UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
__________________________
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 20192020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number 333-187970
__________________________
CC HOLDINGS GS V LLC
(Exact name of registrant as specified in its charter)
__________________________
| Delaware | 20-4300339 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
1220 Augusta Drive,, Suite 600,, Houston,, Texas77057-2261
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE.
Securities Registered Pursuant to Section 12(g) of the Act: NONE.
______________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No o
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
Explanatory Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934; however, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such filing requirements.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See definitions of a "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of December 31, 2019,2020, the only member of the registrant is a wholly owned indirect subsidiary of Crown Castle International Corp.
Documents Incorporated by Reference: NONE.
The registrant is a wholly owned indirect subsidiary of Crown Castle International Corp. and meets the conditions set forth in General Instructions (I)(1)(a) and (b) for Form 10-K and is therefore filing this form with the reduced disclosure format.
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CC HOLDINGS GS V LLC
TABLE OF CONTENTS
| Page | ||||||||||||
| Item 1. | Business | |||||||||||
| Item 1A. | Risk Factors | |||||||||||
| Item 1B. | ||||||||||||
| Item 2. | Properties | |||||||||||
| Item 3. | Legal Proceedings | |||||||||||
| Item 4. | ||||||||||||
| Item 5. | ||||||||||||
| Item 6. | ||||||||||||
| Item 7. | ||||||||||||
| Item 7A. | ||||||||||||
| Item 8. | ||||||||||||
| Item 9. | ||||||||||||
| Item 9A. | ||||||||||||
| Item 9B. | Other Information | |||||||||||
| Item 14. | Principal | |||||||||||
| Item 15. | ||||||||||||
| Item 16. | Form 10-K Summary | |||||||||||
Cautionary Language Regarding Forward-Looking Statements
This Annual Report on Form 10-K for the year ended December 31, 20192020 ("2020 Form 10-K") contains forward-looking statements that are based on management's expectations as of the filing date of this report with the Securities and Exchange Commission ("SEC"). Statements that are not historical facts are hereby identified as forward-looking statements. In addition, words such as "estimate," "anticipate," "project," "plan," "intend," "believe," "expect," "likely," "predicted," "positioned," "continue," "target," "seek," "focus" and any variations of these words, and similar expressions are intended to identify forward-looking statements. Such statements include plans, projections and estimates contained in "Item 1. Business," "Item 3. Legal Proceedings," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" herein. Such forward-looking statements include (1) expectations regarding anticipated growth in the wireless industry and consumption of and demand for wireless data, and our communications infrastructure (as defined below), including factors driving consumption andsuch demand, (2) expectations regarding non-renewals of tenant contracts (including the impact ofdemand for our tenants' decommissioning of the former Leap Wireless, MetroPCS and Clearwire networks (collectively, "Acquired Networks")), (3) expectations regarding our communications infrastructuretowers, including factors driving such demand, and the potential benefits that may be derived therefrom, (4)(3) the strength of the U.S. market for communications infrastructure, (5)(4) availability and adequacy of cash flows and liquidity for, or plans regarding, future discretionary investments, including capital expenditures limitations created as a result of being a wholly owned indirect subsidiary of Crown Castle International Corp. ("CCIC" or "Crown Castle") and reliance on strategic decisions made by CCIC management that enable such discretionary investments, (6)(5) potential benefits of our discretionary investments, (7)(6) expected benefits of future potential spectrum auctions, (8)(7) competitive factors affecting our business, (8) value which may be derived from our allocation of cash generated from our business, (9) expectations regarding our capital structure and the credit markets, our availability and cost of capital, or our ability to service our debt and comply with debt covenants,maturities, (10) expectations for sustaining capital expenditures, (11) expectations related to CCIC's ability to remain qualified as a real estate investment trust ("REIT") and the advantages, benefits or impact of, or opportunities created by the inclusion of our assets and operations in CCIC's REIT, (12) expectations related to the impact of tenant consolidation or ownership changes, including the impact of the merger betweenof T-Mobile and Sprint, (13) the potential effects of the restatement of our previously issued consolidated financial statements, including the Historical Adjustments (as defined below) related thereto (14) expectations regarding our remediation efforts related to a material weakness in our internal control over financial reporting
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Such forward-looking statements should, therefore, be considered in light of various risks, uncertainties and assumptions, including prevailing market conditions, risk factors described under "Item 1A. Risk Factors" herein 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.
Our filings with the SEC are available through the SEC website at www.sec.gov or through CCIC's investor relations website at investor.crowncastle.com. CCIC uses its investor relations website to disclose information about CCIC and us that may be deemed to be material. We encourage investors, the media and others interested to visit CCIC's investor relations website from time to time to review up-to-date information or to sign up for e-mail alerts to be notified when new or updated information is posted on the site.
Interpretation
As used herein, the term "including," and any variation thereof, means "including without limitation." The use of the word "or" herein is not exclusive. Unless this 2020 Form 10-K indicates otherwise or the context otherwise requires, the terms, "we," "our," or "us" as used in this 2020 Form 10-K refer to CC Holdings GS V LLC ("CCL") and its consolidated wholly owned subsidiaries (collectively, "Company"). The Company is a wholly owned subsidiary of Global Signal Operating Partnership, L.P. ("GSOP"), which is an indirect subsidiary of CCIC.
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PART I
Item 1. Business
Overview
We are an indirect, wholly owned subsidiary of CCIC, which is one of the largest owners and operators in the United States ("U.S.") of shared communications infrastructure, including (1) towers and other structures, such as rooftops (collectively, "towers"), and (2) fiber primarily supporting small cell networks ("small cells") and fiber solutions. As of December 31, 2019,2020, CCIC and its subsidiaries collectively owned, leased or managed approximately (1) 40,000 towers and (2) 80,000 route miles of fiber in the U.S., including Puerto Rico.
Our core business is providing access, including space or capacity, to certain communications infrastructure sites ("sites") via long-term contracts in various forms, including lease, license and sublease agreements (collectively, "tenant contracts"). Our existing customers on our sites are referred to herein as "tenants." We seek to increase our site rental revenues through tenant additions or modifications of existing tenant installations (collectively, "tenant additions") on our sites, which we expect to result in significant incremental cash flows due to our low incremental operating costs. Our operating costs generally tend to escalate at approximately the rate of inflation and are not typically influenced by tenant additions.
Below is certain information concerning our business and organizational structure:
•We own, lease and manage approximately 7,600 sites.
•Approximately 63% and 78% of our sites are located in the 50 and 100 largest basic trading areas ("BTAs"), respectively.
•Approximately 68% of our sites are leased or subleased or operated and managed ("SprintT-Mobile Sites") pursuant to 32-year master leases (expiring in May 2037) ("SprintT-Mobile Master Leases") or other agreements with subsidiaries of Sprint.T-Mobile which were assumed by T-Mobile following its merger with Sprint, completed April 1, 2020.
•The contracts for land interests underrelating to our towers have an average total remaining life of approximately 2726 years (including all renewal terms exercisable at our option), weighted based on site rental revenues.
•Our subsidiaries (other than Crown Castle GS III Corp.) are organized specifically to own, lease and manage certain communications infrastructure, such as sites or other structures, and have no employees.
•Management services, including those functions reasonably necessary to maintain, market, operate, manage, or administer the sites, are performed by Crown Castle USA Inc. ("CCUSA"), an affiliate of CCIC, under a management agreement ("Management Agreement"). The management fee under the Management Agreement is equal to 7.5% of our "Operating Revenues," as defined in the Management Agreement.
•For U.S. federal income tax purposes, our assets and operations are included in CCIC's REIT.
◦The Tax Cuts and Jobs Act, which was signed into law in 2017 ("Tax Reform Act"), made substantial changes to the Internal Revenue Code of 1986, as amended ("Code"). Among the many changes impacting corporations are a significant reduction in the corporate income tax rate, the repeal of the corporate alternative minimum tax for years beginning in 2018 and limitations on the deductibility of interest expense. In addition, under the Tax Reform Act, qualified REIT dividends (within the meaning of Section 199A(e)(3) of the Code) constitute a part of a non-corporate taxpayer's "qualified business income amount" and thus CCIC's non-corporate U.S. stockholders may be eligible to take a qualified business income deduction in an amount equal to 20% of such dividends received from CCIC. Without further legislative action, the 20% deduction applicable to qualified REIT dividends will expire on January 1, 2026. The Tax Reform Act has not had a material impact on the Company.
