QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
Commission File Number 001-16441
____________________________________
CROWN CASTLE INTERNATIONAL
CORP.
(Exact name of registrant as specified in its charter)
Delaware
76-0470458
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
1220 Augusta Drive, Suite 500, Houston, Texas 77057-2261
(Address of principal executives office) (Zip Code)
(713) 570-3000
(Registrant's telephone number, including area code)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Number of shares of common stock outstanding at October 31, 2010: 290,756,111
Cautionary Language Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management's expectations as of the filing date of this report with the SEC. Statements that are not historical facts are identified as forward-looking statements. Such statements include plans, projections and estimates contained in “Part I—Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Part I—Item 3. Quantitative and Qualitative Disclosures About Market Risk” herein. Words such as “estimate,” “anticipate,” “project,” “plan,” “intend,” “believe,” “expect,” “likely” and similar expressions are intended to identify forward-looking statements.
Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including prevailing market conditions, risk factors described under “Part II—Item 1A. Risk Factors” herein and in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“2009 Form 10-K”) and other factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected.
1
PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars, except share amounts)
September 30, 2010
December 31, 2009
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
303,979
$
766,146
Restricted cash
207,055
213,514
Receivables, net of allowance of $4,987 and $5,497, respectively
55,201
44,431
Prepaid expenses
69,273
68,551
Deferred income tax assets
92,678
76,089
Deferred site rental receivables and other current assets, net
26,119
27,302
Total current assets
754,305
1,196,033
Property and equipment, net of accumulated depreciation of $3,343,143 and $3,040,572, respectively
4,897,340
4,895,983
Goodwill
2,029,139
1,984,804
Other intangible assets, net of accumulated amortization $595,584 and $476,895, respectively
2,338,517
2,405,422
Deferred site rental receivables, long-term prepaid rent, deferred financing costs and other assets
633,941
474,364
Total assets
$
10,653,242
$
10,956,606
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
$
28,100
$
33,053
Accrued interest
54,546
69,476
Deferred revenues
232,940
179,649
Interest rate swaps
234,940
160,121
Other accrued liabilities
97,226
94,610
Short-term debt, current maturities of debt and other obligations
22,039
217,196
Total current liabilities
669,791
754,105
Debt and other long-term obligations
6,594,066
6,361,954
Deferred income tax liabilities
87,889
74,117
Deferred ground lease payable, interest rate swaps and other liabilities
604,150
514,691
Total liabilities
7,955,896
7,704,867
Commitments and contingencies (note 9)
Redeemable preferred stock, $0.1 par value; 20,000,000 shares authorized; shares issued and outstanding:
September 30, 2010 and December 31, 2009—6,361,000; stated net of unamortized issue costs; mandatory
redemption and aggregate liquidation value of $318,050
316,349
315,654
CCIC stockholders' equity:
Common stock, $.01 par value; 600,000,000 shares authorized; shares issued and outstanding:
September 30, 2010—290,917,968 and December 31, 2009—292,729,684
2,909
2,927
Additional paid-in capital
5,581,479
5,685,874
Accumulated other comprehensive income (loss)
(207,241
)
(124,224
)
Accumulated deficit
(2,995,753
)
(2,628,336
)
Total CCIC stockholders' equity
2,381,394
2,936,241
Noncontrolling interest
(397
)
(156
)
Total equity
2,380,997
2,936,085
Total liabilities and equity
$
10,653,242
$
10,956,606
See condensed notes to condensed consolidated financial statements.
