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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ 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  ¨

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  ¨

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   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Number of shares of common stock outstanding at October 30, 2009: 291,206,034

 

 

 


Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

INDEX

 

             Page

PART I—FINANCIAL INFORMATION

  
 

Item 1.

 

Financial Statements

  
   

Condensed Consolidated Balance Sheet at September 30, 2009 and December 31, 2008

   2
   

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2009 and 2008

   3
   

Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 and 2008

   4
   

Notes to Condensed Consolidated Financial Statements

   5
 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   25
 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   43
 

Item 4.

 

Controls and Procedures

   47

PART II—OTHER INFORMATION

  
 

Item 1A.

 

Risk Factors

   48
 

Item 2.

 

Legal Proceedings

   48
 

Item 6.

 

Exhibits

   48
 

Signatures

   50

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 (as amended by our Form 10-K/A Amendment No. 1, “2008 Form 10-K”) for the fiscal year ended December 31, 2008 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


Table of Contents

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,
2009
    December 31,
2008
 
     (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 268,831      $ 155,219   

Restricted cash

     182,718        147,852   

Receivables, net of allowance for doubtful accounts of $5,935 and $6,267, respectively

     33,382        37,621   

Deferred site rental receivables, net

     11,436        29,650   

Prepaid expenses

     71,570        74,295   

Deferred income tax assets

     99,153        28,331   

Other current assets

     8,203        12,200   
                

Total current assets

     675,293        485,168   

Restricted cash

     5,000        5,000   

Deferred site rental receivables, net

     232,317        144,474   

Property and equipment, net

     4,926,598        5,060,126   

Goodwill

     1,984,183        1,983,950   

Other intangible assets, net

     2,443,134        2,551,332   

Deferred financing costs and other assets, net

     216,694        131,672   
                

Total assets

   $ 10,483,219      $ 10,361,722   
                
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 24,423      $ 33,808   

Accrued interest

     42,600        16,771   

Deferred revenues

     170,063        174,213   

Interest rate swaps

     212,563        52,539   

Other accrued liabilities

     81,949        90,810   

Short-term debt, current maturities of debt and other obligations

     113,106        466,217   
                

Total current liabilities

     644,704        834,358   

Debt and other long-term obligations

     6,022,444        5,635,972   

Deferred ground lease payables

     228,495        199,399   

Deferred income tax liabilities

     95,248        40,446   

Interest rate swaps

     187,388        488,632   

Other liabilities

     137,999        132,324   
                

Total liabilities

     7,316,278        7,331,131   
                

Commitments and contingencies (note 11)

    

Redeemable preferred stock, $0.1 par value; 20,000,000 shares authorized; shares issued and outstanding: September 30, 2009 and December 31, 2008—6,361,000; stated net of unamortized issue costs; mandatory redemption and aggregate liquidation value of $318,050

     315,422        314,726   

CCIC stockholders’ equity:

    

Common stock, $.01 par value; 600,000,000 shares authorized; shares issued and outstanding: September 30, 2009—291,179,312 and December 31, 2008—288,464,431

     2,912        2,885   

Additional paid-in capital

     5,651,938        5,614,507   

Accumulated other comprehensive income (loss)

     (161,330     (408,329

Accumulated deficit

     (2,641,282     (2,493,198
                

Total CCIC stockholders’ equity

     2,852,238        2,715,865   

Noncontrolling interest

     (719       
                

Total equity

     2,851,519        2,715,865   
                

Total liabilities and equity

   $ 10,483,219      $ 10,361,722   
                

See condensed notes to consolidated financial statements.

 

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Table of Contents

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,
 
     2009     2008     2009     2008  

Net revenues:

        

Site rental

   $ 396,466      $ 353,984      $ 1,140,577      $ 1,047,540   

Network services and other

     32,613        30,364        101,286        86,942   
                                

Net revenues

     429,079        384,348        1,241,863        1,134,482   
                                

Operating expenses:

        

Costs of operations(a):

        

Site rental

     114,899        115,758        337,979        341,884   

Network services and other

     21,613        20,541        64,683        60,772   

General and administrative

     39,230        37,437        113,969        110,915   

Asset write-down charges

     3,073        2,902        14,459        9,199   

Acquisition and integration costs

                          2,504   

Depreciation, amortization and accretion

     131,463        131,714        396,236        395,643   
                                

Total operating expenses

     310,278        308,352        927,326        920,917   
                                

Operating income (loss)

     118,801        75,996        314,537        213,565   

Interest expense and amortization of deferred financing costs

     (111,169     (88,138     (327,006     (266,040

Impairment of available-for-sale securities

            (23,718            (23,718

Gains (losses) on purchases and redemptions of debt

     (4,848            (90,174       

Net gain (loss) on interest rate swaps

     (58,327     2,404        (114,060     2,404   

Interest and other income (expense)

     2,569        (847     5,572        1,669   
                                

Income (loss) before income taxes

     (52,974     (34,303     (211,131     (72,120

Benefit (provision) for income taxes

     21,836        2,096        78,276        87,079   
                                

Net income (loss)

     (31,138     (32,207     (132,855     14,959   

Less: Net income (loss) attributable to the noncontrolling interest

     501               (375       
                                

Net income (loss) attributable to CCIC stockholders

     (31,639     (32,207     (132,480     14,959   

Dividends on preferred stock

     (5,202     (5,201     (15,604     (15,604
                                

Net income (loss) attributable to CCIC stockholders after deduction of dividends on preferred stock

   $ (36,841   $ (37,408   $ (148,084   $ (645
                                

Net income (loss)

   $ (31,138   $ (32,207   $ (132,855   $ 14,959   

Other comprehensive income (loss):

        

Available-for-sale securities, net of tax:

        

Unrealized gains (losses) on available-for-sale securities, net of taxes of $0, $0, $0 and $0, respectively

     15,285        (528     24,245        (23,718

Amounts reclassified into results of operations, net of taxes of $0, $0, $0 and $0, respectively

            23,718               23,718   

Derivative instruments:

        

Net change in fair value of cash flow hedging instruments, net of taxes of $(19,720), $21,528, $66,719 and $20,545, respectively

     (89,324     (39,979     37,342        (38,152

Amounts reclassified into results of operations, net of taxes of $264, $1,010, $793 and $1,949, respectively

     9,802        1,874        148,611        3,616   

Foreign currency translation adjustments

     14,717        (38,215     36,594        (22,223
                                

Comprehensive income (loss)

     (80,658     (85,337     113,937        (41,800

Less: Comprehensive income (loss) attributable to the noncontrolling interest

     326               (582       
                                

Comprehensive income (loss) attributable to CCIC stockholders

   $ (80,984   $ (85,337   $ 114,519      $ (41,800
                                

Net income (loss) attributable to CCIC common stockholders, after deduction of dividends on preferred stock, per common share – basic and diluted

   $ (0.13   $ (0.13   $ (0.52   $ 0.00   

Weighted-average common shares outstanding – basic and diluted (in thousands)

     286,707        283,573        286,356        280,780   

 

(a) Exclusive of depreciation, amortization and accretion shown separately.

See condensed notes to consolidated financial statements.

 

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Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(In thousands of dollars)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Cash flows from operating activities:

    

Net income (loss)

   $ (132,855   $ 14,959   

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:

    

Depreciation, amortization and accretion

     396,236        395,643   

(Gains) losses on purchases and redemptions of long-term debt

     90,174          

Amortization of deferred financing costs and other non-cash interest

     43,549        18,846   

Stock-based compensation expense

     21,810        18,386   

Asset write-down charges

     14,459        9,199   

Deferred income tax benefit (provision)

     (83,531     (87,063

Impairment of available-for-sale securities

            23,718   

Income (expense) from forward-starting interest rate swaps

     111,396        2,404   

Other adjustments

     179        (1,665

Changes in assets and liabilities, excluding the effects of acquisitions:

    

Increase (decrease) in accrued interest

     25,829        19   

Increase (decrease) in accounts payable

     (10,257     712   

Increase (decrease) in deferred revenues, deferred ground lease payables, other accrued liabilities and other liabilities

     (12,367     16,888   

Decrease (increase) in receivables

     6,043        7,618   

Decrease (increase) in prepaid expenses, deferred site rental receivables and other assets

     (76,992     (73,909
                

Net cash provided by (used for) operating activities

     393,673        345,755   
                

Cash flows from investing activities:

    

Proceeds from disposition of property and equipment

     3,374        1,117   

Payment for acquisitions (net of cash acquired) of businesses

     (2,581     (27,736

Capital expenditures

     (111,297     (342,737
                

Net cash provided by (used for) investing activities

     (110,504     (369,356
                

Cash flows from financing activities:

    

Proceeds from issuance of long-term debt

     2,228,848          

Proceeds from issuance of capital stock

     16,742        7,775   

Principal payments on long-term debt

     (4,875     (4,875

Purchases and redemptions of long-term debt

     (2,131,910       

Purchases of capital stock

     (1,231     (44,383

Borrowings under revolving credit agreements

     50,000        85,000   

Payments under revolving credit agreements

     (219,400       

Payments for financing costs

     (59,000     (1,538

Net (increase) decrease in restricted cash

     (31,061     (4,378

Dividends on preferred stock

     (14,908     (14,908
                

Net cash provided by (used for) financing activities

     (166,795     22,693   
                

Effect of exchange rate changes on cash

     (2,762     (1,233
                

Net increase (decrease) in cash and cash equivalents

     113,612        (2,141

Cash and cash equivalents at beginning of period

     155,219        75,245   
                

Cash and cash equivalents at end of period

   $ 268,831      $ 73,104   
                

See condensed notes to consolidated financial statements.

 

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Table of Contents

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, 2008, and related notes thereto, included in the 2008 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 also provides complementary services to its customers including initial antenna installation and subsequent augmentation, site acquisition, site development and construction, network design and site selection, site management and other services. The Company’s assets are primarily located throughout the U.S. and Australia and to a much lesser extent in Puerto Rico, Canada and the U.K.

Basis of Presentation

The 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, 2009, the consolidated results of operations for the three and nine months ended September 30, 2009 and 2008 and the consolidated cash flows for the nine months ended September 30, 2009 and 2008. 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.

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.

The Company has evaluated subsequent events through November 5, 2009, which was the date the financial statements were issued.

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, 2009. In addition, on January 1, 2009 the Company adopted certain presentation and disclosure requirements of the FASB Accounting Standards Codification (“ASC”) topic 810 (formerly SFAS No. 160). See note 3.

 

2. 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 2008 Form 10-K with the exception of acquisition and integration costs and restricted cash disclosed below. Additional information regarding the Company’s accounting for long-lived assets is also discussed below.

Restricted Cash

Restricted cash represents the cash held in reserve by the indenture trustees pursuant to the indenture governing certain of the Company’s debt instruments as well as any other cash whose use is limited by contractual provisions. The restriction of all rental cash receipts is a critical feature of these debt instruments, due to the applicable indenture trustee’s ability to utilize the restricted cash for the payment of (1) debt service costs, (2) ground rents, (3) real estate and personal property taxes, (4) insurance premiums related to towers, (5) other assessments by governmental authorities and potential environmental remediation costs and (6) reserves for a portion of advance rents from customers. The restricted cash in excess of required reserve balances is subsequently released to the

 

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Table of Contents

CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

Company in accordance with the terms of the indentures. The increases and decreases in restricted cash have aspects of cash flows from financing as well as cash flows from operating activities and, as such, could be classified as either on the consolidated statement of cash flows. The Company has classified the increases and decreases in restricted cash held by the indenture trustees as cash flows from financing activities based on consideration of the terms of the related indebtedness. The Company has classified the change in the other remaining restricted cash as cash flows from operating activities on the consolidated statement of cash flows and was an outflow of $3.8 million and $0 for the nine months ended September 30, 2009 and 2008, respectively.

