NUVERA COMMUNICATIONS, INC. The following discussion should be read in conjunction with our historical financial statements and the related notes contained elsewhere in this report.
OverviewNuvera has an advanced fiber communications network and offers a diverse array of communications products and services. We provide broadband Internet access, video services and managed and hosted solutions services. In addition we provide local voice service and network access to other communications carriers for connections to our fiber networks as well as long distance service. Our operations consist primarily of providing services to customers for a monthly charge. Because many of these services are recurring in nature, backlog orders and seasonality are not significant factors. Our working capital requirements include financing the construction of our advanced fiber networks. We also require capital to maintain our advanced fiber networks and infrastructure; fund the payroll costs of our highly skilled labor force; maintain inventory to service capital projects, our advanced fiber network and our communication equipment customers; pay dividends and provide for the carrying value of trade accounts receivable, some of which may take several months to collect in the normal course of business. COVID-19 We continue to closely monitor the impact on our business of the outbreak of the COVID-19 pandemic. We have and are continuing to take precautions to ensure the safety of our employees, customers and business partners, while assuring business continuity and reliable service and support to our customers. Health and safety measures implemented include transitioning to remote work-from-home policies, proof of COVID-19 vaccination, redesigning and investing in our office spaces to accommodate a more healthy air quality environment, providing our field technicians and customer-facing personnel with personal protective equipment and additional safety training, practicing social distancing and adding calling in advance for work that must be performed inside customer premises. We are proactively monitoring and augmenting our network capacity, to meet the higher demands for data usage during the pandemic as a result of increased usage from work from home and remote learning applications. As a result of the pandemic, the demand for bandwidth upgrades have increased for our consumer, commercial and carrier customers. Our existing network enables us to efficiently respond and adapt to the increase in Internet traffic during this time. 28
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While we have not seen a significant adverse impact to our financial results from COVID-19 to date, the extent of the future impact of the COVID-19 pandemic on our business is uncertain and difficult to predict. Capital markets andthe United States economy have also been significantly impacted by the pandemic. Adverse economic and market conditions as a result of COVID-19 could also adversely affect the demand for our products and services and may also impact the ability of our customers to satisfy their obligations to us. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely affected. In 2022, we have seen our overall revenues remain steady primarily due to Internet growth mentioned above. However, we continue to see an accelerated loss in our voice service and video service customers as those customers make choices about their entertainment needs and personal finances in light of the COVID-19 pandemic. We have also experienced increased costs in 2022 which have affected our margins. In addition, we are anticipating increased inflation and future supply chain issues in the inventory, equipment and fiber we use in our business and have therefore purchased a large amount of these items in order to mitigate these potential issues and not disrupt our business operations. With respect to liquidity, we continue to evaluate costs and spending across our organization. This includes evaluating discretionary spending and non-essential capital investment expenditures. As ofDecember 31, 2022 , we have$10.1 million on our bank revolver available for use in the event that the need arises. In addition, we have a$40.0 million delayed draw term loan available to fund our fiber expansion plans. We will continue to actively monitor the situation and may take further actions that alter our operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. Executive Summary Highlights: ? OnDecember 8, 2022 , the Company was awarded four broadband grants from theMinnesota Department of Employment and Economic Development (DEED). The grants will provide up to 45.0% to 50.0% of the total cost of building fiber connections to homes and businesses for improved high-speed Internet in unserved and underserved communities and businesses in the Company's service area. The Company is eligible to receive$8,594,688 of approximately$18,139,749 total project costs. The Company will provide the remaining 55.0% to 50% matching funds. Construction and expenditures for these projects will begin in the spring of 2023. We have not received any funds for these projects as ofDecember 31, 2022 . ? OnJuly 15, 2022 ,Nuvera and CoBank entered into (i) an Agreement Regarding Amendments to Loan Documents and (ii) an Amended and Restated Revolving Loan Promissory Note. The agreements amended our existing credit facility with CoBank and secured a new credit facility in the aggregate principal amount of$130.0 million . Under the Agreements, among other things, (i) the Company received a$50.0 million term loan to replace existing debt, (ii) a$50.0 million delayed draw term loan, (iii) the Company's revolving loan was increased from$20.0 million to$30.0 million , (iv) the maturity date of the term loans were set atJuly 15, 2029 , and the maturity day of the revolving loan was set atJuly 15, 2027 , and (iii) the Company operating subsidiaries' agreed to extend their previous guarantees, security interests and mortgages to cover the increased amount of the revolving note. The financing was secured to facilitate the Company's advanced fiber-build plans announced onDecember 15, 2021 . Refer to the Company's 8-K filing with theSEC onJuly 20, 2022 for further details regarding the new credit agreements with CoBank. 29