Certain information concerning our tenants and tenant contracts is as follows:
•Our largest tenants includeare T-Mobile (which merged with Sprint in April 2020), AT&T T-Mobile and Verizon Wireless, which collectively accounted for 90%89% of our 20192020 consolidated site rental revenues.revenues (which includes revenues previously derived from Sprint). See note 11 to our consolidated financial statements for further information regarding our largest tenants.
•The vast majority of our site rental revenues are of a recurring nature and are subject toderived from long-term tenant contracts with our tenants.contracts.
•Our site rental revenues typically result from long-term tenant contracts with (1) initial terms of five to 15 years, (2) multiple renewal periods of five to ten years each, exercisable at the option of the tenants,tenant, (3) limited termination rights for our tenants and (4) monthly rental payments with contractual escalations of the rental price.
•Exclusive of renewals exercisable at the tenants' option, our tenant contracts have a weighted-average remaining life of approximately sixfive years and represent $4.4$4.1 billion of expected future cash inflows.
See "Item 7. MD&A—General Overview" for a further discussion of our business fundamentals.
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Available Information
CCIC maintains a website at www.crowncastle.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended) ("Exchange Act") and other information about us are made available, free of charge, through the investor relations section of CCIC's website at http://investor.crowncastle.com or at the SEC's website at http://www.sec.gov as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Item 1A. Risk Factors
You should carefully consider all of the risks described below, as well as the other information contained in this document when evaluating our business.
Risks Relating to Our Business and Industry
Our business depends on the demand for our sites, driven primarily by demand for wireless data, and we may be adversely affected by any slowdown in such demand. Additionally, a reduction in the amount or change in the mix of network investment by our tenants may materially and adversely affect our business (including reducing demand for our sites).
Tenant demand for our sites depends on the demand for wireless data. Additionally, the willingness of our tenants to utilize our sites, or renew or extend existing tenant contracts on our sites, is affected by numerous factors, including:
•availability or capacity of our sites or associated land interests;
•location of our sites;
•financial condition of our tenants, including their profitability and availability or cost of capital;
•willingness of our tenants to maintain or increase their network investment or changes in their capital allocation strategy;
•availability and cost of spectrum for commercial use;
•increased use of network sharing, roaming, joint development, or resale agreements by our tenants;
•mergers or consolidations by and among our tenants;
•changes in, or success of, our tenants' business models;
•governmental regulations and initiatives, including local or state restrictions on the proliferation of communications infrastructure;
•cost of constructing sites;
•our market competition;
•technological changes including those (1) affecting the number or type of communications infrastructure needed to provide wireless data to a given geographic area or which may otherwise serve as a substitute or alternative to our sites or (2) resulting in the obsolescence or decommissioning of certain existing wireless networks; and
•our ability to efficiently satisfy our tenants' service requirements.
A slowdown in demand for wireless data or our sites may negatively impact our growth or otherwise have a material adverse effect on us. If our tenants or potential tenants are unable to raise adequate capital to fund their business plans, as a result of disruptions in the financial and credit markets or otherwise, they may reduce their spending, which could adversely affect our anticipated growth or the demand for our sites.
The amount, timing and mix of our tenants' network investment is variable and can be significantly impacted by the various matters described in these risk factors. Changes in tenant network investment typically impact the demand for our sites. As a result, changes in tenant plans such as delays in the implementation of new systems, new and emerging technologies (including small cells), or plans to expand coverage or capacity may reduce demand for our sites. Furthermore, the wireless industry could experience a slowdown or slowing growth rates as a result of numerous factors, including a reduction in consumer demand for wireless data or general economic conditions. There can be no assurances that weakness or uncertainty in the economic environment will not adversely impact the wireless industry, which may materially and adversely affect our business, including by reducing demand for our sites. In addition, a slowdown may increase competition for site rental tenants. Such an industry slowdown or a reduction in tenant network investment may materially and adversely affect our business.
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A substantial portion of our revenues is derived from a small number of tenants, and the loss, consolidation, or financial instability of any of such tenants may materially decrease revenues or reduce demand for our sites.
For the year ended December 31, 2019,2020, our site rental revenues by tenant were as follows:
(a)Includes revenues previously derived from Sprint. On April 1, 2020, T-Mobile and Sprint announced the completion of their previously disclosed merger.
Our fourthree largest tenants are T-Mobile (which merged with Sprint in April 2020), AT&T and Verizon Wireless and Sprint.Wireless. The loss of any one of our largest tenants as a result of consolidation, merger, bankruptcy, insolvency, network sharing, roaming, joint development, resale agreements by our tenants, or otherwise may result in (1) a material decrease in our revenues, (2) uncollectible account receivables, (3) an impairment of our deferred site rental receivables, site assets, or intangible assets, or (4) other adverse effects to our business. We cannot guarantee that tenant contracts with our largest tenants will not be terminated or that these tenants will renew their tenant contracts with us. In addition to our fourthree largest tenants, we also derive a portion of our revenues and anticipated future growth from new entrants offering or contemplating offering wireless services. Such tenants may be smaller or have less financial resources than our fourthree largest tenants, may have business models which may not be successful, or may require additional capital.
Consolidation among our tenants will likely result in duplicate or overlapping parts of networks, for example, where they are co-residents on a tower, which may result in the termination, non-renewal or re-negotiation of tenant contracts and negatively impact revenues from our sites. Due to the long-term nature of our tenant contracts, we generally expect that the impact of our site rental revenues from any termination of our tenant contracts as a result of such potential consolidation would be spread over multiple years. Such consolidation (or potential consolidation) may result in a reduction or slowdown in such tenants' network investment in the aggregate because their expansion plans may be similar. Tenant consolidation could decrease the demand for our sites, which in turn may result in a reduction in our revenues or cash flows.
On April 1, 2020, T-Mobile and Sprint announced the completion of their previously disclosed merger. For the year ended December 31, 2019, T-Mobile and Sprint represented approximately 20% and 33%, respectively, of our consolidated site rental revenues. Further, during 2019, we derived approximately 18% and 14% of our consolidated site rental revenues from T-Mobile and Sprint, respectively on towers where both carriers currently reside, inclusive of approximately 2% impact from the previously disclosed expected non-renewals from the anticipated decommissioning of portions of T-Mobile's MetroPCS and Sprint's Clearwire networks. In addition, there is an average of approximately seven years and six years of current term remaining on all tenant contracts with T-Mobile and Sprint, respectively.
Tenant consolidation, including the merger between T-Mobile and Sprint, could decrease or delaythe demand for our sites, which in turn may lead toresult in a reduction in our revenues or cash flows and may trigger a review for impairment of certain long-lived assets. We cannot predict with certainty how the demand for our sites will be impacted by the merger.
See also ""Item 1. Business"Business" and note 1211 to our consolidated financial statements for further information regarding our largest tenants.
As a result of competition in our industry, we may find it more difficult to negotiate favorable rates on our new or renewing tenant contracts.
Our growth is dependent on our entering into new tenant contracts (including amendments to tenant contracts upon modification of an existing tower installation), as well as renewing or renegotiating tenant contracts when existing tenant contracts terminate. Competition in our industry may make it more difficult for us to attract new tenants, maintain or increase our gross margins or maintain or increase our market share. We face competition for site rental tenants and associated contractual rates from various sources, including (1) other independent communications infrastructure owners or operators,
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including those that own, operate, or manage towers, rooftops, broadcast or transmission towers, utility poles, fiber or small cells, or (2) new alternative deployment methods for communications infrastructure.
New technologies may reduce demand for our sites or negatively impact our revenues.
Improvements in the efficiency, architecture and design of communication networks may reduce the demand for our sites. For example, new technologies that may promote network sharing, joint development, wireless backhaul and fronthaul efficiency, or resale agreements by our tenants, such as signal combining technologies or network functions virtualization, may reduce the need for our sites. In addition, other technologies, such as WiFi, Distributed Antenna Systems ("DAS"), femtocells, other small cells, orblimps, satellite (such as low earth orbiting) and mesh transmission systems may, in the future, serve as substitutes for or alternatives to leasing on sites that might otherwise be anticipated or expected had such technologies not existed. In addition, new technologies that enhance the range, efficiency and capacity of communication equipment could reduce demand for our sites. Any significant reduction in demand for our sites resulting from the new technologies may negatively impact our revenues or otherwise have a material adverse effect on us.
If we fail to retain rights to our sites, including the rights to land interests under our towers, our business may be adversely affected.