2
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands of dollars, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
Net revenues:
Site rental
$
437,079
$
396,466
$
1,253,582
$
1,140,577
Network services and other
44,811
32,613
128,762
101,286
Net revenues
481,890
429,079
1,382,344
1,241,863
Operating expenses:
Costs of operations(a):
Site rental
116,233
114,899
345,453
337,979
Network services and other
26,767
21,613
82,990
64,683
General and administrative
41,420
39,230
121,449
113,969
Asset write-down charges
4,429
3,073
8,588
14,459
Acquisition and integration costs
867
—
1,139
—
Depreciation, amortization and accretion
136,218
131,463
403,512
396,236
Total operating expenses
325,934
310,278
963,131
927,326
Operating income (loss)
155,956
118,801
419,213
314,537
Interest expense and amortization of deferred financing costs
(123,196
)
(111,169
)
(364,322
)
(327,006
)
Gains (losses) on purchases and redemptions of debt
(71,933
)
(4,848
)
(138,367
)
(90,174
)
Net gain (loss) on interest rate swaps
(104,421
)
(58,327
)
(292,295
)
(114,060
)
Interest and other income (expense)
847
2,569
985
5,572
Income (loss) before income taxes
(142,747
)
(52,974
)
(374,786
)
(211,131
)
Benefit (provision) for income taxes
7,597
21,836
22,622
78,276
Net income (loss)
(135,150
)
(31,138
)
(352,164
)
(132,855
)
Less: Net income (loss) attributable to the noncontrolling interest
(141
)
501
(351
)
(375
)
Net income (loss) attributable to CCIC stockholders
(135,009
)
(31,639
)
(351,813
)
(132,480
)
Dividends on preferred stock
(5,201
)
(5,202
)
(15,604
)
(15,604
)
Net income (loss) attributable to CCIC stockholders after deduction of dividends on
preferred stock
$
(140,210
)
$
(36,841
)
$
(367,417
)
$
(148,084
)
Net income (loss)
$
(135,150
)
$
(31,138
)
$
(352,164
)
$
(132,855
)
Other comprehensive income (loss):
Available-for-sale securities, net of tax of $0, $0, $0 and $0, respectively:
Unrealized gains (losses) on available-for-sale securities, net of taxes
(1,265
)
15,285
158
24,245
Derivative instruments net of taxes of $(909), $19,984, $(14,124) and $67,512,
respectively:
Net change in fair value of cash flow hedging instruments, net of taxes
(17,562
)
(89,324
)
(139,108
)
37,342
Amounts reclassified into results of operations, net of taxes
16,266
9,802
38,946
148,611
Foreign currency translation adjustments
26,108
14,717
17,097
36,594
Comprehensive income (loss)
(111,603
)
(80,658
)
(435,071
)
113,937
Less: Comprehensive income (loss) attributable to the noncontrolling interest
(196
)
326
(241
)
(582
)
Comprehensive income (loss) attributable to CCIC stockholders
$
(111,407
)
$
(80,984
)
$
(434,830
)
$
114,519
Net income (loss) attributable to CCIC common stockholders, after deduction of
dividends on preferred stock, per common share - basic and diluted
$
(0.49
)
$
(0.13
)
$
(1.28
)
$
(0.52
)
Weighted-average common shares outstanding (in thousands) - basic and diluted
286,119
286,707
286,883
286,356
________________
(a)
Exclusive of depreciation, amortization and accretion shown separately.
See condensed notes to condensed consolidated financial statements.
3
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In thousands of dollars)
Nine Months Ended September 30,
2010
2009
Cash flows from operating activities:
Net income (loss)
$
(352,164
)
$
(132,855
)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation, amortization and accretion
403,512
396,236
Gains (losses) on purchases and redemptions of long-term debt
138,367
90,174
Amortization of deferred financing costs and other non-cash interest
59,734
43,549
Stock-based compensation expense
26,185
21,810
Asset write-down charges
8,588
14,459
Deferred income tax benefit (provision)
(34,279
)
(83,531
)
Income (expense) from forward-starting interest rate swaps
292,295
111,396
Other adjustments
818
179
Changes in assets and liabilities, excluding the effects of acquisitions:
Increase (decrease) in accrued interest
(14,930
)
25,829
Increase (decrease) in accounts payable
(5,309
)
(10,257
)
Increase (decrease) in deferred revenues, deferred ground lease payables, other accrued liabilities and
other liabilities
11,891
(12,367
)
Decrease (increase) in receivables
(7,295
)
6,043
Decrease (increase) in prepaid expenses, deferred site rental receivables, long-term prepaid rent,
restricted cash and other assets
(119,758
)
(76,992
)
Net cash provided by (used for) operating activities
407,655
393,673
Cash flows from investing activities:
Proceeds from disposition of property and equipment
2,035
3,374
Capital expenditures
(148,274
)
(111,297
)
Payments for acquisitions of businesses, net of cash acquired
(126,972
)
(2,581
)
Payments for investments and other
(25,247
)
—
Net cash provided by (used for) investing activities
(298,458
)
(110,504
)
Cash flows from financing activities:
Proceeds from issuance of long-term debt
3,450,000
2,228,848
Proceeds from issuance of capital stock
16,310
16,742
Principal payments on long-term debt and other long-term obligations
(18,282
)
(4,875
)
Purchases and redemptions of long-term debt
(3,541,312
)
(2,131,910
)
Purchases of capital stock
(146,908
)
(1,231
)
Borrowings under revolving credit agreements
—
50,000
Payments under revolving credit agreements
—
(219,400
)
Payments for financing costs
(58,729
)
(59,000
)
Payments for forward-starting interest rate swap settlements
(266,870
)
—
Net (increase) decrease in restricted cash
9,467
(31,061
)
Dividends on preferred stock
(14,909
)
(14,908
)
Net cash provided by (used for) financing activities
(571,233
)
(166,795
)
Effect of exchange rate changes on cash
(131
)
(2,762
)
Net increase (decrease) in cash and cash equivalents
(462,167
)
113,612
Cash and cash equivalents at beginning of period
766,146
155,219
Cash and cash equivalents at end of period
$
303,979
$
268,831
See condensed notes to condensed consolidated financial statements.