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? OnDecember 15, 2021 , the Company announced plans to build and deploy Gig fiber Internet across its network creating crucial access to the fastest speeds available for rural communities, small cities and suburban areas acrossMinnesota . "This is a transformational moment forNuvera as we make a future-focused investment in the communities we serve by providing the most reliable FTTP access to Gig-speed services," saidGlenn Zerbe , CEO. "Our homes, businesses and communities need reliable and affordable connections to school, workplaces and entertainment, as an important and growing part of everyday life." "Nuvera's investment in FTTH network infrastructure will allow more underserved communities acrossMinnesota to leverage the quality of life and economic opportunity that access to a state-of-the-art network provides now and for years to come," said State SenatorNick Frentz , DFL-North Mankato.Nuvera's Gig-speed end-to-end fiber network is building and rolling out now. Service will be available for thousands of customers in 2022. The company will continue to build and deploy the Gig-speed service over the next few years. "We're excited to create 'Nuvera Gig Cities' in the communities we serve while also expanding access to fiber-based Internet service at a range of speeds," said Zerbe. "Nuvera's fiber network gives customers affordable access to a range of speeds from 100 Mbps to 1 Gig at prices that are the same whether you're in ruralGoodhue or suburbanPrior Lake ." WhileNuvera's goal is to bring Gig-speed service to as many communities as possible, the initial buildout will focus on the following cities and surrounding communities: oNew Ulm oHutchinson oGlencoe oGoodhue oLitchfield oRedwood Falls oPrior Lake oElko New Market oSavage oSleepy Eye oSpringfield oAurelia, IA Nuvera's fiber Internet prices range from$50 per month to$100 per month for Gig-speed services. Customers can choose the right speed at an affordable price, including low-income households through Federal programs. ? OnJanuary 29, 2021 , the Company was awarded five broadband grants from the DEED. The grants will provide up to 35.4% of the total cost of building fiber connections to homes and businesses for improved high-speed Internet in unserved or underserved communities and businesses in the Company's service area. The Company is eligible to receive$1,918,037 of the approximately$5,419,617 total project costs. The Company will provide the remaining 64.6% matching funds. Construction and expenditures for these projects began in the spring of 2021. We have received$396,360 for these projects as ofDecember 31, 2022 . ? OnApril 16, 2020 ,Nuvera received a$2,889,000 loan under the Small Business Administration (SBA's) Paycheck Protection Plan (PPP). The PPP was designed to provide a direct incentive for small businesses to keep their workers employed during the COVID-19 crisis. The SBA forgave loans if all employees were kept on the payroll for a required period of time under the program startingApril 16, 2020 , and the loan funds were used for payroll, rent and utilities.Nuvera retained employment of all employees through this period and followed all the SBA rules regarding this loan. The Company applied for debt forgiveness inAugust 2020 . OnFebruary 3, 2021 , the Company was notified by Citizens, the lender on the Company's PPP Loan that Citizens has received payment in full fromthe United States federal government for the amount of the Company's PPP Loan and the Company's PPP Loan had been fully forgiven. 30
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? InJanuary 2020 , the Company was awarded a broadband grant from the DEED. The grant will provide up to 36.5% of the total cost of building fiber connections to homes and businesses for improved high-speed Internet in unserved or underserved communities and businesses in the Company's service area. The Company is eligible to receive$730,000 of the approximately$2,000,000 total project costs. The Company will provide the remaining 63.5% matching funds. Construction and expenditures for these projects began in the spring of 2020 and were completed under budget in the third quarter of 2021. We have received$724,465 for these projects as ofDecember 31, 2022 . ? Net income in 2022 totaled$7,196,702 , which was a$5,055,219 , or 41.3% decrease compared to 2021. This decrease was primarily due to a decrease in operating income, increased interest expense and the PPP loan forgiveness that occurred in 2021, all of which are described below. ? Consolidated revenue for 2022 totaled$65,714,469 , which was a$123,052 decrease compared to 2021. This decrease was primarily due to decreases in voice service, network access revenue, video services, FUSF subsidies and other revenues, partially offset by increases in data services, all of which are described below. Business Trends
Included below is a synopsis of business trends management believes will continue to affect our business in 2023.
Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the communications industry from CATV providers, VoIP providers, wireless, other competitors, emerging technologies and the on-going effects of COVID-19. As we experience access line losses, our switched access revenue will continue to decline consistent with industry-wide trends. A combination of changing minutes of use, carriers optimizing their network costs, lower demand for dedicated lines and downward rate pressures may affect our future voice and switched access revenues. Access line losses totaled 1,790 or 10.40% in 2022 compared to 2021 due to the reasons mentioned above. The expansion of our advanced fiber communications network, growth in broadband connection sales along with continued migration to higher connectivity speeds and the sales of Internet value-added services such as on-line data backup, and hosted and managed service solutions are expected to continue to offset the revenue declines from the access line trends discussed above.
To be competitive, we continue to invest in our fiber broadband network and continue to focus on the research and deployment of advanced technological products that include broadband services, wireless services, private line, VoIP, digital video, IPTV and hosted and managed services.