The property interests on whichand other rights to our towers reside,sites, including the land interests under our towers (other than the sites sub-leased under the Sprint Master Leases) consist ofT-Mobile Sites), are derived from leasehold, sub-leasehold interests, fee interests and easements, as well as permits
granted by governmental entities. A loss of these interests for any reason, including losses arising from the bankruptcies of a significant number of our lessors, from the default by a significant number of our lessors under their mortgage financings or from a legal challenge to our interest in the real property, may interfere with our ability to conduct our business or generate revenues. If a material number of the grantors of these rights elect not to renew their terms, our ability to conduct business or generate revenues could be adversely affected. Further, we may not be able to renew ground leases on commercially viable terms.
Our ability to retain rights to the land interests on which our towers resideare located depends on our ability to purchase such land, including throughby acquiring fee interests and perpetual easements, or renegotiate or extend the terms of the leasesagreements relating to such land. In some cases, other subsidiaries of CCIC have acquired certain third party land interests under certain of our sitestowers as a result of negotiated transactions, and we have entered into leases with such affiliates. Approximately 15% of our sites for the year ended December 31, 20192020 are under our control for less than 10 years. If we are unable to retain rights to the property interests on which our towers reside,are located, our business may be adversely affected.
As of December 31, 2019,2020, approximately 68% of our sites were SprintT-Mobile Sites. CCIC, through its subsidiaries (including us), has the option to purchase, in 2037, all (but not less than all) of the leased and subleased SprintT-Mobile Sites (as well as other SprintT-Mobile sites leased or subleased by other subsidiaries of CCIC) from SprintT-Mobile for approximately $2.3 billion; CCIC has no obligation to exercise the purchase option. CCIC may not have the required available capital to exercise the purchase option at the time this option is exercisable. Even if CCIC does have available capital, it may choose not to exercise its purchase option for business or other reasons. In the event that CCIC does not exercise the purchase option, or is otherwise unable to acquire an interest that would allow us to continue to operate these towers after the applicable period, we will lose the cash flows derived from such towers, which may have a material adverse effect on our business. In the event that CCIC decides to exercise the purchase option, the benefits of the acquisition of the sites may not exceed the costs, which could adversely affect our business.
Failure on our subsidiaries' part to cause the performance of their obligations as landlords under tenant contracts could lead to abatement of rent or termination of tenant contracts.
The vast majority of our tenant contracts are not net contracts. Accordingly, each of our subsidiaries that acts as a landlord is responsible for ensuring the maintenance and repair of its sites and for other obligations and liabilities associated with its sites, such as the payment of real estate taxes related to the tower and ground lease rents, the maintenance of insurance or environmental compliance and remediation. The failure of such subsidiary to cause the performance of their obligations as landlords under a tenant contract could entitle the related lessee to an abatement of rent or, in some circumstances, could result in a termination of the tenant contract. Because our subsidiaries nor we have any employees, as further discussed herein, the Manager (as defined below) is responsible for carrying out the landlord's responsibilities under the tenant contracts. An unscheduled reduction or cessation of payments due under a tenant contract may result in a reduction of the amounts available to make payments on the 3.849% Secured Notes.
Bankruptcy proceedings involving either our subsidiaries or their lessors under the ground leases could adversely affect our ability to enforce our subsidiaries' rights under the ground leases or to remain in possession of the leased property.
Upon the bankruptcy of a lessor or a lessee under a ground lease, the debtor entity generally has the right to assume or reject the ground lease. Pursuant to Section 365(h) of the United States Bankruptcy Code ("Bankruptcy Code"), a ground lessee (i.e.
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(i.e., a subsidiary) whose ground lease is rejected by a debtor ground lessor has the right to remain in possession of its leased premises under the rent reserved in the contract for the term of the ground lease, including any renewals, but is not entitled to enforce the obligation of the ground lessor to provide any services required under the ground lease. In the event of concurrent bankruptcy proceedings involving the ground lessor and the ground lessee, the ground lease could be terminated.
Similarly, upon the bankruptcy of one of our subsidiaries or a third-party owner of a managed site, the debtor entity would have the right to assume or reject any related site management agreement. Because the arrangements under which we derive revenue from the managed sites would not likely constitute contracts of real property for purposes of Section 365(h) of the Bankruptcy Code, the applicable subsidiary may not have the right to remain in possession of the premises or otherwise retain the benefit of the site management agreement if the site management agreement is rejected by a debtor third-party owner.
The bankruptcy of certain SprintT-Mobile subsidiaries, which are sublessors to one of our subsidiaries, could result in such subsidiary's sublease interests being rejected by the bankruptcy court.
Certain of the towers leased from SprintT-Mobile are located on land leased from third parties under ground leases. One of our subsidiaries, Global Signal Acquisitions II LLC ("Global Signal Acquisitions II"), subleases these sites from bankruptcy remote SprintT-Mobile subsidiaries. If one of these SprintT-Mobile subsidiaries should become a debtor in a bankruptcy proceeding and is permitted to reject the underlying ground lease, Global Signal Acquisitions II could lose its interest in the applicable sites. If Global Signal Acquisitions II were to lose its interest in the applicable sites or if the applicable ground leases were to be terminated, we would lose the cash flow derived from the towers on those sites, which may have a material adverse effect on our business. We have similar bankruptcy risks with respect to sites that we operate under management agreements.
Our failure to comply with our covenants in the SprintT-Mobile Master Leases, including our obligation to timely pay ground lease rent, could result in an event of default under the applicable SprintT-Mobile Master Leases, which would adversely impact our business.
Subject to certain cure, arbitration, or other provisions, in the event of an uncured default under a SprintT-Mobile Master Lease, SprintT-Mobile may terminate the SprintT-Mobile Master Lease as to the applicable sites. If we default under the SprintT-Mobile Master Leases with respect to more than 20% of the SprintT-Mobile Sites within any rolling five-year period, SprintT-Mobile will have the right to terminate the SprintT-Mobile Master Leases with respect to all SprintT-Mobile Sites. If SprintT-Mobile terminates SprintT-Mobile Master Leases with respect to all of or a significant number of sites, we would lose all of our interests in those sites (which collectively represent approximately 68% of our sites as of December 31, 2019)2020) and our ability to make payments on the 3.849% Secured Notes would therefore be significantly impaired.
We have no employees of our own and hence are dependent on the Manager for the conduct of our operations. Any failure of the Manager to continue to perform in its role as manager of the sites could have a material adverse impact on our business. Additionally, we could be negatively impacted by other unforeseen events, such as natural disasters, or public health emergencies.that could adversely affect our operations, business and reputation.
Pursuant to the Management Agreement among CCL, certain of its direct and indirect subsidiaries and CCUSA, all of our sites are managed by CCUSA ("Manager"). The Manager continues to be responsible for causing maintenance to be carried out in a timely fashion, carrying out the landlord's responsibilities under the tenant contracts, and marketing the site spaces. Management errors may adversely affect the revenue generated by the sites. In addition, the Manager's performance continues to depend to a significant degree upon the continued contributions of key management, engineering, sales and marketing, tenant support, legal, or finance personnel, some of whom may be difficult to replace. The Manager does not have employment agreements with any of its employees, and no assurance can be given that the services of such personnel will continue to be available to the Manager. Furthermore, the Manager does not maintain key man life insurance policies on its executives that would adequately compensate it for any loss of services of such executives. The loss of the services of one or more of these executives could have a material adverse effect on the Manager's ability to manage our operations.
The management of the sites requires special skills and particularized knowledge. If the Management Agreement is terminated or the Manager is for any reason unable to continue to manage the sites on our behalf, there may be substantial delays in engaging a replacement manager with the requisite skills and experience to manage the sites. There can be no assurance that a qualified
replacement manager can be located or engaged in a timely fashion or on economical terms. If an insolvency proceeding were commenced with respect to the Manager, the Manager as debtor or its bankruptcy trustee might have the power to prevent us from replacing it with a new manager for the sites.
Additionally, we could be negatively impacted by other unforeseen events, such as extreme weather events or natural disasters (including as a result of any potential effects of climate change), or public health emergencies (such asacts of vandalism. There is increasing concern that global climate change is occurring and could result in increased frequency of certain types of natural disasters and extreme
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weather events. We cannot predict with certainly the coronavirus (COVID-19)),rate at which climate change is occurring or the potential direct of indirect impact of climate change on our business. Any such unforeseen events could, among other things, damage or delay deployment of our communication infrastructure assets, interrupt or delay service to our tenants, or disrupt business operations of the Manager. Any such events could result in legal claims or penalties, disruption in our operations, damage to our reputation, negative market perception, or costly response measures, which could adversely affect our business. See "Item 7. MD&A—General Overview—Current Events" for a further discussion of the impacts of COVID-19 on our business.