4
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In thousands of dollars) (Unaudited)
CCIC Stockholders
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss) ("AOCI")
Accumulated
Deficit
Noncontrolling
Interest
Total
Balance, June 30, 2010
$
2,903
$
5,565,554
$
(230,843
)
$
(2,855,543
)
$
(201
)
$
2,481,870
Issuances of capital stock, net of forfeitures
6
7,907
—
—
—
7,913
Purchases and retirement of capital stock
—
(24
)
—
—
—
(24
)
Stock-based compensation
—
8,042
—
—
—
8,042
Other comprehensive income (loss)(a)
—
—
23,602
—
(55
)
23,547
Dividends on preferred stock
—
—
—
(5,201
)
—
(5,201
)
Net income (loss)
—
—
—
(135,009
)
(141
)
(135,150
)
Balance, September 30, 2010
$
2,909
$
5,581,479
$
(207,241
)
$
(2,995,753
)
$
(397
)
$
2,380,997
CCIC Stockholders
Common
Stock
Additional
Paid-In
Capital
AOCI
Accumulated
Deficit
Noncontrolling
Interest
Total
Balance June 30, 2009
$
2,908
$
5,638,213
$
(111,985
)
$
(2,604,441
)
$
(1,046
)
$
2,923,649
Issuances of capital stock, net of forfeitures
4
6,960
—
—
—
6,964
Purchases and retirement of capital stock
—
(14
)
—
—
1
(13
)
Stock-based compensation
—
6,779
—
—
—
6,779
Other comprehensive income (loss)(a)
—
—
(49,345
)
—
(175
)
(49,520
)
Dividends on preferred stock
—
—
—
(5,202
)
—
(5,202
)
Net income (loss)
—
—
—
(31,639
)
501
(31,138
)
Balance, September 30, 2009
$
2,912
$
5,651,938
$
(161,330
)
$
(2,641,282
)
$
(719
)
$
2,851,519
CCIC Stockholders
Common
Stock
Additional
Paid-In
Capital
AOCI
Accumulated
Deficit
Noncontrolling
Interest
Total
Balance, January 1, 2010
$
2,927
$
5,685,874
$
(124,224
)
$
(2,628,336
)
$
(156
)
$
2,936,085
Issuances of capital stock, net of forfeitures
20
16,290
—
—
—
16,310
Purchases and retirement of capital stock
(38
)
(146,870
)
—
—
—
(146,908
)
Stock-based compensation
—
26,185
—
—
—
26,185
Other comprehensive income (loss)(a)
—
—
(83,017
)
—
110
(82,907
)
Dividends on preferred stock
—
—
—
(15,604
)
—
(15,604
)
Net income (loss)
—
—
—
(351,813
)
(351
)
(352,164
)
Balance, September 30, 2010
$
2,909
$
5,581,479
$
(207,241
)
$
(2,995,753
)
$
(397
)
$
2,380,997
CCIC Stockholders
Common
Stock
Additional
Paid-In
Capital
AOCI
Accumulated
Deficit
Noncontrolling
Interest
Total
Balance January 1, 2009
$
2,885
$
5,614,507
$
(408,329
)
$
(2,493,198
)
$
—
$
2,715,865
Issuances of capital stock, net of forfeitures
28
16,714
—
—
—
16,742
Purchases and retirement of capital stock
(1
)
(1,093
)
—
—
(137
)
(1,231
)
Stock-based compensation
—
21,810
—
—
—
21,810
Other comprehensive income (loss)(a)
—
—
246,999
—
(207
)
246,792
Dividends on preferred stock
—
—
—
(15,604
)
—
(15,604
)
Net income (loss)
—
—
—
(132,480
)
(375
)
(132,855
)
Balance, September 30, 2009
$
2,912
$
5,651,938
$
(161,330
)
$
(2,641,282
)
$
(719
)
$
2,851,519
____________________________
(a)
See the statement of operations and other comprehensive income (loss) for the allocation of the components of “other comprehensive income (loss).”
See condensed notes to condensed consolidated financial statements.
5
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Unaudited
(Tabular dollars in thousands, except per share amounts)
1.
General
The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2009, and related notes thereto, included in the 2009 Form 10-K filed by Crown Castle International Corp. (“CCIC”) with the Securities and Exchange Commission (“SEC”). All references to the “Company” include CCIC and its subsidiary companies unless otherwise indicated or the context indicates otherwise.
