rental revenues derived from fiber solutions tenants, regardless of whether the payments from the tenant are received in equal monthly amounts during the life of a tenant contract. Certain of our tenant contracts contain (1) fixed escalation clauses (such as fixed-dollar or fixed-percentage increases) or inflation-based escalation clauses (such as those tied to the change in CPI), (2) multiple renewal periods exercisable at the tenant's option and (3) only limited termination rights at the applicable tenant's option through the current term. If the payment terms call for fixed escalations, upfront payments, or rent-free periods, the revenue is recognized on a straight-line basis over the fixed, non-cancelable term of the tenant contract. When calculating our straight-line rental revenues, we consider all fixed elements of tenant contractual escalation provisions, even if such escalation provisions contain a variable element (such as an escalator tied to an inflation-based index) in addition to a minimum. To the extent we acquire below-market tenant leases for contractual interests with tenants on the acquired communications infrastructure (for example with respect to small cells and fiber), we record the fair value as deferred credits and amortize such deferred credits to site rental revenues over their estimated lease term. Since we recognize revenue on a straight-line basis, a portion of the site rental revenues in a given period represents cash collected or contractually collectible in other periods. Our assets related to straight-line site rental revenues are included in "Other current assets" and "Deferred site rental 39 -------------------------------------------------------------------------------- receivables." Amounts billed or received prior to being earned are deferred and reflected in "Deferred revenues" and "Other long-term liabilities." Amounts to which we have an unconditional right to payment, which are related to both satisfied or partially satisfied performance obligations, are recorded within "Receivables, net" on the consolidated balance sheet. As part of our effort to provide comprehensive communications infrastructure solutions, as an ancillary business, we also offer certain services primarily relating to our Towers segment, which represent 12% of our total revenues for 2019. Services and other revenue consists predominately of (1) site development services primarily relating to existing or new tenant equipment installations, including: site acquisition, architectural and engineering, or zoning and permitting (collectively, "site development services") and (2) tenant equipment installation or subsequent augmentations (collectively, "installation services"). Upon contract commencement, we assess our services to tenants and identify performance obligations for each promise to provide a distinct service. We may have multiple performance obligations for site development services, which primarily include: structural analysis, zoning, permitting and construction drawings. For each of the above performance obligations, services revenues are recognized at completion of the applicable performance obligation, which represents the point at which we believe we have transferred goods or services to the tenant. The revenue recognized is based on an allocation of the transaction price among the performance obligations in a respective contract based on estimated standalone selling price. The transaction price for tower installation services consists of amounts for (1) permanent improvements to our towers that represent a lease component and (2) the performance of the service. Amounts under our tower installation services agreements that represent a lease component are recognized as site rental revenues on a ratable basis over the length of the associated estimated lease term. For the performance of the tower installation service, we have one performance obligation, which is satisfied at the time of the applicable installation or augmentation and recognized as services and other revenues. See "Explanatory Note" immediately preceding Item 1 of this Annual Report on Form 10-K and note 2 to our consolidated financial statements for further information regarding the impact of the Restatement Adjustments. Since performance obligations are typically satisfied prior to receiving payment from tenants, the unconditional right to payment is recorded within "Receivables, net" on our consolidated balance sheet. The vast majority of our services revenues relates to our Towers segment and generally have a duration of one year or less. See note 3 to our consolidated financial statements. Accounting for Acquisitions - General. As described in "Item 1. Business," the majority of our communications infrastructure has been acquired directly or indirectly from the four largest wireless carriers (or their predecessors) through transactions consummated since 1999. We evaluate each of our acquisitions to determine if it should be accounted for as a business combination or as an acquisition of assets. For our business combinations, we allocate the purchase price to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. Any purchase price in excess of the net fair value of the assets acquired and liabilities assumed is allocated to goodwill. See "Item 7. MD&A-Accounting and Reporting Matters-Accounting for Acquisitions-Valuation" below and note 3 to our consolidated financial statements. The determination of the final purchase price allocation could extend over several quarters resulting in the use of preliminary