UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

(Mark one)
☒	ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
For the fiscal year ended December 31, 2017
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001‑34686

HAWAIIAN TELCOM HOLDCO, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)	16‑1710376 (I.R.S. Employer Identification No.)

1177 Bishop Street

Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

808‑546‑4511

(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act: None

Securities to be registered pursuant to Section 12(g) of the Act:


Common Stock, par value $0.01 per share		The NASDAQ Stock Market, LLC
(Title of class)		(Name of each exchange on which registered)

Indicate by check mark if the registrant is a well‑known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

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~~or ~~the~~an ~~definitions~~emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” ~~and~~ “smaller reporting company,” and “emerging growth company” in Rule 12b‑-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☐ Accelerated Filer ☒ Non‑Accelerated Filer ☐(Do not check if asmaller reporting company) Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the registrant’s common stock held by non‑affiliates as of June 30, ~~2016~~2017 was $~~123~~148,~~893~~761,~~946~~372.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of March 1, ~~2017~~ 2018, 11,~~513~~587,~~279~~963 shares of the registrant’s common stock, $0.01 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s Proxy Statement (Part III of Form 10‑K)

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HAWAIIAN TELCOM HOLDCO, INC.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	1718
Item 1B.	Unresolved Staff Comments	2628
Item 2.	Properties	2628
Item 3.	Legal Proceedings	2628
Item 4.	Mine Safety Disclosures	2628
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2728
Item 6.	Selected Financial Data	3031
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3132
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	4344
Item 8.	Financial Statements and Supplementary Data	4445
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	7982
Item 9A.	Controls and Procedures	7982
Item 9B.	Other Information	82
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	8083
Item 11.	Executive Compensation	8290
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	82109
Item 13.	Certain Relationships and Related Transactions, and Director Independence	82111
Item 14.	Principal Accountant Fees and Services	82113
PART IV
Item 15.	Exhibits, Financial Statement Schedules	83114
Item 16.	Form 10-K Summary	87118

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GLOSSARY OF TERMS

Defined below are certain terms used in this report:

Term		Definition
AAIS		Assignment, activation and inventory system
ADM		Add‑drop multiplexer
AIN		Advanced intelligent network
ATM		Asynchronous transfer mode
AWAS		Automated workforce administration system
BAiO		Business All‑in‑One
CAF		Connect America Fund
CLEC		Competitive local exchange carrier
Communications Act		Communications Act of 1934, as amended
CPE		Customer premises equipment
CSRIC		Reliability and Interoperability Council
DEU/DEUCE		Data exchange utility and connection engine systems
FCC		Federal Communications Commission
FTTN		Fiber‑to‑the‑node
FTTP		Fiber‑to‑the‑premise
GPON		Gigabit Passive Optical Network
HPUC		Hawaii Public Utilities Commission
HSI		High‑speed Internet
IBEW		International Brotherhood of Electrical Workers Local 1357
ILEC		Incumbent local exchange carriers
IP‑VPN		Internet protocol Virtual Private Network
IP		Internet protocol
ISDN		Integrated service digital network
ISP		Internet Service Providers
LATA		Local Access Transport Area
LQP		Loop qualification system
MDU		Multi‑dwelling units
MPLS		Multiprotocol Label Switching
MVNO		Mobile virtual network operator
NIST		National Institute of Standards and Technology
NOC		Network Operations Center
Oceanic		Oceanic Time Warner
PBRSU		Performance‑based restricted stock units
PBX		Private‑branch exchange
QoS		Quality of service
RBOC		Regional Bell operating companies
RSN		Regional Sports Network
ROADM		Reconfigurable optical add‑drop multiplexer
OAM		Operations, administration and maintenance
SDH		Synchronous digital hierarchy
SLC		Subscriber line charges
SONET		Synchronous Optical Network
STP		Signal transfer points
SystemMetrics		SystemMetrics Corporation
TDM		Time Division Multiplexing
UNE		Unbundled network element
UNE‑P		Unbundled network element platform
VoIP		Voice over Internet Protocol
VDSL2		Very High Bit Rate Digital Subscriber Line Generation 2
Wavecom		Wavecom Solutions Corporation
WATS		Wide Area Telephone Service

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Forward‑Looking Statements

This Annual Report on Form 10‑K contains certain statements that constitute forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, any statement, projection or estimate that includes or references the words “believes”, “anticipates”, “intends”, “expects”, or any similar expression falls within the safe harbor of forward‑looking statements contained in the Reform Act. These forward‑looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward‑ looking statements by us are based on estimates, projections, beliefs, and assumptions of management and are not guarantees of future performance. Such forward‑looking statements may be contained in this Form 10‑K under “Item 1A—Risk Factors” and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward‑looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause the forward‑looking events discussed in this Form 10‑K not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward‑looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10‑K.

Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward‑looking statements and from historical results include, but are not limited to, the following:

the effect of the pendency of the Merger (See “Part I, Item 1—Business, History and Organizational Structure), including the failure to consummate the Merger for any reason, including the failure to satisfy all of the closing conditions;

failures in our critical back office systems and IT infrastructure;

breach of our data security systems;

increases in the amount of capital expenditures required to execute our business plan;

the loss of certain outsourcing agreements, or the failure of any third party to perform under these agreements;

adverse changes to applicable laws and regulations;

the failure to adequately adapt to technological changes in the telecommunications industry, including changes in consumer technology preferences;

adverse economic conditions in Hawaii;

the availability of lump sum distributions under our union pension plan;

limitations on the ability to utilize net operating losses due to an ownership change under Internal Revenue Code Section 382;

the inability to service our indebtedness;

limitations imposed on our business from restrictive covenants in our credit agreements;

iii

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severe weather conditions and natural disasters;

network disruptions or other delays or interruptions of service; and

failure to renegotiate programming contracts with television content providers.

~~iii~~iv

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PART I

Item 1. Business

Business Overview

Hawaiian Telcom Holdco, Inc. (the Company) is the largest full service provider of communications services and products in Hawaii. WeThrough ~~operate~~our ~~two~~operating ~~primary~~subsidiaries we provide local telephone service including voice and data transport, enhanced custom calling features, network access, directory assistance and private lines. In addition, we provide high speed Internet, long distance services, next generation television service, next generation Internet protocol (IP) based network services, customer premises equipment, data solutions, managed services, data center services including colocation and virtual private cloud, billing and collection and wireless services. Our services are offered on all of Hawaii’s major islands, except for our next generation television service, which currently is available only on the island of Oahu. As of December 31, 2017, our telecommunications operations served approximately 271,000 voice access lines, 22,000 business ~~segments:~~Voice over Internet Protocol (VoIP) lines, 110,000 high-speed Internet lines, and 45,000 video subscribers.

~~Telecommunications. This~~See ~~segment~~“—Sources ~~provides~~of ~~local~~Revenue” ~~telephone~~below ~~service including voice~~ and ~~data~~“Segment ~~transport,~~Information” ~~enhanced~~in ~~custom~~the ~~calling~~notes ~~features,~~to ~~network access, directory assistance and private lines. In addition,~~ the ~~Telecommunications~~financial ~~segment~~statements provides high speed Internet, long distance services, next generation television service, next generation Internet protocol (IP) based network services, customer premises equipment, data solutions, managed services, billing and collection, wireless services, and pay telephone services. Our services are offered on all of Hawaii’s major islands, except for ~~our~~additional ~~next~~information ~~generation~~regarding ~~television~~revenues service, which currently is available only on the island of Oahu. As of December 31, 2016, our telecommunications operations served approximately 296,000 voice access lines, 19,000 business Voice over Internet Protocol (VoIP) lines, 111,000 high-speed Internet lines, and ~~42,000~~total ~~video subscribers~~assets.

Data Center Services. This segment consists of data center services including colocation and virtual private cloud.

See “—Segments and Sources of Revenue” below and “Segment Information” in the notes to the financial statements for information regarding revenues and total assets for each business segment.

History and Organizational Structure

General

The Company was incorporated in Delaware in 2004. Originally incorporated in Hawaii in 1883 as Mutual Telephone Company, our Hawaiian Telcom, Inc. subsidiary has a strong heritage of over ~~133~~134 years as Hawaii’s communications carrier. From 1967 to May 1, 2005, we operated as a division of Verizon Communications Inc. (Verizon) or its predecessors. On May 2, 2005, the Verizon businesses conducted in Hawaii were reorganized and consolidated (2005 Reorganization) into Hawaiian Telcom Communications, Inc., a Delaware corporation and wholly owned subsidiary of the Company. As a result of the 2005 Reorganization, we became a stand-alone provider of communications services, operating as Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc., both wholly -owned subsidiaries of Hawaiian Telcom Communications, Inc.

On ~~December~~July 19, ~~2008~~2017, the Company, ~~Hawaiian~~Cincinnati ~~Telcom~~Bell ~~Communications,~~ Inc. (Cincinnati Bell), ~~Hawaiian~~an ~~Telcom~~Ohio corporation, ~~Inc~~Twin Acquisition Corp., ~~Hawaiian~~a ~~Telcom~~Delaware ~~Services~~corporation ~~Company,~~and ~~Inc.~~a ~~and~~wholly-owned ~~certain~~subsidiary ~~other~~of ~~affiliates~~Cincinnati Bell (~~collectively~~Merger Sub), ~~the~~entered ~~Debtors~~into an Agreement and Plan of Merger (Merger Agreement), ~~filed~~pursuant ~~voluntary~~to ~~petitions~~which ~~for~~Merger ~~relief~~Sub ~~under~~will ~~chapter~~merge 11with ofand into the ~~U.S.~~Company ~~Bankruptcy~~and ~~Code~~the inCompany ~~order~~will tobe ~~facilitate~~the asurviving ~~balance~~corporation ~~sheet~~(the ~~restructuring~~Merger). On ~~The~~November ~~Debtors’~~7, ~~chapter~~2017, 11our ~~Plan~~stockholders ofapproved ~~Reorganization~~the ~~became effective~~Merger, ~~and~~but the ~~Company~~Merger ~~and~~remains ~~other~~subject ~~Debtors~~to ~~emerged~~additional ~~from~~closing ~~chapter~~conditions ~~11,~~including oncertain ~~October~~regulatory 28approvals. Assuming all closing conditions are met, ~~2010~~the Company estimates the Merger to close near the middle of 2018.

Hawaiian Telcom, Inc., a Hawaii corporation, is the incumbent local exchange carrier (“ILEC”) in Hawaii and operates our regulated local exchange carrier business. Hawaiian Telcom Services Company, Inc., a Delaware corporation, operates other businesses including Internet, television, advanced communications and network services, managed services, data center services including colocation and virtual private cloud, cloud‑-based services, long distance and wireless businesses. SystemMetrics Corporation, a wholly‑-owned subsidiary of Hawaiian Telcom Services Company, Inc. and a Hawaii corporation, provides data center services including colocation and virtual private cloud. Wavecom Solutions Corporation, a wholly‑-owned subsidiary of Hawaiian Telcom, Inc. and a Hawaii corporation, provides voice, data and converged services.

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Industry Overview

The telecommunications industry is comprised of companies involved in the transmission of voice, data and video communications over various media and through various technologies. There are two predominant types of local telephone service providers, or carriers, in the telecommunications industry: incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs). An ILEC refers to the regional Bell operating companies (RBOCs), which were the local telephone companies created from the breakup of AT&T in 1984, as well as small and midsize independent telephone companies, such as Hawaiian Telcom, Inc., Cincinnati Bell Inc. and Consolidated Communications, Inc., which sell local telephone service. These ILECs were the traditional monopoly providers of local telephone service prior to the passage of the Telecommunications Act of 1996. In contrast, a CLEC is a competitor to local telephone companies that has been granted permission by a state regulatory commission to offer local telephone service in an area already served by an ILEC.

Over the last decade, the U.S. telecommunications industry has undergone significant structural changes as many of the largest service providers have achieved growth through acquisitions and mergers, while others have restructured or entered bankruptcy to obtain protection from creditors. In addition, the Telecommunications industry continues to see changes in consumer behavior as products and services continue to evolve. Despite these changes, the demand for telecommunications services as a whole, particularly data services, has remained strong, and telecommunications companies increasingly bundle services and provide integrated offerings for customers. Hawaii’s telecommunications industry remains active, and demand for telecommunications services overall remains strong, due in part to the State’s geographic isolation. Hawaii is connected to the mainland United States and Asia via ~~cable~~undersea cables and several satellite networks.

Our Business Strategy

Our primary objective is to ~~become~~be Hawaii’s Technology LeaderSM and the number one service provider of innovative ~~“Always OnSM”~~ communications, information and entertainment solutions to the people and businesses of Hawaii. The key elements of our business strategy are to grow our business with a focus on delivering superior service to our customers, which includes the following:

· Leverage our broadband network. Our broadband network is the foundation for our services to our customers, and we continue to expand its footprint and invest in advanced technology platforms that support advanced communications and network services. We completed the build‑out of our Multiprotocol Label Switching (MPLS) core network statewide and continue to deploy both fiber‑to‑the‑node (FTTN) and fiber‑to‑the‑premise (FTTP) access technologies to enhance and expand the speed and reach of our broadband network. We are deploying high‑speed technologies such as Very High Bit Rate Digital Subscriber Line Generation 2 (VDSL2), Gigabit Passive Optical Network (GPON), and Metro Ethernet to deliver new 1 Gbps broadband service and other high-bandwidth IP-based services such as our next‑generation television to consumers, Voice over Internet Protocol (VoIP), Internet protocol Virtual Private Network (IP‑VPN), managed services, data center services, including colocation and virtual private cloud, and cloud‑based services to businesses. In ~~both~~all customer ~~segments~~channels, we continue to enhance our services by adding new service options, features and functionality.

Drive a customer‑ and sales‑focused organization. Our customer operations team allows us to more effectively focus on customer satisfaction and successful delivery of our services, with the ultimate goal of delivering a consistent and comprehensive customer experience.

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· Deliver new and innovative products and services to attract and retain customers. We have successfully added, and expect to continue to add, new products and services to our customer offerings. We offer a full range of services, including voice, Internet, television, data, customer premises equipment (CPE), wireless, advanced communications and network services, managed services, data center services including colocation and virtual private cloud, and cloud-based services supported by the reach and reliability of Hawaii’s largest next-generation fiber network, 24x7 state-of-the-art network operations center and Tier III data center. We believe our suite of next-generation data and IP based services, such as our Fiber-to-the-Home and Fiber-to-the-Business Internet, business VoIP, IP VPN services, and cloud applications better positions us to compete for new customers and drive winback opportunities while also allowing us to improve retention of existing customers by migrating them from legacy services. Our next generation television service, Hawaiian Telcom TV, is an important growth component for our consumer products portfolio and critical to our strategy to win the home and capture a share of the significant television and entertainment market opportunity.

Improve operating profitability and capital efficiencies. We strive to maintain a disciplined approach to managing operating expenses and capital spending. Our focus on driving operational improvements in our business has resulted in cost savings, and we continue to identify initiatives that we believe will further improve our cost structure. In addition, we continue to review and renegotiate contracts with key IT and outsource suppliers, which has led to additional cost savings. We manage our capital expenditures to optimize returns through disciplined planning and targeted investment of capital. Our strategy is to continue making strategic investments in our business in order to position the Company for long‑term growth.

In furtherance of ~~the~~our ~~Company’s~~ growth strategy, we continue to make important investments that further our business objectives:. In August 2014, the Company joined a consortium of national and international companies to build and operate the Southeast Asia to United States (SEA-US) trans Pacific submarine cable system connecting Indonesia, the Philippines, Guam, Hawaii and the mainland United States. The cost to construct the system is expected to be approximately $235 million. We paid $25 million for a fractional ownership in the system. As part of this project, we constructed a cable landing station in Makaha, Hawaii, and provide cable landing services to SEA-US. The system became operational in August 2017, and provides an initial 20 Tbps of capacity using state-of-the-art 100Gbps technology to accommodate the statewide increase in data consumption.

· In September 2013, we completed the acquisition of SystemMetrics Corporation (SystemMetrics), a leading provider of data center services in the State of Hawaii. The acquisition increased the scale and scope of our existing data center operations by adding a state‑of‑the art facility in Honolulu with 6,500 square feet of data center capacity and room for expansion. SystemMetrics complements our existing portfolio of business service offerings and enables us to further diversify our revenue base.

· In August 2014, the Company joined a consortium of national and international companies to build and operate the Southeast Asia to United States (SEA-US) trans Pacific submarine cable system connecting Indonesia, the Philippines, Guam, Hawaii and the mainland United States. The cost to construct the system is expected to be approximately $235 million. The Company will pay $25 million over the multi-year construction period, with the majority to be paid at periodic milestones in 2016 and 2017, for a fractional ownership in the system, of which $16.6 million has been incurred through December 31, 2016. As part of this project, the Company has agreed to construct a cable landing station in Makaha, Hawaii, and to provide cable landing services to SEA-US. Management expects the system to be completed in the second half of 2017, and will provide an initial 20 Tbps of capacity using state of the art 100Gbps technology to accommodate the statewide increase in data consumption.

Our Competitive Strengths

We believe the following are among our core competitive strengths and enable us to differentiate ourselves in the marketplace and help us successfully execute our business strategy:

· Strong Local Presence. We have been serving Hawaii’s communities for over ~~132~~134 years and employ approximately 1,~~300~~200 employees statewide. Each year, we donate to various local charities and our employees volunteer thousands of hours of community service. Moreover, we believe we are able to understand our customers’ needs because our employees share many of those same needs. We also share Hawaii’s history, heritage, and strive to be an example of Hawaii’s unique values. Because we are locally managed, we believe we are more responsive to Hawaii’s consumers and businesses.

· Growth‑Oriented Product Portfolio. We are the only communications service provider in our market that can provide the same broad array of services to both consumers and business customers that includes voice, Internet, data, CPE, wireless, advanced communications and IP‑based network services, managed services, data center services including colocation and virtual private cloud, and cloud‑based services. Our expanding service suite, including high‑quality enhanced data networking services such as our business VoIP and IP‑VPN services, our managed services, and our cloud applications are targeted at the key growth areas in our marketplace. Our next‑generation television service, employing Ericsson Mediaroom™, is

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· Advanced Network Infrastructure. We own one of the State’s most extensive and reliable communications networks, including one of the largest fiber optic cable networks in Hawaii. Our statewide MPLS backbone and next-generation fiber network is one of the largest IP networks in Hawaii and allows us to deliver advanced IP‑-based services to over 99% of the State’s population. Our network is supported by ~~Hawaii’s~~a ~~only~~ 24x7 state‑-of‑-the‑-art network operations center and Tier III data center. We continue to expand our fiber network and to enhance and expand the speed and reach of our broadband network, which we believe will enable us to offer new products and services that will generate growth in our business and allow us to compete more effectively in the marketplace.

· Strong Management Team. We have assembled an experienced management team that we believe is well‑qualified to lead our ~~Company~~company and execute our strategy. Our management team has significant operational experience in the telecommunications industry combined with extensive knowledge of our local market, which we believe will continue to be a critical driver of our success going forward.

Our Products and Services

Telecommunications

We generally classify our operations and related products and services into three core customer channels: Business, Consumer, and Wholesale. Presented below is an overview of the products and services we offer in each customer channel.

Business Channel

Data Services

We provide a broad portfolio of data services, which we believe are a key growth area driven by demand for increasing bandwidth and more advanced data solutions from business customers. We offer a range of broadband services including High-Speed Internet access, an asymmetrical broadband service geared toward small and medium-sized business customers, with speeds up to 1 Gigabits per second (Gbps) depending on the customer’s location, and Dedicated Internet Access (DIA), a symmetrical Internet access delivered over Ethernet with speeds up to 10 Gbps.

The role of business communication providers is evolving. Consistent with this, we have expanded into application centric, advanced communications and network services. Our services include Routed Network Service, a high performance IP virtual private networking service for business customers; Enhanced Internet Protocol Data Service, a multipoint switched Ethernet service; and Hosted PBX, a business VoIP service that provides businesses with a complete, converged communication solution in a hosted package.

In addition to advanced communications and network services, we continue to provide special access tariff services such as frame relay, a shared wide area network service, and dedicated private lines. See “—Regulation” for further discussion of special access.

Voice Services

Voice services include basic local phone and long distance services for business customers. We provide basic local services generally for a fixed monthly recurring charge and can be enhanced with a variety of value added services such as call waiting, caller ID, voice messaging, three way calling, call forwarding and speed dialing. Value added services may be purchased individually or as part of a package offering for a monthly recurring charge. The rates that can be charged to customers for basic local and certain other services are regulated by the HPUC. We charge business customers higher rates to recover a portion of the costs of providing local service to residential customers, as is customary in the industry. See “—Regulation” for further discussion of regulatory matters.

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Voice Services

Equipment and Managed Services

We have resale relationships and certifications with a number of branded technology vendors, which allows us to competitively sell and install a wide variety of telecommunications equipment such as key, PBX, and other hardware solutions. In addition, we provide managed services as an end -to -end solution that manages, monitors, and supports a business’s network, CPE, and corporate data security. As business networks become more complex, the amount of time and capital businesses must spend to support their networks increases accordingly. Our managed services enable customers to focus on their core business by leaving the day -to -day management of their networks to us. Our managed services product portfolio consists of managed network and security services, IT professional services, and security consulting.

Consumer Channel

Video Services

We introduced our next-generation television service on the island of Oahu in July 2011. Our Hawaiian Telcom TV service is 100% digital with hundreds of local, national, international and music channels, including high-definition, premium, ~~Pay~~pay ~~Per~~per ~~View~~view channels and ~~Video~~video on-demand ~~Demand~~ service. During ~~2016~~2017, we continued to invest in our network to provide integrated digital video, high-speed Internet and voice services to new and existing customers by adding 12over 3,000 new households enabled for our TV service (“HHE”) bringing the total number of HHE to ~~202~~over 205,~~000~~600 as of the end of ~~2016~~2017. The addition of new HHE in our single family home footprint is expected to subside ~~beginning~~going ~~in 2017~~forward. Our IPTV service is expected to be a critical growth component for our consumer products portfolio and an anticipated anchor of our service bundling strategy. With television, we are now able to bundle digital video, high-speed Internet and voice services in certain areas of the island of Oahu.

Internet Services

We provide high-speed Internet access to our residential customers with speeds up to 1 Gbps in the FTTP footprint. ~~For~~In ~~customers who order speeds of 50 Mbps or higher~~2016, we ~~also~~launched ~~offer~~WiFi ~~Wi-Fi~~ Plus, a premium program that provides customized solutions to maximize customers’ in-home Wi-Fi experience.

Voice Services

Consumer voice services include basic local telephone and long distance services. We provide additional value-added features such as call waiting, caller ID, voice messaging, three -way calling, call forwarding and speed dialing. We also offer a variety of long distance plans, including rate plans based on minutes of use, flexible or unlimited long distance calling services. The rates that can be charged to customers for basic local and certain other services are regulated by the HPUC.

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Wholesale Channel

We provide special access or network transport services to our wholesale customers, network operators and other telecommunications carriers. Special access services include IP-based private networks, Ethernet, as well as Synchronous Optical Network (SONET), and Time Division Multiplexing (TDM) transport services. See “—Regulation” for further discussion of special access. In addition, we also provide wireless backhaul, or fiber-to-the-tower connections to support the growing demand for wireless broadband.

Other

Other services include interstate and intrastate switched access for the origination, transport and termination of long distance calls (see “—Regulation” for further discussion of access charges), Connect America Fund support (see “—Regulation” for further discussion of universal service), operator services, billing and collection services and space and power rents for colocation services.

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and power rents for colocation services. We also provide other services including public pay telephone services at approximately 3,100 locations throughout the State of Hawaii.

In addition, we offer wireless services pursuant to a mobile virtual network operator (MVNO) services agreement with Sprint Spectrum, L.P. (Sprint). That agreement allows us to resell Sprint wireless services, including access to Sprint’s nationwide personal communication service (PCS) wireless network to residential and business customers in Hawaii under the Hawaiian Telcom® brand name. The services agreement with Sprint was renewed in May 2015 for a 3-year term which expires in May 2018.

Data Center Services

We provide colocation and virtual private cloud data center services to our business customers. Colocation enables our customers to install and remotely operate their IT equipment. Virtual private cloud services include the use of shared virtualized computing resources and a variety of customer control features and services, including back up data storage and cloud-based network security. We also offer a complete cloud service portfolio that includes a Desktop-as-a-Service product, the Microsoft® Office 365 suite of cloud-based Software-as-a-Service products, along with Infrastructure-as-a-Service and Security-as-a-Service. In addition, we provide related professional services, including planning, design, implementation and support services, to enable our customers to better manage and transition between their IT solutions. We consider data center services as part of our business channel.

Markets and Customers

Telecommunications

We have been a telecommunications provider in Hawaii for more than ~~133~~134 years. Our market consists of 86 central offices serving an area of approximately 6,~~263~~352 square miles on the islands of Oahu, Maui, Hawaii, Kauai, Molokai and Lanai. We are the incumbent provider of local exchange services within this area and own the State’s most extensive local telecommunications network, with approximately ~~299~~272,000 local access lines served as of December 31, ~~2016~~2017, of which 45% served residential customers, ~~54% served business customers,~~ and ~~the remaining 1~~55% served ~~other~~business customers.

Our market is characterized by high population density, with approximately 7072% of the state’s population concentrated on Oahu over an area of approximately 598 square miles, or approximately 1,~~700~~500 persons per square mile. In addition, approximately 34% of the households in Hawaii reside in multi -dwelling units (MDUs)—approximately 4441% on Oahu—compared with approximately 2631% in the U.S. overall. This concentration of customers and commerce provides opportunities to leverage our network infrastructure to deliver products and services efficiently and in a cost effective manner and to market and sell our services more effectively. Given Hawaii’s geographic isolation ~~and the diversity of its population~~, Hawaii residents and businesses may have telecommunications needs that are different from those onin the mainland United States. Furthermore, in ~~2015~~2016, the median household income in Hawaii was estimated to exceed the national median household income by approximately $1615,000. For the foregoing reasons, our strategy is to leverage the distinctive qualities of the Hawaii market to develop customized, local marketing strategies.

Our business marketplace is dominated by several key industries. The federal government accounts for approximately 12% of gross state product. With the U.S. Pacific Command, one of the largest U.S. unified service commands, based in Hawaii, the federal government, collectively through its many departments and agencies, is one of our largest customers. Similarly, Hawaii state and local government, collectively through their many departments and agencies, constitutes a significant part of our business. The hospitality industry and financial institutions also account for a significant portion of our business. The operations of these leading sectors are communications intensive, and we believe that they are dependent on our modern, reliable services. Hawaii’s small business market (in the aggregate) is also a key driver of Hawaii’s economy—approximately 95% of the companies in Hawaii employ fewer than 50 employees, and these businesses make up a market of approximately 37,000 businesses. We believe that these business customers represent an underserved segment that we are targeting aggressively with new product and service offerings.

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Our business marketplace is dominated by several key industries. The federal government accounts for approximately 12% of gross state product. With the U.S. Pacific Command, one of the largest U.S. unified service commands, based in Hawaii, the federal government, collectively through its many departments and agencies, is one of our largest customers. Similarly, Hawaii state and local government, collectively through their many departments and agencies, constitutes a significant part of our business. The hospitality industry and financial institutions also account for a significant portion of our business. The operations of these leading sectors are communications intensive, and we believe that they are dependent on our modern, reliable services. Hawaii’s small business market (in the aggregate) is also a key driver of Hawaii’s economy—approximately 95% of the companies in Hawaii employ fewer than 50 employees, and these businesses make up a market of approximately 38,000 businesses. We believe that these business customers represent an underserved segment that we are targeting aggressively with new product and service offerings.

Data Center Services

We believe there is a significant growth opportunity to provide data center services, including colocation and virtual private cloud, to businesses across the State of Hawaii. There are two important trends driving the growth in the adoption of data center services—the increasing use of cloud -based technologies by business customers to run their most important business functions, and the increasing demand for outsourced solutions. At present, the percentage of businesses in Hawaii that use colocation and virtual private cloud services is small compared to utilization in similarly sized mainland U.S. markets.

Competition

The telecommunications industry is highly competitive. We experience competition from many communications service providers, including ~~the~~Charter Communications d/b/a Spectrum (Spectrum), which acquired local cable operator Oceanic Time Warner (Oceanic), in 2016; wireless carriers,; long distance providers,; competitive local exchange carriers,; Internet service providers,; Internet information providers,; over‑-the‑-top hybrid voice providers,; and other companies that offer network services and managed enterprise solutions. Many of these companies have a strong market presence, brand recognition, and existing customer relationships, all of which contribute to competition that may affect our future revenue growth. We expect competition to intensify as a result of the entrance of new competitors and the rapid development of new technologies, products and services.

~~Oceanic~~Spectrum, ~~a subsidiary of Time Warner Cable Inc.,~~ the second largest cable operator in the United States, is the Company’s most significant competitor. Approximately 70% of the occupied households on Oahu that subscribe to television service subscribe to ~~Oceanic’~~Spectrum's cable television service. ~~Oceanic~~Spectrum also has the majority share of the high speed Internet market in Hawaii, which it uses as a platform to offer voice services utilizing VoIP technology, and markets its cable, high speed Internet, and voice services through competitive bundled offerings. In addition, ~~Oceanic~~Spectrum (~~now~~ marketing business products under “Spectrum Business”) has targeted communications service offerings to small and medium sized businesses. ~~Oceanic~~Spectrum competes aggressively with the Company on products, pricing and marketing. ~~In 2016, Charter Communications acquired Time Warner Cable Inc. but Oceanic continued to operate business-as-usual. In April 2017, Charter is expected to introduce its products and pricing in Hawaii.~~

Wireless communications services continue to constitute a significant source of competition with traditional wireline phone service, especially as wireless carriers expand and improve their network coverage and continue to lower their prices. As a result, many customers have chosen to completely forego use of traditional wireline phone service and instead rely solely on wireless services. We anticipate the wireless substitution trend will continue, and could pose additional threat to our high -speed Internet product, particularly if wireless service rates continue to decline and the wireless service providers are able to deliver faster data speeds. Over the top hybrid providers, such as Skype, ~~and~~ Magic Jack, Vonage, WhatsApp, Messenger, and LINE, also offer the capability to provide local voice and long distance calls using an Internet-connected ~~equipped~~smartphone, tablet or personal computer.

The advanced communications and network services business, as well as the managed services, data center services including colocation and virtual private cloud, and cloud based services businesses, are highly competitive due to the absence of significant barriers to entry. The emergence of non-traditional, application centric players in the market is redefining the role of service providers in these fields.

We are uniquely positioned in the State to bundle data center services with network, managed services, data communications equipment and support services for an end to end, statewide solution. Due to the high cost of commercial real estate in the State of Hawaii, there is a limited inventory of colocation data center space available for Hawaii businesses. There are numerous other providers of cloud based software, including system integrators in Hawaii and web based service providers, that offer software subscriptions and virtual machines on cloud based servers housed in data centers on the mainland U.S. and internationally. However, such out of state solutions raise concerns regarding response latency, the higher cost of private network connectivity from Hawaii and data security.

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~~our~~ We ~~profitability~~are ~~and~~uniquely ~~cash~~positioned ~~flow~~in ~~through~~the ~~targeted~~State ~~reductions~~to inbundle ~~operating~~data ~~expenses~~center ~~and~~services ~~efficient~~with ~~deployment~~network, ofmanaged ~~capital.~~services, Wedata ~~believe~~communications ~~the~~equipment ~~key~~and tosupport ~~success~~services infor ~~these~~an ~~strategies~~end-to-end, isstatewide ~~the~~solution. ~~continued~~Due ~~enhancement~~to ~~and~~the ~~expansion~~high incost ~~the~~of ~~speed~~commercial ~~and~~real ~~reach~~estate ofin ~~our~~the ~~broadband~~State ~~network~~of Hawaii, ~~which~~there weis ~~believe~~a ~~will~~limited ~~enable~~inventory usof tocolocation ~~offer~~data ~~new~~center ~~products~~space ~~and~~available ~~services~~for ~~that~~Hawaii ~~will~~businesses. ~~generate~~There ~~growth~~are innumerous ~~our~~other ~~business~~providers ~~and~~of ~~allow~~cloud-based ussoftware, toincluding ~~compete~~system ~~more~~integrators ~~effectively~~ in ~~the~~Hawaii ~~marketplace.~~and ~~Another~~web-based ~~key~~service toproviders, ~~success~~that isoffer asoftware ~~focus~~subscriptions onand ~~enhancing~~virtual ~~the~~machines ~~customer~~on ~~experience,~~cloud-based asservers wehoused ~~believe~~in ~~exceptional~~data ~~customer~~centers ~~service~~on ~~will~~the ~~differentiate~~mainland usU.S. ~~from~~and ~~our competition~~internationally. ~~Customers~~However, ~~expect~~such ~~industry~~out-of-state ~~leading~~solutions ~~service~~raise ~~from~~concerns ~~their~~regarding ~~service~~response ~~providers. As technologies and services evolve~~latency, the ~~requirement~~higher cost of ~~the~~private ~~carrier~~network toconnectivity ~~excel~~from inHawaii ~~this~~and ~~area~~data ~~is crucial for customer retention~~security.