The Company owns, operates and leases towers and other communications structures (collectively, “towers”). The Company’s primary business is the renting of antenna space to wireless communication companies under long-term contracts. To a lesser extent, the Company performs network services primarily consisting of antenna installations and subsequent augmentations, as well as site acquisition services, engineering services, permitting, other construction services, and other services related to network development. The Company conducts its operations in the U.S. and Canada (collectively referred to as “CCUSA”) and Australia (referred to as “CCAL”).
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 2010, and the consolidated results of operations and the consolidated cash flows for the three and nine months ended September 30, 2010 and 2009. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. Certain reclassifications have been made to the financial statements for prior periods in order to conform to the presentation for the nine months ended September 30, 2010.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s consolidated financial statements are disclosed in the Company’s 2009 Form 10-K.
New Accounting Pronouncements
No accounting pronouncements adopted during the nine months ended September 30, 2010 had a material impact on the Company’s consolidated financial statements. No new accounting pronouncements issued during the nine months ended September 30, 2010 but not yet adopted are expected to have a material impact on the Company’s consolidated financial statements. See the Company’s consolidated financial statements in the 2009 Form 10-K for a discussion of other new accounting pronouncements issued but not yet adopted.
2.
Acquisition
In July 2010, the Company entered into an agreement with NewPath Networks, Inc. ("NewPath") to merge with and into a subsidiary of the Company. In September 2010, the merger with NewPath was completed. NewPath's assets include 35 distributed antenna system ("DAS") networks in operation or under construction. The total cash consideration was approximately $128 million. The preliminary purchase price was predominately allocated to (1) property and equipment, (2) intangible assets consisting of site rental contracts and customer relationships, (3) goodwill, (4) accrued liabilities, and (5) deferred tax liabilities, based upon estimated fair values at the date of acquisition, and is subject to subsequent adjustments as the preliminary estimates are finalized. The Company paid a purchase price that resulted in goodwill due to (1) the expected growth in the DAS business and (2) opportunities to construct and lease future DAS networks.
See note 5 for a discussion of this acquisition's impact on income taxes.
6
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)
(Tabular dollars in thousands, except per share amounts)
3.
Debt and Other Obligations
The following is a summary of the Company’s indebtedness.
Original
Issue Date
Contractual
Maturity Date
Outstanding
Balance as of
September 30,
2010
Outstanding
Balance as of
December 31,
2009
Stated Interest
Rate as of
September 30, 2010(a)
Bank debt - variable rate:
Revolver
Jan. 2007
Sept. 2013
$
—
(b)
$
—
N/A
(c)
2007 Term Loans
Jan./March 2007
March 2014
627,250
632,125
1.8
%
(c)
Total bank debt
627,250
632,125
Securitized debt - fixed rate:
2005 Tower Revenue Notes
June 2005
June 2035
—
1,638,616
—
2006 Tower Revenue Notes
Nov. 2006
Nov. 2036
—
1,550,000
—
January 2010 Tower Revenue Notes
Jan. 2010
2035 - 2040
(d)
1,900,000
—
5.8
%
(d)
August 2010 Tower Revenue Notes
Aug. 2010
2035 - 2040
(d)
1,550,000
—
4.5
%
(d)
2009 Securitized Notes
July 2009
2019/2029
(e)
236,410
250,000
7.0
%
Total securitized debt
3,686,410
3,438,616
High yield bonds - fixed rate:
9% Senior Notes
Jan. 2009
Jan. 2015
801,982
823,809
9.0
%
(f)
7.75% Secured Notes
April 2009
May 2017
975,183
1,167,225
7.8
%
(g)
7.125% Senior Notes
Oct. 2009
Nov. 2019
497,665
497,533
7.1
%
(h)
7.5% Senior Notes
Dec. 2003
Dec. 2013
51
51
7.5
%
Total high yield bonds
2,274,881
2,488,618
Other:
Capital leases and other obligations
Various
Various
(i)
27,564
19,791
Various
(i)
Total debt and other obligations
6,616,105
6,579,150
Less: current maturities and short-term debt and other current obligations
22,039
(j)
217,196
(j)
Non-current portion of long-term debt and other long-term obligations
$
6,594,066
$
6,361,954
________________
(a)
Represents the weighted-average stated interest rate.
(b)
The availability is $400.0 million.
(c)
The Revolver currently bears interest at a rate per annum, at the election of CCOC, equal to the prime rate of The Royal Bank of Scotland plc plus a credit spread ranging from 1.0% to 1.4% or LIBOR plus a credit spread ranging from 2.0% to 2.4%, in each case based on the Company's consolidated leverage ratio. The 2007 Term Loans bear interest at a rate per annum, at CCOC's election, equal to the prime rate of The Royal Bank of Scotland plc plus 0.5% or LIBOR plus 1.5%. See note 4.