Acquisition and Integration Costs

Prior to the adoption of certain amendments of ASC 805 (formerly SFAS No. 141(R)) on January 1, 2009, direct out-of-pocket or incremental costs that were directly related to a business combination were included in the cost of the acquired enterprise. Costs that were previously included in the cost of the acquired enterprise include finder’s fees or other fees paid to outside consultants for accounting, legal, engineering reviews or appraisals. Certain incremental costs directly related to the integration of the acquired enterprise’s operations and tower portfolio were and continue to be expensed as incurred and are classified as “acquisition and integration costs” in the Company’s consolidated statement of operations and comprehensive income (loss).

Prospectively from January 1, 2009, all direct or incremental costs related to a business combination are expensed as incurred. These business combination costs are included in “acquisition and integration costs” on the Company’s consolidated statement of operations and comprehensive income (loss).

Intangible Assets

Intangible assets are included in “other intangible assets, net” on the Company’s consolidated balance sheet and predominately consist of the estimated fair value of the following items recorded in conjunction with acquisitions: (1) site rental customer contracts and customer relationships, (2) below-market leases for land under the acquired towers, (3) term easement rights for land under the acquired towers, and (4) trademarks. The site rental customer contracts and customer relationships intangible assets are comprised of (1) the current term of the in-place contracts, (2) the expected exercise of the renewal provisions contained within the existing current contracts, which automatically occur under contractual provisions, and (3) any associated relationships that are expected to generate value following the expiration of all renewal periods under current contracts. Deferred credits related to above-market leases for land under its towers recorded in conjunction with acquisitions are recorded at the estimated fair value and are included in “other liabilities” on the Company’s consolidated balance sheet.

The useful lives of intangible assets are estimated based on the period for which the intangible assets will benefit the Company and gives consideration to the expected useful life of other assets to which the useful life may relate. Amortization expense for intangible assets is computed using the straight-line method over the estimated useful lives of each of the intangible assets. The useful life of the site rental contracts and customer relationships intangible asset is limited by the maximum depreciable life of the tower (20 years), as a result of the interdependency of the tower and site rental contracts and customer relationships. In contrast, the site rental contracts and customer relationships are estimated to provide economic benefits for several decades because of the low rate of customer cancellations and high rate of renewals experienced to date. Thus, while site rental contracts are valued based upon the fair value of the site rental contracts, which includes assumptions regarding both (1) customers’ exercise of optional renewals contained in the acquired contracts and (2) renewals of the acquired contracts past the contractual term including exercisable options, the site rental contracts are amortized over a period not to exceed 20 years as a result of the useful life being limited by the depreciable life of the tower.

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

The carrying value of other intangible assets with finite useful lives will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company has a dual grouping policy for purposes of determining the unit of account for testing impairment of the site rental contracts and customer relationships intangible assets. First, the Company pools the site rental contracts and customer relationships with the related tower assets into portfolio groups for purposes of determining the unit of account for impairment testing. Secondly, and separately, the Company evaluates the site rental contracts and customer relationships by significant customer or by customer grouping for individually insignificant customers, as appropriate. If the sum of the estimated future cash flows (undiscounted) expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset.

 

3. New Accounting Pronouncements

In September 2006, the FASB issued certain amendments to ASC 820 (formerly SFAS 157), which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. In April 2009, the accounting standards were amended to provide additional guidance for estimating fair value when the volume and level of activity have significantly decreased and guidance on identifying a transaction that is not orderly. In August 2009, FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends the accounting standards to provide additional guidance on measuring liabilities at fair value. On January 1, 2008, the Company adopted the provisions of these amended accounting standards, with the exception of a one-year deferral of implementation for non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis (at least annually), which was adopted on January 1, 2009. The significant categories of assets and liabilities included in the Company’s deferred implementation of these amended accounting standards are (1) non-financial assets and liabilities initially measured at fair value in a business combination, (2) impairment assessments of long-lived assets, goodwill, and other intangible assets, and (3) asset retirement obligations initially measured at fair value. The requirements of these amended accounting standards were applied prospectively. The January 1, 2009 adoption of the portions of these amended accounting standards which were permitted to be initially deferred did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued certain amendments to ASC 810 (formerly SFAS 160) to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. These amendments to the accounting standards clarify that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. These amendments to the accounting standards require consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. On January 1, 2009, the Company adopted these amendments of ASC 810. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements. As a result of adoption of these amendments, the Company has prospectively recorded the income or losses applicable to the noncontrolling interest of CCAL even though the noncontrolling stockholders’ share of the cumulative losses exceeded its equity interest.

In April 2009, the FASB issued certain amendments to ASC 825 (formerly FASB Staff Position No. FAS 107-1 and APB 28-1). This amended accounting guidance requires disclosure about fair value of financial instruments for interim periods as well as in annual financial statements. On June 30, 2009, the Company adopted the provisions of this amended accounting guidance.

In September 2009, FASB issued ASU No. 2009-13 (formerly Emerging Issues Task Forces Issue No. 08-1). ASU No. 2009-13 addresses how to recognize revenue for transactions with multiple deliverables. The provisions of this new guidance are effective for the Company as of January 1, 2011 and will be applied prospectively. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.

During 2009, the Company adopted certain amendments to ASC 805 (formerly SFAS 141(R)), ASC 350 (formerly FSP 142-3), ASC 470 (formerly FASB Staff Position No. APB 14-1) and ASC 855 (formerly SFAS No. 165). These amendments to the ASC did not have a material impact on the Company’s consolidated financial statements. In addition, amendments to ASC 810 (formerly SFAS No. 167) are effective January 1, 2010 and are not expected to have a material impact on the Company’s consolidated financial statements.

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

4. Property and Equipment

The major classes of property and equipment are as follows:

 

     Estimated
Useful Lives
   September 30,
2009
    December 31,
2008
 

Land

      $ 618,335      $ 596,100   

Buildings

   40 years      36,021        35,040   

Telecommunications towers

   1-20 years      6,998,163        6,802,316   

Transportation and other equipment

   3-5 years      25,813        26,505   

Office furniture and equipment

   2-10 years      119,110        110,997   

Construction in process

        75,460        103,623   
                   
        7,872,902        7,674,581   

Less: accumulated depreciation

        (2,946,304     (2,614,455
                   
      $ 4,926,598      $ 5,060,126   
                   

Depreciation expense was $284.7 million and $286.4 million for the nine months ended September 30, 2009 and 2008, respectively.

 

5. Intangible Assets

Virtually all of the intangible assets are recorded at CCUSA. As of September 30, 2009, $2.3 billion of the consolidated net intangible assets relate to site rental contracts and customer relationships. As of September 30, 2009, the accumulated amortization on the consolidated intangible assets was $438.9 million.

Amortization expense related to intangible assets is classified as follows on the Company’s consolidated statement of operations and comprehensive income (loss):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,

Classification

   2009    2008    2009    2008

Depreciation, amortization and accretion

   $ 36,096    $ 35,873    $ 108,185    $ 107,375

Site rental costs of operations

     1,015      1,091      3,062      3,391
                           

Total amortization expense

   $ 37,111    $ 36,964    $ 111,247    $ 110,766
                           

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

6. Debt and Other Obligations

The Company’s indebtedness consists of the following:

 

     Original Issue Date   Contractual
Maturity Date
    Outstanding
Balance as of
September 30,
2009
    Outstanding
Balance as of
December 31,
2008
   Stated Interest
Rate as of
September 30,
2009(a)
 

Bank debt – variable rate:

             

Revolver

   Jan. 2007   Jan. 2010     $      $ 169,400    N/A  (b) 

2007 Term Loans

   Jan./March 2007   March 2014       633,750        638,625    1.8 % (b) 
                       

Total bank debt

           633,750        808,025   
                       

Securitized debt – fixed rate:

             

2006 Mortgage Loan

   Feb. 2006(c)   Feb. 2011              1,548,351      

2004 Mortgage Loan

   Dec. 2004(c)   Dec. 2009              290,317      

2006 Tower Revenue Notes

   Nov. 2006   Nov. 2036   (d     1,550,000        1,550,000    5.7 % (d) 

2005 Tower Revenue Notes

   June 2005   June 2035   (d     1,697,659        1,900,000    4.9 % (d) 

2009 Securitized Notes

   July 2009   2019/2029   (i     250,000           7.1
                       

Total securitized debt

           3,497,659        5,288,668   
                       

High yield bonds – fixed rate:

             

9% Senior Notes(e)

   Jan. 2009   Jan. 2015       821,034           9.0 % (f) 

7.75% Secured Notes(e)

   April 2009   May 2017       1,166,419           7.8 % (g) 

7.5% Senior Notes

   Dec. 2003   Dec. 2013       51        51    7.5
                       

Total high yield bonds

           1,987,504        51   
                       

Other:

             

Capital leases and other obligations

   Various   Various   (h     16,637        5,445    Various  (h) 
                       

Total debt and other obligations

           6,135,550        6,102,189   
                       

Less: current maturities and short-term debt and other current obligations

           113,106  (j)      466,217   
                       

Non-current portion of long-term debt and other long-term obligations

         $ 6,022,444      $ 5,635,972   
                       

 

(a) Represents the weighted-average stated interest rate.
(b) 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 0.25% to 0.63% or LIBOR plus a credit spread ranging from 1.25% to 1.63%, 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 0.50% or LIBOR plus 1.50%. See note 7.
(c) The 2004 Mortgage Loan and 2006 Mortgage Loan remained outstanding as obligations of the subsidiaries of Global Signal that the Company acquired in the Global Signal Merger.
(d) If the 2005 Tower Revenue Notes and the 2006 Tower Revenue Notes (collectively, “Tower Revenue Notes”) are not paid in full on or prior to June 2010 or November 2011, respectively, 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 Tower Revenue Notes, and additional interest (by an additional approximately 5% per annum) will accrue on the Tower Revenue Notes.
(e) During the first four years, the Company may redeem the debt at a price equal to 100% of the principal amount, plus a “make whole” premium, and accrued and unpaid interest, if any. After four years the debt may be redeemed at the redemption prices set forth in the respective indenture. In certain limited circumstances, the Company is required to commence offers to purchase the debt.
(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 Company’s capital leases and other obligations bear interest rates ranging up to 8% and mature in periods ranging from less than one year to approximately 20 years.
(i) The 2009 Securitized Notes consist of $175 million of principal that amortizes during the period beginning in January 2010 and ending in 2019, and $75 million of principal that amortizes during the period beginning in 2019 and ending in 2029.
(j) Inclusive of $98 million estimated principal payments on the Tower Revenue Notes following the anticipated repayment date in June 2010.

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

Revolver

In January 2009, the Revolver was amended to extend the maturity from January 2009 to January 2010 with a total revolving commitment of $188.0 million. The Company paid an extension fee of $9.9 million, but the credit spreads were not impacted by this amendment. As of September 30, 2009, the Revolver was undrawn, and there was $188.0 million of availability under the Revolver.

9% Senior Notes

In January 2009, the Company issued $900.0 million principal amount of 9% senior notes (“9% Senior Notes”) in a public offering pursuant to an indenture. These 9% Senior Notes are general obligations of CCIC, which rank equally with all existing and future senior debt of CCIC. The 9% Senior Notes are effectively subordinated to all liabilities (including trade payables) of each subsidiary of the Company. The proceeds from the 9% Senior Notes were $795.7 million, net of fees and discounts. The Company may use these net proceeds for general corporate purposes. As discussed below, the Company has used the net proceeds to (1) purchase portions of its previously existing 2004 Mortgage Loan, (2) repay and purchase portions of its previously existing 2006 Mortgage Loan in April 2009, and (3) repay the Revolver.

The 9% Senior Notes contain restrictive covenants with which the Company and its restricted subsidiaries must comply, subject to a number of exceptions and qualifications, including restrictions on its ability to incur incremental debt, issue preferred stock, guarantee debt, pay dividends, repurchase its capital stock, use assets as security in other transactions, sell assets or merge with or into other companies, and make certain investments. Certain of these covenants are not applicable if there is no event of default and if the ratio of the Company’s Consolidated Debt (as defined in the 9% Senior Notes indenture) to its Adjusted Consolidated Cash Flows (as defined in the 9% Senior Notes indenture) is less than or equal to 7.0 to 1.0. The 9% Senior Notes do not contain any financial maintenance covenants.