The Manager may experience conflicts of interest in the management of the sites and in the management of sites of affiliates carried out pursuant to other management agreements.
In addition to managing our operations, the Manager is currently party to, and may in the future enter into, separate management agreements with its other affiliates that own, lease, and manage towers or other wireless communications sites. These other affiliates may be engaged in the construction, acquisition, or leasing of wireless communications sites in proximity to our sites. As a result, the Manager may engage in business activities that are in competition with our business in respect of the sites, and the Manager may experience conflicts of interest in the management of our sites and such other sites. Pursuant to the Management Agreement, the Manager continues to be prohibited from soliciting lessees to transfer tenant contracts from sites owned, leased, or managed by us to sites owned, leased or managed by our affiliates. However, there can be no assurance that the persons that control us, the Manager, or those other affiliates will allocate their management efforts in such a way as to maximize the returns with respect to our sites, as opposed to maximizing the returns with respect to other sites. The expansion and development of the Manager's business through acquisitions, increased product offerings or other strategic growth opportunities may cause disruptions in our business, which may have an adverse effect on our business operations or financial results. As a result, the Manager and we may experience conflicts of interest in the management of the land sites. Pursuant to the Management Agreement, the Manager has agreed to manage the sites in the same manner as if the lessees thereunder were not affiliates.
In addition, we may, subject to certain restrictions on affiliate transactions in the Secured Notes Indenture, enter into arms-length transactions with our affiliates to acquire land under our sites. There can be no assurance that the persons that control us will allocate potential opportunities in such a way as to maximize the returns with respect to our sites, as opposed to maximizing the returns for our affiliates.
New wireless technologies may not deploy or be adopted by tenants as rapidly or in the manner projected.
There can be no assurances that new wireless services or technologies, which may drive demand for our sites, will be introduced or deployed as rapidly or in the manner projected by the wireless carriers. In addition, demand or tenant adoption rates for such new technologies may be lower or slower than anticipated for numerous reasons. As a result, growth opportunities or demand for our sites arising from such technologies may not be realized at the times or to the extent anticipated.
If radio frequency emissions from wireless handsets or equipment on our sites are demonstrated to cause negative health effects, potential future claims could adversely affect our operations, costs, or revenues.
The potential connection between radio frequency emissions and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in recent years. We cannot guarantee that claims relating to radio frequency emissions will not arise in the future or that the results of such studies will not be adverse to us.
Public perception of possible health risks associated with cellular or other wireless connectivity services and wireless technologies (such as 5G) may slow or diminish the growth of wireless companies and deployment of new wireless technology, which may in turn slow or diminish our growth. In particular, negative public perception of, and regulations regarding, these perceived health risks may slow or diminish the market acceptance of wireless services and technologies. If a connection between radio frequency emissions and possible negative health effects were established, our operations, costs or revenues may be materially and adversely affected. We currently do not maintain any significant insurance with respect to these matters
The impact of COVID-19 and related risks could materially affect our financial position, results of operations and cash flows.
The global outbreak of the novel coronavirus (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and has adversely affected the U.S. In response, both the public and private sectors have introduced certain policies and initiatives in an effort to reduce the transmission of COVID-19 ("Initiatives"), such as the imposition of travel restrictions; mandates from federal, state and local authorities to close non-essential businesses and avoid large gatherings of people; quarantine or "shelter-in-place;" and the promotion of social distancing and the adoption of work-from-home and online learning by companies and institutions. In addition, the continued
9
spread of COVID-19 and the resulting Initiatives have led to a significant economic downturn, global supply chain disruptions and volatility in the global capital markets.
We have modified, and might further modify, our business practices as a result of the COVID-19 pandemic, the economic and social ramifications of the disease, and the societal and governmental responses in the communities in which we operate. We do not believe that COVID-19 had a material impact on our financial position, results of operations and cash flows for the year ended December 31, 2020. The extent to which the COVID-19 pandemic will affect our financial position, results of operations and cash flows is difficult to predict with certainty and depends on numerous evolving factors, including: the duration, scope and severity of the pandemic; government, social, business and other actions that have been and will be taken in response to the pandemic; the roll-out of the COVID-19 vaccine and its effectiveness in curbing the spread of the virus; and the effect of the pandemic on short- and long-term general economic conditions. Among other things, COVID-19 and the Initiatives could (1) adversely affect the ability of our suppliers, vendors, and the Manager to provide products and services to us; (2) result in decreased demand for our sites; and (3) make it more difficult for us and the Manager to serve our tenants, including as a result of delays or suspensions in the issuance of permits or other authorizations needed to conduct our business. Due to factors beyond our knowledge or control, including the duration and severity of COVID-19, as well as third-party actions taken to contain its spread and mitigate its public health effects, at this time we cannot estimate or predict with certainty the impact of COVID-19, the Initiatives, or the measures we take in response thereto on our financial position, results of operations and cash flows, particularly over the near to medium term, but the impact could be material. See "Item 7. MD&A—General Overview—Coronavirus (COVID-19)" for further information.
Risks Related to Our Debt
Our ability to repay the principal under our 2012 Secured Notes on or prior to the relevant maturity date will be subject to a number of factors outside of our control.
The indenture ("Secured Notes Indenture") governing our $1.0 billion aggregate principal amount of 3.849% secured notes due 2023 ("3.849% Secured Notes") and our previously outstanding $500 million aggregate principal amount of 2.381% secured notes due 2017 ("2.381% Secured Notes") (collectively, the "2012 Secured Notes"), requires us to repay the principal under the 3.849% Secured Notes by their maturity date in April 2023. We currently expect to distribute a substantial portion of our cash flow to our member as dividends. Therefore, our ability to repay the principal under the 3.849% Secured Notes on or prior to their maturity date depends upon our ability either to refinance the indebtedness under the 3.849% Secured Notes or to sell our interests in the sites for an amount that is sufficient to repay the 3.849% Secured Notes in full with interest. Our ability to achieve either of these goals will be affected by a number of factors, including the availability of credit for wireless communications sites, the fair market value of the sites, our equity in the sites, our financial condition, the operating history of the sites, tax laws, or general economic conditions. In addition, neither the trustee for the 3.849% Secured Notes nor any of its respective affiliates or any other person is obligated to provide the funds to refinance the 3.849% Secured Notes.
CCL is a holding company, and therefore its ability to repay its indebtedness is dependent on cash flow generated by its subsidiaries and their ability to make distributions to CCL.
CCL is a holding company with no operations or material assets other than the direct or indirect equity interests it holds in its subsidiaries. As a result, its ability to pay principal and interest on its indebtedness is dependent on the generation of cash flow by its subsidiaries and their ability to make such cash available to CCL by dividend, debt repayment, or otherwise. The earnings and cash flow generated by CCL's subsidiaries will depend on their financial and operating performance, which will be affected by general economic, industry, financial, competitive, operating, legislative, regulatory, or other factors beyond our control. Any payments of dividends, distributions, loans, or advances to CCL by its subsidiaries could also be subject to restrictions on dividends under applicable local law in the jurisdictions in which such subsidiaries operate.
In the event that CCL does not receive distributions from its subsidiaries, or to the extent that the earnings from, or other available assets of, such subsidiaries are insufficient, CCL may be unable to make payments on its indebtedness. Furthermore, Crown Castle GS III Corp., the co-issuer of the 3.849% Secured Notes, has no assets, conducts no operations, and has no independent ability to service the interest and principal obligations under the 3.849% Secured Notes.
10
Risks Relating to Corporate Compliance
The restatement of our previously issued financial statements, the errors that resulted in such restatement, the material weakness that was previously identified in our internal control over financial reporting and the determination that our internal control over financial reporting and disclosure controls and procedures were not effective, could result in loss of investor confidence, litigation or governmental proceedings or investigations, any of which could cause the market value of our debt securities to decline or impact our ability to access the capital markets.