We employ a number of strategies to combat the competitive pressures we face. Our strategies are focused on preserving and generating new revenues through customer retention, upgrading and upselling services to existing customers, new customer growth, winbacks of former customers, new product and feature deployment, and by managing our profitability and cash flow through targeted reductions in operating expenses and efficient deployment of capital. We believe the key to success in these strategies is the continued enhancement and expansion in the speed and reach of our broadband network, which we believe will enable us to offer new products and services that will generate growth in our business and allow us to compete more effectively in the marketplace. Another key to success is a focus on enhancing the customer experience, as we believe exceptional customer service will differentiate us from our competition. Customers expect industry leading service from their service providers. As technologies and services evolve, the requirement of the carrier to excel in this area is crucial for customer retention.

Network Architecture and Technology

~~Our~~As ~~strategy is to enhance and expand~~ the most technologically advanced broadband communications network in the state of Hawaii and to position ourselves as a key hub for critical trans-Pacific traffic. Pursuing such a strategy has enabled us, among other things, to continue being the market leader in Hawaii for advanced ~~communications~~telecommunications and ~~network services and managed and~~ cloud-based services., Inin ~~2016~~2017, we invested approximately $7976 million in our network ~~including~~to ~~significant~~ensure ~~expenditures~~Hawaii’s tomost ~~expand~~technologically advanced broadband communications network provided the reach, capacity, security and resiliency required of our ~~IP-based~~customers ~~packet~~ and ~~broadband~~to ~~network~~position ourselves as a key hub for critical trans-Pacific traffic. ~~Significant~~Pursuing ~~strides~~such ~~were~~a ~~made~~strategy inhas ~~2016~~enabled us to add hundreds of miles to our fiber network and ~~continuing our transformation toward an optical, IP-based broadband network. Additionally, we believe that our commitment~~ to complete the SEA-US trans-pacific submarine cable system ~~will~~which ~~enable~~enables us to expand data connectivity beyond Hawaii to both the Asia/Pacific and Continental U.S. locations.

MPLS and Transport Network

We believe that our statewide MPLS network is unmatched in Hawaii in reach, capacity, security, resiliency, and reliability. Consisting of two provider core routers, eight provider edge routers, and 39 service edge routers meshed for resiliency throughout the island chain, we offer a wide range of Layer 2 and Layer 3 MPLS services with many advanced features, including advanced traffic engineering support of intelligent QoS (Quality of Service) Service OAM (operations, administration, and management) capabilities, multiple access technologies, standards based routing protocols, Internet access across a single physical connection, and up to 100Gb Ethernet access. Driven by ~~continued~~strong ~~high~~ bandwidth ~~demands~~growth from our high-speed Internet service, next-generation television service, wireless backhaul, and other retail and wholesale business requirements, in ~~2016~~2017, we ~~continued~~expanded tobandwidth ~~expand~~capacity ~~our~~in ~~next~~the ~~generation~~border ~~network~~and ~~with~~core ~~the~~sections ~~introduction~~ of aour ~~provider~~MPLS ~~core~~network ~~architecture~~to ~~that~~accommodate ~~simplifies~~increased demand and utilized our ~~overall~~trans-pacific ~~network~~submarine ~~while~~cable ~~increasing~~system ~~scale~~for ~~and~~direct ~~maintaining~~connections to the ~~level~~world’s ofleading ~~resiliency~~internet ~~expected~~carriers bywith ~~our~~100Gb ~~customers~~connections. These interconnected platforms combine wave division multiplexing (WDM) transport, reconfigurable optical add-drop multiplexers (ROADM), and centralized carrier Ethernet switching in a single converged device ~~helping~~allowing us to meet ~~the~~our ~~growing~~customers’ bandwidth needs ateconomically. aIn ~~more~~2017, ~~affordable~~we ~~price.~~also ~~Our~~introduced ~~current~~next ~~backbone~~generation ~~infrastructure~~Optical ~~consists~~Networking ofleveraging lower-cost 100Gb Data Center Interconnect (DCI) and Point-to-Point capabilities. Our two border routers are provisioned with diverse trans-Pacific links to mainland carriers, along with expanded peering and content caching arrangements with global providers to reduce latency and buffering to our customers. InStreaming ~~2017,~~Internet wevideo ~~plan~~is toa ~~continue~~major todemand ~~expand~~on our bandwidth capacity. Thus, in ~~the~~2017, ~~border~~we ~~and~~expanded ~~core~~our ~~sections~~on-island ofVideo ~~our~~Caches ~~MPLS~~from ~~network~~major toCDN ~~accommodate~~(Content ~~increased~~Delivery ~~demand~~Network) Providers and ~~utilize~~activated ~~our~~direct ~~trans-pacific~~interconnection ~~submarine~~to ~~cable~~these ~~system~~providers. In ~~for~~2018, ~~direct~~we ~~connections~~plan to ~~the~~continue ~~world’s~~to ~~leading~~expand ~~internet~~bandwidth ~~carriers~~capacity in core, edge, and access sections of our MPLS network to accommodate increasing demand.

Our telecommunication infrastructure includes more than 16,000 sheath miles of fiber optic cable and copper wire distribution lines. Submarine and deep-sea fiber optic cables connect the islands of Kauai, Oahu, Maui, Molokai, Lanai and Hawaii, while digital microwave radios provide backup inter island connections. In addition to our owned or leased interisland cables between Oahu, Kauai, Maui, Hawaii, Molokai, and Lanai, we are connected by trans-Pacific fiber optic cables to the U.S. Mainland, which provide ring diversity to protect our communications between the islands and high-speed broadband links in and out of the State.

Voice Network

We continue to add services and features via our VoIP application servers to provide Hawaii businesses the communication tools they need to compete locally and globally. In 2016, we extended our VoIP platform with Unified Collaboration (UC) features such as Instant Messaging and Presence.

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AsOur oftelecommunication ~~December~~infrastructure ~~31,~~includes ~~2016~~more than 16,000 wesheath ~~operated~~miles 99of ~~local~~fiber ~~base~~optic cable and ~~remote~~copper ~~switches~~wire distribution lines. We have an ownership interest in the Hawaiian Interisland Cable System (HICS) and ~~five~~Hawaii ~~tandem~~Interisland ~~switches~~Fiber onNetwork HIFN) interisland cables connecting the islands of ~~Hawaii~~Oahu, Kauai, ~~Lanai~~Maui, ~~Maui~~Hawaii, Molokai, and ~~Oahu~~Lanai through deep sea, submarine fiber. We ~~All~~lease ofcapacity on other systems which provide additional diversity to our ~~legacy~~interisland ~~access~~network. We ~~lines~~also ~~are~~have ~~served~~an byownership ~~digital~~interest ~~switches~~in ~~provided~~the ~~predominantly~~Southeast byAsia ~~Nokia~~to ~~(formerly~~United ~~Alcatel~~States (SEA-~~Lucent~~US) trans-Pacific fiber cable network connecting Indonesia, Philippines, Guam, Hawaii, and ~~Genband~~California. In addition, we lease capacity on other trans-Pacific fiber optic cables to the U.S. Mainland, which provide diversity to protect our communications between the islands and high-speed broadband links in and out of the State.

Voice Network

Powered by Broadsoft, we continued to add new services and features to our VoIP application servers in 2017, providing Hawaii businesses the communication tools they need to compete locally and globally in a fast, reliable, and secure manner.

Plain Old Telephone Service (POTS) is still provided statewide and as of December 31, 2017, we operated 99 local base and remote switches and five tandem switches spread across all islands. These legacy access lines are served by digital switches provided predominantly by Nokia (formerly Alcatel-Lucent) and Genband.

Network Optimization Initiatives

To lower onour ~~going~~ operational costs and tomigrate ~~adjust~~ our ~~capacity~~services off legacy systems to ~~account~~more ~~for~~efficient ~~legacy~~next ~~revenue~~generation ~~attrition~~platforms, we ~~optimized~~embarked ~~portions~~on ~~of our~~ network. Weoptimization ~~exited~~projects ~~two~~to ~~legacy~~retire ~~Wavecom~~older ~~leased~~network ~~sites~~elements. In 2017, we shut down our oldest ~~WDM~~Digital ~~network~~Subscriber ~~consisting~~Line Access Multiplexers (DSLAMs) in several key offices, transferred thousands of ~~five~~POTS ~~nodes~~customers off energy inefficient switches, and ~~exited~~migrated ~~two~~customers ~~Hawaiian~~to ~~Telcom~~newer ~~radio~~platforms ~~facilities~~to shut down all remaining frame relay switches. We ~~expect~~plan toon ~~increase~~increasing ~~the~~our ~~pace~~optimization ofinitiatives ~~optimizing~~in 2018, which will further shrink our legacy network infrastructure ~~in 2017~~.

Access Infrastructure

In ~~2016~~2017, we continued ~~our~~to ~~aggressive~~aggressively ~~investment~~invest toin ~~transform~~ our ~~access network to a~~ high-speed, fiber-based broadband network and now have approximately ~~202~~206,000 households enabled on ~~our~~this next generation ~~broadband network~~platform. AnWe ~~additional 3,900~~nearly ~~business~~tripled ~~addresses~~our ~~are~~direct ~~also~~fiber onconnections ~~our~~to ~~GPON~~Hawaii ~~network.~~businesses ~~GPON~~and isnow ahave ~~FTTP~~approximately ~~solution~~11,000 ~~providing~~business aaddresses ~~complete~~on ~~fiber~~our ~~connection~~Gigabit-capable toPassive ~~businesses~~Optical ~~allowing~~Network ~~for~~(GPON). This Fiber-To-The-Premises (FTTP) solution provides businesses transmission speeds of over 1 Gbps~~. Continued~~ ~~deployment~~which ofis expected to satisfy expected increases in bandwidth demand. FTTP solutions will continue to serve new (greenfield) MDU, single -family subdivision developments, and targeted business corridors. ByOur ~~laying~~strategic ~~fiber~~deployment ~~and~~of ~~utilizing~~FTTP ~~various~~solutions ~~passive~~is ~~optical~~creating ~~network~~a ~~components~~robust ~~from~~fiber ~~these~~network ~~developments~~whereby ~~to our central offices,~~ we can ~~further~~ leverage ~~the capabilities of~~ our MPLS backbone, provide higher bandwidth services to our customers, (including our television service), ~~and~~future ~~reduce~~proof ~~maintenance~~our ~~costs.~~customer’s Weneeds, ~~also~~and ~~continued~~reduce ~~to expand~~ our ~~fiber~~maintenance ~~network~~costs. ~~deeper~~Meshed into ~~neighborhoods,~~this ~~shortening~~strategy ~~over~~for ~~1,400~~2017 ~~customer~~was ~~loops~~also inthe ~~2016~~expansion toof ~~3,000 feet or less using FTTN technology, expanded~~ our fiber ~~networks~~network to approximately ~~491~~518 cell sites across the state of Hawaii to provide backhaul services to our wireless carrier customers, and ~~fine~~FTTP/FTTN (Fiber-~~tuned~~To-The-Node) ~~our~~build ~~FTTP~~outs ~~access~~to ~~infrastructure~~approximately to5,200 ~~accommodate~~(over 13,660 ~~Gbps~~on ~~download~~FTTP) high ~~speed~~cost, ~~internet~~underserved ~~bandwidth~~rural inlocations ~~selected~~through ~~areas~~the onuse ~~all~~of ~~major~~federal ~~islands.~~Connect America Funds (CAF). These network enhancements allowed the increased penetration and expansion of higher broadband services including our television service. ~~In 2016, we concluded our NGN build to residential addresses on Oahu.~~ Our ~~2017~~2018 plans ~~includes~~include ~~further~~continued expansion of our next-generation broadband network in key business areas, and further FTTP/FTTN expansion in CAF-eligible areas as part of Phase II of our federal grant.

In 2016, we concluded Phase I of the federal Connect America Fund (CAF) program to provide high speed data services to a total of approximately 1,800 underserved and unserved locations on the island of Hawaii. Our 2017 plans include a continuation of expansion of providing broadband to additional CAF-eligible areas as part of our Phase II federal grant.

Next-Generation Television Service

The implementation of IP-based television service is driving one of the largest network transformations in the telecommunications industry. We introduced our next-generation television service on the island of Oahu in July 2011, deploying the service to both copper-fed and fiber-fed customers and converting entire MDU complexes to our new service. Utilizing Ericsson Mediaroom™ middleware, we provide a wide range of content and multimedia services over our IP based network and provide our customers with new viewing experiences and applications, such as Whole Home DVR (Digital Video Recorder), instant channel change, brilliant picture and sound quality, and over 80 TV Everywhere apps that allow customers to view content on mobile devices. We continue to see strong demand for our television service.

Network Surveillance and Operations

Our statewide network infrastructure is monitored and managed by our Network Operations Center (NOC) located in Honolulu. The eNOC provides surveillance 24x7, 365 days-a-year, for our statewide network consisting of 86 central offices, TV head-end facility, associated interoffice facilities, microwave radio towers, and E911 facilities. Our network infrastructure for voice, data, and video is monitored proactively with state-of-the-art performance and fault management systems. Customer networks are also monitored proactively by our Managed Services team. We have a customer service center which also operates on a 24x7, 365 days-a-year basis to handle customer inquiries and repairs, and provide call completion services. All customer installations and repairs requiring a field technician are offered

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~~during~~ Next-Generation ~~extended~~Television ~~hours and coordinated by our Dispatch Center. All construction activity, for both outside and inside plant, is coordinated by our engineering operations team located at our main office on Oahu.~~Service

We believe our IP-based television introduced on the island of Oahu in 2011 continues to provide a superior linear TV experience to our customers over our competitors. Powered by Ericsson Mediaroom™ middleware, we provide a wide range of content and multimedia services over our IP-based network and provide our customers with new viewing experiences and applications, such as Whole Home DVR (Digital Video Recorder), instant channel change, brilliant picture and sound quality, and over 80 TV Everywhere apps that allow customers to view content on mobile devices. We have coupled this service with a WiFi plus service that greatly improves the WiFi performance and experience in our customers’ homes.

Network Surveillance and Operations

In addition to our network infrastructure, we operate a wide range of equipment from large boom trucks to small passenger vehicles, mobile generators, and other miscellaneous trailers, tools and test equipment. We own or lease most of our administrative and maintenance facilities, central offices, remote switching platforms, and transport and distribution network facilities. With limited exception, our assets are located exclusively in the state of Hawaii.

Information Technology and Support Systems

Our IT-related initiatives continue to be aimed at delivering advanced technologies to our customers as well as delivering a superior customer service experience. Our systems have evolved and we continue to focus our strategy towards customer-centric architectures. This approach focuses on delivering end-to-end system solutions based on customer improvement initiatives integrated into product development and operational efficiencies. The service delivery mechanisms are comprised of a mixture of commercial off-the-shelf-systems, internally designed and developed systems that are purpose built for functions unique to our product offerings, and select niche applications that offer optimal capabilities and flexibility at the network layer.

As part of our ongoing commitment to customer service, we implemented improvements in ~~2016~~2017 to our customer-facing ~~contact~~applications ~~center systems~~ with the implementation of aautomated ~~360°~~trouble ~~customer~~ticketing ~~view~~via ~~and~~the aInternet ~~significant~~and ~~upgrade~~deployed toour ~~the~~first ~~latest~~self-service ~~IVR/ACD~~mobile ~~technology~~application. We Inimplemented ~~addition,~~improvements in ~~2016~~our wecontact ~~provided~~center systems by automating orders from our outside sales ~~force~~teams, ~~with~~allowing ~~new~~for ~~system~~quicker ~~capabilities~~installation times and increased productivity in ~~support~~both our outside sales and offline contact center teams. We were awarded the honor of ~~our~~providing ~~next~~primary ~~generation~~NOC ~~network~~functionality and NOC administration for ~~quicker~~the ~~quoting~~SEA-US Consortium. Further, a new online application was implemented to provide international users and local Hawaii-based employees with the ability to create, manage and track circuit orders and service requests for SEA-US services.

We continue to focus efforts on flow-through automation from order entry through billing, and in ~~2016~~2017 we continued to implement improvements which reduced manual processing of complex orders, increased productivity, and enhanced overall data quality. We made further improvements in ~~2016~~2017 through consolidation of order entry process and systems. We ~~improved~~replaced our field dispatch system to improve technician and ~~fiber~~dispatch efficiency and enabled the provisioning ~~systems~~of new copper technologies to ~~increase~~improve ~~installation~~the ~~efficiency~~speed and quality of our ~~next~~high ~~generation~~speed internet network. In ~~2017~~2018, we plan to continue to make improvements through ~~version~~automation ~~upgrades~~ of ~~our~~more ~~existing~~complex Business ~~Order~~Orders ~~entry systems~~types, ~~IVR/ACD,~~ and increase automation via our provisioning and inventory management applications.

As is the case with other telecommunications companies, we are an on-going target for cyber criminals. In response, we have aggressively pursued initiatives to reduce our cyber security related risks. In 2016, we adopted the National Institute of Standards and Technology (NIST) Cybersecurity Framework to guide our current and future cybersecurity standards, policies, guidelines and practices. Using this framework, we implemented a unified security management infrastructure to consolidate our cybersecurity threat detection and intelligence in addition to deploying additional security control points to improve our security posture. We continue to provide our employees, contractors and vendors awareness including evolution of our corporate cybersecurity communications and policies. Hawaiian Telcom also provides cybersecurity awareness to our customers and the Hawaii community in general. In 2017, we continued our investment in security access, control points and systems as our Information Technology evolved in the areas of mobility and cloud services. In addition, we continue to leverage government resources at the federal, state and local levels to enhance the cybersecurity of Hawaiian Telcom’s network and services. These and other investments reflect our on-going commitment to securing our information assets and protecting sensitive data in our information systems.

Employees

As of December 31, 2016, we employed approximately 1,300 full‑time employees in Hawaii. Of the total employees, approximately 55% were represented by the International Brotherhood of Electrical Workers (IBEW) Local 1357 pursuant to a five‑year collective bargaining agreement that expires at the end of 2017. Negotiations on a new collective bargaining agreement are expected to begin on or before May 1, 2017. We believe that management currently has a constructive relationship with the represented and non‑ represented employee group.

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As is the case with other telecommunications companies, we are an on-going target for cyber criminals. In response, we have aggressively pursued initiatives to reduce our cyber security related risks. We continue to provide our employees, contractors and vendors awareness, including evolution of our corporate cybersecurity communications and policies. We also provide cybersecurity awareness to our customers and the Hawaii community in general. In 2017, we continued our investment in security access, control points and systems as our Information Technology evolved in the areas of mobility and cloud services. In addition, we continue to leverage government resources at the federal, state and local levels to enhance the cybersecurity of our network and services as well as improve our internal policies and procedures. These and other investments reflect our on-going commitment to securing our information assets and protecting sensitive data in our information systems.

Employees

As of December 31, 2017, we employed approximately 1,200 full-time employees in Hawaii. Of the total employees, approximately 55% were represented by the International Brotherhood of Electrical Workers (IBEW) Local 1357 pursuant to a five-year collective bargaining agreement that expires in the third quarter of 2022. We believe that management currently has a constructive relationship with the represented and non-represented employee group.

Insurance

We have insurance to cover risks incurred in the ordinary course of business, including errors and omissions, cyber liability, general liability, property coverage (which includes business interruption), director and officers and employment practices liability, auto, crime, fiduciary and worker’s compensation insurance in amounts typical of similar operators in our industry and with reputable insurance providers. Central office equipment, buildings, furniture and fixtures and certain operating and other equipment are insured under a blanket property insurance program. This program provides substantial coverage against “all risks” of loss including fire, windstorm, flood, earthquake, and other perils not specifically excluded by the terms of the policies. As is typical in the telecommunications industry, we are self‑insured for damage or loss to certain of our transmission facilities, including our buried, undersea and above‑ground transmission lines. We believe that our insurance coverage is adequate; however, the incurrence of substantial uninsured liabilities due to damage or loss to such facilities could have a material adverse effect on our financial results.

Regulation

Federal and State Regulation of Telecommunications Services

Our telephone operations generally are subject to the jurisdiction of the FCC with respect to interstate services and the HPUC with respect to intrastate services. The following summary does not purport to describe all current and proposed applicable federal and state regulation.

Competition

We face increasing competition in all areas of our business. Regulatory changes brought on by the 1996 amendments to the Communications Act, regulatory and judicial actions, and the development of new technologies, products and services have created opportunities for alternative telecommunication service providers, many of which are subject to fewer regulatory constraints than our ILEC. We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry will ultimately have on our business, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success of competition in our markets, the timing and outcome of various regulatory proceedings and any appeals, the timing, extent and success of our pursuit of new opportunities resulting from the amendments to the Communications Act and technological advances, and any changes in the state or federal laws or regulations governing communications.

Universal Service

As a provider of interstate telecommunications, we are required to contribute to federal universal service programs. The FCC adjusts the contribution amount quarterly and may increase or decrease this amount depending on demand for support and the total base of contributors. We previously drew Interstate Access Support of approximately $1.9 million annually from this funding, which was phased out in 2015 after we accepted Connect America Fund (CAF) Phase II support, as further described below.

In November 2011, the FCC released its “Connect America Fund” Order which adopted a number of proposals relating to reforming existing universal service support mechanisms. Among other things, the Order transformed the FCC’s universal service and intercarrier compensation systems into a new Connect America Fund (CAF), which funds broadband deployment in census blocks that the FCC has determined are unserved by an unsubsidized wireline competitor. For price cap carriers such as our subsidiary Hawaiian Telcom, Inc., CAF Phase II support is distributed pursuant to a forward looking cost model. In August 2015, we notified the FCC that we would accept CAF Phase II support which amounts to $4.4 million in annual funding for six years for the calendar years 2015-2020. Under the terms of CAF Phase II, we will offer broadband service at 10 Mbps downstream and 1 Mbps upstream or better to approximately 11,000 eligible locations in high-cost areas in the State of Hawaii and will provide voice and broadband services at reasonable rates. In addition, the FCC previously awarded Hawaiian Telcom, Inc. approximately $400,000 in CAF Phase I Round 1 support and approximately $1 million in CAF Phase I Round 2 support. Broadband deployment obligations for Rounds 1 and 2 have been completed. The FCC is expected to issue additional clarifications relating to CAF Phase II including the methodology for measuring broadband speeds but we do not know if this will impact our

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~~ability~~ Universal ~~to meet the program obligations and result in a loss of some of the support if program obligations are not fully met in a timely manner.~~Service

In November 2011, the FCC released its “Connect America Fund” Order which adopted a number of proposals relating to reforming existing universal service support mechanisms. Among other things, the Order transformed the FCC’s universal service and intercarrier compensation systems into the Connect America Fund (CAF), which funds broadband deployment in census blocks that the FCC has determined are unserved by an unsubsidized wireline competitor. For price cap carriers such as our subsidiary Hawaiian Telcom, Inc., CAF Phase II support is distributed pursuant to a forward-looking cost model. In August 2015, we notified the FCC that we would accept CAF Phase II support which amounts to $4.4 million in annual funding for six years for the calendar years 2015-2020. Under the terms of CAF Phase II, we will offer broadband service at 10 Mbps downstream, and 1 Mbps or better upstream, to approximately 11,000 eligible locations in high-cost areas in the State of Hawaii, and will provide voice and broadband services at reasonable rates. The FCC is expected to issue additional clarifications relating to CAF Phase II, including the methodology for measuring broadband speeds, but we do not know if this will impact our ability to meet the program obligations and result in a loss of some of the support if program obligations are not fully met.

In December 2017, the FCC released the final list of census blocks eligible for the CAF Phase II auction which includes a list of the census block groups and associated reserve prices. Census block groups are expected to be the minimum geographic areas for which bids may be made. It includes census blocks that are: (1) located in price cap territories that are not served by a price cap ILEC or an unsubsidized competitor with voice and broadband at speeds of 10/1 Mbps or higher; and (2) based on averaged cost, are identified by the Connect America Cost Model as high-cost or extremely high-cost. As required by prior orders, the list is being made available at least three months prior to the deadline for the submission of short-form applications for the auction. On January 9, 2018, the FCC released a draft order, which will be considered at its January 30, 2018 open meeting, which proposes a start date of July 24, 2018, for the auction. We are evaluating whether to submit a bid in the auction.

Government Regulation of Retail Rates

The FCC and the HPUC are the two agencies that regulate our telecommunications services. In general, the FCC regulates interstate service, and the HPUC regulates intrastate service. The HPUC has, slowly over time, reduced its rate regulation of some of our services. The HPUC classifies all regulated telecommunications services as fully competitive, partially competitive, or non‑competitive.

In 2009 and 2010, the Hawaii State Legislature required the HPUC to treat all intrastate retail telecommunications services, including intrastate toll (i.e., inter island), central exchange (Centrex), most residential and business local exchange services, integrated service digital network (ISDN) private lines and special assemblies, and directory assistance, as “fully competitive” under the HPUC’s rules with certain qualifications. HPUC approval and cost support filings are no longer required to establish or reduce rates or to bundle service offerings; however, all service offerings must be priced above the service’s long run incremental cost, and the HPUC can require cost support demonstrating compliance with its costing rules at any time. The HPUC retains the ability to suspend and investigate any offering. In 2012, the Hawaii State Legislature further leveled the regulatory playing field by providing us with pricing flexibility to increase tariffed intrastate rates for any retail telecommunications service without approval from the HPUC with the exception of basic exchange service. (i.e., single line residential and single line business services), which ~~continue~~continues to require HPUC approval. Competitive forces, however, may cause us to be unable to raise our local rates in the future.

The classification of retail local exchange intrastate services as fully competitive and the ability to bundle the services with other fully or partially competitive services or other services that are not within the HPUC’s jurisdiction enable us to charge a discounted rate for bundled service offerings and have helped us to be more competitive.12

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The classification of retail local exchange intrastate services as fully competitive and the ability to bundle the services with other fully or partially competitive services, or other services that are not within the HPUC’s jurisdiction, enable us to charge a discounted rate for bundled service offerings and have helped us to be more competitive.

State and Federal Regulation of Long Distance Services

We are subject to certain conditions imposed by the HPUC and the FCC on the manner in which we conduct our long distance operations. For example, we are prohibited from joint ownership of local and long‑distance telephone transmission or switching facilities. The HPUC is responsible for ensuring that our ILEC does not discriminate against other long distance providers.

Federal Requirements

As an ILEC, we are subject to federal laws governing a number of access and interconnection requirements, and other competitive obligations. Among other things, an ILEC must negotiate in good faith with other carriers requesting interconnection and access to unbundled network elements (UNEs), and must offer its competitors access to UNEs, such as local loops and inter -office transport, at regulated rates. The FCC also has limited our obligation to unbundle fiber facilities to multiple dwelling units, such as apartment buildings, and to homes and offices deployed in FTTC and FTTP arrangements. In addition, federal law regulates competitors’ requests to colocate facilities within our central offices and to have access to our subscriber list information in order to produce competing directories. The FCC also has imposed specific rules regarding the manner and time within which a customer’s telephone number must be ported to a competing carrier’s service, and has strict guidelines prohibiting the ILEC’s use of this information for any other purposes. In December 2015, the FCC granted forbearance to ILECs from the equal access rules and dialing parity requirement for connecting interexchange carriers on a prospective basis. The FCC also granted similar forbearance from the requirement to provide 64 kbps voice channels where copper loops have been retired and the requirement to provide access to newly-deployed entrance conduit at regulated rates.

Interstate and Intrastate Access Charges

The rates that we can charge for interstate access are regulated by the FCC. The FCC has made various reforms to the existing rate structure for access charges, which, combined with greater competition, have caused the aggregate amount of access charges paid by long distance carriers to decrease over time.

Our interstate and intrastate access charge levels have been and will continue to be fundamentally affected by the FCC’s reform of intercarrier compensation, described below.

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Federal Framework for Intercarrier Compensation

In its “Connect America Fund” Order (see “—Universal Service” above) that reformed universal service, the FCC also fundamentally restructured the regulatory regime for intercarrier compensation, which consists of state and interstate access charges and local reciprocal compensation. Among other things, this comprehensive reform unifies state and interstate intercarrier charges in certain circumstances, provides a mechanism to replace intercarrier revenues lost through rate unification, and resolves prospectively a number of outstanding disputes among carriers regarding interconnection and compensation obligations. In particular, the FCC’s order required that price-cap carriers reduce interstate and intrastate terminating switched access rates to $.0007 over a six year phase-down period. The FCC also required that most intercarrier compensation be eliminated, and that it be replaced by a system of “bill & keep”, ~~replace it~~ whereby the carrier would have to seek recovery of its costs entirely from its own end users. In the interim, the FCC capped most existing intercarrier compensation rates and established a phase -down of those rates over a six-year period for price -cap companies such as Hawaiian Telcom, Inc. To partially offset the resulting decrease in revenues, the Commission authorized ~~Hawaiian~~us ~~Telcom, Inc.~~ to assess ~~its~~our end user -customers a limited recovery charge that would increase over the time period during which intercarrier compensation rates decline, then would be phased out ~~over~~gradually ~~a three-year period~~ beginning in 2017. Finally, the FCC decided that interstate access charges should apply to VoIP or other Internet protocol based service providers on a prospective basis, subject to the same interim phase down requirements described above. The FCC found that carriers should have the opportunity to make up for any loss of revenues either through the established recovery mechanisms or through the sale of additional services, such as broadband and television services.

~~Hawaiian~~We ~~Telcom,~~have ~~Inc. has~~ implemented ~~the~~six ~~first five~~ phases of the intercarrier compensation reform, offsetting a portion of the resulting revenue loss through the FCC-authorized monthly recurring access recovery charge for certain classes of customers. Intercarrier compensation rates have been reduced to either bill & keep or $0.0007 per minute.

In a separate proceeding, the FCC found that Internet bound traffic is not subject to reciprocal compensation under Section 251(b)(5) of the Communications Act. Instead, the FCC established a federal rate cap for this traffic, which is and will remain $0.0007 per minute until the FCC decides otherwise.

Special Access

~~The~~In ~~FCC~~1999, ~~has~~the FCC adopted rules for special access services, also known as Business Data Services (BDS), that provide for pricing flexibility and ultimately the removal of services from price regulation when prescribed competitive thresholds are met. We currently have pricing flexibility for certain special access services offered throughout our territory. In the first quarter of 2015, Hawaiian Telcom, as a provider of dedicated special access services, complied with the FCC’s order for a mandatory special access data collection by filing detailed information concerning carrier services provided to enterprise and wholesale customers, including special access services. The FCC has used the data collected to evaluate competition in the market for special access services and to help the FCC decide whether to modify the special access pricing rules for price -cap carriers, including whether the pricing flexibility rules should be modified or eliminated. The FCC has compiled the data and our economic consultant, hired by a consortium in which we participate with six other price cap carriers, has submitted their findings that competition in the special access market is robust and that pricing flexibility should be continued. We also filed comments in support of these findings with respect to the Hawaii market. In late 2016, the FCC Chairman circulated an Order that would have reduced BDS prices for certain legacy services over three years but this order was not voted on and it is uncertain when this proceeding will be concluded or what impact it will have on providers of dedicated special access services, especially in light of the pending change in the FCC Chairperson.