(d)
If the respective series of the January 2010 Tower Revenue Notes and August 2010 Tower Revenue Notes are not paid in full on or prior to 2015, 2017 and 2020, as applicable, then Excess Cash Flow (as defined in the indenture) of the Issuers (as defined in the indenture) will be used to repay principal of the applicable series and class of the Tower Revenue Notes, and additional interest (by an additional approximately 5% per annum) will accrue on the respective Tower Revenue Notes.
(e)
The 2009 Securitized Notes consist of $166.4 million of principal as of September 30, 2010 that amortizes through 2019, and $70.0 million of principal that amortizes during the period beginning in 2019 and ending in 2029.
(f)
The effective yield is approximately 11.3%, inclusive of the discount.
(g)
The effective yield is approximately 8.2%, inclusive of the discount.
(h)
The effective yield is approximately 7.2%, inclusive of the discount.
(i)
The Company's capital leases and other obligations bear interest rates up to 9% and mature in periods ranging from less than one year to approximately 20 years.
(j)
The decrease in the current maturities reflects the refinancing of the 2005 Tower Revenue Notes.
Securitized Debt — 2010 Tower Revenue Notes
Indirect subsidiaries of the Company issued $1.9 billion of principal amount of senior secured notes in January 2010 (“January 2010 Tower Revenue Notes”) and $1.55 billion of principal amount of senior secured notes in August 2010 ("August 2010 Tower Revenue Notes"), respectively, pursuant to the indenture governing the existing Tower Revenue Notes. The January 2010 Tower
7
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)
(Tabular dollars in thousands, except per share amounts)
Revenue Notes and the August 2010 Tower Revenue Notes (collectively, "2010 Tower Revenue Notes") are secured on a first priority basis by a pledge of the equity interests of each applicable issuer and by certain other assets of such subsidiaries. The 2010 Tower Revenue Notes are not guaranteed by and are not obligations of CCIC or any of its subsidiaries other than the subsidiaries issuing the 2010 Tower Revenue Notes and the indirect subsidiary of the Company that is the direct parent of those issuers. The 2010 Tower Revenue Notes will be paid solely from the cash flows generated from operations of the towers held by the issuers of the 2010 Tower Revenue Notes. The net proceeds of the January 2010 Tower Revenue Notes were primarily used to repay the portion of the 2005 Tower Revenue Notes not previously purchased. The January 2010 Tower Revenue Notes consist of three series of notes with principal amounts of $300.0 million, $350.0 million and $1.3 billion and have anticipated repayment dates in 2015, 2017 and 2020, respectively. The net proceeds of the August 2010 Tower Revenue Notes were primarily used to repay the portion of the 2006 Tower Revenue Notes not previously purchased. The August 2010 Tower Revenue Notes consist of three series of notes with principal amounts of $250.0 million, $300.0 million and $1.0 billion and have anticipated repayment dates in 2015, 2017 and 2020, respectively.
The Company may repay the 2010 Tower Revenue Notes in whole or in part at any time after the second anniversary of the respective closing date, provided such repayment is accompanied by any applicable prepayment consideration.
The indenture governing the Tower Revenue Notes contains covenants and restrictions customary for rated securitizations, including provisions prohibiting the issuers from incurring additional indebtedness or further encumbering their assets. The 2010 Tower Revenue Notes contain the same financial covenants as the previously outstanding 2005 and 2006 Tower Revenue Notes which are discussed in the consolidated financial statements in the 2009 Form 10-K.
Debt Purchases and Repayments
The following is a summary of the purchases and repayments of debt during the nine months ended September 30, 2010.
Principal Amount
Cash Paid(a)
Gains (losses)
2005 Tower Revenue Notes
$
1,638,616
$
1,651,255
$
(15,718
)
2006 Tower Revenue Notes
1,550,000
1,629,920
(87,755
)
2009 Securitized Notes (b)
5,000
5,250
(393
)
9% Senior Notes
33,115
36,116
(6,425
)
7.75% Secured Notes (b)
199,593
218,771
(28,076
)
Total
$
3,426,324
$
3,541,312
$
(138,367
)
(c)
________________
(a)
Exclusive of accrued interest.
(b)
These debt purchases were made by CCIC, rather than by the subsidiaries issuing the debt, because of restrictions upon the subsidiaries issuing the debt; as a result, the debt remains outstanding at the Company's subsidiaries.
(c)
Inclusive of $23.4 million related to the write-off of deferred financing costs and discounts.