estimates that are subject to adjustment until finalized. Such changes could have a significant impact on our consolidated financial statements. Accounting for Acquisitions - Leases. With respect to business combinations that include towers that we lease and operate, such as the AT&T, T-Mobile and Sprint leased and subleased towers, we evaluate such agreements to determine treatment as finance or operating leases. The evaluation of such agreements for finance or operating lease treatment previously included consideration of each of the lease classification criteria under ASC 840-10-25, namely (1) the transfer of ownership provisions, (2) the existence of bargain purchase options, (3) the length of the remaining lease term, and (4) the present value of the minimum lease payments. With respect to the AT&T Acquisition, T-Mobile Acquisition, and the Sprint towers acquired in the Global Signal Acquisition, we determined that the tower leases were finance leases and the underlying land leases were operating leases based upon the lease term criterion, after considering the fragmentation criteria applicable under ASC 840-10-25 to leases involving both land and buildings (i.e., towers). We determined that the fragmentation criteria was met, and the tower leases could be accounted for as finance leases apart from the land leases, which are accounted for as operating leases, since (1) the fair value of the land in the aforementioned business combinations was greater than 25% of the total fair value of the leased property at inception and (2) the tower lease expirations occur beyond 75% of the estimated economic life of the tower assets. Since the adoption of ASC 842 in 2019, the Company has not consummated any material acquisitions. See note 3 to our consolidated financial statements for further information. 40 -------------------------------------------------------------------------------- Accounting for Acquisitions - Valuation. As ofDecember 31, 2019 , our largest asset was property and equipment, which primarily consists of communications infrastructure, followed by goodwill, operating lease ROU assets and intangible assets. Our identifiable intangible assets predominately relate to the site rental contracts and tenant relationships intangible assets. See note 3 to our consolidated financial statements for further information regarding the nature and composition of the site rental contracts and tenant relationships intangible assets. The fair value of the vast majority of our assets and liabilities is determined by using either: (1) discounted cash flow valuation methods (for estimating identifiable
intangibles such as site rental contracts and tenant relationships or
operating lease right-of-use assets and lease liabilities acquired); or
(2) estimates of replacement costs (for tangible fixed assets such as
communications infrastructure).
The purchase price allocation requires subjective estimates that, if incorrectly
estimated, could be material to our consolidated financial statements, including
the amount of depreciation, amortization and accretion expense. The most
important estimates for measurement of tangible fixed assets are (1) the cost to
replace the asset with a new asset and (2) the economic useful life after giving
effect to age, quality, and condition. The most important estimates for
measurement of intangible assets are (1) discount rates and (2) timing and
amount of cash flows including estimates regarding tenant renewals and
cancellations. The most important estimates for measurement of operating lease
ROU assets and lease liabilities acquired are (1) present value of our future
lease payments, including whether renewals or extensions should be measured, and
(2) favorability or unfavorability to the current market terms. With respect to
business combinations that include towers that we lease and operate, such as the
T-Mobile, Sprint and AT&T leased and subleased towers, we evaluate such
agreements to determine treatment as finance or operating leases and
identification of any bargain purchase options.
We record the fair value of obligations to perform certain asset retirement
activities, including requirements, pursuant to our ground leases, easements,
and leased facility agreements to remove communications infrastructure or
remediate the space upon which certain of our communications infrastructure
resides. In determining the fair value of these asset retirement obligations we
must make several subjective and highly judgmental estimates such as those
related to: (1) timing of cash flows; (2) future costs; (3) discount rates; and
(4) the probability of enforcement to remove the towers or small cells or
remediate the land. See note 3 to our consolidated financial statements.
Accounting for Long-Lived Assets - Useful Lives. We are required to make
subjective assessments as to the useful lives of our tangible and intangible
assets for purposes of determining depreciation, amortization and accretion
expense that, if incorrectly estimated, could be material to our consolidated
financial statements. Depreciation expense for our property and equipment is
computed using the straight-line method over the estimated useful lives of our
various classes of tangible assets. The substantial portion of our property and
equipment represents the cost of our communications infrastructure, which is
generally depreciated with an estimated useful life equal to the shorter of
(1) 20 years or (2) the term of the lease (including optional renewals) for the
land interests under the communications infrastructure.