7.75% Secured Notes

On April 30, 2009, two indirect subsidiaries of the Company (“7.75% Notes Issuers”) issued $1.2 billion principal amount of 7.75% secured notes (“7.75% Secured Notes”) due 2017 pursuant to an indenture. The 7.75% Secured Notes are guaranteed by the direct and indirect subsidiaries of the 7.75% Notes Issuers (“Guarantors”). These 7.75% Secured Notes are secured on a first priority basis by a pledge of the equity interests of the Guarantors and by certain other assets of such subsidiaries. The 7.75% Secured Notes are obligations of the subsidiaries that were obligated under the 2006 Mortgage Loan, which was repaid in part through the proceeds from the 7.75% Secured Notes. The 7.75% Secured Notes are not guaranteed by and are not obligations of CCIC or any of its subsidiaries other than the 7.75% Notes Issuers and Guarantors. The 7.75% Secured Notes will be paid solely from the cash flows generated from operations of the towers held directly and indirectly by the issuers and the Guarantors.

The proceeds from these 7.75% Secured Notes were $1.15 billion net of fees and discounts. The Company has used the net proceeds, along with other cash, to repay the 2006 Mortgage Loan.

The 7.75% Secured Notes contain restrictive covenants with which the issuing subsidiaries and the Guarantors must comply, subject to a number of exceptions and qualifications, including restrictions on their ability to incur debt, make restricted payments, incur liens, enter into certain merger or change of control transactions, enter into related party transactions and engage in certain other activities as set forth in the indenture. The 7.75% Secured Notes contain financial covenants that could result in cash being deposited in a reserve account and require the Company to offer to purchase the 7.75% Secured Notes.

2009 Securitized Notes

On July 31, 2009, indirect subsidiaries of the Company (“2009 Securitized Notes Issuers”) issued $250 million principal amount of senior secured notes, series 2009-1 (“2009 Securitized Notes”) pursuant to an indenture. The 2009 Securitized Notes are secured by, among other things, (1) a security interest in substantially all of the personal property of the 2009 Securitized Notes Issuers, (2) a pledge of the equity interests of the subsidiaries holding such towers, and (3) a security interest in the 2009 Securitized Notes Issuers’ contracts with customers to lease space on

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

their towers (space licenses). The 2009 Securitized Notes are obligations of the subsidiaries that were obligated under the 2004 Mortgage Loan, which was repaid in part through proceeds of the 2009 Securitized Notes. The 2009 Securitized Notes are not guaranteed by and are not obligations of CCIC or any of its subsidiaries other than the 2009 Securitized Notes Issuers and the indirect subsidiary of the Company that is the parent of the 2009 Securitized Notes Issuers and a guarantor of the 2009 Securitized Notes. The 2009 Securitized Notes will be paid solely from the cash flows generated from operations of the towers held by the issuers of the 2009 Securitized Notes. The Company has used the net proceeds to repay the portion of the 2004 Mortgage Loan not previously purchased.

The Company may prepay the 2009 Securitized Notes in whole or in part at any time after the second anniversary of the closing date, provided such prepayment is accompanied by any applicable prepayment consideration.

The indenture governing the 2009 Securitized Notes contains covenants and restrictions customary for rated securitizations, including provisions prohibiting the issuers from incurring additional indebtedness or further encumbering their assets. The 2009 Securitized Notes contain financial covenants that could result in cash being deposited in a reserve account, with such cash being applied to repay the debt.

Contractual Maturities

The following are the scheduled contractual maturities of the total debt and other long-term obligations outstanding at September 30, 2009, exclusive of the 6.25% Convertible Preferred Stock. These maturities reflect contractual maturity dates and do not consider the principal payments that will commence following the anticipated repayment dates on the Tower Revenue Notes. If the Tower Revenue Notes are not paid in full on or prior to June 2010 or November 2011, respectively, 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 Tower Revenue Notes, and additional interest (by an additional approximately 5% per annum) will accrue on the Tower Revenue Notes. See also note 15.

 

     Three Months
Ending December 31,
   Years Ending December 31,
     2009    2010    2011    2012    2013    2014    Thereafter

Scheduled contractual maturities

   $ 1,625    $ 22,837    $ 24,600    $ 25,600    $ 26,294    $ 626,148    $ 5,520,993

Debt Purchases and Repayments

The following is a summary of the partial purchases and repayments of debt during the nine months ended September 30, 2009.

 

     Principal Amount    Cash Paid(a)    Gains (losses)  

2004 Mortgage Loan(b)

   $ 293,505    $ 293,711    $ (2,128

2006 Mortgage Loan(b)

     1,550,000      1,634,184      (85,654

2005 Tower Revenue Notes(c)

     202,341      204,015      (2,392

Revolver

     219,400      219,400        
                      

Total

   $ 2,265,246    $ 2,351,310    $ (90,174 )(d) 
                      

 

(a) Exclusive of accrued interest.
(b) Includes purchases and repayments.
(c) 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.
(d) Inclusive of $4.1 million related to the write-off of deferred financing costs and other non-cash adjustments.

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

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,
     2009    2008    2009    2008

Interest expense on debt obligations

   $ 94,225    $ 81,939    $ 283,457    $ 247,194

Amortization of deferred financing costs

     6,779      3,820      19,814      11,494

Amortization of discounts on long-term debt

     3,489           8,605     

Amortization of interest rate swaps

     6,147      755      12,213      2,265

Amortization of purchase price adjustments on long-term debt

     62      942      1,507      2,828

Other

     467      682      1,410      2,259
                           

Total

   $ 111,169    $ 88,138    $ 327,006    $ 266,040
                           

 

7. Interest Rate Swaps

The Company only enters into interest rate swaps 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 financing, 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 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 mitigate such non-performance risk. The Company does not require collateral as security for its interest rate swaps. In September 2008, the Company de-designated as hedging instruments two interest rate swaps with a combined notional value of $475.0 million that are held by a subsidiary of Lehman Brothers because of the probability the counterparty would default. The settlement value of the interest rate swaps with Lehman Brothers was a liability of $36.9 million as of September 30, 2009. The Company’s other interest rate swaps are with Morgan Stanley and the Royal Bank of Scotland plc who have credit ratings of “A” or better.

The following is a summary of the outstanding interest rate swaps as of September 30, 2009:

 

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)

   $ 293,825    Dec. 2009    Dec. 2014    5.1   LIBOR

2005 Tower Revenue Notes anticipated refinancing(e)

     1,900,000    June 2010    June 2015    5.2   LIBOR

Non-economic hedge(f)

     1,550,000    Feb. 2011    Feb. 2016    5.3   LIBOR

2006 Tower Revenue Notes anticipated refinancing(e)

     1,550,000    Nov. 2011    Nov. 2016    5.1   LIBOR

Variable to fixed:

             

2007 Term Loans(g)

     625,000    Dec. 2007    Dec. 2009    4.1   LIBOR
                 

Total

   $ 5,918,825           
                 

 

(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 2004 Mortgage Loan. See the discussion below regarding discontinuation of the hedge accounting.
(e) The hedges of the anticipated refinancing of the 2005 Tower Revenue Notes and 2006 Tower Revenue Notes are inclusive of interest rate swaps having notional values of $275.0 million and $200.0 million, respectively, held by a subsidiary of Lehman Brothers.

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

(f) This interest rate swap previously hedged the anticipated refinancing of the 2006 Mortgage Loan. See following discussion regarding the discontinuation of the hedge accounting.
(g) The Company has effectively fixed the interest rate for the first two years on $625.0 million of the 2007 Term Loans due March 2014 at a combined rate of approximately 4.1% (plus the applicable credit spread).

The Company determined the refinancing of the 2006 Mortgage Loan in April 2009 via the issuance of the 7.75% Secured Notes in April 2009 did not qualify as the hedged forecasted transaction. The Company also determined in April 2009 that the hedged transaction would not occur. Consequently, the Company discontinued hedge accounting and reclassified the entire loss (approximately $133 million) from accumulated other comprehensive income (loss) to earnings during the first nine months of 2009 for the interest rate swaps hedging the refinancing of the 2006 Mortgage Loan. The Company refinanced the 2004 Mortgage Loan via the issuance of the 2009 Securitized Notes in July 2009, which did qualify as the hedged forecasted transaction and resulted in $3.9 million of ineffectiveness. As of September 30, 2009, the Company has estimated that it is probable that the future expected refinancing of the Tower Revenue Notes will occur. As of September 30, 2009, the Company has incurred an aggregate liability of $249.7 million on the interest rate swaps hedging the future expected refinancing of the Tower Revenue Notes, of which an aggregate $226.3 million has been recorded to accumulated other comprehensive income (loss). The liability exceeded the loss recorded to accumulated other comprehensive income (loss) because in 2008 hedge accounting was prospectively discontinued on the interest rate swaps with Lehman Brothers. A change in the assessment of the future expected refinancing of the Tower Revenue Notes may result in prospectively discontinuing hedge accounting or immediate reclassification of the current unrealized loss from accumulated other comprehensive income (loss) to earnings.

Currently, the Company has elected not to early settle the forward-starting interest rate swaps that hedged the refinancing of the 2004 Mortgage Loan and 2006 Mortgage Loan. As a result, these swaps are no longer economic hedges of the Company’s exposure to LIBOR on anticipated refinancing of its existing debt and changes in the fair value of the 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). The Company’s non-economic hedges have a notional value of $1.8 billion, and the combined settlement value is a liability of approximately $152.1 million as of September 30, 2009.

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 $21 million for the next twelve months. See also note 9.

 

          Fair Value of Interest Rate Swaps
Liability Derivatives

Interest Rate Swaps

  

Classification

   September 30,
2009
   December 31,
2008

Designated as hedging instruments:

        

Current

   Interest rate swaps, current    $ 148,744    $ 52,539

Non-current

   Interest rate swaps, non-current      65,353      442,286

Not designated as hedging instruments:

        

Current

   Interest rate swaps, current      63,819     

Non-current

   Interest rate swaps, non-current      122,035      46,346
                

Total

      $ 399,951    $ 541,171
                

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
   

Classification

Interest Rate Swaps Designated as Hedging Instruments (a)

   2009     2008     2009     2008    

Gain (loss) recognized in OCI (effective portion)

   $ (69,604   $ (61,507   $ 104,061      $ (58,697   OCI

Gain (loss) reclassified from accumulated OCI into income (effective portion)

     (6,146     (2,884     (12,615     (5,565   Interest expense and amortization of deferred financing costs

Amount of gain (loss) recognized in income (ineffective portion and excluded from effectiveness testing)

     (3,920 ) (b)             (3,920 ) (b)           Net gain (loss) on interest rate swaps

 

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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,
  

Classification

Interest Rate Swaps Not Designated as Hedging Instruments (a)

   2009     2008    2009     2008   

Gain (loss) recognized in income

   $ (54,407   $ 2,404    $ (110,140 )(c)    $ 2,404    Net gain (loss) on interest rate swaps

 

(a) Exclusive of benefit (provision) for income taxes.
(b) Inclusive of ineffectiveness related to the interest rate swaps hedging the 2004 Mortgage Loan.
(c) Inclusive of the previously mentioned $133 million loss related to the interest rate swap hedging the 2006 Mortgage Loan, partially offset by income from the decrease in the liability on interest rate swaps not designated as hedging instruments.

 

8. Stockholders’ Equity

In February 2009, the Company issued 59,500 shares of common stock to the non-employee members of its board of directors. In connection with these shares, the Company recognized stock-based compensation expense of $1.0 million for the nine months ended September 30, 2009.

The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to the CCIC stockholders and equity attributable to the noncontrolling interest.

 

     CCIC Stockholders              
     Common
Stock
   Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    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(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
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Noncontrolling
Interest
    Total  

Balance June 30, 2008

   $ 2,827    $ 5,535,860      $ 22,537      $ (2,386,771   $      $ 3,174,453   
                                               

Issuances of capital stock, net of forfeitures

     59      64,471                             64,530   

Purchases and retirement of capital stock

          (45                          (45

Stock-based compensation

          6,346                             6,346   

Other comprehensive income(a)

                 (53,130                   (53,130

Dividends on preferred stock

                        (5,201            (5,201

Net income (loss)

                        (32,207            (32,207
                                               

Balance, September 30, 2008

   $ 2,886    $ 5,606,632      $ (30,593   $ (2,424,179   $      $ 3,154,746   
                                               

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

     CCIC Stockholders              
     Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    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(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   
                                                
     CCIC Stockholders              
     Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Noncontrolling
Interest
    Total  

Balance, January 1, 2008

   $ 2,825      $ 5,561,454      $ 26,166      $ (2,423,534   $      $ 3,166,911   
                                                

Issuances of capital stock, net of forfeitures

     73        71,163                             71,236   

Purchases and retirement of capital stock

     (12     (44,371                          (44,383

Stock-based compensation

            18,386                             18,386   

Other comprehensive income(a)

                   (56,759                   (56,759

Dividends on preferred stock

                          (15,604            (15,604

Net income (loss)

                          14,959               14,959   
                                                

Balance, September 30, 2008

   $ 2,886      $ 5,606,632      $ (30,593   $ (2,424,179   $      $ 3,154,746   
                                                

 

(a) See the statement of operations and other comprehensive income (loss) for the allocation of the components of “other comprehensive income (loss).”

See note 13 for information regarding stock-based compensation.

 

9. 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, 2009     December 31, 2008  
     Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Cash and cash equivalents

   $ 268,831      $ 268,831      $ 155,219      $ 155,219   

Restricted cash

     187,718        187,718        152,852        152,852   

Available-for-sale securities

     28,461        28,461        4,216        4,216   

Short-term and long-term debt and other obligations

     (6,135,550     (6,290,963     (6,102,189     (4,808,985

Interest rate swaps

     (399,951     (399,951     (541,171     (541,171

The fair value of available-for-sale securities is based on quoted market prices. 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 quoted market prices on the Company’s

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

outstanding debt and management’s knowledge of current credit spreads in the debt market. 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. There were no changes since December 31, 2008 in the Company’s valuation techniques used to measure fair values other than utilizing implied spreads from quoted market prices on the Company’s outstanding debt in determining the Company’s credit risk assumption for purposes of valuing the interest rate swaps instead of credit default swap spreads including those of indexes of comparable securities. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 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, 2009
     Level 1    Level 2    Level 3     Total

Cash and cash equivalents

   $ 268,831                $ 268,831

Restricted cash

     187,718                  187,718

Available-for-sale securities

     28,461                  28,461
                            
   $ 485,010                $ 485,010
                            
     Liabilities at Fair Value as of September 30, 2009
     Level 1    Level 2    Level 3     Total

Interest rate swaps

   $    $    $ 399,951 (a)    $ 399,951
                            

 

(a) As of September 30, 2009, the liability on a cash settlement basis of $421.8 million has been reduced by $21.8 million, related to credit risk (primarily the Company’s non-performance risk) to reflect the interest rate swaps at fair value.

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, 2009:

 

     Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
 
     Interest Rate Swaps  
     Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Beginning balance

   $ 281,588      $ 541,171   

Settlements

     (5,648     (14,430

Less: Total gains (losses):

    

Included in earnings

     54,407        (22,729

Included in other comprehensive income (loss)

     69,604        (104,061
                

Ending balance

   $ 399,951      $ 399,951   
                

Total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date

   $ 54,407      $ (22,729
                

 

10. 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 convertible notes and preferred stock, as determined under the if-converted method.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Net income (loss) attributable to CCIC stockholders

   $ (31,639   $ (32,207   $ (132,480   $ 14,959   

Dividends on preferred stock

     (5,202     (5,201     (15,604     (15,604
                                

Net income (loss) attributable to CCIC common stockholders after deduction of dividends on preferred stock for basic and diluted computations

   $ (36,841   $ (37,408   $ (148,084   $ (645
                                

Weighted average number of common shares outstanding during the period for basic and diluted computations (in thousands)

     286,707        283,573        286,356        280,780   
                                

Basic and diluted net income (loss) attributable to CCIC common stockholders, after deduction of dividends on preferred stock, per common share

   $ (0.13   $ (0.13   $ (0.52   $ 0.00   

The calculations of common shares outstanding for the diluted computations exclude the potential common shares shown in the table below. The inclusion of such potential common shares shown in the table below in the diluted per share computations would be anti-dilutive.

 

     As of
September 30,
     2009    2008

Options to purchase shares of common stock(a)

   2,985    4,189

Shares of 6.25% Convertible Preferred Stock which are convertible into shares of common stock at a conversion price of $36.875 per share

   8,625    8,625

Restricted stock awards (note 13)

   4,321    3,017
         

Total potential common shares

   15,931    15,831
         

 

(a) As of September 30, 2009, outstanding stock options include (1) 2.6 million options with an exercise price below $31.36 and a weighted-average exercise price of $13.56 per share and (2) 0.4 million options with an exercise price above $31.37 and a weighted-average exercise price of $32.47 per share. The options outstanding as of September 30, 2009 have a weighted-average remaining contractual term of 1.6 years.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

11. Commitments and Contingencies

The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business, along with a derivative lawsuit as described below. 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.

In February 2007, plaintiffs filed a consolidated petition styled In Re Crown Castle International Corp. Derivative Litigation, Cause No. 2006-49592; in the 234th Judicial District Court, Harris County, Texas which consolidated five stockholder derivative lawsuits filed in 2006. The lawsuit names various of the Company’s current and former directors and officers. The lawsuit makes allegations relating to the Company’s historic stock option practices and alleges claims for breach of fiduciary duty and other similar matters. Among the forms of relief, the lawsuit seeks alleged monetary damages sustained by CCIC. See note 15.

 

12. Operating Segments

The Company’s reportable operating segments for the three and nine months ended September 30, 2009 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.

 

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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:

 

     Three Months Ended September 30, 2009     Three Months Ended September 30, 2008  
     CCUSA     CCAL     Eliminations     Consolidated
Total
    CCUSA     CCAL     Eliminations     Consolidated
Total
 

Net revenues:

                

Site rental

   $ 376,239      $ 20,227      $      $ 396,466      $ 332,715      $ 21,269      $      $ 353,984   

Network services and other

     31,194        1,419               32,613        27,972        2,392               30,364   
                                                                
     407,433        21,646               429,079        360,687        23,661               384,348   
                                                                

Costs of operations:(a)

                

Site rental

     108,572        6,327               114,899        109,757        6,001               115,758   

Network services and other

     20,742        871               21,613        18,878        1,663               20,541   

General and administrative

     36,350        2,880               39,230        33,220        4,217               37,437   

Asset write-down charges

     3,198        (125            3,073        2,863        39               2,902   

Depreciation, amortization and accretion

     124,766        6,697               131,463        124,434        7,280               131,714   
                                                                

Operating income (loss)

     113,805        4,996               118,801        71,535        4,461               75,996   

Interest expense and amortization of deferred financing costs

     (110,698     (3,656     3,185        (111,169     (87,457     (6,690     6,009        (88,138

Impairment of available-for-sale securities

                                 (23,718                   (23,718

Gains (losses) on purchases and redemptions of debt

     (4,848                   (4,848                            

Net gain (loss) on interest rate swaps

     (58,327                   (58,327     2,404                      2,404   

Interest and other income (expense)

     4,451        1,303        (3,185     2,569        4,985        177        (6,009     (847

Benefit (provision) for income taxes

     22,146        (310            21,836        2,687        (591            2,096   
                                                                

Net income (loss)

     (33,471     2,333               (31,138     (29,564     (2,643            (32,207

Less: Net income (loss) attributable to the noncontrolling interest

            501               501                               
                                                                

Net income (loss) attributable to CCIC stockholders

   $ (33,471   $ 1,832      $      $ (31,639   $ (29,564   $ (2,643   $      $ (32,207
                                                                

Capital expenditures

   $ 31,640      $ 749      $      $ 32,389      $ 108,943      $ 31,360      $      $ 140,303   
                                                                

Total assets (at period end)

   $ 10,455,585      $ 287,627      $ (259,993   $ 10,483,219           
                                        

 

(a) Exclusive of depreciation, amortization and accretion shown separately.

 

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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:

 

     Nine Months Ended September 30, 2009     Nine Months Ended September 30, 2008  
     CCUSA     CCAL     Eliminations     Consolidated
Total
    CCUSA     CCAL     Eliminations     Consolidated
Total
 

Net revenues:

                

Site rental

   $ 1,085,445      $ 55,132      $      $ 1,140,577      $ 985,415      $ 62,125      $      $ 1,047,540   

Network services and other

     96,743        4,543               101,286        78,822        8,120               86,942   
                                                                
     1,182,188        59,675               1,241,863        1,064,237        70,245               1,134,482   
                                                                

Costs of operations:(a)

                

Site rental

     321,534        16,445               337,979        323,663        18,221               341,884   

Network services and other

     61,576        3,107               64,683        56,557        4,215               60,772   

General and administrative

     103,728        10,241               113,969        98,097        12,818               110,915   

Asset write-down charges

     13,864        595               14,459        9,067        132               9,199   

Acquisition and integration costs

                                 2,504                      2,504   

Depreciation, amortization and accretion

     375,848        20,388               396,236        373,730        21,913               395,643   
                                                                

Operating income (loss)

     305,638        8,899               314,537        200,619        12,946               213,565   

Interest expense and amortization of deferred financing costs

     (325,596     (10,787     9,377        (327,006     (263,782     (19,684     17,426        (266,040

Impairment of available-for-sale securities

                                 (23,718              (23,718

Gains (losses) on purchases and redemptions of debt

     (90,174                   (90,174                            

Net gain (loss) on interest rate swaps

     (114,060                   (114,060     2,404                      2,404   

Interest and other income (expense)

     13,563        1,386        (9,377     5,572        18,664        431        (17,426     1,669   

Benefit (provision) for income taxes

     79,192        (916            78,276        88,789        (1,710            87,079   
                                                                

Net income (loss)

     (131,437     (1,418            (132,855     22,976        (8,017            14,959   

Less: Net income (loss) attributable to the noncontrolling interest

            (375            (375                            
                                                                

Net income (loss) attributable to CCIC stockholders

   $ (131,437   $ (1,043   $      $ (132,480   $ 22,976      $ (8,017   $      $ 14,959   
                                                                

Capital expenditures

   $ 107,273      $ 4,024      $      $ 111,297      $ 301,000      $ 41,737      $      $ 342,737   
                                                                

Total assets (at period end)

   $ 10,455,585      $ 287,627      $ (259,993   $ 10,483,219           
                                        

 

(a) Exclusive of depreciation, amortization and accretion shown separately.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

The following are reconciliations of net income (loss) to Adjusted EBITDA for the three and nine months ended September 30, 2008 and 2009.

 

     Three Months Ended September 30, 2009     Three Months Ended September 30, 2008  
     CCUSA     CCAL     Eliminations     Consolidated
Total
    CCUSA     CCAL     Eliminations     Consolidated
Total
 

Net income (loss)

   $ (33,471   $ 2,333      $      $ (31,138   $ (29,564   $ (2,643   $      $ (32,207

Adjustments to increase (decrease) net income (loss):

                

Asset write-down charges

     3,198        (125            3,073        2,863        39               2,902   

Depreciation, amortization and accretion

     124,766        6,697               131,463        124,434        7,280               131,714   

Interest expense and amortization of deferred financing costs

     110,698        3,656        (3,185     111,169        87,457        6,690        (6,009     88,138   

Impairment of available-for-sale securities

                                 23,718                      23,718   

Gains (losses) on purchases and redemptions of debt

     4,848                      4,848                               

Net gain (loss) on interest rate swaps

     58,327                      58,327        (2,404                   (2,404

Interest and other income (expense)

     (4,451     (1,303     3,185        (2,569     (4,985     (177     6,009        847   

(Benefit) provision for income taxes

     (22,146     310               (21,836     (2,687     591               (2,096

Stock-based compensation expense

     6,779        433               7,212        6,346        754               7,100   
                                                                

Adjusted EBITDA

   $ 248,548      $ 12,001      $      $ 260,549      $ 205,178      $ 12,534      $      $ 217,712   
                                                                
     Nine Months Ended September 30, 2009     Nine Months Ended September 30, 2008  
     CCUSA     CCAL     Eliminations     Consolidated
Total
    CCUSA     CCAL     Eliminations     Consolidated
Total
 

Net income (loss)

   $ (131,437   $ (1,418   $      $ (132,855   $ 22,976      $ (8,017   $      $ 14,959   

Adjustments to increase (decrease) net income (loss):

                

Asset write-down charges

     13,864        595               14,459        9,067        132               9,199   

Acquisition and integration costs

                                 2,504                      2,504   

Depreciation, amortization and accretion

     375,848        20,388               396,236        373,730        21,913               395,643   

Interest expense and amortization of deferred financing costs

     325,596        10,787        (9,377     327,006        263,782        19,684        (17,426     266,040   

Impairment of available-for-sale securities

                                 23,718                      23,718   

Gains (losses) on purchases and redemptions of debt

     90,174                      90,174                               

Net gain (loss) on interest rate swaps

     114,060                      114,060        (2,404                   (2,404

Interest and other income (expense)

     (13,563     (1,386     9,377        (5,572     (18,664     (431     17,426        (1,669

(Benefit) provision for income taxes

     (79,192     916               (78,276     (88,789     1,710               (87,079

Stock-based compensation expense

     21,810        2,765               24,575        18,386        2,428               20,814   
                                                                

Adjusted EBITDA

   $ 717,160      $ 32,647      $      $ 749,807      $ 604,306      $ 37,419      $      $ 641,725   
                                                                

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

Major Customers

The following table summarizes the percentage of the consolidated revenues from those customers accounting for more than 10% of the consolidated revenues.

 

     Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Sprint Nextel Corp.

   21   22

AT&T

   19   20

Verizon Wireless(a)

   20   18

T-Mobile

   12   13
            

Total

   72   73
            

 

(a) Inclusive of Alltel.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, restricted cash and trade receivables. The Company mitigates its risk with respect to cash and cash equivalents by maintaining such deposits at high credit quality financial institutions and monitoring the credit ratings of those institutions. The Company’s restricted cash is predominately held and directed by a trustee. See note 7 regarding counterparty credit risk relating to interest rate swaps.

The Company derives the largest portion of its revenues from customers in the wireless communications industry. Certain of the Company’s customers have credit ratings below investment grade, such as Sprint Nextel and certain emerging and second tier wireless carriers. The Company mitigates its concentrations of credit risk with respect to trade receivables by actively monitoring the creditworthiness of its customers, the use of customer leases with contractually determinable payment terms and proactive management of past due balances.

 

13. Stock-Based Compensation

Restricted Common Stock

A summary of restricted stock activity for the nine months ended September 30, 2009 is as follows:

 

     Number of Shares  
     (In thousands of shares)  

Shares outstanding at December 31, 2008

   2,749   

Shares granted(a)

   2,231   

Shares vested

   (204

Shares forfeited

   (455
      

Shares outstanding at September 30, 2009

   4,321   
      

 

(a) Weighted-average grant-date fair value of $10.02 per share and a weighted-average requisite service period of 2.6 years. The awards with market conditions included an expected volatility of 46% in the Monte Carlo simulation used to measure grant date fair value.

During the nine months ended September 30, 2009, the Company granted 0.8 million shares of restricted stock awards that time vest over a three-year period. During the nine months ended September 30, 2009, the Company granted 1.4 million shares of restricted stock awards (“2009 performance awards”) to the Company’s executives and certain other employees which may vest on the third anniversary of the grant date subject to a market condition. The number of 2009 performance awards that may cliff vest on the third anniversary of the grant date is based upon achieving a price appreciation hurdle along a price range continuum using the highest average closing price per share of common stock for 20 consecutive trading days during the last 180 days of the performance period. If the highest average price achieved during the performance period is the minimum, target and maximum prices of $23.15, $28.10 and $39.06, then 25%, 50% or 100%, respectively, of the 2009 performance awards vest. Achieving a highest average price equal to the minimum price, target price or maximum price would require the common stock

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

to achieve a compound annual growth rate (CAGR) of approximately 13%, 21% or 35%, respectively, from the grant date closing common stock price per share of $15.99. If the highest average price achieved during the performance period is between the minimum, target and maximum prices then the percentage of the shares that vest is determined based on a pro rata basis in relation to the minimum, target and maximum price. To the extent that the requisite service period is rendered, compensation cost for accounting purposes is not reversed; rather, it is recognized regardless of whether or not the market performance target is achieved.

The Company recognized stock-based compensation expense related to restricted stock awards of $20.8 million and $17.2 million for the nine months ended September 30, 2009 and 2008, respectively. The unrecognized compensation expense (net of estimated forfeitures) related to restricted stock awards as of September 30, 2009 is $32.0 million.

Stock-Based Compensation Expense

The following table summarizes the components of stock-based compensation expense. For the three and nine months ended September 30, 2009, the Company recorded tax benefits of $2.4 million and $7.6 million, respectively, related to stock-based compensation expenses.

 

     Three Months Ended September 30, 2009    Three Months Ended September 30, 2008
     CCUSA    CCAL    Total    CCUSA    CCAL    Total

Stock-based compensation expense:

                 

Site rental costs of operations

   $ 231    $    $ 231    $ 178    $    $ 178

Network services and other costs of operations

     298           298      217           217

General and administrative expenses

     6,250      433      6,683      5,951      754      6,705
                                         
   $ 6,779    $ 433    $ 7,212    $ 6,346    $ 754    $ 7,100
                                         
     Nine Months Ended September 30, 2009    Nine Months Ended September 30, 2008
     CCUSA    CCAL    Total    CCUSA    CCAL    Total

Stock-based compensation expense:

                 

Site rental costs of operations

   $ 700    $    $ 700    $ 686    $    $ 686

Network services and other costs of operations

     893           893      588           588

General and administrative expenses

     20,217      2,765      22,982      17,112      2,428      19,540
                                         
   $ 21,810    $ 2,765    $ 24,575    $ 18,386    $ 2,428    $ 20,814
                                         

 

14. Supplemental Cash Flow Information

Supplemental disclosures of cash flow information and non-cash investing and financing activities are as follows:

 

     Nine Months Ended
September 30,
 
     2009     2008  

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 257,567      $ 247,300   

Income taxes paid

     5,130        4,190   

Supplemental disclosure of non-cash investing and financing activities:

    

Increase (decrease) in the fair value of available-for-sale securities

     24,245        (23,718

Common stock issued in connection with the conversion of debt

            63,340   

Increase (decrease) in the fair value of interest rate swaps (note 7)

     (104,401     (34,253

Assets acquired through capital leases and installment sales

     12,726        2,332   

 

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CROWN CASTLE INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited (Continued)

(Tabular dollars in thousands, except per share amounts)

 

15. Subsequent Events

7.125% Senior Notes

In October 2009, the Company issued $500.0 million principal amount of 7.125% senior notes (“7.125% Senior Notes”) in a public offering pursuant to an indenture. These 7.125% Senior Notes are general obligations of CCIC, which rank equally with all existing and future senior debt of CCIC. The 7.125% Senior Notes are effectively subordinated to all liabilities (including trade payables) of each subsidiary of the Company and rank pari pasu with the 9% senior notes. The proceeds from the 7.125% Senior Notes were $490.0 million, net of fees and discounts. The Company expects to use the net proceeds for general corporate purposes, which may include the purchase or repayment of certain indebtedness of its subsidiaries.

The 7.125% Senior Notes contain restrictive covenants with which the Company and its restricted subsidiaries must comply, subject to a number of exceptions and qualifications, including restrictions on its ability to incur incremental debt, issue preferred stock, guarantee debt, pay dividends, repurchase its capital stock, use assets as security in other transactions, sell assets or merge with or into other companies, and make certain investments. Certain of these covenants are not applicable if there is no event of default and if the ratio of the Company’s Consolidated Debt (as defined in the 7.125% Senior Notes indenture) to its Adjusted Consolidated Cash Flows (as defined in the 7.125% Senior Notes indenture) is less than or equal to 7.0 to 1.0. The 7.125% Senior Notes do not contain any financial maintenance covenants.

Derivative Litigation

In October 2009, the plaintiffs’ claims with respect to the consolidated petition styled In Re Crown Castle International Corp. Derivative Litigation, Cause No. 2006-49592, in the 234th Judicial District Court, Harris County, Texas were dismissed with prejudice. This order to dismiss is appealable by the plaintiffs.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the response to Part I, Item 1 of this report and the consolidated financial statements of the Company including the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)” included in our 2008 Form 10-K. Any capitalized terms used but not defined in this Item have the same meaning given to them in our 2008 Form 10-K. Unless this Form 10-Q indicates otherwise or the context requires, the terms “we,” “our,” “our company,” “the company,” or “us” as used in this Form 10-Q refer to Crown Castle International Corp. and its subsidiaries.

General Overview

Overview

As of September 30, 2009, we owned, leased or managed approximately 24,000 towers for wireless communications. Revenues generated from our core site rental business represented 92% of our third quarter 2009 consolidated revenues, of which 95% was attributable to our CCUSA operating segment. The vast majority of our site rental revenues is of a recurring nature and has been contracted for in a prior year.

The following are certain highlights of our business fundamentals:

 

   

potential growth resulting from wireless network expansion;

 

   

site rental revenues under long-term leases with contractual escalations;

 

   

revenues predominately from large wireless carriers;

 

   

majority of land under our towers under long-term control;

 

   

relatively fixed tower operating costs;

 

   

high incremental margins and cash flows on organic revenue growth;

 

   

minimal sustaining capital expenditure requirements;

 

   

vast majority of debt has contractual maturities after five years and has fixed rate coupons; and

 

   

significant cash flows from operations.

Our long-term strategy is to increase stockholder value by translating anticipated future growth in our core site rental business into growth in our results of operations on a per share basis. The key elements of our strategy are:

 

   

to organically grow revenues and cash flows from our towers by co-locating additional tenants on our towers; and

 

   

to allocate capital efficiently (in no particular order: purchase our own common stock, enter into strategic tower acquisitions, acquire the land on which towers are located, selectively construct or acquire towers and distributed antenna systems, improve and structurally enhance our existing towers, and purchase, redeem or refinance our debt or preferred stock). See also “Item 2. MD&A—Liquidity and Capital Resources.”

Our long-term strategy is based on our belief that opportunities will be created by the expected continued growth in the wireless communications industry, which is predominately driven by the demand for wireless telephony and data services by consumers. As a result of such expected growth in the wireless communications industry, we believe that the demand for our towers will continue and result in organic growth of our revenues due to the co-location of additional tenants on our existing towers. We expect that new tenant additions or modifications of existing installations (collectively referred to as “tenant additions”) on our towers should result in significant incremental cash flow due to the relatively fixed costs to operate a tower (which tend to increase at approximately the rate of inflation).

As mentioned in our 2008 Form 10-K, our site rental revenues typically result from long-term contracts with (1) initial terms of five to fifteen years, (2) multiple renewal periods at the option of the tenant of five to ten years each, and (3) contractual escalators of the rental price. More recently, we have been able to successfully negotiate up to fifteen year terms for both initial and renewal periods for certain of our customers and are endeavoring to continue that trend. As of September 30, 2009, our customer contracts at CCUSA have an average remaining life of approximately seven years, exclusive of renewals at the customer’s option.

 

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In March 2009, we entered into an agreement to provide certain management, construction and acquisition services for a third party as to certain tower opportunities in the United States for a period of 24 months. The arrangement should permit us to maintain our construction and acquisition capacities and expertise and further our good relationships with certain major customers with limited capital commitments and expenditures as to such towers.

The following is a discussion of certain recent events which may impact our business and our strategy or the wireless communications industry:

 

   

Consumers increased their use of wireless voice and data services according to the CTIA U.S. wireless industry survey issued on October 7, 2009.

 

  ¡  

Wireless data service revenues for the first half of 2009 were more than $19.4 billion, which represents a 31% increase over the first half of 2008;

 

  ¡  

Wireless users exceeded 276 million as of June 30, 2009, which represents a year-over-year increase of nearly 14 million subscribers, or 5%; and

 

  ¡  

Minutes of use exceeded 1.1 trillion for the first half of 2009, which represented a year-over-year increase of 3%.

 

   

In January 2009, Verizon Wireless completed the acquisition of Alltel Corp., a provider of wireless services to primarily rural markets. As has been the case with other customer consolidations in the recent past, we do not expect lease cancellations from duplicate or overlapping networks as a result of this acquisition to have a material adverse affect on our results.

 

   

The challenging credit markets and global economic recession continued during 2009. However, the credit markets improved somewhat during 2009 from the fourth quarter of 2008, as seen in the decrease in credit spreads and improved liquidity in the market place. The extent and length of the global economic recession is difficult to predict; and although the economic outlook has improved during 2009, a pronounced or prolonged expansion of the economy is not assured. The following is a discussion of the potential impact on us from the credit markets and global economic recession:

 

  ¡  

Historically, aggregate capital spending and the associated demand for our towers by wireless communication companies have been relatively stable over the last several years, although we did see reductions during prior economic downturns. We do not expect the current economic conditions to significantly impact the long-term growth in wireless voice and data demand, which has historically been the predominate driver of demand for our towers over the long-term. In addition, this global economic recession has not significantly impacted our existing recurring revenues, including with respect to customer defaults or bankruptcies. Consequently, we currently do not anticipate any material negative impact on our revenues over the foreseeable future. In addition, we expect site rental revenues for 2010 of between $1.645 billion and $1.665 billion, representing growth rates from the estimated full year 2009 of between 7% and 8%.

 

  ¡  

As seen in our issuances of debt during 2009, our borrowing costs on these new debt issuances are higher than on our existing debt. Unless credit markets improve, our prospective debt refinancings may result in an increase in our weighted-average cost of debt. In light of the current challenges in the credit markets, beginning in the fourth quarter of 2008 we (1) extended the maturity of our debt by refinancing a substantial portion of our debt during 2009 and (2) reduced our discretionary capital expenditures in order to retire our indebtedness. Over the near term, we expect to continue to invest the majority of our available cash toward the retirement of debt, settlement of our interest rate swaps and resumption of discretionary investments depending upon the credit environment. See “Item 2. MD&A—Liquidity and Capital Resources.”

Consolidated Results of Operations

The following discussion of our results of operations should be read in conjunction with our condensed consolidated financial statements and our 2008 Form 10-K. 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 2. MD&A—Accounting and Reporting Matters—Critical Accounting Policies and Estimates” and note 1 to our consolidated financial statements on our 2008 Form 10-K).

 

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Comparison of Consolidated Results

The following information is derived from our historical consolidated statements of operations for the periods indicated.

 

     Three Months Ended
September 30, 2009
    Three Months Ended
September 30, 2008
       
     Amount     Percent
of Net
Revenues
    Amount     Percent
of Net
Revenues
    Percent
Change(b)
 
     (Dollars in thousands)  

Net revenues:

          

Site rental

   $ 396,466      92   $ 353,984      92   12

Network services and other

     32,613      8     30,364      8   7
                                  
     429,079      100     384,348      100   12
                                  

Operating expenses:

          

Costs of operations(a):

          

Site rental

     114,899      29     115,758      33   (1 )% 

Network services and other

     21,613      66     20,541      68   5
                      

Total costs of operations

     136,512      32     136,299      35     

General and administrative

     39,230      9     37,437      10   5

Asset write-down charges

     3,073      1     2,902      1   6

Acquisition and integration costs

                           *   

Depreciation, amortization and accretion

     131,463      30     131,714      34     
                              

Operating income (loss)

     118,801      28     75,996      20   56

Interest expense and amortization of deferred financing costs

     (111,169   (26 )%      (88,138   (23 )%    26

Impairment of available-for-sale securities

                 (23,718   (6 )%    *   

Gains (losses) on purchases and redemption of debt

     (4,848   (1 )%                *   

Net gain (loss) in interest rate swaps

     (58,327   (14 )%      2,404           *   

Interest and other income (expense)

     2,569      1     (847        *   
                              

Income (loss) before income taxes

     (52,974   (12 )%      (34,303   (9 )%    *   

Benefit (provision) for income taxes

     21,836      5     2,096      1   *   
                              

Net income (loss)

     (31,138   (7 )%      (32,207   (8 )%    *   

Less: Net income (loss) attributable to the noncontrolling interest

     501                       *   
                              

Net income (loss) attributable to CCIC stockholders

   $ (31,639   (7 )%    $ (32,207   (8 )%    *   
                              

 

*: Percentage is not meaningful
(a) Exclusive of depreciation, amortization and accretion shown separately.
(b) Inclusive of the impact of foreign exchange rate fluctuations. See “Item 2. MD&A—Comparison of Operating Segments—CCAL”

 

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     Nine Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2008
       
     Amount     Percent
of Net
Revenues
    Amount     Percent
of Net
Revenues
    Percent
Change(b)
 
     (Dollars in thousands)  

Net revenues:

          

Site rental

   $ 1,140,577      92   $ 1,047,540      92   9

Network services and other

     101,286      8     86,942      8   16
                                  
     1,241,863      100     1,134,482      100   9
                                  

Operating expenses:

          

Costs of operations(a):

          

Site rental

     337,979      30     341,884      33   (1 )% 

Network services and other

     64,683      64     60,772      70   6
                      

Total costs of operations

     402,662      33     402,656      35     

General and administrative

     113,969      9     110,915      10   3

Asset write-down charges

     14,459      1     9,199      1   57

Acquisition and integration costs

                 2,504           *   

Depreciation, amortization and accretion

     396,236      32     395,643      35     
                              

Operating income (loss)

     314,537      25     213,565      19   47

Interest expense and amortization of deferred financing costs

     (327,006   (26 )%      (266,040   (23 )%    23

Impairment of available-for-sale securities

                 (23,718   (2 )%    *   

Gains (losses) on purchases and redemption of debt

     (90,174   (7 )%                *   

Net gain (loss) in interest rate swaps

     (114,060   (9 )%      2,404           *   

Interest and other income (expense)

     5,572             1,669           *   
                              

Income (loss) before income taxes

     (211,131   (17 )%      (72,120   (6 )%    *   

Benefit (provision) for income taxes

     78,276      6     87,079      7   (10 )% 
                              

Net income (loss)

     (132,855   (11 )%      14,959      1   *   

Less: Net income (loss) attributable to the noncontrolling interest

     (375                    *   
                              

Net income (loss) attributable to CCIC stockholders

   $ (132,480   (11 )%    $ 14,959      1   *   
                              

 

*: Percentage is not meaningful
(a) Exclusive of depreciation, amortization and accretion shown separately.
(b) Inclusive of the impact of foreign exchange rate fluctuations. See “Item 2. MD&A—Comparison of Operating Segments—CCAL”

Third Quarter 2009 and 2008. Our consolidated results of operations for the third quarter of 2009 and 2008, respectively, consist predominately of our CCUSA segment, which accounted for (1) 95% and 94% of consolidated net revenues, (2) 95% and 94% of consolidated gross margins, and (3) 106% and 92% of net income (loss) attributable to CCIC stockholders. Our operating segment results, including CCUSA, are discussed below (see “Item 2. MD&A—Comparison of Operating Segments”).

First Nine Months 2009 and 2008. Our consolidated results of operations for the first nine months of 2009 and 2008, respectively, consist predominately of our CCUSA segment, which accounted for (1) 95% and 94% of consolidated net revenues, (2) 95% and 93% of consolidated gross margins, and (3) 99% and 154% of net income (loss) attributable to CCIC stockholders. Our operating segment results, including CCUSA, are discussed below (see “Item 2. MD&A—Comparison of Operating Segments”).

Comparison of Operating Segments

Our reportable operating segments for the third quarter of 2009 are (1) CCUSA, primarily consisting of our U.S. (including Puerto Rico) tower operations, and (2) CCAL, our Australian tower operations. Our financial results are reported to management and the board of directors in this manner.

See note 12 to our condensed consolidated financial statements for segment results, our definition of Adjusted EBITDA, and a reconciliation of net income (loss) attributable to CCIC stockholders to Adjusted EBITDA.

 

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Our measurement of profit or loss currently used to evaluate our operating performance and operating segments is earnings before interest, taxes, depreciation, amortization and accretion, as adjusted. Our measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in the tower sector, and is not a measure of performance calculated in accordance with GAAP. Adjusted EBITDA is discussed further under “Item 2. MD&A—Accounting and Reporting MattersNon-GAAP Financial Measures.

CCUSA — Third Quarter 2009 and 2008

Net revenues for the third quarter of 2009 increased by $46.7 million, or 13%, from the same period in the prior year. This increase in net revenues primarily resulted from an increase in site rental revenues of $43.5 million, or 13%, for the same period. This increase in site rental revenues was impacted by the following items, in no particular order: new tenant additions across our entire portfolio inclusive of straight-line accounting for certain lease escalations, straight-line accounting from renewal of customer leases, escalations net of the impact of straight-line accounting, and cancelations of customer leases. Tenant additions were influenced by the previously mentioned growth in the wireless communications industry.

Network services and other revenues for the third quarter of 2009 increased by $3.2 million, or 12%, from the same period in the prior year. The increase in network services and other revenues reflects the quarterly volatility and variable nature of the network services business as these revenues are not under long-term contract.

Site rental gross margins for the third quarter of 2009 increased by $44.7 million, or 20%, from the same period in the prior year. The increase in the site rental gross margins was related to the previously mentioned 13% increase in site rental revenues. Site rental gross margins as a percentage of site rental revenues for third quarter of 2009 increased by four percentage points, to 71%, from the same period in the prior year primarily as a result of the high incremental margins associated with tenant additions given the relatively fixed costs to operate a tower. The $44.7 million incremental margin represents 103% of the related increase in site rental revenues.

General and administrative expenses for the third quarter of 2009 increased by $3.1 million from the same period in the prior year. General and administrative expenses are inclusive of stock-based compensation charges as discussed further in note 13 to our condensed consolidated financial statements. The increase in general and administrative expenses was primarily due to the increase in salary and employee benefits, including an increase in the annual bonus accrual and other non-recurring expenses, partially offset by cost management initiatives. In addition, general and administrative expenses were 9% of net revenues for both the third quarter of 2009 and 2008. Typically, our general and administrative expenses do not significantly increase as a result of the co-location of additional tenants on our towers.

Adjusted EBITDA for the third quarter of 2009 increased by $43.4 million, or 21%, from the same period in the prior year. Adjusted EBITDA was positively impacted by the growth in our site rental and service businesses, including the high incremental margin on the new tenant additions.

Depreciation, amortization and accretion for the third quarter of 2009 increased by $0.3 million, or less than 1%, from the same period in the prior year. The small increase is consistent with the movement in our fixed assets and intangible assets which did not materially change between the third quarter of 2008 and the third quarter of 2009.

The increase in interest expense and amortization of deferred financing costs of $23.2 million, or 27%, from the third quarter of 2008 to 2009 predominately resulted from refinancing 37% of our debt outstanding as of September 30, 2009 during 2009 with new debt that has higher borrowing costs, which increased the weighted-average maturity of our portfolio of debt. During the third quarter of 2009, we recorded losses on interest rate swaps of $58.3 million which predominately resulted from an increase in the liability for those swaps not subject to hedge accounting. For a further discussion of the debt refinancing and the interest rate swaps see notes 6 and 7 to our condensed consolidated financial statements, “Item 2. MD&A—Liquidity and Capital Resources” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk”.

During the third quarter of 2008, we recorded a non-cash impairment charge of $23.7 million related to a decline in the value of FiberTower that was deemed to be other-than-temporary. Our investment in FiberTower was in an unrealized gain position of $24.2 million as of September 30, 2009.

 

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The benefit (provision) for income taxes for the third quarter of 2009 was a benefit of $22.1 million, representing an increase of $19.5 million from the same period in the prior year. The benefit for income taxes for the third quarter of 2009 is inclusive of a $5.3 million reversal of state tax valuation allowances. The effective tax rate for the third quarter of 2009 differs from the federal statutory rate predominately due to these state tax benefits. The effective tax rate for the third quarter of 2008 differs from the federal statutory rate predominately due to a full valuation allowance on our unrealized capital losses from our investment in FiberTower and state taxes. As of September 30, 2009, we are limited to recognizing approximately $8 million of future federal tax benefits since we currently expect that other additional benefits would have a full valuation allowance because our history of tax operating losses prevents us from determining it is more likely than not that we may realize these benefits.

Net income (loss) attributable to CCIC stockholders for the third quarter of 2009 was a loss of $33.5 million inclusive of net losses from interest rate swaps of $58.3 million. Net income (loss) attributable to CCIC stockholders for the third quarter of 2008 was a loss of $29.6 million inclusive of a non-cash impairment charge of $23.7 million related to our investment in FiberTower. The increase in net loss was predominately due to (1) the previously mentioned charges and (2) the previously mentioned increase in interest expense of $23.2 million, partially offset by (3) growth in our core site rental business and (4) the increase in income taxes benefits resulting from the increase in pre-tax losses.

CCUSA — First Nine Months 2009 and 2008

Net revenues for the first nine months of 2009 increased by $118.0 million, or 11%, from the same period in the prior year. This increase in net revenues primarily resulted from an increase in site rental revenues of $100.0 million, or 10%, for the same period. This increase in site rental revenues was impacted by the following items, in no particular order: new tenant additions across our entire portfolio inclusive of straight-line accounting for certain lease escalations, straight-line accounting from renewal of customer leases, escalations net of the impact of straight-line accounting, and cancelations of customer leases. Tenant additions were influenced by the previously mentioned growth in the wireless communications industry.

Network services and other revenues for the first nine months of 2009 increased by $17.9 million, or 23%, from the same period in the prior year. The increase in network services and other revenues reflects the quarterly volatility and variable nature of the network services business as these revenues are not under long-term contract.

Site rental gross margins for the first nine months of 2009 increased by $102.2 million, or 15%, from the same period in the prior year. The increase in the site rental gross margins was related to the previously mentioned 10% increase in site rental revenues. Site rental gross margins as a percentage of site rental revenues for first nine months of 2009 increased by three percentage points, to 70%, from the same period in the prior year primarily as a result of the high incremental margins associated with tenant additions given the relatively fixed costs to operate a tower. The $102.2 million incremental margin represents 102% of the related increase in site rental revenues.

General and administrative expenses for the first nine months of 2009 increased by $5.6 million, or 6%, from the same period in the prior year. General and administrative expenses are inclusive of stock-based compensation charges as discussed further in note 13 to our condensed consolidated financial statements. The increase in general and administrative expenses was primarily due to the increase in salary and employee benefits, including an increase in the annual bonus accrual and other non-recurring expenses, and stock-based compensation, partially offset by the realization of certain cost management initiatives. In addition, general and administrative expenses were 9% of net revenues for both the first nine months of 2009 and 2008. Typically, our general and administrative expenses do not significantly increase as a result of the co-location of additional tenants on our towers.

Adjusted EBITDA for the first nine months of 2009 increased by $112.9 million, or 19%, from the same period in the prior year. Adjusted EBITDA was positively impacted by the growth in our site rental business including the high incremental margin on the tenant additions.

Depreciation, amortization and accretion for the first nine months of 2009 increased by $2.1 million, or less than 1%, from the same period in the prior year. The small increase is consistent with the movement in our fixed assets and intangible assets which did not materially change between the first nine months of 2008 and 2009.

 

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During the first nine months of 2009, we refinanced our 2006 mortgage loan in order to extend the maturity of our debt portfolio. As a result of purchasing and early retiring the 2006 mortgage loan, we incurred a net loss of $85.7 million for the first nine months of 2009 inclusive of the make whole payment. The increase in interest expense and amortization of deferred financing costs of $61.8 million, or 23%, from the first nine months of 2008 to 2009 predominately resulted from refinancing 37% of our debt outstanding as of September 30, 2009 with new debt that has higher borrowing costs. The refinancing of the 2006 mortgage loan did not qualify for hedge accounting as the actual refinancing was not consistent with that anticipated as part of hedge accounting, which resulted in discontinuing hedge accounting and reclassifying $133 million from AOCI to earnings during the nine months ended September 30, 2009. This loss was partially offset by gains on interest rate swaps that resulted from a decrease in the liability for those swaps not subject to hedge accounting. For a further discussion of the debt refinancing and the interest rate swaps see notes 6 and 7 to our condensed consolidated financial statements, “Item 2. MD&A—Liquidity and Capital Resources” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk”.

During the third quarter of 2008, we recorded a non-cash impairment charge of $23.7 million related to a decline in the value of FiberTower that was deemed to be other-than-temporary. Our investment in FiberTower was in an unrealized gain position of $24.2 million as of September 30, 2009.

The benefit (provision) for income taxes for the first nine months of 2009 was a benefit of $79.2 million, representing a decrease of $9.6 million from the same period in the prior year. The benefit for income taxes for the first nine months of 2008 is inclusive of tax benefits of $74.9 million resulting from the completion of the IRS examination of our U.S. federal tax return from 2004. The benefit for income taxes for the first nine months of 2009 is inclusive of a $15.8 million reversal of state tax valuation allowances. The effective tax rate for the first nine months of 2009 differs from the federal statutory rate predominately due to these state tax benefits. The effective tax rate for the nine months ended September 30, 2008 differs from the statutory rate due predominately to income tax benefits resulting from the completion of the IRS examination and a full valuation allowance on our unrealized capital losses from our investment in FiberTower and state taxes. As of September 30, 2009, we are limited to recognizing approximately $8 million of future federal tax benefits since we currently expect that other additional benefits would have a full valuation allowance because our history of tax operating losses prevents us from determining it is more likely than not that we may realize these benefits.

Net income (loss) attributable to CCIC stockholders for the first nine months of 2009 was a loss of $131.4 million, inclusive of (1) net losses from interest rate swaps of $114.1 million and (2) net losses from purchases and early retirement of debt of $90.2 million. Net income (loss) attributable to CCIC stockholders for the first nine months of 2008 was income of $23.0 million, inclusive of (1) tax benefits of $74.9 million resulting from the completion of an IRS examination and (2) a non-cash impairment charge of $23.7 million related to our investment in FiberTower. The change from net income to net loss was predominately due to (1) the previously mentioned charges and benefits and (2) the previously mentioned increase in interest expense of $61.8 million, partially offset by (3) growth in our core site rental business.

CCAL — Third Quarter 2009 and 2008

The increases and decreases between the third quarter of 2009 and 2008 were inclusive of exchange rate fluctuations. The average exchange rate of the Australian dollar to one U.S dollar for the third quarter of 2009 was approximately 0.83, a decrease of 6% from approximately 0.89 for the same period in the prior year. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Total net revenues for the third quarter of 2009 decreased by $2.0 million, or 9%, from the same period in the prior year. Site rental revenues for the third quarter of 2009 decreased by $1.0 million, or 5%, from the same period in the prior year. The decrease in the exchange rate negatively impacted net revenues and site rental revenues by approximately $1.4 million and $1.3 million, respectively, and both accounted for a decline of 6% for the third quarter of 2009 from the same period in the prior year. Site rental revenues were also impacted by various other factors, including, in no particular order, new tenant additions on our towers, straight-line accounting from renewal of customer leases, escalations net of the impact of straight-line accounting, and cancellations of customer leases. Net revenues were also impacted by a $1.0 million decrease in network services and other revenues. The decrease in network services and other revenues reflects the quarterly volatility and variable nature of the network services business as these revenues are not under long-term contracts.

 

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Adjusted EBITDA for the third quarter of 2009 decreased by $0.5 million, or 4%, from the same period in the prior year. Adjusted EBITDA was negatively impacted by the exchange rate fluctuations. Site rental gross margins decreased by $1.4 million, or 9%, to 69% of site rental revenues, for the third quarter of 2009, from $15.3 million, or 72% of site rental revenues, for third quarter in 2008.

Net income (loss) attributable to CCIC stockholders for the third quarter of 2009 was a net income of $1.8 million, compared to a net loss of $2.6 million for the third quarter of 2008. The change from net loss to net income was predominately due to a decrease in interest expense and amortization of deferred financing costs of $3.0 million, the majority of which is due to a decrease in the variable interest rate of our intercompany debt.

CCAL — First Nine Months 2009 and 2008

The increases and decreases between the first nine months of 2009 and 2008 were inclusive of exchange rate fluctuations. The average exchange rate of the Australian dollar to one U.S dollar for the first nine months of 2009 was approximately 0.75, a decrease of 17% from approximately 0.91 for the same period in the prior year. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Total net revenues for the first nine months of 2009 decreased by $10.6 million, or 15%, from the same period in the prior year. This decrease in net revenues primarily resulted from a decrease in site rental revenues of $7.0 million, or 11%, from the same period in the prior year. The decrease in the exchange rate negatively impacted net revenues and site rental revenues by approximately $12.6 million and $11.7 million, respectively, and accounted for a decline of 18% and 19%, respectively, for the nine months of 2009 from the same period in the prior year. Site rental revenues were also impacted by various other factors, including, in no particular order, new tenant additions on our towers, towers acquired during and after the first nine months of 2008, straight-line accounting from renewal of customer leases, escalations net of the impact of straight-line accounting, and cancellation of customer leases. Net revenues were also impacted by a $3.6 million decrease in network services and other revenues. The decrease in network services and other revenues reflects the quarterly volatility and variable nature of the network services business as these revenues are not under long-term contracts.

Adjusted EBITDA for the first nine months of 2009 decreased by $4.8 million, or 13%, from the same period in the prior year. Adjusted EBITDA was negatively impacted by exchange rate fluctuations. Site rental gross margins decreased by $5.2 million, or 12%, to 70% of site rental revenues, for the nine months of 2009, from $43.9 million, or 71% of site rental revenues for the first nine months of 2008.

Net income (loss) attributable to CCIC stockholders for the first nine months of 2009 was a net loss of $1.0 million, compared to a net loss of $8.0 million in the first nine months of 2008. The decrease in net loss was primarily driven by a decrease in interest expense and amortization of deferred financing costs of $8.9 million, the majority of which was due to a decrease in the variable interest rate of our intercompany debt.

Liquidity and Capital Resources

Overview

General. Our site rental business is generally characterized by a stable cash flow stream generated by revenues under long-term contracts that should be recurring for the foreseeable future. Over the last five years, our cash from operations have exceeded our cash interest payments and sustaining capital expenditures and provided us with cash available for discretionary investments. We seek to allocate the cash produced by our operations in a manner that will enhance per share operating results. Our operating cash flows have not been materially negatively impacted by the current conditions in the credit markets and the economic recession. However, given the current conditions in the credit markets, we currently expect to limit our discretionary investments and use the majority of our cash to purchase or repay our debt and settle our interest rate swaps. Historically, we invested our available cash in discretionary investments such as those discussed in “Item 1. Business—Strategy” on our 2008 Form 10-K, which we expect to resume in the future depending upon the credit environment and availability of liquidity in the capital markets.

 

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Liquidity Position. The following is a summary of our capitalization and liquidity position. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and note 6 to our condensed consolidated financial statements for additional information regarding our debt.

 

     September 30, 2009 Pro Forma(a)
     (In thousands of dollars)

Cash and cash equivalents(b)

   $ 757,831

Undrawn revolver availability

     188,000

Debt and other long-term obligations

     6,633,050

Interest rate swaps

     399,951

Redeemable preferred stock

     315,422

CCIC stockholders’ equity

     2,851,519

 

(a) Pro forma for the issuance of 7.125% senior notes.
(b) Exclusive of $187.7 million of restricted cash.

In addition to cash on hand and undrawn revolver availability, we expect to generate between $550 million and $600 million of cash flows from operating activities over the next 12 months.

Recent Events. In light of the global economic recession and the current challenging credit markets, we have taken the following actions to extend and ladder our debt maturities and retire our debt with cash flows from operations.

 

   

We have reduced discretionary capital expenditures in order to increase liquidity available to retire our debt and settle our interest rate swaps. Of the approximately $550 million of cash flows from operating activities that we currently expect to generate during full year 2009, we currently expect to use at least $175 million of such cash flow on capital expenditures, although our actual aggregate capital expenditures may be greater than or less than this amount depending upon several factors, including the availability of financing. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for a further discussion of interest rate swaps.

 

   

During the first ten months of 2009, we issued $2.9 billion face value of debt with stated interest rates ranging from 6.25% to 9% and maturities between 2015 and 2029. We used the net proceeds of $2.7 billion from these issuances as well as cash flows from operations to retire an aggregate $2.4 billion face value of debt (inclusive of $86.1 million cash losses on these retirements), including the 2004 mortgage loan, the 2006 mortgage loan, the amount outstanding under our revolving credit facility and portions of our Tower Revenue notes. Over the last two years, we have lowered our gross leverage (Consolidated Debt to Adjusted Consolidated Cash Flows—see “Item 2. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity”) to 6.5 times from 7.7 times, exclusive of the issuance of the 7.125% senior notes since the proceeds of the 7.125% senior notes currently are held in cash. In addition, after giving effect to the issuance of the 7.125% senior notes, since December 31, 2008, we increased our cash on hand by $602.6 million. See “Item 2. MD&A—Liquidity and Capital Resources—Financing Activities” for a discussion of these issuances and retirements.

As a result of these actions, approximately 41% of our debt outstanding as of September 30, 2009 pro forma for the 7.125% senior notes has been refinanced during 2009, thereby extending the weighted-average maturity of our debt and laddering the maturities while prudently managing our leverage ratio and cost of debt. Over the next twelve months we have no debt maturities other than principal payments on amortizing debt and the expiration of our undrawn revolving credit agreement in January 2010. We do not anticipate the need to access the capital markets to refinance our existing debt for five years, although, as mentioned above, we plan on endeavoring to refinance the tower revenue notes on or before their anticipated repayment dates in 2010 and 2011. Our ability to obtain borrowings that are securitized by tower cash flows and are at commercially reasonable terms will depend on various factors, such as our ability to generate cash flows on our existing towers and the state of the capital markets. If we are unable to refinance our debt with similar instruments, we may explore other forms of financing, which may include other forms of debt or issuances of equity or equity related securities. See “Item 2. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity.

Our tower revenue notes (totaling $3.2 billion) have final maturities in 2035 and 2036. However, if our tower revenue notes are not repaid in full by their anticipated repayment dates (June 2010—$1.7 billion or November

 

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2011—$1.55 billion) then the interest rates increase by approximately 5% per annum (to between approximately 10% to 11%) and substantially all of the cash flows of the subsidiaries issuing the tower revenue notes (Excess Cash Flow as defined in the tower revenue notes indenture) will be used to repay principal. We currently expect estimated Excess Cash Flow of the issuers of the tower revenue notes of approximately $385 million for full year 2009, exclusive of the Tower Revenue Notes purchased by CCIC, representing approximately two-thirds of our annualized consolidated cash flows from operations for 2009. Should this occur, we anticipate having sufficient liquidity to operate our existing business with no impact on our operations. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for a tabular presentation of our debt maturities as of September 30, 2009, pro forma for the issuance of the 7.125% senior notes.

Long-term Strategy. Our long-term strategy contemplates funding our discretionary investments primarily with operating cash flows and, in certain instances, potential future debt financings and issuances of equity or equity related securities. Over the long-term, we may continue to increase our debt in nominal dollars if we realize anticipated future growth in our operating cash flows in order to maintain debt leverage that we believe is appropriate to drive long-term stockholder value and optimize our weighted-average cost of capital. Over the long term, we target leverage of approximately five times Adjusted EBITDA and interest coverage of approximately three times Adjusted EBITDA, subject to various factors such as the availability and cost of capital and the potential long-term return on our discretionary investments.

Summary Cash Flow Information

A summary of our cash flows is as follows:

 

     Nine Months Ended September 30,  
     2009     2008     Change  
     (In thousands of dollars)  

Net cash provided by (used for):

      

Operating activities

   $ 393,673      $ 345,755      $ 47,918   

Investing activities

     (110,504     (369,356     258,852   

Financing activities

     (166,795     22,693        (189,488

Effect of exchange rate changes on cash

     (2,762     (1,233     (1,529
                        

Net increase (decrease) in cash and cash equivalents

   $ 113,612      $ (2,141   $ 115,753   
                        

Operating Activities

The increase in net cash provided by operating activities for the first nine months of 2009 of $47.9 million, or 14%, from 2008 was primarily due to growth in our site rental business. We expect net cash provided by operating activities for the year ended December 31, 2010 will be greater than the year ended December 31, 2009, primarily as a result of our anticipated growth in our core site rental business, partially offset higher by cash interest expense. Changes in working capital, and particularly changes in deferred rental revenues, prepaid ground leases and accrued interest, can have a dramatic impact on our net cash from operating activities for interim periods, largely due to the timing of payments and receipts.

Investing Activities

Capital Expenditures. A summary of our capital expenditures is as follows:

 

     Nine Months Ended September 30,  
     2009    2008    Change  
     (In thousands of dollars)  

Land purchases

   $ 6,113    $ 164,413    $ (158,300

Construction or purchases of towers

     15,470      106,535      (91,065

Sustaining

     15,692      14,835      857   

Tower improvements and other

     74,022      56,954      17,068   
                      

Total

   $ 111,297    $ 342,737    $ (231,440
                      

 

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As previously mentioned, we have reduced our total capital expenditures from our 2008 levels in order to retire our debt. These reductions in capital expenditures include reductions in purchases of land, and construction and purchase of towers. Reductions in capital expenditures related to customer installations are not contemplated. Our decisions regarding capital expenditures are influenced by the availability and cost of capital and expected returns on alternative investments. The following is a discussion of certain aspects of our capital expenditures.

 

   

Other than sustaining capital expenditures, which we expect to be approximately $26 million to $28 million for the year ended December 31, 2009, our capital expenditures are discretionary and are made with respect to activities we believe exhibit sufficient potential to improve our long-term results of operations on a per share basis. We expect to use roughly $175 million of our cash flow on capital expenditures for full year 2009, with approximately $100 million of our capital expenditures targeted for our existing tower assets related to customer installations and related capacity improvement.

 

   

While we have reduced our purchases of land, we expect to maintain long-term control of our towers by continuing to supplement land purchases with (1) extensions of the terms of ground leases for land under our towers and (2) acquisitions of land on installment, which requires substantially less liquidity than purchases of land. We will likely increase our purchases of land in the future. As of September 30, 2009, we owned in fee or had perpetual or long-term easements in the land under approximately 24% of our towers; and leases for land under our towers have an average remaining maturity of approximately 30 years after considering renewal options.

Financing Activities

9% Senior Notes. In January 2009, we issued $900.0 million principal amount of 9% senior notes due 2015 in a public offering pursuant to an indenture. These 9% senior notes are general obligations of CCIC, which rank equally with all existing and future senior debt of CCIC. The 9% senior notes are effectively subordinated to all liabilities (including trade payables) of each subsidiary of ours and rank pari pasu with the 7.125% senior notes. The 9% senior notes bear interest at a rate of 9.0% per annum, payable semi-annually beginning on July 15, 2009. We received net proceeds of $795.7 million, net of fees and discounts. We have used a portion of the net proceeds to retire (1) a portion of our 2006 mortgage loan, (2) a portion of our 2004 mortgage loan, and (3) the amount outstanding under our revolving credit facility. See note 6 to our consolidated financial statements.

The 9% senior notes contain restrictive covenants that are discussed in “Item 2. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity.”

7.75% Secured Notes. On April 30, 2009, two of our indirect subsidiaries issued $1.2 billion principal amount of 7.75% secured notes due 2017 pursuant to an indenture. These 7.75% secured notes are secured on a first priority basis by a pledge of the equity interests of the Guarantors, and by certain other assets of the Guarantors. The 7.75% secured notes are obligations of the subsidiaries that were previously obligated under the 2006 mortgage loan. The 7.75% secured notes will not be guaranteed by and will not be obligations of CCIC or any of its subsidiaries other than the 7.75% Notes Issuers and Guarantors. The 7.75% secured notes will be paid solely from the cash flows generated from operations of the towers held directly and indirectly by the issuers and the Guarantors. These 7.75% secured notes bear interest at a rate of 7.75% per annum, payable quarterly beginning on August 1, 2009. We received net proceeds of $1.15 billion, net of fees and discounts. As discussed herein, we have used the net proceeds, along with other cash, to repay the portion of our 2006 mortgage loan not previously purchased. See note 6 to our consolidated financial statements.

See “Item 2. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity” for a discussion of debt covenants.

2009 Securitized Notes. On July 31, 2009, certain indirect subsidiaries of ours issued $250 million principal amount of 2009 securitized notes, with a weighted-average interest rate of 7.1%, pursuant to an indenture. Such subsidiaries hold a portion of the U.S. towers acquired in the Global Signal Merger. The 2009 securitized notes are secured by, among other things, (1) a security interest in substantially all of the personal property of the 2009 securitized notes Issuers, (2) a pledge of the equity interests of the subsidiaries holding such towers, and (3) a security interest in the 2009 Securitized Notes Issuers’ contracts with customers to lease space on their towers (space licenses). The 2009 securitized notes are not guaranteed by and are not obligations of CCIC or any of its subsidiaries other than the 2009 securitized notes issuers and the indirect subsidiary of ours that is the parent of the 2009 securitized notes issuers and a guarantor of the 2009 securitized notes. We received proceeds of $246.3 million, net of fees, from the issuance of the 2009 securitized notes. We have used the net proceeds to repay the portion of our 2004 mortgage loan not previously purchased. See note 6 to our consolidated financial statements.

 

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The 2009 securitized notes consist of $175 million of principal amount that amortizes during the period beginning in January 2010 and ending in 2019, and $75 million of principal amount that amortizes during the period beginning in 2019 and ending in 2029. The life of the 2009 securitized notes is substantially longer than the five year balloon maturities that we previously obtained in the securitization market. The 2009 securitized debt was rated investment grade with tranche ratings of A2 and A3 from Moody’s.

See “Item 2. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity” for a discussion of debt covenants.

7.125% Senior Notes. In October 2009, we issued $500.0 million principal amount of 7.125% senior notes due 2019 in a public offering pursuant to an indenture. These 7.125% senior notes are general obligations of CCIC, which rank equally with all existing and future senior debt of CCIC. The 7.125% senior notes are effectively subordinated to all liabilities (including trade payables) of each subsidiary of ours and rank pari pasu with the 9% senior notes. The 7.125% senior notes bear interest at a rate of approximately 7.1% per annum, payable semi-annually beginning on May 1, 2010. We expect to use the net proceeds for general corporate purposes, which may include the repurchase or repayment of certain indebtedness of our subsidiaries. See note 15 to our consolidated financial statements.

The 7.125% senior notes contain restrictive covenants that are discussed in “Item 2. MD&A—Liquidity and Capital Resources—Factors Affecting Sources of Liquidity.”

Debt Purchases and Repayments. The following is a summary of our partial purchases and repayments of debt during the first nine months of 2009.

 

     Principal Amount    Cash Paid(a)    Gains (losses)  
     (In thousands of dollars)  

2004 Mortgage Loan(c)

   $ 293,505    $ 293,711    $ (2,128

2006 Mortgage Loan(c)

     1,550,000      1,634,184      (85,654

2005 Tower Revenue Notes(b)

     202,341      204,015