As discussed in the "Explanatory Note" and note 2 to our consolidated financial statements, in connection with the filing of its Annual Report on Form 10-K for the year ended December 31, 2019, CCIC corrected certain historical errors related to the timing of revenue recognition for its tower installation services. As a result, we have determined that, despite us not receiving any cash, an amount equal to the lease component as a result of installation and other construction-related services performed by CCIC on our behalf should be recorded on our consolidated financial statements as deferred revenue, and then amortized as revenues on a ratable basis over the length of the tenants’ associated estimated lease term. In addition to this determination, we have also determined that errors existed related to our accounting for obligations to perform asset retirement activities pursuant to our ground lease and easement agreements. Due to these determinations, we concluded that our previously issued consolidated financial statements for fiscal years ended December 31, 2017 and 2018, and each of our unaudited condensed consolidated financial statements and related disclosures for the quarterly and year-to-date periods during such years and for the first three quarters of fiscal year 2019, should be restated. Although the Company has restated these financial statements and the previously identified material weakness in the Company's internal control over financial reporting has been remediated, as a result of these errors and restatement, we were and continue to be subject to additional risks and uncertainties, including litigation and loss of investor confidence. We may become subject to litigation or governmental proceedings or investigations that could result in additional unanticipated legal costs regardless of the outcome of the litigation. Additionally, if we are not successful in any such litigation, we may be required to pay substantial damages or settlement costs.
If we fail to comply with laws or regulations which regulate our business and which may change at any time, we may be fined or even lose our right to conduct some of our business.
A variety of federal, state, local, and foreign laws and regulations apply to our business. Failure to comply with applicable requirements may lead to civil or criminal penalties, require us to assume indemnification obligations or breach contractual provisions. We cannot guarantee that existing or future laws or regulations, including federal, state and local tax laws, will not adversely affect our business (including CCIC's REIT status), increase delays or result in additional costs. We also may incur additional costs as a result of liabilities under applicable laws and regulations, such as those governing environmental and safety matters. These factors may have a material adverse effect on us.
CCIC’s failure to remain qualified to be taxed as a REIT would result in its inability to deduct dividends to stockholders when computing its taxable income, which could reduce our available cash or subject us to income taxes.
CCIC operates as a REIT for federal income tax purposes. As a REIT, CCIC is generally entitled to a deduction for dividends that it pays and therefore is not subject to U.S. federal corporate income tax on its taxable income that is distributed to its stockholders. As a REIT, CCIC may still be subject to certain federal, state, local, and foreign taxes on its income and assets, including alternative minimum taxes, taxes on any undistributed income, and state, local, or foreign income, franchise, property, and transfer taxes. We are an indirect subsidiary of CCIC and, for U.S. federal income tax purposes, our assets and operations are part of the CCIC REIT. Furthermore, as a result of the deduction for dividends paid, some or all of CCIC's net operating loss carryforwards ("NOLs") related to its REIT status may expire without utilization.
While CCIC intends to operate so that it remains qualified as a REIT, given the highly complex nature of the rules governing REITs, the importance of ongoing factual determinations, the possibility of future changes in circumstances, and the potential impact of future changes to laws and regulations impacting REITs, no assurance can be given by CCIC or us that CCIC will qualify as a REIT for any particular year.
We do not expect the Tax Reform Act to significantly affect us, although we cannot predict with certainty how such legislation will affect CCIC and us in the future. In addition, the present U.S. federal tax treatment of REITs is subject to change, possibly with retroactive effect, by legislative, judicial or administrative action at any time, and any such change might adversely affect CCIC's REIT status or benefits. We cannot predict the impact, if any, that such changes, if enacted, might have on our business. However, it is possible that such changes could adversely affect our business or inclusion of our assets and operations in CCIC's REIT.
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If, in any taxable year, CCIC fails to qualify for taxation as a REIT and it is not entitled to relief under the Code, then we will be subject to federal and state income tax, including for applicable years beginning before January 1, 2018, any applicable alternative minimum tax, on our taxable income at regular corporate rates.
As a REIT, CCIC needs to continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts it dividends to its stockholders, and the ownership of its capital stock in order to maintain REIT status. Compliance with these tests requires CCIC to refrain from certain activities and may hinder its ability to make certain attractive investments, including the purchase of non-qualifying assets, the expansion of non-real estate activities, and investments in the businesses to be conducted by its taxable REIT subsidiaries ("TRSs"), and to that extent limit its opportunities and its flexibility to change its business strategy. Furthermore, acquisition opportunities in domestic or international markets may be adversely affected if CCIC needs or requires the target company to comply with some REIT requirements prior to completing any such acquisition. In addition, as a REIT, CCIC may face investor pressures not to pursue growth opportunities that are not immediately accretive.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own, lease and manage approximately 7,600 sites geographically dispersed throughout the U.S. Towers are vertical, metal structures generally ranging in height from 50 to 300 feet. Our tenants' equipment may be placed on towers, building rooftops and other structures. Our towers are located on tracts of land that support the towers, equipment shelters and, where applicable, guy-wires to stabilize the tower.
See the following for further information regarding our sites:
•"Item 1. Business—Overview" for information regarding our site portfolio. •"Item 7. MD&A—Liquidity and Capital Resources—Material Cash Requirements" for information regarding our lease obligations. • |
"Schedule III - Schedule of Real Estate and Accumulated Depreciation" for further information on our productive properties. |
Approximately 68% of our sites are leased or subleased or operated and managed pursuant to the SprintT-Mobile Master Leases or other agreements with subsidiaries of Sprint.T-Mobile. CCIC, through its subsidiaries (including the Company), has the option in 2037 to purchase all (but not less than all) of the SprintT-Mobile Sites. CCIC has no obligation exercise the option. See note 1 to our consolidated financials statements and "Item 1A. Risk Factors" for a further discussion.
As of December 31, 2019,2020, the average number of tenants (defined as a unique license and any related amendments thereto) per site is approximately 2.5. Substantially all of our sites can accommodate additional tenancy either as currently constructed or with appropriate modifications to the structure.
Item 3. Legal Proceedings
We are periodically involved in legal proceedings that arise in the ordinary course of business. Most of these proceedings arising in the ordinary course of business involve disputes with landlords, vendors, collection matters involving bankrupt tenants, zoning or siting matters or condemnation. While the outcome of these matters cannot be predicted with certainty, management does not expect any pending matters to have a material adverse effect on us.
Item 4. Mine Safety Disclosures
N/A
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our equity is not publicly traded. Our only member is GSOP, a wholly owned indirect subsidiary of CCIC. During 20192020 and 2018,2019, we recorded a net equity distribution from GSOP of amounts due to our affiliates of $358.9$406.0 million and $368.0$358.9 million, respectively. See notes 65 and 76 to our consolidated financial statements.
Item 6. Selected Financial Data
| Years Ended December 31, | |||||||||||||||||||
| (In thousands of dollars) | 2019(c) | 2018(c) | 2017(c) | 2016(c) | 2015(c) | ||||||||||||||
(As Restated)(d) | |||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Site rental revenues: | |||||||||||||||||||
| Revenues from tenant contracts | $ | 678,150 | $ | 659,490 | $ | 616,897 | $ | 611,639 | $ | 607,276 | |||||||||
Amortization of tower installations and modifications(a) | 52,341 | 43,491 | 38,435 | 34,507 | 29,566 | ||||||||||||||
| Total site rental revenues | 730,491 | 702,981 | 655,332 | 646,146 | 636,842 | ||||||||||||||
| Operating expenses: | |||||||||||||||||||
Site rental costs of operations—third parties(b) | 152,619 | 149,748 | 149,764 | 151,812 | 150,225 | ||||||||||||||
Site rental costs of operations—related parties(b) | 43,281 | 40,981 | 36,655 | 33,901 | 31,859 | ||||||||||||||
Site rental costs of operations—total(b) | 195,900 | 190,729 | 186,419 | 185,713 | 182,084 | ||||||||||||||
| Management fee—related party | 49,837 | 48,520 | 46,946 | 45,433 | 43,709 | ||||||||||||||
| Asset write-down charges | 1,050 | 593 | 181 | 4,851 | 6,021 | ||||||||||||||
| Depreciation, amortization and accretion | 207,396 | 207,528 | 207,764 | 207,826 | 205,904 | ||||||||||||||
| Total operating expenses | 454,183 | 447,370 | 441,310 | 443,823 | 437,718 | ||||||||||||||
| Operating income (loss) | 276,308 | 255,611 | 214,022 | 202,323 | 199,124 | ||||||||||||||
| Interest expense and amortization of deferred financing costs | (39,874 | ) | (39,874 | ) | (39,874 | ) | (49,515 | ) | (53,223 | ) | |||||||||
| Gains (losses) on retirement of debt | — | — | — | (10,273 | ) | — | |||||||||||||
| Other income (expense) | 669 | 196 | 287 | (242 | ) | (244 | ) | ||||||||||||
| Income (loss) before income taxes | 237,103 | 215,933 | 174,435 | 142,293 | 145,657 | ||||||||||||||
| Benefit (provision) for income taxes | (426 | ) | (416 | ) | 614 | 668 | 733 | ||||||||||||
| Net income (loss) | $ | 236,677 | $ | 215,517 | $ | 175,049 | $ | 142,961 | $ | 146,390 | |||||||||
| Years Ended December 31, | |||||||||||||||||||
| (In thousands of dollars) | 2019(b) | 2018(b) | 2017(b) | 2016(b) | 2015(b) | ||||||||||||||
(As Restated)(c) | |||||||||||||||||||
| Other Data: | |||||||||||||||||||
Summary cash flow information(a): | |||||||||||||||||||
| Net cash provided by (used for) operating activities | $ | 451,069 | $ | 426,841 | $ | 394,567 | $ | 370,211 | $ | 382,252 | |||||||||
| Net cash provided by (used for) investing activities | (86,610 | ) | (70,929 | ) | (48,312 | ) | (52,037 | ) | (84,941 | ) | |||||||||
| Net cash provided by (used for) financing activities | (362,759 | ) | (367,976 | ) | (335,034 | ) | (319,025 | ) | (303,141 | ) | |||||||||
| Balance Sheet Data (at period end): | |||||||||||||||||||
| Cash and cash equivalents | $ | 20,407 | $ | 18,707 | $ | 30,771 | $ | 19,550 | $ | 20,401 | |||||||||
| Property and equipment, net | 1,010,367 | 1,010,451 | 1,033,258 | 1,081,050 | 1,128,713 | ||||||||||||||
| Total assets | 4,601,457 | 3,614,120 | 3,748,589 | 3,907,225 | 4,063,081 | ||||||||||||||
| Total debt | 995,431 | 994,047 | 992,663 | 991,279 | 1,487,055 | ||||||||||||||
Total member's equity(a) | 2,096,954 | 2,219,198 | 2,371,657 | 2,531,642 | 2,199,234 | ||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Throughout this Item 7 and this 2020 Form 10-K, site rental revenues include both revenuerevenues from tenant contracts and amortization of tower installations and modifications.
General Overview
Overview
We own, lease and manage approximately 7,600 sites located across the United States. See "Item 1. Business" for additional information regarding our sites and tenant contracts.
Highlights of Business Fundamentals
•Potential growth resulting from the increasing demand for wireless data
◦We expect U.S. wireless carriers will continue their focus on improving network quality and expanding capacity (including through 5G initiatives) by adding additional antennas or other equipment on our sites.
◦We expect existing and potential new tenant demand for our sites will result from (1) new technologies, (2) increased usage of mobile entertainment, mobile internet and machine-to-machine applications, (3) adoption of other emerging and embedded wireless devices (including smartphones, laptops, tablets, wearables and other devices), (4) increasing smartphone penetration, (5) wireless carrier focus on expanding both network quality and capacity, (6) the adoption of other bandwidth-intensive applications (such as cloud services and video communications), (7) the availability of additional spectrum and (8) increased government initiatives to support connectivity throughout the U.S.
◦Tenant additions on our existing sites are achieved at a low incremental operating cost, delivering high incremental returns.
▪Substantially all of our sites can accommodate additional tenancy, either as currently constructed or with appropriate modifications to the structure (which may include extensions or structural reinforcement).
•Organizational structure
◦For U.S. federal income tax purposes, CCIC operates as a REIT and, as its indirect subsidiary, our assets and operations are included in the CCIC REIT. See "Item 1A. Risk Factors" and notes 2 and 8 to our consolidated financial statements. ◦Our subsidiaries (other than Crown Castle GS III Corp.) were organized specifically to own, lease and manage certain sites, such as towers or other structures, and have no employees. ◦Management services, including those functions reasonably necessary to maintain, market, operate, manage or administer our sites, are performed by CCUSA. The management fee is equal to 7.5% of our "Operating Revenues," as defined in the Management Agreement. • |
Site rental revenues under long-term tenant contracts
◦Initial terms of five to 15 years for site rental revenues derived from tenant contracts, with contractual escalations and multiple renewal periods of five to 10 years each, exercisable at the option of the tenant.
◦Weighted-average remaining term of approximately five years, exclusive of renewals exercisable at the tenants' option, currently representing approximately $4.1 billion of expected future cash inflows.
•Majority of our revenues from large wireless carriers
◦Approximately 89% of our site rental revenues were derived from T-Mobile (which includes revenues previously derived from Sprint), AT&T ◦The average number of tenants per site was approximately 2.5. 13 • |
Majority of land interests under our towers under long-term control
◦More than 80% and more than 50% of our sites are under our control for greater than 10 and 20 years, respectively. The aforementioned percentages include towers located on land that is owned, including through fee interests and perpetual easements.
◦Approximately one-fourth of our site rental costs of operations represent ground lease payments to our affiliates. Such affiliates acquired the rights to such land interests as a result of negotiated transactions with third parties in connection with a program established by CCIC to extend the rights to the land under its portfolio of towers.
•Relatively fixed tower operating costs
◦Our operating costs tend to escalate at approximately the rate of inflation and are not typically influenced by tenant additions or non-renewals.
•Minimal sustaining capital expenditure requirements
◦Sustaining capital expenditures represented less than 1% of site rental revenues.
•Fixed rate debt with no short-term maturities
◦Our debt consists of $1.0 billion aggregate principal amount of 3.849% Secured Notes. See note 5 to our consolidated financial statements.
•Significant cash flows from operations
Coronavirus (COVID-19)
In accordance with the novel coronavirus (COVID-19) continuesU.S. Department of Homeland Security guidance issued in March 2020 designating telecommunications infrastructure and networks as critical infrastructure, we have continued our operations to spread and significantly impact the United States, public and private sector policies and initiatives intendedensure viability of communications networks, which are essential to reduce the transmission of COVID-19 ("Initiatives"), such as the imposition of travel restrictions, mandates from federal, state and local authorities to avoid large gatherings of people, quarantine or "shelter-in-place," the promotion of social distancing and the adoption of work-from-home and online learning by companies and institutions, could impact our operations. Among other things, COVID-19 and the Initiatives could (1) adversely affect the ability of our suppliers, vendors and the Manager to provide products and services to us, (2) result in decreased demand for our sites, and (3) make it more difficult for us and the Manager to serve our customers, including as a result of delays or suspensions in the issuance of permits or other authorizations needed to conduct our business.
Regulation S-X Considerations
The 3.849% Secured Notes were co-issued by CCL and its wholly owned finance subsidiary, Crown Castle GS III Corp. ("Co-Issuer" and, together with CCL, "Issuers"), and are guaranteed by all direct and indirect wholly owned subsidiaries of CCL, other than Co-Issuer (collectively, "Guarantors"). Subject to the provisions of the Secured Notes Indenture, a Guarantor may be released and relieved of its obligations under its guarantee under certain circumstances, including: (1) in the event of any sale or other disposition of all or substantially all of the assets of any Guarantor, by way of merger, consolidation or otherwise to a person that is not (either before or after giving effect to such transaction) CCL or one of its subsidiaries, (2) in the event of any sale or other disposition of all of the capital stock of any Guarantor, to a person that is not (either before or after giving effect to such transaction) CCL or a subsidiary of CCL, (3) upon CCL's exercise of legal defeasance in accordance with the relevant provisions of the Secured Notes Indenture or (4) upon the discharge of the Secured Notes Indenture in accordance with its terms.
CCL is a holding company with no significant operations or material assets other than the direct and indirect equity interests it holds in the Co-Issuer and the Guarantors. CCL conducts all of its business operations through the Guarantors. As a result, its ability to pay principal and interest on the 3.849% Secured Notes is dependent on the cash flow generated by the Guarantors and their ability to make such cash available to CCL by dividend or otherwise. The Guarantors' earnings will depend on their financial and operating performance, which will be affected by general economic, industry, financial, competitive, operating, legislative, regulatory and other factors beyond CCL's control. Any payments of dividends, distributions, loans or advances to CCL by the Guarantors could also be subject to restrictions on dividends under applicable local law in the jurisdictions in which the Guarantors operate. In the event that CCL does not receive distributions from the Guarantors, or to the extent that the earnings from, or other available assets of, the Guarantors are insufficient, CCL may be unable to make payments on the 3.849% Secured Notes. Furthermore, the Co-Issuer has no material assets and conducts no
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operations. Therefore, the Co-Issuer has no independent ability to service the interest and principal obligations under the 3.849% Secured Notes.
Pursuant to the Secured Notes Indenture, and the terms of a pledge and security agreement related thereto ("Pledge Agreement" and, together with the Secured Notes Indenture, "Notes Documents"), the 3.849% Secured Notes and the related guarantees are secured by perfected, first priority (subject to certain permitted liens set forth in the Secured Notes Indenture) pledges of the equity interests of each of the Guarantors and proceeds thereof. The 3.849% Secured Notes are not secured by any other assets, including any mortgage liens on properties.
Pursuant to the terms of the Notes Documents, the trustee under the Secured Notes Indenture may pursue remedies under the Secured Notes Indenture, or pursue foreclosure proceedings on the collateral, following an event of default under the Secured Notes Indenture. However, unless a principal payment event of default or a bankruptcy event of default under the Secured Notes Indenture has occurred and is continuing or any other event has occurred that resulted in the acceleration of the 3.849% Secured Notes, the pledgors of such equity interests will receive any dividends and distributions on such pledged equity interests free and clear of the lien securing the 3.849% Secured Notes. Because the collateral consists of equity interests, its value is subject to fluctuations based on factors that include, among other things, general economic conditions and the ability to realize on the collateral as part of a going concern and in an orderly fashion to available and willing buyers and not under distressed circumstances. There is no trading market for the pledged equity interests.
Under the terms of the Notes Documents, the Issuers and the Guarantors will be entitled to the release of the collateral from the liens securing the 3.849% Secured Notes under one or more circumstances, including (1) to enable the Issuers or any subsidiary to consummate the disposition of such collateral as described under the asset sale covenant of the Secured Notes Indenture; (2) as permitted under the amendment provisions of the Secured Notes Indenture; or (3) as otherwise provided in the Pledge Agreement. Upon the release of any subsidiary from its guarantee, if any, in accordance with the terms of the Secured Notes Indenture, the lien on any collateral held by such Guarantor and the lien on any pledged equity interests issued by such Guarantor will automatically terminate. In addition, upon the occurrence of (i) payment in full of the 3.849% Secured Notes and any other payment obligations under the Notes Documents, together with accrued and unpaid interest, or (ii) a defeasance or discharge of the Secured Notes Indenture as provided in the Secured Notes Indenture, the liens on all collateral created under the Pledge Agreement will terminate.
The foregoing description of the Notes Documents is qualified in its entirety by the terms of the Secured Notes Indenture and the Pledge Agreement, which are includedincorporated by reference as Exhibit 4.1 and Exhibit 4.2, respectively, to this 2020 Form 10-K.
The following discussion of our results of operations for 2020 compared to 2019 should be read in conjunction with the "Explanatory Note" immediately preceding Item 1 of this Annual Report on Form 10-K, "Item 1. Business," "Item 7. MD&A—Liquidity and Capital Resources" and our consolidated financial statements, including note 2statements. For a discussion of our results of operations and financial condition for 2019 compared to 2018 that is not included in this 2020 Form 10-K, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our consolidated financial statements. AmountsAnnual Report on Form 10-K for the year ended December 31, 2018 and 2017, and any discussion relating to those amounts, give effect to2019, which was filed with the impact of the Historical Adjustments as described in the "Explanatory Note."SEC on April 9, 2020.
The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with GAAP, which requires us to make estimates and judgments that affect the reported amounts. See "Item 7. MD&A—Accounting and Reporting Matters—Critical Accounting Policies and Estimates" herein and note 32 to our consolidated financial statements.
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Comparison of Consolidated Results of Operations
The following is a comparison of our 2020, 2019 2018 and 20172018 consolidated results of operations:
| Years Ended December 31, | Percent Change | Years Ended December 31, | Percent Change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands of dollars) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | (In thousands of dollars) | 2020 | 2019 | 2018 | 2020 vs. 2019 | 2019 vs. 2018 | |||||||||||||||||||||||||||||||||||
(As Restated)(d) | ||||||||||||||||||||||||||||||||||||||||||||||
| Site rental revenues: | Site rental revenues: | |||||||||||||||||||||||||||||||||||||||||||||
| Revenues from tenant contracts | $ | 678,150 | $ | 659,490 | $ | 616,897 | 3 | % | 7 | % | Revenues from tenant contracts | $ | 691,365 | $ | 678,150 | $ | 659,490 | 2 | % | 3 | % | |||||||||||||||||||||||||
Amortization of tower installations and modifications(a) | 52,341 | 43,491 | 38,435 | 20 | % | 13 | % | Amortization of tower installations and modifications(a) | 58,455 | 52,341 | 43,491 | 12 | % | 20 | % | |||||||||||||||||||||||||||||||
| Total site rental revenues | 730,491 | 702,981 | 655,332 | 4 | % | 7 | % | Total site rental revenues | 749,820 | 730,491 | 702,981 | 3 | % | 4 | % | |||||||||||||||||||||||||||||||
| Operating expenses: | Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||
Costs of operations(b)(c) | 195,900 | 190,729 | 186,419 | 3 | % | 2 | % | |||||||||||||||||||||||||||||||||||||||
Management fee(c) | 49,837 | 48,520 | 46,946 | 3 | % | 3 | % | |||||||||||||||||||||||||||||||||||||||
Site rental cost of operations - third parties(b) | Site rental cost of operations - third parties(b) | 155,219 | 152,619 | 149,748 | 2 | % | 2 | % | ||||||||||||||||||||||||||||||||||||||
| Ground rent expenses - related parties | Ground rent expenses - related parties | 45,886 | 43,281 | 40,981 | 6 | % | 6 | % | ||||||||||||||||||||||||||||||||||||||
Site rental cost of operations - total(b) | Site rental cost of operations - total(b) | 201,105 | 195,900 | 190,729 | 3 | % | 3 | % | ||||||||||||||||||||||||||||||||||||||
| Management fee - related party | Management fee - related party | 51,847 | 49,837 | 48,520 | 4 | % | 3 | % | ||||||||||||||||||||||||||||||||||||||
| Asset write-down charges | 1,050 | 593 | 181 | * | * | Asset write-down charges | 424 | 1,050 | 593 | * | * | |||||||||||||||||||||||||||||||||||
| Depreciation, amortization and accretion | 207,396 | 207,528 | 207,764 | — | % | — | % | Depreciation, amortization and accretion | 210,333 | 207,396 | 207,528 | 1 | % | — | % | |||||||||||||||||||||||||||||||
| Total operating expenses | 454,183 | 447,370 | 441,310 | 2 | % | 1 | % | Total operating expenses | 463,709 | 454,183 | 447,370 | 2 | % | 2 | % | |||||||||||||||||||||||||||||||
| Operating income (loss) | 276,308 | 255,611 | 214,022 | 8 | % | 19 | % | Operating income (loss) | 286,111 | 276,308 | 255,611 | 4 | % | 8 | % | |||||||||||||||||||||||||||||||
Interest expense and amortization of deferred financing costs | (39,874 | ) | (39,874 | ) | (39,874 | ) | — | % | — | % | (39,874) | (39,874) | (39,874) | — | % | — | % | |||||||||||||||||||||||||||||
| Other income (expense) | 669 | 196 | 287 | * | * | Other income (expense) | 115 | 669 | 196 | * | * | |||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 237,103 | 215,933 | 174,435 | * | * | Income (loss) before income taxes | 246,352 | 237,103 | 215,933 | 4 | % | 10 | % | |||||||||||||||||||||||||||||||||
| Benefit (provision) for income taxes | (426 | ) | (416 | ) | 614 | * | * | Benefit (provision) for income taxes | (399) | (426) | (416) | * | * | |||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 236,677 | $ | 215,517 | $ | 175,049 | * | * | Net income (loss) | $ | 245,953 | $ | 236,677 | $ | 215,517 | 4 | % | 10 | % | |||||||||||||||||||||||||||
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* Percentage is not meaningful. (a) | (b)Exclusive of depreciation, amortization and accretion shown separately and certain indirect costs included in the management fee. |
Years Ended December 31, 20192020 and 20182019
Site rental revenues for 20192020 increased by approximately $27.5$19.3 million, or 4%3%, from 2018.2019. Site rental revenues were impacted by the following items, inclusive of straight-line accounting: tenant additions across our entire portfolio, renewals or extensions of tenant contracts, escalations and non-renewals of tenant contracts. Tenant additions were influenced by our tenants' ongoing efforts to improve network quality and capacity. See also "Item 7. MD&A—General Overview."
Operating income for 20192020 increased by approximately $20.7$9.8 million, or 8%4%, from 2018.2019. The increase in operating income was predominately due to the aforementioned increase in site rental revenues, partially offset by an increase in costs of operations and the management fee.
Interest expense and amortization of deferred financing costs remained unchanged from 20182019 to 2019.2020.
Benefit (provision) for income taxes was a provision of $0.4 million for both 20192020 and 2018.2019. The effective tax rates for 20192020 and 20182019 differ from the federal statutory rate predominately due to CCIC's REIT status (including the dividends paid deduction) and our inclusion therein. See "Item 1A. —Risk Factors" and notes 32 and 98 to our consolidated financial statements.
Net income for 20192020 was approximately $236.7$246.0 million, compared to net income of approximately $215.5$236.7 million for 2018.2019. The increase in net income was predominately due to the aforementioned increase in site rental revenues.
Liquidity and Capital Resources
Overview
General. Our core business generates revenues under long-term tenant contracts (see "Item 1. Business—Overview" and "Item 7. MD&A—General Overview—Overview") from the largest U.S. wireless carriers. Historically, our net cash provided by operating activities has exceeded our capital expenditures. For the foreseeable future, we expect to generate net cash provided by operating activities (exclusive of movements in working capital) that exceeds our capital expenditures. We seek to allocate
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the net cash generated from our business in a manner that we believe drives value for our member.
From a cash management perspective, we currently distribute cash on hand above amounts required pursuant to the Management Agreement to our member. If any future event would occur that would leave us with a deficiency in our operating cash flow, while not required, CCIC may contribute cash back to us.
CCIC operates as a REIT for U.S. federal income tax purposes. For U.S. federal income tax purposes, our assets and operations are included in the CCIC REIT. We expect to continue to pay minimal cash income taxes as a result of CCIC's REIT status and NOLs. "Item 1A. Risk Factors" and notes 32 and 98 to our consolidated financial statements.
Liquidity Position. The following is a summary of our capitalization and liquidity position as of December 31, 2019:2020:
| (In thousands of dollars) | December 31, 2019 | ||
| Cash and cash equivalents | 20,407 | ||
| Debt | $ | 995,431 | |
| Total equity | 2,096,954 | ||
| (In thousands of dollars) | December 31, 2020 | ||||
| Cash and cash equivalents | $ | 17,439 | |||
| Debt | 996,815 | ||||
| Total equity | 1,936,951 | ||||
Over the next 12 months:
•We expect that our net cash provided by operating activities should be sufficient to cover our expected capital expenditures.
•We have no scheduled contractual debt maturities.
Long-term Strategy. We may increase our debt in nominal dollars, subject to the provisions of the 2012 Secured Notes outstanding and various other factors, such as the state of the capital markets and CCIC's targeted capital structure, including with respect to leverage ratios. From a cash management perspective, we currently distribute cash on hand above amounts required pursuant to the Management Agreement to our member. If any future event would occur that would leave us with a deficiency in our operating cash flow, while not required, CCIC may contribute cash back to us.
See note 65 to our consolidated financial statements for additional information regarding our debt.
Summary Cash Flows Information
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| (In thousands of dollars) | (As Restated) | (In thousands of dollars) | ||||||||||||||||||||||||||
| Net cash provided by (used for): | Net cash provided by (used for): | |||||||||||||||||||||||||||
| Operating activities | $ | 451,069 | $ | 426,841 | $ | 394,567 | Operating activities | $ | 443,432 | $ | 451,069 | $ | 426,841 | |||||||||||||||
| Investing activities | (86,610 | ) | (70,929 | ) | (48,312 | ) | Investing activities | (40,444) | (86,610) | (70,929) | ||||||||||||||||||
| Financing activities | (362,759 | ) | (367,976 | ) | (335,034 | ) | Financing activities | (405,956) | (362,759) | (367,976) | ||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 1,700 | $ | (12,064 | ) | $ | 11,221 | Net increase (decrease) in cash and cash equivalents | $ | (2,968) | $ | 1,700 | $ | (12,064) | ||||||||||||||
Operating Activities
The increasedecrease in net cash provided by operating activities for 20192020 of $24.2$7.6 million, or 6%2%, from 20182019 was primarily due to growtha net decrease in cash revenues, including cash escalations that are subject to straight-line accounting. The increase in net cash providedworking capital partially offset by operating activities from 2017 to 2018 was primarily due to growth in cash revenues, including cash escalations that are subject to straight-line accounting. Changes in working capital contribute to variability in net cash provided by operating activities, largely due to the timing of advanced payments by us and advanced receipts from tenants.
Investing Activities
Capital Expenditures
Our capital expenditures are primarily recorded as a result of certain CCIC transactionstower installation and modification services performed by CCUSA that result in permanent improvements to our towers. CCL isWe receive no cash from, and are not a party to, such transactions, and does not make cash payments in connection with such transactions. Such capital expenditures include the following:
•Discretionary capital expenditures primarily consist of expansion or development of sites (including capital expenditures related to (1) enhancing sites in order to add new tenants for the first time or support subsequent tenant equipment augmentations, or (2) modifying the structure of a site asset to accommodate additional tenants). Discretionary capital expenditures also include purchases of land interests (which primarily relates to land assets under towers as CCIC seeks to manage its interests in the land beneath its towers), certain technology-related
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investments necessary to support and scale future tenant demand for our sites, and other capital projects, The expansion or development of existing sites to accommodate new leasing typically varies based on, among other factors: (1) the type of site, (2) the scope, volume, and mix of work performed on the site, (3) existing capacity prior to installation, or (4) changes in structural engineering regulations and standards. Our decisions regarding discretionary capital expenditures are influenced by (1) sufficient potential to enhance CCIC's long-term stockholder value, (2) CCIC's availability and cost of capital and (3) CCIC's expected returns on alternative uses of cash, such as payments of dividends and investments.
•Sustaining capital expenditures consist of maintenance capital expenditures on our sites that enable our tenants' ongoing quiet enjoyment of the site.
A summary of our capital expenditures for the last three years is as follows:
| Years Ended December 31, | |||||||||||||||||
| (In thousands of dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Discretionary | $ | 37,408 | $ | 79,039 | $ | 63,369 | |||||||||||
| Sustaining | 3,036 | 7,571 | 7,560 | ||||||||||||||
| Total | $ | 40,444 | $ | 86,610 | $ | 70,929 | |||||||||||
| Years Ended December 31, | ||||||||
| (In thousands of dollars) | 2019 | 2018 | 2017 | |||||
| (As Restated) | ||||||||
Discretionary(a) | 79,039 | 63,369 | 38,812 | |||||
| Sustaining | 7,571 | 7,560 | 9,500 | |||||
| Total | 86,610 | 70,929 | 48,312 | |||||
Capital expenditures increaseddecreased by approximately $15.7$46.2 million from 20182019 to 20192020 predominately due to a higher volume of improvements performed on existing sites.
slowdown in tower service activity in 2020 compared to 2019.
Financing Activities
The net cash flows used for financing activities during the years ended December 31, 20192020 and 20182019 were impacted by our continued practice of distributing excess cash to our member. See note 76 to our consolidated financial statements.
The following table summarizes our contractualmaterial cash obligationsrequirements as of December 31, 2019.2020. These contractualmaterial cash obligationsrequirements relate primarily to our 3.849% Secured Notes and lease obligations for land interests underrelating to our towers.
| (In thousands of dollars) | Years Ending December 31, | (In thousands of dollars) | Years Ending December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contractual Obligations(a) | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Material Cash Requirements(a) | Material Cash Requirements(a) | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Totals | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt | $ | — | $ | — | $ | — | $ | 1,000,000 | $ | — | $ | — | $ | 1,000,000 | Debt | $ | — | $ | — | $ | 1,000,000 | $ | — | $ | — | $ | — | $ | 1,000,000 | |||||||||||||||||||||||||||||||||||||||
| Interest payments on debt | 38,490 | 38,490 | 38,490 | 19,245 | — | — | 134,715 | Interest payments on debt | 38,490 | 38,490 | 19,245 | — | — | — | 96,225 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease obligations(b) | 107,579 | 107,746 | 107,486 | 106,990 | 106,000 | 1,185,872 | 1,721,673 | Lease obligations(b) | 108,739 | 108,718 | 108,372 | 107,561 | 106,926 | 1,130,872 | 1,671,188 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total contractual obligations | $ | 146,069 | $ | 146,236 | $ | 145,976 | $ | 1,126,235 | $ | 106,000 | $ | 1,185,872 | $ | 2,856,388 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total material cash requirements | Total material cash requirements | $ | 147,229 | $ | 147,208 | $ | 1,127,617 | $ | 107,561 | $ | 106,926 | $ | 1,130,872 | $ | 2,767,413 | |||||||||||||||||||||||||||||||||||||||||||||||||||||