In October 2015, the FCC initiated an investigation into the terms and conditions of the special access service pricing plans of four large price -cap carriers (AT&T, CenturyLink, Frontier, and Verizon). Issues designated for investigation included whether the following practices were just and reasonable practices under the Communications Act (Act): (1) percentage commitments based on a purchaser’s historical or existing levels of purchases; (2) shortfall fees; (3) upper percentage thresholds; (4) overage penalties; (5) certain long-term commitments; and (6) early-termination fees. The investigation also considered whether certain commercial agreements should be subject to the filing requirements of the Act and whether the special access pricing plans inhibit the transition from TDM-based special access to IP-based services. In May 2016, the FCC ordered the affected carriers to remove such provisions from their tariffs by July 1, 2016. This order was appealed to the D.C. Circuit Court of Appeals. In 2017, the FCC requested that the Court remand the decision, sought additional public comments, and is now considering whether to affirm, modify, or reverse the original July 2016 order, which is still pending before the FCC. We do not know if and when we may be required to remove similar provisions from our tariffs.

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~~services.~~ In ~~May~~April ~~2016~~2017, the FCC ~~ordered~~adopted new rules governing BDS. The FCC deregulated and detariffed: (1) all packet-based BDS services and TDM-based services with bandwidths in excess of the ~~affected~~level ~~carriers~~of a DS3; (2) TDM-based DS1 and DS3 transport; and (3) TDM-based DS1 and DS3 end-user channel terminations in counties deemed competitive, and in non-competitive counties where the ILEC had previously been granted Phase II pricing flexibility. In counties deemed non-competitive, ILECs will continue to ~~remove~~be ~~such~~subject ~~provisions~~to ~~from~~price-cap ~~their~~regulation based on ILEC Phase I pricing flexibility rules, which means that contract tariffs byand ~~July~~volume 1and term discounts will be permitted. Four of the five counties in Hawaii were deemed fully competitive. For the remaining county, ~~2016~~Kalawao County, we filed an application in November 2017 with the FCC to discontinue offering business data services in Kalawao County. We doexpect ~~not~~the ~~know~~discontinuance ifto ~~and~~be ~~when~~approved in January 2018. Once granted, we ~~may~~will beno ~~required~~longer provide BDS in a non-competitive county, allowing us to ~~remove~~fully ~~similar~~detariff ~~provisions~~BDS ~~from~~across ~~our~~the state. Detariffing applies to both ILECs and CLECs. The Order also terminates the interim wholesale access rule requirements for discontinued TDM-based BDS and UNE-P replacement services that were adopted in 2015. Most of the new BDS rules became effective on August 1, 2017, which began the 36-month transition period for detariffing. Some rules require approval of the Office of Management and Budget (OMB), including: (1) the rule grandfathering special access contract-based tariffs in effect on or before August 1, 2017 (CFR §1.776); and (2) the detariffing rules for ILECs and CLECs (CFR §§61.201 and 61.203, respectively).

Federal Regulatory Classification of Broadband and Internet Services

The FCC ~~has~~previously considered ~~been considering~~ whether, and under what circumstances, services that employ Internet protocol are “telecommunications services” subject to regulations that apply to other telecommunications services, but it has not definitively ruled on the issue, and instead has made a series of decisions addressing specific services and regulations.

In March 2006, a request of Verizon that sought forbearance from Title II regulation for certain advanced broadband special access services was deemed granted by operation of law. This forbearance grant was applicable to us since ~~Hawaiian~~we ~~Telcom,~~were ~~Inc. was~~ part of Verizon when the original Verizon petition for forbearance was filed. This action permitted us to deregulate covered advanced broadband special access services, giving us greater flexibility in our pricing and terms and conditions for eligible services. The ~~In October 2011, tw telecom of hawaii l.p. and others filed a petition requesting the~~ FCC toincluded ~~reverse in part~~ the ~~forbearance deemed granted to~~ Verizon. Weforbearance ~~filed comments~~ in ~~opposition~~its toApril ~~the~~2017 ~~petition.~~BDS ~~In November 2012~~Order, ~~the~~which Adgranted ~~Hoc Telecommunications Users Committee and others filed a petition requesting~~ the ~~FCC~~same totype ~~reverse~~of ~~in part the~~ forbearance for ~~Verizon~~packet-switched ~~and~~services ~~other grants of forbearance by the FCC related~~ to ~~advanced~~all ~~broadband special access services~~providers. ~~There is no definite timeframe for an FCC decision on these petitions, which may be addressed as part of the special access proceeding.~~

In December 2010, the FCC adopted “net neutrality” rules, termed “open Internet” rules that would bar Internet service providers from blocking or slowing Web content sent to homes and businesses. The rules continue to treat broadband Internet access services under the FCC’s Title I authority, but adopted as rules the existing guidelines applicable to Internet service providers. The FCC also adopted three additional rules concerning blocking, non discrimination, and transparency. The anti-discrimination and no blocking rules were vacated by a federal court of appeals, but the public disclosure requirement remains in place.

In February 2015, the FCC reclassified broadband service, both fixed and mobile, from its longstanding status as a Title I information service to a Title II common carrier telecommunications service. While reasonable network management iswas permitted, the open Internet order ~~bans~~banned blocking legal content/applications, throttling lawful traffic and paid prioritization or “fast lanes”, expands transparency rules and creates a general conduct rule to bar broadband Internet service providers from unreasonably interfering with or disadvantaging the ability of consumers and edge providers to reach and communicate with each other. In ~~Further~~December 2017, the FCC ~~granted~~reversed ~~new~~its ~~authority~~February to2015 ~~address~~ruling ~~Internet~~and ~~interconnection~~reclassified ~~issues~~broadband ~~arising~~service, inboth ~~the~~fixed ~~exchange~~and ofmobile, ~~traffic~~from ~~between~~a ~~mass~~Title ~~market~~II ~~broadband~~common ~~providers~~carrier ~~and~~telecommunications ~~other~~service ~~networks~~back ~~and~~to ~~services~~its ~~such~~longstanding status as ~~edge~~a ~~providers.~~Title ~~While~~I ~~the~~information ~~order~~service, ~~grants~~including ~~forbearance~~rescinding ~~from~~the ~~many~~previously ~~Title~~established IIrules ~~provisions~~against ~~such~~blocking asand ~~rate~~discrimination. ~~regulation~~The orrules ~~tariffs,~~were ~~last~~released ~~mile~~in ~~unbundling,~~January ~~burdensome~~2018 ~~filing~~and ~~requirements/accounting~~are ~~standards,~~expected ~~USF~~to ~~contributions,~~come under intense scrutiny and ~~any~~legal ~~new~~opposition. The ~~taxes~~change orin ~~fees,~~rules ~~uncertainty~~is ~~looms~~not ~~concerning~~expected ~~continued~~to ~~forbearance~~have ina ~~future~~major ~~years.~~impact ~~All~~on ~~the~~us ~~new~~because ~~rules~~we ~~will~~do benot ~~effective~~throttle ~~the~~or ~~first~~block ~~quarter~~Internet oftraffic ~~2017,~~and ~~but~~have no paid prioritization practices. Congress is considering adopting open Internet legislation to ~~prevent~~effect ~~Title~~laws IIregarding ~~regulation~~blocking ofand ~~broadband~~discrimination. ~~services,~~We ~~and~~do ~~there~~not ~~are~~know ~~indications~~what ~~that~~ the ~~FCC~~final ~~may~~outcome ~~also~~of ~~reassess~~these ~~its~~actions ~~reclassification~~will ofbe, ~~broadband~~or ~~service~~how toour abroadband ~~Title~~services IImay ~~common~~be ~~carrier~~affected ~~telecommunications~~by ~~service~~any ~~given~~further ~~the~~rules ~~pending~~that ~~changes~~may atbe ~~the~~adopted. The FCC.’s Weorder dois ~~not~~also ~~know~~subject ~~what~~to ~~the~~a ~~final~~court ~~outcome~~appeal ofand ~~these~~it ~~actions~~is ~~will~~uncertain ~~be,~~when orthis ~~how~~will ~~our broadband services may~~ be ~~affected~~resolved.

Video Services Regulation

Through our Hawaiian Telcom Services Company, Inc. subsidiary, we began to provide television service on the island of Oahu in July 2011. We are regulated as a cable TV operator under federal and state law. As the non‑dominant video service provider in the state of Hawaii, we face the risk that we will be unable to obtain access to programming that we need in order to compete with Oceanic Time Warner (Oceanic), the dominant cable TV provider in the state. Some of this programming is owned by the parent company of Oceanic, which may or may not be required to provide access to us under the FCC’s program access rules.

In October 2012, the FCC issued an order lifting the program access rule ban on exclusive contracts between any cable operator and any cable‑affiliated programming vendor. It also issued a separate notice seeking comment on whether (1) to establish a rebuttable presumption that an exclusive contract for a cable‑affiliated Regional Sports

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Network (RSN) is an unfair act; (2) it should establish a standstill provision during an RSN‑related complaint; and (3) the presumptions for RSNs should be extended to a cable‑affiliated national sports network. The FCC found a preemptive prohibition on exclusive contracts is no longer necessary and that a case‑by‑case process will remain in place to assess the impact of individual exclusive contracts. The FCC order provides a 45‑day answer period for all complaints and a six‑month deadline for it to act on a complaint alleging a denial of programming. The order also incorporates safeguards regarding RSNs, by establishing a rebuttable presumption that an exclusive contract involving a cable‑affiliated RSN has the “purpose or effect” of “significantly hindering or preventing” the complainant from providing television services, placing the burden of proof on the distributor.

In December 2012, the FCC granted a complaint filed by the Mauna Kea Broadcasting Company with the FCC seeking to place its over-the-air broadcasting station KLEI TV on both Oceanic’s and our television systems. The order required us to place KLEI TV on channel 6, which is already occupied by another programming station. Both Oceanic and Hawaiian Telcom Services Company, Inc. have filed a petition for reconsideration of this decision, which effectively stays the mandate of the order until all appeals are resolved. We cannot predict when or how the FCC will resolve this petition.

In June 2015, Charter Communications Inc. filed applications with the FCC, HPUC and Hawaii State Department of Commerce and Consumer Affairs (“DCCA”) Cable TV Division for approval of the merger of Charter Communications, Inc. ("Charter") and Time Warner Cable Inc. (TWC), which owns Oceanic, the dominant cable TV provider in Hawaii. In this same transaction, Charter is also merging with Advance/Newhouse Partnership (“Advance”), which provides video services through Bright House Networks, LLC in six states, excluding Hawaii. We filed comments with the FCC and DCCA that given Oceanic’s large market share in both the video and broadband markets, conditions specific to the Hawaii market should be placed on the acquisition so that the merger will not further stifle competition and harm the video programming and wired broadband markets in Hawaii. Final approval of the transaction with limited non-Hawaii specific conditions was granted in May 2016.

In October 2016, the FCC adopted a Broadband Privacy order that requires broadband Internet service providers (ISPs) to obtain “opt-in” permission before using or sharing information about the sites their customers visit on the Internet and their online communications but allows the ISPs to use non-sensitive information on an opt-out basis—that is, unless the consumer takes affirmative action to object. The order also imposes data security and breach notification requirements, as well as transparency requirements regarding notice of information collection, how it is used, who it is shared with, and customer options for granting or denying permission. Privacy information must be “persistently” available on the ISP’s website or mobile app.

The order abandons the three-tier usage-based privacy framework for broadband ISPs in favor of an approach that bases privacy obligations on the sensitivity of the information being used or shared and in some areas is inconsistent with the FTC’s technology-neutral privacy regime. The FCC’s order is subject to numerous petitions for reconsideration. We do not know what the final outcome will be, or how our broadband services may be affected.

Other Federal and State Regulatory Proceedings

The FCC has been exploring whether to modify its rules requiring utilities to provide telecommunications carriers and cable television companies with access to their poles, ducts, and rights of way. In April 2011, the FCC adopted new pole attachment rules that, among other things, require access to poles and conduit within a shorter period of time, and further limit make ready costs. In addition, these new rules change the rates for pole attachments by mandating that broadband attachers pay pole attachment rates that are closer to existing cable TV rates, than higher rates applicable to telecommunications carriers. These rules also for the first time allow telephone companies to demand reasonable rates from utility pole owners. These rules tend to increase the burdens and costs of pole and conduit owners such as us. The rules were upheld on appeal in February 2013. In December 2015, the FCC further revised the formula for calculating pole attachment rates for telecommunications carriers. The change will ensure that pole attachment rates for telecommunications attachers, including providers of broadband Internet access service (BIAS), approximate the rates for cable attachers. In November 2013, the FCC adopted rules to improve the reliability and resiliency of 911 communications networks nationwide by requiring that 911 service providers take reasonable measures to provide reliable 911 service, as evidenced by an annual certification. Providers can comply with this requirement by either

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~~implementing~~ In ~~certain~~October ~~industry~~2016, ~~backed~~the ~~“best~~FCC ~~practices~~adopted a Broadband Privacy order that required broadband Internet service providers (ISPs) to obtain “opt-in”, permission before using or bysharing ~~implementing~~information ~~alternative~~about ~~measures~~the ~~that~~sites ~~are~~their ~~reasonably~~customers ~~sufficient~~visit toon ~~ensure~~the ~~reliable~~Internet ~~911~~and ~~service~~their online communications. AsThe aBroadband ~~911~~Privacy ~~service~~order ~~provider~~also imposed data security and breach notification requirements, ~~Hawaiian~~as ~~Telcom~~well ~~Inc.~~as ~~filed~~transparency ~~its~~requirements ~~annual~~regarding ~~certification~~information ~~that~~collection, itsuch ~~was~~as ~~100%~~how ~~compliant~~such byinformation ~~October~~is ~~2016~~used, with ~~the~~whom ~~new~~such ~~911~~information ~~communications~~is ~~networks~~shared, ~~reliability~~ and ~~resiliency~~customer ~~standards~~options for granting or denying permission.

In ~~August~~June ~~2015~~2017, ~~the~~before ~~FCC adopted rules concerning~~ the ~~transition from the copper-based Time Division Multiplexing (TDM) network to a fiber-based Internet Protocol (IP) network. To address backup power~~ requirements ~~for residential consumers~~ of ~~IP based voice and data services that replace~~ the ~~traditional~~Broadband ~~telephony~~Privacy ~~used~~order tobecame ~~dial 911,~~ effective ~~February 2016~~, ~~prior to switching facilities-based, fixed, residential voice services from copper, which is line-powered, to fiber, Hawaiian Telcom must educate affected residential subscribers on~~ the ~~impact~~FCC ofissued ~~this switch, and offer these subscribers the option to purchase~~ a ~~backup~~subsequent ~~power~~order ~~solution~~stating that ~~provides~~the atprivacy ~~least~~rules ~~eight~~in ~~hours~~the of2016 ~~standby~~order ~~power~~were ~~during~~no alonger ~~commercial power outage. Within three years~~valid, inand ~~accordance~~re-instated ~~with~~the ~~FCC~~privacy ~~requirements,~~rules ~~Hawaiian Telcom is required to offer at least one option~~ that ~~provides~~were aeffective ~~minimum~~before ~~of 24 hours standby power. The purpose of~~ the ~~requirement~~2016 isorder towas ~~ensure consumers can make calls to 911 in the event of a power outage~~adopted.

InVideo aServices separate proceeding, the FCC also adopted rules governing the retirement of copper loops and the discontinuance of legacy services used as a wholesale input. Among other things, ILECs will be required to: (1) provide interconnecting entities at least six months’ advance notice of proposed copper retirement; and (2) consider the impact of their actions on the end-users of carrier-customers when discontinuing, reducing, or impairing a service used as a wholesale input. In order to receive authority to discontinue, reduce, or impair either special access services at DS1 speed and above or commercial wholesale platform service, ILECs will also be required to provide competing carriers with wholesale access to their IP services on reasonably comparable rates, terms, and conditions. The FCC’s order is subject to a court appeal and it is uncertain when this will be resolved. Regulation

InThrough ~~October~~our ~~2015, Black Diamond Capital Management, LLC, (“Black Diamond”) which through two of its managed investment funds, collectively owns approximately 24.1% of the total outstanding common stock of~~ Hawaiian Telcom ~~Holdco~~Services Company, Inc. ~~(Holdco)~~subsidiary, ~~filed~~we anbegan ~~application with the HPUC requesting approval~~ to ~~increase~~provide ~~its~~television ~~ownership~~service upon tothe ~~33%~~island of ~~the~~Oahu ~~outstanding~~in ~~common~~July ~~stock of Holdco~~2011. ~~Under~~We ~~state~~are ~~law,~~regulated noas ~~more~~a ~~than~~cable ~~twenty-five~~TV ~~percent~~operator ofunder ~~the~~federal ~~issued~~ and ~~outstanding~~state ~~voting~~law. ~~stock~~As ofthe anon-dominant ~~corporation~~video ~~organized~~service ~~under~~provider in the ~~laws~~state of ~~the State and who owns~~Hawaii, ~~controls,~~we ~~operates,~~face orthe ~~manages~~risk athat ~~public~~we ~~utility~~will ~~shall~~ be ~~held,~~unable byto ~~any~~obtain ~~single~~access ~~foreign~~to ~~corporation~~programming orthat ~~any~~we ~~single~~need ~~nonresident~~in ~~alien,~~order orto ~~held~~compete bywith ~~any~~Spectrum ~~person~~(fka Oceanic), ~~unless~~the ~~prior~~dominant ~~written~~cable ~~approval~~TV isprovider ~~obtained~~in ~~from~~ the ~~HPUC~~state. ~~Hawaiian~~Some ~~Telcom~~of ~~supported~~this ~~Black~~programming ~~Diamond’s~~is ~~request~~owned ~~based~~by on the ~~Standstill~~parent ~~and~~company ~~Support~~of ~~Agreement between Black Diamond and Hawaiian Telcom. In May 2016~~Spectrum, ~~the~~which ~~HPUC~~may ~~granted~~or ~~Black~~may ~~Diamond~~not ~~approval,~~be ~~with~~required ~~conditions,~~ to ~~increase~~provide ~~its~~access ~~ownership up~~ to ~~31.5%~~us ofunder the ~~outstanding~~FCC’s ~~common~~program ~~stock~~access ~~of the Company~~rules.

In ~~December~~October ~~2015~~2012, the FCC, ~~responding~~issued toan aorder ~~forbearance~~lifting ~~petition~~the ~~filed~~program byaccess ~~USTelecom~~rule inban ~~late~~on ~~2014,~~exclusive ~~released~~contracts anbetween ~~order~~any ~~removing~~cable ~~certain~~operator ~~regulatory~~and ~~requirements~~any ~~for~~cable-affiliated ~~legacy~~programming ~~voice~~vendor. ~~services~~It ~~that~~also ~~are~~issued noa ~~longer~~separate ~~relevant~~notice inseeking ~~today's~~comment ~~marketplace.~~on ~~The~~whether ~~FCC~~(1) ~~granted~~to ~~forbearance~~establish ~~from~~a ~~FCC~~rebuttable ~~rules~~presumption ~~regarding~~that ~~the~~an ~~unbundling~~exclusive ofcontract 64for ~~kbps~~a ~~voice~~cable-~~grade~~affiliated ~~channels.~~Regional ~~The~~Sports ~~FCC's~~Network ~~rules~~(RSN) ~~previously~~is ~~required~~an ~~unbundling~~unfair ofact; ~~such~~(2) ~~channels~~it inshould ~~order~~establish toa ~~provide~~standstill ~~narrowband~~provision ~~services~~during ~~over~~an ~~fiber~~RSN-related ~~where~~complaint; anand ~~ILEC~~(3) ~~retires~~the apresumptions ~~copper~~for ~~loop~~RSNs itshould ~~has~~be ~~overbuilt~~extended ~~with~~to ~~FTTP~~a orcable-affiliated ~~FTTC~~national sports network. The FCC ~~granted~~found ~~forbearance, subject to~~ a ~~narrow,~~preemptive ~~targeted~~prohibition ~~"grandfathering"~~on ~~condition,~~exclusive ~~under~~contracts ~~which~~is ~~incumbents~~no ~~must~~longer ~~maintain~~necessary ~~access~~and tothat ~~unbundled~~a 64case-by-case ~~kbps~~process ~~channels~~will ~~that~~remain ~~are~~ in ~~use~~place asto ofassess the ~~adopted~~impact ~~date~~ of ~~the~~individual ~~order~~exclusive contracts. The FCC ~~also~~order ~~granted~~provides ~~forbearance~~a ~~from~~45-day ~~rules~~answer ~~requiring~~period ~~ILECs~~for toall ~~provide~~complaints ~~access~~and toa ~~newly~~six-~~deployed~~month ~~entrance~~deadline ~~conduit~~for init ~~“greenfield”~~to ~~(new~~act ~~developments)~~on ~~situations~~a tocomplaint ~~competitive~~alleging ~~LECs~~a atdenial ~~regulated~~of ~~rates~~programming. The ~~FCC,~~order ~~however,~~also ~~denied~~incorporates ~~forbearance~~safeguards ~~for~~regarding ~~“brownfield”~~RSNs, ~~situations~~by ~~(existing~~establishing ~~developments)~~a ~~because~~rebuttable presumption that ~~concluded~~an ~~that~~exclusive ~~ILECs~~contract ~~have~~involving a ~~"pre~~cable-~~existing~~affiliated ~~advantage"~~RSN inhas ~~brownfield~~the ~~deployments~~“purpose ~~that~~or ~~merited~~effect” ~~different treatment. The removal~~ of ~~these~~“significantly ~~requirements~~hindering ~~helps~~or topreventing” ~~level~~ the ~~playing~~complainant ~~field~~from inproviding ~~the~~television ~~increasingly~~services, ~~competitive~~placing ~~telecommunications~~the ~~market~~burden ~~by relieving us~~ of ~~some~~proof ofon the ~~outdated obligations to provide competitive access~~distributor.

~~Environmental,~~Other ~~Health~~Federal and ~~Safety~~State ~~Regulations~~Regulatory Proceedings

WeThe ~~are~~FCC ~~subject~~has been exploring whether to ~~various~~modify ~~environmental,~~its ~~health~~rules requiring utilities to provide telecommunications carriers and ~~safety~~cable ~~laws~~television companies with access to their poles, ducts, and ~~regulations~~rights of way. In April 2011, the FCC adopted new pole attachment rules that, ~~govern~~among ~~our~~other ~~operations~~things, require access to poles and ~~may~~conduit ~~adversely~~within ~~affect~~a ~~our~~shorter period of time, and further limit make-ready costs. ~~Some~~In ofaddition, ~~our~~these ~~properties~~new ~~use,~~rules orchange ~~may~~the ~~have~~rates ~~used~~for inpole ~~the~~attachments ~~past~~by mandating that broadband attachers pay pole attachment rates that are closer to existing cable TV rates, ~~on‑site~~than ~~facilities~~higher orrates ~~underground~~applicable ~~storage~~to ~~tanks~~telecommunications carriers. These rules also for the ~~storage~~first time allow telephone companies to demand reasonable rates from utility pole owners. These rules tend to increase the burdens and costs of ~~hazardous~~pole ~~materials~~and conduit owners such as us. The rules were upheld on appeal in February 2013. In December 2015, the FCC further revised the formula for calculating pole attachment rates for telecommunications carriers. The change will ensure that ~~could~~pole ~~create~~attachment rates for telecommunications attachers, including providers of broadband Internet access service (BIAS), approximate the ~~potential~~rates for cable attachers. In November 2017, the ~~release~~FCC ofadopted various rule changes intended to speed broadband deployment by (1) excluding capital costs recovered via make-ready fees from pole attachment rates; (2) establishing a 180-day shot-clock for pole attachment complaints; and (3) allowing ILECs to access poles owned by CLECs. These rule changes became effective January 2018.

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~~hazardous~~ In ~~substances~~August or2015, ~~contamination~~the ofFCC adopted rules concerning the ~~environment.~~transition Wefrom ~~cannot~~the ~~predict~~copper-based ~~with~~Time ~~any~~Division ~~certainty~~Multiplexing ~~our~~(TDM) ~~future~~network ~~capital~~to ~~expenditure~~a fiber-based Internet Protocol (IP) network. To address backup power requirements for ~~environmental~~residential ~~regulatory~~consumers ~~compliance,~~of ~~although~~IP-based wevoice ~~have~~and ~~not~~data ~~currently~~services ~~identified~~that ~~any~~replace ofthe ~~our~~traditional telephony used to dial 911, effective February 2016, prior to switching facilities-based, asfixed, ~~requiring~~residential ~~material~~voice ~~expenditures~~services ~~for~~from ~~environmental~~copper, ~~remediation~~which oris line-powered, to ~~achieve~~fiber, ~~compliance~~Hawaiian Telcom must educate affected residential subscribers on the impact of this switch, and offer these subscribers the option to purchase a backup power solution that provides at least eight hours of standby power during a commercial power outage. Within three years, in accordance with ~~environmental~~FCC ~~regulations~~requirements, Hawaiian Telcom is required to offer at least one option that provides a minimum of 24 hours standby power. The purpose of the requirement is to ensure consumers can make calls to 911 in the event of a power outage.

In a separate proceeding in 2015, the FCC also adopted rules governing the retirement of copper loops and the discontinuance of legacy services used as a wholesale input. Among other things, the rules required ILECs to: (1) provide interconnecting entities at least six months’ advance notice of proposed copper retirement; and (2) consider the impact of their actions on the end-users of carrier-customers when discontinuing, reducing, or impairing a service used as a wholesale input. In order to receive authority to discontinue, reduce, or impair either special access services at DS1 speed and above or commercial wholesale platform service, the rules required ILECs to provide competing carriers with wholesale access to their IP services on reasonably comparable rates, terms, and conditions. In November 2017, the FCC adopted various rule changes intended to speed the transition from copper networks and legacy services to next-generation networks and services by reforming rules that increase costs and slow broadband deployment including: (1) streamlining the copper retirement rules adopted in 2015, including reducing the notice period from 180 to 90 days; (2) accelerating the approval process for applications that grandfather low-speed legacy services, discontinuing legacy data services already grandfathered, or discontinuing low-speed legacy services with no customers; and (3) reversing the 2015 clarification that, when discontinuing a service, a carrier must also take into account the retail end-users of its wholesale customers. These rule changes will not become effective until approved by the Office of Management and Budget. The FCC’s order is also subject to a court appeal and it is uncertain when this will be resolved.

Environmental, Health and Safety Regulations

We are subject to various environmental, health and safety laws and regulations that govern our operations and may adversely affect our costs. Some of our properties use, or may have used in the past, on‑site facilities or underground storage tanks for the storage of hazardous materials that could create the potential for the release of hazardous substances or contamination of the environment. We cannot predict with any certainty our future capital expenditure requirements for environmental regulatory compliance, although we have not currently identified any of our facilities as requiring material expenditures for environmental remediation or to achieve compliance with environmental regulations.

Available Information

We make available, through the Investor Relations link on our website at www.hawaiiantel.com, under “SEC Filings,” our annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, and amendments to those reports, free of charge as soon as reasonably practicable after we electronically file or furnish them to the U.S. Securities and Exchange Commission. The charters for the committees of our Board of Directors (Audit, Compensation, Executive, and Nominating and Governance Committees), as well as our Code of Business Conduct and any amendments and waivers thereto, also can be found on the Investor Relations site, under “Corporate Governance.” The contents of our website are not incorporated into this Annual Report on Form 10‑K.

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Item 1A. Risk Factors

You should carefully consider the risks described below as well as the other information contained in this Form 10‑K. Any of the following risks could materially adversely affect our business, financial condition or results of operations.

Risks Relating to our Business

Our business faces a variety of financial, operating and market risks, including the following:

Risks Relating to the Pending Merger.

On July 9, 2017, we, Cincinnati Bell and Merger Sub entered into a Merger Agreement, pursuant to which we will become a wholly-owned subsidiary of Cincinnati Bell. On November 7, 2017, our stockholders approved the Merger. Assuming all closing conditions are met, we estimate the Merger to close near the middle of 2018. However, the Merger remains subject to obtaining required approvals and satisfying closing conditions, which may delay or prevent completion of the Merger and/or result in the incurrence of additional costs. Further, certain events may delay the completion of the Merger or result in a termination of the Merger Agreement. Some of these events are outside of our control. Completion of the Merger is also conditioned upon, among other things, the receipt of certain governmental consents and regulatory approvals including approval by the Federal Communications Commission and Hawaii Public Utilities Commission. No assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied. Even if all such consents and approvals are obtained, no assurance can be given as to the terms, conditions and timing of the consents and approvals or that they will satisfy the terms of the Merger Agreement.

The failure to complete the Merger and delays completing the Merger could adversely affect the market price of our common stock.

Failure to complete the Merger would prevent us from realizing the anticipated benefits of the Merger. In addition, the market price of our common stock may reflect various market assumptions as to whether and when the Merger will be completed. Consequently, the failure to complete, or any delay in the completion of the Merger could result in a significant adverse change in the market price of our common stock, particularly to the extent that the current market price reflects a market assumption that the Merger will be completed.

Whether or not the Merger is completed, the pendency of the transaction could cause disruptions in our business, which could have an adverse effect on our business and financial results.

The pendency of the Merger could cause disruptions in our business, including, but not limited to, the following:

· current and prospective employees may experience uncertainty about their future roles with the combined company or consider other employment alternatives, which might adversely affect our ability to retain or attract key managers and other employees;

· our customers may anticipate changes in how they are served and may, as a result, choose to discontinue their service or choose another provider;

· our management’s attention may be diverted from the operation of the business toward the completion of the Merger; and

· the Merger Agreement contains certain negative covenants that limit how we conduct our business during the pendency of the Merger.

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The telecommunications industry is increasingly competitive, and we may have difficulty competing effectively.

All sectors of the telecommunications industry are competitive. Competition in the markets in which we operate could, among other things:

reduce our customer base;

require us to lower prices charged to customers in order to compete; or

require us to increase marketing expenditures and the use of discounting and promotional campaigns.

Any of these events could have a material adverse effect on our business and financial results.

Wireline Services. As the ILEC, we face competition from resellers, local providers who lease UNEs from us, from facilities‑based providers of local telephone services, and from providers of VoIP services.

We have historically faced access line losses as a result of competition and substitution of traditional wireline services with wireless services. Access line losses have been faced by the industry as a whole, and we cannot assure you that access line losses will not continue in the future. In particular, the increasing penetration of high‑speed Internet and VoIP could lead to further primary and secondary access line losses.

Interconnection duties are governed, in part, by telecommunications rules and regulations related to the UNEs that must be provided. These rules and regulations remain subject to ongoing modifications. Our business is subject to extensive governmental regulation, and applicable legislation and regulations and changes to them could adversely affect our business. However, we received some regulatory relief in 2009 when the Hawaii State Legislature passed Act 180, which classified retail local exchange intrastate services as fully competitive. While HPUC approval and cost support filings are no longer required to establish or modify rates or to bundle service offerings, HPUC approval is required to raise the rate that existed for the retail service in the tariff at the time of implementation of Act 180. In addition, while cellular wireless services initially complemented traditional local exchange and long distance services, existing and emerging wireless and IP technologies are increasingly competitive with local exchange and, particularly, long distance services in some or all of our service areas.

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cellular wireless services initially complemented traditional local exchange and long distance services, existing and emerging wireless and IP technologies are increasingly competitive with local exchange and, particularly, long distance services in some or all of our service areas.

Internet Services. We expect that the Internet access services business will continue to be highly competitive due to the absence of significant barriers to entry. We currently compete with a number of established online services companies, inter‑exchange carriers and cable companies. Competition is particularly intense for broadband services.

Managed Services. We face numerous competitors that vary based on the type of managed services being offered. Other network service providers provide some form of managed network service monitoring capability. Numerous voice and data equipment vendors provide management of the installed equipment either at an individual location or across multiple networked locations. Competitive managed IP and network security services are offered by various firms that specialize in this area.

Data Center and Cloud‑Based Services. There currently is a limited inventory of colocation data center space available in Hawaii. However, there are numerous other providers of cloud‑based software, including system integrators in Hawaii and web‑based service providers, that offer software subscriptions and virtual machines on cloud‑based servers housed in data centers on the U.S. mainland and internationally.

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Advanced Communications and Network Services. These advanced services businesses are highly competitive. Many non‑traditional players have emerged in the business communications market, attracted by the absence of significant barriers to entry. Many of these non‑traditional players are capable of focusing on highly specialized areas of the market.