Interest Expense and Amortization of Deferred Financing Costs
The components of “interest expense and amortization of deferred financing costs” are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
Interest expense on debt obligations
$
101,012
$
94,225
$
304,588
$
283,457
Amortization of deferred financing costs
3,825
6,779
11,705
19,814
Amortization of discounts on long-term debt
3,666
3,489
10,716
8,605
Amortization of interest rate swaps
14,400
6,147
36,225
12,213
Other
293
529
1,088
2,917
Total
$
123,196
$
111,169
$
364,322
$
327,006
4.
Interest Rate Swaps
The Company enters into interest rate swaps only to manage and reduce its interest rate risk, including the use of (1) forward- starting interest rate swaps to hedge its exposure to variability in future cash flows attributable to changes in LIBOR on anticipated financings, including refinancings and potential future borrowings, and (2) interest rate swaps to hedge the interest rate variability on a portion of the Company's floating rate debt. The Company does not enter into interest rate swaps for speculative or trading purposes. The forward-starting interest rate swaps call for the Company to pay interest at a fixed rate in exchange for receiving
8
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)
(Tabular dollars in thousands, except per share amounts)
interest at a variable rate equal to LIBOR. The forward-starting interest rate swaps are exclusive of any credit spread that would be incremental to the fixed rate in determining the all-in interest rate of the anticipated financing.
The Company is exposed to non-performance risk from the counterparties to its interest rate swaps; however, the Company generally uses master netting arrangements to partially mitigate such non-performance risk. The Company does not require collateral from its counterparties as security for its interest rate swaps. The Company's interest rate swaps are with Morgan Stanley, the Royal Bank of Scotland plc and Credit Agricole.
The following is a summary of the outstanding interest rate swaps as of September 30, 2010:
Hedged Item(a)
Combined
Notional
Start Date(b)
End Date
Pay Fixed
Rate(c)
Receive Variable
Rate
Variable to fixed — forward starting:
Non-economic hedge(d)
1,351,825
Feb. 2011
Feb. 2016
5.3
%
LIBOR
Non-economic hedge(e)
1,550,000
Nov. 2011
Nov. 2016
5.1
%
LIBOR
Variable to fixed:
2007 Term Loans(f)
600,000
Jan. 2010
Dec. 2011
1.3
%
LIBOR
Total
$
3,501,825
________________
(a)
Inclusive of interest rate swaps not designated as hedging instruments.
(b)
On the respective effective dates (start dates), the Company is contractually obligated to terminate and settle in cash the forward-starting interest rate swaps.
(c)
Exclusive of any applicable credit spreads.
(d)
This interest rate swap previously hedged the anticipated refinancing of the 2006 Mortgage Loan. See the discussion below regarding discontinuation of hedge accounting.
(e)
This interest rate swap previously hedged the anticipated refinancing of the 2006 Tower Revenue Notes. See the discussion below regarding discontinuation of hedge accounting.
(f)
The Company has effectively fixed LIBOR for two years on $600.0 million of the 2007 Term Loans at a combined rate of approximately 1.3% (exclusive of the applicable credit spread).
The Company refinanced the 2005 Tower Revenue Notes and the 2006 Tower Revenue Notes via the issuance of the January 2010 Tower Revenue Notes in January 2010 and the August 2010 Tower Revenue Notes in August 2010, respectively. Each of these refinancings qualified as the respective hedged forecasted transaction and resulted in no ineffectiveness. During the nine months ended September 30, 2010, the Company paid an aggregate of $265.7 million to settle (1) the interest rate swaps that previously hedged the refinancing of the 2005 Tower Revenue Notes and (2) a portion of the interest rate swaps that previously hedged the 2006 Mortgage Loan. The interest rate swaps hedging the refinancing of the 2006 Mortgage Loan and the 2006 Tower Revenue Notes are no longer economic hedges of the Company's exposure to LIBOR on the anticipated refinancing of its existing debt as a result of the Company's election not to settle these interest rate swaps following the refinancing of the respective debt. As a result, changes in the fair value of such non-economic swaps are prospectively recorded in earnings until settlement in “net gain (loss) on interest rate swaps” on the consolidated statement of operations and comprehensive income (loss). After giving effect to the partial cash settlement of the interest rate swaps hedging the 2006 Mortgage Loan during the third quarter of 2010 totaling $33.0 million, the Company's non-economic hedges have a notional value of $2.9 billion, and the settlement value is a liability of approximately $453.3 million as of September 30, 2010.
The following shows the effect of interest rate swaps on the consolidated balance sheet and consolidated statement of operations and comprehensive income (loss). The estimated net amount, pre-tax, that is expected to be reclassified into earnings from accumulated other comprehensive income (loss) is approximately $71.6 million for the next twelve months. See also note 6.