The useful life of our intangible assets is estimated based on the period over
which the intangible asset is expected to benefit us and gives consideration to
the expected useful life of other assets to which the useful life may relate. We
review the expected useful lives of our intangible assets on an ongoing basis
and adjust if necessary. Amortization expense for intangible assets is computed
using the straight-line method over the estimated useful life of each of the
intangible assets. The useful life of the site rental contracts and tenant
relationships intangible assets is limited by the maximum depreciable life of
the communications infrastructure (20 years), as a result of the interdependency
of the communications infrastructure and site rental contracts and tenant
relationships. In contrast, the site rental contracts and tenant relationships
are estimated to provide economic benefits for several decades because of the
low rate of tenant cancellations and high rate of renewals experienced to date.
Thus, while site rental contracts and tenant relationships are valued based upon
the fair value of the site rental contracts and tenant relationships which
includes assumptions regarding both (1) tenants' exercise of optional renewals
contained in the acquired leases and (2) renewals of the acquired leases past
the contractual term including exercisable options, the site rental contracts
are amortized over a period not to exceed 20 years as a result of the useful
life being limited by the depreciable life of the communications infrastructure.
Accounting for Long-Lived Assets - Impairment Evaluation. We review the carrying
values of property and equipment, intangible assets, or other long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. We utilize the following dual grouping
policy for purposes of determining the unit of account for testing impairment of
the site rental contracts and tenant relationships:
(1) we pool site rental contracts and tenant relationships intangible assets
and property and equipment into portfolio groups; and
41--------------------------------------------------------------------------------
(2) we separately pool site rental contracts and tenant relationships by
significant tenant or by tenant grouping for individually insignificant
tenants, as appropriate.
We first pool site rental contracts and tenant relationships intangible assets and property and equipment into portfolio groups for purposes of determining the unit of account for impairment testing, because we view communications infrastructure as portfolios and communications infrastructure in a given portfolio and its related tenant contracts are not largely independent of the other communications infrastructure in the portfolio. We re-evaluate the appropriateness of the pooled groups at least annually. This use of grouping is based in part on (1) our limitations regarding disposal of communications infrastructure, (2) the interdependencies of communications infrastructure portfolios, and (3) the manner in which communications infrastructure is traded in the marketplace. The vast majority of our site rental contracts and tenant relationships intangible assets and property and equipment are pooled into theU.S. owned communications infrastructure group. Secondly, and separately, we pool site rental contracts and tenant relationships by significant tenant or by tenant grouping for individually insignificant tenants, as appropriate, for purposes of determining the unit of account for impairment testing because we associate the value ascribed to site rental contracts and tenant relationships intangible assets to the underlying contracts and related tenant relationships acquired. Our determination that an adverse event or change in circumstance has occurred that indicates that the carrying amounts may not be recoverable will generally involve (1) a deterioration in an asset's financial performance compared to historical results, (2) a shortfall in an asset's financial performance compared to forecasted results, or (3) changes affecting the utility and estimated future demands for the asset. When considering the utility of our assets, we consider events that would meaningfully impact (1) our communications infrastructure or (2) our tenant relationships. For example, consideration would be given to events that impact (1) the structural integrity and longevity of our communications infrastructure or (2) our ability to derive benefit from our existing tenant relationships, including events such as tenant's bankruptcy or insolvency or loss of a significant tenant. During 2019, there were no events or circumstances that caused us to review the carrying value of our intangible assets or property and equipment due in part to our assets performing consistently with or better than our expectations. If the sum of the estimated future cash flows (undiscounted) from an asset, or portfolio group, significant tenant or tenant group (for individually insignificant tenants), as applicable, is less than its carrying amount, an impairment loss may be recognized. If the carrying value were to exceed the undiscounted cash flows, measurement of an impairment loss would be based on the fair value of the asset, which is based on an estimate of discounted future cash flows. The most important estimates for such calculations of undiscounted cash flows are (1) the expected additions of new tenants and equipment on our communications infrastructure and (2) estimates regarding tenant cancellations and renewals of tenant contracts. We could record impairments in the future if changes in long-term market conditions, expected future operating results or the utility of the assets results in changes for our impairment test calculations which negatively impact the fair value of our property and equipment and intangible assets, or if we changed our unit of account in the future. Approximately 2% of our total towers currently have no tenants. We continue to pay operating expenses on these towers in anticipation of obtaining tenants on these towers in the future, primarily because of the demographics and continuing increase in demand for data in the areas around these individual towers. We estimate, based on current visibility, potential tenants on a majority of these towers. To the extent we do not believe there are long-term prospects of obtaining tenants on an individual asset and all other possible avenues for recovering the carrying value have been exhausted, including sale of the asset, we appropriately reduce the carrying value of such assets to fair value. Accounting forGoodwill - Impairment Evaluation. We test goodwill for impairment on an annual basis, regardless of whether adverse events or changes in circumstances have occurred. The annual test begins with goodwill and all intangible assets being allocated to applicable reporting units. We then perform a qualitative assessment to determine whether it is "more likely than not" that the fair value of the reporting unit is less than its carrying amount. If we conclude that it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount, we would be required to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Our reporting units are the same as our operating segments (Towers and Fiber). See note 16 to our consolidated financial statements. We performed our most recent annual goodwill impairment test as ofOctober 1, 2019 , which resulted in no impairments. Deferred Income Taxes. We operate as a REIT forU.S. federal income tax purposes. Our REIT taxable income is generally not subject to federal and state income taxes as a result of the deduction for dividends paid and any usage of our remaining NOLs. Accordingly, the only provision or benefit for federal income taxes for the year endedDecember 31, 2019 relates to TRSs. Furthermore, as a result of the deduction for dividends paid, some or all of our NOLs related to our REIT may expire without utilization. See "Item 1.Business-Company Developments, REIT Status and Industry Overview-REIT Status" for a discussion of the impact of our REIT status. 42 -------------------------------------------------------------------------------- Our TRSs will continue to be subject, as applicable, to federal and state income taxes and foreign taxes in the jurisdictions in which such assets and operations are located. Our ability to utilize our NOLs is dependent, in part, upon us having sufficient future earnings to utilize our NOLs before they expire. If market conditions change materially and we determine that we will be unable to generate sufficient taxable income in the future to utilize our NOLs, we would be required to record an additional valuation allowance, which would reduce our earnings. Such adjustments could cause a material effect on our results of operations for the period of the adjustment. The change in our valuation allowance has no effect on our cash flows. For a further discussion of our benefit (provision) for income taxes, see "Item 7. MD&A-Results of Operations" and note 11 to our consolidated financial statements. Accounting Pronouncements Recently Adopted Accounting Pronouncements. See note 3 to our consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted. See note 3 to our consolidated financial statements. Non-GAAP and Segment Financial Measures In addition to the non-GAAP financial measures used herein and as discussed in note 16 to our consolidated financial statements, we also provide (1) segment site rental gross margin, (2) segment services and other gross margin, and (3) segment operating profit, which are key measures used by management to evaluate the performance of our operating segments. These segment measures are provided pursuant to GAAP requirements related to segment reporting. We define segment site rental gross margin as segment site rental revenues less segment site rental cost of operations, which excludes stock-based compensation expense and prepaid lease purchase price adjustments recorded in consolidated site rental cost of operations. We define segment services and other gross margin as segment services and other revenues less segment services and other cost of operations, which excludes stock-based compensation expense recorded in consolidated services and other cost of operations. We define segment operating profit as segment site rental gross margin plus segment services and other gross margin, less selling, general and administrative expenses attributable to the respective segment. All of these measurements of profit or loss are exclusive of depreciation, amortization and accretion, which are shown separately. Additionally, certain costs are shared across segments and are reflected in our segment measures through allocations that management believes to be reasonable. We use earnings before interest, taxes, depreciation, amortization and accretion, as adjusted ("Adjusted EBITDA"), which is a non-GAAP financial measure, as an indicator of consolidated financial performance. Our measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in the communications infrastructure sector or other REITs, and is not a measure of performance calculated in accordance with GAAP. Adjusted EBITDA should not be considered in isolation or as a substitute for operating income (loss), net income (loss), net cash provided by (used for) operating, investing and financing activities or other income statement or cash flow statement data prepared in accordance with GAAP and should be considered only as a supplement to net income (loss) computed in accordance with GAAP as a measure of our performance. There are material limitations to using a measure such as Adjusted EBITDA, including the difficulty associated with comparing results among more than one company, including our competitors, and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income or loss. Management compensates for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with their analysis of net income (loss). We define Adjusted EBITDA as net income (loss) plus restructuring charges (credits), asset write-down charges, acquisition and integration costs, depreciation, amortization and accretion, amortization of prepaid lease purchase price adjustments, interest expense and amortization of deferred financing costs, (gains) losses on retirement of long-term obligations, net (gain) loss on interest rate swaps, (gains) losses on foreign currency swaps, impairment of available-for-sale securities, interest income, other (income) expense, (benefit) provision for income taxes, cumulative effect of a change in accounting principle, (income) loss from discontinued operations and stock-based compensation expense. The reconciliation of Adjusted EBITDA to our net income (loss) is set forth below. Amounts prior to 2019 have been restated to reflect the impact of the Historical Adjustments as discussed in the "Explanatory Note" immediately preceding Item 1 of this Annual Report on Form 10-K. 43 --------------------------------------------------------------------------------
Years Ended December 31,
(In millions of dollars) 2019 2018 2017
(As Restated)(c)
Net income (loss) $ 860 $ 622 $ 366
Adjustments to increase (decrease) net income
(loss):
Asset write-down charges 19 26 17
Acquisition and integration costs 13 27 61
Depreciation, amortization and accretion 1,572 1,527 1,241
Amortization of prepaid lease purchase price
adjustments 20 20 20
Interest expense and amortization of deferred
financing costs 683 642 591
(Gains) losses on retirement of long-term
obligations 2 106 4
Interest income (6 ) (5 ) (19 )
Other (income) expense (1 ) (1 ) (1 )
(Benefit) provision for income taxes 21 19 26
Stock-based compensation expense 116 108 96
Adjusted EBITDA(a)(b) $ 3,299 $ 3,091 $ 2,402 (a) The components in this table may not sum to the total due to rounding.
(b) The above reconciliation excludes the items included in our Adjusted EBITDA
definition which are not applicable to the periods shown.
(c) See "Explanatory Note" immediately preceding Item 1 of this Annual Report on
Form 10-K and note 2 to our consolidated financial statements for further
information.
We believe Adjusted EBITDA is useful to investors or other interested parties in
evaluating our financial performance because:
• it is the primary measure used by our management (1) to evaluate the
economic productivity of our operations and (2) for purposes of makingdecisions about allocating resources to, and assessing the performance of
our operations;
• although specific definitions may vary, it is widely used by investors or
other interested parties in evaluation of the communications
infrastructure sector and other REITs to measure financial performance
without regard to items such as depreciation, amortization and accretion,
which can vary depending upon accounting methods and the book value of
assets;
• we believe it helps investors and other interested parties meaningfully
evaluate and compare the results of our operations (1) from period to
period and (2) to our competitors by removing the impact of our capital
structure (primarily interest charges from our outstanding debt) and
asset base (primarily depreciation, amortization and accretion) from our
financial results; and
• it is similar to the measure of current financial performance generally
used in our debt covenant calculations.
Our management uses Adjusted EBITDA: • as a performance goal in employee annual incentive compensation;
• as a measurement of financial performance because it assists us in
comparing our financial performance on a consistent basis as it removes
the impact of our capital structure (primarily interest charges from our
outstanding debt) and asset base (primarily depreciation, amortization
and accretion) from our operating results;
• in presentations to our board of directors to enable it to have the same
measurement of financial performance used by management;
• for planning purposes, including preparation of our annual operating budget;
• as a valuation measure in strategic analyses in connection with the
purchase and sale of assets;
• in determining self-imposed limits on our debt levels, including the
evaluation of our leverage ratio and interest coverage ratio; and
• with respect to compliance with our debt covenants, which require us to
maintain certain financial ratios that incorporate concepts such as, or
similar to, Adjusted EBITDA.
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