We continue to evaluate our operating structure to identify opportunities for
increased operational efficiencies and effectiveness. This involves evaluating
opportunities for task automation, network efficiency and the balancing of our
workforce based on the current needs of our customers.
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Financial results for the Communications Segment for the years ended
Telecom Segment
2022 2021 Increase (Decrease)
Operating Revenues
Voice Service $ 5,694,428 $ 6,175,847 $ (481,419) -7.8%
Network Access 4,759,084 5,652,372 (893,288) -15.8%
Video Service 12,497,458 12,597,289 (99,831) -0.8%
Data Service 27,028,332 25,495,739 1,532,593 6.0%
A-CAM/FUSF 11,721,412 11,743,918 (22,506) -0.2%
Other 4,013,755 4,172,356 (158,601) -3.8%
Total Operating Revenues 65,714,469 65,837,521 (123,052) -0.2%
Cost of Services, Excluding Depreciation
and Amortization 30,179,770 29,034,757 1,145,013 3.9%
Selling, General and Administrative 9,916,482 10,377,186 (460,704) -4.4%
Depreciation and Amortization Expenses 14,108,246 12,538,778 1,569,468 12.5%
Total Operating Expenses 54,204,498 51,950,721 2,253,777 4.3%
Operating Income $ 11,509,971 $ 13,886,800 $ (2,376,829) -17.1%
Net Income $ 7,196,702 $ 12,251,921 $ (5,055,219) -41.3%
Capital Expenditures $ 37,977,118 $ 19,011,909 $ 18,965,209 99.8%
Key metrics
Access Lines 15,426 17,216 (1,790) -10.4%
Video Customers 9,099 10,172 (1,073) -10.5%
Broadband Connections 32,675 32,520 155 0.5%
Revenue
Voice Service - We receive recurring revenue for basic voice services that
enable customers to make and receive telephone calls within a defined local
calling area for a flat monthly fee. In addition to subscribing to basic local
voice services, our customers may choose from a variety of custom calling
features such as call waiting, call forwarding, caller identification and
voicemail. Voice service revenue was $5,694,428 , which was $481,419 or 7.8%
lower in 2022 compared to 2021. This decrease was primarily due to a decrease in
access lines, which continues to be impacted by the on-going effects of
COVID-19, which has accelerated an industry trend of customers moving to other
communications options, partially offset by a combination of rate increases
introduced into several of our markets in the past few years.
The number of access lines we serve as a company have been decreasing, which is consistent with a general industry trend, as customers are increasingly utilizing other technologies, such as wireless phones and IP services.
Network Access - We provide access services to other communications carriers for the use of our facilities to terminate or originate traffic on our network. Additionally, we bill SLCs to substantially all of our customers for access to the public switched network. These monthly SLCs are regulated and approved by theFCC . In addition, network access revenue was derived from several federally administered pooling arrangements designed to provide network support and distribute funding to communications companies. Network access revenue was$4,759,084 , which was$893,288 or 15.8% lower in 2022 compared to 2021. This decrease was primarily due to lower minutes of use on our network and lower special access revenues, which continues to be impacted by the on-going effects of COVID-19, which has accelerated an industry trend of customers moving to other communications options. 32
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In recent years, IXCs and others have become more aggressive in disputing both interstate carrier access charges and the applicability of access charges to their network traffic. We believe that long distance and other communication providers will continue to challenge the applicability of access charges either before theFCC or directly with the LECs. We cannot predict the likelihood of future claims and cannot estimate the impact. Video Service - We receive monthly recurring revenue from our subscribers for providing commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve twenty-two communities with our IPTV services and five communities with our CATV services. Video service revenue was$12,497,458 , which was$99,831 or 0.8% lower in 2022 compared to 2021. This decrease was primarily due to a decrease in video customers, partially offset by a combination of rate increases introduced into several of our markets over the past few years. Our video service revenues continue to be impacted by the on-going effects of COVID-19, which has accelerated an industry trend of customers moving to other video options. Data Service - We provide high speed Internet to business and residential customers. Our revenue is earned based on the offering of various flat rate packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage. Data service revenue was$27,028,332 , which was$1,532,593 or 6.0% higher in 2022 compared to 2021. This increase was primarily due to an increase in data customers, customers upgrading their packages and speeds and the implementation of a monthly equipment charge to our customers. We expect continued growth in this area will be driven by completing our advanced FTTP network, expansion of our service areas and marketing managed service solutions to businesses. A-CAM/FUSF - In 2019, the Company elected to receive funding from A-CAM, with the exception ofScott -Rice, which still receives funding from the FUSF. See Note 2 - "Revenue Recognition" for a discussion regarding FUSF. A-CAM/FUSF support totaled$11,721,412 , which was$22,506 or 0.2% lower in 2022 compared to 2021. This decrease was primarily due to lower FUSF support received due to lower traffic on our network resulting from our declining access lines. Other Revenue - Our customers are billed for toll and long-distance services on either a per call or flat-rate basis. This also includes the offering of directory assistance, operator service and long distance private lines. We also generate revenue from directory publishing through an outside vendor, sales and service of CPE, bill processing and other customer services. Our directory publishing revenue in our telephone directories recurs monthly. We also provide retail sales and service of cellular phones and accessories through Telespire, a national wireless provider. We resell these wireless services asNuvera Wireless , our branded product. We receive both recurring revenue for our wireless services, as well as revenue collected for the sales of wireless phones and accessories. Other revenue was$4,013,755 , which was$158,601 or 3.8% lower in 2022 compared to 2021. This decrease was primarily due to decreases in the sales and installation of CPE, and lower long-distance revenues.
Cost of Services (Excluding Depreciation and Amortization)
Cost of services (excluding depreciation and amortization) was$30,179,770 , which was$1,145,013 or 3.9% higher in 2022 compared to 2021. This increase was primarily due to higher costs associated with increased maintenance and support agreements on our equipment and software, and increased costs to maintain a highly-skilled workforce. We have experienced increased inflation in our operations in 2022 and expect future inflationary pressures could affect our costs to operate our business. 33
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were$9,916,482 , which was$460,704 or 4.4% lower in 2022 compared to 2021. This decrease reflects cost containment efforts implemented in 2022, partially offset by increased costs associated with our FTTP network initiative. We have experienced increased inflation in our operations in 2022 and expect future inflationary pressures could affect our costs to operate our business.
Depreciation and Amortization
Depreciation and amortization was$14,108,246 , which was$1,569,468 or 12.5% higher in 2022 compared to 2021. This increase was primarily due to accelerated depreciation on our copper cable networks as we transition to a new advanced FTTP network and increases in our advanced FTTP network assets, reflecting our continual investment in technology and infrastructure in order to meet our customers' demands for products and services. Operating Income Operating income was$11,509,971 , which was$2,376,829 or 17.1% lower in 2022 compared to 2021. This decrease was primarily due to higher costs of services and depreciation, all of which are described above.
See Consolidated Statements of Income (for discussion below)
Other Income (Expense) and Interest Expense
Other income in 2022 and 2021, included a patronage credit earned with CoBank, which was a result of our debt agreements with them. The patronage credit allocated and received in 2022 was$567,468 , compared to$625,490 allocated and received in 2021. CoBank determines and pays the patronage credit annually, generally in the first quarter of the calendar year, based on its results from the prior year. We record these patronage credits as income when they are received.
Interest and dividend income increased
Interest expense increased$1,357,317 in 2022 compared to 2021. This increase was primarily due to higher outstanding debt balances and increased interest rates on our non-swapped debt in connection with our increased term debt credit facility and our increased revolving credit facility with CoBank to support our fiber-build initiative. OnFebruary 3, 2021 , the Company was notified by Citizens, the lender on the Company's PPP Loan, that Citizens had received payment-in-full fromthe United States federal government for the amount of the Company's PPP Loan and the Company's PPP Loan had been fully forgiven resulting in a gain on debt forgiveness of$2,912,433 , which was the total of the PPP Loan plus accrued interest on the loan.
The Company recognized a
Other investment income increased
Income Taxes Income tax expense decreased by$1,033,310 in 2022 compared to 2021 as we recorded income tax expense of$2,698,663 in 2022 and$3,731,973 in 2021. The decrease in income taxes was primarily due to decreased operating income and increased interest expense. The effective income tax rate was approximately 27.3% for 2022 and 23.4% 2021. The difference between the effective tax rate and the federal statutory tax rate are reconciled in Note 8 - "Income Taxes." 34
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Table of Contents Non-GAAP Measures In addition to the results reported with GAAP, we also use certain non-GAAP measures such as net earnings before interest expense, income taxes, and depreciation and amortization (EBITDA) and adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends. These financial measures are not a measure of financial performance under GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance and net cash provided by operating activities as a measure of liquidity. They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies. Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below. Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below. These measures are a common measure of operating performance in the communications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash.
The following table is a reconciliation of net income to adjusted EBITDA for the
years ended
2022 2021
Net Income $ 7,196,702 $ 12,251,921
Add (subtract):
Interest Expense, net of interest income 3,481,846 2,126,240
Income tax expense (benefit) 2,698,663 3,731,973
Depreciation and amortization 14,108,246 12,538,778
EBITDA 27,485,457 30,648,912
Adjustments to EBITDA:
Other, net ¹ (1,610,018) (4,043,089)
Investment distributions ² (46,305) (30,245)
Non-cash, stock-based compensation ³ 64,301 187,951
Adjusted EBITDA $ 25,893,435 $ 26,763,529 ¹ Includes the equity earnings from our investments, patronage income, PPP Loan forgiveness,
and certain other miscellaneous items.
² Includes other cash distributions received from our investments less cash dividends.
³ Represents compensation expenses in connection with the issuance of stock awards,
which, because of the non-cash nature of these expenses, are excluded from
adjusted EBITDA.
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Liquidity and Capital Resources
Capital StructureNuvera's total capital structure (long-term and short-term debt obligations, net of unamortized loan fees plus stockholders' equity) was$181,134,049 atDecember 31, 2022 , reflecting 56.6% equity and 43.4% debt. This compares to a capital structure of$146,277,211 atDecember 31, 2021 , reflecting 67.4% equity and 32.6% debt. In the communications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately 3.13 times debt to EBITDA (as defined in the loan documents), which is well within acceptable limits for our agreements and our industry. Our management believes adequate operating cash flows and other internal and external resources, such as our cash on hand, and new credit facility are available to finance ongoing operating requirements, including capital expenditures, business development, debt service and temporary financing of trade accounts receivable. Liquidity Outlook Our short-term and long-term liquidity needs arise primarily from (i) capital expenditures; (ii) working capital requirements needed to support our growth; (iii) debt service; (iv) dividend payments on our stock and (v) potential acquisitions. Our primary sources of liquidity for the year endedDecember 31, 2022 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. As ofDecember 31, 2022 , we had a working capital surplus of$18,161,983 . In addition, as ofDecember 31, 2022 , we had$10.1 million available under our revolving credit facility to fund any short-term working capital needs. Also we have a$40.0 million delayed draw term loan available to fund our fiber expansion plans. The working capital surplus as ofDecember 31, 2022 was primarily the result of increased inventories to support our fiber-build initiative and a delay in principal payments to CoBank as a part of our new debt facility with them. We have not conducted a public equity offering. We operate with original equity capital, retained earnings and additions to indebtedness in the form of senior debt and bank lines of credit.
Impact of COVID-19 on Our Cash Flows
The global spread of COVID-19 and the various attempts to contain it may create
volatility with our future cash flows. Our future cash flows are could be
impacted by our customer's inability to pay for or keep their existing services,
or their inability to acquire our services due to their personal financial
hardships created by COVID-19. We may not be able to expand our network, acquire
new customers or service existing customers based on our future cash flow
position. We continue to monitor our discretionary spending in reaction to the
COVID-19 pandemic. We have experienced disruptions in our business as we
implemented modifications to preserve adequate liquidity and ensure that our
business can continue to operate during this uncertain time.
Cash Flows
We expect our liquidity needs to include capital expenditures, payment of
interest and principal on our indebtedness, income taxes and dividends. We use
our cash inflow to manage the temporary increases in cash demand and utilize our
revolving credit facility to manage more significant fluctuations in liquidity
caused by growth initiatives.
While it is often difficult for us to predict the impact of general economic
conditions, including the impact of COVID-19 on us, we believe that we will be
able to meet our current and long-term cash requirements primarily through our
operating cash flows and anticipated debt financing and anticipate that we will
be able to plan for and match future liquidity needs with future internal and
available external resources.
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We periodically seek to add growth initiatives by either expanding our network or our markets through organic or internal investments or through strategic acquisitions. We believe we can adjust the timing or the number of our initiatives according to any limitations which may be imposed by our capital structure or sources of financing.
The following table summarizes our cash flow:
For Year Ended December 31
2022 2021 Increase (Decrease)
Net cash provided by (used in):
Operating activities $ 26,524,265 $ 20,782,468 $ 5,741,797 27.63%
Investing activities (53,624,237) (21,253,732) (32,370,505) -152.31%
Financing activities 25,104,379 (5,840,247) 30,944,626 529.85%
Change in cash $ (1,995,593) $ (6,311,511) $ 4,315,918 -68.38%
Cash Flows from Operating Activities
Cash generated by operations for the year endedDecember 31, 2022 was$26,524,265 , compared to cash generated by operations of$20,782,468 in 2021. The increase in cash from operating activities in 2022 was primarily due to the timing of the increase/decrease in assets and liabilities, which included the accrual of interest payments on our CoBank loan that were paid in 2023 and the timing of income tax payments. Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to stockholders. Cash as ofDecember 31, 2022 was$310,556 , compared to$2,306,149 atDecember 31, 2021 .
Cash Flows from Investing Activities
We operate in a capital-intensive business. We continue to upgrade our advanced fiber networks for changes in technology in order to provide advanced services to our customers. Cash flows used in investing activities were$53,624,237 for the year endedDecember 31, 2022 , compared to$21,253,732 used in investing activities in 2021. Capital expenditures relating to our fiber initiative and on-going operations were$37,977,118 in 2022 and$19,011,909 in 2021. Materials and supply expenditures increased by$15,651,923 in 2022. This increase was primarily due to a large purchase of these items to support our fiber-build initiatives and to avoid anticipated supply chain issues and increased inflation we are expecting in future periods. Our investing expenditures were financed with cash flows from our current operations and advances on our line of credit when needed. We believe that our current operations and new debt financing from CoBank will provide adequate cash flows to fund our plant additions for the upcoming year; however, funding from our revolving credit facility is available if the timing of our cash flows from operations does not match our cash flow requirements. As ofDecember 31, 2022 , we had$10.1 million available under our existing revolving credit facility and$40.0 million on our delayed draw term to fund capital expenditures and other operating needs.
Cash Flows Provided By/(Used In) Financing Activities
Cash provided by financing activities for the year endedDecember 31, 2022 was$25,104,379 . This included long-term debt repayments of$57,330,775 , loan proceeds of$56,063,223 , loan origination fees of$1,165,859 , changes in our revolving credit facility and delayed draw term loan of$33,172,860 , grants received for plant construction of$396,360 , the repurchase of common stock of$3,187,500 and the distribution of$2,843,930 of dividends to stockholders. Cash used in financing activities for the year endedDecember 31, 2021 was$5,840,247 . This included long-term debt repayments of$4,610,400 , changes in revolving credit facility of$1,077,589 , grants received for plant construction of$724,465 , the repurchase of common stock of$167,467 and the distribution of$2,864,434 of dividends to stockholders. The change in cash flows used in financing activities in 2022 was primarily due to changes in our revolving credit facility and delayed draw term loan associated with our new credit agreement for funding our fiber initiative, partially offset by the repurchase of common stock. 37
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Table of Contents Working Capital We had a working capital surplus (i.e. current assets minus current liabilities) of$18,161,983 as ofDecember 31, 2022 , with current assets of approximately$29.8 million and current liabilities of approximately$11.6 million , compared to a working capital surplus of$2,545,129 atDecember 31, 2021 . The ratio of current assets to current liabilities was 2.56 and 1.23 atDecember 31, 2022 and 2021. The working capital surplus as ofDecember 31, 2022 was primarily the result of increased inventories to support our fiber-build initiative and a delay in principal payments to CoBank as part of our new debt facility with them.
At
Long-Term Debt and Revolving Credit Facilities
Our long-term debt obligations as ofDecember 31, 2022 , were$79,885,082 (excluding long-term loan origination fees). Our long-term debt obligations as ofDecember 31, 2021 , were$43,369,374 (excluding long-term loan origination fees), net of current debt maturities of$4,610,400 (excluding short-term loan origination fees). OnJuly 15, 2022 ,Nuvera and CoBank entered into (i) an Agreement Regarding Amendments to Loan Documents and (ii) an Amended and Restated Revolving Loan Promissory Note. The agreements amended our existing credit facility with CoBank and secured a new credit facility in the aggregate principal amount of$130.0 million . Under the Agreements, among other things, (i) the Company received a$50.0 million term loan to replace existing debt, (ii) a$50.0 million delayed draw term loan, (iii) the Company's revolving loan was increased from$20.0 million to$30.0 million , (iv) the maturity date of the term loans were set atJuly 15, 2029 , and the maturity day of the revolving loan was set atJuly 15, 2027 , and (v) the Company's operating subsidiaries' agreed to extend their previous guarantees, security interests and mortgages to cover the increased amount of the revolving note. The financing was secured to facilitate the Company's advanced fiber-build plans announced onDecember 15, 2021 . Refer to the Company's 8-K filing with theSEC onJuly 20, 2022 for further details regarding the new credit agreements with CoBank.
Our Long-Term Debt consists of the following notes:
New Credit Agreement ? TERM A-1 LOAN -$50,000,000 term note with interest payable quarterly. Final maturity date of this note isJuly 15, 2029 . Twelve quarterly principal payments of$625,000 are due commencingDecember 31, 2025 throughSeptember 30, 2028 , and three quarterly principal payments of$937,500 commencing onDecember 31, 2028 through maturity date. A final balloon payment of$39,687,500 is due at maturity of this note onJuly 15, 2029 . ? DELAYED DRAW TERM LOAN -$50,000,000 Delayed Draw Term Loan with interest on any outstanding amounts payable quarterly. Final maturity date of this loan isJuly 15, 2029 . Twelve quarterly principal payments of 1.25% of the outstanding loan balance are due commencingDecember 31, 2025 throughSeptember 30, 2028 , and three quarterly principal payments of 1.875% of the outstanding loan balance commencing onDecember 31, 2028 through maturity date. A final balloon payment of the balance of the Delayed Draw Term Loan is due at maturity of this note onJuly 15, 2029 . We currently have drawn$10,000,000 on this Delayed Draw Term Loan as ofDecember 31, 2022 . 38
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? REVOLVING LOAN -
The term loan borrowings initially bear interest at a "Margin for Base Rate Loans" of 2.15% above the applicable base rate. The margin for base rate loans for term loans increases as our "Leverage Ratio" increases. The revolving loan borrowings initially bear interest at a "Margin for Base Rate Loans" of 1.90% above the applicable base rate. The margin for base rate loans for revolving loans increases as our "Leverage Ratio" increases. We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facility with CoBank require that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility. Under the new credit facility,Nuvera has the ability to enter into IRSAs in connection with amounts borrowed from CoBank. In connection with the closing of the new credit facility, the Company "rolled over" its two exiting IRSAs. As described in Note 7 - "Interest Rate Swaps," onAugust 1, 2018 we entered into an IRSA with CoBank covering 25 percent of our then existing debt balance or$16,137,500 of our aggregate indebtedness to CoBank onAugust 1, 2018 . As ofDecember 31, 2022 , our IRSA covered$10,950,800 , with a weighted average interest rate of 4.36%. As described in Note 7 - "Interest Rate Swaps," onAugust 29, 2019 we entered into a second IRSA with CoBank covering an additional$42,000,000 of our then aggregate indebtedness to CoBank onAugust 29, 2019 . As ofDecember 31, 2022 , our IRSA covered$30,693,138 , with a weighted average interest rate of 2.69%.
Our remaining outstanding debt of
As ofDecember 31, 2022 our additional delayed draw term loan of$40.0 million and unused revolving credit facility of$10.1 million are subject to an unused commitment fee of 0.25% annually, until drawn. Once drawn, this debt would be subject to an effective weighted average interest rate based on current rate of interest in effect at the time. Under the new credit agreement, the Company and its respective subsidiaries have entered into security agreements under which substantially all the assets ofNuvera and its respective subsidiaries have been pledged to CoBank as collateral. In addition,Nuvera and its respective subsidiaries have guaranteed all the obligations under the credit facility. The credit agreement contains certain customary events of default, which include failure to make payments when due, the material inaccuracy of representations or warranties, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, certain judgments, certain ERISA-related events, or a change in control (as defined in the credit agreement). The term mortgage notes are required to be paid in quarterly installments covering principal and interest, beginning onDecember 31, 2025 and maturing onJuly 15, 2029 . The revolving mortgage is to be paid at maturity onJuly 15, 2027 . Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends in an amount up to$3,000,000 in any year as long as no default or event of default have occurred. Our current Total Leverage Ratio as ofDecember 31, 2022 , was 3.13. 39
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Our credit facility requires us to comply with specified financial ratios and tests. These financial ratios include total leverage ratio, debt service coverage ratio and equity to total assets ratio. AtDecember 31, 2022 , we were in compliance with all the stipulated financial ratios in our loan agreements. There are security and loan agreements underlying our current CoBank credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. Also, our credit facility contains restrictions that, among other things, limits or restricts our ability to enter into guarantees and contingent liabilities, incur additional debt, issue stock, transact asset sales, transfers or dispositions, and engage in mergers and acquisitions, without CoBank approval. OnApril 16, 2020 ,Nuvera received a$2,889,000 loan under the SBA's PPP, which was established as part of the Coronavirus Aid, Relief Economic Security Act (CARES Act). The PPP Loan was unsecured and was evidenced by a note in the favor of Citizens as the lender. OnFebruary 3, 2021 , the Company was notified by Citizens, the lender on the Company's PPP Loan that Citizens had received payment in full fromthe United States federal government for the amount of the Company's PPP Loan and the Company's PPP Loan had been fully forgiven. We recognized a gain on the forgiveness of$2,912,433 , which included the original amount of the loan plus accrued interest in the quarter endedMarch 31, 2021 .
See Note 6 - "Long-Term Debt" for information pertaining to our long-term debt and current effective interest rates.
Guarantees
We have guaranteed a portion of the obligations of our
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations stated in this 2022 Annual Report on Form 10-K are based uponNuvera's consolidated financial statements that have been prepared in accordance with GAAP, rules and regulations of theSEC and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate. The preparation of our financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements and during the reporting period. Actual results may differ from these estimates. Our senior management has discussed the development and selection of accounting estimates and the related Management Discussion and Analysis disclosure with our Audit Committee. For a summary of our significant accounting policies, see Note 1 - "Business Description and Summary of Significant Accounting Policies." Revenue Recognition
See Note 2 - "Revenue Recognition" for a discussion of our revenue recognition policies.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In making the determination of the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs and changes in customer relationships, credit worthiness and concentrations of credit risk. Specific accounts receivable are written off once a determination is made that the account is uncollectible. Additional allowances may be required if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments. Our allowance for doubtful accounts was$140,000 and$80,000 as ofDecember 31, 2022 and 2021. 40
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Table of Contents Valuation ofGoodwill We have goodwill on our books related to prior acquisitions of communications company properties. As discussed more fully in Note 5 - "Goodwill and Intangibles," and in accordance with GAAP, goodwill is reviewed for impairment annually or more frequently if an event occurs or circumstances change that would reduce the fair value below its carrying value. We perform our annual fair value evaluation in the fourth quarter of each year.
The impairment test for goodwill involves measuring a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss.
In 2022 and 2021, we engaged an independent valuation firm to aid in the completion of an annual impairment test for existing goodwill acquired. For 2022 and 2021, the testing resulted in no impairment to goodwill as the determined fair value was sufficient to pass the impairment test. We used a combination of Income (Discounted Cash Flow Method or DCF Method) and Market Approaches to estimate the fair value of the goodwill on our books related to prior acquisitions of communications company properties. The assumptions used in the estimates of fair value were based on projections provided by our management and a rate of return based on market information observed in debt and traded equity securities. Their Market Approaches considered market multiples observed in companies comparable to ours, traded on public exchange or over-the-counter, or transacted in a merger or acquisition transaction.
Assumptions used in our 2022 DCF model include the following:
? A 9.00% weighted average cost of capital based on an industry weighted average cost of capital;
? A 2.0% terminal revenue growth rate. The most significant amount of goodwill recorded on our books was due to the acquisitions of HTC, SETC andScott -Rice. The carrying value of the goodwill was$49,903,029 as ofDecember 31, 2022 and 2021. In 2022, we tested the HTC, SETC andScott -Rice goodwill. Based on the DCF model approach that was used, we determined the estimated enterprise fair value of our reporting units exceeded the carrying amount of that reporting units by approximately 20.8%, 24.5% and 27.7% for HTC, SETC andScott -Rice, respectively, which indicated that we had no impairment as ofDecember 31, 2022 . Future negative changes relating to our financial operations could result in a potential impairment of goodwill. Income Taxes The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Significant components of our deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnership investments and intangible assets due to the difference between book and tax basis. Our effective income tax rate is normally higher thanthe United States tax rate due to state income taxes and permanent differences. We account for income taxes in accordance with GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. As required by GAAP, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. 41
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In accordance with GAAP, we record net unrecognized tax benefits that, if recognized, would affect the income tax provision when recorded. See Note 8 - "Income Taxes."
As of
We are primarily subject toUnited States ,Minnesota ,Iowa ,Nebraska ,North Dakota andWisconsin income taxes. Tax years subsequent to 2018 remain open to examination by federal and state tax authorities. During the year endingDecember 31, 2022 we settled our examination by theState of Minnesota . The examination did not have a material effect on our financial statements. Our policy is to recognize interest and penalties related to income tax matters as income tax expense. As ofDecember 31, 2022 and 2021 we had$3,518 and$4,102 of interest or penalties accrued that related to income tax matters.
Property, Plant and Equipment
We record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. In assessing the recoverability of long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, we would write down those assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows expected from those assets. Changes in these estimates could have a material adverse effect on the assessment of long-lived assets, thereby requiring a write-down of the assets. Write-downs of long-lived assets are recorded as impairment charges and are a component of operating expenses. We have reviewed our long-lived assets and concluded that no impairment charge on these long-lived assets is necessary. We use the group life method (mass asset accounting) to depreciate the assets of our communication companies. Communications plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of communications plant and equipment requires a significant amount of judgment. We periodically review data on the expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates.Equity Method Investment We are an investor in several partnerships and limited liability corporations. Our percentages of ownership in these joint ventures range from 7.54% to 24.30%. We use the equity method of accounting for these investments, which reflects original cost and the recognition of our share of the net income or losses from the respective operations. Incentive Compensation We engaged an outside consultant in 2005 to advise us in our development of an Employee Incentive Plan (EIP) for employees other than executive officers and a Management Incentive Plan (MIP) for our executive officers. Both plans were implemented in 2006. Both of these plans are cash/stock-based/Option-based incentive plans. Payments on each plan are based on an achievement of objectives of measurable corporate and operational performance with financial targets. The financial targets include the achievement of specified certain operating income before interest, taxes, depreciation and amortization criteria, while the operational targets are based upon fiber passings, fiber connections, and net Internet customer additions. The EIP permits the issuance of up to 200,000 shares of our Common Stock in stock awards. 42
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We accrue an estimated liability each year for these potential payouts and reverse that accrual if the incentive payout targets are not met and paid out. Incentive payouts, if earned, are typically paid in late March of the year following the target year and after the filing of our Annual Report on Form 10-K.
OnFebruary 24, 2017 , our BOD adopted theNuvera Communications, Inc. 2017 Omnibus Stock Plan (OSP) effectiveMay 25, 2017 . The shareholders of the Company approved the OSP at theMay 25, 2017 Annual Meeting of Shareholders. The purpose of the OSP was to enableNuvera and its subsidiaries to attract and retain talented and experienced people, closely link employee compensation with performance realized by shareholders, and reward long-term results with long-term compensation. The OSP enables us to grant stock incentive awards to current and new employees, including officers, and to Board members and service providers. The OSP permits stock incentive awards in the form of Options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units (RSU's), performance stock, performance units, and other awards in stock or cash. The OSP permits the issuance of up to 625,000 shares of our Common Stock in any of the above stock awards.
See Note 15 - "Stock Based Compensation" for a detailed discussion of our incentive compensation and RSUs.
Recent Accounting Developments
See Note 1 - "Business Description and Summary of Significant Accounting Policies" for a discussion of recent accounting developments.
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