Fair Value of Interest Rate Swaps
Liability Derivatives
Interest Rate Swaps
Classification
September 30, 2010
December 31, 2009
Designated as hedging instruments:
Current
Interest rate swaps, current
$
6,506
$
136,961
Non-current
Interest rate swaps, non-current
—
41,702
Not designated as hedging instruments:
Current
Interest rate swaps, current
228,434
23,160
Non-current
Interest rate swaps, non-current
208,377
98,779
Total
$
443,317
$
300,602
9
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)
(Tabular dollars in thousands, except per share amounts)
Interest Rate Swaps Designated as Hedging Instruments (a)
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
Classification
Gain (loss) recognized in OCI (effective portion)
$
(16,794
)
$
(69,604
)
$
(125,638
)
$
104,061
OCI
Gain (loss) reclassified from accumulated OCI into income (effective portion)
(14,400
)
(6,147
)
(36,225
)
(12,213
)
Interest expense and amortization of
deferred financing costs
Amount of gain (loss) recognized in income (ineffective portion and excluded from effectiveness testing)
—
(3,920
)
—
(3,920
)
Net gain (loss) on interest rate swaps
Interest Rate Swaps Not Designated as Hedging Instruments (a)
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
Classification
Gain (loss) recognized in income
$
(104,421
)
(b)
$
(54,407
)
$
(292,295
)
(b)
$
(110,140
)
Net gain (loss) on interest rate swaps
________________
(a)
Exclusive of benefit (provision) for income taxes.
(b) The vast majority of this loss relates to the decrease in fair value of interest rate swaps not designated as hedging instruments.
5.
Income Tax
During the year ended December 31, 2009, the Company recognized the federal tax benefits on its taxable losses incurred which reduced its net deferred tax liabilities. During the three months ended March 31, 2010, the Company continued to recognize federal tax benefits on taxable losses incurred up to the maximum estimated benefit. The resulting net deferred tax position at March 31, 2010 required additional federal tax benefits in future periods to have a full valuation allowance, unless future discrete events allowed the Company to record additional deferred tax liabilities. During the first nine months of 2010, the Company continued to incur taxable losses for which recognition of the federal tax benefits were unable to be recorded, except for $16.5 million of federal tax benefit recorded predominately as a result of discrete events, including the acquisition of NewPath (see note 2). The Company has recorded a full valuation allowance on its federal tax benefits because of the Company's history of tax operating losses. For the nine months ended September 30, 2010, the effective tax rate differed from the federal statutory rate predominately due to the Company's federal deferred tax valuation allowances.
6.
Fair Value Disclosures
The following is the estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities).
September 30, 2010
December 31, 2009
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Assets:
Cash and cash equivalents
$
303,979
$
303,979
$
766,146
$
766,146
Restricted cash, current and non-current
212,055
212,055
218,514
218,514
Liabilities:
Long-term debt and other obligations
6,616,105
7,180,417
6,579,150
6,870,979
Interest rate swaps(a)
443,317
443,317
300,602
300,602
________________
(a)
See note 4.
The fair value of cash and cash equivalents and restricted cash approximate the carrying value. The estimated fair value of the Company's debt securities is based on indicative quotes (that is non-binding quotes) from brokers that require judgment to interpret market information including implied credit spreads for similar borrowings on recent trades or bid/ask prices or quotes from active markets if available. The fair value of interest rate swaps is determined using the income approach and is predominately based on observable interest rates and yield curves and, to a lesser extent, the Company's and the contract counterparty's credit risk. The credit risk (the Company's non-performance risk) assumption for interest rate swap fair values is primarily based on implied spreads from indicative quotes on the Company's outstanding debt and management's knowledge of current credit spreads in the debt market. There were no changes since December 31, 2009 in the Company's valuation techniques used to measure fair
10
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)
(Tabular dollars in thousands, except per share amounts)
values.
The following table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Assets at Fair Value as of September 30, 2010
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
$
303,979
—
—
$
303,979
Restricted cash
212,055
—
—
212,055
$
516,034
—
—
$
516,034
Liabilities at Fair Value as of September 30, 2010
Level 1
Level 2
Level 3
Total
Interest rate swaps
$
—
$
—
$
443,317
(a)
$
443,317
________________
(a)
As of September 30, 2010, the liability on a cash settlement basis was $460.0 million. Fair value differs from settlement value because fair value considers non-performance risk such as credit risk.
The following is a summary of the activity for liabilities classified as level 3 fair value measurements during the three and nine months ended September 30, 2010:
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
Interest Rate Swaps, Net
Three Months Ended September 30, 2010
Nine Months Ended September 30, 2010
Beginning balance
$
359,716
$
300,040
Settlements
(35,609
)
(271,283
)
Less: Total gains (losses):
Included in earnings(a)
102,416
288,922
Included in other comprehensive income (loss)
16,794
125,638
Ending balance
$
443,317
$
443,317
________________
(a)
Includes $93.8 million and $203.2 million, respectively, for the three and nine months ended September 30, 2010 of losses that are attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date.