Next‑Generation Television Service. We launched our television service on the island of Oahu in July 2011. The market for television services in Hawaii is dominated by ~~Oceanic~~Spectrum. On the island of Oahu, approximately 70% of occupied households that subscribe to television service subscribe to ~~Oceanic~~Spectrum’s cable service. There is no assurance we will be able to compete successfully against ~~Oceanic~~Spectrum. In particular, the costs to acquire programming is a significant and increasing cost, and there is no assurance our content acquisition costs will be in line with ~~Oceanic~~Spectrum’s such that we can remain competitive. Direct broadcast satellite companies currently are not significant competitors, but this could change in the future.

Wireless Services. We provide wireless telecommunications services by use of a mobile virtual network operator (MVNO) model in which we resell another carrier’s facilities‑based wireless services under the Hawaiian Telcom® brand name. The market in Hawaii for wireless telecommunications services is subject to intense competition. In addition, our wireless business may be less profitable than the wireless businesses of other telecommunications companies due to our use of a MVNO model.

We have made and expect to continue to make material capital expenditures in connection with improvements to our network and other facilities. Unforeseen increases in the amount of capital expenditures required to execute our current business plan could have a material adverse effect on our business and financial results.

We have made and expect to continue to make a significant ~~amount of~~ capital expenditures to, among other things, enhance the capabilities of our network, such as that required to provide digital video service, enhance the functionality of our existing IT systems, and support the deployment of new products and services. We intend to fund ~~these~~future capital expenditures and expenses with operating cash flows and funds available to us under our credit facilities. Increases in the amount of capital expenditures and expenses required to upgrade our network and other facilities above those contemplated by our current business plan, could cause our cash flows and available financing to be insufficient to fund such capital expenditures and operating expenses and have a material adverse effect on our business and financial results.

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Failures in our critical back‑office systems and IT infrastructure could have a material adverse effect on our business and financial results.

We operate our own back‑office and IT infrastructure, including business processes, software applications (such as billing systems, corporate finance systems, human resources and payroll systems and customer relationship management systems), and hardware that are vital to our operations. Failures in our back‑office systems and IT infrastructure could have a material adverse effect on our business and financial results.

Our success will depend on our ability to attract and retain qualified management and other personnel.

Our success depends upon the talents and efforts of our senior management team. The loss of any member of our senior management team, due to retirement or otherwise, and the inability to attract and retain highly qualified technical and management personnel in the future, could have a material adverse effect on our business, financial condition, results of operations, liquidity and/or the market price of our outstanding securities.

Approximately half of our workforce is represented by a labor union and therefore subject to a collective bargaining agreement, which expires at the end of 2017. The inability to enter into a new collective bargaining agreement on favorable terms could have a material adverse effect on our business, financial condition, results of operations, liquidity and/or the market price of our outstanding securities.20

As of December 31, 2016, approximately half of our employees were covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers Local 1357 (“IBEW”) that expires at the end of 2017. The inability to negotiate and enter into a new collective bargaining agreement on favorable terms could result in an increase in our operating expenses or covered employees could strike or engage in other collective behaviors. If unionized workers were to engage in a strike, we could experience a significant disruption of our operations or higher ongoing labor costs, either of which could have a material adverse effect on our business, financial condition, results of operations, liquidity and/or the market price of our outstanding securities. Future renegotiation of these and other labor agreements or the provisions of such labor agreements could adversely impact our service reliability and significantly increase our costs for healthcare, pension plans, wages and other benefits, which could have a material adverse impact on our business, financial condition, results of operations, liquidity and/or the market price of our outstanding securities.

An IT and/or network security breach may lead to unauthorized use or disabling of our network, theft of customer data, unauthorized use or publication of our intellectual property and/or confidential business information and could have a material adverse effect on our business and financial results.

We are subject to cyber and other data security risks. This risk may be heightened as we expand our managed services, data center services, and cloud based services. We seek to effectively prevent, detect and respond to all cyber-attacks, but, in some cases, we might be unaware of an incident or its magnitude. Significant security failures could result in the theft, loss, damage, unauthorized use or publication of our intellectual property and/or confidential business information; the theft, loss, damage, unauthorized use or publication of our customers’ personally identifiable information, intellectual property and/or confidential business information; or the unauthorized use or disabling of our network elements. While we have technology and information security processes and cybersecurity risk managment in place to mitigate these risks and respond to any incidents, there is no assurance these measures will be adequate to prevent an incident, including incidents involving sophisticated criminal organizations and nation-state actors. A disabling of our network elements or a loss of confidential or proprietary data or other data security breaches could materially and adversely affect our customers, employees and vendors, damage our reputation among customers and the public, disrupt operations, and subject us to possible financial losses, any of which could have a material adverse effect on our financial condition and results of operations and our ability to expand our services.

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We are subject to cyber and other data security risks. This risk may be heightened as we expand our managed services, data center services, and cloud-based services. We seek to effectively prevent, detect and respond to all cyber-attacks, but, in some cases, we might be unaware of an incident or its magnitude. Significant security failures could result in the theft, loss, damage, unauthorized use or publication of our intellectual property and/or confidential business information; the theft, loss, damage, unauthorized use or publication of our customers’ personally identifiable information, intellectual property and/or confidential business information; or the unauthorized use or disabling of our network elements. While we have technology and information security processes and cybersecurity risk managment in place to mitigate these risks and respond to any incidents, there is no assurance these measures will be adequate to prevent an incident, including incidents involving sophisticated criminal organizations and nation-state actors. A disabling of our network elements or a loss of confidential or proprietary data or other data security breaches could materially and adversely affect our customers, employees and vendors, damage our reputation among customers and the public, disrupt operations, and subject us to possible financial losses, any of which could have a material adverse effect on our financial condition and results of operations and our ability to expand our services.

A network disruption could cause delays or interruptions of service, which could cause us to lose customers.

To be successful, we will need to continue to provide our customers with reliable and uninterrupted service over our expanded network. Disruptions in our service could occur as a result of events that are beyond our control. Some of the risks to our network and infrastructure include, without limitation:

physical damage to our transmission network including poles, cable and access lines;

widespread power surges or outages;

software defects in critical systems; and

damage or disruption inflicted by third parties, whether intentionally or unintentionally, upon the network or our other infrastructure.

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From time to time, in the ordinary course of business, we have experienced and in the future may experience short disruptions in our service due to factors such as cable damage, inclement weather and service failures of our third‑party service providers. We could experience more significant disruptions in the future. In addition, certain portions of our network may lack adequate redundancy to allow for expedient recovery of service to affected customers. Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and incur expenses, which could have a material adverse effect on our business, financial condition, results of operations, liquidity and/or the market price of our outstanding securities.

We rely on several material outsourcing agreements to operate our business. The loss of certain of these agreements, or the failure of any third party to perform under certain of these agreements, could have a material adverse effect on our business and financial results.

Several critical services necessary to operate our business are provided by third‑party service providers. For example, we have entered into agreements with Accenture and other third parties for the provision of, among other things, critical printing, billing, and IT services.

Upon expiration or termination of these agreements, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, favorable to us, or at all. The failure of these third‑party service providers to satisfy their obligations under their agreements with us, without a suitable replacement, could have a material adverse effect on our business and financial results. Additionally, if these third‑party service providers were to seek U.S. bankruptcy law protection, our agreements with such service providers, and such service providers’ ability to provide the services under those agreements, could be adversely impacted, and although we may have a claim for damages against the bankruptcy estate, the claim may or may not be paid in the bankruptcy proceeding.

Our business is subject to extensive governmental regulation. Applicable legislation and regulations and changes to them could adversely affect our business and financial results.

We operate in a heavily regulated industry, and most of our revenues come from the provision of services regulated by the FCC and the HPUC. Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts and could be changed by federal or state legislative initiative, judicial review or regulatory agencies at any time. We cannot predict the impact of future developments or changes to the regulatory environment or the impact such developments or changes would have on us.

The “Connect America Fund” Order adopted by the FCC in November 2011 comprehensively reformed both the universal service program and intercarrier compensation and has had a significant impact on us. See “—Universal Service” above for a discussion of the impact of the Order on the universal service program, and “—Federal Framework for Intercarrier Compensation” above for a discussion of the impact of the Order on intercarrier compensation. Changes in other FCC policies under review also could have a significant impact on us by increasing our obligations and/or reducing our revenue.

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in other FCC policies under review also could have a significant impact on us by increasing our obligations and/or reducing our revenue.

In February 2015, the FCC reclassified broadband service, both fixed and mobile, from its longstanding status as a Title I information service to a Title II common carrier telecommunications service. Although it is too early to determine with any certainty how the order will affect our broadband services, the order could result in additional costs and reduced margins in our broadband business. See “Federal Regulatory Classification of Broadband and Internet Services”.

State government regulation also is a source of business uncertainty. We cannot predict whether state proceedings will be initiated or the possible outcome of such proceedings at this time.

The HPUC could limit the ability of Hawaiian Telcom, Inc., one of ~~the~~our ~~Company’s~~ indirect operating subsidiaries, to distribute funds or assets to its parent company.

All of our operations are conducted through our subsidiaries. Any revenue we may receive is derived from distributions from such subsidiaries. Hawaiian Telcom, Inc., one of our indirect operating subsidiaries, is subject to HPUC regulatory authority which could potentially limit the ability of Hawaiian Telcom, Inc. to distribute funds or assets to its parent company. The inability of any of our regulated subsidiaries to make a distribution would, thus, limit the ability and amount of funds available for us to make a distribution to our stockholders.

~~A reduction by the HPUC or the FCC of the rates we charge our customers would reduce our revenues and could reduce our earnings.~~22

The rates we charge our local telephone customers are based, in part, on a rate‑of‑return authorized by the HPUC on capital invested in our network. These authorized rates, as well as allowable investment and expenses, are subject to review and change by the HPUC at any time. If the HPUC orders us to reduce our rates, our revenues would be reduced and our earnings also could be reduced absent corresponding reductions in costs or offsetting revenue increases in other segments. We cannot assure you that our rates will remain at their current levels. The HPUC order received in connection with the 2007 sale of our directories publishing business imposed a condition requiring the imputation of revenues. Specifically, a directory publishing revenue credit in the annual amount of $42.6 million per year must be added as regulated revenues into the calculation of Hawaiian Telcom, Inc.’s earnings from 2008 to 2022 in all future rate cases, alternative form of regulation proceedings, or other proceedings before the HPUC investigating Hawaiian Telcom, Inc.’s earnings or financial performance. This condition may adversely affect our ability to obtain rate increases in the future.

Also, our local exchange service competitors may gain a competitive advantage based on rules which favor competitors. For example, competitors have the ability to purchase our services at discounted rates set by the HPUC and to resell them at rates that are not subject to the level of regulatory scrutiny generally faced by us. Additionally, as a result of the state regulators permitting our competitors to intervene in rate‑setting proceedings, there is a potential that such competitors could obtain business sensitive information about us during such proceedings.

The FCC approves tariffs for interstate access and subscriber line charges, both of which are components of our network access revenue. The FCC currently is considering whether to restrain special access pricing by carriers like us subject to price caps on interstate rates. The “Connect America Fund” Order that the FCC adopted in November 2011 reduces switched interstate access charges for carriers like us over a period of six years but allows us to recover some of the foregone revenue from our end users. It is possible we may be required to recover more revenue through subscriber line charges or forego this revenue altogether. This could reduce our revenue or impair our competitive position.

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A reduction by the HPUC or the FCC of the rates we charge our customers would reduce our revenues and could reduce our earnings.

The rates we charge our local telephone customers are based, in part, on a rate-of-return authorized by the HPUC on capital invested in our network. These authorized rates, as well as allowable investment and expenses, are subject to review and change by the HPUC at any time. If the HPUC orders us to reduce our rates, our revenues would be reduced and our earnings also could be reduced absent corresponding reductions in costs or offsetting revenue increases in other segments. We cannot assure you that our rates will remain at their current levels. The HPUC order received in connection with the 2007 sale of our directories publishing business imposed a condition requiring the imputation of revenues. Specifically, a directory publishing revenue credit in the annual amount of $42.6 million per year must be added as regulated revenues into the calculation of Hawaiian Telcom, Inc.’s earnings from 2008 to 2022 in all future rate cases, alternative form of regulation proceedings, or other proceedings before the HPUC investigating Hawaiian Telcom, Inc.’s earnings or financial performance. This condition may adversely affect our ability to obtain rate increases in the future.

Also, our local exchange service competitors may gain a competitive advantage based on rules which favor competitors. For example, competitors have the ability to purchase our services at discounted rates set by the HPUC and to resell them at rates that are not subject to the level of regulatory scrutiny generally faced by us. Additionally, as a result of the state regulators permitting our competitors to intervene in rate-setting or other regulatory proceedings, there is a potential that such competitors could obtain business sensitive information about us during such proceedings.

The FCC approves tariffs for interstate access and subscriber line charges, both of which are components of our network access revenue. The “Connect America Fund” Order that the FCC adopted in November 2011 reduces switched interstate access charges for carriers like us over a period of six years but allows us to recover some of the foregone revenue from our end users. It is possible we may be required to recover more revenue through subscriber line charges or forego this revenue altogether. This could reduce our revenue or impair our competitive position.

If we do not adapt to technological changes in the telecommunications industry, we could lose customers and market share.

The telecommunications industry is subject to rapid and significant changes in technology, frequent new product and service introductions and evolving industry standards which could reduce the competitiveness of our services. Adapting to technological developments could require unbudgeted upgrades or the procurement of additional products that could be expensive and time consuming to implement. If we fail to adapt successfully to technological changes or fail to obtain access to important new technologies, we could lose customers and be limited in our ability to attract new customers and sell new services to our existing customers.

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Our business may be adversely affected if we cannot continue to license or enforce the intellectual property rights on which our business depends.

We rely on patent, copyright, trademark and trade secret laws and licenses and other agreements with our employees, customers, suppliers and other parties to establish and maintain our intellectual property rights in technology and the products and services used in our operations. Also, because of the rapid pace of technological change, we develop our own technologies, products and services and rely on technologies developed or licensed by third parties. However, any of our intellectual property rights could be challenged or invalidated, or such intellectual property rights may not be sufficient to permit us to take advantage of current industry trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, discontinuance of certain product or service offerings or other competitive harm. We may not be able to obtain or continue to obtain licenses from these third parties on reasonable terms, if at all. In addition, claims of intellectual property infringement could require us to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question, which could require us to change our business practices or offerings and limit our ability to compete effectively. Even unsuccessful claims can be time‑consuming and costly to defend and may divert management’s attention and resources away from our businesses. In recent years, the number of intellectual property infringement claims has been increasing in the communications industry and this could negatively impact us as a company.

The failure to renegotiate programming contracts with television content providers on acceptable terms or at all could have a material adverse effect on our business and results of operations.

We expect television content costs to continue to be one of our largest operating costs associated with providing television service. In recent years, the cable industry has experienced rapid increases in the cost of programming, especially the costs for sports programming and for local broadcast station retransmission content.

Programming costs are generally assessed on a per-subscriber basis, and therefore, are related directly to the number of subscribers to which the programming is provided. Our relatively small base of subscribers limits our ability to negotiate lower per-subscriber programming costs. As our programming contracts with content providers expire, there can be no assurance that they will be renewed on acceptable terms or that they will be renewed at all, in which case we may be unable to provide such programming as part of our video services packages. The loss of this content could have a material adverse effect on our business and results of operations.

The geographic concentration of our operations in Hawaii make our business susceptible to local economic and regulatory conditions and consumer trends, and an economic downturn, recession or unfavorable legislative or regulatory action affecting Hawaii could have a disproportionate and material adverse effect on our business, financial condition, results of operations, liquidity and/or the market price of our outstanding securities.

Substantially all of our customers and operations are located in Hawaii. Because of Hawaii’s geographic isolation, the successful operation and growth of our businesses is dependent on favorable economic and regulatory conditions in the state. The Hawaii economy, in turn, is dependent upon many factors, including:

the level of government and military spending;

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the legal, regulatory and political environment;

the strength of the Hawaii tourism industry, which is in turn dependent on global economic conditions principally those in the U.S. mainland and Pacific rim;

the availability and cost of skilled labor;

the continued growth in services industries; and

the absence of hurricanes or other natural disasters and terrorism incidents.

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The customer base for telecommunications services in Hawaii is small and geographically concentrated. The population of Hawaii is approximately 1.4 million, approximately 70% of whom live on the island of Oahu. Any adverse economic conditions affecting Oahu, or Hawaii generally, could materially impair our ability to operate our business. Labor shortages or increased labor costs in Hawaii could also have a material adverse effect on our business.

In addition, we may be subject to increased costs for goods and services that it is unable to control or defray. Increased expenses including, but not limited to, energy and health care could have a material adverse effect on our business and results of operations.

Limitations on our ability to use NOL carryforwards, and other factors requiring us to pay cash to satisfy our tax liabilities in future periods, may affect our ability to fund our operations, make capital expenditures and repay our indebtedness.

We currently have a material amount of net operating loss (“NOL”) carryforwards and so‑called “built‑in losses,” all of which we intend to use in the future to reduce our federal and state taxable income. In the event that an “ownership change” were to occur with respect to our stock, such as the completion of the Merger, it is possible that our ability to use our NOLs and built‑in losses would become subject to an annual limitation. An ownership change could occur with respect to our stock merely as a result of one or more “5‑percent shareholders” buying or selling our shares, even if no one person were to acquire a controlling percentage of our stock. Although we will monitor transfers of our stock, there can be no assurance that we will not suffer an ownership change with substantial adverse tax consequences.

Our indebtedness could adversely affect our financial condition.

We have a significant amount of indebtedness. We maintain a Term Loan in the amount of $~~290~~320 million and a revolving credit facility which may be drawn in an amount up to $30 million (Revolving Credit Facility), each with a first priority lien on all assets.

The debt service requirements of our indebtedness could:

make it more difficult for us to satisfy the service requirements of our other obligations, including pension funding obligations, investments required to maintain and upgrade our network and service fleet, investments required to introduce and deploy new products and services, as well as the operating costs of our businesses;

increase our vulnerability to general adverse economic and industry conditions;

require us to dedicate a higher than desired portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

make it difficult to secure credit terms with our vendors;

place us at a competitive disadvantage compared to our competitors that have less debt; and

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limit our ability to borrow additional funds.

In addition, the terms of our Term Loan and Revolving Credit Facility contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long‑term best interests and restrict the payment of dividends. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

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The Term Loan matures in 2019. We generally do not expect to generate the necessary cash flow to repay our Term Loan in its entirety by the maturity date and such repayment in full is dependent upon the ability to refinance the Term Loan on reasonable terms. The ability to refinance the indebtedness on reasonable terms before the maturity date cannot be assured.

On February 24, 2017, we entered into a Credit Agreement with CoBank, ACB, and certain other lenders that are a party thereto that is expected to close on or about May 3, 2017 (the “New Facility”). The Company plans to use a part of the proceeds of the New Facility to retire our existing Term Loan, but there is no assurance that we will successfully close the New Facility.

To service our indebtedness and fund capital expenditures, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our current indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We will likely need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Restrictive covenants in the agreements governing our indebtedness restrict our ability to operate our business and pursue our business strategies, and a breach of such covenants may result in the acceleration of our long‑ term debt maturities.

The restrictive covenants in the Term Loan, Revolving Credit Facility and under the New Facility limit our ability, among other things, to:

incur additional indebtedness;

pay dividends or make distributions in respect of our capital stock or to make certain other restricted payments or investments;

sell assets, including capital stock of subsidiaries;

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

enter into transactions with our affiliates;

· ~~invest in new products and services or~~ make capital expenditures; and

incur liens.

In addition, the restrictive covenants may prohibit us from prepaying our other indebtedness and require us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control.

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Severe weather conditions and natural disasters which occur in Hawaii could have a material adverse effect on our operations and financial results.

From time to time, Hawaii experiences severe weather conditions such as high winds and heavy rainfall, and natural disasters such as earthquakes, volcanic eruptions and tsunami, which can overwhelm our employees, disrupt our services and severely damage our property. Such disruptions in service and damage to property could materially decrease our revenues and materially increase our expenses. InFor ~~2014~~example, ~~Hawaii~~in ~~experienced two hurricanes and a volcanic eruption which adversely affected our financial results. In~~ 2015, seven hurricanes and six tropical storms passed near Hawaii, resulting in record rainfall which damaged infrastructure and adversely affected our financial results. In 2016, one tropical storm and two hurricanes either made landfall or passed near Hawaii causing heavy rainfall and high surf. While these events did not have a material adverse effect on our operating results or financial condition, we cannot assure you that these types of events will not become more common or severe in the future or not result in material harm to ~~the~~our ~~Company’s~~ business, financial condition, results of operations, liquidity and/or the market price of our securities. Moreover, it is impossible to predict the extent to which climate change could cause extreme weather conditions to become more frequent or more extreme.

Concentration of ownership among stockholders may prevent new investors from influencing significant corporate decisions.

~~Based~~As ~~on Schedules 13D and 13G, and Forms 4 filed by the respective holders, as~~ of December 31, ~~2016~~2017, two of our stockholders collectively (with their affiliates) own approximately 45% of our outstanding common stock. Each of these two stockholder groups filed a Schedule 13D in 2015 indicating that it may, among other things, engage in communications with our representatives or other stockholders of the Company, purchase additional shares of Company common stock or propose directors for our Board of Directors. In 2016, we entered into a Nomination, Standstill and Support Agreement with our largest stockholder, Black Diamond Capital Management, L.L.C. (“BD”), and a Nomination, Standstill and Support Agreement(collectively, the Standstill Agreements) with our second largest beneficial stockholder, Twin Haven Capital Partners, L.L.C., Twin Haven Special Opportunities Fund III, L.P., Twin Haven Special Opportunities Partners III, L.L.C., Twin Haven Special Opportunities Fund IV, L.P. and Twin Haven Special Opportunities Partners IV, L.L.C. (collectively, Twin Haven). Pursuant to each of the Standstill Agreements, among other things, we agreed to nominate one designee of each of BD and Twin Haven to our Board of Directors at each of the ~~next~~2016, ~~three~~2017 and 2018 annual meetings of stockholders. In return, each of BD and Twin Haven has agreed during the three-year term, among other things, to refrain from taking certain actions with respect to us and our securities (including soliciting proxies, proposing any sale transaction or tender offer, seeking representation on our Board of Directors in excess of one designee, or acquiring additional shares of Company common stock beyond an agreed-upon level) and, subject to limited exceptions, to vote all of its shares in accordance with the recommendation of our Board of Directors on any matter submitted for stockholder approval. Although the Standstill Agreements limit BD’s and Twin Haven’s influence over us, each of our major stockholders still has significant influence on the outcome of matters requiring stockholder approval, even if these stockholders are not acting in a coordinated manner, including the election of directors and significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. This concentration of ownership may make some transactions more difficult or impossible without the support of these stockholders, or more likely with the support of these stockholders, and may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control may otherwise benefit our other stockholders.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of our common stock.

Future sales, or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales could occur. Additionally, the high concentration of ownership of our stock could increase the risk that such a large block sale could occur. These sales, or the possibility that these sales may occur, may also make it more difficult for us to obtain additional capital by selling equity securities in the future at a time and at a price that we deem appropriate.

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or the possibility that these sales may occur, may also make it more difficult for us to obtain additional capital by selling equity securities in the future at a time and at a price that we deem appropriate.

Item 1B. Unresolved Staff Comments.

None

Item 2. Properties.

We own our corporate headquarters, which is located in 1177 Bishop Street, Honolulu, Hawaii 96813 and consists of over 465,000 square feet of office space. We also have other properties consisting primarily of approximately ~~124~~126 owned (including part‑owned) and approximately 5761 leased or licensed real estate properties, including our administrative facilities and facilities for call centers, customer service sites for the television business, switching equipment, fiber optic networks, microwave radio and cable and wire facilities, cable head‑end equipment, coaxial distribution networks, routers and servers used in our telecommunications business, as well as a state‑of‑the‑art data center facility with up to 6,500 square feet of data center capacity and room for expansion. See Item 1, “Business—Network Architecture and Technology.” For purposes of Hawaii state law, we are classified as a public utility and, accordingly, do not pay any property taxes on properties used in providing telecommunication services. Substantially all of our assets (including those of our subsidiaries) are pledged for the Term Loan.

Item 3. Legal Proceedings

We are involved in various claims, legal actions and regulatory proceedings arising from time to time in the ordinary course of business. In the opinion of management, the ultimate disposition of the legal matters in which the Company is currently involved will not have a material adverse effect on our combined financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our Common Stock trades on The NASDAQ Stock Market under the symbol “HCOM”. The holders of our Common Stock are entitled to one vote per share on any matter to be voted upon by stockholders. The following table sets forth the high and low sales prices of our Common Stock for the period from January 1, ~~2015~~2016 through December 31, ~~2016~~2017:

	Market Price
	High		Low
2017
First Quarter	$	26.59	$	22.80
Second Quarter	$	26.45	$	23.12
Third Quarter	$	31.20	$	24.33
Fourth Quarter	$	31.57	$	29.72
2016
First Quarter	$	25.26	$	20.75
Second Quarter	$	24.66	$	19.14
Third Quarter	$	24.09	$	21.28
Fourth Quarter	$	25.50	$	20.11
2015
First Quarter	$	27.45	$	25.80
Second Quarter	$	27.96	$	24.92
Third Quarter	$	26.06	$	20.46
Fourth Quarter	$	25.97	$	20.51

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Holders

As of ~~March 1~~December 31, 2017, there were 3615 holders of record of our Common Stock and approximately 31,~~450~~360 beneficial owners.

Dividends

We have not declared or paid any dividends on our Common Stock. Our Term Loan and Revolving Credit Facility limit our ability to declare or pay dividends.

Securities Authorized for Issuance Under Equity Compensation Plans.

Securities authorized for issuance under equity compensation plans as of December 31, ~~2016~~2017 included:

			Number of securities
			remaining available for
	Number of securities		future issuance under
	to be issued upon	Weighted-‑average	equity compensation
	exercise of	exercise price of	plans (excluding
	outstanding options,	outstanding options,	securities reflected in
Plan Category	warrants and rights(2)	warrants and rights	column(a))
	(a)	(b)	(c)
Equity Compensation Plans Approved by Security Holders	—	—	—
Equity Compensation Plans not Approved by Security Holders(1)(2)	~~272~~367,~~167~~043	—	~~638~~468,~~496~~826
Total	~~272~~367,~~167~~043	—	~~638~~468,~~496~~826

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(1)

The 2010 Equity Incentive Plan was authorized by the Plan of Reorganization. Under the 2010 Equity Incentive Plan, the securities remaining available for future issuance may be issued either as restricted stock, restricted stock units, stock appreciation rights, stock options, or other stock or stock‑based awards.

(2) For performance‑based restricted stock units granted in ~~2016~~2017, amounts reflected in this table assume payout in shares at 156.25% of target. The actual number of shares issued can range from 0% to 156.25% of target depending upon achievement of applicable performance goals.

Sale of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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Stockholder Return Performance Graph

The graph below compares the cumulative total stockholder return on our Common Stock with the cumulative total return on the Standards & Poor’s (S&P) 500 Stock Index, and the NASDAQ Telecommunications Index for the five years ending December 31, ~~2016~~2017, assuming an initial investment of $100 with reinvestment of dividends.

COMPARISON OF CUMULATIVE TOTAL RETURN

Among Hawaiian Telecom Holdco, Inc., S&P 500 and NASDAQ Telecommunications

	At December 31,
	2011		2012		2013		2014		2015		2016
	2012		2013		2014		2015		2016		2017
Hawaiian Telcom Holdco, Inc.	$	100.00	$	~~126~~150.62	$	~~190~~141.7138	$	~~179~~127.0349	$	~~161~~127.4308	$	~~160~~158.9126
S&P 500	$	100.00	$	~~116~~132.0039	$	~~153~~150.5751	$	~~174~~152.6059	$	~~177~~170.0184	$	~~198~~208.1814
NASDAQ Telecommunications	$	100.00	$	~~105~~127.4828	$	~~134~~141.2593	$	~~149~~134.7140	$	~~141~~158.7704	$	~~166~~190.7000

The foregoing performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.

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Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this annual report.

Selected Financial Data (dollars in thousands, except per share amounts)

	Year Ended December 31,
	2016		2015		2014		2013		2012
	2017 (2)		2016		2015		2014		2013 (1)
Statements of income data (1):
Statements of income (loss) data:
Operating revenues	$	~~392~~368,~~963~~419	$	~~393~~392,~~413~~963	$	~~390~~393,~~739~~413	$	~~391~~390,~~150~~739	$	~~385~~391,~~498~~150
Depreciation and amortization		8988,~~916~~424		8789,~~879~~916		7887,~~014~~879		7778,~~301~~014		7077,~~908~~301
Operating income		182,~~792~~001		1918,~~262~~792		3019,~~471~~262		4130,~~771~~471		4541,~~856~~771
Interest expense		1716,~~095~~414		1617,~~786~~095		16,~~496~~786		1816,~~875~~496		2218,~~183~~875
Income tax provision (benefit) (2)		591		1,357		5,910		8,782		(91,382)
Income tax provision		88,002		591		1,357		5,910		8,782
Net income		1,106		1,100		8,099		10,488		109,982
Net income (loss)		(107,241)		1,106		1,100		8,099		10,488
Earnings per common share—
Earnings (loss) per common share—
Basic	$	0(9.1027)	$	0.10	$	0.7610	$	10.0176	$	101.7401
Diluted		0(9.1027)		0.10		0.7210		0.9572		100.3295
Statements of cash flow data—net cash provided by (used in)(3):
Statements of cash flow data—net cash provided by (used in):
Operating activities	$	9098,~~088~~710	$	90,~~596~~088	$	90,~~490~~596	$	7690,~~961~~490	$	8676,~~460~~961
Investing activities		(9795,~~841~~256)		(9897,~~229~~841)		(9698,~~243~~229)		(8596,~~030~~243)		(85,~~310~~030)
Financing activities		(516,~~238)~~409		1(5,~~335~~238)		(31,~~363)~~335		(93,~~373~~363)		(169,~~220~~373)
Balance Sheets data (as of end of period):
Cash and cash equivalents	$	1540,~~821~~759	$	3015,~~312~~821	$	3930,~~885~~312	$	4939,~~551~~885	$	6649,~~993~~551
Property, plant and equipment, net		~~595~~608,~~997~~298		~~579~~595,~~107~~997		~~565~~579,~~956~~107		~~524~~565,~~375~~956		~~507~~524,~~197~~375
Total assets		~~803~~739,~~921~~506		~~799~~803,~~695~~921		~~796~~799,~~724~~695		~~771~~796,724		~~780~~771,~~667~~724
Long term debt (4)		284,699		286,046		287,179		288,388		290,985
Long term debt (3)		309,316		284,699		286,046		287,179		288,388
Stockholders’ equity		~~304~~220,~~914~~209		~~307~~304,~~699~~914		~~304~~307,~~534~~699		~~313~~304,~~012~~534		~~276~~313,~~860~~012

(1) The Company acquired SystemMetrics Corporation on September 30, 2013 ~~and Wavecom Solutions Corporation on December 31, 2012~~. The results of operations are included in the above financial information from the acquisition date.

(2) AsDuring ofthe year ended December 31, ~~2012~~2017, the Company ~~released~~established ~~its~~a full valuation allowance for deferred income tax assets resulting in an income tax ~~benefit~~expense of $9188.40 million for the year ended December 31, ~~2012~~2017.

(3) InLong‑term ~~2016,~~debt ~~the~~includes ~~Company adopted a new accounting standard modifying~~ the ~~presentation~~related ofcurrent ~~restricted~~portion ~~cash~~and inis ~~the~~net ~~statements~~ of ~~cash~~debt ~~flow.~~issuance ~~The~~costs ~~statements~~and oforiginal ~~cash~~issue ~~flow data has been revised for the application of the new standard for all periods presented~~discount. ~~See Note 2 to the consolidated financial statements.~~

~~(4) Long‑term debt includes the related current portion and is net of debt issuance costs and original issue discount.~~ 31

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Background

In the following discussion and analysis of financial condition and results of operations, unless the context otherwise requires, “we,” “us” or the “Company” refers, collectively, to Hawaiian Telcom Holdco, Inc. and its subsidiaries.

The statements in the discussion and analysis regarding the anticipated closing of the merger, industry outlook, our expectations regarding the future performance of our business and the other non‑historical statements in the discussion and analysis are forward‑looking statements. These forward‑looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, “Risk Factors.” Our actual results may differ materially from those contained in any forward‑looking statements. You should read the following discussion together with Item 6, “Selected Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this annual report. We undertake no obligation to update publicly any forward looking statements for any reason even if new information becomes available or other events occur in the future.

~~Segments~~Pending ~~and~~Merger ~~Sources~~with ofCincinnati ~~Revenue~~Bell

WeOn ~~operate~~July in9, ~~two~~2017, ~~reportable~~Hawaiian ~~segments~~Telcom Holdco, Inc. (~~telecommunication~~“Holdco”), ~~and~~a ~~data~~Delaware ~~center~~corporation, ~~services~~Cincinnati Bell Inc. (“Cincinnati Bell”), ~~based~~an onOhio ~~how~~corporation, ~~resources~~Twin ~~are~~Acquisition ~~allocated~~Corp., a Delaware corporation and ~~performance~~a iswholly ~~assessed~~owned bysubsidiary ~~our~~of ~~chief~~Cincinnati ~~operating~~Bell ~~decision~~(“Merger ~~maker.~~Sub”), ~~Our~~entered ~~chief~~into ~~operating~~an ~~decision~~Agreement ~~maker~~and isPlan ~~our~~of ~~Chief~~Merger ~~Executive~~(the ~~Officer~~“Merger Agreement”), pursuant to which Merger Sub will merge with and into Holdco and Holdco will be the surviving corporation (the “Merger”).

~~Telecommunications~~Sources of Revenue

~~The~~We ~~telecommunication~~derive ~~segment derives~~ revenue from the following sources in three main customer channels:

Business Channel

Business data services include high bandwidth data products such as Ethernet, Routed Network Services and Dedicated Internet Access along with traditional High-Speed Internet (“HSI”) for business customers and VoIP. Business VoIP, also referred to as BVoIP, is a unified hosted communications solution for business that includes digital voice services bundled with internet service.

Voice services include local telephone service for business customers. These revenues include monthly charges for basic service and enhanced calling features such as voice mail, caller ID and 3-way calling. Voice also includes long distance services and subscriber line charges prescribed by the Federal ~~Communication~~Communications Commission and imposed on voice customers.

~~Equipment~~Hosted and managed services includes ~~installation~~physical ~~and~~colocation, ~~maintenance~~virtual ofcolocation ~~business~~and ~~customer~~various ~~premise~~related ~~equipment~~security, asnetwork ~~well~~management asand ~~managed~~network ~~service~~installation ~~for~~related ~~customer telephone and IT networks~~services.

Equipment and related services includes installation and maintenance of business customer premise equipment as well as managed service for customer telephone and IT networks.

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Consumer Channel

Video services are marketed as Hawaiian Telcom TV which includes digital television as well as advanced entertainment services. High-Speed Internet services are provided to residential customers as well. Voice services include basic local phone and long distance services, as well as enhanced features.

Wholesale Channel

Wholesale revenue represents wholesale carrier data services provided to both wireline and wireless carriers.

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Other

We receive revenue from various other sources such as wireless services which includes the sale of wireless handsets and other wireless accessories, and switched carrier access which compensates us for origination, transport and termination of calls for long distance and other interexchange carriers. Also included in other revenue is government subsidies generally to provide service in rural or isolated areas.

~~Data~~Results ~~Center~~of ~~Services~~Operations for the Years Ended December 31, 2017, 2016 and 2015

~~The~~For ~~data~~the ~~center~~year ~~services~~ended ~~segment~~December ~~provides~~31, ~~physical colocation~~2017, ~~virtual~~we ~~colocation~~incurred ~~and~~a ~~various~~net ~~related~~loss ~~telephony~~of ~~services~~$107.2 million. WeThe ~~consider~~net ~~data~~loss ~~center~~for ~~services~~the ascurrent year period was most significantly impacted by the income tax provision of $88.0 million. In part, because of recent pretax losses from operations, we concluded it was not appropriate to factor in future income in our ~~business~~assessment ~~channel~~of the realization of deferred income tax assets. As such, we established a full valuation allowance for our deferred income tax assets during the year ended December 31, 2017 resulting in the large income tax provision.

Results of Operations for the Years Ended December 31, 2016, 2015 and 2014

Operating Revenues

The following tables summarize our volume information (lines or subscribers) as of December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, and our operating revenues for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015.

Volume information includes certain information by lines. The line counts represent the number of billed units as of the end of the period as reflected in the records of our primary billing system. The separation of units by the business and consumer channel is based on the customer account designation in the billing system which is generally consistent with how revenue information is separated by channel. Business data lines represent digital subscriber lines used to provide internet services. Video service subscribers are determined with a count of individual customers as reflected in our primary billing system as of period end. For bulk contracts for multi dwelling units, we count individual residences subject to the bulk contract. Video homes enabled is estimated based on a count of single family homes and homes in multi dwelling units that are able to obtain our television service as of the period end and are rounded to the nearest thousand.

~~Volume~~Beginning ~~Information~~in 2017, we discontinued separate reporting of data center services revenue. As discussed in Note 16 to the consolidated financial statements, we no longer separately report data center services as a separate segment. All revenue is now reported by channel and product/service offering on a company-wide basis. Prior period information has been revised to reflect the current presentation.

				2016 vs 2015			2015 vs 2014
	December 31,			Change			Change
	2016	2015	2014	Number	Percentage		Number	Percentage
Business
Data lines	19,596	20,081	19,589	(485)	(2.4)	%	492	2.5	%
BVoIP lines	19,091	16,749	12,898	2,342	14.0	%	3,851	29.9	%
Voice access lines	160,829	168,058	175,636	(7,229)	(4.3)	%	(7,578)	(4.3)	%
Consumer
Video subscribers	41,557	35,876	28,124	5,681	15.8	%	7,752	27.6	%
Internet lines	91,089	93,002	92,875	(1,913)	(2.1)	%	127	0.1	%
Voice access lines	135,363	151,996	169,488	(16,633)	(10.9)	%	(17,492)	(10.3)	%
Homes enabled for video	202,000	190,000	160,000	12,000	6.3	%	30,000	18.8	%

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Volume Information


				2017 vs 2016			2016 vs 2015
	December 31,			Change			Change
	2017	2016	2015	Number	Percentage		Number	Percentage
Business
Data lines	18,289	19,596	20,081	(1,307)	(6.7)	%	(485)	(2.4)	%
BVoIP lines	22,457	19,091	16,749	3,366	17.6	%	2,342	14.0	%
Voice access lines	149,959	160,829	168,058	(10,870)	(6.8)	%	(7,229)	(4.3)	%

Consumer
Video subscribers	45,183	41,557	35,876	3,626	8.7	%	5,681	15.8	%
Internet lines	91,883	91,089	93,002	794	0.9	%	(1,913)	(2.1)	%
Voice access lines	121,169	135,363	151,996	(14,194)	(10.5)	%	(16,633)	(10.9)	%
Homes enabled for video	206,000	202,000	190,000	4,000	2.0	%	12,000	6.3	%

Operating Revenues (dollars in thousands)

	For the Year Ended
	December 31,				Change
	2016		2015		Amount		Percentage
	2017		2016		Amount		Percentage
Business
Data services	$	5960,~~363~~354	$	4965,~~327~~134	$	10(4,~~036~~780)	20(7.3)	%
Voice services		8782,~~136~~582		9387,~~722~~370		(64,~~586~~788)	(75.05)	%
Data center services		12,435		11,094		1,341	12.1	%
Hosted and managed services		6,368		6,430		(62)	(1.0)	%
Equipment and managed services		21,729		20,546		1,183	5.8	%
Equipment and related services		20,173		21,729		(1,556)	(7.2)	%
		180,663		174,689		5,974	3.4	%
		169,477		180,663		(11,186)	(6.2)	%
Consumer
Video services		4043,~~558~~595		3340,~~666~~558		63,~~892~~037	207.5	%
Internet services		2826,~~993~~750		3228,~~687~~993		(32,~~694~~243)	(117.37)	%
Voice services		7364,~~388~~981		7973,~~273~~388		(58,~~885~~407)	(711.45)	%
		142,939		145,626		(2,687)	(1.8)	%
		135,326		142,939		(7,613)	(5.3)	%
Wholesale carrier data		5350,~~664~~741		5653,~~430~~664		(2,~~766~~923)	(45.94)	%
Other		1512,~~697~~875		1615,~~668~~697		(~~971~~2,822)	(518.80)	%
	$	~~392~~368,~~963~~419	$	~~393~~392,~~413~~963	$	(~~450~~24,544)	(06.12)	%

Business Channel

~~The~~We ~~Company~~continue ~~continues~~ to transform ~~its~~our business channel by replacing traditional voice services with next generation strategic services. ~~The~~We ~~Company~~consider ~~considers~~ strategic service revenues in the business channel to include business data services, and ~~data~~hosted ~~center~~and managed services. ~~Business strategic revenues for the year ended December 31, 2016 represent 40% of the total business channel revenues compared to 35% in the prior year.~~

Business data services, including internet and BVoIP, decreased for the year ended December 31, ~~2016~~2017 ~~increased~~ compared to the same period in the prior year. Demand ~~primarily~~for ~~due~~data services continues to ~~non-recurring~~rise ~~fees~~as reflected in the growth of BVoIP lines but revenues were adversely impacted by competitive pricing pressure and declining revenue associated with one large institutional customer. For the ~~year~~years ended December 31, ~~2016~~2017 and ~~2015~~2016, business data services revenue from this customer amounted to $61.25 million and $16.12 million, respectively, including non-recurring fee revenue~~. We~~ ~~anticipate less revenue from this customer in 2017 as the recognition of revenue~~ on certain upfront billed amounts that ended with the fixed contract term on June 30, 2016. In addition, during the year ended December 31, 2016, we recognized the remaining balance of deferred up-front charges of $0.8 million when another institutional customer terminated the related services. ~~In general, the demand for data services continues to rise as reflected in the growth in BVoIP lines.~~

Continued competition in the telecommunications industry has increasingly resulted in customers using technologies other than traditional phone lines for voice and data. Business customers are moving local voice services to VoIP technology. Generally, VoIP technology is less expensive than traditional wireline phone service, requiring us to respond with more competitive bundled unified service such as our BVoIP product. 34

The decrease in voice service revenues for the business channel for the year ended December 31, 2016 compared to the year ended December 31, 2015 was caused primarily by the decline of voice access lines. Business voice access lines decreased 4.3% as of December 31, 2016 compared to 2015. The decline in traditional voice access lines was partially offset by an increase in BVoIP lines of 14%.

Data center services revenues for the year ended December 31, 2016 increased when compared to the prior year period as a result of year-over-year increased Ethernet, security and hardware sales. Data center services is deemed a separate business segment. However, we consider this an integral part of our business channel.

Equipment and managed services sales increased for the year ended December 31, 2016 when compared to the prior year because of large contract installations for certain commercial and institutional customers. Revenue from equipment sales varies from period to period based on the volume of large installation projects.

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The decrease in voice service revenues for the business channel for the year ended December 31, 2017 compared to the year ended December 31, 2016 was caused primarily by the decline of voice access lines. Business voice access lines decreased 6.8% as of December 31, 2017 compared to December 31, 2016. The decline in traditional voice access lines was partially offset by an increase in BVoIP lines of 17.6% for the same period.

Hosted and managed services revenues for the year ended December, 2017 were comparable to the prior year period.

Equipment and related services revenues decreased for the year ended December 31, 2017 when compared to the prior year period because of large contract installations for certain commercial and institutional customers completed in 2016. Revenue from equipment sales varies from period to period based on the volume of large installation projects.

Consumer Channel

~~The~~We ~~Company~~continue ~~continues~~ to transform ~~its~~our consumer channel by replacing traditional voice services with next generation strategic services. ~~The~~We ~~Company~~consider ~~considers~~ strategic service revenues in the consumer channel to include video and internet services. Consumer strategic revenues ~~increased $3.2 million for the year ended December 31, 2016 and~~ now represent 4952% of the total consumer channel revenues for the current year compared to 4649% in the prior year.

Video services revenue increased for the year ended December 31, ~~2016~~2017 compared to the prior year ~~due~~because toof an increase in video subscribers of ~~5,681 as well as in increase in the rates charged subscribers~~8.7%.

Internet revenues for the year ended December 31, ~~2016~~2017 decreased compared to the prior year as a result of the combined effect of competitive pricing and a decline in low-bandwidth internet subscribers.

The decrease in voice services revenue for the year ended December 31, ~~2016~~2017 compared to the year ended December 31, ~~2015~~2016 was caused primarily by a decline in voice access lines. Consumer voice access lines decreased 10.95% ~~during~~from the year ago period which contributed an estimated $87.7 million to the decline in consumer voice services ~~revenue~~. Residential customers are increasingly using wireless services in place of traditional wireline phone services as well as using VoIP technology offered by cable competitors.

In an effort to slow the rate of internet and voice line loss, we are continuing retention and acquisition programs, and are increasingly focusing efforts on bundling of services. We have instituted various “saves” campaigns designed to focus on specific circumstances where we believe customer churn is controllable. These campaigns include targeted offers to “at risk” customers as well as other promotional tools designed to enhance customer retention. We also emphasize win back and employee referral programs. Additionally, we are intensifying our efforts relative to developing tools and training to enhance our customer service capability to improve customer retention and growth.

Wholesale and Other Channel

Wholesale carrier revenue decreased for the year ended December 31, ~~2016~~2017 compared to the prior year as certain carriers have replaced older legacy circuits with more cost effective higher bandwidth solutions.

Other revenue decreased for the year ended December 31, ~~2016~~2017 compared to ~~the~~2016 ~~year ended December 31, 2015~~ because of a decline in ancillary services. There has been a reduction in marketing effort on certain ancillary products, such as wireless, as we focus on other telecommunication ~~and data center~~ services.

3435

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Operating Revenues (dollars in thousands)

	For the Year Ended
	December 31,				Change
	2015		2014		Amount		Percentage
	2016		2015		Amount		Percentage
Business
Data services	$	4965,~~327~~134	$	4454,~~832~~588	$	410,~~495~~546	1019.03	%
Voice services		9387,~~722~~370		9893,~~936~~972		(56,~~214~~602)	(57.30)	%
Data center services		11,094		10,737		357	3.3	%
Hosted and managed services		6,430		5,583		847	15.2	%
Equipment and managed services		20,546		19,324		1,222	6.3	%
Equipment and related services		21,729		20,546		1,183	5.8	%
		174,689		173,829		860	0.5	%
		180,663		174,689		5,974	3.4	%
Consumer
Video services		3340,~~666~~558		2333,~~810~~666		96,~~856~~892	4120.45	%
Internet services		3228,~~687~~993		3132,~~024~~687		1(3,~~663~~694)	5(11.43)	%
Voice services		7973,~~273~~388		8779,~~263~~273		(75,~~990~~885)	(97.24)	%
		145,626		142,097		3,529	2.5	%
		142,939		145,626		(2,687)	(1.8)	%
Wholesale carrier data		5653,~~430~~664		5756,~~771~~430		(12,~~341~~766)	(24.39)	%
Other		1615,~~668~~697		1716,~~042~~668		(~~374~~971)	(25.28)	%
	$	~~393~~392,~~413~~963	$	~~390~~393,~~739~~413	$	~~2,674~~(450)	(0.71)	%

Business Channel

Business data services, ~~revenue~~including internet and BVoIP, for the year ended December 31, ~~2015~~2016 increased ~~when~~ compared to the prior year asprimarily due to non-recurring fees associated with one large institutional customer. For the year ended December 31, 2016 and 2015, business data services revenue from this customer amounted to $6.2 million and $1.1 million, respectively, including non-recurring fee revenue. In addition, during the year ended December 31, 2016, we recognized the remaining balance of deferred up-front charges of $0.8 million when another institutional customer terminated the related services. In general, the demand for data services ~~continued~~continues to ~~grow~~rise as reflected in the growth in ~~data lines and~~ BVoIP lines.

The decrease in voice ~~services~~service revenues for the business channel for the year ended December 31, ~~2015~~2016 compared to the ~~prior~~ year ~~period~~ended December 31, 2015 was caused primarily by the decline of voice access lines. ~~from~~Business ~~2014~~voice toaccess ~~2015~~lines ~~because~~decreased of4.3% ~~the~~as ~~same~~of ~~factors~~December ~~discussed~~31, ~~previously~~2016 ~~for~~compared ~~the~~to ~~decline from~~ 2015. The todecline ~~2016. Business~~in traditional voice access lines ~~decreased~~was ~~4.3%~~partially ~~during~~offset ~~the~~by ~~period~~an ~~for~~increase anin ~~estimated~~BVoIP ~~$4.3~~lines ~~million~~of ~~impact~~14%.

~~Data~~Hosted ~~center~~and managed services revenues for the year ended December 31, ~~2015~~2016 increased when compared to the prior year period as a result of year-over-year increased ~~virtual~~security ~~colocation~~and ~~services~~hardware sales.

Equipment and ~~managed~~related services sales increased for the year ended December 31, ~~2015~~2016 when compared to the prior year ~~ended December 31, 2014 increased~~ because of large contract installations for certain commercial and institutional customers.

Consumer Channel

Video ~~service~~services revenue increased for the year ended December 31, ~~2015~~2016 compared to the prior year due to an increase in video subscribers of 75,~~752~~681 as well as in increase in the rates charged subscribers.

Internet ~~services revenue~~revenues for the year ended December 31, ~~2015~~2016 ~~increased~~decreased ~~when~~ compared to the prior year as a result of athe ~~rate~~combined ~~increase~~effect ~~and~~of ascompetitive ~~more customers were subject to premium~~ pricing onand ~~higher~~decline ~~bandwidth~~in ~~offerings. Consumer~~ internet ~~lines did not change significantly between December 31, 2015 and December 31, 2014~~subscribers.

The decrease in voice services revenues for the consumer channel for the year ended December 31, 2015 compared to the prior year period was caused primarily by the decline of voice access lines from 2014 to 2015 because of the same factors discussed previously for the decline from 2015 to 2016. Residential voice access lines decreased 10.3% during the period for an estimated $9.0 million impact.36

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The decrease in voice services revenue for the year ended December 31, 2016 compared to the year ended December 31, 2015 was caused primarily by a decline in voice access lines. Consumer voice access lines decreased 10.9% during the year which contributed an estimated $8.7 million to the decline in consumer voice services revenue. Residential customers are increasingly using wireless services in place of traditional wireline phone services as well as using VoIP technology offered by cable competitors.

Wholesale and Other Channel

Wholesale carrier revenue decreased for the year ended December 31, ~~2015~~2016 compared to the prior year ~~period decreased~~ as certain carriers have replaced older legacy circuits with more cost effective ~~alternatives~~higher bandwidth solutions.

Other revenue ~~was~~decreased ~~impacted~~for ~~by government subsidies from~~ the ~~Universal~~year ~~Service~~ended ~~Fund~~December ~~which~~31, ~~increased~~2016 ~~for~~compared to the year ended December 31, 2015 ~~compared~~because toof ~~the~~a ~~prior~~decline ~~year~~in byancillary $2services.5 There ~~million.~~has Inbeen ~~conjunction~~a ~~with~~reduction ~~reforming~~in ~~the~~marketing ~~Universal~~effort on certain ancillary products, such as wireless, as we focus on other telecommunication and data center services.

Service Fund, the Federal Communications Commission (“FCC”) established the Connect America Fund (“CAF”) which provides incremental support to broadband service providers. CAF Phase II is the long-term component of the program. In August 2015, we notified the FCC that we are accepting CAF Phase II support which amounts to $4.4 million in annual funding. This support was retroactive through the beginning of 2015, net of certain other receipts from the Universal Service Fund, and will continue for six years. Under the terms of the CAF Phase II, we will offer broadband service at 10 Mbps downstream and 1 Mbps upstream or better to approximately 11,000 eligible locations in high-cost areas in the State of Hawaii and will provide voice and broadband services at reasonable rates. For the year ended December 31, 2015, we recognized $3.3 million in CAF Phase II subsidies as revenue in the consolidated statement of income.

Other revenues declined for the year ended December 31, 2015 compared to the year ended December 31, 2014, despite the increase in government subsidies, as there has been a reduction in marketing effort on certain ancillary products, such as wireless, as we focus on other telecommunication and data center services.

Operating Costs and Expenses

The following table summarizes our costs and expenses for ~~2016~~the year ended December 31, 2017 compared to the costs and expenses for ~~2015~~year ended December 31, 2016 (dollars in thousands):

	For the Year Ended
	December 31,				Change
	2016		2015		Amount		Percentage
	2017		2016		Amount		Percentage
Cost of revenues (exclusive of depreciation and amortization)	$	~~165~~163,~~835~~101	$	~~162~~165,~~474~~835	$	3(2,~~361~~734)	2.(1.6)	%
Selling, general and administrative expenses		~~118~~114,~~420~~893		~~123~~118,~~798~~420		(53,~~378~~527)	(4.3.0)	%
Depreciation and amortization		8988,~~916~~424		8789,~~879~~916		2(1,~~037~~492)	2(1.37)	%
	$	~~374~~366,~~171~~418	$	374,~~151~~171	$	20(7,753)	0(2.01)	%
By segment —
Telecommunications	$	361,002	$	362,158	$	(1,156)	(0.3)	%
Data center		13,169		11,993		1,176	9.8	%
	$	374,171	$	374,151	$	20	0.0	%

~~The~~Our ~~Company’s~~ total headcount as of December 31, ~~2016~~2017 was 1,~~290~~220 compared to 1,~~315~~290 as of December 31, ~~2015~~2016. Employee related costs are included in both cost of revenues and selling, general and administrative expenses.

Cost of revenues consists of costs we incur to provide our products and services including those for operating and maintaining our networks, installing and maintaining customer premise equipment, video content costs and other cost of services ~~sold~~ directly associated with various products. Costs of revenue for the year ended December 31, ~~2016~~2017 ~~increased~~ when compared to the prior year ~~because~~period ofdecreased ~~higher~~with ~~content~~reduced labor costs ~~for Hawaiian Telcom TV~~ of $61.89 million aswith weour ~~add~~emphasis ~~subscribers~~on labor efficiency. ~~These~~ In ~~increases~~addition, ~~were~~for ~~offset~~the byyear ~~lower~~2017 ~~electricity~~compared ~~charges~~to of2016, we incurred $1.95 million onless ~~lower~~in ~~rates~~third ~~and~~party ~~usage~~labor ~~from~~costs ~~various~~primarily ~~power~~due ~~saving~~to ~~initiatives~~enhanced management of repair activity. InThese ~~addition,~~declines ~~wages~~ were ~~lower~~partially offset by ~~$1.9~~a ~~million~~net ~~related~~increase toin ~~less~~direct ~~time~~costs ~~needed~~of providing certain services, such as video content costs, for ~~rain~~the ~~related~~year ~~repairs~~ended ~~and~~December ~~efficiencies~~31, in2017 compared to the ~~use~~prior year period of ~~our~~$1.9 ~~workforce~~million.

Selling, general and administrative expenses include costs related to sales and marketing, information systems and other administrative functions. The ~~decrease~~change for the year ended December 31, ~~2016~~2017 ~~compared~~relative to the ~~prior~~ year ~~period~~ended ~~was~~December 31, 2016 is primarily due to lower ~~pension~~wage costs of $43.72 million on lower headcount. ~~There~~Included ~~was~~in aselling, ~~significantly~~general ~~higher~~and ~~volume~~administrative expenses are professional fees of ~~retirements~~$2.4 ~~involving~~million for the year ended December 31, 2017 in conjunction with the pending merger. This increased expense was offset by declines in other outside contractor related costs on cost savings initiatives.

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lump sum pension settlements in 2015 resulting in much higher pension settlement losses being recognized in 2015. The balance of the decrease is due to various cost savings measures initiated during 2016.

Depreciation and amortization for the year ended December 31, 2016 was higher by $2.0 million than the prior year due to asset additions to support growth in the business for next-generation services such as video, and higher speed internet and data.

The cause of the change in operating costs and expenses for the telecommunications segment for the year ended December 31, 2016 compared to the same period in 2015 are the same as those explaining changes in costs and expenses for all segments discussed above.

The increase in operating costs and expenses for the data center services segment for the year ended December 31, 2016 compared to the year ended December 31, 2015 is due to greater direct costs of services of $1.0 million with increased service volumes.

The following table summarizes our costs and expense for the year ended December 31, 2015 compared to the year ended December 31, 2014 (dollars in thousands).

	For the Year Ended
	December 31,				Change
	2015		2014		Amount		Percentage
Cost of revenues (exclusive of depreciation and amortization)	$	162,474	$	166,280	$	(3,806)	(2.3)	%
Selling, general and administrative expenses		123,798		115,974		7,824	6.7	%
Depreciation and amortization		87,879		78,014		9,865	12.6	%
	$	374,151	$	360,268	$	13,883	3.9	%
By segment —
Telecommunications	$	362,158	$	349,319	$	12,839	3.7	%
Data center		11,993		10,949		1,044	9.5	%
	$	374,151	$	360,268	$	13,883	3.9	%

The Company’s total headcount as of December 31, 2015 was 1,315 compared to 1,361 as of December 31, 2014. Employee related costs are included in both cost of revenues and selling, general and administrative expenses.

Costs of revenue for the year ended December 31, 2015 decreased when compared to the prior year due to lower wages and benefits of $4.5 million on lower headcount. In addition, costs declined on lower electricity charges of $5.3 million on lower rates and usage from various power saving initiatives. These decreases were offset by increased content costs for Hawaiian Telcom TV of $5.8 million as we add subscribers.

Selling, general and administrative expenses increased for the year ended December 31, 2015 compared to the prior year period was due to the pension settlement loss of $8.1 million. The settlement loss occurred due to a large number of retirements in 2015.

Depreciation and amortization for the year ended December 31, 2015 was higher by $9.9 million than the same period in the prior year due to asset additions to support growth in the business for next-generation services such as video, and higher speed internet and data.

The cause of the change in operating costs and expenses for the telecommunications segment for the year ended December 31, 2015 compared to the same period in 2014 are the same as those above explaining changes in costs and expenses for all segments.

The increase in operating costs and expenses for the data center services segment for the year ended December 31, 2015 compared to the year ended December 31, 2014 is due to greater costs for leased circuits of $0.5 million with

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~~increased~~ Depreciation ~~service~~and ~~volumes. In~~amortization ~~addition,~~ for ~~2015~~the year ended December 31, ~~depreciation~~2017 ~~increased~~was ~~$0.5~~lower ~~million~~than onin ~~asset~~the ~~additions~~prior year due to ~~our~~certain ~~data~~assets ~~center~~becoming ~~made~~fully todepreciated ~~support~~in ~~expected~~the ~~business~~latter ~~growth~~part of 2016.

The following table summarizes our costs and expense for the year ended December 31, 2016 compared to the year ended December 31, 2015 (dollars in thousands).


	For the Year Ended
	December 31,				Change
	2016		2015		Amount		Percentage
Cost of revenues (exclusive of depreciation and amortization)	$	165,835	$	162,474	$	3,361	2.1	%
Selling, general and administrative expenses		118,420		123,798		(5,378)	(4.3)	%
Depreciation and amortization		89,916		87,879		2,037	2.3	%
	$	374,171	$	374,151	$	20	0.0	%

Our total headcount as of December 31, 2016 was 1,290 compared to 1,315 as of December 31, 2015. Costs of revenue for the year ended December 31, 2016 increased when compared to the prior year because of higher content costs for Hawaiian Telcom TV of $6.8 million as we add subscribers. These increases were offset by lower electricity charges of $1.9 million on lower rates and usage from various power saving initiatives. In addition, wages were lower by $1.9 million related to less time needed for rain related repairs and efficiencies in the use of our workforce.

Selling, general and administrative expenses decreased for the year ended December 31, 2016 compared to the prior year period due to lower pension costs of $4.7 million. There was a significantly higher volume of retirements involving lump sum pension settlements in 2015 resulting in much higher pension settlement losses being recognized in 2015. The balance of the decrease is due to various cost savings measures initiated during 2016.

Other Income and (Expense)

The following table summarizes other income (expense) for the years ended December 31, 2017 and 2016 (dollars in thousands).


	For the Year Ended
	December 31,				Change
	2017		2016		Amount		Percentage
Interest expense	$	(16,414)	$	(17,095)	$	681	(4.0)	%
Loss on early extinguishment of debt		(4,826)		—		(4,826)	NA	%
	$	(21,240)	$	(17,095)	$	(4,145)	24.2	%

Interest expense for the year ended December 31, 2017 decreased compared to 2016 due to lower interest rates associated with our new financing. Interest capitalized amounted to $1.9 million and $1.6 million for the years ended December 31, 2017 and 2016, respectively.

In February 2017, we entered into a delayed draw credit agreement for new term loans and a new revolving credit facility. The new facility fully funded the repayment of the existing term loan and replacement of the existing revolving credit facility on May 4, 2017. We recognized the repayment of the existing debt instruments as a debt extinguishment incurring a loss on early extinguishment of debt of $4.8 million.

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The following table summarizes other income (expense) for the years ended December 31, 2016 and 2015 (dollars in thousands).


	For the Year Ended
	December 31,				Change
	2016		2015		Amount		Percentage
Interest expense	$	(17,095)	$	(16,786)	$	(309)	1.8	%
Interest income and other		—		(19)		19	(100.0)	%
	$	(17,095)	$	(16,805)	$	(290)	1.7	%

Interest expense for the year ended December 31, 2016 compared to the prior year increased due to the term loan amendment entered into in May 2016 which resulted in a higher interest rate and certain financing costs expensed as part of the amendment process. Interest capitalized amounted to $1.6 million and $1.1 million for the years ended December 31, 2016 and 2015, respectively.

The following table summarizes other income (expense) for the years ended December 31, 2015 and 2014 (dollars in thousands).

	For the Year Ended
	December 31,				Change
	2015		2014		Amount		Percentage
Interest expense	$	(16,786)	$	(16,496)	$	(290)	1.8	%
Interest income and other		(19)		34		(53)	(155.9)	%
	$	(16,805)	$	(16,462)	$	(343)	2.1	%

Interest expense for the year ended December 31, 2015 compared to the same period in the prior year increased due to new installment financing incurred at the end of 2014. Interest capitalized amounted to $1.1 million for both the years ended December 31, 2015 and 2014.

Income Tax

WeFor ~~had effective tax rates of 34.8% and 55.2% for~~ the ~~years~~year ended December 31, ~~2016 and 2015~~2017, ~~respectively. We~~we ~~had~~recognized ~~effective~~an income tax ~~rates~~provision of 55$88.2%0 ~~and 42~~million.~~2% for the years ended December 31, 2015 and 2014, respectively.~~ WeThe ~~consider~~large ~~a variety of factors in determining the effective~~ tax ~~rate,~~provision ~~including the U.S. federal statutory rate, expected nondeductible expenses and estimated state taxes. The rate for the year ended December 31, 2015~~ was ~~higher~~primarily ~~than~~attributed ~~both~~to the ~~prior~~full ~~and~~valuation ~~subsequent~~allowance ~~year~~established asfor ~~certain~~deferred ~~permanent differences between financial reporting and~~ income tax ~~income,~~ assets in ~~particular related to~~ the ~~deduction~~current ~~limitation for compensation, were proportionately larger relative to the pretax income in that~~ year period.

AsWe ofassess ~~December~~the ~~31,~~ability ~~2016,~~to ~~net~~realize ~~operating~~our ~~losses~~deferred ~~available~~tax ~~for~~assets ~~carry~~and ~~forward~~assess ~~through~~the ~~2036~~need ~~amounted~~for toa ~~$166.5~~valuation ~~million~~allowance ~~for~~on ~~federal~~an ~~purposes~~ongoing ~~and $172~~basis.~~5 million~~ ~~for~~We ~~state~~are ~~purposes. Availability~~required ofto ~~net~~consider ~~operating~~all ~~losses~~available inpositive ~~future~~and ~~periods~~negative ~~may~~evidence bein ~~subject~~evaluating tothe ~~additional~~likelihood ~~limitations~~that ifwe ~~there~~will isbe aable ~~deemed~~to ~~change~~realize inthe ~~control~~benefit ~~for~~of ~~income~~our deferred tax ~~reporting~~assets ~~purposes. Such~~in ~~change~~the infuture. ~~control~~Such ~~will~~evidence beincludes ~~determined~~scheduled ~~for~~reversals ~~income~~of deferred tax ~~reporting~~liabilities, ~~purposes~~projected ~~based~~future ontaxable ~~cumulative~~income, ~~changes~~tax inplanning ~~stock~~strategies ~~ownership~~and ~~over~~the aresults ~~defined~~of ~~period~~recent operations.

WeIn ~~have~~considering ~~recognized~~the ~~significant~~impact ~~deferred~~of ~~income~~recent operations on our deferred tax ~~assets~~asset ~~related~~assessment, towe ~~net~~utilize ~~operating~~a ~~losses~~rolling ~~available~~three ~~for~~years ~~carry~~of ~~forward~~financial ~~and~~results ~~for~~as ~~differences~~the ~~between~~primary measure of cumulative income or losses. These are adjusted for permanent differences between financial reporting and ~~tax~~taxable ~~reporting~~income. For ~~purposes~~the year ended December 31, 2017, we incurred a pretax loss from operations. IfIn ~~there~~addition, isas of December 31, 2017, we had a ~~decline~~cumulative inloss from operations for the ~~level~~three year period. Because of ~~actual~~the ~~future~~three oryear ~~forecasted~~cumulative ~~earnings~~losses, ~~the~~we ~~conclusion~~are ~~regarding~~required to look only to sources of income that are deemed objective and verifiable based on historical experience. We considered that the ~~need~~cumulative ~~for~~loss awas ~~valuation~~caused, ~~allowance~~in ~~may~~part, ~~change~~by costs not expected to recur in future periods, ~~resulting~~such as merger costs. However, the loss was also caused by costs, such as pension settlement losses, that are not deemed part of core operations but the frequency of which is hard to predict. For example, during 2017, the level of retirements and related pension settlements ramped up making it more challenging to conclude such expenses will not recur in future periods. With the ~~establishment~~challenge of apredicting ~~valuation~~future ~~allowance~~taxable ~~for~~income ~~some~~based oron ~~all~~actual historical results, we had to limit the amount of taxable income included in our assessment of deferred income tax ~~assets~~asset recoverability.

38Based on the more likely than not criteria for realization of deferred income tax assets, we established a full valuation allowance for our deferred income tax assets during the year ended December 31, 2017. If, in future periods, new positive evidence becomes available, the conclusion regarding the need for a full valuation allowance may change resulting in the reversal of some or all of the valuation allowance.

For the year ended December 31, 2017, the income tax provision differs from amounts determined by applying the statutory federal income tax rate of 34% to the loss before income taxes primarily because of changes in the valuation allowance established for the recovery of deferred income tax assets. Excluding the effects of the valuation allowance, we consider a variety of factors in determining the effective tax rate, including our pretax results, the U.S. federal statutory rate, expected nondeductible expenses and estimated state taxes.

We had effective tax rates of 34.8% and 55.2% for the years ended December 31, 2016 and 2015, respectively. The rate for the year ended December 31, 2016 was lower than for the year ended December 31, 2015 as certain permanent differences between financial reporting and income tax income were proportionally larger related to the pretax income in 2015. The largest such permanent difference was the deduction limitation for compensation.

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As of December 31, 2017, net operating losses available for carry forward through 2037 amounted to $222.6 million for federal purposes and $227.0 million for state purposes. Availability of net operating losses in future periods may be subject to additional limitations if there is a deemed change in control for income tax reporting purposes. Such change in control will be determined for income tax reporting purposes based on cumulative changes in stock ownership over a defined period.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act which significantly changes the existing U.S. tax laws including a reduction in the corporate tax rate from 34% to 21%. We gave recognition to the new law as of the effective date with a revised measurement of our deferred federal income tax assets and liabilities. The impact was to reduce our net deferred income tax asset by $28.0 million. The Company also reduced its valuation allowance by the same amount as of that date as it had previously established a full valuation allowance as discussed above. Going forward, the new law provides for numerous changes to U.S. tax laws that may impact our determination of taxable income or loss. In addition, net operating losses generated in future periods will be subject to carry forward indefinitely but there are restrictions on the percentage of net operating losses that can be used to offset future taxable income in any one year.

Liquidity and Capital Resources

As of December 31, ~~2016~~2017, we had cash and cash equivalents of $1540.8 million. From an ongoing operating perspective, our cash requirements ~~going~~in ~~into~~2018 ~~2017~~will consist of supporting the development and introduction of new products, capital expenditure projects, pension funding obligations and other changes in working capital. A combination of cash‑-on‑-hand, cash generated from operating activities and available financing will be used to fund our cash requirements.

We continue to focus on improving operating results, including efforts to simplify product offerings, improve our customer service experience and increase our revenue enhancement activities. There can be no assurance that these actions will result in improved overall cash flow. We continue to have sizable retirement obligations for our existing employee base. Any sustained declines in the value of pension trust assets or relatively high levels of pension lump sum benefit payments, ~~such as those paid in 2015,~~ will increase the magnitude of future plan contributions.

Agreements with the HPUC and the debt agreements of Hawaiian Telcom Communications, Inc. limit the ability of our subsidiaries to pay dividends to the parent company and restrict the net assets of all of our subsidiaries. This can limit our ability to pay dividends to our shareholders. As the parent company has no operations, debt or other obligations, this restriction has no other immediate impact on our operations.

Cash Flows

Our primary source of funds continues to be cash generated from operations. We use the net cash generated from operations to fund network expansion and modernization to facilitate enhanced services. We expect that our capital spending requirements will continue to be financed through internally generated funds. We also expect to use cash generated in future periods for debt service. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure financial flexibility.

Net cash provided by ~~operating~~operations ~~activities~~ amounted to $9098.17 million for ~~2016~~the ~~and~~year ended December 31, 2017. Net cash provided by operations amounted to $90.61 million for ~~2015~~the year ended December 31, 2016. ~~Cash~~ The increase in cash provided by operations was ~~comparable~~because ~~between~~of ~~years~~up-front payments received for fiber circuit capacity on our trans-Pacific cable that was completed in August 2017. Net cash provided by operating activities was ~~also~~ comparable for the years ended December 31, ~~2015~~2016 and ~~2014~~2015.

Cash used in investing activities for 2016 was comprised of capital expenditures of $97.8 million which was comparable to capital expenditures of $99.0 million in 2015. In 2016, there was a continued emphasis on building out of our next generation network to support new products such as Hawaiian Telcom TV as well as higher speed internet. The level of capital expenditures for 2017 is expected to be less than 2016 as we scale back capital on certain elements of our network expansion initiatives focusing on those directly related to sales opportunities. 40

Cash used in investing activities included capital expenditures of $99.0 million and $96.7 million for the years ended December 31, 2015 and 2014, respectively. The increase was because of continued emphasis of building out of our next generation network to support new products such as Hawaiian Telcom TV as well as higher speed internet.

Cash used in financing activities for each of the three years ended December 31, 2016 was related primarily to the repayment of our debt and satisfaction of other obligations. In addition, during the year ended December 31, 2015, we received $6.9 million upon the exercise of warrants for cash. During the year ended December 31, 2014, we sold most of our radio towers for $2.9 million. The sale agreement includes a leaseback by us for a minimum of 10 years to allow us to continue to use the towers for radio equipment. We accounted for the sale as a financing transaction.

Outstanding Debt and Financing Arrangements

As of December 31, 2016, we had outstanding $290.1 million in aggregate long‑term debt and an undrawn $30.0 million revolving line of credit.

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~~interest~~ Cash ~~coverage~~used ~~with~~in ~~minimum~~investing ~~allowed~~activities ~~ratio~~for 2017 was comprised of 4capital expenditures of $95.~~50:1~~3 million which were lower than capital expenditures of ~~earnings~~$97.8 ~~before~~million ~~interest,~~in ~~taxes~~2016. Beginning in 2017, ~~depreciation~~we ~~and~~scaled ~~amortization~~back tocapital ~~interest~~on ~~expense;~~certain ~~leverage~~elements ~~with~~of ~~maximum~~our ~~allowed~~network ~~ratio~~expansion ofinitiatives, ~~3.00:1~~such ofas ~~indebtedness~~for toenabling ~~earnings~~large ~~before~~areas ~~interest,~~for ~~taxes~~video service, ~~depreciation~~focusing ~~and~~on ~~amortization;~~those ~~and~~directly arelated ~~maximum~~to ~~level~~sales ofopportunities. Cash ~~annual~~used in investing activities for 2016 was comprised of capital expenditures of $~~105~~97.0 8 million. Wewhich ~~were~~was incomparable ~~compliance~~to ~~with~~capital ~~these~~expenditures ~~covenants~~of as$99.0 ofmillion ~~December 31,~~in ~~2016~~2015.

InDuring ~~February~~the year ended December 31, 2017, we ~~entered~~received ~~into~~the aproceeds ~~delayed~~of ~~draw~~our ~~credit~~new ~~agreement~~term ~~for~~loan ~~new~~borrowing of $320.0 million. Prior to funding the term ~~loans~~loan, ~~and~~we ahad ~~new~~made ~~revolving~~borrowings on our existing line of credit ~~facility~~of $10.0 million in 2017. The ~~new~~drawing ~~facility~~was ~~provides~~used, ain ~~commitment~~part, to fund capital costs of our trans-Pacific submarine cable. The new term loan funded the repayment of the existing term ~~loan~~debt and ~~replacement~~the ofoutstanding ~~the~~balance on our existing ~~revolving~~line of credit. Total ~~facility~~repayments inof ~~May~~debt amounted to $305.3 million for the year ended December 31, 2017. ~~Included~~In inaddition, during the ~~new~~same ~~facility~~period iswe apaid ~~term~~for ~~loan~~costs ~~for~~of the new financing amounting to $906.03 million. Cash ~~with~~used ain ~~maturity~~financing inactivities ~~2022~~for years ended December 31, 2016 and ~~another~~2015 ~~term~~was ~~loan~~related ~~for~~primarily ~~$230.0~~to ~~million~~the ~~with~~repayment aof ~~maturity~~our indebt ~~2023~~and satisfaction of other obligations. ~~The~~In ~~agreement~~addition, ~~also~~during ~~provides~~the ~~for~~year aended ~~new~~December ~~line~~31, of2015, ~~credit~~we ~~for~~received $306.09 million ~~with~~upon athe ~~maturity~~exercise inof ~~2022~~warrants for cash.

~~With~~Outstanding ~~our~~Debt ~~new debt structure, we do not expect to generate the necessary cash flows from operations to repay the facility in its entirety by the maturity dates of 2022~~ and ~~2023. Repayment~~Financing ~~is dependent on our ability to refinance the credit facility in the future at reasonable terms. The ability to refinance the indebtedness at reasonable terms before maturity cannot be assured.~~Arrangements

As of December 31, 2017, we had outstanding $314.9 million in aggregate long‑term debt and an undrawn $30.0 million revolving line of credit.

Our bank credit facilities contain various negative and affirmative covenants that restrict, among other things, incurrence of additional indebtedness, payment of dividends, redemptions of stock, other distributions to shareholders and sales of assets. In addition, there are financial covenants which have the following metrics as of December 31, 2017: debt service coverage with minimum allowed ratio of 2.75:1 of earnings before interest, taxes, depreciation and amortization to debt service which includes scheduled principal payments and cash interest; leverage with maximum allowed ratio of 3.25:1 of indebtedness to earnings before interest, taxes, depreciation and amortization; and a maximum level of annual capital expenditures of $105.0 million. We were in compliance with these covenants as of December 31, 2017.

With our debt structure, we do not expect to generate the necessary cash flows from operations to repay the facility in its entirety by the maturity dates of 2022 and 2023. Repayment is dependent on our ability to refinance the credit facility at reasonable terms. The ability to refinance the indebtedness at reasonable terms before maturity cannot be assured.

Contractual Obligations

The following table sets forth our long‑term debt and contractual obligations for the next several years. The term loan facility and debt interest obligation are based on the balance and provisions of the term loan as of December 31, ~~2016~~2017. Pension funding obligations are based on known fixed funding. Additional obligations are expected in future periods for retirement related costs. Obligations are as follows (dollars in thousands):

2018 and

2020 and

2022 and

2019 and

2021 and

2023 and

2017

2019

2021

Thereafter

Total

2018

2020

2022

Thereafter

Total

Term loan facility

310,~~000~~250

~~287~~29,~~138~~125

—97,250

—178,250

~~290~~314,~~138~~875

Debt interest

1516,~~173~~747

2231,~~465~~598

—25,816

—3,184

3777,~~638~~345

Pension funding obligations

45,~~804~~360

—

45,~~804~~360

Operating leases

2,~~208~~097

3,~~474~~793

21,~~816~~699

5,~~478~~481

13,~~976~~070

Supplier contracts

169,~~786~~936

143,~~848~~312

—

3113,~~634~~248

Other installment contracts

23,~~797~~544

23,~~495~~268

12,~~999~~263

75,~~103~~746

14,~~394~~821

Total

4447,~~768~~934

~~330~~71,~~420~~096

4127,~~815~~028

12192,~~581~~661

~~392~~438,~~584~~719

We do not maintain any off balance sheet financing or other arrangements.

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Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. The following is a summary of certain policies considered critical by management.

Goodwill and Indefinite‑Lived Intangible Assets

Goodwill and intangible assets not subject to amortization are tested for impairment annually, or when events or changes in circumstances indicate that the asset might be impaired. For goodwill, awe ~~two‑step~~compare ~~impairment test is performed. The first step compares~~ the fair value of a reporting unit with its carrying amount~~, including goodwill~~. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value is determined by allocating the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill is in excess of the implied fair value of that goodwill, then an impairment loss is recognized equal to that excess. For indefinite‑lived intangible assets, the impairment test consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of a reporting unit or an indefinite‑lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value is an estimate based on ~~either~~ an approach using market capitalization or on the present value of an expected range of future cash flows, or a combination of the two.

The expected range of future cash flows is based on internal forecasts developed utilizing management’s knowledge of the business and the anticipated effects of market forces. The use of different assumptions or estimates of future cash flows could produce different impairment amounts (or none at all) for goodwill and indefinite‑lived intangible assets. A significant amount of judgment is involved in developing these internal forecasts and determining if an impairment has occurred. Assumptions and estimates that could generate an impairment loss include lower-than-expected future cash flows resulting from slower than anticipated revenue growth or lower than anticipated profitability. Any adverse changes in the projected cash flows could affect our conclusions as to the recoverability of goodwill and ~~may~~indefinite-lived ~~result~~intangible ~~in an impairment loss~~assets.

~~Goodwill~~In ~~subject~~addition to ~~impairment~~projection ~~testing~~of atcash ~~December 31~~flows, ~~2016~~we ~~amounted~~must toalso ~~$10.5 million~~determine ~~for~~an ~~the~~appropriate ~~data~~discount ~~center~~rate ~~services~~to ~~reporting~~determine ~~unit~~the ~~and~~present ~~$1.6 million~~value ~~for~~of ~~the~~such ~~telecommunications~~cash ~~unit~~flows. The ~~For~~discount ~~both~~rates ~~reporting~~used ~~units~~are ~~the~~based ~~fair~~on ~~value of~~ the ~~reporting~~estimated ~~unit~~weighted ~~was~~average ~~above~~cost ~~the~~of ~~carrying~~capital ~~value~~which ~~allowing~~is ussubject to ~~conclude~~change ~~there~~based ison novarious ~~impairment~~economic ~~in goodwill at this time~~factors. Changes ~~Significant assumptions which are reasonably possible of changing~~ in ~~future periods relate to control premiums used for~~ the ~~market~~rate ~~capitalization~~can ~~approach~~have ~~and~~a tofairly ~~projection~~significant ofimpact ~~future~~on ~~cash flows used for determining~~ the ~~reporting~~estimated ~~unit~~ value. For ~~for~~example, ~~goodwill impairment evaluation and~~ for ~~determining~~ the ~~brand name value for the indefinite-lived~~ intangible asset impairment ~~evaluation. For the brand name intangible assets~~, ~~future cash flows were estimated using~~ a ~~relief of royalty method using an assumed royalty rate of~~ one percent ~~applied~~increase toin ~~projected revenues. In addition,~~ the discount ~~rates~~rate ~~used~~would ~~are~~reduce ~~based on~~ the estimated ~~weighted~~fair ~~average~~value ~~cost~~ of ~~capital~~the ~~which~~intangible isasset ~~subject~~by toover ~~change~~ten ~~based on various economic factors~~percent.

The discount rate is one of the more significant assumptions used to value both goodwill and indefinite-lived intangible assets. For the intangible asset impairment, a one percent increase in the discount rate would reduce the estimated fair value of the intangible asset by over 10 percent.

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Impairment of Long‑Lived Assets and Definite‑Lived Intangibles

We assess the recoverability of long‑lived assets, including property, plant and equipment and definite‑lived intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, if the sum of the expected cash flows, undiscounted and without interest, resulting from use of the asset is less than the carrying amount, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the assets. When determining future cash flow estimates, we consider historical operating results, as adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by us in such areas as future economic conditions, industry specific conditions and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long‑lived assets, including identifiable intangible assets subject to amortization. Significant assumptions which are reasonably possible of changing in future periods relate to projection of future cash flows generated by the long‑lived assets which are dependent on projections of company‑wide profitability and capital expenditures for maintaining our network in future periods. In addition, estimates of the cash generating useful lives are also critical to such evaluations.

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Revenue Recognition

We recognize revenue when evidence of an arrangement exists, the earnings process is complete and collectability is reasonably assured. We recognize service revenues based upon usage of our local exchange network ~~and facilities and contract fees~~. In general, fixed fees for local telephone, Internet access, television, data center services and certain other services are billed one month in advance and recognized the following month when earned. Revenue from other products that are not fixed fee or that exceed contracted amounts is recognized when such services are provided.

Amounts billed to customers for activating wireline service are deferred and recognized over the average customer relationship. The costs associated with activating such services are deferred and recognized as an operating expense over the same period. Costs in excess of revenues are recognized as expense in the period in which activation occurs. Other charges for activation are generally deferred and recognized in revenue over the contract term.

Universal Service revenue subsidies, such as Connect America Fund Phase II, are government‑sponsored support received in association with providing service in mostly rural, high‑cost areas. These revenues are typically calculated by the government agency responsible for administering the support program. These revenues are recognized as granted by the government agency.

Telecommunication systems and structured cabling project revenues are recognized on a percentage completion basis, generally based on the relative portion of costs incurred to total estimated costs of a project, except for short duration projects which are recognized upon completion of the project. Maintenance services are recorded when the service is provided.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry‑specific economic conditions, historical customer performance and anticipated customer performance. While we believe our process effectively addresses our exposure for doubtful accounts, changes in economic, industry or specific customer conditions may require adjustment to the allowance for doubtful accounts recognized by us.

Income Taxes

Management calculates the income tax provision, current and deferred income taxes along with the valuation allowance based upon various complex estimates and interpretations of income tax laws and regulations. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. The most significant assumption in this process are projections of future income which are reasonably possible of changing in future periods.

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Employee‑Related Benefits

We incur certain employee‑related costs associated with pensions and post‑ retirement health care benefits. In order to measure the expense associated with these employee‑related benefits, management must make a variety of estimates, including discount rates used to measure the present value of certain liabilities, assumed rates of return on assets set aside to fund these expenses, employee turnover rates, anticipated mortality rates and anticipated healthcare costs. The estimates used by management are based on our historical experience, as well as current facts and circumstances. We use third‑party specialists to assist management in appropriately measuring the expenses associated with these employee‑related benefits. Different estimates could result in our recognizing different amounts of expense over different time periods.

The discount rate used for determining the year‑end benefit plan obligation was calculated using a weighting of expected benefit payments and rates associated with high‑quality U.S. corporate bonds for each year of expected payment to derive a single estimated rate at which the benefits could be effectively settled. A change in the estimated discount rate would have a direct inverse impact on the recorded employee benefit obligation liability. Based on past experience, relatively small changes in the discount rate do not have a significant impact on the pension and other postretirement benefit cost but a substantial change in the rate is likely to have a large impact.

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The estimated return on plan assets was based on historical trends combined with long‑term expectations. In selecting the rate of return on plan assets for purposes of determining net periodic benefit cost, we considered economic forecasts for the types of investments held by the plans (primarily equity and fixed income investments), and the plans’ asset allocations. While primary emphasis was on the economic forecasts of long‑term returns, consideration was given to the past performance of the plans’ assets. The assumption is based on consideration of all inputs, with a focus on long‑term trends to avoid short‑term market influences. Assumptions are not changed unless structural trends in the underlying economy are identified, our asset strategy changes, or there are significant changes in other inputs. The method for selecting the expected return on plan assets did not change from prior periods.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As of December 31, ~~2016~~2017, our floating rate obligations consisted of $~~290~~314.19 million of debt outstanding under our term loan facility. Accordingly, our earnings and cash flow are affected by changes in interest rates. Based on our borrowings at December 31, ~~2016~~2017 and assuming a 1.0 percentage point increase or decrease in the average interest rate under these borrowings, we estimate that our annual interest expense would increase or decrease by approximately $23.91 million.

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Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Hawaiian Telcom Holdco, Inc. Consolidated Financial Statements
Management’s Annual Report on Internal Control over Financial Reporting		4546
Report of Independent Registered Public Accounting Firm—Consolidated Financial Statements		4647
Report of Independent Registered Public Accounting Firm—Internal Control over Financial Reporting		4748
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014		48
Consolidated Statements of Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015		50
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014		49
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015		51
Consolidated Balance Sheets as of December 31, 2016 and 2015		50
Consolidated Balance Sheets as of December 31, 2017 and 2016		52
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014		51
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015		53
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014		52
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015		54
Notes to Consolidated Financial Statements		5355

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Management’s Annual Report on Internal Control over Financial Reporting

Management of Hawaiian Telcom Holdco, Inc. (the “Company”), including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a‑15(f) and 15d‑15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal controls were designed to provide assurance as to the reliability of its financial reporting and the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. There are inherent limitations in the effectiveness of any system of internal control over financial reporting; however, based on the evaluation, management has concluded the Company’s internal control over financial reporting was effective as of December 31, ~~2016~~2017.

The Company’s independent registered public accounting firm has audited the accompanying consolidated financial statements and the Company’s internal control over financial reporting. The reports of the independent registered public accounting firm are included in this Annual Report on Form 10‑K on the following pages.

/s/ Scott K. Barber		/s/ Dan T. Bessey
Scott K. Barber		Dan T. Bessey
Chief Executive Officer		Senior Vice President and Chief Financial Officer
March 14, 2017		March 14, 2017
March 13, 2018		March 13, 2018

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~~Report~~REPORT ofOF ~~Independent~~INDEPENDENT ~~Registered~~REGISTERED ~~Public~~PUBLIC ~~Accounting~~ACCOUNTING ~~Firm~~FIRM

To the Board of Directors and Stockholders of Hawaiian Telcom Holdco, Inc.

~~Hawaiian~~Opinion ~~Telcom~~on ~~Holdco, Inc.~~the Financial Statements

~~Honolulu~~We have audited the accompanying consolidated balance sheets of Hawaiian Telcom Holdco, ~~Hawaii~~Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, ~~the~~in ~~accompanying~~accordance ~~consolidated~~with ~~balance~~the ~~sheets~~standards of ~~Hawaiian~~the ~~Telcom~~Public ~~Holdco, Inc.~~Company ~~and~~Accounting ~~subsidiaries~~Oversight Board (~~the~~United ~~“Company”~~States) ~~as of December 31~~(PCAOB), ~~2016~~the ~~and~~Company's ~~2015,~~internal ~~and~~control ~~the~~over ~~related~~financial ~~consolidated~~reporting ~~statements~~as of ~~income~~December 31, ~~comprehensive income (loss)~~2017, ~~changes~~based inon ~~stockholders’~~criteria ~~equity,~~established ~~and~~in ~~cash~~Internal ~~flows~~Control ~~for~~— ~~each~~Integrated ofFramework ~~the~~(2013) ~~three~~issued ~~years~~by in the ~~period~~Committee ~~ended~~of ~~December 31,~~Sponsoring ~~2016.~~Organizations ~~These~~of ~~financial statements are~~ the ~~responsibility~~Treadway ofCommission ~~the~~and ~~Company’s~~our ~~management.~~report ~~Our~~dated ~~responsibility~~March is13, to2018, ~~express~~expressed an unqualified opinion on ~~these~~the ~~financial~~Company's ~~statements~~internal ~~based~~control onover ~~our~~financial ~~audits~~reporting.

WeBasis conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ~~our opinion.~~Opinion

InThese ~~our~~financial ~~opinion,~~statements ~~such~~are ~~consolidated~~the ~~financial~~responsibility ~~statements~~of ~~present~~the ~~fairly,~~Company's inmanagement. ~~all~~Our ~~material~~responsibility ~~respects,~~is to express an opinion on the Company's financial ~~position~~statements ofbased ~~Hawaiian~~on ~~Telcom~~our ~~Holdco, Inc~~audits. ~~and~~We ~~subsidiaries~~are asa ofpublic ~~December 31,~~accounting ~~2016~~firm ~~and~~registered ~~2015,~~with ~~and~~ the ~~results~~PCAOB ofand ~~their~~are ~~operations~~required ~~and~~to ~~their~~be ~~cash~~independent ~~flows~~with ~~for~~respect ~~each~~to of the ~~three~~Company ~~years~~ in ~~the~~accordance ~~period~~with ~~ended~~the ~~December 31,~~U.S. ~~2016,~~federal insecurities ~~conformity~~laws ~~with~~and ~~accounting~~the ~~principles~~applicable ~~generally~~rules ~~accepted~~and inregulations of the ~~United~~Securities ~~States~~and ofExchange ~~America~~Commission and the PCAOB.

We ~~have~~conducted ~~also~~our ~~audited,~~audits in accordance with the standards of the ~~Public~~PCAOB. ~~Company~~Those ~~Accounting~~standards ~~Oversight~~require ~~Board~~that ~~(United~~we ~~States),~~plan and perform the ~~Company’s~~audit ~~internal~~to ~~control~~obtain ~~over~~reasonable assurance about whether the financial ~~reporting~~statements asare free of ~~December 31,~~material ~~2016~~misstatement, ~~based~~whether ondue ~~the~~to ~~criteria~~error ~~established~~or infraud. ~~Internal~~Our ~~Control—Integrated~~audits ~~Framework~~included ~~(2013)~~performing ~~issued~~procedures byto assess the ~~Committee~~risks of ~~Sponsoring~~material ~~Organizations~~misstatement of the ~~Treadway~~financial ~~Commission~~statements, ~~and~~whether ~~our~~due ~~report~~to ~~dated~~error ~~March 14~~or fraud, ~~2017~~and ~~expressed~~performing anprocedures ~~unqualified~~that ~~opinion~~respond to those risks. Such procedures included examining, on a test basis, evidence regarding the ~~Company’s~~amounts ~~internal~~and ~~control~~disclosures ~~over~~in the financial ~~reporting~~statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Honolulu, Hawaii

March 14 13, ~~2017~~2018

46We have served as the Company's auditor since 2005.

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~~Report~~REPORT ofOF ~~Independent~~INDEPENDENT ~~Registered~~REGISTERED ~~Public~~PUBLIC ~~Accounting~~ACCOUNTING ~~Firm~~FIRM

To the Board of Directors and Stockholders of Hawaiian Telcom Holdco, Inc.

~~Hawaiian~~Opinion ~~Telcom~~on ~~Holdco, Inc.~~Internal Control over Financial Reporting

~~Honolulu~~We have audited the internal control over financial reporting of Hawaiian Telcom Holdco, ~~Hawaii~~Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, ~~the~~in ~~internal~~accordance ~~control~~with ~~over~~the ~~financial~~standards ~~reporting~~ of ~~Hawaiian~~the ~~Telcom~~Public ~~Holdco, Inc.~~Company ~~and~~Accounting ~~subsidiaries~~Oversight Board (~~the~~United ~~“Company”~~States) ~~as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework~~ (~~2013~~PCAOB), ~~issued by~~ the ~~Committee~~consolidated offinancial ~~Sponsoring~~statements ~~Organizations~~as of ~~the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting~~ and for ~~its assessment of~~ the ~~effectiveness~~year ofended ~~internal~~December ~~control over financial reporting~~31, ~~included~~2017 inof the ~~accompanying~~Company ~~Management’s~~and ~~Annual~~our ~~Report~~report ondated ~~Internal~~March ~~Control~~13, ~~over~~2018, ~~Financial~~expressed ~~Reporting. Our responsibility is to express~~ an unqualified opinion on ~~the~~those ~~Company’s internal control over~~ financial ~~reporting based on our audit~~statements.

WeBasis conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ~~our~~Opinion ~~opinion.~~

AThe ~~company~~Company’s management is responsible for maintaining effective internal control over financial reporting isand afor ~~process~~its ~~designed~~assessment ~~by,~~of ~~or under~~ the ~~supervision~~effectiveness of, ~~the~~internal ~~company’s~~control ~~principal~~over ~~executive and principal~~ financial ~~officers~~reporting, orincluded ~~persons~~in ~~performing~~the ~~similar~~accompanying ~~functions,~~Management's ~~and~~Annual ~~effected~~Report byon ~~the~~Internal ~~company’s~~Control ~~board~~over ofFinancial ~~directors,~~Reporting. ~~management,~~Our ~~and~~responsibility ~~other~~is ~~personnel~~ to ~~provide~~express ~~reasonable~~an ~~assurance~~opinion ~~regarding~~on the ~~reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company~~Company’s internal control over financial reporting ~~includes~~based ~~those~~on ~~policies~~our ~~and~~audit. ~~procedures~~We ~~that~~are ~~(1) pertain~~a topublic ~~the~~accounting ~~maintenance~~firm ofregistered ~~records~~with ~~that, in reasonable detail, accurately and fairly reflect~~ the ~~transactions~~PCAOB and ~~dispositions~~are ofrequired ~~the~~to ~~assets~~be ofindependent ~~the~~with ~~company;~~respect ~~(2) provide reasonable assurance that transactions are recorded as necessary~~ to ~~permit~~the ~~preparation~~Company ~~of financial statements~~ in accordance with ~~generally~~the ~~accepted~~U.S. ~~accounting~~federal ~~principles,~~securities ~~and~~laws ~~that receipts~~ and ~~expenditures of~~ the ~~company~~applicable ~~are~~rules ~~being made only in accordance with authorizations of management~~ and ~~directors~~regulations of the ~~company;~~Securities and ~~(3) provide~~Exchange ~~reasonable~~Commission ~~assurance~~and ~~regarding prevention or timely detection of unauthorized acquisition, use, or disposition of~~ the ~~company’s assets that could have a material effect on the financial statements~~PCAOB.

~~Because~~We ofconducted ~~the~~our ~~inherent~~audit ~~limitations~~in ofaccordance ~~internal~~with ~~control~~the ~~over~~standards ~~financial~~of ~~reporting, including~~ the ~~possibility~~PCAOB. ofThose ~~collusion~~standards orrequire ~~improper~~that ~~management~~we ~~override~~plan ofand ~~controls,~~perform ~~material~~the ~~misstatements~~audit ~~due~~ to ~~error~~obtain orreasonable ~~fraud~~assurance ~~may~~about ~~not~~whether beeffective ~~prevented~~internal orcontrol ~~detected~~over onfinancial areporting ~~timely~~was ~~basis.~~maintained ~~Also,~~in ~~projections~~all ofmaterial ~~any~~respects. ~~evaluation~~Our ofaudit ~~the~~included ~~effectiveness~~obtaining ofan ~~the~~understanding of internal control over financial reporting, toassessing ~~future~~the ~~periods~~risk ~~are~~that ~~subject~~a tomaterial ~~the~~weakness ~~risk~~exists, ~~that~~testing ~~the~~and ~~controls~~evaluating ~~may~~the ~~become~~design ~~inadequate~~and ~~because~~operating effectiveness of ~~changes~~internal incontrol ~~conditions~~based on the assessed risk, orand ~~that~~performing ~~the~~such ~~degree~~other ofprocedures ~~compliance~~as ~~with~~we considered necessary in the ~~policies~~circumstances. orWe ~~procedures~~believe ~~may~~that ~~deteriorate~~our audit provides a reasonable basis for our opinion.

InDefinition ~~our~~and ~~opinion,~~Limitations ~~the Company maintained, in all material respects, effective internal control over financial reporting as~~ of ~~December 31, 2016, based on the criteria established in~~ Internal Control~~—Integrated~~ ~~Framework~~over ~~(2013)~~Financial ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission.~~Reporting

WeA ~~have~~company’s ~~also~~internal ~~audited,~~control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the ~~standards~~maintenance of records that, in reasonable detail, accurately and fairly reflect the ~~Public~~transactions ~~Company~~and ~~Accounting~~dispositions ~~Oversight~~of ~~Board~~the ~~(United~~assets ~~States),~~of the ~~consolidated~~company; ~~financial~~(2) ~~statements~~provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and ~~for~~that receipts and expenditures of the ~~year~~company ~~ended~~are ~~December 31,~~being ~~2016~~made only in accordance with authorizations of management and directors of the ~~Company~~company; and ~~our~~(3) ~~report~~provide ~~dated~~reasonable ~~March 14~~assurance regarding prevention or timely detection of unauthorized acquisition, ~~2017~~use, ~~expressed~~or andisposition ~~unqualified~~of ~~opinion~~the company’s assets that could have a material effect on ~~those~~the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Honolulu, Hawaii

March 14 13, ~~2017~~2018

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Hawaiian Telcom Holdco, Inc.

Consolidated Statements of Income (Loss)

(Dollars in thousands, except per share amounts)

	For the Year Ended December 31,
	2016		2015		2014
	2017		2016		2015
Operating revenues	$	~~392~~368,~~963~~419	$	~~393~~392,~~413~~963	$	~~390~~393,~~739~~413
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)		~~165~~163,~~835~~101		~~162~~165,~~474~~835		~~166~~162,~~280~~474
Selling, general and administrative		~~118~~114,~~420~~893		~~123~~118,~~798~~420		~~115~~123,~~974~~798
Depreciation and amortization		8988,~~916~~424		8789,~~879~~916		7887,~~014~~879
Total operating expenses		~~374~~366,~~171~~418		374,~~151~~171		~~360~~374,~~268~~151
Operating income		182,~~792~~001		1918,~~262~~792		3019,~~471~~262
Other income (expense):
Interest expense		(1716,~~095~~414)		(1617,~~786~~095)		(16,~~496~~786)
Interest income and other		—		(19)		34
Loss on early extinguishment of debt		(4,826)		—		—
Total other expense		(17,095)		(16,805)		(16,462)
Interest income and other		—		—		(19)
Income before income tax provision		1,697		2,457		14,009
Total other expense		(21,240)		(17,095)		(16,805)
Income tax provision		591		1,357		5,910
Income (loss) before income tax provision		(19,239)		1,697		2,457
Net income	$	1,106	$	1,100	$	8,099
Income tax provision		88,002		591		1,357
Net income per common share -
Net income (loss)	$	(107,241)	$	1,106	$	1,100
Basic	$	0.10	$	0.10	$	0.76
Net income (loss) per common share -
Diluted	$	0.10	$	0.10	$	0.72
Basic	$	(9.27)	$	0.10	$	0.10
Weighted average shares used to compute net income per common share -
Diluted	$	(9.27)	$	0.10	$	0.10
Basic		11,503,296		10,977,341		10,591,351
Weighted average shares used to compute net income (loss) per common share -
Diluted		11,555,997		11,386,303		11,308,051
Basic		11,573,435		11,503,296		10,977,341
Diluted		11,573,435		11,555,997		11,386,303

See accompanying notes to consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)

	For the Year Ended December 31,
	2016		2015		2014
	2017		2016		2015
Net income	$	1,106	$	1,100	$	8,099
Net income (loss)	$	(107,241)	$	1,106	$	1,100
Other comprehensive income (loss):
Unrealized holding gain (loss) on investments arising during period		—		64		(4)
Unrealized holding gain on investments arising during period		—		—		64
Retirement plan loss		(9,437)		(8,863)		(31,124)
Retirement plan gain (loss)		24,257		(9,437)		(8,863)
Income tax benefit on comprehensive loss		3,607		3,358		11,897
Income tax benefit (provision) on other comprehensive income (loss)		(5,003)		3,607		3,358
Other comprehensive loss, net of tax		(5,830)		(5,441)		(19,231)
Other comprehensive income (loss), net of tax		19,254		(5,830)		(5,441)
Comprehensive loss	$	(487,~~724~~987)	$	(4,~~341~~724)	$	(114,~~132~~341)

See accompanying notes to consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share information)

	December 31,
	2016		2015
	2017		2016
Assets
Current assets
Cash and cash equivalents	$	1540,~~821~~759	$	3015,~~312~~821
Receivables, net		3332,~~377~~229		3233,~~736~~377
Material and supplies		86,~~090~~810		8,~~499~~090
Prepaid expenses		4,~~093~~899		4,~~068~~093
Other current assets		71,~~229~~328		27,~~102~~229
Total current assets		6886,~~610~~025		7768,~~717~~610
Property, plant and equipment, net		~~595~~608,~~997~~298		~~579~~595,~~107~~997
Intangible assets, net		3231,~~728~~026		3432,~~828~~728
Goodwill		12,104		12,104
Deferred income taxes, net		~~92,171~~—		8992,~~896~~171
Other assets		2,~~311~~053		62,~~043~~311
Total assets	$	~~803~~739,~~921~~506	$	~~799~~803,~~695~~921
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt	$	310,~~000~~250	$	3,000
Accounts payable		5356,~~506~~874		4453,~~841~~506
Accrued expenses		1511,~~293~~736		1415,~~491~~293
Advance billings and customer deposits		1514,~~013~~807		1715,~~551~~013
Other current liabilities		6,~~327~~774		56,~~932~~327
Total current liabilities		93100,~~139~~441		8593,~~815~~139
Long-term debt		~~281~~299,~~699~~066		~~283~~281,~~046~~699
Employee benefit obligations		~~105~~79,~~930~~953		~~104~~105,~~597~~930
Other liabilities		18,239		18,538
Deferred income taxes, net		910		—
Total liabilities		499,007		491,996
Other liabilities		38,927		18,239
Total liabilities		519,297		499,007
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 11,513,279 and 11,466,398 shares issued and outstanding at December 31, 2016 and 2015, respectively		115		115
Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 11,587,963 and 11,513,279 shares issued and outstanding at December 31, 2017 and 2016, respectively		116		115
Additional paid-in capital		~~179~~182,~~958~~689		~~178~~179,~~019~~958
Accumulated other comprehensive loss		(3515,~~218~~964)		(2935,~~388~~218)
Retained earnings		~~160~~53,~~059~~368		~~158~~160,~~953~~059
Total stockholders’ equity		~~304~~220,~~914~~209		~~307~~304,~~699~~914
Total liabilities and stockholders’ equity	$	~~803~~739,~~921~~506	$	~~799~~803,~~695~~921

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

(Dollars in thousands)

	For the Year Ended
	December 31,
	2016		2015		2014
	2017		2016		2015
Cash flows from operating activities:
Net income	$	1,106	$	1,100	$	8,099
Net income (loss)	$	(107,241)	$	1,106	$	1,100
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		8988,~~916~~424		8789,~~879~~916		7887,~~014~~879
Deferred financing amortization		21,~~068~~442		12,~~922~~068		1,~~855~~922
Employee retirement benefits		(8,103)		(3,634)		(12,078)
Loss on early extinguishment of debt		4,826		—		—
Provision for uncollectible receivables		4,031		3,648		3,590
Employee retirement benefits		(1,720)		(8,103)		(3,634)
Stock based compensation		2,303		1,584		4,174
Provision for uncollectible receivables		3,797		4,031		3,648
Deferred income taxes		1,332		1,958		6,851
Stock based compensation		2,827		2,303		1,584
Deferred income taxes		88,628		1,332		1,958
Changes in operating assets and liabilities:
Receivables		(42,~~672~~649)		(34,~~722~~672)		(13,~~731~~722)
Material and supplies		~~409~~1,280		~~838~~409		~~(386)~~838
Prepaid expenses and other current assets		~~(153)~~95		9(153)		~~(104)~~9
Accounts payable and accrued expenses		3(1,~~935~~059)		(93,~~973)~~935		3(9,~~882~~973)
Advance billings and customer deposits		(120,~~038)~~377		8(1,~~565~~038)		(18,~~436)~~565
Other current liabilities		(~~344~~653)		(~~759~~344)		(~~296~~759)
Other		~~(702)~~336		~~1,181~~(702)		561,181
Net cash provided by operating activities		9098,~~088~~710		90,~~596~~088		90,~~490~~596
Cash flows from investing activities:
Capital expenditures		(9795,~~841~~256)		(9997,~~034~~841)		(9699,~~706~~034)
Proceeds on sale of investments		—		~~805~~—		~~463~~805
Net cash used in investing activities		(9795,~~841~~256)		(9897,~~229~~841)		(9698,~~243~~229)
Cash flows from financing activities:
Proceeds from exercise of warrant		—		6,870		—
Proceeds from borrowing		330,000		—		—
Proceeds from installment financing		2,155		2,780		4,336
Proceeds from exercise of warrant		—		—		6,870
Repayment of capital lease and installment financing		(3,341)		(4,217)		(3,179)
Proceeds from installment financing		2,423		2,155		2,780
Repayment of debt		(3,000)		(3,000)		(3,000)
Repayment of capital lease and installment financing		(3,961)		(3,341)		(4,217)
Refinancing and loan amendment costs		(688)		(150)		—
Repayment of borrowings		(305,263)		(3,000)		(3,000)
Taxes paid related to net share settlement of equity awards		(364)		(948)		(1,520)
Refinancing and loan amendment costs		(6,295)		(688)		(150)
Net cash provided by (used in) financing activities		(5,238)		1,335		(3,363)
Taxes paid related to net share settlement of equity awards		(495)		(364)		(948)
Net change in cash, cash equivalents and restricted cash		(12,991)		(6,298)		(9,116)
Net cash provided by (used in) financing activities		16,409		(5,238)		1,335
Cash, cash equivalents and restricted cash, beginning of period		34,137		40,435		49,551
Net change in cash, cash equivalents and restricted cash		19,863		(12,991)		(6,298)
Cash, cash equivalents and restricted cash, end of period	$	21,146	$	34,137	$	40,435
Cash, cash equivalents and restricted cash, beginning of period		21,146		34,137		40,435
Cash, cash equivalents and restricted cash, end of period	$	41,009	$	21,146	$	34,137

See accompanying notes to consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share information)

						Accumulated
				Additional		Other				Total
	Common Stock			Paid-In		Comprehensive		Retained		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Earnings		Equity
Balance, January 1, 2014	10,495,856	$	105	$	167,869	$	(4,716)	$	149,754	$	313,012
Balance, January 1, 2015	10,673,292	$	107	$	170,521	$	(23,947)	$	157,853	$	304,534
Stock based compensation	—		—		4,174		—		—		4,174
Exercise of warrant	73,422		1		(1)		—		—		—
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes	104,014		1		(1,521)		—		—		(1,520)
For the Year Ended December 31, 2014:
Net income	—		—		—		—		8,099		8,099
Other comprehensive loss, net of tax	—		—		—		(19,231)		—		(19,231)
Balance, December 31, 2014	10,673,292		107		170,521		(23,947)		157,853		304,534
Stock based compensation	—		—		1,584		—		—		1,584
Exercise of warrant	719,075		7		6,863		—		—		6,870
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes	74,031		1		(949)		—		—		(948)
For the Year Ended December 31, 2015:
Net income	—		—		—		—		1,100		1,100
Other comprehensive loss, net of tax	—		—		—		(5,441)		—		(5,441)
Balance, December 31, 2015	11,466,398		115		178,019		(29,388)		158,953		307,699
Stock based compensation	—		—		2,303		—		—		2,303
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes	46,881		—		(364)		—		—		(364)
For the Year Ended December 31, 2016:	—
Net income	—		—		—		—		1,106		1,106
Other comprehensive loss, net of tax	—		—		—		(5,830)		—		(5,830)
Balance, December 31, 2016	11,513,279	$	115	$	179,958	$	(35,218)	$	160,059	$	304,914
Cumulative effect of adoption of new accounting standard for stock compensation	—		—		—		—		550		550
Stock based compensation	—		—		2,827		—		—		2,827
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes	74,684		1		(96)		—		—		(95)
For the Year Ended December 31, 2017:	—
Net loss	—		—		—		—		(107,241)		(107,241)
Other comprehensive income, net of tax	—		—		—		19,254		—		19,254
Balance, December 31, 2017	11,587,963	$	116	$	182,689	$	(15,964)	$	53,368	$	220,209

See accompanying notes to consolidated financial statements.

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Hawaiian Telcom Holdco, Inc.

Notes to Consolidated Financial Statements

1. Description of Business

Business Description

Hawaiian Telcom Holdco, Inc. and subsidiaries (the “Company”) is the incumbent local exchange carrier for the State of Hawaii with an integrated telecommunications network. The Company offers a variety of telecommunication services to residential and business customers in Hawaii including local telephone, network access and data transport, long distance, internet, television and wireless phone service. The Company also provides communications equipment sales and maintenance, data center colocation and network managed services.

The communication services the Company provides are subject to regulation by the Public Utilities Commission of the State of Hawaii (“HPUC”) with respect to intrastate rates and services and other matters, and the State of Hawaii Department of Commerce and Consumer Affairs with respect to television. Certain agreements with the HPUC limit the amount of dividends and other distributions the Company may pay as well as place restrictions on certain transactions affecting the operations and capital structure of the Company. The Federal Communication Commission (“FCC”) regulates rates that the Company charges long‑distance carriers and other end‑user subscribers for interstate access services and interstate traffic.

Proposed Merger

On July 9, 2017, Hawaiian Telcom Holdco, Inc. (“Holdco”), a Delaware corporation, Cincinnati Bell Inc. (“Cincinnati Bell”), an Ohio corporation, Twin Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Cincinnati Bell (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Holdco and Holdco will be the surviving corporation (the “Merger”).

Pursuant to the Merger Agreement and as consideration for the Merger, Holdco shareholders will have the option to elect either $30.75 in cash, 1.6305 shares of Cincinnati Bell common stock, or a mix of $18.45 in cash and 0.6522 shares of Cincinnati Bell common stock for each Holdco share. The final distribution to Holdco shareholders is subject to proration such that the aggregate consideration to be paid to Holdco stockholders will be 60 percent cash and 40 percent Cincinnati Bell common stock. Such distribution will be made upon closing of the Merger.

The completion of this transaction is subject to closing conditions including the receipt of regulatory approvals from, among others, the Hawaii Public Utilities Commission, and approval by the Holdco shareholders which occurred on November 7, 2017. The Merger Agreement contains certain termination rights for Holdco and Cincinnati Bell. The Merger Agreement stipulates that in the event of a termination of the Merger Agreement under specified circumstances, primarily related to if the Company receives and favors a competing merger offer, the Company will be required to pay a fee of $11.9 million.

In connection with entering into the Merger Agreement with Cincinnati Bell, the Company incurred professional fees related to the transaction of $2.4 million for the year ended December 31, 2017.

Organization

The Company has one direct wholly‑owned subsidiary, Hawaiian Telcom Communications, Inc. which has two direct wholly‑owned subsidiaries – Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc. Hawaiian Telcom, Inc. operates the regulated incumbent local exchange carrier and Hawaiian Telcom Services Company, Inc. operates all other businesses.

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2. Summary of Significant Accounting Policies

The accompanying consolidated financial statements of the Company have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in the opinion of management, includes all adjustments necessary for a fair presentation of the results of operations, comprehensive income (loss), financial position and cash flows for each period presented.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements of the Company include the results of operations, financial position, and cash flows of Hawaiian Telcom Holdco, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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Revenue Recognition

Revenue is recognized when evidence of an arrangement exists, the earnings process is complete and collectibility is reasonably assured. The prices for certain services are filed in tariffs with the regulatory body that exercises jurisdiction over the services.

Basic local service, enhanced calling features such as caller ID, special access circuits, long‑distance flat rate calling plans, most data services, internet, television, data center colocation and wireless services are billed one month in advance. Revenue for these services is recognized in the month services are rendered. The portion of advance‑billed services associated with services that will be delivered in a subsequent period is deferred and recorded as a liability in advance billings and customer deposits.

Revenues for providing usage based services, such as per‑minute long‑distance service, access charges billed to long‑distance companies for originating and terminating long‑distance calls on the Company’s network and video on demand, are billed in arrears. Revenues for these services are based on actual rated usage and, where necessary, historical usage patterns, and are recognized in the month services are rendered.

For long-term indefeasible right of use, or IRU, contracts for fiber circuit capacity, the Company may receive up-front payments for services to be delivered for a period of up to 25 years. In these situations, the Company defers the revenue and amortizes it on a straight-line basis to earnings over the term of the contract.

Universal Service revenue subsidies, including those related to Connect America Fund Phase II, are government‑sponsored support received in association with providing service in mostly rural, high‑cost areas. These revenues are typically calculated by the government agency responsible for administering the support program. These revenues are recognized as granted by the government agency.

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With respect to arrangements with multiple deliverables, the Company determines whether more than one unit of accounting exists in an arrangement. To the extent that the deliverables are separable into multiple units of accounting, total consideration is allocated to the individual units of accounting based on their relative fair value, determined by the price of each deliverable when it is regularly sold on a stand‑alone basis. Revenue is recognized for each unit of accounting as delivered or as service is performed depending on the nature of the deliverable comprising the unit of accounting.

Taxes Collected from Customers

The Company presents taxes collected from customers and remitted to governmental authorities on a gross basis, including such amounts in the Company’s reported operating revenues and selling, general and administrative expenses. Such amounts represent primarily Hawaii state general excise taxes and HPUC fees. Such taxes and fees amounted to $8.4 million, $8.24 million and $78.52 million for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

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Cash and Cash Equivalents

Cash and cash equivalents include cash and money market accounts with maturities at acquisition of three months or less. The majority of cash balances at December 31, ~~2016~~2017 are held in one bank in demand deposit accounts.

Supplemental Non‑Cash Investing and Financing Activities

Accounts payable included $2627.14 million, $2026.61 million and $2120.26 million at December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively, for additions to property, plant and equipment.

Receivables

The Company recognizes accounts receivable net of an allowance for doubtful accounts. The Company makes estimates of the uncollectibility of its accounts receivable by specifically analyzing accounts receivable and historic bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. After multiple attempts at collection of delinquent accounts, the balance due is deemed uncollectible and charged against the allowance.

Material and Supplies

Material and supplies which consist mainly of cable, supplies and replacement parts, are stated at the lower of cost, determined principally by the average cost method, or net realizable value.

Property and Depreciation

Property, plant and equipment are carried at cost. Depreciation has been calculated using the composite remaining life method and straight-line depreciation. The composite method depreciates the remaining net investment in telephone plant over remaining economic asset lives by asset category. This method requires periodic review and revision of depreciation rates. The average economic lives utilized for assets are as follows: building – 18 to 34 years; cable and wire – 11 to 37 years; switching and circuit equipment – 6 to 15 years; and other property – 4 to 17 years.

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Software

The Company capitalizes the costs associated with externally acquired software for internal use. Project costs associated with internally developed software are segregated into three project stages: preliminary project stage, application development stage and post‑implementation stage. Costs associated with both the preliminary project stage and post‑implementation stage are expensed as incurred. Costs associated with the application development stage are capitalized. Software maintenance and training costs are expensed as incurred. Capitalized software is generally amortized on a straight‑line method basis over its useful life, not to exceed five years.

Goodwill and Other Intangible Assets

Goodwill and other indefinite‑lived intangible assets are not amortized. Such assets are reviewed annually, or more frequently under various conditions, for impairment. The goodwill impairment test involves acomparing ~~two‑step process. The first step, identifying a potential impairment, compares~~ the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit, ~~exceeds~~for ~~its fair value~~goodwill, or the ~~second~~indefinite-lived ~~step~~intangible ~~will~~asset ~~need~~exceeds toits befair ~~conducted. The second step~~value, ~~measuring~~ the impairment loss, ~~compares~~is ~~the~~recognized ~~implied~~for ~~fair value of~~ the ~~reporting unit goodwill with the carrying~~ amount of ~~that goodwill. Any excess of~~ the ~~reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss~~excess. The Company performs its annual impairment test during the fourth quarter, primarily using a market valuation and discounted cash flows methodology.

Intangible assets with definite lives, including the value assigned to the customer base, are being amortized over the remaining estimated lives. For customer relationship intangibles, amortization is calculated using a declining balance method in relation to estimated retention lives of acquired customers.

55Impairment of Long‑Lived Assets and Definite-Lived Intangibles

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Impairment of Long‑Lived Assets

The Company assesses the recoverability of long‑lived assets, including property, plant and equipment and definite‑lived intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, if the sum of the expected cash flows, undiscounted and without interest, resulting from use of the asset are less than the carrying amount, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the assets.

Debt Issuance

Deferred financing costs and original issue discount are amortized over the term of the related debt issuance using the effective interest method and presented as a direct deduction of the carrying amount of the debt.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities at each balance sheet date using enacted tax rates expected to be in effect in the year the differences are expected to reverse. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized.

The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statements of income (loss).

Employee Benefit Plans

Pension and postretirement health and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Actuarial gains and losses are amortized over the average remaining service period or expected life of participants ~~deemed~~as ~~inactive~~applicable.

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Maintenance and Repairs

The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged to expense as these costs are incurred.

Advertising

Advertising costs are expensed as incurred. Advertising expense amounted to $65.18 million, $56.91 million and $65.19 million for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

Stock Based Compensation

The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors based on estimated fair values. The fair value of restricted stock units is generally based on the closing price of the Company’s common stock on the date of grant. The fair value of market-based stock awards is estimated using a statistical pricing model as of the date of grant. Because stock-based compensation expense is based on awards that ultimately ~~expected to~~ vest, it has been reduced for actual forfeitures.

Earnings per Share

Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing earnings by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing earnings, adjusted for the effect, if any, from assumed conversion of all potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. The denominator used to compute basic and diluted earnings per share is as follows:


	For the Year Ended
	December 31,
	2017	2016	2015
Basic earnings per share - weighted average shares	11,573,435	11,503,296	10,977,341
Effect of dilutive securities:
Employee and director restricted stock units	—	52,701	83,727
Warrants	—	—	325,235
Diluted earnings per share - weighted average shares	11,573,435	11,555,997	11,386,303

The computation of weighted average dilutive shares outstanding excluded grants of restricted stock units convertible into 311,090 shares for the year ended December 31, 2017. For the year ended December 31, 2017, the Company incurred a net loss so the restricted stock units are anti-dilutive to the computation of diluted net loss per share. For the years ended December 31, 2016 and 2015, the antidilutive restricted stock units excluded from the computation of weighted average dilutive shares outstanding were not significant.

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calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. The denominator used to compute basic and diluted earnings per share is as follows:

	For the Year Ended
	December 31,
	2016	2015	2014
Basic earnings per share - weighted average shares	11,503,296	10,977,341	10,591,351
Effect of dilutive securities:
Employee and director restricted stock units	52,701	83,727	143,787
Warrants	—	325,235	572,913
Diluted earnings per share - weighted average shares	11,555,997	11,386,303	11,308,051

For the years ended December 31, 2016, 2015 and 2014, all antidilutive restricted stock units excluded from the computation of weighted average dilutive shares outstanding were not significant.

Recently Adopted Accounting Pronouncements

In ~~November~~March 2016, the Financial Accounting Standards Board (the “FASB”) issued ana ~~accounting~~new standard ~~modifying~~that simplifies the ~~presentation~~accounting offor ~~restricted~~employee ~~cash~~share-based inpayment ~~the statement of cash flows~~transactions. The new standard ~~requires~~impacts ~~restricted~~the ~~cash~~accounting befor ~~included~~related ~~with~~income ~~cash~~taxes, forfeitures and ~~cash~~statutory ~~equivalents~~tax ~~when~~withholding ~~reconciling~~requirements ~~the~~as ~~beginning-of-period~~well ~~and~~as ~~end-~~the classification of~~-period~~ ~~total~~certain ~~amounts~~related ~~shown~~payments onin the statement of cash flows. The ~~Company~~new ~~adopted~~accounting ~~the~~guidance ~~standard~~was effective ~~upon~~for ~~issuance~~the Company in 2017. The ~~consolidated~~adoption ~~statement~~method ofrequired ~~cash~~is ~~flows~~specified ~~for~~as ~~the~~retrospective, ~~year~~modified ~~ended~~retrospective ~~December~~or ~~31,~~prospective ~~2016~~for ~~reflects~~each ~~application~~ of the various accounting provisions impacted by this new standard. ~~Retrospective~~The ~~application~~Company is ~~required~~accounting sofor forfeitures on its share-based transactions as they occur beginning January 1, 2017. The impact of the ~~consolidated~~modified ~~statement~~retrospective adoption of ~~cash~~this ~~flows~~provision ~~for~~was not significant. In addition, the ~~years~~Company ~~ended~~began ~~December~~accounting ~~31,~~for ~~2015~~excess tax benefits and ~~December~~tax ~~31,~~deductions ~~2014~~on ~~were~~share-based ~~revised~~award tosettlements ~~reflect~~prospectively ~~application~~as ofincome ~~the~~tax ~~new~~expense ~~standard. This~~or ~~resulted~~benefit in ~~the~~its ~~following~~consolidated ~~increases~~statements of income (~~decreases~~loss) beginning January 1, 2017. Excess tax benefits that were not recognized prior to January 1, 2017 because the ~~total~~related ~~amounts~~tax ~~previously~~deduction ~~reported~~had innot ~~the~~reduced ~~consolidated~~taxes ~~statements~~currently payable have been recognized on a modified retrospective basis through a cumulative effect adjustment which increased retained earnings as of ~~cash~~January ~~flows~~1, ~~(dollars~~2017 inby ~~thousands):~~$0.6 million.

	For the Year Ended
	December 31,
	2015		2014
Cash flows from operating activities:
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	$	—	$	400
Advance billings and customer deposits		3,500		—
Other		175		(313)
Net cash provided by operating activities		3,675		87
Cash flows from investing activities:
Funds released from restricted cash account		(400)		—
Proceeds on sale of investments		—		463
Net cash used in investing activities		(400)		463
Net change in cash, cash equivalents and restricted cash		3,275		550
Cash, cash equivalents and restricted cash, beginning of period		550		—
Cash, cash equivalents and restricted cash, end of period	$	3,825	$	550

In January 2017, the FASB issued new accounting guidance simplifying the test for goodwill impairment. The new guidance eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the standard, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company adopted the standard effective December 31, 2017 on a prospective basis with no current impact.

Recently Issued Accounting Pronouncement on Revenue Recognition 57

In May 2014, the FASB issued a new accounting standard which provides guidance for revenue recognition. The new accounting standard supersedes existing revenue recognition requirements and most industry-specific guidance. The standard’s core principal is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods and services. The Company adopted the new standard effective January 1, 2018. The Company selected the modified retrospective method of adoption which requires a cumulative effect adjustment to retained earnings as of the adoption date. The initial application of the new standard was limited to contracts not yet completed as of the effective date. The details of significant changes in the Company’s revenue recognition and the quantitative impact are provided below.

Prior to 2018, the Company recognized revenue for telecommunication and structured cabling project revenues on a percentage of completion basis, generally based on the relative portion of costs incurred to total estimated costs of a project, except for short duration projects which were recognized upon completion of the project. Beginning in 2018, the Company is recognizing revenue on all projects as completed. In addition, beginning in 2018, the Company began recognizing a financing component to the up-front payments for services to be delivered under indefeasible right of use contracts for fiber circuit capacity.

Beginning in 2018, the Company began deferring certain costs to obtain a contract and is recognizing such costs over the expected contract term. Prior to 2018, the Company had deferred certain costs related to activation in an amount that approximated the related revenue and recognized such costs over the expected customer life. The Company has concluded that such costs are no longer significant or are accounted for under other accounting standards such as those related to capitalization in conjunction with installation of an asset.

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The ~~following~~new isaccounting astandard ~~reconciliation~~also ofprovides ~~cash,~~guidance ~~cash~~on ~~equivalents~~presentation ~~and~~of ~~restricted~~contract ~~cash~~assets ~~reported~~and liabilities in the consolidated balance ~~sheets~~sheet. The tostandard ~~the~~provides ~~total~~specific guidance on presentation of ~~such~~advance ~~amounts~~billings. Beginning in ~~the~~2018, ~~consolidated~~a ~~statements~~liability ofis recognized for advance billings where cash ~~flows~~has ~~(dollars~~been received in ~~thousands):~~advance of delivery of goods or services, or when payment is due and the contract is noncancellable. Prior to 2018, a liability was recognized when the related goods or services were invoiced in advance of delivery of goods or services.

	December 31,
	2016		2015
Cash and cash equivalents	$	15,821	$	30,312
Restricted cash included in other current assets
Escrow deposits for capacity sales		5,000		—
Restricted cash included in other assets
Escrow deposits for capacity sales		—		3,500
Other		325		325
Total cash, cash equivalents and restricted cash	$	21,146	$	34,137

The cumulative effect of application of the new accounting standard as of January 1, 2018, net of estimated tax, was to increase retained earnings by an amount estimated at $4.0 million to $6.0 million. The impact will be reflected in the Company’s condensed consolidated financial statements beginning with the quarter ended March 31, 2018.

~~The~~In ~~escrow~~preparation ~~deposits~~ for ~~capacity~~adoption ~~sales~~of ~~are~~the ~~more~~new ~~fully~~accounting ~~described~~standard, the Company has implemented internal controls, system functionality and revised business processes to prepare financial information in ~~Note~~accordance 13with the standard. ~~The~~These ~~restriction~~new onprocesses ~~the~~and ~~escrow~~procedures ~~deposit~~ensure data utilized for financial reporting is ~~expected~~complete toand beaccurate ~~removed~~and is assessed in ~~2017~~accordance sowith the ~~restricted~~guidelines ~~cash~~of ~~amount~~the standard. The Company is ~~reflected~~implementing innew ~~other~~internal ~~current~~controls ~~assets~~to address risks associated with applying the new revenue recognition model as ofwell ~~December~~as ~~31,~~monitoring ~~2016~~controls to identify new sales arrangements or changes in the business environment that will affect the Company’s current accounting assessment.

Other Recently Issued Accounting Pronouncements

In May 2014, the FASB issued a new accounting standard which provides guidance for revenue recognition which was most recently amended in May 2016. The new accounting standard will supersede the current revenue recognition requirements and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard, along with the amendments which must be adopted at the same time as the new standard, is effective for the Company in the first quarter of 2018 with either full retrospective or modified retrospective adoption permitted. The modified retrospective approach requires a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period for which the new accounting guidance is effective. Early adoption is allowed from the first quarter of 2017. The Company is currently evaluating the impact of the adoption of this accounting standard on the Company’s consolidated financial statements and financial statement disclosures. As this process is still ongoing, the final effect of adoption is not yet fully known. The Company has concluded that it will adopt the new standard in the first quarter of 2018. In conjunction with its efforts to prepare for adoption, the Company is focusing its analysis on timing of revenue recognition including for sales of certain telecommunications equipment. In addition, the Company is evaluating the need to modify its presentation of certain revenue related assets and liabilities in its consolidated balance sheet upon adoption of the new standard.

In August 2014, the FASB issued an accounting standard with new guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. Management must evaluate whether it is probable that known conditions or events, considered in the aggregate, would raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. If such conditions or events are identified, the standard requires management’s mitigation plans to alleviate the doubt or a statement of the substantial doubt about the entity’s ability to continue as a going concern to be disclosed in the financial statements. The standard is effective for fiscal years and interim periods beginning after December 15, 2016 applied on a prospective basis with early adoption permitted. The Company is not expecting a significant impact from adoption of this accounting standard.

In February 2016, the FASB issued a new standard which revises the accounting for leases. The new standard is effective for the Company in the first quarter of 2019. The standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases the lessee would recognize lease expense on a straight-line basis. The standard requires use of a modified retrospective transition approach beginning with the earliest period presented in the period of transition. The Company is currently assessing the impact that adoption of this guidance will have on its consolidated financial statements.

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In March 2016, the FASB issued a new standard that simplifies the accounting for employee share-based payment transactions. The new standard impacts the accounting for related income taxes, forfeitures and statutory tax withholding requirements as well as the classification of certain related payments in the statement of cash flows. The new accounting guidance is effective for the Company in the first quarter of 2017 with early adoption permitted. The adoption method required is specified as retrospective, modified retrospective or prospective for each of the various accounting provisions impacted by this new standard. The Company will account for forfeitures on its share-based transactions as they occur beginning January 1, 2017. The impact of the modified retrospective adoption of this provision is not expected to be significant. In addition, the Company will begin accounting for excess tax benefits and tax deficiencies on share-based awards as income tax expense or benefit in its consolidated statement of income beginning January 1, 2017.

In June 2016, the FASB issued amended guidance on accounting for the impairment of financial instruments. The standard requires adoption of an impairment model known as the current expected credit loss model that is based on expected losses rather than incurred losses. For the Company, it is anticipated this will impact primarily the accounting for credit losses on trade receivables. The new standard is effective for the Company in the first quarter of 2020 with early adoption permitted from the first quarter of 2019. The provisions of the new standard expected to impact the Company must be adopted using the modified retrospective approach. The Company is evaluating the effect of the guidance on the Company’s consolidated financial statements and financial statement disclosures.

In ~~January~~March 2017, the FASB ~~revised~~issued ~~the~~a ~~accounting~~new ~~for~~standard ~~goodwill~~that ~~impairments~~amends bythe ~~eliminating~~income statement presentation of the ~~second~~components ~~step~~of ~~from~~net ~~the~~periodic ~~goodwill~~benefit ~~impairment~~cost ~~test~~for defined benefit and other postretirement plans. ~~Instead,~~The ifnew standard requires that the ~~carrying~~current ~~amount~~service ofcost acomponent ~~reporting~~be ~~unit~~disaggregated ~~exceeds~~from the ~~fair~~other ~~value,~~components anof ~~impairment~~net ~~loss~~benefit iscost. The ~~recognized~~other components must be presented elsewhere in anthe ~~amount~~income ~~equal~~statement tooutside ~~that~~of ~~excess,~~income ~~limited~~from tooperations. In addition, only the ~~total~~service-cost ~~amount~~component of ~~goodwill~~net ~~allocated~~benefit tocost ~~that~~is ~~reporting~~eligible ~~unit~~for capitalization related to self-constructed assets. The ~~modified~~new standard is effective for ~~annual~~the ~~and~~Company ~~any~~beginning ~~interim~~January ~~impairment~~1, ~~tests~~2018 ~~for~~with ~~periods~~early ~~beginning~~adoption ~~after~~permitted. The ~~December~~presentation ~~15,~~requirements ~~2019. Early~~must ~~adoption~~be isadopted ~~allowed~~on ~~for~~a ~~annual~~retrospective basis and ~~any~~the ~~interim~~change ~~impairment~~in ~~tests~~capitalization ~~occurring~~methodology ~~after~~applied ~~January~~on 1,a ~~2017~~prospective basis. The Company iscurrently ~~not~~presents ~~expecting~~the aentire ~~significant~~net ~~impact~~benefit cost in income from ~~adoption~~operations but has disclosed the components of ~~this~~net ~~modified~~benefit ~~accounting~~costs ~~standard~~in Note 8 to the consolidated financial statements. The Company has adopted this standard effective January 1, 2018 and will reflect the new presentation of net periodic benefit cost beginning with its condensed consolidated financial statements for the quarter ended March 31, 2018.

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In May 2017, the FASB issued additional guidance for stock compensation accounting. The guidance provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. The standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The amendment to the accounting standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted and the provisions must be applied prospectively to a stock award modified on or after the adoption date. The Company adopted the new standard effective January 1, 2018 with no current impact.

In February 2018, the FASB amended accounting rules to allow for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (see Note 9). Accounting rules generally require deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. Therefore, the tax effects of items within accumulated other comprehensive income may not reflect the appropriate tax rate (referred to as stranded tax effects). Consequently, the amendment allows for an optional elimination of the stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendment is effective for the Company in the first quarter of 2018. The Company has chosen not to adopt the standard early, though allowed. The Company is still evaluating the potential impact of the accounting amendment and has not yet concluded if it will adopt the optional provisions of the amendment. If the provisions are adopted, the Company expects to apply the standard in the period of adoption rather than retrospectively.

3. Receivables, Net

Receivables consisted of the following (dollars in thousands):

	December 31,
	2016		2015
	2017		2016
Customers and other	$	3736,~~408~~118	$	3637,~~667~~408
Allowance for doubtful accounts		(43,~~031~~889)		(34,~~931~~031)
	$	3332,~~377~~229	$	3233,~~736~~377

The Company grants credit to customers in the normal course of business. At December 31, ~~2016~~2017 and ~~2015~~2016, the Company did not have customer balances representing more than 10% of total receivables. During the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, the Company had no customers that represented more than 10% of total revenues.

The following is a summary of activity for the allowance for doubtful accounts (dollars in thousands):

			Additional
			Charges to		Deductions
	Beginning		Costs and		from		Ending
	Balance		Expenses		Allowance		Balance
January 1 to December 31, 2016	$	3,931	$	4,031	$	(3,931)	$	4,031
January 1 to December 31, 2017	$	4,031	$	3,797	$	(3,939)	$	3,889
January 1 to December 31, 2016		3,931		4,031		(3,931)		4,031
January 1 to December 31, 2015		3,755		3,648		(3,472)		3,931
January 1 to December 31, 2014		3,942		3,590		(3,777)		3,755

5962

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4. Property, Plant and Equipment

Property, plant and equipment consisted of the following (dollars in thousands):

	December 31,	~~December 31,~~
		2016			2015
	2017			2016
Land	$	$67,278	~~67,278~~	$	$67,278	~~67,278~~
Buildings		120,999	~~115,775~~		115,775	~~114,351~~
Central office equipment		222,248	~~208,004~~		208,004	~~194,707~~
Outside communications plant		479,655	~~412,244~~		412,244	~~377,042~~
Other equipment, vehicles and furniture		104,846	~~87,849~~		87,849	~~74,377~~
Construction in progress		34,759	~~55,606~~		55,606	~~32,595~~
Software		90,652	~~78,547~~		78,547	~~66,704~~
Other		10,834	~~10,834~~		10,834	~~10,873~~
Property, plant and equipment cost	$	1,131,271	~~1,036,137~~	$	1,036,137	~~937,927~~
Less accumulated depreciation		(522,973)	~~440,140~~		(440,140)	~~358,820~~
	$	$608,298	~~595,997~~	$	$595,997	~~579,107~~

Depreciation expense amounted to $8786.87 million, $8587.48 million and $7585.14 million for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

5. Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of the identifiable intangible assets are as follows (dollars in thousands):

	December 31, 2016						December 31, 2015
	December 31, 2017						December 31, 2016
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Value		Amortization		Value		Value		Amortization		Value
Subject to amortization:
Customer relationships	$	21,709	$	1617,~~299~~983	$	53,~~410~~726	$	21,709	$	1416,~~238~~299	$	75,~~471~~410
Trade name and other		320		~~302~~320		18—		320		~~263~~302		5718
		22,029		1618,~~601~~303		53,~~428~~726		22,029		1416,~~501~~601		75,~~528~~428
Not subject to amortization:
Brand name		27,300		—		27,300		27,300		—		27,300
		27,300		—		27,300		27,300		—		27,300
	$	49,329	$	1618,~~601~~303	$	3231,~~728~~026	$	49,329	$	1416,~~501~~601	$	3432,~~828~~728

60Amortization expense amounted to $1.7 million, $2.1 million and $2.5 million for the years ended December 31 2017, 2016 and 2015, respectively. Estimated amortization expense for the next five years and thereafter is as follows (dollars in thousands):


Year ended December 31,
2018	$	1,307
2019		930
2020		574
2021		270
2022		223
Thereafter		422
	$	3,726

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~~Amortization~~As ~~expense~~of ~~amounted~~December to31, 2017, the Company has goodwill of $212.1 million. Prior to 2017, the Company recognized $210.5 million of goodwill as part of the data center services segment and $21.9 6 million ~~for~~in the ~~years~~telecommunications ~~ended~~segment. As ~~December~~further 31discussed ~~2016~~in Note 16, ~~2015~~because ~~and~~of ~~2014~~recent operational, ~~respectively. Estimated~~organizational ~~amortization~~and ~~expense~~reporting ~~for~~changes, the ~~next~~Company ~~five~~has ~~years~~concluded it now has only one segment and ~~thereafter~~one isreporting asunit. As ~~follows~~such, ~~(dollars~~the Company now classifies all goodwill in ~~thousands):~~the one segment.

Year ended December 31,
2017	$	1,703
2018		1,307
2019		930
2020		574
2021		270
Thereafter		644
	$	5,428

6. Accrued Expenses and Other Liabilities

In conjunction with the acquisition of SystemMetrics Corporation in 2013, the Company recognized goodwill of $10.5 million which is attributed to the data center services segment. In conjunction with the 2012 acquisition of Wavecom Solutions Corporation, the Company recognized goodwill amounting to $1.6 million which is included in the telecommunications segment.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses consisted of the following (dollars in thousands):

	December 31,
	2016		2015
	2017		2016
Salaries and benefits	$	117,~~662~~875	$	1211,~~185~~662
Interest		2,~~583~~890		12,~~262~~583
Other taxes		~~1,048~~971		1,~~044~~048
	$	1511,~~293~~736	$	1415,~~491~~293

Other current liabilities consisted of the following (dollars in thousands):

	December 31,
	2016		2015
	2017		2016
Other postretirement benefits, current	$	3,~~332~~226	$	23,~~929~~332
Installment financing contracts, current		2,~~157~~978		12,~~849~~157
Other		~~838~~570		~~1,154~~838
	$	6,~~327~~774	$	56,~~932~~327

61Other liabilities, noncurrent, consisted of the following (dollars in thousands):

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	December 31,
	2017		2016
Deferred revenue, noncurrent	$	28,036	$	7,453
Installment financing contracts, noncurrent		8,982		8,692
Other		1,909		2,094
	$	38,927	$	18,239

Deferred revenue includes advance billings of capacity and other services related to the Company’s trans-Pacific cable as more fully described in Note 13.

7. Long‑Term Debt

Long‑Term debt consists of the following (dollars in thousands):

	Interest Rate
	Average Interest Rate		Final	December 31,
	at December 31,		Final		December 31,
	December 31, 2017		Maturity	2017			2016
	2016		Maturity		2016			2015
Term loan A-1	5.13	%	May 4, 2022	$	87,750		$	—
Term loan	5.25	%	June 6, 2019		$	290,138		$	293,138
Term loan A-2	5.38		May 4, 2023		227,125			—
Debt issue costs and original issue discount						(5,439)			(7,092)
Term loan retired	NA		NA		—			290,138
						284,699			286,046
Debt issue costs and issue discount					(5,559)			(5,439)
Current						3,000			3,000
					309,316			284,699
Noncurrent					$	281,699		$	283,046
Current					10,250			3,000
Noncurrent				$	299,066		$	281,699

The term loan outstanding at December 31, 2016 provides for interest at the Alternate Base Rate, a rate which is indexed to the prime rate with certain adjustments as defined, plus a margin of 3.25% or a Eurocurrency rate on deposits of one, two, three or six months but no less than 1.00% per annum plus a margin of 4.25%. The Company has selected the Eurocurrency rate as of December 31, 2016 resulting in an interest rate currently at 5.25%. The interest rate margin is subject to a further increase of 0.25% should there be a downgrade in the Company’s credit rating.64

The term loan provides for interest payments no less than quarterly. In addition, quarterly principal payments of $0.8 million are required. The balance of the loan is due at maturity on June 6, 2019. The Company must prepay, generally within three months after year end, up to 75% of excess cash flow, as defined. The percent of excess cash flow required is dependent on the Company’s leverage ratio. Excess cash flow payments due for the years ended December 31, 2016, 2015 and 2014 were not significant. The Company must also make prepayments on loans in the case of certain events such as large asset sales.

In May 2016, the Company amended the term loan allowing for a revised leverage ratio financial covenant. The amendment modifies the maximum allowed leverage ratio, as defined, for the four consecutive fiscal quarters ended from June 30, 2016 to September 30, 2017 to 3.00:1.00, from December 31, 2017 to September 30, 2018 to 2.75:1.00, and from December 31, 2018 and each subsequent quarter to 2.50:1.00. In conjunction with the amendment, the Company paid a fee to the lenders of $0.4 million and such fee was deferred as financing related costs. The Company concluded that the amended lenders’ term loans were not substantially different than the lenders’ term loans prior to amendment. In addition, the Company paid an arrangement fee and legal costs amounting to $0.3 million. Such fees were expensed as incurred in 2016.

The Company has a revolving credit facility which was extended on April 9, 2015 to mature on December 6, 2018. The facility has an available balance of $30.0 million with no amounts drawn at any time through December 31, 2016. A commitment fee is payable quarterly to the lender under the facility. Interest on amounts outstanding is based on, at the Company’s option, the bank prime rate plus a margin of 3.0% to 6.0% or the Eurocurrency rate for one, two, three or six month periods plus a margin of 4.0% to 5.5%. The margin is dependent on the Company’s leverage, as defined in the agreement, at the time of the borrowing.

The obligations under the bank facilities are guaranteed by the Company and each subsidiary with certain exceptions. In addition, the bank credit facilities are collateralized by substantially all of the Company’s assets.

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~~New~~In ~~Financing~~February in2017, the Company entered into a delayed draw credit agreement for new term loans and a new revolving credit facility. The new facility fully funded the repayment of the existing term loan and replacement of the existing revolving credit on May 4, 2017. Included in the new facility is a term loan A-1 for $90.0 million with quarterly principal payments of $1.1 million with the balance due at maturity in May 2022. Interest, payable at least quarterly, is at the Alternate Base Rate plus a margin of 2.75% or a Eurocurrency rate plus a margin of 3.75%. In addition, the facility provides for a second term loan A-2 for $230.0 million with quarterly principal payments of $1.4 million for the first eight quarters and $2.9 million per quarter thereafter with the balance due at maturity in May 2023. Interest, payable at least quarterly, is at the Alternate Base Rate plus a margin of 3.0% or a Eurocurrency rate plus a margin of 4.0%.

~~In February 2017, the Company entered into a delayed draw credit agreement for new term loans and a new revolving credit facility.~~ The new facility also provides for a ~~commitment~~line ~~to fund repayment~~ of ~~the existing term loan and replacement of the existing revolving~~ credit in ~~May 2017. Included in~~ the ~~new~~amount ~~facility~~of ~~is a term loan for~~ $9030.0 million with ~~quarterly principal payments of $1.1 million with the balance due at~~ maturity in May 2022. ~~Interest,~~A ~~payable~~commitment atfee ~~least quarterly,~~ is at the Alternate Base Rate plus a margin of 2.75% or a Eurocurrency rate plus a margin of 3.75%. In addition, the facility provides for a second term loan for $230.0 million with quarterly principal payments of $1.4 million for the first eight quarters and $2.9 million per quarter thereafter with the balance due at maturity in May 2023. Interest, payable ~~at least~~ quarterly, isto at the ~~Alternate~~lender ~~Base~~under ~~Rate plus a margin of 3.00% or a Eurocurrency rate plus a margin of 4.00%. In addition,~~ the ~~agreement provides for a line of credit in the amount of $30~~facility.~~0 million with maturity in May 2022.~~ Interest on the line of credit is at the Alternate Base Rate plus a margin of 2.75% or a Eurocurrency rate plus a margin of 3.75%. ~~The~~There ~~interest~~were ~~rate~~no ~~margins~~drawings onas ~~the~~of ~~facility~~or ~~are~~for ~~subject~~the toperiods aended ~~decrease~~December of31, ~~0.25%~~2017 ~~with~~on ~~a defined improvement in~~ the ~~Company’s~~new ~~leverage~~line ~~ratio~~of credit.

The interest rate margins on the facility are subject to a decrease of 0.25% with a defined improvement in the Company’s leverage ratio. The obligations under the bank facilities are guaranteed by the Company and each subsidiary with certain exceptions. In addition, the bank credit facilities are collateralized by substantially all of the Company’s assets.

The bank credit facilities contain various negative and affirmative covenants that restrict, among other things, incurrence of additional indebtedness, payment of dividends, redemptions of stock, other distributions to shareholders and sales of assets. In addition, there are financial covenants which have the following metrics as of December 31, 2017: debt service coverage with minimum allowed ratio of 2.75:1 of earnings before interest, taxes, depreciation and amortization to debt service which includes scheduled principal payments and cash interest; leverage with maximum allowed ratio of 3.25:1 of indebtedness to earnings before interest, taxes, depreciation and amortization; and a maximum level of annual capital expenditures of $105.0 million. The Company was in compliance with these covenants as of December 31, 2017.

The Company incurred $6.3 million in underwriting fees, original issue discount and legal costs in 2017 in conjunction with the new debt facility. Such costs and the existing debt original issue discount, deferred financing costs, underwriting fees and legal costs were accounted for in accordance with accounting standards for extinguishment of debt instruments. The Company compared each syndicated lenders’ loan under the old term loan with the syndicated lenders’ loan under the new term loans. All loans under the new term loan were deemed substantially different. As such, the Company deferred the costs of the new debt as a reduction of the carrying value of the new debt. In addition, the Company recognized the repayment of the existing debt instruments as a debt extinguishment incurring a loss on early extinguishment of debt of $4.8 million.

The Company had an existing revolving credit facility which was repaid and terminated on May 4, 2017. Drawings for the year ended December 31, 2017 amounted to $10.0 million. Such draws were used primarily to fund the construction of the SEA-US submarine cable system described in Note 13. There were no amounts drawn as of or for the years ended December 31, 2016 or 2015.

One of the syndicated lenders in both the new term loan and the term loan retired is a cooperative bank owned by its customers. Annually, this bank distributes patronage in the form of cash and stock in the cooperative based on the Company’s average outstanding loan balance. The Company recognizes the patronage, generally as declared, as a reduction of interest expense. The stock component is recognized at its stated cost basis with the accumulated stock investment included in other noncurrent assets. The investment balance as of December 31, 2017 was not significant.

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Loan Amendment in 2016

In May 2016, the Company amended its term loan allowing for a revised leverage ratio financial covenant. The amendment modified the maximum allowed leverage ratio. In conjunction with the amendment, the Company paid a fee to the lenders of $0.4 million and such fee was deferred as financing related costs. The Company concluded that the amended lenders’ term loans were not substantially different than the lenders’ term loans prior to amendment. In addition, the Company paid an arrangement fee and legal costs amounting to $0.3 million. Such fees were expensed as incurred in 2016.

Capitalized Interest

Interest capitalized by the Company amounted to $1.69 million, $1.16 million and $1.1 million for the years ended December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

Maturities

The maturities of ~~the existing~~ debt at December 31, ~~2016~~2017 are as follows (dollars in thousands):

The annual requirements for principal payments on long-term debt as of December 31, 20165 are as follows (dollars in thousands):
Year ended December 31,
2017	$	3,000
2018	$	10,250
2018		3,000
2019		13,125
2019		284,138
2020		16,000
	$	290,138
2021		16,000
2022		81,250
Thereafter		178,250
	$	314,875

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8. Employee Benefit Plans

Pension and Other Postretirement Benefits

The Company sponsors a defined benefit pension plan, with benefits frozen as of March 1, 2012, and postretirement health and life insurance benefits for union employees. The Company also sponsors a cash balance pension plan for nonunion employees, with benefits frozen as of April 1, 2007, and certain management employees receive postretirement health and life insurance under grandfathered provisions of a ~~terminated~~formerly ~~plan.~~active ~~In January 2017, the Company amended the postretirement health benefits~~ plan ~~for certain management employees by implementing a cap on the amount of the premium subsidy at 2017 levels~~. ~~This curtailment of benefits will be recognized for financial reporting purposes in 2017.~~

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The change in projected benefit obligation, change in plan assets, funded status and weighted average actuarial assumptions were as follows (dollars in thousands):

	Pension Benefits						Other Postretirement Benefits
	December 31,						December 31,
	2016			2015			2016			2015
	2017			2016			2017			2016
Change in projected benefit obligation:
Obligation at beginning of period	$	203,~~455~~316		$	~~248~~203,~~505~~455		$	6073,~~749~~789		$	5960,~~830~~749
Service cost		—			—			~~1,104~~898			1,~~088~~104
Interest cost		76,~~347~~705			87,~~073~~347			2,~~637~~193			2,~~355~~637
Actuarial (gain) loss		311,~~686~~574			63,~~699~~686			11(1,~~036~~641)			~~(765)~~11,036
Benefits paid		(11,172)			(59,822)			(1,737)			(1,759)
Plan change		—			—			(18,262)			—
Obligation at end of period		203,316			203,455			73,789			60,749
Benefits paid		(26,962)			(11,172)			(1,844)			(1,737)
Projected benefit obligation at end of period		194,633			203,316			55,133			73,789
Change in plan assets:
Fair value of plan assets at beginning of period		~~156~~167,~~678~~843			~~206~~156,~~309~~678			—			—
Actual return on plan assets		13,032			852			—			—
Return on plan assets		22,525			13,032			—			—
Employer contributions		93,~~305~~181			9,~~339~~305			1,~~737~~844			1,~~759~~737
Benefits paid		(1126,~~172~~962)			(5911,~~822~~172)			(1,~~737~~844)			(1,~~759~~737)
Fair value of plan assets at end of period		~~167~~166,~~843~~587			~~156~~167,~~678~~843			—			—
Funded status:
Plan assets less than projected benefit obligation	$	(3528,~~473~~046)		$	(4635,~~777~~473)		$	(7355,~~789~~133)		$	(6073,~~749~~789)
Amounts recognized on balance sheet:
Other current liabilities	$	—		$	—		$	(3,~~332~~226)		$	(23,~~929~~332)
Employee benefit obligation, noncurrent		(3528,~~473~~046)			(4635,~~777~~473)			(7051,~~457~~907)			(5770,~~820~~457)
Net amount recognized	$	(3528,~~473~~046)		$	(4635,~~777~~473)		$	(7355,~~789~~133)		$	(6073,~~749~~789)
Actuarial loss recognized in accumulated other comprehensive income (loss)	$	(3631,~~919~~886)		$	(3736,~~945~~919)		$	(~~20,040~~816)		$	(920,~~577~~040)
Actuarial assumptions:
Measurement date		12/31/2016			12/31/2015			12/31/2016			12/31/2015
Measurement date, December 31		2017			2016			2017			2016
Discount rate ranges from a low of		3.8150	%		43.0981	%		43.0362	%		4.3203	%
Discount rate ranges to a high of		3.8550	%		43.1085	%		43.2563	%		4.5625	%
Assumed health care cost trend rate, current		NA			NA			7.2500	%		7.5025	%
Assumed health care cost trend rate, ultimate		NA			NA			5.00	%		5.00	%
Assumed health care cost trend rate, ultimate year		NA			NA			2026			2026

~~During~~The ~~the year ended December 31, 2016, the~~ Company’s ~~union~~ pension ~~plan~~plans paid lump- sum ~~benefits~~payments to ~~plan~~ participants resulting in ~~full~~ settlement ofaccounting ~~obligations~~for ~~due amounting to $7.1 million. This resulted in~~ the ~~recognition~~applicable ofplans and a loss ~~amounting~~on ~~to $1~~settlement.3 The ~~million for the year ended December 31, 2016. During the year ended December 31, 2015, the~~ Company’s ~~pension plans paid~~ lump-sum benefits to plan participants in full settlement of obligations due ~~amounting~~resulting in settlement accounting amounted to $5523.90 million, $7. ~~This~~1 ~~resulted~~million inand ~~the recognition of a loss amounting to~~ $855.19 million for the ~~year~~years ended December 31, 2017, 2016 and 2015, respectively.

64In January 2017, the Company amended the postretirement health benefits plan for management employees by implementing a cap on the amount of the premium subsidy at 2017 levels. This resulted in recognition of a negative plan amendment as of January 31, 2017. The new measurement resulted in a retirement plan gain which was recognized in other comprehensive income of $19.7 million for the year ended December 31, 2017.

The estimated amount of the actuarial gain or loss to be amortized from accumulated other comprehensive income (loss) during 2018 is $0.4 million of loss for pension benefits and $0.9 million of gain for other postretirement benefits.

The Company accrues the service costs of pension and postretirement benefits over the period from the date of hire until the date the employee becomes fully eligible for benefits. The following provides the components of benefit costs and weighted average actuarial assumptions for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):

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The estimated amount of the actuarial loss to be amortized from accumulated other comprehensive income (loss) during 2017 is $0.5 million for pension benefits and $1.5 million for other postretirement benefits.

Pension Benefits

	~~For the For the Year Ended~~	For the For the Year Ended
	~~December 31,~~	December 31,
	2016				2015				2014
		2017				2016				2015
Interest cost	$	~~7,347~~$	6,705		$	~~7,994~~$	7,347		$	~~8,844~~$	7,994
Expected asset return		~~(10,172)~~	(10,376)			~~(12,565)~~	(10,172)			~~(12,664)~~	(12,565)
Amortization of loss		~~574~~	464			~~186~~	574			~~135~~	186
Net periodic benefit income		~~(2,251)~~	(3,207)			~~(4,385)~~	(2,251)			~~(3,685)~~	(4,385)
Settlement loss		~~1,277~~	3,995			~~8,088~~	1,277			—	8,088
Total benefit (income) expense	$	~~(974)~~$	788		$	~~3,703~~$	(974)		$	~~(3,685)~~$	3,703
Actuarial assumptions:
Discount rate ranges from a low of		~~3.28~~	%3.56	%		~~3.54~~	%3.28	%		~~4.40~~	%3.54	%
Discount rate ranges to a high of		~~4.10~~	%3.85	%		~~4.09~~	%4.10	%		~~4.62~~	%4.09	%
Expected return on plan assets		~~7.00~~	%7.00	%		~~7.25~~	%7.00	%		~~7.25~~	%7.25	%

	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
2017
Common stocks - domestic large cap	$	9,660	$	—	$	—	$	9,660
Equity funds - large cap index		—		92,731		—		92,731
Fixed income funds - diversified bond		—		63,768		—		63,768
Short term investment funds		—		428		—		428
	$	9,660	$	156,927	$	—	$	166,587
2016
Common stocks - domestic large cap	$	10,201	$	—	$	—	$	10,201
Equity funds - large cap index		—		93,576		—		93,576
Fixed income funds - diversified bond		—		63,613		—		63,613
Short term investment funds		—		453		—		453
	$	10,201	$	157,642	$	—	$	167,843
2015
Common stocks - domestic large cap	$	8,954	$	—	$	—	$	8,954
Equity funds - large cap index		—		85,874		—		85,874
Fixed income funds - diversified bond		—		61,300		—		61,300
Short term investment funds		—		550		—		550
	$	8,954	$	147,724	$	—	$	156,678

			Other
	Pension Plans		Postretirement
	Benefits Paid		Benefits Paid
2017	$	36,396	$	3,332
2018	$	43,041	$	3,284
2018		16,592		3,637
2019		12,912		3,435
2019		13,013		3,749
2020		13,442		3,541
2020		13,261		3,872
2021		11,871		3,556
2021		12,470		3,938
2022		13,458		3,504
2022 through 2026		59,733		19,560
2023 through 2027		54,687		16,628
	$	~~151~~149,~~465~~411	$	3833,~~088~~948

	1-Percentage		1-Percentage
	Point Increase		Point Decrease
Effect on total of service and interest costs components	$	~~335~~NONE	$	~~(264)~~NONE
Effect on postretirement benefit obligation		~~7,012~~NONE		~~(5,524)~~NONE

	December 31,
	2016		2015
	2017		2016
Deferred tax liabilities:
Property and equipment	$	4633,~~965~~215	$	46,~~636~~965
Other basis differences		~~533~~329		~~542~~533
		47,498		47,178
		33,544		47,498
Deferred tax assets:
Net operating loss and credit carryforwards		6661,~~580~~017		5566,~~043~~580
Intangible assets		3013,~~913~~877		4130,~~678~~913
Expenses deferred for tax		52,~~347~~933		5,~~638~~347
Employee benefits		3315,~~434~~851		3133,~~423~~434
Other basis differences		32,~~730~~560		3,~~642~~730
		140,004		137,424
		96,238		140,004
Valuation allowance		(~~335~~63,604)		(~~350~~335)
		139,669		137,074
		32,634		139,669
Deferred tax asset, net	$	92,171	$	89,896
Deferred tax asset (liability), net	$	(910)	$	92,171

	~~For the Year Ended~~	For the Year Ended
	~~December 31,~~	December 31,
	2016			2015			2014
		2017			2016			2015
Income tax at federal rate	$	577		$	835		$	4,763
Income tax (benefit) at federal rate		$	(6,541)		$	577		$	835
Increase (decrease) resulting from:
State income taxes, net of federal income tax		~~101~~	(813)		~~104~~	101		~~592~~	104
Permanent difference for compensation limitation		—	—		~~637~~	—		~~595~~	637
Expense not deductible for tax		~~292~~	—		98	292		~~415~~	98
Tax credit included in taxable income		~~283~~	238		~~252~~	283		~~327~~	252
Other permanent differences		20	71		~~110~~	20		47	110
Capital goods excise tax credit		~~(741)~~	(626)		~~(601)~~	(741)		~~(942)~~	(601)
Other, net		74			54			51
Change in federal income tax rate			28,018			—			—
Change in valuation allowance		(15)			(132)			62
Other, net			132			74			54
Total income tax provision	$	591		$	1,357		$	5,910
Change in valuation allowance			67,523			(15)			(132)
Total income tax provision		$	88,002		$	591		$	1,357

			Charge (Credit)
			to Income Tax
	Beginning		Expense or		Ending
	Balance		Equity		Balance
January 1 to December 31, 2016	$	350	$	(15)	$	335
January 1 to December 31, 2015		482		(132)		350
January 1 to December 31, 2014		420		62		482

		Weighted-
		Average
		Grant-Date Fair
	Shares	Value per Share
Nonvested at January 1, 2014	260,734	$	18
Nonvested at January 1, 2015	245,752	$	27
Granted	155,146		31
Vested	(157,794)		21
Forfeited	(12,334)		25
Nonvested at December 31, 2014	245,752		27
Granted	140,909		26
Vested	(110,623)		28
Forfeited	(101,520)		26
Nonvested at December 31, 2015	174,518		26
Granted	127,360		25
Vested	(62,651)		25
Forfeited	(12,537)		25
Nonvested at December 31, 2016	226,690	$	25
Granted	164,190		24
Vested	(78,623)		25
Forfeited	(1,167)		21
Nonvested at December 31, 2017	311,090	$	25

Years ended, December 31:
2017	$	2,208
2018	$	2,097
2018		1,749
2019		1,910
2019		1,725
2020		1,883
2020		1,697
2021		1,266
2021		1,119
2022		433
Thereafter		5,~~478~~481
	$	13,~~976~~070

	Unrealized		Defined Benefit
	Gain (Loss) on		Postretirement
	Investments		Plans		Total
January 1, 2014	$	(60)	$	(4,656)	$	(4,716)
January 1, 2015	$	(64)	$	(23,883)	$	(23,947)
Other comprehensive loss for 2014, net of tax		(4)		(19,227)		(19,231)
December 31, 2014		(64)		(23,883)		(23,947)
Other comprehensive income (loss) for 2015, net of tax		64		(5,505)		(5,441)
December 31, 2015		—		(29,388)		(29,388)
Other comprehensive loss for 2016, net of tax		—		(5,830)		(5,830)
December 31, 2016	$	—	$	(35,218)	$	(35,218)
Other comprehensive income for 2017, net of tax		—		19,254		19,254
December 31, 2017	$	—	$	(15,964)	$	(15,964)

Years ended, December 31:
2017	$	16,786
2018	$	9,936
2018		11,536
2019		3,312
	$	3113,~~634~~248

Filing Compare · Hawaiian Telcom Holdco, Inc.