7.
Per Share Information
Basic net income (loss) attributable to CCIC common stockholders, after deduction of dividends on preferred stock, per common share excludes dilution and is computed by dividing net income (loss) attributable to CCIC stockholders after deduction of dividends on preferred stock by the weighted-average number of common shares outstanding in the period. Diluted income (loss) attributable to CCIC common stockholders, after deduction of dividends on preferred stock, per common share is computed by dividing net income (loss) attributable to CCIC stockholders after deduction of dividends on preferred stock by the weighted-average number of common shares outstanding during the period plus any potential dilutive common share equivalents, including shares issuable (1) upon exercise of stock options and warrants and the vesting of restricted stock awards as determined under the treasury stock method and (2) upon conversion of the Company's preferred stock, as determined under the if-converted method. The Company's restricted stock awards are considered participating securities and may be included in the computation pursuant to the two-class method. However, the Company does not present the two-class method when there is no difference in the per share amount from the if-converted method.
The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations.
11
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)
(Tabular dollars in thousands, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
Net income (loss) attributable to CCIC stockholders
$
(135,009
)
$
(31,639
)
$
(351,813
)
$
(132,480
)
Dividends on preferred stock
(5,201
)
(5,202
)
(15,604
)
(15,604
)
Net income (loss) attributable to CCIC common stockholders after deduction of dividends on preferred stock for basic and diluted computations
$
(140,210
)
$
(36,841
)
$
(367,417
)
$
(148,084
)
Weighted-average number of common shares outstanding during the period for basic and diluted computations (in thousands)
286,119
286,707
286,883
286,356
Basic and diluted net income (loss) attributable to CCIC common stockholders after deduction of dividends on preferred stock, per common share
$
(0.49
)
$
(0.13
)
$
(1.28
)
$
(0.52
)
For all periods presented, CCIC stock options and unvested restricted stock awards are excluded from dilutive common shares because the net impact is anti-dilutive. 8.6 million shares reserved for issuance upon conversion of the 6.25% convertible preferred stock are excluded from dilutive common shares for the three and nine months ended September 30, 2010 and September 30, 2009 because the impact is anti-dilutive as determined under the if-converted method. See note 11.
8.
Leases
Tenant Leases
The following table is an updated summary of the rental cash payments owed to the Company, as a lessor, by tenants pursuant to lease agreements in effect as of September 30, 2010. Generally, the Company's leases with its tenants provide for (1) annual escalations and multiple renewal periods at the applicable tenant's option and (2) only limited termination rights at the applicable tenant's option through the current term. The weighted-average remaining term of tenant leases at CCUSA is approximately seven years, exclusive of renewals at the tenant's option. The tenants' rental payments included in the table below are through the current terms with a maximum current term of 20 years and do not assume exercise of tenant renewal options.
Years Ending December 31,
2011
2012
2013
2014
2015
Thereafter
Total
Tenant Leases
$
1,570,561
$
1,562,482
$
1,514,503
$
1,454,158
$
1,279,964
$
7,876,409
$
15,258,077
9.
Commitments and Contingencies
The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs or losses that may be incurred, if any, management believes the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position or results of operations.
10.
Operating Segments
The Company's reportable operating segments for the three and nine months ended September 30, 2010 are (1) CCUSA, primarily consisting of the Company's U.S. (including Puerto Rico) tower operations and (2) CCAL, the Company's Australian tower operations. Financial results for the Company are reported to management and the board of directors in this manner.
The measurement of profit or loss currently used by management to evaluate the results of operations for the Company and its operating segments is earnings before interest, taxes, depreciation, amortization and accretion, as adjusted (“Adjusted EBITDA”). The Company defines Adjusted EBITDA as net income (loss) plus restructuring charges (credits), asset write-down charges, acquisition and integration costs, depreciation, amortization and accretion, interest expense and amortization of deferred financing costs, gains (losses) on purchases and redemptions of debt, net gain (loss) on interest rate swaps, impairment of available-for-sale securities, interest and other income (expense), benefit (provision) for income taxes, cumulative effect of change in accounting principle, income (loss) from discontinued operations and stock-based compensation expense. Adjusted EBITDA is not intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with U.S. generally accepted accounting principles), and the Company's measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. There are no significant revenues resulting from transactions between the Company's operating segments. Inter-company borrowings and related interest between segments are eliminated to reconcile segment results and assets to the consolidated basis.
12
CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)
(Tabular dollars in thousands, except per share amounts)
The financial results for the Company's operating segments are as follows:
