In addition, tower construction is subject to regulations implementing the National Historic Preservation Act. Compliance with FAA, environmental or historic preservation requirements could significantly delay or prevent the registration or construction of a particular tower or make tower construction more costly. In some jurisdictions, local laws or regulations may impose similar requirements.
On October 27, 2011, the FCC adopted a number of broad changes to the ICC rules governing the interstate access rates charged by small-to-mid-sized ILECs such as Shenandoah Telephone. For example, the FCC adopted a national “bill-and-keep” framework, which maywill result in substantial reductions in the access charges paid by long distance carriers and other interconnecting carriers, possibly to zero, accompanied by increases to the subscriber line charges paid by business and residential end users. In addition, the FCC has changed some of the rules that determine what compensation carriers,voice service providers, including but not limited to wireless carriers, competitive local exchange carriers, VOIPVoice over Internet Protocol (“VoIP”) providers and providers of other Internet-enabled services, should pay (and receive)and receive for theiroriginating and terminating traffic that is interconnected with ILEC networks.
The VSCC has jurisdiction over local telephone companies’ intrastate access charges, and has indicated in the past that it might open a generic proceeding on the rates charged for intrastate access, although the scope and likelihood of such a proceeding is unclear in light of the FCC’s overhaul of the ICCintercarrier compensation rules (discussed above), which affectedaffect states’ jurisdiction over intrastate access charges. The VSCC issued a Final Order on August 9, 2011 that requires elimination ofrequired service providers to eliminate their common carrier line charges in three stages. Pursuant to the order, the Company’s intrastate common line revenue is expected to decline by approximately $0.3 million annually beginninghad declined in 2012 until such charges areeach of the previous three years, and was eliminated byin mid-2014.
If the Universal Service Administrative Company (“USAC”) were required to account for the USF program in accordance with generally accepted accounting principles for federal agencies under the Anti-Deficiency Act (the “ADA”), it could cause delays in USF payments to fund recipients and significantly increase the amount of USF contribution payments charged to wireline and wireless consumers. Each year since 2004, Congress has adopted short-term exemptions for the USAC from the ADA. Congress has from time to time considered adopting a longer term exemption for the USAC from the ADA, but we cannot predict whether any such exemption will be adopted or the effect it may have on the Company.
The provision of cable service generally is subject to regulation by the FCC, and cable operators typically also must comply with the terms of the franchise agreement between the cable operator and the local franchising authority. Some states, including Virginia and West Virginia, have enacted regulations and franchise provisions that also can affect certain aspects of a cable operator’s operations.
The following table presents information about our executive officers who, other than Christopher E. French, are not members of our board of directors. Our executive officers serve at the pleasure of the Board of Directors.
Mr. French is President and Chief Executive Officer of the Company, where he is responsible for the overall leadership and strategic direction of the Company. He has served as presidentPresident since 1988, and has been a member and Chairman of the Board of Directors since 1996. Prior to appointment as President, Mr. French held a variety of positions with the Company, including Vice President Network Service and Executive Vice President. Mr. French holds a BS in electrical engineering and an MBA, both from the University of Virginia. He has held board and officer positions in both state and national telecommunications associations, including service as a director of the Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO) and was president and director of the Virginia Telecommunications Industry Association. Mr. French is currently a member of the Leadership Committee of the USTelecom Association.
Mr. MacKenzie is Executive Vice President and Chief Operating Officer (COO) of the Company. He joined the Company in 2003, and is responsible for Shentel's daily operations of its subsidiaries. Mr. MacKenzie began his career in the telecommunications industry in 1975. He was the co-founder and President of Broadslate Networks and Essex Communications. He served as COO of Digital Television Services and as Senior Vice President of Contel Cellular. Mr. MacKenzie is a graduate of The College of William and Mary and holds a BBA in accounting and holds a C.P.A. certificate from the Virginia State Board of Accountancy.accounting. Mr. MacKenzie is a member of the Board of Directors of the American Cable Association.
Ms. Skolits serves as Chief Financial Officer and Vice President of- Finance at Shentel. She joined the Company in 2007 and is responsible for Shentel's daily financial decisions. Ms. Skolits’ industry experience began in 19801995 and included three years with Revol Wireless where she served as Chief Financial Officer. Ms. Skolits' telecommunications experience also includes serving as Controller for Comcast Metrophone, Director of Financial Operations for Comcast Cellular Communications and Chief Financial Officer of City Signal Communications. Ms. Skolits earned a BS degree in Commerce with a concentration in Accounting from the University of Virginia and she holds a C.P.A. certificate from the Virginia State BoardVirginia.
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Mr. Pirtle is Senior Vice President - Marketing and Sales & Marketing for Shentel. He was promoted to Senior Vice President in September 2015. He is responsible for sales and marketing of allSprint branded wireless products and services, Shentel branded cable TV, Internet access, and voice products and services offered by the Company.company. He is also responsible for the Shentel brand identity. His previous position was Vice President - Wireless, responsible for Shentel’s Wireless segment. He joined the Company in 1992 as Vice President of- Network Services responsible for Shentel's technology decisions, and maintenance and operation of its networks – telephone, cable, cellular, paging and fiber optics.optics networks. He helped launch Shentel's Internet business in 1994, and led its participation in its wireless PCS business and Sprint affiliation beginning in 1995. He is a graduate of the University of Virginia. Mr. Pirtle is a co-founder of the Shenandoah Valley Technology Council and representshas represented the Company on the Board of Valleynet.
Ms. Flowers served as General Counsel until January 28, 2013 and as Vice President - Legal and Secretary until February 18, 2013. Ms. Flowers now serves as Associate General Counsel. Prior to joining the Company in November 2008, Ms. Flowers was Of Counsel in the Washington, DC office of Davis Wright Tremaine LLP since 2007, and from 1994 to 2006 was Of Counsel in the Washington, DC office of Cole, Raywid & Braverman, LLP. Ms. Flowers has extensive legal experience representing telecommunications, media and technology companies. Ms. Flowers earned a B.A. with honors in Political Science from the University of North Carolina at Chapel Hill, and earned a J.D. cum laude from Georgetown University Law Center.ValleyNet.
Mr. Ostroski is General Counsel and Vice President – Legal and Corporate Secretary for Shentel. PriorHe joined Shentel in 2013 and is responsible for all legal and regulatory compliance matters for the Company. He also acts as Corporate Secretary to joining the Company in January 2013, Mr. Ostroski was a Partner in the law firmCompany’s Board of Thomas, Long, Niesen & Kennard since 2012 and was the Principal at RBO Consulting from 2011 to 2012 and from 2007 to 2009. Mr. Ostroski also served as Executive Vice President and General Counsel for One Communications from 2009 to 2011 and Senior Vice President and General Counsel for Commonwealth Telephone Enterprises from 2001 to 2007.Directors. Mr. Ostroski began his career in the telecommunications industry in 1985 and alsohas served as Executive Vice President and General Counsel tofor One Communications, Senior Vice President and General Counsel for Commonwealth Telephone Enterprises, Executive Vice President and General Counsel for RCN Corporation and Senior Vice President and General Counsel of C-TEC Corporation prior to 2001.Corporation. Mr. Ostroski earned a B.S.BS degree in Social Science from Wilkes University and also earned a J.D.Juris Doctor degree from Temple University School of Law.
Mr. Whitaker is Senior Vice President –- Operations for Shentel. He was promoted to Senior Vice President in September 2015. He was previously the Vice President - Cable with responsibility for Shentel cable operations. Mr. Whitaker joined Shentel in 2004 through the Shentel acquisition of NTC Communications. Mr. Whitaker is responsible for the ongoing development, operations and maintenance of Shentel’s Cable, Wirelinewireless, wireline and Wireless Operations.cable operations. Additionally, he supports the Shentel Network Operations Center and Data Operations groups for Shentel.Center. Mr. Whitaker began his career in 1982. Mr. Whitaker1983. He previously was previously COO of NTC Communications, and served as VPVice President of Network Operations at Broadslate Networks, Director of Wireless Operations for nTelos, and was Co-Founder and Vice President of Nat-Com, Incorporated. Mr. Whitaker is a graduate of West Virginia Wesleyan College in Buckhannon, WV.
Mr. McKay is Senior Vice President of- Engineering & Planning for Shentel. He joined Shentelwas promoted to Senior Vice President in 2004 andSeptember 2015. He is responsible for network planning and engineering for all Shentel’s networks.networks and the Marketing and Sales of Shentel’s fiber optic network. Previously he was Vice President - Wireline and Engineering. Mr. McKay joined Shentel in 2004 and began his telecommunications industry experiencecareer in 1996, including previous engineering management positions at UUNET and Verizon. He is a graduate of the University of Virginia, where he earned M.E.ME and B.S.BS degrees in Electrical Engineering. He represents the Company on the Board of ValleyNet.
Mr. Baughman is Vice President of- Information Technology of Shentel. He began his career in 1991 working with the Navy and entered the telecommunications industry in 1995, with communications and operations experience from a variety of communicationsworking for companies including Bellcore/Telcordia, AT&T, Lucent, WINfirst and SureWest. He joined the Company in 2006. He2006 and is responsible for all of the back-office software and infrastructure systems at Shentel. Mr. Baughman has a B.S.BS in Electrical Engineering from Lafayette College and an M.S.MS in Optics from the University of Rochester.
Websites and Additional Information
The Company maintains a corporate website at www.shentel.com.www.shentel.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,8‑K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such reports with or to the SEC. The contents of our website are not a part of this report. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding the Company.
Our business and operations are subject to a number of risks and uncertainties, including those set forth under “Business-Competition” and the following:
Risks Related to the Telecommunications Industry
Intensifying competition in all segments of our business may limit our ability to sustain profitable operations.
As new technologies are developed and deployed by competitors in our service area, some of our subscribers may select other providers’ offerings based on price, capabilities and personal preferences. Most of our competitors possess greater resources, have more extensive coverage areas, and offer more services than we do. If significant numbers of our subscribers elect to move to other competing providers, or if market saturation limits the rate of new subscriber additions, we may not be able to sustain profitable operations.
Nationwide, incumbent local exchange carriers have experienced a decrease in access lines due to the effect of wireless and wireline competition and the elimination of second lines dedicated to dial-up Internet as customers migrate to broadband connections.competition. We have experienced comparatively modest reductions in the number of access lines to date, but based on industry experience we anticipate that the long-term trend toward declining telephone subscriber counts will continue. There is a significant risk that this downward trend could have a material adverse effect on the Company’s landline telephone operations in the future.
The Company’s revenue from fiber leases may be adversely impacted by price competition for these facilities.
Alternative technologies, changes in the regulatory environment and current uncertainties in the marketplace may reduce future demand for existing telecommunication services.
The telecommunications industry is experiencing significant technological change, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products and enhancements and changes in end-user requirements and preferences. Technological advances, industry changes, changes in the regulatory environment, and the availability of additional blocks of spectrum or additional flexibility with respect to the use of currently available spectrum could cause the technology we use to become obsolete. We and our vendors may not be able to respond to such changes and implement new technology on a timely basis, or at an acceptable cost.
Continued adverseAdverse economic conditions in the United States and in our market area involving significantly reduced consumer spending could have a negative impact on our results of operations.
Our customers are individual consumers and businesses that provide goods and services to others, and are located in a relatively concentrated geographic area. The on-goingAny national economic weakness, restricted credit markets, and high unemployment rates could continue to depress consumer spending and harm our operating performance. In addition, any adverse economic conditions that affect our geographic markets in particular could have further negative impacts on our results.
Regulation by government and taxing agencies may increase our costs of providing service or require changes in services, either of which could impair our financial performance.
Our operations are subject to varying degrees of regulation by the FCC, the Federal Trade Commission, the Federal Aviation Administration,FAA, the Environmental Protection Agency, and the Occupational Safety and Health Administration, as well as by state and local regulatory agencies.agencies and franchising authorities. Action by these regulatory bodies could negatively affect our operations and our costs of doing business. For example, changes in tax laws or the interpretation of existing tax laws by state and local authorities could increase income, sales, property or other tax costs.
Our access revenue may be adversely impacted by legislative or regulatory actions, or technology developments, that decrease access rates or exempt certain traffic from paying for access to our regulated telephone network.
On October 27, 2011, the FCC adopted a number of broad changes to the intercarrier compensation rules governing the interstate access rates charged by small-to-mid-sized ILECs such as Shenandoah Telephone. For example, the FCC adopted a national “bill and keep” framework, which may result in substantial reductions in the access charges paid by long distance carriers and other interconnecting carriers, possibly to zero, accompanied by increases to the subscriber line charges paid by business and residential end users. In addition, the FCC has changed some of the rules that determine what compensation carriers, including but not limited to wireless carriers, competitive local exchange carriers, VoIP providers and providers of other Internet-enabled services, should pay (and receive) for their traffic that is interconnected with ILEC networks. Although the legality of the FCC’s recent changes to the ICC rules have been challenged by various parties, theseThese changes, and potential future changes, to such compensation regulations could increase our expenses or reduce our revenues. In addition, the Company is working to resolve several routine interconnection and intercarrier compensation-related disputes concerning the appropriate access rates and terms for the origination and termination of traffic on third-party networks.
The VSCC has jurisdiction over local telephone companies’ intrastate access charges, and has indicated in the past that it might open a generic proceeding on the rates charged for intrastate access, although the scope and likelihood of such a proceeding is unclear in light of the FCC’s overhaul of the intercarrier compensation rules, which affect states’ jurisdiction over intrastate access charges. The VSCC issued a Final Order on August 9, 2011 that requires elimination of common carrier line charges in three stages. Pursuant to the order, the Company’s intrastate common line revenue is expected to decline by approximately $0.3 million annually beginninghas declined in 2012 until such charges areeach of the last three years and was eliminated byin mid-2014.
Our distribution networks may be subject to weather relatedweather-related events that may damage our networks and adversely impact our ability to deliver promised services or increase costs related to such events.
During 2012, the Mid-Atlantic region experienced two stormsOur distribution networks may be subject to weather-related events that impactedcould damage our cable networks more extensively than usual. The Company incurred approximately $800 thousand of costs to repair damage caused in these storms.and impact service delivery. Some published reports predict that warming global temperatures will increase the frequency and severity of such weather related events. Should such predictions be correct, and should such events impact the Mid-Atlantic region covered by our networks more frequently than in the past, our revenues and expenses could be materially adversely impacted.
Risks Related to our Overall Business Strategy
We may not benefit from our acquisition strategy.
As part of our business strategy, we regularly evaluate opportunities to enhance the value of our company by pursuing acquisitions of other businesses, and we intend to evaluate whether to pursue such strategic acquisition opportunities as they arise, though we remain subject to financial and other covenants in our credit agreements that contain restrictions as to the opportunities we may be able to pursue. We cannot provide any assurance, however, with respect to the timing, likelihood, size or financial effect of any potential transaction involving our company, as we may not be successful in identifying and consummating any acquisition or in integrating any newly acquired business into our operations.
The evaluation of business acquisition opportunities and the integration of any acquired businesses pose a number of significant risks, including the following:
| · | acquisitions may place significant strain on our management, financial and other resources by requiring us to expend a substantial amount of time and resources in the pursuit of acquisitions that we may not complete, or to devote significant attention to the various integration efforts of any newly acquired businesses, all of which will require the allocation of limited resources; |
| · | acquisitions may not have a positive impact on our cash flows or financial performance, even if acquired companies eventually contribute to an increase in our cash flows or profitability, because the acquisitions may adversely affect our operating results in the short term as a result of transaction-related expenses we will have to pay or the higher operating and administrative expenses we may incur in the periods immediately following an acquisition as we seek to integrate the acquired business into our operations; |
| · | we may not be able to eliminate as many redundant costs as we anticipate; |
| · | our operating and financial systems and controls and information services may not be compatible with those of the companies we may acquire and may not be adequate to support our integration efforts, and any steps we take to improve these systems and controls may not be sufficient; |
| · | our business plans and projections used to justify the acquisitions and expansion investments are based on assumptions of revenues per subscriber, penetration rates in specific markets where we operate, and expected operating costs. These assumptions may not develop as projected, which may negatively impact our profitability; |
| · | growth through acquisitions will increase our need for qualified personnel, who may not be available to us or, if they were employed by a business we acquire, remain with us after the acquisition; and |
| · | acquired businesses may have unexpected liabilities and contingencies, which could be significant. |
Our ability to comply with the financial covenants in our credit agreementsagreement depends primarily on our ability to generate sufficient operating cash flow.
Our ability to comply with the financial covenants under the agreementsagreement governing our secured credit facilities will depend primarily on our success in generating sufficient operating cash flow. Under our credit agreements,agreement, we are subject to a total leverage ratio covenant, a minimum debt service coverage ratio covenant, and a minimum equity to assets ratio covenant. Industry conditions and financial, business and other factors, including those we identify as risk factors in this and our other reports, will affect our ability to generate the cash flows we need to meet those financial tests and ratios. Our failure to meet the tests or ratios could result in a default and acceleration of repayment of the indebtedness under our credit facilities. If the maturity of our indebtedness were accelerated, we would not have sufficient funds to repay such indebtedness. In such event, our lenders would be entitled to proceed against the collateral securing the indebtedness, which includes substantially our entire assets, to the extent permitted by our credit agreementsagreement and applicable law.
Our substantial level of indebtedness could adversely affect our financial health and ability to compete.
As of December 31, 2012,2015, we have $232.2had $201.3 million of total long-term indebtedness, including the current portion of such indebtedness. Our substantial level of indebtedness could have important consequences. For example, it may:
| · | increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations, because a significant portion of our borrowings may continue to be at variable rates of interest; |
| · | require us to dedicate a substantial 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, dividends and other general corporate purposes; |
| · | limit our ability to borrow additional funds to alleviate liquidity constraints, as a result of financial and other restrictive covenants in our credit agreements;agreement; |
| · | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and |
| · | place us at a competitive disadvantage relative to companies that have less indebtedness. |
In addition, our secured credit facilities impose operating and financial restrictions that limit our discretion on some business matters, which could make it more difficult for us to expand, finance our operations and engage in other business activities that may be in our interest. These restrictions limit our ability and that of our subsidiaries to:
| · | incur additional indebtedness and additional liens on our assets; |
| · | engage in mergers or acquisitions or dispose of assets; |
| · | pay dividends or make other distributions; |
| · | voluntarily prepay other indebtedness; |
| · | enter into transactions with affiliated persons; |
| · | change the nature of our business. |
In addition to the term loan secured indebtedness we have incurred, and the $50 million of revolving credit indebtedness we may incur from time to time, we may incur additional indebtedness under our credit facilities. Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.
Our ability to refinance our indebtedness in the future, should circumstances require it, will depend on our ability in the future to generate cash flows from operations and to raise additional funds, including through the offering of equity or debt securities. We may not be able to generate sufficient cash flows from operations or to raise additional funds in amounts necessary for us to repay our indebtedness when such indebtedness becomes due and to meet our other cash needs.
Our wireless and wireline telephone switch equipment, as well as the primary means of access to and from our customers to other parties’ telecommunications networks, are located in one building.
Our regulated telephone switching equipment and our PCS wireless switch, as well as many of the trunk lines and other circuits that provide access to and from our customers for voice services, internet access, data transmission services, and to some extent video services, are all housed in one building. Should that building and its contents be damaged severely, our ability to deliver many of our promised services may be substantially affected for extended periods of time, causing us to lose or refund revenue, lose customers, or incur significant costs to repair damage quickly to minimize the loss of revenues and customers. If proper or adequate insurance coverage is not in place, we may incur substantial costs to write-down the value ofreplace damaged equipment and other assets.
Disruptions of our information technology infrastructure could harm our business.
We depend on our information technology infrastructure to achieve our business objectives. A disruption of our infrastructure could be caused by a natural disaster, manufacturing failure, telecommunications system failure, or defective or improperly installed new or upgraded business management systems. Portions of our IT infrastructure also may experience interruptions, delays, or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. In the event of any such disruption, we may be unable to conduct our business in the normal course. Moreover, our business involves the processing, storage and transmission of data, which would also be negatively affected by such an event. A disruption of our infrastructure could cause us to lose customers and revenue, particularly during a period of heavy demand for our services. We also could incur significant expense in repairing system damage and taking other remedial measures. We could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm, and other serious negative consequences if we sustain cyber attackscyber-attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our customers or other third parties.
We manage and store various proprietary information and sensitive or confidential data relating to our operations. We routinely process, store and transmit large amounts of data for our customers, including sensitive and personally identifiable information. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our systems. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the system.
The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after a cyber incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers that may impede our critical functions. We could lose existing or potential customers for our services in connection with any actual or perceived security vulnerabilities in the services. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or other third parties could expose us, our customers, or other third parties affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise harm our business.
We are subject to laws, rules and regulations relating to the collection, use and security of user data. Our operations are also subject to federal and state laws governing information security. In the event of an information security breach, such rules may require consumer and government agency notification and may result in regulatory enforcement actions with the potential of monetary forfeitures. Our ability to execute transactions and to possess and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require us to notify customers or employees of a data security breach. We have incurred, and will continue to incur, expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.
Risks Relating to the Pending Merger and the Pending Sprint Transactions
We may be unable to obtain the governmental and regulatory approvals required to consummate the Merger and the Sprint Transactions, or required governmental and regulatory approvals may delay the Merger or the Sprint Transactions or result in the imposition of conditions that are not favorable to us or that could cause the parties to abandon the Merger or the Sprint Transactions.
Our ability to complete the Merger and the Sprint Transactions is subject to risks and uncertainties, including, but not limited to, the risks that we may be unable to obtain the governmental and regulatory approvals required to consummate the Merger and the Sprint Transactions, or required governmental and regulatory approvals may delay the Merger or the Sprint Transactions or result in the imposition of conditions that are not favorable to us or that could cause the parties to abandon the Merger or the Sprint Transactions. If the Merger is not completed for any reason, our ongoing business may be materially and adversely affected and we may fail to realize any of the anticipated benefits of having completed the Merger.
Failure to complete the Merger and the Sprint Transactions could have a material adverse effect on our financial condition and results and could negatively impact our stock price.
We have incurred and will continue to incur significant transaction costs relating to the Merger and the Sprint Transactions, including legal, accounting, financial advisory, regulatory and other expenses. In connection with the Merger and the Sprint Transactions, we currently expect to incur regulatory costs, professional fees and other transaction-related fees and expenses until the Merger and the Sprint Transactions are completed successfully or abandoned. Such costs could total approximately $30 to $35 million. In general, these expenses are payable regardless of whether the Merger or the Sprint Transactions are completed successfully. If the Merger is not completed successfully, we may be obligated, depending on the specific circumstances, to pay nTelos a termination fee of $25 million or $8.8 million, plus reimbursement of up to $2.5 million in fees, costs and expenses incurred by nTelos in connection with the Merger. The payment of such termination fees and reimbursements could have a material adverse effect on our financial condition, results of operations or cash flows. In addition, we could face litigation in the event the Merger or the Sprint Transactions are not consummated, which could subject us to significant liability for damages and result in the incurrence of substantial additional legal fees. The current market price of our common stock may reflect an assumption that the Merger and the Sprint Transactions will be consummated, and failure to complete the Merger or the Sprint Transactions could result in a decline in our stock price.
If completed, the Merger and the Sprint Transactions may not achieve the intended benefits or may disrupt our current plans and operations.
If we are not able to integrate the business and assets of nTelos in an efficient and effective manner, the anticipated benefits and cost savings may not be realized fully, or at all, or may take longer to realize than expected, and the financial results of our operations may be affected materially and adversely. An inability to realize the full extent of the anticipated benefits of the Merger, the Sprint Transactions and the other transactions contemplated by the Merger Agreement, as well as any delays encountered in the integration process, could have a material adverse effect upon our revenues, level of expenses and operating results, which may adversely affect the value of our common stock following the Merger. In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized.
As integration planning has progressed since the date of the Merger Agreement and the Master Agreement, certain of our past assumptions about the migration of nTelos customers and systems have materially changed. We now expect that the migration process could extend through 2017. This extended migration process will result in us incurring additional one-time costs associated with, among other things, maintaining the nTelos core network, providing additional customer care and, in certain circumstances, customer device replacement. We expect that the aggregate amount of non-recurring costs associated with the Merger and the Sprint Transactions could be as much as twice the amount of our previous estimates.
Actual growth and cost synergies from the Merger and Sprint Transactions, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address integration challenges, we may be unable to successfully integrate the business and assets of nTelos or to realize the anticipated benefits of the Merger and the Sprint Transactions.
The integration of the business and assets of nTelos will require significant time and focus from our management following the Merger, and may divert attention from our day-to-day operations and our other businesses. Additionally, consummation of the Merger and the Sprint Transactions could disrupt current plans and operations, which could delay the achievement of our strategic objectives.
We may be unable to retain our and/or nTelos’ customers, key management personnel and other key employees successfully after the Merger and the Sprint Transactions are completed, which could materially and adversely affect the future business and operations of the combined company.
The success of the Merger and the Sprint Transactions will depend in part on our ability to retain customers and retain, motivate and recruit key executives and employees. Current nTelos customers may experience uncertainty while the Merger is pending or during the migration process to Sprint’s billing platform after the consummation of the Merger, which may materially and adversely affect the future business and operations of the combined company. It is also possible that key employees currently employed by nTelos and by us may decide not to remain with nTelos or with us, as applicable, while the Merger is pending or with us after the Merger is consummated. If key employees terminate their employment, or if an insufficient number of employees are retained to maintain effective operations, our business activities may be adversely affected and management’s attention may be diverted from successfully integrating the business and assets of nTelos to hiring suitable replacements, all of which may cause our business to suffer. In addition, we and nTelos may not be able to locate suitable replacements for any key employees who leave either company, or offer employment to potential replacements on reasonable terms.
Risks Related to the Wireless Industry
New disclosure or usage requirements could adversely affect the results of our wireless operations.
The FCC is considering imposing additional consumer protection requirements upon wireless service providers, including billing-related disclosures and usage alerts. Such requirements could increase costs related to or impact the amount of revenue we receive from our wireless services.
Customer concerns over radio frequency emissions may discourage use of wireless handsets or expose us to potential litigation.
MediaIn the past, media reports have suggested that certain radio frequency emissions from wireless handsets may be linked to various health problems, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Additionally, the FCC is currently considering the commencement ofhas commenced a rulemaking and notice of inquiry that would seekseeks public comment on a variety of issues, including whether revisions to the existing radio frequency standards and testing requirements.requirements are warranted. Any decrease in demand for wireless services, increases in the costs of litigation, or damage awards resulting from substantiation of harm from such emissions could impair our ability to sustain profitable operations.
Regulation by government or potential litigation relating to the use of wireless phones while driving could adversely affect the results of our wireless operations.
Some studies have indicated that some aspects of using wireless phones while driving may impair drivers' attention in certain circumstances, making accidents more likely. These concerns could lead to litigation relating to accidents, deaths or serious bodily injuries, or to new restrictions or regulations on wireless phone use. A number of state and local governments are considering or have enacted legislation that would restrict or prohibit the use of a wireless handset while driving a vehicle or, alternatively, require the use of a hands-free handset. Additionally, certain federal agencies have adopted rules and proposed guidelines for the use of wireless handsets while operating commercial and non-commercial vehicles. These rules, and any legislation that could be enacted, may require wireless service providers to supply to their subscribers hands-free enhanced services, such as voice activatedvoice-activated dialing and hands-free speaker phones and headsets, in order to continue generating revenue from subscribers, who make many of their calls while on the road. If we are unable to provide hands-free services and products to subscribers in a timely and adequate fashion, the volume of wireless phone usage would likely decrease, and the ability of our wireless operations to generate revenues would suffer.
Risks Related to our PCS BusinessWireless Services
The performance of our wireless service provider Shenandoah Personal Communications, LLC, our largest operating subsidiary in terms of revenues and assets, may be adversely affected by any interruption in, or other adverse change to, Sprint Nextel’sSprint’s business.
We rely on Sprint Nextel’sSprint’s ongoing operations to continue to offer our PCSwireless subscribers the seamless national services that we currently provide. Any interruption in, or other adverse change to, Sprint Nextel’sSprint’s business could adversely affect our results of operations, liquidity and financial condition. The terms of Sprint Nextel’s proposed transaction with Softbank Corp., or an unexpected delay in consummating the transaction, could affect Sprint Nextel’s business in a way that could be adverse to us. Our business could also be adversely affected if competing national or regional wireless carriers are able to introduce new products and services or otherwise satisfy customers’ service demands more rapidly or more effectively than Sprint Nextel.Sprint.
Our participation in Sprint Nextel’sSprint’s network modernization plan may affect our operating results, liquidity and financial position.
Sprint Nextel is implementing a network modernization plan, known as Network Vision, that incorporates upgrades and improvementscontinues to modernize its wireless networks,network with the intention of improving voice quality, coverage and data speeds and simultaneously reducing future operating costs. We are participatingparticipate in this plan, and to date, have upgraded a substantial portion of the network in our service areas.
The continuing success of the Network Vision planSprint’s modernization plans will depend on the timing, extent and cost of implementation and the performance of third parties. If Network Vision does not provide an enhanced network experience, our abilityFuture activities include incorporating the 2.5 gigahertz spectrum to provide enhanced wireless services to our customers, to retain and attract customers, and to maintain and grow our customer revenues could be adversely affected.acquired from Sprint. Should Sprint’s implementation of the Network Vision plan be delayed, or costs exceed expected amounts, our margins wouldcould be adversely affected and such effects could be material. Should theSprint’s future delivery of services expected to be deployed on the upgraded network be delayed, due to technological constraints, performance of third-party suppliers, or other reasons, the cost of providing such servicesit could become higher than expected, which could produce higher costs to customers, potentially resultingresult in the loss of customers to our competitors, and adversely affectingaffect our revenues, profitability and cash flows from operations.
Our business may suffer as a result of competitive pressures.
Our revenue growth is primarily dependent on the growth of the subscriber base and average monthly revenues per user. Competitiverecurring charges to subscribers. Since 2014, competitive pressures may adversely affect our abilityhave moved the focus from unlimited individual plans to increase our future revenues. A continuation offamily shared data plans. These competitive pressures in the wireless telecommunications market could cause some major carriers to offer plans with increasingly larger bundles of minutes of use and data services at lower prices that may compete with the Sprint Nextel wireless plans we sell.prices. Increased price competition maywill lead to lower average monthly revenues per user.recurring charges or a loss of subscribers in the future. Continued competitive pressures in 2016 and beyond could require Sprint to lower its prices, which will limit growth in monthly recurring charges to subscribers.
We may not be able to implement our business plan if our operating costs are higher than we anticipate.
Increased competition may lead to higher promotional costs, losses on sales of handsets and other costs to acquire subscribers. If these costs are more than we anticipate, the actual amount of funds available to implement our operating strategy and business plan may fall short of our estimates.
The dynamic nature of the wireless market may limit management’s ability to correctly identify causes of volatility in key operating performance measures.
Our business plan and estimated future operating results are based on estimates of key operating performance measures, including subscriber growth, subscriber turnover (commonly known as churn), average monthly revenue per subscriber, losses on sales of handsetsequipment revenue, and other subscriber acquisition costs and other operating costs. Recent moves by all carriers to offer installment billing and leasing for handsets will have an effect on revenues, cost of goods sold, and churn. Since these plans are new to the industry, the full impact of these changes cannot be determined at this time. The dynamic nature of the wireless market, economic conditions, increased competition in the wireless telecommunications industry, the entry of new competitors due to recent or future FCC spectrum auctions, new service offerings by Sprint Nextel or competitors at lower prices, and other issues facing the wireless telecommunications industry in general have created a level of uncertainty that may adversely affect our ability to predict these key measures.measures of performance.
We may experience a high rate of subscriber turnover, which could adversely affect our future financial performance.
Subscriber loss, or churn, has been relatively stable in recent years. Because of significant competition in the industry, in general, the popularity of prepaid wireless service offerings, changes to Sprint Nextel’sSprint’s competitive position in particular and the overalla new economic downturn, among other factors, this relative stability may not continue and the future rate of subscriber turnover may be higher than rates in recent periods. Factors that may contribute to higher churn include the following:
| · | inability or unwillingness of subscribers to pay, which would result in involuntary deactivations; |
| · | subscriber mix and credit class, particularly an increase in sub-prime credit subscribers; |
| · | competition of products, services and pricing of other providers; |
| · | increases in the popularity of prepaid services, which historically have higher churn than postpaid services; |
| · | inadequate network performance and coverage relative to that provided by competitors in our service area; |
| · | inadequate customer service; |
| · | any future changes by Sprint Nextel or the Company in the products and services offered. |
A high rate of subscriber loss could increase the sales and marketing costs we incur in obtaining new subscribers, especially because, consistent with industry practice, even with the introduction of handset installment billing and leasing, we expect to continue to subsidize mosta significant portion of the costs related to the purchases of handsets by some subscribers.
We may incur significantly higher wireless handset subsidy costs than we anticipate for existing subscribers who upgrade to a new handset.
As our subscriber base matures, and technological innovations occur, we anticipate that existing subscribers will continue to upgrade to new wireless handsets. To discourage customer defections to competitors, we offer price plans that subsidize a portion of the price of wireless handsets and in some cases incur sales commissions for handset upgrades. If more subscribers upgrade to new subsidized wireless handsets than we project, or if the cost of such handsets increases or the amount of handset subsidies offered in the competitive marketplace increases more than we project, our results of operations would be adversely affected. If we do not continue to offer the option to subsidize the cost of the handsets for handset upgrades, subscribers could choose to deactivate the service and move to other carriers.
If we are unable to secure and retain tower sites, the level of service we provide could be adversely affected.
Many of our cell sites are co-located on leased tower facilities shared with one or more wireless providers. A large portion of these leased tower sites are owned by a limited number of companies. If economic conditions affect the leasing company, our leaseability to enter into leases at new locations may be affected, and the ability to remain on the tower at reasonable rates could be jeopardized, which could leave portions of our service area without service and increase customer turnover.
Most of the towers that we own are located on leased real property. If such leases were not renewed, we could be forced to relocate our cell site, which would create significant additional expenses, or leave portions of our service area without service, increasing the likelihood of customer turnover.
Risks Related to Our Relationship with Sprint Nextel
Sprint Nextel may make business decisions that are not in our best interests, which may adversely affect our relationships with subscribers in our territory, increase our expenses and decrease our revenues.
Under its agreements with us, Sprint Nextel has a substantial amount of control over the conduct of our PCSwireless business. Accordingly, Sprint Nextel may make decisions that could adversely affect our PCSwireless business, such as the following:
| · | Sprint Nextel could price its national plans based on its own objectives and could set price levels or other terms that may not be economically advantageous for us; |
| · | Sprint Nextel could develop products and services or establish credit policies, that could adversely affect our results of operations; |
| · | if Sprint Nextel’sSprint’s costs to perform certain services exceed the costs wethey expect, subject to limitations under our agreements, Sprint Nextel could seek to increase the amounts charged;charged to us for such services; |
| · | Sprint Nextel could make decisions that could adversely affect the Sprint Nextel brand names, products or services; |
| · | Sprint Nextel could make technology and network decisions that could greatly increase our capital investment requirements and our operating costs to continue offering the seamless national service we provide; |
| · | Sprint Nextel could restrict our ability to offer new services needed to remain competitive. This could put us at a competitive disadvantage relative to other wireless service providers if they begin offering new services in our market areas, increasing our churn and reducing our revenues and operating income from wireless services. |
Our dependence on Sprint Nextel for services may limit our ability to forecast operating results.
Our dependence on Sprint Nextel injects a degree of uncertainty into our business and financial planning. We may, at times, disagree with Sprint Nextel concerning the applicability, calculation approach, or accuracy of Sprint Nextel-suppliedSprint-supplied revenue data. It is our practice to reflect the information supplied by Sprint Nextel in our financial statements for the applicable periods and to make corrections, if any, no earlier than the period in which Sprint Nextel and we agree to the corrections.
Inaccuracies in data provided by Sprint Nextel could overstate or understate our expenses or revenues and result in out-of-period adjustments that may adversely affect our financial results.
Because Sprint Nextel provides billing and collection services for us, Sprint Nextel remits a significant portion of our total revenues. We rely on Sprint Nextel to provide accurate, timely and sufficient data and information to enable us to properly record properly revenues, expenses and accounts receivable which underlie a substantial portion of our financial statements and other financial disclosures. We and Sprint Nextel could discover errors or inaccuracies, which, while not material to Sprint, Nextel, could be material to us. If we are required in the future to make adjustments or incur charges as a result of errors or inaccuracies in data provided by Sprint, Nextel, such adjustments or charges could materially affect our financial results for the period with respect to which the adjustments are made or charges are incurred. Such adjustments or charges could require restatement of our financial statements.
We are subject to risks relating to Sprint Nextel’sSprint’s provision of back office services, and changes in products, services, plans and programs.
Any failure by Sprint Nextel to provide high-quality back office services could lead to subscriber dissatisfaction, increased churn or otherwise increased costs. We rely on Sprint Nextel'sSprint’s internal support systems, including customer care, billing and back office support. Our operations could be disrupted if Sprint Nextel is unable to provide and expand its internal support systems while maintaining acceptable service levels, or to efficiently outsource those services and systems through third-party vendors.
In addition, restrictions exist, and new restrictions are considered from time to time by Congress, federal agencies and states, on the extent to which wireless customers may receive unsolicited telemarketing calls, text messages, junk e-mail or spam. Our reliance on Sprint to perform those functions could subject the company to potential liabilities. For example, an FCC enforcement action in 2015 resulted in a significant fine assessed upon Sprint following investigations that revealed the company had improperly billed customers millions of dollars in unauthorized third-party premium text messaging services.
The competitiveness of Sprint Nextel’s PCSSprint’s wireless products and services is a key factor in our ability to attract and retain subscribers. Changes in Sprint Nextel’s PCSSprint’s wireless products and services may reduce subscriber additions, increase subscriber turnover and decrease subscriber credit quality.
Sprint Nextel'sSprint’s roaming arrangements to provide service outside of the Sprint Nextel National Network may not be competitive with other wireless service providers, which may restrict our ability to attract and retain subscribers and may increase our costs of doing business.
We rely on Sprint Nextel'sSprint’s roaming arrangements with other wireless service providers for coverage in areas where Sprint PCSwireless service is not available. If customers are not able to roam quickly or efficiently onto other wireless networks, we may lose current subscribers and Sprint PCS wireless services may be less attractive to new subscribers.
The risks related to our roaming arrangements include the following:
| · | the quality of the service provided by another provider while roaming may not approximate the quality of the service provided by the Sprint Nextel PCSwireless network; |
| · | the price of a roaming call off network may not be competitive with prices of other wireless companies for roaming calls;calls, or may not be “commercially reasonable” (as determined by the FCC); |
| · | customers may not be able to use Sprint Nextel'sSprint’s advanced features, such as voicemail notification, while roaming; and |
| · | Sprint Nextel or the carriers providing the service may not be able to provide accurate billing information on a timely basis. |
Some provisions of the Sprint Nextel agreements may diminish the value of our common stock and restrict or diminish the value of our business.
Under limited circumstances involving non-renewal of our agreement or a breach by us, Sprint Nextel may purchase the operating assets of our PCSwireless operations at a discount of 20% in the event of non-renewal, or 28% in the event of a breach. These discounts would be applied to the “entire business value” (“EBV”) as that term is defined in our agreement with Sprint Nextel. Sprint. EBV is defined as i) the fair market value of a going concern paid by a willing buyer to a willing seller;seller in a change of control transaction; ii) valued as if the business will continue to utilize existing brands and operate under existing agreements; and, iii) valued as if we ownhave continued use of the spectrum.spectrum then in use in the network. Determination of EBV is made by an independent appraisal process. In addition, Sprint Nextel must approve any assignment of the Sprint Nextel agreements by us. Sprint Nextel also has a right of first refusal to purchase our PCSwireless operating assets if we decide to sell those assets to a third party. These restrictions and other restrictions contained in the Sprint Nextel agreements could adversely affect the value of our common stock, may limit our ability to sell the foregoing assets on advantageous terms, may reduce the value a buyer would be willing to pay, and may reduce the "entire business value,"EBV, as described in the Sprint Nextel agreements.
We may have difficulty in obtaining an adequate supply of handsets from Sprint Nextel.Sprint.
We depend on our relationship with Sprint Nextel to obtain handsets. Sprint Nextel orders handsets from various manufacturers. We could have difficulty obtaining specific types of handsets in a timely manner if:
| · | Sprint Nextel does not adequately project the need for handsets, or enter into arrangements for new types of handsets or other customer equipment, for itself, its PCS Affiliateswireless affiliates and its other third-party distribution channels, particularly in connection with the transition to new technologies; |
| · | Sprint Nextel gives preference to other distribution channels; |
| · | we do not adequately project our need for handsets; |
| · | Sprint Nextel modifies its handset logistics and delivery plan in a manner that restricts or delays access to handsets; or |
| · | there is an adverse development in the relationship between Sprint Nextel and its suppliers or vendors. |
The occurrence of any of the foregoing could disrupt subscribers’ service or result in a decrease in our subscribers.
If Sprint Nextel does not continue to enhance its nationwide digital wireless network, we may not be able to attract and retain subscribers.
Our PCSwireless operations are dependent on Sprint Nextel'sSprint’s national network. Sprint Nextel'sSprint’s digital wireless network may not provide nationwide coverage to the same extent as the networks of its competitors, which could adversely affect our ability to attract and retain subscribers. Sprint Nextel currently covers a significant portion of the population of the United States, Puerto Rico and the U.S. Virgin Islands. Sprint Nextel offers PCSwireless services, either on its own network or through its roaming agreements, in every part of the United States.
Sprint Nextel completed a transaction in which it transferred mobile broadband licenses and business operations to Clearwire Corp. and obtained a majority equity ownership interest in Clearwire, with major cable operators, Google Inc., Intel Corporation, Cisco Systems, Inc. and other investors contributing investment capital and obtaining equity in Clearwire. This transaction was entered with an expectation that Clearwire would expand its broadband networks in large metropolitan areas across the United States and that Sprint Nextel would offer high-speed broadband services (“4G Wimax”) in conjunction with Clearwire. Sprint Nextel has announced that it intends to acquire the portion of Clearwire that it does not presently own.
Sprint Nextel’s arrangements with Clearwire and the risks associated with the Clearwire venture might adversely affect our business. Since entering into the Clearwire arrangement, Sprint Nextel has decided to upgrade its entire network incorporating 4G LTE technology. At this point, otherIf Sprint’s wireless providers are ahead of Sprint Nextel in deploying their 4G networks. The introduction of 4G services in our service area by other operators, independent of arrangements with us or before we are able to complete the deployment of our own 4G network, might adversely affect our PCS business.
If Sprint Nextel’s PCS licenses are not renewed or are revoked, our PCSwireless business would be harmed.
Non-renewal or revocation by the FCC of Sprint Nextel's PCSSprint’s wireless licenses would significantly harm us. Wireless spectrum licenses are subject to renewal and revocation by the FCC. There may be opposition to renewal of Sprint Nextel's PCSSprint’s wireless licenses upon their expiration, and Sprint Nextel's PCSSprint’s wireless licenses may not be renewed. The FCC has adopted specific standards to apply to PCSwireless license renewals. Any failure by Sprint Nextel to comply with these standards could cause revocation or forfeiture of Sprint Nextel's PCSSprint’s wireless licenses.
If Sprint Nextel does not maintain control over its licensed spectrum, our Sprint Nextel agreements may be terminated, which would render us unable to continue providing service to our subscribers. Sprint may also need additional spectrum to keep up with customer demands and the availability and cost of this spectrum could have an impact on our wireless business.
Risks Related to Our Cable BusinessesServices
We face risks from increasing competition for the provision of cable and related video services.
Incumbent cable companies, which have historically provided video service, face competition from direct broadcast satellite providers, and more recently from large providers of wireline telecommunications services (such as Verizon, Centurylink and AT&T), which have begun to upgrade their networks to provide video services in addition to voice and broadband services. Wireless providers are also are entering the market for video services by making such services available on handsets and tablets. In some areas, direct broadcast satellite providers have partnered with large incumbent telecommunications service providers to offer triple-play services. Moreover, consumers are increasingly accessing video content from alternative sources, such as internet-based websitesInternet-based “over the top” providers and applications. The influx of competitors in this area, together with the development of new technologies to support them, are resulting in significant changes in the video business models and regulatory provisions that have applied to the provision of video and other services. These developments may lead to a decline in the price and profitability of video and otherrelated services.
Our programming costs are subject to demands for increased payments.
The cable television industry has continued to experience an increase in the cost of programming, especially sports programming. In addition, as we add programming to our video services for existing customers or distribute existing programming to more customers, we incur increased programming expenses. Broadcasters affiliated with major over-the-air network services have been increasing their demands for cash payments and other concessions for the right to carry local network television signals on our cable systems. TheseIf we are unable to raise our customers’ rates or offset such increased programming and retransmission consent costs through the sale of additional services, these increased costs cannot always be recouped by increased rates to subscribers.could have an adverse impact on our results of operations. Moreover, as our programming contracts and retransmission agreements with programming providers expire, there can be no assurance that they will be renewed on acceptable terms. The Copyright Office adopted rules in 2014 governing private audits of cable operators’ compulsory copyright payments, and any resulting audits initiated by copyright owners could lead to demands for increased copyright payments.
Changes to key regulatory requirements can affect our ability to compete.
As programming and retransmission consent costs and retail rates increase, Congress and the FCC have expressed concern about the impact on consumers, and they could impose restrictions affecting cable rates and programming packages that could adversely impact our existing business model.
The Company operates cable television systems in largely rural areas of Virginia, West Virginia and Maryland. Virginia has adopted legislation to make it easier for companies to obtain local franchises to provide cable television service. The FCC has adopted new rules which substantially reduce the cost of obtaining a local franchise. These rules may make it easier for the Company to expand its cable television business, but also may result in increased competition for such business.
As partMany franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances, local franchises have not been renewed at expiration, and we have operated and are operating under either temporary operating agreements or without a franchise while negotiating renewal terms with the local franchising authorities. We cannot assure you that we will be able to comply with all significant provisions of its National Broadband Plan Inquiry,our franchise agreements. Additionally, although historically we have renewed our franchises without incurring significant costs, we cannot assure you that we will be able to renew, or to renew as favorably, our franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affect our business in the affected geographic area.
Pole attachments are wires and cables that are attached to utility poles. Cable system attachments to investor-owned public utility poles historically have been regulated at the federal or state level, generally resulting in reasonable pole attachment rates for attachments used to provide cable service. In contrast, utility poles owned by municipalities or cooperatives are not subject to federal regulation and are generally exempt from state regulation and their attachment rates tend to be higher. Future regulatory changes in this area could impact the pole attachment rates we pay utility companies.
In December 2014, Congress repealed a prohibition on cable operators offering set-top boxes with integrated security and navigational features (effective December 4, 2015), but also directed the FCC raised several policy issues concerning cableto establish a working group of “technical experts” to identify downloadable security design options to facilitate consumer use of retail navigation devices in lieu of set-top boxes including whether such boxes should accommodate two-wayprovided by cable operators. The working group issued its report in August 2015. In February 2016, the FCC initiated a new rulemaking proceeding and proposed new rules that would require us and other MVPDs to make changes to our networks to enable customer-owned third party devices to access our video services in lieu of our leased set-top boxes. Specifically, the FCC’s proposal would require MVPDs to offer three so-called “information flows” to third-party device makers, which would include: (1) information about programming availability; (2) information about what a device is permitted to do with the content; and (3) the video program content from sources other thanitself. If adopted as currently proposed by the FCC, the proposal could require us to undertake costly steps to re-engineer our network, and it could have a significant impact on our ability to deliver cable operator such as Internet web sites. In addition, current FCC rules require that cable operators allow customers to attach set-top box devices purchased at retail instead of leasing a box from the cable operator. These devices can access programming from sources thattelevision services and compete with other video service providers, including those providing so-called “over-the-top” video services. We cannot predict the program offeringsnature and pace of these and other developments or the Company. These devices, and any rule changeseffect they may have on our operations. New regulations could increase our cost for equipment, affect our relationship with our customers, and/or enable third parties to try to offer equipment that impose access obligations onaccesses disaggregated cable content merged with other services delivered over the Company’s leased boxes, could reduce demand for the Company’s video products.Internet to compete with our premium service offerings.
Any significant impairment of our non-amortizing cable franchise rights would lead to a decrease in our assets and a reduction in our net operating performance.
At December 31, 2012,2015, we had non-amortizing cable franchise rights of approximately $64.1 million which constituted approximately 11.2%10.2% of total assets at that date. If we make changes in our business strategy or if market or other conditions adversely affect our cable operations, we may be forced to record an impairment charge, which would lead to a decrease in the carrying value of the Company’s assets and reduction in our net operating performance. We test non-amortizing intangible assets for impairment annually or whenever events or changes in circumstances indicate impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record an impairment charge for the difference between the carrying value of the non-amortizing intangible assets and the fair value of the non-amortizing intangible assets, in the period in which the determination is made. The testing of non-amortizing intangible assets for impairment requires the Company to make significant estimates about the future performance and cash flows of our Cable segment, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in underlying business operations, future reporting unit operating performance, changes in competition, or changes in technologies. Any changes to key assumptions or actual performance compared with those assumptions, about our Cable segment’s business and its future prospects, or actual performance compared with those assumptions, or other assumptions, could affect the fair value of our Cable segment non-amortizing intangibles, resulting in an impairment charge. During 2012, the Company recorded an impairment charge of $11.0 million to write-off the carrying value of goodwill recorded during past acquisitions of cable companies.
Risks Related To Our Broadband Services
Our broadband services may be adversely impacted by legislative or regulatory changes that affect our ability to develop and offer services or that could expose us to liability from customers or others.
The Company provides broadband Internet access services to its cable and telephone customers through cable modems and digital subscriber lines (“DSL”), respectively.DSL. The FCC has adopted “open internet” rules, also referred to as “net neutrality,” that could affect the Company’s provision of broadband services.
On February 26, 2015, in response to a federal appellate court ruling invalidating the FCC’s initial “open Internet” rules, the FCC adopted an order imposing new rules regulating broadband Internet access service. The Order reclassifies wireline and wireless broadband services as Title II common carrier services, and asserts legal authority to regulate broadband service offered by ISPs under Title II, Title III, and Section 706 of the Telecommunications Act. In an effort to protect consumers and edge providers, the new rules would prohibit ISPs from engaging in blocking, throttling, and paid prioritization, and the existing transparency rules would be enhanced. Reasonable network management activities would remain permitted. For example,the first time, under this Order the FCC has authority to hear complaints and take enforcement action if it determines that the interconnection of ISPs are not just and reasonable, or if ISPs fail to meet a new general obligation not to harm consumers or edge providers. The Order forbears (at least for now) from certain Title II regulation, such as rate regulation, tariffs and last-mile unbundling. It does not propose assessment of USF fees on broadband at this time. The Order has been appealed by multiple parties, but the rules require transparency asare currently in effect (except for the expanded disclosure requirements, which will not become effective until they receive approval from the Office of Management and Budget). The Order could have a material adverse effect on our business and results of operations. There are also legislative proposals in Congress to speedpreempt the Chairman’s proposed “utility-style” regulation, while still addressing many of the underlying concerns. We do not know at the current time if the new regulations will survive judicial review, nor do we know how they would be administered if they do, but they could limit our ability to efficiently manage our cable systems and respond to operational and competitive challenges. Such rules or statutes could also restrict arrangements between us and Internet content, application, and service and network management practices, performance characteristics, and terms and conditionsproviders, including backbone connection arrangements. In addition, if the FCC were to adopt new rules under a Title II framework, the reclassification of broadband services as Title II common carrier services could subject our services to far more extensive and burdensome federal and state regulation.
On January 29, 2015, the FCC, in a nation-wide proceeding evaluating whether “advanced broadband” is being deployed in a reasonable and timely fashion, increased the minimum connection speeds required to qualify as advanced broadband service to 25 Mbps for downloads and 3 Mbps for uploads. As a result, the FCC concluded that advanced broadband was not being sufficiently deployed and initiated a new inquiry into what steps it might take to encourage broadband deployment. This action may lead the FCC to adopt additional measures affecting our broadband business. At the same time, the FCC has ongoing proceedings to allocate additional spectrum for advanced wireless service, which could provide additional wireless competition to our broadband business.
Risks Related to Our Voice Services
Offering voice communications service may subject us to additional regulatory burdens, causing us to incur additional costs.
We offer voice communications services over our broadband network and continue to develop and deploy VoIP services. BothThe FCC has ruled that competitive telephone companies that support VoIP services, such as those we offer our customers, are entitled to interconnect with incumbent providers of traditional telecommunications services, which ensures that our VoIP services can compete in the fixedmarket. The scope of these interconnection rights are being reviewed in a current FCC proceeding, which may affect our ability to compete in the provision of voice services or result in additional costs. The FCC has also declared that certain VoIP services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of state and mobilelocal regulation of VoIP services is not yet clear. It is not clear how the FCC Chairman’s proposal to reclassify wireline and wireless broadband services as Title II common carrier services, and subject to Section 706, will affect the regulatory status of our VoIP services. Expanding our offering of these services may require us to obtain certain additional authorizations. We may not be able to obtain such authorizations in a timely manner, or conditions could be imposed upon such licenses or authorizations that may not be favorable to us. Telecommunications companies generally are subject to various no blocking requirements and the fixedother significant regulation which could also be extended to VoIP providers. If additional telecommunications regulations are applied to our VoIP service, is subjectit could cause us to a “no-unreasonable-discrimination” requirement that might prohibit the Company from charging websites for enhanced delivery of content. Congress may also consider increasing regulatory authority over broadband providers, although specific proposals are not currently pending.incur additional costs.
The Federal Trade Commission is also consideringFCC has already extended certain traditional telecommunications carrier requirements to many VoIP providers such as us, including E911, USF collection, CALEA, privacy of CPNI, number porting, rural call completion, outage reporting, disability access and discontinuance of service requirements. In November 2014, the FCC adopted an order imposing limited backup power obligations on providers of facilities-based fixed, residential voice services that are not otherwise line-powered, including our VoIP services. This order will become effective for providers with fewer than 100,000 U.S. customer lines in August 2016 and at that time will require the company to disclose certain information to customers and to make available back up power at the point of sale.
In November 2011, the FCC released an order significantly changing the rules governing intercarrier compensation payments for the origination and termination of telephone traffic between carriers, including VoIP service providers like us. The Tenth Circuit Court of Appeals upheld the rules in May, 2014. The new rules will result in a substantial decrease in intercarrier compensation payments over a multi-year period. In addition, the potential transition of Local Number Portability Administrators may impact our ability to manage number porting and related tasks, and/or may result in additional costs arising from the transition to behavioral advertising on the Internet which may extend to broadband service providers.a new administrator.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
The Company owns its corporate headquarters, which occupies a 60,000-square foot building in Edinburg, Virginia. The Company also owns a 26,500-square foot buildingthree additional buildings in EdinburgEdinburg:
| · | a 26,500-square foot building that houses the Company's main switching center and technical staff and technical staff, |
| · | a 14,000-square foot building that includes warehouse space and houses operations staff, and |
| · | a 10,700-square foot building in Edinburg used for customer services and retail sales. |
The Company owns nine telephone exchange buildings that are located in the major towns and some of the rural communities that are served by the regulated telecommunications operations. These buildings contain switching and fiber optic equipment and associated local exchange telecommunications equipment. The Company owns a building that houses customer service operations in Rustburg, Virginia. The Company has fiber optic hubs or points of presence in Hagerstown, Maryland; Ashburn, Berryville, Edinburg, Front Royal, Harrisonburg, Herndon, Leesburg, Stephens City, WarrentonMaryland, Virginia and Winchester, Virginia; and Franklin, Petersburg, Shepherdstown and Martinsburg, West Virginia.
The Company leases land, buildings and tower space in support of its PCSWireless operations. As of December 31, 2012,2015, the Company had 516555 PCS sites, including Wireless sites on property owned by the Company, and 1416 leased retail locations.
The Company owns or leases other warehouse, office and retail space in various locations to support its operations. The leases for the foregoing land, buildings and tower space expire on various dates between 20132016 and 2039.2040. For information about these leases, see Note 1312 to the consolidated financial statements appearing elsewhere in this report. The Company plans to lease additional land, equipment space, and retail space in support of its operations.
On August 24, 2015, Mr. Marvin Westen and Mr. Paul Sekerak each filed a putative class action lawsuit challenging the Merger in which the Company, Merger Sub, nTelos and members of the nTelos board of directors have been named as defendants. The stockholders actions were filed in the Court of Chancery of the State of Delaware. These actions are styled Marvin Westen v. Michael A. Huber, et al., Case No. CA-11421, and Paul Sekerak v. nTelos Holdings Corp., et al., Case No. CA-11422. The actions generally allege, among other things, that each member of the nTelos board of directors breached fiduciary duties to nTelos and its stockholders by agreeing to sell nTelos for consideration deemed “inadequate” and by agreeing to deal protection terms that allegedly foreclose competing offers. Plaintiffs also allege that the Company and Merger Sub (or, in the case of Mr. Sekerak, the Company and nTelos) purportedly aided and abetted the foregoing breaches. Plaintiffs seek, among other things, injunctive relief preventing consummation of the Merger (and/or directing rescission of the transaction, to the extent already implemented), unspecified damages and an award of plaintiff’s expenses and attorneys’ fees. The Company believes these claims are without merit and intend to defend the Company and Merger Sub vigorously.
Not applicable
PART II
| ITEM 5. | MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company declared a two-for-one split of the Company’s common stock, for shareholders of record as of the close of business on December 31, 2015. All historical share amounts have been doubled and all historical per share amounts have been halved throughout this document. The Company's stock is traded on the NASDAQ Global Select Market under the symbol “SHEN.”
The following table shows the closing high and low sales prices per share of common stock as reported by the NASDAQ Global Select Market for each quarter during the last two years:
| 2012 | | High | | | Low | | |
| 2015 | | | High | | | Low | |
| Fourth Quarter | | $ | 18.71 | | | $ | 12.92 | | | $ | 25.34 | | | $ | 20.44 | |
| Third Quarter | | | 18.32 | | | | 13.61 | | | | 21.57 | | | | 15.77 | |
| Second Quarter | | | 13.61 | | | | 10.07 | | | | 18.22 | | | | 15.29 | |
| First Quarter | | | 11.42 | | | | 9.51 | | | | 16.45 | | | | 13.78 | |
| | | | | | | | | | |
| 2011 | | High | | | Low | | |
| Fourth Quarter | | $ | 14.37 | | | $ | 9.11 | | |
| Third Quarter | | | 17.69 | | | | 10.55 | | |
| Second Quarter | | | 19.00 | | | | 16.08 | | |
| First Quarter | | | 19.37 | | | | 15.77 | | |
| 2014 | | High | | | Low | |
| Fourth Quarter | | $ | 16.00 | | | $ | 12.09 | |
| Third Quarter | | | 15.53 | | | | 12.41 | |
| Second Quarter | | | 16.31 | | | | 12.83 | |
| First Quarter | | | 16.73 | | | | 11.68 | |
As of February 13, 2013,17, 2016, there were 4,3814,186 holders of record of the Company’s common stock.
Shenandoah Telecommunications Company historically has paid annual cash dividends on or about December 1 of each year. The cash dividend was $0.33$0.24 per share in 20122015 and 2011.$0.235 per share in 2014. Dividends are paid to Shenandoah Telecommunications Company shareholders from accumulated dividends paid to it by its operating subsidiaries. Under the Company’s credit agreement with CoBank dated September 14, 2012, the Company is restricted in its ability to pay dividends in the future. So long as no Default or Event of Default (as such term is defined in the credit agreement) exists before, or will result after giving effect to such dividends, distributions or redemptions on a pro forma basis, the Company may declare or pay a lawful dividend or other distribution of assets, or retire, redeem, purchase or otherwise acquire capital stock in an aggregate amount which when added to any such dividends, distributions or redemptions of capital stock or other equity interest made, declared or paid from and after January 1, 2012 does not exceed $5 million plus 50% of the Company’s consolidated net income (excluding non-cash extraordinary items such as write-downs or write-ups of assets, other than current assets) from January 1, 2012 to the date of declaration of any such dividends, distributions or redemptions.
The following graph and table show the cumulative total shareholder return on the Company’s common stock compared to the NASDAQ U.S.US Index and the NASDAQ Telecommunications Index for the period between December 31, 20072010 and December 31, 2012.2015. The NASDAQ Telecommunications Index includes 14533 companies that represent a wide mix of telecommunications service and equipment providers and smaller carriers that offer similar products and serve similar markets. The graph assumes $100 was invested on December 31, 20072010 in (1) the Company’s common stock, (2)and the NASDAQ U.S. Index and (3) the NASDAQ Telecommunications Index,other two indexes, and that all dividends were reinvested and market capitalization weighting as of December 31, 2008, 2009, 2010, 2011, 2012, 2013, 2014 and 2012.2015.
| | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| Shenandoah Telecommunications Company | 100 | 119 | 88 | 82 | 47 | 71 |
| NASDAQ U.S. Index | 100 | 61 | 88 | 104 | 105 | 124 |
| NASDAQ Telecommunications Index | 100 | 57 | 86 | 111 | 118 | 159 |
| | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | |
| Shenandoah Telecommunications Company | | | 100 | | | | 58 | | | | 86 | | | | 147 | | | | 182 | | | | 253 | |
| NDAQ US | | | 100 | | | | 118 | | | | 137 | | | | 183 | | | | 206 | | | | 207 | |
| NDAQ Telecom Stocks | | | 100 | | | | 127 | | | | 152 | | | | 172 | | | | 177 | | | | 183 | |
The Company maintains a dividend reinvestment plan (the “DRIP”) for the benefit of its shareholders. When shareholders remove shares from the DRIP, the Company issues a certificate for whole shares, pays out cash for any fractional shares, and cancels the fractional shares purchased. In addition, in conjunction with the award of shares or exercises of stock options, the Company periodically repurchases shares from certain recipients to cover the minimum statutory tax withholding requirements associated with the transaction. The following table provides information about the Company’s repurchases of shares during the three months ended December 31, 2012:2015:
| | | Number of Shares Purchased | | | Average Price Paid per Share | | | Number of Shares Purchased | | | Average Price Paid per Share | |
| | | | | | | | | | | | | |
| October 1 to October 31 | | | 7 | | | $ | 17.58 | | | | 293 | | | $ | 23.55 | |
| November 1 to November 30 | | | 1 | | | | 14.30 | | | | 3,004 | | | | 24.11 | |
| December 1 to December 31 | | | 1 | | | $ | 14.32 | | | | 283 | | | | 21.17 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 9 | | | $ | 16.83 | | | | 3,580 | | | $ | 23.84 | |
The following table presents selected financial data as of December 31, 2015, 2014, 2013, 2012, 2011, 2010, 2009, and 20082011 and for each of the years in the five-year period ended December 31, 2012.2015.
The selected financial data as of December 31, 20122015 and 20112014 and for each of the years in the three-year period ended December 31, 20122015 are derived from the Company’s audited consolidated financial statements appearing elsewhere in this report. The selected financial data as of December 31, 2010, 2009,2013, 2012, and 20082011 and for the years ended December 31, 20092012 and 20082011 are derived from the Company’s audited consolidated financial statements not included in this report.
The 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 appearing elsewhere in this report.
(in thousands, except share and per share data.)data; all share and per share data have been adjusted to reflect the two-for-one stock split effective December 31, 2015)
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 342,485 | | | $ | 326,946 | | | $ | 308,942 | | | $ | 288,075 | | | $ | 251,145 | |
| Operating expenses | | | 268,399 | | | | 265,003 | | | | 253,535 | | | | 253,417 | | | | 218,855 | |
| Operating income | | | 74,086 | | | | 61,943 | | | | 55,407 | | | | 34,658 | | | | 32,290 | |
| Interest expense | | | 7,355 | | | | 8,148 | | | | 8,468 | | | | 7,850 | | | | 8,289 | |
| Income taxes | | | 27,726 | | | | 22,151 | | | | 19,878 | | | | 12,008 | | | | 10,667 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 40,864 | | | $ | 33,883 | | | $ | 29,586 | | | $ | 16,603 | | | $ | 13,538 | |
| Discontinued operations, net of tax (a) | | | - | | | | - | | | | - | | | | (300 | ) | | | (545 | ) |
| Net income | | $ | 40,864 | | | $ | 33,883 | | | $ | 29,586 | | | $ | 16,303 | | | $ | 12,993 | |
| Total assets | | | 628,740 | | | | 619,242 | | | | 597,006 | | | | 570,740 | | | | 479,979 | |
| Total debt – including current maturities | | | 201,250 | | | | 224,250 | | | | 230,000 | | | | 231,977 | | | | 180,575 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shareholder Information: | | | | | | | | | | | | | | | | | | | | |
| Shares outstanding | | | 48,475,132 | | | | 48,264,994 | | | | 48,080,554 | | | | 47,924,220 | | | | 47,675,056 | |
| Income per share from continuing operations-diluted | | $ | 0.84 | | | $ | 0.70 | | | $ | 0.62 | | | $ | 0.35 | | | $ | 0.28 | |
| Loss per share from discontinued operations-diluted | | | - | | | | - | | | | - | | | | (0.01 | ) | | | (0.01 | ) |
| Net income per share-diluted | | | 0.83 | | | | 0.70 | | | | 0.61 | | | | 0.34 | | | | 0.27 | |
| Cash dividends per share | | $ | 0.24 | | | $ | 0.235 | | | $ | 0.18 | | | $ | 0.165 | | | $ | 0.165 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 288,075 | | | $ | 251,145 | | | $ | 195,206 | | | $ | 160,935 | | | $ | 144,778 | |
| Operating expenses | | | 253,417 | | | | 218,855 | | | | 162,875 | | | | 117,995 | | | | 99,312 | |
| Operating income | | | 34,658 | | | | 32,290 | | | | 36,331 | | | | 42,940 | | | | 45,466 | |
| Interest expense | | | 7,850 | | | | 8,289 | | | | 4,716 | | | | 1,361 | | | | 1,009 | |
| Income taxes | | | 12,008 | | | | 10,667 | | | | 13,393 | | | | 17,510 | | | | 17,595 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 16,603 | | | $ | 13,538 | | | $ | 18,774 | | | $ | 25,152 | | | $ | 26,222 | |
| Discontinued operations, net of tax (a) | | | (300 | ) | | | (545 | ) | | | (699 | ) | | | (10,060 | ) | | | (2,077 | ) |
| Net income | | $ | 16,303 | | | $ | 12,993 | | | $ | 18,075 | | | $ | 15,092 | | | $ | 24,145 | |
| Total assets | | | 570,740 | | | | 479,979 | | | | 466,437 | | | | 271,725 | | | | 266,837 | |
| Total debt – including current maturities | | | 232,177 | | | | 180,575 | | | | 195,112 | | | | 32,960 | | | | 41,359 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shareholder Information: | | | | | | | | | | | | | | | | | | | | |
| Shares outstanding | | | 23,962,110 | | | | 23,837,528 | | | | 23,766,873 | | | | 23,680,843 | | | | 23,605,467 | |
| Income per share from continuing operations-diluted | | $ | 0.69 | | | $ | 0.57 | | | $ | 0.79 | | | $ | 1.06 | | | $ | 1.11 | |
| Loss per share from discontinued operations-diluted | | | (0.01 | ) | | | (0.02 | ) | | | (0.03 | ) | | | (0.42 | ) | | | (0.09 | ) |
| Net income per share-diluted | | | 0.68 | | | | 0.55 | | | | 0.76 | | | | 0.64 | | | | 1.02 | |
| Cash dividends per share | | $ | 0.33 | | | $ | 0.33 | | | $ | 0.33 | | | $ | 0.32 | | | $ | 0.30 | |
| (a) | Discontinued operations include the operating results of Converged Services. The Company announced its intention to dispose of Converged Services in September 2008, and reclassified its operating results as discontinued for all periods presented. In 2009,operations. The Company completed the Company recognized an impairment loss of $17.5 million, or $10.7 million net of tax, to write-down the net assetsdisposition of Converged Services to their estimated fair value. In 2010, the Company recognized an additional impairment loss of $1.9 million, or $1.1 million net of tax, to write-down the net assets of Converged Services to their current estimated fair value. In 2011, the Company recognized an additional impairment loss of $0.6 million, or $0.4 million net of tax, to write-down the net assets of Converged Services to their current estimated fair value.properties during 2013. |
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, or strategies regarding the future. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include those discussed in this report under “Business-Competition” and “Risk Factors.” The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances, except as required by law.
General
Overview. Shenandoah Telecommunications Company is a diversified telecommunications company providing both regulated and unregulated telecommunications services through its wholly owned subsidiaries. These subsidiaries provide wireless personal communications services (as a Sprint PCS affiliate of Sprint Nextel) andaffiliate), local exchange telephone services, as well as cable television, video, Internetinternet and data services, long distance sale of telecommunications equipment,services, fiber optics facilities, and leased tower facilities. The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Cable, and (3) Wireline.
| * | The Wireless segment provides digital wireless service as a Sprint PCS Affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia. In this area, the Company is the exclusive provider of wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz bands under the Sprint brand. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers. |
| * | The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia. |
| * | The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of Pennsylvania. |
A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company as well as certain general and administrative costs historically charged to Converged Services that cannot be allocated to discontinued operations.company.
The Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate of Sprint Nextel. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
The Cable segment provides video, internet and voice services in Virginia, West Virginia and portions of western Maryland.
The Wireline segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long distance access services throughout Shenandoah County and portions of northwestern Augusta County, Virginia, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor, including portions of West Virginia and Maryland.
The Company is the exclusive provider of wireless mobility communications network products and services on the 800 and 1900 MHz bands under the Sprint brand from Harrisonburg, Virginia to Harrisburg, York and Altoona, Pennsylvania. The Company’s primary service area for the wireline and cable television businesses was historically Shenandoah County, Virginia. The county is a rural area in northwestern Virginia, with an estimated population of approximately 42,000 inhabitants. In November 2009, the Company acquired approximately 1,000 telephone access lines in northwestern Augusta County, Virginia, by acquiring the assets of the North River Telephone Cooperative. The Company believes that the potential for significant numbers of additional wireline customers in its existing operating area is limited. With the acquisition in December 2008 of cable system assets and customers from Rapid Communications, LLC, the Company expanded its cable services to portions of West Virginia and Alleghany County, Virginia. In July 2010, the Company further expanded its cable services through the acquisition of cable system assets and customers from JetBroadband, LLC, located throughout southern Virginia and southern West Virginia, and in December 2010, with the acquisition of cable assets and customers in Salem, West Virginia, and Oakland, Maryland, from Cequel III Communications II LP, doing business as Suddenlink.
Through its subsidiary Shentel Converged Services, the Company provides local and long distance voice, video, and Internet services on an exclusive and non-exclusive basis to MDU communities, consisting primarily of off-campus college student housing throughout the southeastern United States. Since late 2008, Converged Services has been classified as a discontinued operation and its assets and liabilities reclassified as held for sale in the consolidated financial statements. During 2011 and 2012, the Company sold all but a small portion of this subsidiary, and the Company expects to complete the sale of the remaining portion in early 2013.
The Company sells and leases equipment, mainly related to the services it provides. The Company participates in emerging services and technologies by investment in technology venture funds and direct investment in non-affiliated companies.
Significant Transactions
The 2012, 20112015, 2014 and 20102013 financial results of the Company reflected several significant transactions. These transactions should be noted in understanding the financial results of the Company for 2012, 20112015, 2014 and 2010.2013.
Converged ServicesPending Acquisition of nTelos and Related Transactions
In September 2008,On August 10, 2015, we entered into the Merger Agreement with Merger Sub and nTelos, pursuant to which, subject to certain conditions, at the effective time of the Merger, Merger Sub will merge with and into nTelos, with nTelos surviving the Merger as our wholly-owned subsidiary.
Under the terms of the Merger Agreement, which has been approved by the stockholders of nTelos and unanimously approved by the boards of directors of the Company announced its intention to sell its Converged Services segment. The operating resultsand nTelos, at the effective time of this segment were reclassified to discontinued operations,the Merger, each share of nTelos common stock, par value $0.01 per share, of nTelos (“nTelos Common Stock”) issued and the assets and liabilities were reclassified as assets and liabilities held for sale. Certain general overhead costs previously charged or allocatedoutstanding immediately prior to the Converged Services segment are not appropriately chargeableeffective time of the Merger (other than shares held by us, nTelos and any subsidiaries (which will be cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), will be converted into the right to discontinued operations, and these costs have been reclassified toreceive the “Other” segment within continuing operations for all periods presented. In March 2009, based upon an assessment of fair value based upon bids receivedMerger Consideration. This results in the auction process, the Company recognized an impairment charge totaling $17.5 million ($10.7 million, net of taxes), on the assets held for sale. The impairment charge was included in discontinued operations. During the fourth quarter of 2010 and the third quarter of 2011, based upon continuing developments in the process of selling these assets, the Company determined that the faira total equity value of Converged Services had declined from earlier estimates. Accordingly,nTelos of approximately $208 million, after including shares and other equity-based awards expected to vest on change of control. In accordance with the Company recorded impairment lossesMerger Agreement, we will repay all existing indebtedness of $1.9 million and $0.6 million, respectively, ($1.1 million and $0.4 million, respectively, net of taxes) to further reduce the carrying value of these assets to their revised estimated fair value less cost to sell. During 2011, the Company sold service contracts and assets for a substantial numbernTelos as of the properties in a seriesclosing of transactions, generating cash proceeds ofthe Merger, which was approximately $3.0$520 million and an additional $2.3 million of proceeds placed in escrow. During 2012, the Company sold additional service contracts and assets for an additional $1.9 million in cash proceeds, as well as collecting all but $0.1 million of proceeds previously placed in escrow. As of December 31, 2012, negotiations to complete the sale2015.
The completion of the remaining properties continue. At this time,Merger is subject to the expected proceeds are sufficient to coversatisfaction or waiver of certain conditions, including the remaining $0.2 millionapproval of carrying value,the transaction by the FCC and the Company has determined that there has been no additional impairment to the carrying valueconsummation of the assets.
Changes in Pension Plans
In 2006,Sprint Transactions. We expect the Company froze benefit accruals for all participants inMerger to close at the Company’s defined benefit pension plan. Duringend of the first quarter, or the early part of the second quarter, of 2010,2016.
On February 26, 2016, we entered into a letter agreement with nTelos pursuant to which the Company completedparties agreed to extend the settlementdate after which either we or nTelos may terminate the Merger Agreement, from February 29, 2016 to June 28, 2016, as permitted by the Merger Agreement. While the parties believe that closing will occur at the end of the plan followingfirst quarter or early in the receiptsecond quarter, the purpose of a favorable tax determination letterthe extension is to allow the parties additional time to satisfy certain conditions in February, 2010. In order to complete the settlement,Merger, which would not have been satisfied by the Company contributed $1.0 million to fully fundend of February 29, 2016 date.
In connection with the pension obligations,execution of the Merger Agreement, on August 10, 2015, PCS and recognized $3.6 millionSprintCom entered into the Master Agreement and, along with certain affiliates of pension expense from otherSprint, entered into the Affiliate Addendum. The closing of the Sprint Transactions will occur simultaneously with, and are conditioned upon, the consummation of the Merger.
Once the Merger and the Sprint Transactions are completed, we will implement comprehensive income. During the second quarterintegration activities for nTelos customers. As part of 2010, the Company also curtailed future participation in the Company’s Supplemental Executive Retirement Plan (“SERP”). Current participants may remain in the SERP and will continue to earn returns (either gains or losses) on invested balances, but the Company will make no further contributions to the SERP and no new participantsthat process, nTelos customers will be eligiblemigrated to joinSprint and Sprint’s billing platforms. As migration planning has progressed since the SERP. As a resultdate of the curtailment,Merger Agreement and Master Agreement, certain of our past assumptions about the Company recognized a curtailment loss of $0.7 million, consisting of actuarial losses previously recordedmigration have materially changed. We now expect that the migration process could extend through 2017. This extended migration process will result in us incurring additional one-time costs associated with, among other comprehensive income.
Acquisition of Virgin Mobile Customersthings, maintaining the nTelos core network, providing additional customer care and, Initiation of Prepaid Wireless Sales
On July 8, 2010, the Company acquired the right to receive a share of revenues from approximately 50,000 Virgin Mobile customers in our service area, and effective July 11, 2010, the Company began selling Virgin Mobile and Boost prepaid products and services under an amendment to the Sprint agreements. The Company recognized amortization on the $6.9 million capitalized purchase price of the acquired contract for the 50,000 acquired Virgin Mobile subscribers. The amortization of the acquired subscriber base will approximate the life of the customers acquired, gradually decreasing over the expected four year life of this asset. The Company incurs significant costs of acquisition (including handset subsidies, commissions, and other sales and marketing costs) in the month of a newcertain circumstances, customer activation. New customers are expected to generate net income over their service life. Due to expensing all costs of acquisition in the month of acquisition, the sale of prepaid products and services had a net negative impact on operating results until the base of customers was sufficient suchdevice replacement. We expect that the aggregate monthly revenue less recurring expenses exceeded the up-frontamount of non-recurring costs for new activations. The Company believes it had reached this point in 2011.
Acquisition of JetBroadBand
On July 30, 2010, the Company completed the acquisition of the cable operations of JetBroadBand for $148 million in cash. The acquired cable operations offered video, high speed Internet and voice services representing approximately 66,000 revenue generating units in southern Virginia and southern West Virginia. The acquired networks passed approximately 115,000 homes. Various fees and other expenses associated with the acquisition increasedMerger and the Company’s operating expenses by approximately $3.1 millionSprint Transactions could be as much as twice the amount of our previous estimates. We are in 2010.discussions with Sprint on potential ways to mitigate the incremental costs associated with the extended migration process.
Network Vision
In February 2012, the Company announced that it had amended its Management Agreement with Sprint Nextel Corporation in connection with the Company’s commitment to build a 4G LTE network in the Company’s service area. Replacement of base stations began in May 2012, proceeded slowly through that August, and accelerated inthat fall. During 2012, the fall. As of December 31, 2012,Company completed upgrades to 200 of the Company’s 516 base stations, had been upgradedand during 2013, completed upgrades to 4G LTE. Allsubstantially all of its 526 total base stations are expected to be replaced before the end of 2013, with most work expected to be completed by the end of the third quarter of 2013. stations.
Based upon the initial timetable and updated as the timetable was revised,revisions, the Company determined that changes to the depreciation schedulesremaining depreciable lives for base stations and certain other assets were required, resulting in $8.4adding $3.2 million of additional depreciation in 2012.expense to 2013’s results. The 4G LTE base stations require either fiber or microwave backhaul. As a result,Accordingly, the Company is replacingreplaced the copper-based T1 circuits it currently haspreviously had or leased with fiber and microwave technology. In addition to incurring the costs to install the new backhaul facilities, the Company incursincurred duplicate network costs during the replacement period for each base station, early termination fees, and higher monthly costs of the higher capacity circuits (though much less expensive per megabit of capacity) following the upgrade, impacting 2012, 2013 and future years.upgrade. However, the additional capacity of the new fiber-based backhaul facilities will delay the need to further upgrade its capacity to accommodate additional network traffic.
Revision of Prepaid Cost Pass-throughs
In July 2010, the During 2013, based upon Company executed an amendment to its Management Agreement with Sprint Nextel to allow the Company to participate in Sprint Nextel’s prepaid wireless offerings. Due to the nature of the prepaid business, the revenue and cost per unit (per average subscriber or per gross addition or upgrade, as defined) passed through to the Company were based on Sprint Nextel’s national averages for its prepaid programs, as determined by Sprint. In December 2012, Sprint Nextel determined it had incorrectly calculated certain cost pass-throughs from inception of the Company’s participation, and reimbursed the Company for $11.8 million to correct its errors from July 2010 through September 2012. The Company recognized this receipt as a reduction of expenses in the quarter and year ended December 31, 2012.
Cable Segment Goodwill Impairment
During 2012,projections, the Company determined that microwave equipment used to backhaul wireless traffic from approximately 150 of its cell sites would be inadequate to carry its traffic by 2016, and accordingly, reduced the fair valueremaining useful life of the Company’s Cable segment had declined during the year, and that the goodwill associated with this segment had become impaired. As a result the Company recorded an $11.0 million write-downclass of Cable segment goodwill. Factors contributing to this determination included weak economic conditions, underperformance relative to market operating margins and penetration levels, and continued capital spending to upgrade the last remaining markets, improve the customer experience, and combat subscriber loss.assets.
Critical Accounting Policies
The Company relies on the use of estimates and makes assumptions that affect its financial condition and operating results. These estimates and assumptions are based on historical results and trends as well as the Company's forecasts as to how these might change in the future. The most critical accounting policies that materially affect the Company's results of operations include the following:
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or products have been delivered, the price to the buyer is fixed and determinable and collectability is reasonably assured. Revenues are recognized by the Company based on the various types of transactions generating the revenue. For services, revenue is recognized as the services are performed. For equipment sales, revenue is recognized when the sales transaction is complete. For transactions with customers in our Wireless segment that involve multiple elements, such as the sale of service combined with the sale of a handset, the consideration received at the time of sale is measured and allocated to the separate units based upon their relative fair values. Generally, this method results in all cash received at the time of the initial sale being allocated to and recognized as equipment revenue.
Under the Sprint Nextel Management Agreement, postpaid wireless service revenues are reported net of an 8% Management Fee and, since its imposition effective January 1, 2007, thea Net Service Fee retained by Sprint Nextel. TheSprint. Initially set at 8.8%, the Net Service Fee was initially set at 8.8%, and was increased to 12% during 2010 and to 14%, the maximum then allowed, under the Management Agreement, effective June 1, 2010. In accordance with the February, 2012, amendment, the maximum fee will increase to 14% effective July 1,in August 2013. Prepaid wireless service revenues are reported net of a 6% Management Fee.
Allowance for Doubtful Accounts
Estimates are used in determining the allowance for doubtful accounts and are based on historical collection and write-off experience, current trends, credit policies, and the analysis of the accounts receivable by aging category. In determining these estimates, the Company compares historical write-offs in relation to the estimated period in which the subscriber was originally billed. The Company also looks at the historical average length of time that elapses between the original billing date and the date of write-off and the financial position of its larger customers in determining the adequacy of the allowance for doubtful accounts. From this information, the Company assigns specific amounts to be applied against the aging categories. The Company provides an allowance for all receivables over 60 days old and partial allowances for all otheroutstanding receivables. The Company does not carry an allowance for receivables related to Sprint Nextel PCS customers. In accordance with the terms of the affiliate contract with Sprint, Nextel, the Company receives payment from Sprint Nextel for the monthly net billings to PCS customers in weekly installments over the following four or five weeks.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the recoverability of deferred tax assets generated on a state-by-state basis from net operating losses apportioned to that state. Management uses a more likely than not threshold to make the determination if a valuation allowance is warranted for tax assets in each state. Management will evaluateevaluates the effective rate of taxes based on apportionment factors, the Company’s operating results, and the various state income tax rates.
Leases
The Company recognizes rent expense on a straight-line basis over the initial lease term and renewal periods that are reasonably assured at the inception of the lease. In light of the Company’s investment in each leased site, including acquisition costs and leasehold improvements, the Company includes the exercise of certain renewal options in the recording of operating leases. Where the Company is the lessor, the Company recognizes revenue on a straight line basis over the non-cancelable term of the lease.
Long-lived Assets
The Company views the determination of the carrying value of long-lived assets as a criticalsignificant accounting estimate since the Company must determine an estimated economic useful life in order to properly amortize or depreciate long-lived assets and because the Company must consider if the value of any long-lived assets have been impaired, requiring adjustment to the carrying value.
Economic useful life is the duration of time the asset is expected to be productively employed by us, which may be less than its physical life. The Company’s assumptions on obsolescence, technological advances, and other factors affect the determination of estimated economic useful life. The estimated economic useful life of an asset is monitored to determine if it continues to be appropriate in light of changes in business circumstances. For example, technological advances may result in a shorter estimated useful life than originally anticipated. In such a case, the Company would depreciate the remaining net book value of the asset over the new estimated remaining life, increasing depreciation expense on a prospective basis. During 2013, based upon Company projections, the Company determined that microwave equipment used to backhaul wireless traffic from approximately 150 of its cell sites would be inadequate to carry its traffic by 2016, and accordingly, reduced the remaining useful life of this class of assets. Additional depreciation expense was $1.2 million in 2014 and was not significant in 2013.
Goodwill and Other Intangible Assets
Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations and was created primarily through cable acquisitions. Cable franchises, included in Intangible assets, net, provide us with the non-exclusive right to provide video services in a specified area. While some cable franchises are issued for a fixed time (generally 10 years), renewals of cable franchises have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of our cable franchises.
Goodwill, cable franchisesCable franchise rights and other indefinite-lived intangible assets with indefinite lives are not amortized but are tested at least annually for impairment. The testing is performed on the value as of November 30 each year, and is generally composed of comparing the book value of the assets to their estimated fair value. Goodwill is tested by comparing the book value of our Cable segment to the fair value of the Cable segment, calculated under a discounted cash flow approach. Cable franchises are tested for impairment on an aggregate basis, consistent with the management of the Cable segment as a whole, utilizing a greenfield valuation approach. It is the Company’s practice to engage an independent appraiser to prepare both the goodwill and franchise rightsthese fair value analyses.
Intangible assets that have finite useful lives are amortized over their useful lives. Acquired subscriber base assets are amortized using accelerated amortization methods over the expected period in which those relationships are expected to contribute to our future cash flows. Other finite-lived intangible assets are generally amortized using the straight-line method of amortization.
Other
The Company does not have any unrecorded off-balance sheet transactions or arrangements; however, the Company has significant commitments under operating leases.
Results of Continuing Operations
20122015 Compared to 20112014
Consolidated Results
The Company’s consolidated results from continuing operations for the years ended December 31, 20122015 and 20112014 are summarized as follows:
| (in thousands) | | Years Ended December 31, | | | Change | | | Years Ended December 31, | | | Change | |
| | | 2012 | | | 2011 | | | $ | | | | % | | | 2015 | | | 2014 | | | $ | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 288,075 | | | $ | 251,145 | | | | 36,930 | | | | 14.7 | | | $ | 342,485 | | | $ | 326,946 | | | | 15,539 | | | | 4.8 | |
| Operating expenses | | | 253,417 | | | | 218,855 | | | | 34,562 | | | | 15.8 | | | | 268,399 | | | | 265,003 | | | | 3,396 | | | | 1.3 | |
| Operating income | | | 34,658 | | | | 32,290 | | | | 2,368 | | | | 7.3 | | | | 74,086 | | | | 61,943 | | | | 12,143 | | | | 19.6 | |
| Other income (expense) | | | (6,047 | ) | | | (8,085 | ) | | | 2,038 | | | | (25.2 | ) | |
| Other expense, net | | | | 5,496 | | | | 5,909 | | | | 413 | | | | 7.0 | |
| Income tax expense | | | 12,008 | | | | 10,667 | | | | 1,341 | | | | 12.6 | | | | 27,726 | | | | 22,151 | | | | 5,575 | | | | 25.2 | |
| Net income from continuing operations | | $ | 16,603 | | | $ | 13,538 | | | | 3,065 | | | | 22.6 | | |
| Net income | | | $ | 40,864 | | | $ | 33,883 | | | | 6,981 | | | | 20.6 | |
Operating revenues
Operating revenues increased $36.9$15.5 million, or 14.7%, in 2012 over 2011,4.8%. Cable segment revenue grew $13.1 million, primarily due to an increase of $26.2 million in the Wireless segment and $8.3 million in the Cable segment. The increase in the Wireless segment resulted from an increase in postpaid service revenues of $16.4 million and $9.4 million in prepaid service revenues. The postpaid revenues grew as a result of a 5.8%5.4% growth in average subscriber counts and an increase in subscribers during the year, and incremental data fees chargedrevenue per subscriber. Wireless segment revenues increased $1.3 million compared to customers with smartphones. The2014. Net prepaid service revenues grew as a result of a 20% increase in prepaid customers during 2012. The Cable segment revenues grewrevenue increased $4.3 million, primarily due to 4.5% growth in average prepaid subscribers over 2014 and higher average revenue per subscriber due to improvements in product mix. Net postpaid service revenues decreased $2.7 million as a 4.6%6.7% increase in average postpaid subscribers was more than offset by lower revenue generating units, customers shifting to higher-priced digital TV packagesservice plans associated with handset financing and higher speed dataleasing programs. Wireline segment revenue increased $4.4 million, led by growth in carrier access packages,fees, fiber revenues, and video price increases.internet service revenues. Affiliate revenues increased $3.3 million. Affiliate revenues are eliminated from the consolidated totals shown in the table above.
Operating expenses
During the fourth quarter of 2012, the Company received $11.8Total operating expenses increased $3.4 million, from Sprint Nextelor 1.3%, in 2015 compared to reduce cost allocations relating to our participation in Sprint Nextel’s prepaid program beginning in July 2010 and continuing through September 30, 2012. The expense reduction reduced costs2014. Cost of goods and services sold bydecreased $8.4 million, primarily due to an $11.8 million decrease in PCS postpaid and selling,prepaid handset costs, partially offset by a $4.1 million increase in cable programming and retransmission consent costs. Selling, general and administrative expenses increased $7.0 million, driven by $3.4$3.5 million and reflected the recalculation of certain expenses costs per gross addition (including the cost of handsets) and cash cost per user, associated with the program. Had Sprint Nextel calculated these costs consistently in previous years, prepaid expenses in 2010pending acquisition of nTelos and 2011 would have been reduced by $1.2a $1.8 million and $4.9 million, respectively.
Adjusting for the effectincrease to support growth of the wireless prepaid wirelessbusiness. Depreciation and amortization expense reduction discussed above, operating expenses increased $45.6$4.8 million, compared to the 2011 period. The adjusted Wireless segment operations accounted for $27.2 million of the year over year increase, principally due to incremental handset subsidies a one-time unfavorable adjustment of $9.4$2.0 million and a $9.1 million increase in depreciation expense due to acceleratedcumulative impact of additional depreciation on base stationcertain assets placed into service in one year and other assets being replaced earlier than originally expected. The remaining increaseclosed out in Wireless segment operating expenses was largelythe fixed asset system in a result of costssubsequent year, and to ongoing projects to expand and upgrade the wireless, network, along with higher sellingcable and marketing expenses associated with prepaid wireless plans. Cable segment operating expenses increased $16.3 million, due to an $11.0 million write-off of goodwill, along with growth in customer service support costs, programming costs, network costs and maintenance expenses.fiber networks.
Other income (expense)Expense, net
The changeInterest expense decreased $0.8 million in other income (expense) resulted primarily2015 from improvement in investment results in 2012 over 2011.2014. The decrease resulted from a combination of lower outstanding balances due to principal paydowns in 2015, as well as a decrease in the base rate of 0.25% effective May of 2015 due to improvements in the Company’s leverage ratio. Each of these factors contributed approximately $0.4 million to the decrease. The reduction in interest expense that resulted from declining rates and lower outstanding balances (prior to the refinancing in September 2012) was largelypartially offset by the write-off of $0.8 million of unamortized loan costs remainingreduced gains from the 2010 loan as a result of replacing certain lenders from the original credit agreement. Changesinvestments in the fair value of the swap agreement entered into in 2010 added $0.4 million to interest expense during 2011, while reducing interest expense $0.2 million during 2012.2015.
Income tax expense
The Company’s effective tax rate onincreased from 39.5% in 2014 to 40.4% in 2015. The increase is primarily attributable to the non-deductible costs for tax purposes related to the pending acquisition of nTelos.
Net income from continuing operations decreased from 44.1% in 2011 to 42.0% in 2012 principally due to changes undertaken to simplify the Company’s corporate structure that reduced the impact of state taxes on the Company’s overall effective tax rate. The Company expects that the effective tax rate will decline to approximately 40% in 2013.
Net income increased $7.0 million, or 20.6%, in 2015 from continuing operations
Net income from continuing operations increased $3.1 million2014. Growth in 2012 from 2011, primarily assubscriber counts in the Wireless and Cable segments, along with a resultdecrease in cost of goods and services sold in the prepaid adjustmentWireless segment contributed to the increase, but were partially offset by expenses related to the goodwill impairment, improved investment results, lower interest expense,pending acquisition of nTelos and the decrease in the effective tax rate.unfavorable adjustment to depreciation expense.
Wireless
The Company’s Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, through Shenandoah PCS CompanyPersonal Communications, LLC (“PCS”), a Sprint PCS Affiliate of Sprint Nextel. ThisAffiliate. Through Shenandoah Mobile, LLC (“Mobile”), this segment also leases land on which it builds Company-owned cell towers, which it leases to affiliated and non-affiliated wireless service providers, throughout the same four-state area described above, through Shenandoah Mobile Company (“Mobile”).above.
PCS receives revenues from Sprint Nextel for subscribers that obtain service in PCS’s network coverage area. PCS relies on Sprint Nextel to provide timely, accurate and complete information to record the appropriate revenue for each financial period. Postpaid revenues received from Sprint Nextel are recorded net of certain fees retained by Sprint Nextel.Sprint. These fees totaled 16.8%total 22% of postpaid net postpaid billed revenue (gross customer billings net of credits and adjustments to customer accounts, and write-offs of uncollectible accounts), as defined until June 2010, when Sprint Nextel exercised its right to re-evaluateby the net service fee component, and increased the total fees retained by Sprint Nextel to 20%.Affiliate Agreement with Sprint.
During the first quarter of 2012, theThe Company entered into agreements with Sprint Nextel and Alcatel-Lucent to begin adding 4G LTE service to the Company’s Wireless network. The 4G service will use base station equipment acquired from Alcatel-Lucent in conjunction with Sprint Nextel’s wireless network upgrade plan known as Network Vision. There was no immediate change to the fees paid to Sprint, but the net service fee cap that is currently 12% of net billed revenues will increase to 14% on July 1, 2013. If an analysis of the balance of payments between Sprint and Shentel supports raising the rate, Sprint could increase the net service fee to 14% at that time.
Beginning in July 2010, the Company began offeringoffers prepaid wireless products and services in its PCS network coverage area. Sprint Nextel retains a 6% Management Fee onequal to 6% of prepaid revenues.customer billings. Prepaid revenues received from Sprint Nextel are reported net of the cost of this fee. Other fees charged on a per unit basis are separately recorded as expenses according to the nature of the expense. The Company pays handset subsidies to Sprint Nextel for the difference between the selling price of prepaid handsets and their cost, in aggregate andrecorded as a net cost included in cost of goods sold. The revenue and expense components reported to us by Sprint Nextel are based on Sprint Nextel’sSprint’s national averages for prepaid services, rather than being specifically determined by customers assigned to our geographic service areas.
2015, approximately 77% of postpaid gross additions through Company channels involved a handset financing plan. All else being equal, the service plans for these subscribers generate less monthly service revenue compared to plans with a subsidized handset.
The following tables show selected operating statistics of the Wireless segment as of the dates shown:
| | | Dec. 31, 2015 | | | Dec. 31, 2014 | | | Dec. 31, 2013 | |
| Retail PCS Subscribers – Postpaid | | | 312,512 | | | | 287,867 | | | | 273,721 | |
| Retail PCS Subscribers – Prepaid | | | 142,840 | | | | 145,162 | | | | 137,047 | |
| PCS Market POPS (000) (1) | | | 2,433 | | | | 2,415 | | | | 2,397 | |
| PCS Covered POPS (000) (1) | | | 2,224 | | | | 2,207 | | | | 2,067 | |
| CDMA Base Stations (sites) | | | 552 | | | | 537 | | | | 526 | |
| Towers Owned | | | 158 | | | | 154 | | | | 153 | |
| Non-affiliate Cell Site Leases (2) | | | 202 | | | | 198 | | | | 217 | |
| Gross PCS Subscriber Additions – Postpaid | | | 77,067 | | | | 72,891 | | | | 66,558 | |
| Net PCS Subscriber Additions ��� Postpaid | | | 24,645 | | | | 14,146 | | | | 10,829 | |
| PCS Average Monthly Retail Churn % - Postpaid (3) | | | 1.47 | % | | | 1.76 | % | | | 1.75 | % |
| Gross PCS Subscriber Additions – Prepaid | | | 83,796 | | | | 74,838 | | | | 76,416 | |
| Net PCS Subscriber Additions (Losses) – Prepaid | | | (2,322 | ) | | | 8,115 | | | | 8,870 | |
| PCS Average Monthly Retail Churn % - Prepaid (3) | | | 4.93 | % | | | 4.00 | % | | | 4.24 | % |
| | | Dec. 31, | | | Dec. 31, | | | Dec. 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| Retail PCS Subscribers – Postpaid | | | 262,892 | | | | 248,620 | | | | 234,809 | |
| Retail PCS Subscribers – Prepaid | | | 128,177 | | | | 107,100 | | | | 66,956 | |
| PCS Market POPS (000) (1) | | | 2,390 | | | | 2,388 | | | | 2,337 | |
| PCS Covered POPS (000) (1) | | | 2,057 | | | | 2,055 | | | | 2,049 | |
| CDMA Base Stations (sites) | | | 516 | | | | 509 | | | | 496 | |
| EVDO-enabled sites (2) | | | 444 | | | | 433 | | | | 381 | |
| EVDO Covered POPS (000) | | | 2,029 | | | | 2,027 | | | | 1,981 | |
| Towers | | | 150 | | | | 149 | | | | 146 | |
| Non-affiliate Cell Site Leases | | | 216 | | | | 219 | | | | 216 | |
| Gross PCS Subscriber Additions – Postpaid (3) | | | 69,124 | | | | 65,240 | | | | 63,515 | |
| Gross PCS Subscriber Additions – Prepaid (4) | | | 72,793 | | | | 86,328 | | | | 33,488 | |
| Net PCS Subscriber Additions – Postpaid (3) | | | 14,272 | | | | 13,811 | | | | 11,989 | |
| Net PCS Subscriber Additions – Prepaid (4) | | | 21,077 | | | | 40,144 | | | | 17,071 | |
| PCS Average Monthly Retail Churn % - Postpaid (5) | | | 1.79 | % | | | 1.78 | % | | | 1.89 | % |
| PCS Average Monthly Retail Churn % - Prepaid (5) | | | 3.67 | % | | | 4.33 | % | | | 4.85 | % |
| 1) | POPS refers to the estimated population of a given geographic area and is based on information purchased from third party sources. Market POPS are those within a market area which the Company is authorized to serve under its Sprint PCS affiliate agreements, and Covered POPS are those covered by the network’s service area.Company’s network. Covered POPS increased in 2014 primarily as a result of the Company’s deployment of the 800 megahertz spectrum at existing cell sites. |
| 2) | EVDO – Evolution Data Optimized – The third generationdecrease from December 31, 2013 to December 31, 2014 is primarily a result of wireless broadband technology.termination of Sprint iDEN leases associated with the former Nextel network. |
| 3) | For the twelve months ended. |
| 4) | For the 2012 and 2011 periods, additions for the twelve months ended. For the 2010 period, additions since initiation of prepaid offerings in July 2010; excludes prepaid subscribers purchased. |
| 5) | PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period. It is the average for the twelve months shown, except for prepaid churn in the period ended December 31, 2010, where it is the average for the period July through December, 2010. |
As of December 31, 2012, of the 516 CDMA base station sites in operation, Network Vision upgrades had been completed at 224 sites, and 4G LTE service was available at 200 of those. All remaining sites are expected to be upgraded during 2013.
(in thousands) | | Years Ended December 31, | | | Change | | | Years Ended December 31, | | | Change | |
| | | 2012 | | | 2011 | | | $ | | | | % | | | 2015 | | | 2014 | | | $ | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Wireless service revenue | | $ | 162,912 | | | $ | 137,118 | | | $ | 25,794 | | | | 18.8 | | | $ | 192,752 | | | $ | 191,147 | | | $ | 1,605 | | | | 0.8 | |
| Tower lease revenue | | | 9,114 | | | | 8,901 | | | | 213 | | | | 2.4 | | | | 10,505 | | | | 10,201 | | | | 304 | | | | 3.0 | |
| Equipment revenue | | | 5,982 | | | | 5,053 | | | | 929 | | | | 18.4 | | | | 5,175 | | | | 5,729 | | | | (554 | ) | | | (9.7 | ) |
| Other revenue | | | 1,630 | | | | 2,366 | | | | (736 | ) | | | (31.1 | ) | | | 369 | | | | 377 | | | | (8 | ) | | | (2.1 | ) |
| Total segment operating revenues | | $ | 179,638 | | | $ | 153,438 | | | $ | 26,200 | | | | 17.1 | | | $ | 208,801 | | | $ | 207,454 | | | $ | 1,347 | | | | 0.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 63,906 | | | | 56,705 | | | | 7,201 | | | | 12.7 | | | | 63,570 | | | | 73,290 | | | | (9,720 | ) | | | (13.3 | ) |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 30,716 | | | | 29,455 | | | | 1,261 | | | | 4.3 | | | | 35,792 | | | | 33,171 | | | | 2,621 | | | | 7.9 | |
| Depreciation and amortization | | | 31,660 | | | | 23,906 | | | | 7,754 | | | | 32.4 | | | | 34,416 | | | | 31,111 | | | | 3,305 | | | | 10.6 | |
| Total segment operating expenses | | | 126,282 | | | | 110,066 | | | | 16,216 | | | | 14.7 | | | | 133,778 | | | | 137,572 | | | | (3,794 | ) | | | (2.8 | ) |
| Segment operating income | | $ | 53,356 | | | $ | 43,372 | | | $ | 9,984 | | | | 23.0 | | | $ | 75,023 | | | $ | 69,882 | | | $ | 5,141 | | | | 7.4 | |
Operating revenues
Wireless service revenue increased $25.8$1.6 million, or 18.8%0.8%, for 2012in 2015 over 2011. Postpaid wireless2014. Net prepaid service revenues grew $4.3 million, or 9.9%, due to 4.5% growth in average prepaid subscribers over 2014 and higher average revenue net of fees and adjustments, generated $16.4 million of the year over year increase. The $10 monthly fee for smartphone data usage contributed $15.1 millionper subscriber due to improvements in product mix. Net postpaid service revenues during 2012, an increase of $8.4 million over 2011. In addition, averagedecreased $2.7 million. Average postpaid subscribers for 2012 increased 5.8% compared6.7% in 2015 over the 2014 period, but the increase was more than offset by promotional discounts and a switch to 2011. Prepaid wirelesslower revenue service plans associated with handset financing and leasing plans. Under these programs, the Company receives less service revenue increased $9.4 million, net offrom the subscriber, while the equipment revenue from the subscriber and the handset expense become Sprint’s responsibility and are not recorded by the Company. The decreases in service fees. Prepaid customers increased 19.7% torevenues are currently more than 128 thousand at December 31, 2012, from 107 thousand customers at December 31, 2011.offset by a decrease in handset expense within cost of goods and services.
The increase in towerTower lease revenue resultedincreased primarily from scheduled escalations in revenue streams.as a result of amendments to existing leases, as third party co-locators add 4G capabilities to our towers.
The increase in equipmentEquipment revenue resulteddecreased due primarily from the incremental revenue from iPhones sold,to a lower volume of subsidized handset sales, partially offset by fewer sales of other lower priced devices.discounts on those sales.
The decrease in other revenue primarily resulted from a $500 thousand reclassification of activation revenues from other revenue to Wireless service revenue. The remaining decrease was driven by lower revenues received from the Federal Universal Service Fund through Sprint.
Operating Expenses
During the fourth quarter of 2012, the Company received $11.8 million from Sprint Nextel to correct errors in its cost allocations relating to our participation in Sprint Nextel’s prepaid program beginning in July 2010 and continuing through September 30, 2012. The expense reduction reflected the recalculation of certain expenses, including the cost of handsets, costs per gross addition and cash cost per user, associated with the program. Had Sprint Nextel correctly calculated these costs, prepaid expenses in 2010 and 2011 would have been reduced by $1.2 million and $4.9 million, respectively.
Operating expenses
Cost of goods and services
Costs of goods and services increased $7.2 decreased $9.7 million, or 12.7%13.3%, in 20122015 from 2011. After adjusting for2014. Postpaid handset costs decreased $10.9 million, as handset expenses associated with financing and leasing plans are Sprint’s responsibility and are not recorded by the effect ofCompany. Prepaid handset costs decreased $1.0 million, driven by year-over-year declines in both the prepaid wireless expense reduction discussed above,volume and average cost of goods and serviceshandsets. Network costs increased $14.8 million, or 27.8%, in 2012 from 2011. Costs of handsets for postpaid phones increased $5.9$1.9 million, due to higher cost iPhonesa decrease in labor capitalized to projects and 4G smartphones. Similarly, handset subsidies associated with prepaid wireless plans increased $3.8 million, or 54%, in 2012 over 2011 due to a greater offering of higher cost smartphones. Costs of the expanded network coverage and roll-out of LTE coverage resulted in a $3.3 million increase in network costs, including $2.4 million in additional backhaul line costs and increased rent expense of $1.1 million at LTE cell sites. The Company recognized minimal gains on equipment traded-in during 2012 compared to $1.9 million of gains on equipment traded-in during 2011.
Costs of goods and services will continue to increase in 2013 primarily due to increases in rent and power expenses for cell sites and towers. Additionally, the mixprior year period included a $0.4 million gain on disposal of handsets sold to higher cost smartphones, as well as the higher costs for backhaul and rent during the Network Vision transition and thereafter.
Selling, general and administrative3G equipment.
Selling, general and administrative expensescosts increased $1.3$2.6 million, or 4.3%7.9%, in 2012 from 2011. After adjusting for the effect of2015 over 2014. Costs to support the prepaid wireless expense reduction discussed above, selling,business increased $1.8 million, driven by subscriber growth, product mix, and higher general and administrative costs. Personnel costs increased $0.7 million due to the addition of new retail stores. Advertising expenses increased $4.8$0.6 million. Property taxes increased $0.5 million or 17.4%, in 2012 from 2011, principally due to $3.3a prior year refund and a higher tax basis in network assets as a result of recent upgrades. The increases were partially offset by a $1.1 million decline in third party commissions expense due to lower volume of incremental selling and marketing expenses associated with the prepaid wireless plans. Commission and advertising expenses increased $0.8 million and $0.4 million, respectively, in 2012 from 2011 levels.
Depreciation and amortizationcommissionable handsets activated through dealer channels.
Depreciation and amortization increased $7.8$3.3 million, or 10.6%, in 20122015 over 2011. Depreciation increased $9.1 million in 2012, as work began to build a 4G LTE network in the Company’s service area, resulting in accelerated depreciation2014, following completion of $8.4 million on existing assets as the Company replaces its existing wireless network. The increase in depreciation was partially offset by a decreaseNetwork Vision upgrades.
48
Cable
The Cable segment provides analog, digital and high-definition television service under franchise agreements in Virginia, West Virginia and Maryland, as well asvideo, internet and voice services in these markets.
The Company closed on the acquisitionfranchise areas in portions of cable operations from JetBroadBand effective July 30, 2010, and Suddenlink effective November 30, 2010. The Cable segment results include the operating results of the acquired operations from these dates forward.
The Company has been upgrading its cable systems since early 2009, and by December 2010 had completed upgrades to the systems acquired in late 2008. During 2011, the Company completed upgrades to most of the markets acquired in 2010 that were located in Virginia. As of December 31, 2012, upgrades to the last market acquired in 2010, located inVirginia, West Virginia are still in process, and should be completed in 2013. The Company has rolled out new or expandedwestern Maryland, and leases fiber optic facilities throughout its service area. It does not include video, services, internet and voice services provided to each market as upgrades have been completed.
customers in Shenandoah County, Virginia.
The following table shows selected operating statistics of the Cable segment as of the dates shown:
| | | Dec. 31, 2012 | | | Dec. 31, 2011 | | | Dec. 31, 2010 | | | Dec. 31, 2015 | | | Dec. 31, 2014 | | | Dec. 31, 2013 | |
| | | | | | | | | | | | | | | | | | | |
| Homes Passed (1) | | | 184,533 | | | | 182,156 | | | | 178,763 | | | | 172,538 | | | | 171,589 | | | | 170,470 | |
| Customer Relationships (2) | | | | | | | | | | | | | | | | | | | | | | | | |
| Video customers | | | 59,089 | | | | 62,835 | | | | 65,138 | | | | 48,184 | | | | 49,247 | | | | 51,197 | |
| Non-video customers | | | 15,709 | | | | 12,513 | | | | 9,074 | | | | 24,550 | | | | 22,051 | | | | 18,341 | |
| Total customer relationships | | | 74,798 | | | | 75,348 | | | | 74,212 | | | | 72,734 | | | | 71,298 | | | | 69,538 | |
| Video | | | | | | | | | | | | | | | | | | | | | | | | |
| Customers (3) | | | 61,559 | | | | 64,979 | | | | 67,235 | | | | 50,215 | | | | 52,095 | | | | 53,076 | |
| Penetration (4) | | | 33.4 | % | | | 35.7 | % | | | 37.6 | % | | | 29.1 | % | | | 30.4 | % | | | 31.1 | % |
| Digital video penetration (5) | | | 39.5 | % | | | 39.0 | % | | | 34.0 | % | | | 77.9 | % | | | 65.9 | % | | | 49.2 | % |
| High-speed Internet | | | | | | | | | | | | | | | | | | | | | | | | |
| Available Homes (6) | | | 163,273 | | | | 156,119 | | | | 144,099 | | | | 172,538 | | | | 171,589 | | | | 168,255 | |
| Customers (3) | | | 41,025 | | | | 37,021 | | | | 31,832 | | | | 55,690 | | | | 51,359 | | | | 45,776 | |
| Penetration (4) | | | 25.1 | % | | | 23.7 | % | | | 22.1 | % | | | 32.3 | % | | | 29.9 | % | | | 27.2 | % |
| Voice | | | | | | | | | | | | | | | | | | | | | | | | |
| Available Homes (6) | | | 154,552 | | | | 143,235 | | | | 118,652 | | | | 169,801 | | | | 168,852 | | | | 163,282 | |
| Customers (3) | | | 12,307 | | | | 9,881 | | | | 6,340 | | | | 20,166 | | | | 18,262 | | | | 14,988 | |
| Penetration (4) | | | 8.0 | % | | | 6.9 | % | | | 5.3 | % | | | 11.9 | % | | | 10.8 | % | | | 9.2 | % |
| Revenue Generating Units (7) | | | 114,891 | | | | 111,881 | | | | 105,407 | | | | 126,071 | | | | 121,716 | | | | 113,840 | |
| Fiber Route Miles | | | | 2,844 | | | | 2,834 | | | | 2,636 | |
| Total Fiber Miles (8) | | | 39,418 | | | | 34,772 | | | | 31,577 | | | | 76,949 | | | | 72,694 | | | | 69,296 | |
| Fiber Route Miles | | | 2,077 | | | | 1,990 | | | | 1,389 | | |
| Average Revenue Generating Units | | | | 124,054 | | | | 117,744 | | | | 110,611 | |
| 1) | Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information. |
| 2) | Customer relationships represent the number of customers who receive at least one of our services. |
| 3) | Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer. Where services are provided on a bulk basis, such as to hotels, universities and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above. |
| 4) | Penetration is calculated by dividing the number of customers by the number of homes passed or available homes, as appropriate. |
| 5) | Digital video penetration is calculated by dividing the number of digital video customers by total video customers. Digital video customers are video customers who receive any level of video service via digital transmission. A dwelling with one or more digital set-top boxes or digital adapters counts as one digital video customer. |
| 6) | Homes and businesses are considered available (“available homes”) if we can connect them to our distribution system without further extending the transmission lines and if we offer the service in that area. Homes passed in Shenandoah County are excluded from available homes as we do not offer high-speed internet or voice services over our co-axial distribution network in this market. |
| 7) | Revenue generating units are the sum of video, voice and high-speed internet customers. |
| 8) | Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. |
| (in thousands) | | Years Ended December 31, | | | Change | |
| | | 2015 | | | 2014 | | | $ | | | % | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue (1) | | $ | 88,980 | | | $ | 77,179 | | | $ | 11,801 | | | | 15.3 | |
| Other revenue (1) | | | 8,642 | | | | 7,374 | | | | 1,268 | | | | 17.2 | |
| Total segment operating revenues | | $ | 97,622 | | | $ | 84,553 | | | $ | 13,069 | | | | 15.5 | |
| | | | | | | | | | | | | | | | | |
| Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 54,611 | | | | 51,982 | | | | 2,629 | | | | 5.1 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 19,412 | | | | 19,521 | | | | (109 | ) | | | (0.6 | ) |
| Depreciation and amortization | | | 23,097 | | | | 23,148 | | | | (51 | ) | | | (0.2 | ) |
| Total segment operating expenses | | | 97,120 | | | | 94,651 | | | | 2,469 | | | | 2.6 | |
| Segment operating income (loss) | | $ | 502 | | | $ | (10,098 | ) | | $ | 10,600 | | | | 105.0 | |
(in thousands) | | Years Ended December 31, | | | Change | |
| | | 2012 | | | 2011 | | | $ | | | | % | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue | | $ | 66,010 | | | $ | 59,051 | | | $ | 6,959 | | | | 11.8 | |
| Equipment and other revenue | | | 10,313 | | | | 9,009 | | | | 1,304 | | | | 14.5 | |
| Total segment operating revenues | | $ | 76,323 | | | $ | 68,060 | | | $ | 8,263 | | | | 12.1 | |
| | | | | | | | | | | | | | | | | |
| Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 48,978 | | | | 47,417 | | | | 1,561 | | | | 3.3 | |
| Goodwill impairment | | | 10,952 | | | | - | | | | 10,952 | | | | N/A | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 22,335 | | | | 18,827 | | | | 3,508 | | | | 18.6 | |
| Depreciation and amortization | | | 23,519 | | | | 23,198 | | | | 321 | | | | 1.4 | |
| Total segment operating expenses | | | 105,784 | | | | 89,442 | | | | 16,342 | | | | 18.3 | |
| Segment operating loss | | $ | (29,461 | ) | | $ | (21,382 | ) | | $ | (8,079 | ) | | | 37.8 | |
| (1) | Prior year service and other revenue amounts have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue. |
Operating revenues and expenses
The Cable segment total operating revenuesservice revenue increased $7.0$11.8 million, in 2012 over 2011,or 15.3%. Internet service revenue increased $8.5 million, or 29.7%, due to a 4.6%9.7% increase in average internet subscribers, along with an improved product mix as customers upgraded to higher-speed plans with higher monthly recurring charges. Video revenue, including retransmission consent fee surcharges, increased $4.0 million driven by video rate increases in January 2015. Voice revenue increased $1.2 million due to 16.7% growth in average voice revenue generating units, customers shifting to higher-priced digital TV packages and higher speed data access packages, and video price increases.units. These increases were partially offset by a $1.9 million increase in bundle discounts.
Equipment and other revenues increasedOther revenue grew $1.3 million, or 14.5%,primarily due to increases in revenue from sales ofnew fiber optic servicescontracts and in a variety of ancillary revenues such as set-top box rental fees, advertising revenues, and other fees billed to customers, each of which generated approximately $0.3 million in incremental revenues.higher installation revenue.
Operating expenses
Cable segment cost of goods and services increased due to a $1.2$2.6 million, increaseor 5.1%, in Cable content cost. In addition,2015 over 2014. Video programming costs, to supportincluding retransmission consent fees, increased $4.1 million as the expansionimpact of voice services, along withrising rates per subscriber outpaced declining video subscriber counts. Network costs for third party installation and maintenance, contributed an additional $1.6 million of the increase. Network maintenance costs also grew $0.7 million, primarily due to repairs that were required after strong storms damaged portions of the network. Partially offsetting the increases in cost of goods and services were $1.9$0.4 million of savings in backhaul and power costs as a result of the network re-build efforts over the last two years.
The Company recorded an $11.0 million impairment of goodwillincrease in the fourth quarterUniversal Service fees mandated by the U.S. government in the current year. The increases were offset by a $1.5 million decrease in disposal costs following a $1.6 million disposal of 2012.obsolete equipment in 2014, along with a $1.0 million decrease in maintenance expense following a multi-year project to upgrade cable network infrastructure.
Selling, general and administrative expenses have increased principally due to costs fordecreased $0.1 million against the prior year as declines in marketing and customer service costs were largely offset by growth in administrative and general administrative functions.operating tax expenses.
Wireline
The Wireline segment is composed of two subsidiaries providing telecommunications services. Through these subsidiaries, this segment provides regulated and unregulated voice services, dial-upDSL and DSLbroadband internet access, and long distance access services throughout Shenandoah County and portions of northwesternRockingham, Frederick, Warren and Augusta counties in Virginia. The segment also provides video services in portions of Shenandoah County, Virginia, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor includingthrough West Virginia, Maryland and portions of West Virginia and Maryland.Pennsylvania.
| | | Dec. 31, | | | Dec. 31, | | | Dec. 31, | | | Dec. 31, 2015 | | | Dec. 31, 2014 | | | Dec. 31, 2013 | |
| | | 2012 | | | 2011 | | | 2010 | | |
| Telephone Access Lines | | | 22,297 | | | | 23,083 | | | | 23,706 | | |
| Telephone Access Lines (1) | | | | 20,252 | | | | 21,612 | | | | 22,106 | |
| Long Distance Subscribers | | | 10,157 | | | | 10,483 | | | | 10,667 | | | | 9,476 | | | | 9,571 | | | | 9,851 | |
| DSL Subscribers | | | 12,567 | | | | 12,351 | | | | 11,946 | | |
| Dial-up Internet Subscribers | | | 996 | | | | 1,410 | | | | 2,190 | | |
| Video Customers(2) | | | | 5,356 | | | | 5,692 | | | | 6,342 | |
| DSL and Cable Modem Subscribers (3) | | | | 13,086 | | | | 12,742 | | | | 12,632 | |
| Fiber Route Miles | | | | 1,736 | | | | 1,556 | | | | 1,452 | |
Total Fiber Miles (1)(4) | | | 84,107 | | | | 78,523 | | | | 71,118 | | | | 123,891 | | | | 86,801 | | | | 84,600 | |
| Fiber Route Miles | | | 1,420 | | | | 1,349 | | | | 1,267 | | |
| 1) | Effective October 1, 2015, the Company launched cable modem services on its cable plant, and ceased the requirement that a customer have a telephone access line to purchase DSL service. |
| 2) | The Wireline segment’s video service passes approximately 16,000 homes. |
| 3) | 2015 total includes 420 customers served via the coaxial cable network. |
| 4) | Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. |
(in thousands) | | Years Ended December 31, | | | Change | |
| | | 2015 | | | 2014 | | | $ | | | % | |
| | | | | | | | | | | | | | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue (1) | | $ | 21,880 | | | $ | 20,986 | | | $ | 894 | | | | 4.3 | |
| Carrier access and fiber revenues (1) | | | 42,303 | | | | 39,202 | | | | 3,101 | | | | 7.9 | |
| Other revenue (1) | | | 3,237 | | | | 2,847 | | | | 390 | | | | 13.7 | |
| Total segment operating revenues | | $ | 67,420 | | | $ | 63,035 | | | $ | 4,385 | | | | 7.0 | |
| | | | | | | | | | | | | | | | | |
Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 31,668 | | | | 30,088 | | | | 1,580 | | | | 5.3 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 6,612 | | | | 6,009 | | | | 603 | | | | 10.0 | |
| Depreciation and amortization | | | 12,736 | | | | 11,224 | | | | 1,512 | | | | 13.5 | |
| Total segment operating expenses | | | 51,016 | | | | 47,321 | | | | 3,695 | | | | 7.8 | |
| Segment operating income | | $ | 16,404 | | | $ | 15,714 | | | $ | 690 | | | | 4.4 | |
(in thousands) | | Years Ended December 31, | | | Change | |
| | | 2012 | | | 2011 | | | $ | | | | % | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue | | $ | 16,444 | | | $ | 16,028 | | | $ | 416 | | | | 2.6 | |
| Access revenue | | | 12,604 | | | | 13,405 | | | | (801 | ) | | | (6.0 | ) |
| Facilities lease revenue | | | 21,153 | | | | 16,856 | | | | 4,297 | | | | 25.5 | |
| Equipment revenue | | | 36 | | | | 39 | | | | (3 | ) | | | (7.7 | ) |
| Other revenue | | | 4,421 | | | | 3,200 | | | | 1,221 | | | | 38.2 | |
| Total segment operating revenues | | $ | 54,658 | | | $ | 49,528 | | | $ | 5,130 | | | | 10.4 | |
| Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 24,785 | | | | 19,702 | | | | 5,083 | | | | 25.8 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 6,859 | | | | 7,528 | | | | (669 | ) | | | (8.9 | ) |
| Depreciation and amortization | | | 9,171 | | | | 8,453 | | | | 718 | | | | 8.5 | |
| Total segment operating expenses | | | 40,815 | | | | 35,683 | | | | 5,132 | | | | 14.4 | |
| Segment operating income | | $ | 13,843 | | | $ | 13,845 | | | $ | (2 | ) | | | (0.0 | ) |
| (1) | Prior year categories of access revenue and facilities lease revenue have been combined into the new category of carrier access and fiber revenue to conform to current year presentation. Additionally, set-top box revenues included in other revenue in the prior year are now presented within service revenue. |
Operating revenues
OperatingTotal operating revenues in 2015 increased $5.1$4.4 million, or 10.4%7.0%, over 2014. Carrier access and fiber revenues grew $3.1 million as growth in 2012 from 2011. The increaseaffiliate and non-affiliate fiber contracts were partially offset by favorable Universal Service program adjustments that were recorded in the first quarter of 2014. Internet service revenue resulted primarily from contractsgrew $1.2 million as customers upgraded to provide internet access to third parties. Access revenue decreased due to changes in affiliate billings in the third quarter of 2011. Facility lease revenue increased due to charges for additional circuits to our Wireless affiliate and third parties for fiber to the tower and similar projects, to support voice services in the acquired cable markets, as well as service contracts to other customers. Other revenue increased as the Company provided services at cost to the new owners of Converged Services properties during transition of the properties. This increase is offset by an increase in cost of goods and services.higher-speed plans.
Operating expenses
Operating expenses overall increased $5.1$3.7 million, or 14.4%7.8%, in 2012,2015, compared 2011.to 2014. The increase in cost of goods and services resulted primarily from the costs of providing service to the new owners of transitioning Converged Services properties. Also driving thea $2.1 million increase were the costs of obtaining service from third parties to provide voice services to Shentel Cable and other customers, related to the increases in service revenue and facilities lease revenue shown above, as well as approximately $0.3 million in costs to repair facilities following a major summer storm at the end of June 2012.support affiliate fiber routes. The increase in depreciation resulted from additions to switch and circuit equipment in support of fiber and other service contract revenue increases as shown above. Thewas partially offset by a $0.6 million decrease in selling,affiliate and non-affiliate line costs. Sales, general and administrative expenses resulted from lower commissions,increased as a result of growth in sales and customer service support teams.
Depreciation expense grew $1.5 million as a result of continued investment in the construction of fiber facilities. The current year total includes an unfavorable adjustment of $0.4 million related to assets placed into service in one year and bad debt charges, each of which was less than $0.2 million.closed out in the fixed asset system in a subsequent year.
20112014 Compared to 20102013
Consolidated Results
The Company’s consolidated results from continuing operations for the years ended December 31, 20112014 and 20102013 are summarized as follows:
| (in thousands) | | Years Ended December 31, | | | Change | | | Years Ended December 31, | | | Change | |
| | | 2011 | | | 2010 | | | $ | | | | % | | | 2014 | | | 2013 | | | $ | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 251,145 | | | $ | 195,206 | | | $ | 55,939 | | | | 28.7 | | | $ | 326,946 | | | $ | 308,942 | | | | 18,004 | | | | 5.8 | |
| Operating expenses | | | 218,855 | | | | 162,875 | | | | 55,980 | | | | 34.4 | | | | 265,003 | | | | 253,535 | | | | 11,468 | | | | 4.5 | |
| Gain on sale of directory | | | - | | | | 4,000 | | | | (4,000 | ) | | | n/a | | |
| Operating income | | | 32,290 | | | | 36,331 | | | | (4,041 | ) | | | (11.1 | ) | | | 61,943 | | | | 55,407 | | | | 6,536 | | | | 11.8 | |
| Other income (expense) | | | (8,085 | ) | | | (4,164 | ) | | | (3,921 | ) | | | 94.2 | | | | 5,909 | | | | (5,943 | ) | | | (34 | ) | | | (0.6 | ) |
| Income tax expense | | | 10,667 | | | | 13,393 | | | | (2,726 | ) | | | (20.4 | ) | | | 22,151 | | | | 19,878 | | | | 2,273 | | | | 11.4 | |
| Net income from continuing operations | | $ | 13,538 | | | $ | 18,774 | | | $ | (5,236 | ) | | | (27.9 | ) | | $ | 33,883 | | | $ | 29,586 | | | | 4,297 | | | | 14.5 | |
Operating revenues
Operating revenues increased $55.9$18.0 million, or 28.7%5.8%, in 20112014 over 2010,2013. Wireless segment revenues increased $9.3 million compared to 2013. The Wireless revenue growth included an increase in net postpaid service revenues of $5.0 million, driven by 4.7% year-over-year growth in average postpaid subscribers. In addition, net prepaid service revenues grew $3.2 million, or 7.9%, due to 4.9% growth in average prepaid subscribers and higher average revenue per subscriber in 2014 over 2013. Cable segment revenues increased $8.7 million. Cable service revenues grew $5.3 million due to a 6.4% increase in average revenue generating units compared to the 2013 period, a video rate increase in early 2014, and to customers selecting higher-priced digital TV and higher-speed data packages. Cable equipment revenues increased $2.3 million due to a change in January 2014 of charging customers separately for their first set top box, which previously had been included in the service fee. Additionally, customer use of digital converter boxes grew as the Company converted markets to all-digital signals. Growth in fiber lease revenue contributed $0.6 million to the year-over-year increase of Cable segment revenue. Wireline segment revenue increased $3.6 million, primarily due to an increase of $25.5 milliongrowth in the Wireless segmentfacility lease revenues from new contracts with affiliates and $31.2 million in the Cable segment. The increase in the Wireless segment resulted from an increase in prepaid service revenues of $16.6 million and $9.3 million in postpaid service revenues. The increase in prepaid service revenues resulted from having a full year’s worth of prepaid revenues in 2011, versus 6 months in 2010, as well as a 60% increase in prepaid customers during 2011. The increase in postpaid revenues resulted from a 5.9% increase in subscribers during the year, as well as incremental data revenues applied to plans with smartphones beginning in early 2011. The increase in Cable segment revenues resulted primarily from the full year impact of the systems acquired during 2010, as well as to a 7% increase in services provided during 2011.third parties.
Operating expenses
OperatingTotal operating expenses increased $56.0$11.5 million or 34.4%,in 2014 compared to the 2010 period. The2013. Cost of goods and services sold increased $4.6 million, including increases of $3.3 million in Cable segment operations accounted for $37.3video programming costs and $1.7 million in network maintenance costs. Disposal costs increased $1.6 million, as the Company disposed of obsolete equipment that had been taken out of service while upgrading the year over yearcable and wireline networks. The increase principallyin disposal costs was offset by reductions in network costs, driven primarily by lower third party backhaul expenses along with an increase in network engineering labor capitalized to projects. Selling, general and administrative expenses increased $1.7 million, due to the incremental months of ownership of the systems acquired during 2010. Incremental depreciationhigher personnel costs, partially offset by lower advertising and bad debt expenses. Depreciation and amortization expense on assets placed in service during late 2010 and throughout 2011 accounted for muchincreased $5.2 million, primarily due to completion of the rest of increase in Cable segment costs. Wireless segment operating expenses increased $20.5 million, principally due to $14.5 million of additional costs associated with prepaid subscribers. Wireless backhaulNetwork Vision and othercable network costs accounted for much of the remainder of the increase in Wireless segment expenses.
Gain on sale of directory
The Company sold its telephone directory for $4 million in cash during the third quarter of 2010.
Other income (expense)
The change in other income (expense) resulted primarily from incremental interest costs associated with the additional debt utilized to finance the acquisition of cable systems during 2010. Investment results and other non-operating items generated less income in 2011 than 2010.
Income tax expense
The Company’s effective tax rate ondecreased from 40.2% in 2013 to 39.5% in 2014. The 2013 period included $0.5 million in unfavorable adjustments from finalizing the estimated effects of restructuring entities during 2012. The 2014 period included $0.2 million in favorable adjustments to estimates made for the 2013 federal and state returns filed in September 2014.
Net income from continuing operations increased from 41.6% in 2010 to 44.1% in 2011 principally due to changes in the mix of taxable income resulting in more income apportioned to states with relatively higher tax rates, and more losses apportioned to states with relatively lower tax rates, resulting in an increase in the effective state tax rate.
Net income increased $4.3 million, or 14.5%, in 2014 from continuing operations
Net income from continuing operations decreased $5.2 million2013, reflecting growth in 2011 from 2010, primarily as a result of the additional lossessubscriber counts and revenue per subscriber in the CableWireless segment, the incremental interestpartially offset by increases in operating expenses associated with the debt utilized to acquire the cable systems, and the increaseincurred in the effective tax rate.support of this growth.
Wireless
| (in thousands) | | Years Ended December 31, | | | Change | | | Years Ended December 31, | | | Change | |
| | | | 2014 | | | 2013 | | | $ | | | % | |
| | | 2011 | | | 2010 | | | $ | | | | % | | | | | | | | | | | | | | |
| Segment operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Wireless service revenue | | $ | 137,118 | | | $ | 111,279 | | | $ | 25,839 | | | | 23.2 | | | $ | 191,147 | | | $ | 182,955 | | | $ | 8,192 | | | | 4.5 | |
| Tower lease revenue | | | 8,901 | | | | 8,145 | | | | 756 | | | | 9.3 | | | | 10,201 | | | | 10,339 | | | | (138 | ) | | | (1.3 | ) |
| Equipment revenue | | | 5,053 | | | | 5,713 | | | | (660 | ) | | | (11.6 | ) | | | 5,729 | | | | 5,218 | | | | 511 | | | | 9.8 | |
| Other revenue | | | 2,366 | | | | 2,751 | | | | (385 | ) | | | (14.0 | ) | | | 377 | | | | (387 | ) | | | 764 | | | | 197.5 | |
| Total segment operating revenues | | | 153,438 | | | | 127,888 | | | | 25,550 | | | | 20.0 | | | $ | 207,454 | | | $ | 198,125 | | | $ | 9,329 | | | | 4.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment operating expenses | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 56,705 | | | | 44,794 | | | | 11,911 | | | | 26.6 | | | | 73,290 | | | | 72,995 | | | | 295 | | | | 0.4 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 29,455 | | | | 21,558 | | | | 7,897 | | | | 36.6 | | | | 33,171 | | | | 32,812 | | | | 359 | | | | 1.1 | |
| Depreciation and amortization | | | 23,906 | | | | 23,187 | | | | 719 | | | | 3.1 | | | | 31,111 | | | | 28,177 | | | | 2,934 | | | | 10.4 | |
| Total segment operating expenses | | | 110,066 | | | | 89,539 | | | | 20,527 | | | | 22.9 | | | | 137,572 | | | | 133,984 | | | | 3,588 | | | | 2.7 | |
| Segment operating income | | $ | 43,372 | | | $ | 38,349 | | | $ | 5,023 | | | | 13.1 | | | $ | 69,882 | | | $ | 64,141 | | | $ | 5,741 | | | | 9.0 | |
Operating revenues
Wireless service revenue increased $25.8$8.2 million, or 23.2%4.5%, for 20112014 over 2010. Prepaid wireless2013. Net postpaid service revenue, net of fees, generated $16.6revenues increased $5.0 million, of the year over year increase. Prepaid customers increased to more than 107 thousand at December 31, 2011, from 67 thousand customers at December 31, 2010. Postpaid wireless service revenue increased $9.3 million, net of fees and adjustments, or 8.1%. Average3.5%, driven by 4.7% year-over-year growth in average postpaid subscribers for 2011 increased 5.7% compared to 2010.subscribers. The $10 monthly fee for smartphone data usage added to customer bills during 2011 added $6.7 million to postpaid net service fee increased from 12% of net billed revenues during 2011. The increase in the postpaid Net Service Fee from 8.8% of billed revenue to 12.0%, effective June14% on August 1, 2010, resulted in a $4.6 million reduction in2013, reducing net postpaid service revenue by $2.1 million, or approximately $0.3 million per month. Net prepaid service revenues grew $3.2 million, or 7.9%. Average prepaid subscribers increased 4.9% in 2011, versus a reduction2014 over 2013, with changes in the mix of approximately $2.2 millionsubscribers accounting for the remainder of the increase in 2010 net postpaidprepaid service revenues.
The increasedecrease in tower lease revenue resulted from additional cell sitethe termination of Sprint iDEN leases associated with the former Nextel network. Equipment revenue increased due to growth in accessories sales and higher rateslower discounts on existing leases.
The decrease in equipmenthandset sales. Other revenue resulted fromincreased, as the prior year period included a 5% decrease in postpaid handsets sold combined with an 11.5% decrease in the average revenue per postpaid handset sold.
The decrease in other revenue primarily resulted from a one-time$0.8 million unfavorable adjustment to straight-line rent accruals recorded inrelated to the third quartertermination of 2010 on a small number of leases due to a determination that the leases were longer-term than initially thought. This was partially offset by an increase in Universal Service Charge revenues.iDEN leases.
Cost of goods and servicesOperating expenses
Cost of goods and services increased $11.9$0.3 million, or 26.6%0.4%, in 20112014 from 2010. Handset subsidies2013. Network costs increased $1.1 million, driven by increases in rent and backhaul expenses associated with the new prepaid wireless plans increased $7.1 million, or 223%, in 2011 over 2010. Gross additions of prepaid wireless customers increased nearly 160%. Costs of handsets for postpaid phones increased $1.9Network Vision project. Maintenance expense grew $1.0 million due to increases in maintenance contracts that support the upgraded wireless network. Cost of services declined by $0.8 million, driven by lower costs to support WiMax subscribers and prepaid “top-up” services. Cost of goods declined due to a one-time $0.4 million gain related to actual disposal costs for the Network Vision project being less than previously accrued. Handset costs declined $0.3 million as a lower volume of subsidized handsets, driven by the start of installment handset sales in 2014, was partially offset by higher cost smartphones and 4G phones. The Company paid $1.1 million in fees to provide 4G services in 2011. Costshandset costs.
54
Selling, general and administrative costs increased $0.4 million, or 1.1%, in 2014 over 2013 primarily due to the additional retail store personnel to support subscriber growth.
Depreciation and amortization increased $2.9 million, or 10.4%, in 2014 over 2013, following completion of Network Vision upgrades.
Cable
(in thousands) | | Years Ended December 31, | | | Change | |
| | | 2014 | | | 2013 | | | $ | | | % | |
| | | | | | | | | | | | | | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue (1) | | $ | 77,179 | | | $ | 69,782 | | | $ | 7,397 | | | | 10.6 | |
| Other revenue (1) | | | 7,374 | | | | 6,090 | | | | 1,284 | | | | 21.1 | |
| Total segment operating revenues | | $ | 84,553 | | | $ | 75,872 | | | $ | 8,681 | | | | 11.4 | |
| | | | | | | | | | | | | | | | | |
| Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 51,982 | | | | 45,767 | | | | 6,215 | | | | 13.6 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 19,521 | | | | 19,052 | | | | 469 | | | | 2.5 | |
| Depreciation and amortization | | | 23,148 | | | | 21,202 | | | | 1,946 | | | | 9.2 | |
| Total segment operating expenses | | | 94,651 | | | | 86,021 | | | | 8,630 | | | | 10.0 | |
| Segment operating loss | | $ | (10,098 | ) | | $ | (10,149 | ) | | $ | 51 | | | | 0.5 | |
| (1) | Prior year service and other revenue amounts have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue. |
Operating revenues
Cable revenue increased $8.7 million, or 11.4% in 2014 over 2013. Cable service revenue increased $7.4 million, or 10.6%, due to a 6.4% increase in average revenue generating units, a video rate increase in January 2014, customers selecting higher-priced digital TV services and higher-speed data access packages, and increases in equipment rents. Other revenue increased by $1.3 million, due to increases in facility lease revenue, which grew $0.7 million due to new contracts with third parties, while all other revenues increased $0.6 million from 2013 to 2014.
Operating expenses
Cable segment cost of goods and services increased $6.2 million, or 13.6%, in 2014 over 2013. Video programming costs increased $3.3 million as the impact of rising rates per subscriber outpaced declining video subscriber counts. Asset disposal costs increased $1.4 million, as the Company disposed of obsolete equipment that was removed from service while upgrading the network. Maintenance costs increased $0.7 million to support network growth and personnel costs increased $0.5 million.
Selling, general and administrative expenses increased $7.9grew $0.5 million against the prior year as increases in 2011 from 2010 duecosts related to $6.7 million of incremental sellingcustomer service and marketing expenses associated with the prepaid wireless plans. Other increases included $0.9 million in advertising and $0.9 million in higher retail store display and demo phone expenses. These increasesadministrative functions were partially offset by $0.8reductions of $0.3 million in pension related costs in 2010.
Depreciationmarketing and amortization
Depreciationselling expense and amortization increased $0.7$0.1 million in 2011 over 2010, principally due to $0.4 million of additional amortization on the $6.9 million of acquired prepaid subscriber base, and $0.3 million due to capital projects placed in service in late 2010 and 2011.bad debt expense.
Cable
(in thousands) | | Years Ended December 31, | | | Change | |
| | | 2011 | | | 2010 | | | $ | | | | % | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue | | $ | 59,051 | | | $ | 32,527 | | | $ | 26,524 | | | | 81.5 | |
| Equipment and other revenue | | | 9,009 | | | | 4,292 | | | | 4,717 | | | | 109.9 | |
| Total segment operating revenues | | | 68,060 | | | | 36,819 | | | | 31,241 | | | | 84.9 | |
| | | | | | | | | | | | | | | | | |
| Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 47,417 | | | | 26,904 | | | | 20,513 | | | | 76.2 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 18,827 | | | | 13,858 | | | | 4,969 | | | | 35.9 | |
| Depreciation and amortization | | | 23,198 | | | | 11,314 | | | | 11,884 | | | | 105.0 | |
| Total segment operating expenses | | | 89,442 | | | | 52,076 | | | | 37,366 | | | | 71.8 | |
| Segment operating loss | | $ | (21,382 | ) | | $ | (15,257 | ) | | $ | (6,125 | ) | | | 40.1 | |
Operating revenues and expenses
The Cable segment total operating revenues increased $31.2 million in 2011 over 2010, the majority of which (approximately $28 million) resulted from a full twelve months of activity in 2011 from the cable systems acquired in 2010. Cable segment RGU’s increased by 7.0% during 2011, accounting for the remainder of the increase in cable segment revenues.
Cable segment operating expenses include seven additional months of expenses for the cable markets acquired in July 2010, and eleven months of additional expenses for the cable markets acquired in December 2010, that account for much (approximately $16 million) of the increase in cost of goods and selling, general and administrative expenses shown above. The 2010 period included $3.2 million in transaction related operating expenses and $0.6 million in pension related expenses. Incremental cost increases (approximately $12 million overall) reflected higher programming costs due to increased subscribers and increases in rates charged by third parties; higher marketing and related expenses; repair and maintenance expenses; and other costs to acquire new subscribers. The increase in depreciation and amortization expense represents both a full yearconsists of $3.1 million of higher depreciation andexpense related to network upgrades, offset by lower amortization on the acquired assets, as well as increases due to new assets placed in service as network upgradescustomer base intangible asset recorded when the cable markets were completed during 2010 and 2011.
this asset declines on the anniversary of the acquisitions.
Wireline
(in thousands) | | Years Ended December 31, | | | Change | |
| | | 2014 | | | 2013 | | | $ | | | % | |
| | | | | | | | | | | | | | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue (1) | | $ | 20,986 | | | $ | 20,244 | | | $ | 742 | | | | 3.7 | |
| Carrier access and fiber revenues (1) | | | 39,202 | | | | 36,266 | | | | 2,936 | | | | 8.1 | |
| Other revenue (1) | | | 2,847 | | | | 2,960 | | | | (113 | ) | | | (3.8 | ) |
| Total segment operating revenues | | $ | 63,035 | | | $ | 59,470 | | | $ | 3,565 | | | | 6.0 | |
| | | | | | | | | | | | | | | | | |
Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 30,088 | | | | 28,603 | | | | 1,485 | | | | 5.2 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 6,009 | | | | 5,344 | | | | 665 | | | | 12.4 | |
| Depreciation and amortization | | | 11,224 | | | | 11,308 | | | | (84 | ) | | | (0.7 | ) |
| Total segment operating expenses | | | 47,321 | | | | 45,255 | | | | 2,066 | | | | 4.6 | |
| Segment operating income | | $ | 15,714 | | | $ | 14,215 | | | $ | 1,499 | | | | 10.5 | |
(in thousands) | | Years Ended December 31, | | | Change | |
| | | 2011 | | | 2010 | | | $ | | | | % | |
| Segment operating revenues | | | | | | | | | | | | | |
| Service revenue | | $ | 16,028 | | | $ | 15,222 | | | $ | 806 | | | | 5.3 | |
| Access revenue | | | 13,405 | | | | 13,027 | | | | 378 | | | | 2.9 | |
| Facilities lease revenue | | | 16,856 | | | | 14,202 | | | | 2,654 | | | | 18.7 | |
| Equipment revenue | | | 39 | | | | 47 | | | | (8 | ) | | | (17.0 | ) |
| Other revenue | | | 3,200 | | | | 4,703 | | | | (1,503 | ) | | | (32.0 | ) |
| Total segment operating revenues | | $ | 49,528 | | | $ | 47,201 | | | $ | 2,327 | | | | 4.9 | |
| Segment operating expenses | | | | | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 19,702 | | | | 17,503 | | | | 2,199 | | | | 12.6 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 7,528 | | | | 8,845 | | | | (1,317 | ) | | | (14.9 | ) |
| Depreciation and amortization | | | 8,453 | | | | 7,883 | | | | 570 | | | | 7.2 | |
| Total segment operating expenses | | | 35,683 | | | | 34,231 | | | | 1,452 | | | | 4.2 | |
| Gain on sale of directory | | | - | | | | 4,000 | | | | (4,000 | ) | | | n/a | |
| Segment operating income | | $ | 13,845 | | | $ | 16,970 | | | $ | (3,125 | ) | | | (18.4 | ) |
| (1) | Prior year categories of access revenue and facilities lease revenue have been combined into the new category of carrier access and fiber revenue to conform to current year presentation. Additionally, set-top box revenues included in other revenue in the prior year are now presented within service revenue |
Operating revenues
OperatingTotal operating revenues in 2014 increased $2.3$3.6 million or 4.9%,over 2013. Increases in 2011 from 2010. The increase in facilities leaseservice revenue resulted from additional contracts entered into during 2010 and 2011. The decrease in other revenues resulted primarily from increases in revenues to provide broadband services. Carrier access and fiber revenue grew $2.9 million due to additional leasing of fiber backhaul facilities to new and existing customers, offset by a decrease in directory advertising revenues subsequentas a result of 2013 changes in certain intrastate access charges. Other revenue decreased $0.1 million due in part to the saleconclusion of the directory in late 2010.billings for transition services to buyers of Converged Services’ properties.
Operating expenses
Operating expenses overall increased $2.1 million, or 4.6%, for 2014 over 2013. The increase in cost of goods and services resulted primarily from access expenses and linea $2.3 million increase in costs incurredto provide the additional facilities to support the increasesgrowth in facilities lease revenues.revenues described above. The decreasedisposal of obsolete and out of service assets resulted in selling, general and administrative expenses resulted primarily from $2.0an additional $0.5 million increase in pension related charges recognizedcosts. These increases were partially offset by a $0.9 million increase in the second quarter of 2010.labor capitalized to projects.
Gain on sale of directory
The Company sold its telephone directory for $4 million during the third quarter of 2010.
Non-GAAP Financial Measure
In managing our business and assessing our financial performance, management supplements the information provided by financial statement measures prepared in accordance with GAAP with adjusted OIBDA, which is considered a “non-GAAP financial measure” under SEC rules.
Adjusted OIBDA is defined by us as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of: certain non-recurring transactions; impairment of assets; gains and losses on asset sales; and share based compensation expense; business acquisition costs; and pension settlement and curtailment expenses.expense. Adjusted OIBDA should not be construed as an alternative to operating income as determined in accordance with GAAP as a measure of operating performance.
In a capital-intensive industry such as telecommunications, management believes that adjusted OIBDA and the associated percentage margin calculations are meaningful measures of our operating performance. We use adjusted OIBDA as a supplemental performance measure because management believes it facilitates comparisons of our operating performance from period to period and comparisons of our operating performance to that of other companies by excluding potential differences caused by the age and book depreciation of fixed assets (affecting relative depreciation expenses) as well as the other items described above for which additional adjustments were made. In the future, management expects that the Company may again report adjusted OIBDA excluding these items and may incur expenses similar to these excluded items. Accordingly, the exclusion of these and other similar items from our non-GAAP presentation should not be interpreted as implying these items are non-recurring, infrequent or unusual.
While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the current period allocation of costs associated with long-lived assets acquired or constructed in prior periods, and accordingly may obscure underlying operating trends for some purposes. By isolating the effects of these expenses and other items that vary from period to period without any correlation to our underlying performance, or that vary widely among similar companies, management believes adjusted OIBDA facilitates internal comparisons of our historical operating performance, which are used by management for business planning purposes, and also facilitates comparisons of our performance relative to that of our competitors. In addition, we believe that adjusted OIBDA and similar measures are widely used by investors and financial analysts as measures of our financial performance over time, and to compare our financial performance with that of other companies in our industry.
Adjusted OIBDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. These limitations include the following:
| · | it does not reflect capital expenditures; |
| · | many of the assets being depreciated and amortized will often have to be replaced in the future and adjusted OIBDA does not reflect cash requirements for such replacements; |
| · | it does not reflect costs associated with share-based awards exchanged for employee services; |
| · | it does not reflect interest expense necessary to service interest or principal payments on indebtedness; |
| · | it does not reflect gains, losses or dividends on investments; |
| · | it does not reflect expenses incurred for the payment of income taxes and other taxes; and |
| · | other companies, including companies in our industry, may calculate adjusted OIBDA differently than we do, limiting its usefulness as a comparative measure. |
In light of these limitations, management considers adjusted OIBDA as a financial performance measure that supplements but does not replace the information reflected in our GAAP results.
The following table shows adjusted OIBDA for the years ended December 31, 2012, 20112015, 2014 and 2010:
(in thousands) | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| Adjusted OIBDA | | $ | 105,952 | | | $ | 93,148 | | | $ | 84,006 | |
| | | Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | |
| | | | | | | | | | |
| Adjusted OIBDA | | $ | 150,902 | | | $ | 132,144 | | | $ | 118,596 | |
The following table reconciles adjusted OIBDA to operating income, which we consider to be the most directly comparable GAAP financial measure, for the years ended December 31, 2012, 20112015, 2014 and 2010:2013:
| (in thousands) | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating income | | $ | 34,658 | | | $ | 32,290 | | | $ | 36,331 | |
| Plus depreciation and amortization | | | 64,412 | | | | 55,770 | | | | 42,630 | |
| Adjusted prepaid results | | | (6,137 | ) | | | 4,890 | | | | 1,247 | |
| Less gain on directory sale | | | - | | | | - | | | | (4,000 | ) |
| Less (gain) loss on asset sales | | | 441 | | | | (1,309 | ) | | | 107 | |
| Plus non-cash goodwill impairment charge | | | 10,952 | | | | - | | | | - | |
| Plus storm damage costs | | | 813 | | | | - | | | | - | |
| Plus share based compensation expense | | | 1,626 | | | | 1,507 | | | | 675 | |
| Plus pension settlement and curtailment expense | | | - | | | | - | | | | 3,781 | |
| Plus business acquisition expenses | | | - | | | | - | | | | 3,235 | |
| Adjusted OIBDA | | $ | 106,765 | | | $ | 93,148 | | | $ | 84,006 | |
| | | Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | |
| Consolidated Results: | | | | | | | | | |
| Operating income | | $ | 74,086 | | | $ | 61,943 | | | $ | 55,407 | |
| Plus depreciation and amortization | | | 70,702 | | | | 65,890 | | | | 60,722 | |
| Plus (gain) loss on asset sales | | | 235 | | | | 2,054 | | | | 784 | |
| Plus share based compensation expense | | | 2,333 | | | | 2,257 | | | | 1,683 | |
| Plus nTelos acquisition related expenses | | | 3,546 | | | | - | | | | - | |
| Adjusted OIBDA | | $ | 150,902 | | | $ | 132,144 | | | $ | 118,596 | |
The following tables reconcile adjusted OIBDA to operating income by major segment for the years ended December 31, 2012, 20112015, 2014 and 2010:2013:
| | | Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | |
| Wireless Segment: | | | | | | | | | |
| Operating income | | $ | 75,023 | | | $ | 69,882 | | | $ | 64,141 | |
| Plus depreciation and amortization | | | 34,416 | | | | 31,111 | | | | 28,177 | |
| Plus (gain) loss on asset sales | | | 62 | | | | (101 | ) | | | 647 | |
| Plus share based compensation expense | | | 554 | | | | 475 | | | | 481 | |
| Adjusted OIBDA | | $ | 110,055 | | | $ | 101,367 | | | $ | 93,446 | |
| | | Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | |
| Cable Segment: | | | | | | | | | |
| Operating income (loss) | | $ | 502 | | | $ | (10,098 | ) | | $ | (10,149 | ) |
| Plus depreciation and amortization | | | 23,097 | | | | 23,148 | | | | 21,202 | |
| Plus (gain) loss on asset sales | | | 45 | | | | 1,500 | | | | (59 | ) |
| Plus share based compensation expense | | | 811 | | | | 848 | | | | 735 | |
| Adjusted OIBDA | | $ | 24,455 | | | $ | 15,398 | | | $ | 11,729 | |
| (in thousands) | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating income | | $ | 53,356 | | | $ | 43,372 | | | $ | 38,349 | |
| Plus depreciation and amortization | | | 31,660 | | | | 23,906 | | | | 23,187 | |
| Adjusted prepaid results | | | (6,137 | ) | | | 4,890 | | | | 1,247 | |
| Less (gain) loss on asset sales | | | (9 | ) | | | (1,699 | ) | | | (55 | ) |
| Plus share based compensation expense | | | 468 | | | | 444 | | | | 235 | |
| Plus pension settlement and curtailment expense | | | - | | | | - | | | | 1,014 | |
| Adjusted OIBDA | | $ | 79,338 | | | $ | 70,913 | | | $ | 63,977 | |
| (in thousands) | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating income (loss) | | $ | (29,461 | ) | | $ | (21,382 | ) | | $ | (15,257 | ) |
| Plus depreciation and amortization | | | 23,519 | | | | 23,198 | | | | 11,314 | |
| Less (gain) loss on asset sales | | | 126 | | | | 176 | | | | 82 | |
| Plus non-cash goodwill impairment charge | | | 10,952 | | | | - | | | | - | |
| Plus storm damage costs | | | 813 | | | | - | | | | - | |
| Plus share based compensation expense | | | 692 | | | | 594 | | | | 198 | |
| Plus pension settlement and curtailment expense | | | - | | | | - | | | | 597 | |
| Plus business acquisition expenses | | | - | | | | - | | | | 3,235 | |
| Adjusted OIBDA | | $ | 6,641 | | | $ | 2,586 | | | $ | 169 | |
| (in thousands) | | Years Ended December 31, | | |
| | | 2012 | | | 2011 | | | 2010 | | | Years Ended December 31, | |
| | | | | | | | | | | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | | | (in thousands) | |
| Wireline Segment: | | | | | | | | | | |
| Operating income | | $ | 13,843 | | | $ | 13,845 | | | $ | 16,970 | | | $ | 16,404 | | | $ | 15,714 | | | $ | 14,215 | |
| Plus depreciation and amortization | | | 9,171 | | | | 8,453 | | | | 7,883 | | | | 12,736 | | | | 11,224 | | | | 11,308 | |
| Less gain on directory sale | | | - | | | | - | | | | (4,000 | ) | |
| Less (gain) loss on asset sales | | | 305 | | | | 214 | | | | 81 | | |
| Plus (gain) loss on asset sales | | | | 169 | | | | 655 | | | | 195 | |
| Plus share based compensation expense | | | 372 | | | | 357 | | | | 182 | | | | 408 | | | | 386 | | | | 356 | |
| Plus pension settlement and curtailment expense | | | - | | | | - | | | | 1,960 | | |
| Adjusted OIBDA | | $ | 23,691 | | | $ | 22,869 | | | $ | 23,076 | | | $ | 29,717 | | | $ | 27,979 | | | $ | 26,074 | |
Financial Condition, Liquidity and Capital Resources
The Company has four principal sources of funds available to meet the financing needs of its operations, capital projects, debt service, investments and potential dividends. These sources include cash flows from operations, existing balances of cash and cash equivalents, the liquidation of investments and borrowings. Management routinely considers the alternatives available to determine what mix of sources are best suited for the long-term benefit of the Company.
Sources and Uses of Cash. The Company generated $97.0$119.3 million of net cash from operations in 2012,2015, an increase from $115.0 million in 2014, which was a $16.1$20.7 million increase from $80.9 million in 2011, which was a $5.7 million increase over 2010. Higher net income in 2012 and2013. The increases were primarily due to increases in the non-cash components of expenses, principally goodwill impairment and depreciation charges, combined with increases in payables foroperating income taxes, resulted in the increase compared to 2011. For 2011 compared to 2010, lower net income was more than offset by increases in the non-cash components ofbefore depreciation and amortization charges.amortization.
During 2012,2015, the Company utilized $83.9$69.3 million in net investing activities, including $89.1$69.7 million invested in capital expenditures,assets, partially offset by proceeds from sales of assets. During 2011,2014, the Company utilized $70.6$67.6 million in net investing activities. Plant and equipment purchases in 2015, 2014 and 2013 totaled $74.7$69.7 million, in 2011, up $18.8$68.2 million from $55.9and $117.0 million, in 2010.respectively. Capital expenditures in 20122015 supported projects across all segments, including wireless network capacity and coverage enhancements, new retail stores, cable segment extensions and investment in customer premises equipment, and expansion and upgrade of our fiber networks. Expenditures in 2014 also supported projects across all segments, including wireless network capacity and coverage enhancements, cable plant expansion and upgrades, and wireline fiber builds. Expenditures in 2013 primarily supported the upgrade of PCS base stations in conjunction with the Network Vision project, as well as expansion of capacity on other PCS base stations and other related spending. Cable system upgrades continued in 2012, with completion of upgrades to acquired systems expectedwere completed in 2013.
Financing activities utilized $42.2 million in 2015 as the first half of 2013. Capital expendituresCompany made $23.0 million in 2011 were made primarilyprincipal payments on long-term debt, paid cash dividends totaling $11.1 million and paid $7.9 million in debt issuance fees related to support upgrades of cable markets acquired from JetBroadbandthe pending nTelos acquisition. Financing activities utilized $16.8 million in 2010 and2014, principally due to keep pace with capacity demands in our Wireless segment. The Company received $3.0$10.8 million in cash proceeds from salesdividends paid to shareholders and $5.8 million of service contracts and assets in our Converged Services unit during 2011. During 2010, the Companyprincipal repayments on long-term debt. Financing activities utilized $210.7$10.5 million in investing activities, including $159.0 million invested in new business opportunities. Plant and equipment purchases totaled $55.9 million in 2010. The Company received $4 million in cash for the sale of its telephone directory in 2010. Capital expenditures in 2010 primarily supported the completion of network upgrades in the cable systems acquired in 2008 and planning and initial spending for upgrades of cable markets acquired in July 2010. Other capital expenditures supported the completion of six new cell towers, 20 new base stations, and 47 base stations where high-speed data capacity was added during 2010, as well as capacity expansions at and fiber builds to other cell sites in our network, as well as other projects.
Financing activities provided $42.2 million in 2012, as the Company refinanced its credit agreement and expanded the term loan to support the expected spending associated with the Network Vision project. Dividends paid totaled $7.4 million in 2012. Financing activities in 2011 utilized $21.9 million,2013, principally due to $14.5 million in repayments of principal under our loan agreements and $7.3$8.2 million in dividends paid to shareholders. Financing activities provided $150.9shareholders and $2.0 million during 2010, as the Company entered into a new financing in conjunction with the acquisition of cable systems in July 2010, paying down a substantial portion of the company’s then-existing outstanding debt.principal repayments under our loan agreements.
Indebtedness. As of December 31, 2012,2015, the Company’s indebtedness totaled $232.2$201.3 million, with an annualized overall weighted averageeffective interest rate of approximately 2.99%.3.21% after considering the impact of the interest rate swap contract. The balance included $1.9 million fixed at 7.37% (the Fixed Term Loan Facility, described further below), and $230.0 millionconsists of the Term Loan A Facility at a variable rate (of 2.96%(2.67% as of December 31, 2012)2015) that resets monthly based on one month LIBOR plus a base rate of 2.75%2.25% currently. The Fixed Term Loan Facility is required to be repaid in monthly installments of approximately $235 thousand of principal, plus interest at 7.37%, through August 2013. The Term Loan A Facility requires quarterly principal repayments of $5.75 million, beginningwhich began on December 31, 2014 and continuing thereafterwill continue until the remaining expected balance of approximately $120.75 million is due at maturity on September 30, 2019. These loans are more fully described below.
The Company’s credit agreement includes a Revolver Facility that provides for $50 million in availability for future capital expenditures and general corporate needs. In addition, the credit agreement permits the Company to enter into one or more Incremental Term Loan Facilities in the aggregate principal amount not to exceed $100 million subject to compliance with certain covenants. At December 31, 2012,2015, no draw had been made under the Revolver Facility and the companyCompany had not entered into any Incremental Term Loan Facility. When and if a draw is made, the maturity date and interest rate options would be substantially identical to the Term Loan A Facility.Facility, though the margin on principal drawn on the revolver is 0.25% less than the corresponding margin on term loans. If the interest rate on an Incremental Term Loan Facility is more than 0.25% greater than the rate on the existing outstanding balances, the interest rate on the existing debt would reset at the same rate as the Incremental Term Loan Facility. Repayment provisions would be agreed to at the time of each draw under the Incremental Term Loan Facility.
The Company is subject to certain financial covenants to be measured on a trailing twelve month basis each calendar quarter unless otherwise specified. These covenants include:
| · | a limitation on the Company’s total leverage ratio, defined as indebtedness divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than or equal to 3.00 to 1.00 from the closing date through March 31, 2014, then 2.50 to 1.00 from April 1, 2014 through March 31, 2015, and 2.00 to 1.00 thereafter; |
| · | a minimum debt service coverage ratio, defined as EBITDA divided by the sum of all scheduled principal payments on the Term Loans and regularly scheduled principal payments on other indebtedness plus cash interest expense, greater than 2.50 to 1.00 at all times; |
| · | a minimum equity to assets ratio, defined as consolidated total assets minus consolidated total liabilities, divided by consolidated total assets, of at least 0.30 to 1.00 from the amendment date through December 31, 2013; then at least 0.325 to 1.00 through December 31, 2014, and at least 0.35 to 1.00 thereafter, measured at each fiscal quarter end. |
As of December 31, 2012,2015, the Company was in compliance with the financial covenants in its credit agreements, and ratios at December 31, 20122015 were as follows:
| | | Actual | | Covenant Requirement |
| Total Leverage Ratio | | | 2.071.35 | | 3.002.00 or Lower |
| Debt Service Coverage Ratio | | | 5.834.24 | | 2.50 or Higher |
| Equity to Assets Ratio | | | 36.4%46.1 | % | 30.0%35.0% or Higher |
Contractual Commitments. The Company is obligated to make future payments under various contracts it has entered into, includingprimarily amounts pursuant to its various long-term debt facilities,facility, and non-cancelable operating lease agreements for retail space, tower space and cell sites. Expected future minimum contractual cash obligations for the next five years and in the aggregate at December 31, 2012,2015, are as follows:
Payments due by periods
(in thousands) | | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt principal (1) | | $ | 232,177 | | | $ | 1,977 | | | $ | 28,750 | | | $ | 46,000 | | | $ | 155,450 | | | $ | 201,250 | | | $ | 23,000 | | | $ | 46,000 | | | $ | 132,250 | | | $ | - | |
| Interest on long–term debt (1) | | | 39,085 | | | | 6,972 | | | | 13,191 | | | | 10,723 | | | | 8,199 | | | | 17,495 | | | | 5,141 | | | | 9,054 | | | | 3,300 | | | | - | |
| “Pay fixed” obligations (2) | | | 11,567 | | | | 2,317 | | | | 3,823 | | | | 3,108 | | | | 2,319 | | | | 3,410 | | | | 1,038 | | | | 1,705 | | | | 667 | | | | - | |
| Operating leases (3) | | | 116,793 | | | | 11,648 | | | | 22,818 | | | | 21,838 | | | | 60,489 | | | | 143,402 | | | | 14,605 | | | | 29,324 | | | | 27,741 | | | | 71,732 | |
| Purchase obligations (4) | | | 20,044 | | | | 20,044 | | | | - | | | | - | | | | - | | | | 15,155 | | | | 13,058 | | | | 2,097 | | | | - | | | | - | |
| nTelos Acquisition (5) | | | | 17,000 | | | | 17,000 | | | | - | | | | - | | | | - | |
| Total obligations | | $ | 419,666 | | | $ | 42,958 | | | $ | 68,582 | | | $ | 81,669 | | | $ | 226,457 | | | $ | 397,712 | | | $ | 73,842 | | | $ | 88,180 | | | $ | 163,958 | | | $ | 71,732 | |
| 1) | Includes principal payments and estimated interest payments on the Term Loan A Facility based upon outstanding balances and rates in effect at December 31, 2012.2015. |
| 2) | Represents the maximum interest payments we are obligated to make under our derivative agreements.agreement. Assumes no receipts from the counterparty to our derivative agreements.agreement. |
| 3) | Amounts include payments over reasonably assured renewals. See Note 1312 to the consolidated financial statements appearing elsewhere in this report for additional information. |
| 4) | Represents open purchase orders at December 31, 2012. Commitments to our primary Network Vision vendor represent $14,000 of this amount.2015. |
| 5) | Represents estimated costs to complete the financing arrangements that will be due and payable regardless of whether the transaction closes. Additionally, if the deal closes, the Company expects to incur approximately $15 million in transaction related expenses; if the deal does not close, the Company can expect to incur $25 million in a break-up fee. |
The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.
Capital Commitments. The Company spent $89.1$69.7 million on capital projects in 2012,2015, up from $74.7$68.2 million spent in 20112014 and $55.9$117.0 million spent in 2010.2013. Capital expenditures in 2015 and 2014 supported projects across all segments, including wireless network capacity and coverage enhancements, cable plant expansion and upgrades, and wireline fiber builds. The Company incurred significant capital spending in 20122013 related to upgrade itsthe PCS network upgrade as part of Sprint Nextel’sSprint’s Network Vision upgrade project, and in 2011 to keep pace with rising demand for data in our Wireless network. Network vision related spending will continue at comparable levels in 2013. Spending on upgrades to the acquired cable systems occurred in all three years, and will continue into 2013 with the final cable upgrades. The Company also continued capital spending to expand and upgrade its fiber network and other on-going projects.project.
Capital expenditures budgeted for 2013 total $125.2 million. The 2013 budget includes $23.12016 totaled $229.4 million, including $134.2 million on the Wireless segment for upgrades and expansion of the nTelos wireless network. Due primarily to complete the last acquired cable system upgradedelay in closing the nTelos merger, the Company now expects that capital expenditures for 2016 will be $10.9 million lower, or $218.5 million, with $120.3 million in the Wireless segment relating to the nTelos wireless network. In addition, $21.2 million is budgeted for information technology upgrades, new and renovated buildings and other continuing cable segment expenditures. The 2013 budget includes $60.7projects, $24.2 million to complete the replacement of every base station in our wirelessfor additional network as part of Network Vision, as well as adding capacity, and $36.4 million for network coverage to our PCS network,expansion including new fiber routes, new cell towers, to supportand cable market expansion. Approximately $13.1 million of the expansion of PCS network coverage,budget is success-based, and on-going spending to expand and upgrade our fiber networks and information technology capabilities.will be scaled back if not supported by customer growth.
The Company believes that, excluding the impacts of the pending nTelos acquisition, cash on hand and cash flow from operations (and if necessary, borrowings available under the Company’s existing credit facilities) will provide sufficient cash to enable the Company to fund its planned capital expenditures, make scheduled principal and interest payments, meet its other cash requirements and maintain compliance with the terms of its existing financing agreements for at least the next 12 months. Thereafter, capital expenditures will likely continue to be required to provide increased capacity to meet the Company’s expected growth in demand for its products and services. The actual amount and timing of the Company’s future capital requirements may differ materially from the Company’s estimate depending on the demand for its products, new market developments and opportunities and general economic opportunities.
The Company’s cash flows from operations could be adversely affected by events outside the Company’s control, including, without limitation, changes in overall economic conditions, regulatory requirements, changes in technologies, availability of labor resources and capital, changes in the Company’s relationship with Sprint, Nextel, and other conditions. The Wireless segment's operations are dependent upon Sprint Nextel’sSprint’s ability to execute certain functions such as billing, customer care, and collections; the subsidiary’s ability to develop and implement successful marketing programs, and the subsidiary’s ability to effectively and economically manage other operating activities under the Company's agreements with Sprint Nextel.Sprint. The Company's ability to continue to attract and maintain a sufficient customer base particularly in the cable markets, is also critical to the Company’s ability to maintain a positive cash flow from operations. The foregoing events individually or collectively could affect the Company’s results.
Merger-Related Financing Transaction. In connection with the Merger and the Sprint Transactions, on December 18, 2015, we entered into a credit agreement (the “New Credit Agreement”) with various banks and other financial institutions party thereto (the “Lenders”) and CoBank, ACB, as administrative agent for the Lenders. The New Credit Agreement provides for three facilities: (i) a five-year revolving credit facility of up to $75 million, (ii) a five-year term loan facility of up to $485 million and (iii) a seven-year term loan facility of up to $400 million (collectively, the “Facilities”), which we expect to use to pay the Merger Consideration, to finance the network upgrades required by the Sprint Transactions, to refinance, in full, all indebtedness outstanding under our existing credit agreement, to repay all existing indebtedness of nTelos, to pay fees and expenses in connection with the Merger and for working capital, capital expenditures and other corporate purposes of us and our subsidiaries (and, following the consummation of the Merger, of nTelos and its subsidiaries).
We will be the borrower under the New Credit Agreement. The availability of the Facilities is subject to the satisfaction or waiver of certain conditions set forth in the New Credit Agreement, including, among other things, the consummation of the Merger on or before June 28, 2016. The commitments of the Lenders with respect to the Facilities will terminate if the consummation of the Merger and the initial funding of the Facilities does not occur on or prior to June 28, 2016.
Subsequent to the closing of the Merger, the Company’s future requirements for debt service will increase, due to incremental interest on the larger outstanding loan balances, and increased amortization requirements to pay down the loan balances, compared to the terms of our existing debt arrangements.
Recently Issued Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, delaying the effective date of ASU 2014-09. As amended, the new standard is effective for the Company on January 1, 2018. Early application is not permitted. The standard permits the use of December 31, 2012, there were no recently issued buteither the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU No. 2015-2, “Consolidation (Topic 820): Amendments to the Consolidation Analysis”. The ASU provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities. All legal entities will be subject to reevaluation under this revised consolidation model. The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships. ASU 2015-2 is effective accounting pronouncementsfor fiscal years, and interim reporting periods within those fiscal years, beginning after September 1, 2016 (fiscal 2017). The Company is still evaluating what impact, if any, this ASU will have on the Company’s consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires that woulddebt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and will be effective for the Company beginning on January 1, 2016. Early adoption is permitted. The Company has not elected to early adopt and does not expect this adoption to have a significantmaterial impact on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”, to simplify the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company will not elect to early adopt and does not expect this adoption to have a material impact on its consolidated financial statements.
In addition to the updates outlined above, FASB has issued other Accounting Standards Updates that were reviewed by management and determined to have a minimal impact on the Company’s financial statements. The Company will continue to evaluate the impact of all updates as they are released.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s market risks relate primarily to changes in interest rates on instruments held for other than trading purposes. The Company’s interest rate risk generally involves three components. The first component is outstanding debt with variable rates. As of December 31, 2012,2015, the Company had $230.0$201.3 million of variable rate debt outstanding, bearing interest at a rate of 2.96%2.67% as determined on a monthly basis. An increase in market interest rates of 1.00% would add approximately $2.3$1.9 million to annual interest expense. An additional $1.9 millionexpense, excluding the effect of the Company’s outstanding debt has a fixedinterest rate of 7.37% through maturity in August 2013;swap. In 2012, the remaining $0.3 million of outstanding debt bears no interest. Due to the relatively short time frame to maturity of the fixed rate debt, market value approximates carrying value of the fixed rate debt. The Company entered into two swap agreements that, through the maturity of the firsta swap agreement on August 31, 2013, cover notional principal equal to nearly all of the outstanding variable rate debt to pay a blended fixed rate of just over 1.00% and receive a variable rate based on one month LIBOR; subsequently, the second swap agreementthat covers notional principal equal to approximately 76% of the outstanding variable rate debt through maturity in 2019, requiring the Company to pay a fixed rate of 1.13% and receive a variable rate based on one month LIBOR (0.42% as of December 31, 2015), to manage a portion of its interest rate risk. Changes in the net interest paid or received under the 2012 swap would offset approximately 76% of the change in interest expense on the variable rate debt outstanding. The 2012 swap currently adds approximately $0.7 million to annual interest expense, based on the spread between the fixed rate and the variable rate currently in effect on our debt.
The second component of interest rate risk consists of temporary excess cash, which can be invested in various short-term investment vehicles such as overnight repurchase agreements and Treasury bills with a maturity of less than 90 days. TheAs of December 31, 2015, the cash is currently invested in a combination of a commercial checking account that has limited interest rate risk, and three money market mutual funds that contain a treasury bill which matured at partotal investment of $20 million on January 24, 2013.$40.1 million. Management continues to evaluatecontinually evaluates the most beneficial use of these funds.
The third component of interest rate risk is marked increases in interest rates that may adversely affect the rate at which the Company may borrow funds for growth in the future. If the Company should borrow additional funds under any Incremental Term Loan Facility to fund its capital investment needs, repayment provisions would be agreed to at the time of each draw under the Incremental Term Loan FacilityFacility. If the interest rate margin on any draw exceeds by more than 0.25% the applicable interest rate margin on the Term Loan A Facility, the applicable interest rate margin on the Term Loan A Facility shall be increased to equal the interest rate margin on the Incremental Term Loan Facility. If interest rates increase generally, or if the rate applied under the Company’s Incremental Term Loan Facility causes the Company’s outstanding debt to be repriced, the Company’s future interest costs could increase.
Management views market risk as having a potentially significant impact on the Company's results of operations, as future results could be adversely affected if interest rates were to increase significantly for an extended period, or if the Company’s need for additional external financing resulted in increases to the interest rates applied to all of its new and existing debt. As of December 31, 2015 the Company has $48.4 million of variable rate debt with no interest rate protection. The Company’s investments in publicly traded stock and bond mutual funds under the rabbi trust, which are subject to market risks and could experience significant swings in market values, are offset by corresponding changes in the liabilities owed to participants in the Executive Supplemental Retirement Plan. General economic conditions affected by regulatory changes, competition or other external influences may pose a higher risk to the Company’s overall results.
As of December 31, 2012,2015, the Company has $6.1had $8.0 million of cost and equity method investments. Approximately $2.1$2.6 million wasis invested in privately held companies directly or through investments with portfolio managers. Most of the companies are in an early stage of development and significant increases in interest rates could have an adverse impact on their results, ability to raise capital and viability. The Company’s market risk is limited to the funds previously invested.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements listed in Item 15 are filed as part of this report and appear on pages F-2 through F-34.F-33.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
(a) Evaluation of Disclosure Controls and Procedures| (a) | Evaluation of Disclosure Controls and Procedures |
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), our management, including our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of December 31, 2012.2015. Based on this, our chief executive officer and chief financial officer concluded that, as of December 31, 2012,2015, our disclosure controls and procedures were effective.
(b) Management’s Report on Internal Control Over Financial Reporting| (b) | Management’s Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of our chief executive officer and our chief financial officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012,2015, based on the framework and criteria established in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on management’s evaluation under the COSO framework of our internal control over financial reporting, management concluded that our internal control over financial reporting was effective as of December 31, 2012.2015.
KPMG LLP, an independent registered public accounting firm, which audited the Company’s consolidated financial statements included in this Annual Report, has issued a report on the effectiveness of the Company’s internal control over financial reporting, which is included in Item 8 of this Annual Report.
(c) Changes in Internal Control Over Financial Reporting| (c) | Changes in Internal Control Over Financial Reporting |
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20122015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
See “Executive Officers” in Part 1, Item 1 of this report for information about our executive officers, which is incorporated by reference in this Item 10. Other information required by this Item 10 is incorporated by reference to the Company's definitive proxy statement for its 20132016 Annual Meeting of Shareholders, referred to as the “2013“2016 proxy statement,” which we will file with the SEC on or before 120 days after our 20122015 fiscal year end, and which appears in the 20132016 proxy statement under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”.
We have adopted a code of ethics applicable to our chief executive officer and other senior financial officers, who include our principal financial officer, principal accounting officer or controller, and persons performing similar functions. The code of ethics, which is part of our Code of Business Conduct and Ethics, is available on our website at www.shentel.com. To the extent required by SEC rules, we intend to disclose any amendments to our code of conduct and ethics, and any waiver of a provision of the code with respect to the Company’s directors, principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our website referred to above within four business days following such amendment or waiver, or within any other period that may be required under SEC rules from time to time.
Information required by this Item 11 is incorporated herein by reference to the 20132016 proxy statement, including the information in the 20132016 proxy statement appearing under the captions “Election of Directors-Director Compensation” and “Executive Compensation.”
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required by this Item 12 is incorporated herein by reference to the 20132016 proxy statement appearing under the caption “Security Ownership.”
The Company awards stock options to its employees meeting certain eligibility requirements under a planplans approved by its shareholders in 2005.2005 and 2014, referred to as the “2005 stock option plan” and “2014 stock option plan”, respectively. Outstanding options and the number of shares available for future issuance as of December 31, 20122015 were as follows:
| | | Number of securities to be issued upon exercise of outstanding options | | | Weighted average exercise price of outstanding options | | | Number of securities remaining available for future issuance | |
| | | | | | | | | | |
| 2005 stock option plan | | 494,688 | | | $17.82 | | | 608,106 | |
| | | Number of securities to be issued upon exercise of outstanding options | | | Weighted average exercise price of outstanding options | | | Number of securities remaining available for future issuance | |
| | | | | | | | | | |
| 2005 stock option plan | | | 904,158 | | | $ | 7.70 | | | | - | |
| | | | | | | | | | | | | |
| 2014 stock option plan | | | - | | | | - | | | | 2,824,654 | |
Since 2007,Effective April 2014, the 2014 stock option plan was approved by shareholders with 3.0 million shares authorized. As a result of the adoption of the 2014 stock option plan, additional grants will not be made under the terms of the 2005 stock option plan, the Company has awarded 337,206 shares and share unitsalthough outstanding grants may continue to employees and directors in various grants in 2007, 2010, 2011, and 2012. As of December 31, 2012, 213,354 shares and share units were outstanding, and 45,045 shares and share units vested and werevest, be distributed during 2012. These shares and share units have been deducted from the number of securities remaining available for future issuance in the table above.or exercised.
| ITEM 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Information required by this Item 13 is incorporated herein by reference to the 20132016 proxy statement, including the information in the 20132016 proxy statement appearing under the caption “Executive Compensation-Certain Relationships and Related Transactions.”
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Information required by this Item 14 is incorporated herein by reference to the 20132016 proxy statement, including the information in the 20132016 proxy statement appearing under the caption “Shareholder Ratification of Independent Registered Public Accounting Firm.”
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) The following consolidated financial statements of the Company appear on pages F-2 through F-34F-33 of this report and are incorporated by reference in Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 20122015 and 20112014
Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 20122015, 2014 and 2013
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 20122015, 2014 and 2013
Consolidated Statements of Cash Flows for the three years ended December 31, 20122015, 2014 and 2013
Notes to Consolidated Financial Statements
(a)(2) All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(a)(3) The following exhibits are either filed with this Form 10-K or incorporated herein by reference. Our Securities Exchange Act file number is 000-09881.
Exhibits Index
Exhibits Index
Exhibit Number | Exhibit Description |
|
| | |
Number
2.1 | | Agreement and Plan of Merger, dated as of August 10, 2015, by and among Shenandoah Telecommunications Company, Gridiron Merger Sub, Inc. and NTELOS Holdings Corp., filed as Exhibit Description 2.1 to the Company’s Current Report on Form 8-K, dated August 11, 2015. |
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| 3.1 | | Amended and Restated Articles of Incorporation of Shenandoah Telecommunications Company filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2007.2007, as amended by the Articles of Amendment of Shenandoah Telecommunications Company filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K , filed January 5, 2016. |
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| 3.2 | | Amended and Restated Bylaws of Shenandoah Telecommunications Company, effective September 17, 2012, filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K dated September 18, 2012. |
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| 4.1 | | Rights Agreement, dated as of February 8, 2008 between the Company and American Stock Transfer & Trust Company filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated January 25, 2008. |
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| 4.2 | | Specimen representing the Common Stock, no par value, of Shenandoah Telecommunications Company, filed as Exhibit 4.3 to the Company’s Report on Form 10-K for the year ended December 31, 2007. |
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| 10.1 | | Shenandoah Telecommunications Company Stock Incentive Plan filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333-21733). |
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10.2 | | Shenandoah Telecommunications Company Dividend Reinvestment Plan filed as Exhibit 4.4 to the Company’s Registration Statement on Form S-3D (No. 333-74297). |
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10.3
10.2 | | Settlement Agreement and Mutual Release dated as of January 30, 2004 by and among Sprint Spectrum L.P., Sprint Communications Company L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P. and Shenandoah Personal Communications Company and Shenandoah Telecommunications Company, dated January 30, 2004; filed as Exhibit 10.3 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.4 | 10.3 | Sprint PCS Management Agreement dated as of November 5, 1999 by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.4 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.5 | 10.4 | Sprint PCS Services Agreement dated as of November 5, 1999 by and between Sprint Spectrum L.P. and Shenandoah Personal Communications Company filed as Exhibit 10.5 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.6 | 10.5 | Sprint Trademark and Service Mark License Agreement dated as of November 5, 1999 by and between Sprint Communications Company, L.P. and Shenandoah Personal Communications Company filed as Exhibit 10.6 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.7 | 10.6 | Sprint Spectrum Trademark and Service Mark License Agreement dated as of November 5, 1999 by and between Sprint Spectrum L.P. and Shenandoah Personal Communications Company filed as Exhibit 10.7 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.8 | 10.7 | Addendum I to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.8 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.9 | 10.8 | Asset Purchase Agreement dated November 5, 1999 by and among Sprint Spectrum L.P., Sprint Spectrum Equipment Company, L. P., Sprint Spectrum Realty Company, L.P., and Shenandoah Personal Communications Company, serving as Exhibit A to Addendum I to the Sprint PCS Management Agreement and as Exhibit 2.6 to the Sprint PCS Management Agreement filed as Exhibit 10.9 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
10.10 | |
| 10.9 | Addendum II dated August 31, 2000 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.10 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.11
| 10.10 | Addendum III dated September 26, 2001 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.11 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.12 | 10.11 | Addendum IV dated May 22, 2003 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.12 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.13 | 10.12 | Addendum V dated January 30, 2004 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.13 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
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10.14 | 10.13 | Supplemental Executive Retirement Plan as amended and restated, filed as Exhibit 10.14 to the Company’s Current Report on Form 8-K dated March 23, 2007. |
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10.15
| 10.14 | Addendum VI dated May 24, 2004 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.15 to the Company’s Report on Form 10-Q for the quarterly period ended June 30, 2004. |
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10.16 | | Interest Purchase Agreement dated November 30, 2004 by and among Shentel Converged Services, Inc., NTC Communications LLC and the Interest holders named therein filed as Exhibit 10.22 to the Company’s Current Report on Form 8-K dated January 21, 2005. |
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10.17 | 10.15 | Description of the Shenandoah Telecommunications Company Incentive Plan filed as Exhibit 10.25 to the Company’s Current Report on Form 8-K dated January 21, 2005. |
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10.18 | 10.16 | Description of Compensation of Non-Employee Directors. Filed as Exhibit 10.26 to the Company’s Current Report on Form 8-K dated May 4, 2005. |
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10.19 | 10.17 | Description of Management Compensatory Plans and Arrangements. Filed as Exhibit 10.27 to the Company’s current report on Form 8-K dated April 20, 2005. |
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10.20 | 10.18 | 2005 Stock Incentive Plan filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (No. 333-127342). |
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10.21 | 10.19 | Form of Incentive Stock Option Agreement under the 2005 Stock Incentive Plan filed as Exhibit 10.29 to the Company’s Report on Form 10-K for the year ended December 31, 2005. |
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10.22
10.20 | | Addendum VII dated March 13, 2007 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., Wireless Co., L.P., APC PCS, LLC, Phillieco, L.P., and Shenandoah Personal Communications Company, filed as Exhibit 10.31 to the Company’s Report on Form 10-K for the year ended December 31, 2006. |
10.23
| 10.21 | Settlement Agreement and Mutual Release dated March 13, 2007 by and among Sprint Nextel Corporation, Sprint Spectrum L.P., Wireless Co., L.P., Sprint Communications Company L.P., APC PCS, LLC, Phillieco, L.P., and Shenandoah Personal Communications Company and Shenandoah Telecommunications, filed as Exhibit 10.32 to the Company’s Report on Form 10-K for the year ended December 31, 2006. |
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10.24 | 10.22 | Form of Performance Share Award to Executives filed as Exhibit 10.33 to the Company’s Current Report on Form 8-K dated September 20, 2007. |
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10.25 | 10.23 | Addendum VIII to the Sprint Management Agreement dated November 19, 2007, filed as Exhibit 10.36 to the Company’s Current Report on Form 8-K dated November 20, 2007. |
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10.26 | 10.24 | Asset Purchase Agreement dated August 6, 2008, between Rapid Communications, LLC, Rapid Acquisition Company, LLC, and Shentel Cable Company, filed as Exhibit 10.37 to the Company’s Report on Form 10-Q for the period ended June 30, 2008. |
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10.27 | 10.25 | Amendment Number 1 to the Asset Purchase Agreement dated August 6, 2008, between Rapid Communications, LLC, Rapid Acquisition Company, LLC, and Shentel Cable Company, filed as Exhibit 10.40 to the Company’s Current Report on Form 8-K dated November 7, 2008. |
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10.28 | 10.26 | Addendum IX to the Sprint Management Agreement dated as of April 14, 2009, and filed as Exhibit 10.42 to the Company’s Annual Report on Form 10-K dated March 8, 2010. |
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10.29 | 10.27 | Asset Purchase Agreement dated as of April 16, 2010, between JetBroadband VA, LLC, Helicon Cable Communications, LLC, JetBroadband WV, LLC, JetBroadband Holdings, LLC, Helicon Cable Holdings, LLC, Shentel Cable Company and Shenandoah Telecommunications Company, filed as Exhibit 10.43 to the Company’s Current Report on Form 8-K, dated April 16, 2010. |
| | | |
10.30
| 10.28 | Addendum X dated March 15, 2010 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.44 to the Company’s Current Report on Form 10-Q, dated May 7, 2010. |
| | | |
10.31
| 10.29 | Addendum XI dated July 7, 2010 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.45 to the Company’s Current Report on Form 8-K dated July 8, 2010. |
| | | |
10.32 | 10.30 | Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.46 to the Company’s Current Report on Form 8-K dated July 30, 2010. |
| | | |
10.33 | 10.31 | Second Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.47 to the Company’s Current Report on Form 8-K dated April 29, 2011. |
| | | |
10.34 | 10.32 | Third Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q dated August 8, 2011. |
10.35
| 10.33 | Letter Agreement modifying section 10.2.7.2 of Addendum X dated March 15, 2010 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.49 to the Company’s Quarterly Report on Form 10-Q dated August 8, 2011. |
| | | |
10.36 | 10.34 | Fourth Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q dated August 8, 2011. |
| | | |
10.37 | 10.35 | Addendum XII dated February 1, 2012 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.51 to the Company’s Current Report on Form 8-K dated February 2, 2012. |
| | | |
10.38 | 10.36 | Fifth Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.52 to the Company’s Current Report on Form 8-K dated February 2, 2012. |
| | | |
10.39 | 10.37 | Addendum XIII dated September 14, 2012 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.53 to the Company’s Current Report on Form 8-K dated September 17, 2012. |
| | | |
10.40
| 10.38 | Consent and Agreement dated September 14, 2012 related to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.54 to the Company’s Current Report on Form 8-K dated September 17, 2012. |
| | | |
10.41 | 10.39 | Amended and Restated Credit Agreement dated as of September 14, 2012, among Shenandoah Telecommunications Company, CoBank, ACB, and other Lenders, filed as Exhibit 10.55 to the Company’s Current Report on Form 8-K dated September 17, 2012. |
| | | |
*10.4210.40 | | Addendum XIV dated as of November 19, 2012, to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC.LLC, filed as Exhibit 10.42 to the Company’s Annual Report on Form 10-K dated March 5, 2013. |
| |
| 10.41 | Addendum XV dated as of March 11, 2013, to Sprint PCS Management Agreement by and among Sprint Spectrum, L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal communications, LLC, filed as Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q dated May 3, 2013. |
| |
| 10.42 | First Amendment dated January 30, 2014, to the Amended and Restated Credit Agreement among Shenandoah Telecommunications Company, CoBank, ACB, and other Lenders, filed as Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| |
| 10.43 | Joinder Agreement dated January 30, 2014, to the Amended and Restated Credit Agreement among Shenandoah Telecommunications Company, CoBank, ACB, and other Lenders, filed as Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| |
| 10.44 | Addendum XVI dated as of December 9, 2013 to Sprint PCS Management Agreement by and among Sprint Spectrum, L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| 10.45 | Addendum XVII dated as of April 11, 2014, to Sprint PCS Management Agreement by and among Sprint Spectrum, L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| |
| 10.46 | 2014 Equity Plan filed as Appendix A to the Company’s Definitive Proxy Statement filed on March 13, 2014 (No. 333-196990). |
| |
| 10.47 | Master Agreement dated as of August 10, 2015, by and among SprintCom, Inc. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 11, 2015. |
| | |
| 10.48 | Addendum XVIII dated as of August 10, 2015, to Sprint PCS Management Agreement by and among SprintCom, Inc., PhillieCo, L.P., and Shenandoah Personal Communications, LLC, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated August 11, 2015. |
| |
| 10.49 | Credit Agreement dated as of December 18, 2015, by and among Shenandoah Telecommunications Company, as Borrower, the guarantors party thereto from time to time, CoBank, ACB, as Administrative Agent, and various other agents and lenders named therein, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December 24, 2015. |
| | |
| *21 | | List of Subsidiaries. |
| | | |
| *23.1 | | Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
| | | |
| *31.1 | | Certification of President and Chief Executive Officer of Shenandoah Telecommunications Company pursuant to Rule 13a-14(a)under the Securities Exchange Act of 1934. |
| | | |
| *31.2 | | Certification of Vice President and Chief Financial Officer of Shenandoah Telecommunications Company pursuant to Rule 13a-14(a)under the Securities Exchange Act of 1934. |
| | | |
| *32 | | Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. |
(101)
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(101) | Formatted in XBRL (Extensible Business Reporting Language) |
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| | 101.INS | | XBRL Instance Document |
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| | | 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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| | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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| | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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| | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.herewith
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
| February 26, 2016 | SHENANDOAH TELECOMMUNICATIONS COMPANY | |
| | | |
March 5, 2013 | | /S/ CHRISTOPHER E. FRENCH | |
| | Christopher E. French, President | |
| | (Duly Authorized Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/CHRISTOPHER E. FRENCH | | President & Chief Executive Officer, |
March 5, 2013 | February 26, 2016 | Director (Principal Executive Officer) |
| Christopher E. French | | |
| | |
/s/ADELE M. SKOLITS | | Vice President – Finance and Chief Financial Officer |
Adele M. Skolits | February 26, 2016 | (Principal Financial Officer and |
March 5, 2013 Adele M. Skolits | | Principal Accounting Officer) |
| | | |
/s/DOUGLAS C. ARTHUR | | Director |
March 5, 2013 | February 26, 2016 | |
| Douglas C. Arthur | | |
| | |
/s/KEN L. BURCH | | Director |
March 5, 2013 | February 26, 2016 | |
| Ken L. Burch | | |
| | |
/s/TRACY FITZSIMMONS | | Director |
March 5, 2013 | February 26, 2016 | |
| Tracy Fitzsimmons | | |
| | |
/s/JOHN W. FLORA | | Director |
March 5, 2013 | February 26, 2016 | |
| John W. Flora | | |
| | |
/s/ RICHARD L. KOONTZ, JR. | | Director |
March 5, 2013 | February 26, 2016 | |
| Richard L. Koontz, Jr. | | |
| | |
/s/DALE S. LAM | | Director |
March 5, 2013 | February 26, 2016 | |
| Dale S. Lam | | |
| | |
/s/ JONELLE ST. JOHN | | Director |
March 5, 2013 | February 26, 2016 | |
| Jonelle St. John | | |
| | |
/s/JAMES E. ZERKEL II | | Director |
March 5, 2013 | February 26, 2016 | |
| James E. Zerkel II | | |
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
Index to the Consolidated 20122015 Financial Statements
| | Page |
| Reports of Independent Registered Public Accounting Firm | F-2 and F-3 |
| | |
Consolidated Financial Statements for the Years Ended December 31, 2012, 20112015, 2014 and 20102013 | |
| | |
| Consolidated Balance Sheets | F-4 and F-5 |
| Consolidated Statements of Income and Comprehensive Income | F-6 |
| Consolidated Statements of Shareholders’ Equity | F-7 and F-8 |
| Consolidated Statements of Cash Flows | F-9 and F-10 |
| Notes to Consolidated Financial Statements | F-11 through F-34F-33 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Shenandoah Telecommunications Company:
We have audited Shenandoah Telecommunications Company’s (the Company’s) internal control over financial reporting as of December 31, 2012,2015, based on criteria established in Internal Control—Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. TheCommission (COSO). Shenandoah Telecommunications Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.Reporting (Item 9A). Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit.
We 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company'scompany’s internal 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'scompany’s internal control over financial reporting 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 reasonable 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 reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
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.
In our opinion, theShenandoah Telecommunications Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Shenandoah Telecommunications Company and subsidiaries as of December 31, 20122015 and 2011,2014, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-yearthree‑year period ended December 31, 2012,2015, and our report dated March 5, 2013February 26, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
/S/ KPMG LLP |
|
Richmond, Virginia |
March 5, 2013 |
Richmond, Virginia
February 26, 2016
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Shenandoah Telecommunications Company:
We have audited the accompanying consolidated balance sheets of Shenandoah Telecommunications Company and subsidiaries (the Company) as of December 31, 20122015 and 2011,2014, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-yearthree‑year period ended December 31, 2012.2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shenandoah Telecommunications Company and subsidiaries as of December 31, 20122015 and 2011,2014, and the results of their operations and their cash flows for each of the years in the three-yearthree‑year period ended December 31, 2012,2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theShenandoah Telecommunications Company’s internal control over financial reporting as of December 31, 2012,2015, based on criteria established in Internal Control–Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 5, 2013February 26, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reportingreporting.
/s/ KPMG LLP
Richmond, Virginia
February 26, 20.16
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 20122015 and 20112014
in thousands
| ASSETS | | 2012 | | | 2011 | |
| | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 71,086 | | | $ | 15,874 | |
| Accounts receivable, net | | | 25,274 | | | | 21,483 | |
| Income taxes receivable | | | 4,705 | | | | 12,495 | |
| Materials and supplies | | | 9,789 | | | | 7,469 | |
| Prepaid expenses and other | | | 4,546 | | | | 3,844 | |
| Assets held for sale | | | 203 | | | | 2,797 | |
| Deferred income taxes | | | 832 | | | | 502 | |
| Total current assets | | | 116,435 | | | | 64,464 | |
| Investments, including $2,064 and $2,160 carried at fair value | | | 8,214 | | | | 8,305 | |
| | | | | | | | | |
| Property, plant and equipment, net | | | 365,474 | | | | 310,754 | |
| | | | | | | | | |
| Other Assets | | | | | | | | |
| Intangible assets, net | | | 74,932 | | | | 81,346 | |
| Cost in excess of net assets of businesses acquired | | | 10 | | | | 10,962 | |
| Deferred charges and other assets, net | | | 5,675 | | | | 4,148 | |
| Other assets, net | | | 80,617 | | | | 96,456 | |
| Total assets | | $ | 570,740 | | | $ | 479,979 | |
See accompanying notes to consolidated financial statements.
| ASSETS | | 2015 | | | 2014 | |
| | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 76,812 | | | $ | 68,917 | |
| Accounts receivable, net | | | 29,778 | | | | 30,371 | |
| Income taxes receivable | | | 7,694 | | | | 14,752 | |
| Materials and supplies | | | 4,183 | | | | 8,794 | |
| Prepaid expenses and other | | | 8,573 | | | | 4,279 | |
| Deferred income taxes | | | 907 | | | | 1,211 | |
| Total current assets | | | 127,947 | | | | 128,324 | |
| | | | | | | | | |
Investments, including $2,654 and $2,661 carried at fair value | | | 10,679 | | | | 10,089 | |
| | | | | | | | | |
| Property, plant and equipment, net | | | 410,018 | | | | 405,907 | |
| | | | | | | | | |
| Other Assets | | | | | | | | |
| Intangible assets, net | | | 66,993 | | | | 68,260 | |
| Deferred charges and other assets, net | | | 13,103 | | | | 6,662 | |
| Other assets, net | | | 80,096 | | | | 74,922 | |
| Total assets | | $ | 628,740 | | | $ | 619,242 | |
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 20122015 and 20112014
in thousands
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | 2012 | | | 2011 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | |
| Current Liabilities | | | | | | | | | | | | |
| Current maturities of long-term debt | | $ | 1,977 | | | $ | 21,913 | | | $ | 23,000 | | | $ | 23,000 | |
| Accounts payable | | | 31,729 | | | | 11,708 | | | | 13,009 | | | | 11,151 | |
| Advanced billings and customer deposits | | | 11,190 | | | | 10,647 | | | | 11,674 | | | | 12,375 | |
| Accrued compensation | | | 2,671 | | | | 2,094 | | | | 5,915 | | | | 5,466 | |
| Liabilities held for sale | | | - | | | | 267 | | |
| Accrued liabilities and other | | | 10,573 | | | | 8,950 | | | | 7,639 | | | | 7,162 | |
| Total current liabilities | | | 58,140 | | | | 55,579 | | | | 61,237 | | | | 59,154 | |
| | | | | | | | | | | | | | | | | |
| Long-term debt, less current maturities | | | 230,200 | | | | 158,662 | | | | 178,250 | | | | 201,250 | |
| | | | | | | | | | | | | | | | | |
| Other Long-Term Liabilities | | | | | | | | | | | | | | | | |
| Deferred income taxes | | | 57,896 | | | | 51,675 | | | | 74,868 | | | | 76,777 | |
| Deferred lease payable | | | 4,903 | | | | 4,174 | | | | 8,142 | | | | 7,180 | |
| Asset retirement obligations | | | 5,896 | | | | 7,610 | | | | 7,266 | | | | 6,928 | |
| Other liabilities | | | 5,857 | | | | 4,620 | | | | 9,039 | | | | 9,607 | |
| Total other liabilities | | | 74,552 | | | | 68,079 | | | | 99,315 | | | | 100,492 | |
| | | | | | | | | | | | | | | | | |
| Commitments and Contingencies | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Shareholders’ Equity | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| Common stock, no par value, authorized 48,000 shares; issued and outstanding 23,962 shares in 2012 and 23,838 shares in 2011 | | | 24,688 | | | | 22,043 | | |
| Accumulated other comprehensive loss | | | (863 | ) | | | - | | |
| Common stock, no par value, authorized 96,000 shares; issued and outstanding 48,475 shares in 2015 and 48,265 shares in 2014 | | | | 32,776 | | | | 29,712 | |
| Accumulated other comprehensive income, net of taxes | | | | 415 | | | | 1,122 | |
| Retained earnings | | | 184,023 | | | | 175,616 | | | | 256,747 | | | | 227,512 | |
| Total shareholders’ equity | | | 207,848 | | | | 197,659 | | | | 289,938 | | | | 258,346 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 570,740 | | | $ | 479,979 | | | $ | 628,740 | | | $ | 619,242 | |
See accompanying notes to consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2012, 20112015, 2014 and 20102013
in thousands, except per share amounts
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| Operating revenues | | $ | 288,075 | | | $ | 251,145 | | | $ | 195,206 | |
| | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 117,407 | | | | 106,640 | | | | 74,673 | |
| Impairment charge on goodwill | | | 10,952 | | | | - | | | | - | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 60,646 | | | | 56,445 | | | | 45,572 | |
| Depreciation and amortization | | | 64,412 | | | | 55,770 | | | | 42,630 | |
| Total operating expenses | | | 253,417 | | | | 218,855 | | | | 162,875 | |
| Gain on sale of directory | | | - | | | | - | | | | 4,000 | |
| Operating income | | | 34,658 | | | | 32,290 | | | | 36,331 | |
| | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | |
| Interest expense | | | (7,850 | ) | | | (8,289 | ) | | | (4,716 | ) |
| Gain (loss) on investments, net | | | 858 | | | | (696 | ) | | | (165 | ) |
| Non-operating income, net | | | 945 | | | | 900 | | | | 717 | |
| | | | | | | | | | | | | |
| Income from continuing operations before income taxes | | | 28,611 | | | | 24,205 | | | | 32,167 | |
| Income tax expense | | | 12,008 | | | | 10,667 | | | | 13,393 | |
| | | | | | | | | | | | | |
| Net income from continuing operations | | | 16,603 | | | | 13,538 | | | | 18,774 | |
| | | | | | | | | | | | | |
| Loss from discontinued operations of Converged Services, net of tax benefits of $196, $359 and $480, respectively | | | (300 | ) | | | (545 | ) | | | (699 | ) |
| Net income | | $ | 16,303 | | | $ | 12,993 | | | $ | 18,075 | |
| Other comprehensive loss: | | | | | | | | | | | | |
| Unrealized loss on interest rate hedge, net of tax | | | (863 | ) | | | - | | | | - | |
| Reclassification gain from pension plans, net of tax | | | - | | | | - | | | | 2,448 | |
| Comprehensive income | | $ | 15,440 | | | $ | 12,993 | | | $ | 20,523 | |
| | | | | | | | | | | | | |
| Income per share: | | | | | | | | | | | | |
| Basic and diluted net income per share: | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 0.69 | | | $ | 0.57 | | | $ | 0.79 | |
| Loss from discontinued operations, net of income taxes | | | (0.01 | ) | | | (0.02 | ) | | | (0.03 | ) |
| Net income | | $ | 0.68 | | | $ | 0.55 | | | $ | 0.76 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding, basic | | | 23,877 | | | | 23,781 | | | | 23,730 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding, diluted | | | 24,019 | | | | 23,826 | | | | 23,823 | |
See accompanying notes to consolidated financial statements.
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Operating revenues | | $ | 342,485 | | | $ | 326,946 | | | $ | 308,942 | |
| | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | |
| Cost of goods and services, exclusive of depreciation and amortization shown separately below | | | 121,330 | | | | 129,743 | | | | 125,140 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown below | | | 76,367 | | | | 69,370 | | | | 67,673 | |
| Depreciation and amortization | | | 70,702 | | | | 65,890 | | | | 60,722 | |
| Total operating expenses | | | 268,399 | | | | 265,003 | | | | 253,535 | |
| Operating income | | | 74,086 | | | | 61,943 | | | | 55,407 | |
| | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | |
| Interest expense | | | (7,355 | ) | | | (8,148 | ) | | | (8,468 | ) |
| Gain on investments, net | | | 105 | | | | 208 | | | | 756 | |
| Non-operating income, net | | | 1,754 | | | | 2,031 | | | | 1,769 | |
| Income before income taxes | | | 68,590 | | | | 56,034 | | | | 49,464 | |
Income tax expense | | | 27,726 | | | | 22,151 | | | | 19,878 | |
| Net income | | $ | 40,864 | | | $ | 33,883 | | | $ | 29,586 | |
| | | | | | | | | | | | | |
| Other comprehensive income: | | | | | | | | | | | | |
| Unrealized gain (loss) on interest rate hedge, net of tax | | | (707 | ) | | | (1,472 | ) | | | 3,457 | |
| Comprehensive income | | $ | 40,157 | | | $ | 32,411 | | | $ | 33,043 | |
| | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | |
| Basic | | $ | 0.84 | | | $ | 0.70 | | | $ | 0.62 | |
| Diluted | | $ | 0.83 | | | $ | 0.70 | | | $ | 0.61 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding, basic | | | 48,388 | | | | 48,198 | | | | 48,002 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding, diluted | | | 49,024 | | | | 48,720 | | | | 48,230 | |
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2012, 2011 and 2010
in thousands, except per share amounts
| | | Shares | | | Common Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| Balance, December 31, 2009 | | | 23,681 | | | $ | 17,890 | | | $ | 160,230 | | | $ | (2,448 | ) | | $ | 175,672 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | 18,075 | | | | - | | | | 18,075 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | 2,448 | | | | 2,448 | |
| Dividends declared ($0.33 per share) | | | - | | | | - | | | | (7,833 | ) | | | - | | | | (7,833 | ) |
| Dividends reinvested in common stock | | | 29 | | | | 520 | | | | - | | | | - | | | | 520 | |
| Stock based compensation | | | - | | | | 792 | | | | - | | | | - | | | | 792 | |
| Common stock issued through exercise of incentive stock options | | | 57 | | | | 561 | | | | - | | | | - | | | | 561 | |
| Net excess tax benefit from stock options exercised | | | - | | | | 70 | | | | - | | | | - | | | | 70 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | | 23,767 | | | $ | 19,833 | | | $ | 170,472 | | | $ | - | | | $ | 190,305 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | 12,993 | | | | - | | | | 12,993 | |
| Dividends declared ($0.33 per share) | | | - | | | | - | | | | (7,849 | ) | | | - | | | | (7,849 | ) |
| Dividends reinvested in common stock | | | 51 | | | | 529 | | | | - | | | | - | | | | 529 | |
| Stock based compensation | | | - | | | | 1,718 | | | | - | | | | - | | | | 1,718 | |
| Common stock issued through exercise of incentive stock options | | | 5 | | | | 37 | | | | - | | | | - | | | | 37 | |
| Common stock issued for share awards | | | 19 | | | | - | | | | - | | | | - | | | | - | |
| Common stock issued | | | 1 | | | | 13 | | | | - | | | | - | | | | 13 | |
| Common stock repurchased | | | (5 | ) | | | (92 | ) | | | - | | | | - | | | | (92 | ) |
| Net excess tax benefit from stock options exercised | | | - | | | | 5 | | | | - | | | | - | | | | 5 | |
| Balance, December 31, 2011 | | | 23,838 | | | $ | 22,043 | | | $ | 175,616 | | | $ | - | | | $ | 197,659 | |
See accompanying notes to consolidated financial statements.
(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2012, 20112015, 2014 and 20102013
in thousands, except per share amounts
| | | Shares | | | Common Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| Balance, December 31, 2012 | | | 47,924 | | | $ | 24,688 | | | $ | 184,023 | | | $ | (863 | ) | | $ | 207,848 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | 29,586 | | | | - | | | | 29,586 | |
| Other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | 3,457 | | | | 3,457 | |
| Dividends declared ($0.18 per share) | | | - | | | | - | | | | (8,647 | ) | | | - | | | | (8,647 | ) |
| Dividends reinvested in common stock | | | 40 | | | | 475 | | | | - | | | | - | | | | 475 | |
| Stock based compensation | | | - | | | | 1,938 | | | | - | | | | - | | | | 1,938 | |
| Common stock issued through exercise of incentive stock options | | | 132 | | | | 1,186 | | | | - | | | | - | | | | 1,186 | |
| Common stock issued for share awards | | | 136 | | | | - | | | | - | | | | - | | | | - | |
| Common stock issued | | | 2 | | | | 10 | | | | - | | | | - | | | | 10 | |
| Common stock repurchased | | | (154 | ) | | | (1,600 | ) | | | - | | | | - | | | | (1,600 | ) |
| Net excess tax benefit from stock options exercised | | | - | | | | 62 | | | | - | | | | - | | | | 62 | |
| Balance, December 31, 2013 | | | 48,080 | | | | 26,759 | | | | 204,962 | | | | 2,594 | | | | 234,315 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | 33,883 | | | | - | | | | 33,883 | |
| Other comprehensive income, net of tax | | | - | | | | - | | | | - | | | | (1,472 | ) | | | (1,472 | ) |
| Dividends declared ($0.235 per share) | | | - | | | | - | | | | (11,333 | ) | | | - | | | | (11,333 | ) |
| Dividends reinvested in common stock | | | 39 | | | | 572 | | | | - | | | | - | | | | 572 | |
| Stock based compensation | | | - | | | | 2,624 | | | | - | | | | - | | | | 2,624 | |
| Common stock issued through exercise of incentive stock options | | | 102 | | | | 1,141 | | | | - | | | | - | | | | 1,141 | |
| Common stock issued for share awards | | | 162 | | | | - | | | | - | | | | - | | | | - | |
| Common stock issued | | | 2 | | | | 6 | | | | - | | | | - | | | | 6 | |
| Common stock repurchased | | | (120 | ) | | | (1,785 | ) | | | - | | | | - | | | | (1,785 | ) |
| Net excess tax benefit from stock options exercised | | | - | | | | 395 | | | | - | | | | - | | | | 395 | |
| Balance, December 31, 2014 | | | 48,265 | | | | 29,712 | | | | 227,512 | | | | 1,122 | | | | 258,346 | |
| | | Shares | | | Common Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| Net income | | | - | | | | - | | | | 16,303 | | | | - | | | | 16,303 | |
| Other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | (863 | ) | | | (863 | ) |
| Dividends declared ($0.33 per share) | | | - | | | | - | | | | (7,896 | ) | | | - | | | | (7,896 | ) |
| Dividends reinvested in common stock | | | 37 | | | | 493 | | | | - | | | | - | | | | 493 | |
| Stock based compensation | | | - | | | | 1,842 | | | | - | | | | - | | | | 1,842 | |
| Common stock issued through exercise of incentive stock options | | | 55 | | | | 404 | | | | - | | | | - | | | | 404 | |
| Common stock issued for share awards | | | 45 | | | | - | | | | - | | | | - | | | | - | |
| Common stock issued | | | 1 | | | | 10 | | | | - | | | | - | | | | 10 | |
| Common stock repurchased | | | (13 | ) | | | (143 | ) | | | - | | | | - | | | | (143 | ) |
| Net excess tax benefit from stock options exercised | | | - | | | | 39 | | | | - | | | | - | | | | 39 | |
| Balance, December 31, 2012 | | | 23,962 | | | $ | 24,688 | | | $ | 184,023 | | | $ | (863 | ) | | $ | 207,848 | |
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2015, 2014 and 2013
in thousands, except per share amounts
| | | Shares | | | Common Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | $ | - | | | $ | 40,864 | | | $ | - | | | $ | 40,864 | |
| Other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | (707 | ) | | | (707 | ) |
| Dividends declared ($0.24 per share) | | | - | | | | - | | | | (11,629 | ) | | | - | | | | (11,629 | ) |
| Dividends reinvested in common stock | | | 22 | | | | 544 | | | | - | | | | - | | | | 544 | |
| Stock based compensation | | | - | | | | 2,719 | | | | - | | | | - | | | | 2,719 | |
| Common stock issued through exercise of incentive stock options | | | 87 | | | | 996 | | | | - | | | | - | | | | 996 | |
| Common stock issued for share awards | | | 212 | | | | - | | | | - | | | | - | | | | - | |
| Common stock issued | | | 1 | | | | 11 | | | | - | | | | - | | | | 11 | |
| Common stock repurchased | | | (111 | ) | | | (1,885 | ) | | | - | | | | - | | | | (1,885 | ) |
| Net excess tax benefit from stock options exercised | | | - | | | | 679 | | | | - | | | | - | | | | 679 | |
| Balance, December 31, 2015 | | | 48,475 | | | $ | 32,776 | | | $ | 256,747 | | | $ | 415 | | | $ | 289,938 | |
See accompanying notes to consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2012, 20112015, 2014 and 20102013
in thousands
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Cash Flows from Operating Activities | | | | | | | | | |
| Net income | | $ | 40,864 | | | $ | 33,883 | | | $ | 29,586 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation | | | 69,287 | | | | 63,324 | | | | 56,583 | |
| Amortization | | | 1,415 | | | | 2,566 | | | | 4,139 | |
| Provision for bad debt | | | 1,640 | | | | 1,678 | | | | 2,019 | |
| Stock based compensation expense | | | 2,333 | | | | 2,624 | | | | 1,938 | |
| Excess tax benefits on stock option exercises | | | (679 | ) | | | (395 | ) | | | (101 | ) |
| Deferred income taxes | | | (451 | ) | | | 2,975 | | | | 14,266 | |
| Net loss on disposal of equipment | | | 235 | | | | 1,975 | | | | 753 | |
| Realized loss on disposal of investments | | | 20 | | | | - | | | | 1 | |
| Unrealized (gains) loss on investments | | | 141 | | | | 51 | | | | (391 | ) |
| Net gains from patronage and equity investments | | | (805 | ) | | | (852 | ) | | | (837 | ) |
| Amortization of long term debt issuance costs | | | 567 | | | | 605 | | | | 609 | |
| Other | | | 93 | | | | 1,515 | | | | 1,663 | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| (Increase) decrease in: | | | | | | | | | | | | |
| Accounts receivable | | | (1,047 | ) | | | (6,225 | ) | | | (2,594 | ) |
| Materials and supplies | | | 492 | | | | 1,921 | | | | (927 | ) |
| Income taxes receivable | | | 7,058 | | | | 1,824 | | | | (11,871 | ) |
| Other assets | | | (6,368 | ) | | | 1,055 | | | | (1,034 | ) |
| Increase (decrease) in: | | | | | | | | | | | | |
| Accounts payable | | | 2,753 | | | | 5,040 | | | | (2,145 | ) |
| Deferred lease payable | | | 962 | | | | 1,024 | | | | 1,253 | |
| Other deferrals and accruals | | | 811 | | | | 405 | | | | 1,354 | |
| Net cash provided by operating activities | | $ | 119,321 | | | $ | 114,993 | | | $ | 94,264 | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| Cash Flows from Operating Activities | | | | | | | | | |
| Net income | | $ | 16,303 | | | $ | 12,993 | | | $ | 18,075 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Impairments on assets held for sale | | | - | | | | 645 | | | | 1,888 | |
| Goodwill impairment | | | 10,952 | | | | - | | | | - | |
| Depreciation | | | 57,961 | | | | 45,350 | | | | 36,553 | |
| Amortization | | | 6,452 | | | | 10,420 | | | | 6,078 | |
| Pension settlement and curtailment expense | | | - | | | | - | | | | 3,964 | |
| Provision for bad debt | | | 2,870 | | | | 3,243 | | | | 1,462 | |
| Stock based compensation expense | | | 1,842 | | | | 1,718 | | | | 792 | |
| Excess tax benefits on stock option exercises | | | (106 | ) | | | (5 | ) | | | (70 | ) |
| Deferred income taxes | | | 6,504 | | | | 15,973 | | | | 4,628 | |
| Net (gain) loss on disposal of equipment | | | 426 | | | | (1,360 | ) | | | 335 | |
| Gain on sale of assets | | | - | | | | - | | | | (4,000 | ) |
| Realized (gain) loss on disposal of investments | | | (66 | ) | | | 27 | | | | 147 | |
| Unrealized (gains) losses on investments | | | (191 | ) | | | 132 | | | | (325 | ) |
| Net (gain) loss from patronage and equity | | | | | | | | | | | | |
| Investments | | | (894 | ) | | | 233 | | | | 100 | |
| Write-off of unamortized loan fees | | | 780 | | | | - | | | | - | |
| Other | | | 1,526 | | | | 257 | | | | 373 | |
| Changes in assets and liabilities, exclusive of acquired businesses: | | | | | | | | | | | | |
| (Increase) decrease in: | | | | | | | | | | | | |
| Accounts receivable | | | (8,246 | ) | | | (1,891 | ) | | | (3,120 | ) |
| Materials and supplies | | | (2,321 | ) | | | (1,080 | ) | | | (262 | ) |
| Income taxes receivable | | | 7,790 | | | | (9,919 | ) | | | 2,955 | |
| Increase (decrease) in: | | | | | | | | | | | | |
| Accounts payable | | | (4,690 | ) | | | (596 | ) | | | 3,528 | |
| Deferred lease payable | | | 729 | | | | 416 | | | | 374 | |
| Other prepaids, deferrals and accruals | | | (647 | ) | | | 4,371 | | | | 1,729 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 96,974 | | | $ | 80,927 | | | $ | 75,204 | |
(Continued)
(Continued)
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2012, 20112015, 2014 and 20102013
in thousands
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Cash Flows From Investing Activities | | | | | | | | | |
| Acquisition of property, plant and equipment | | $ | (69,679 | ) | | $ | (68,232 | ) | | $ | (117,028 | ) |
| Proceeds from sale of equipment | | | 363 | | | | 551 | | | | 331 | |
| Proceeds from sales of assets | | | - | | | | - | | | | 25 | |
| Purchase of investment securities | | | - | | | | - | | | | (12 | ) |
| Cash distributions from investments | | | 54 | | | | 43 | | | | 121 | |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | $ | (69,262 | ) | | $ | (67,638 | ) | | $ | (116,563 | ) |
| | | | | | | | | | | | | |
| Cash Flows From Financing Activities | | | | | | | | | | | | |
| Principal payments on long-term debt | | $ | (23,000 | ) | | $ | (5,750 | ) | | $ | (1,977 | ) |
| Cash paid for debt issuance costs | | | (7,880 | ) | | | - | | | | - | |
| Dividends paid, net of dividends reinvested | | | (11,085 | ) | | | (10,761 | ) | | | (8,191 | ) |
| Excess tax benefits on stock option exercises | | | 679 | | | | 395 | | | | 101 | |
| Repurchases of common stock | | | (1,885 | ) | | | (1,785 | ) | | | (1,600 | ) |
| Proceeds from issuances of common stock | | | 1,007 | | | | 1,147 | | | | 1,196 | |
| | | | | | | | | | | | | |
| Net cash used in financing activities | | $ | (42,164 | ) | | $ | (16,754 | ) | | $ | (10,471 | ) |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 7,895 | | | $ | 30,601 | | | $ | (32,770 | ) |
| | | | | | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | | | | | |
| Beginning | | | 68,917 | | | | 38,316 | | | | 71,086 | |
| Ending | | $ | 76,812 | | | $ | 68,917 | | | $ | 38,316 | |
| | | | | | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | |
| Cash payments for: | | | | | | | | | | | | |
| Interest, net of capitalized interest of $436 in 2015, $373 in 2014, and $396 in 2013 | | $ | 6,784 | | | $ | 7,548 | | | $ | 8,077 | |
| Income taxes paid, net | | $ | 21,119 | | | $ | 17,233 | | | $ | 17,483 | |
| | | 2012 | | | 2011 | | | 2010 | |
| Cash Flows From Investing Activities | | | | | | | | | |
| Acquisition of property, plant and equipment | | $ | (89,053 | ) | | $ | (74,663 | ) | | $ | (55,936 | ) |
| Proceeds from sale of equipment | | | 102 | | | | 675 | | | | 258 | |
| Proceeds from sales of assets | | | 3,803 | | | | 2,986 | | | | 4,000 | |
| Cash paid to acquire prepaid subscriber rights | | | - | | | | - | | | | (6,884 | ) |
| Cash paid to acquire businesses | | | - | | | | - | | | | (152,114 | ) |
| Purchase of investment securities | | | - | | | | (84 | ) | | | (127 | ) |
| Proceeds from sale of investment securities | | | 1,227 | | | | 475 | | | | 62 | |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | $ | (83,921 | ) | | $ | (70,611 | ) | | $ | (210,741 | ) |
| | | | | | | | | | | | | |
| Cash Flows From Financing Activities | | | | | | | | | |
| Principal payments on long-term debt | | $ | (178,397 | ) | | $ | (14,538 | ) | | $ | (28,620 | ) |
| Amounts borrowed under debt agreements | | | 230,000 | | | | - | | | | 189,800 | |
| Cash paid for debt issuance costs | | | (2,418 | ) | | | - | | | | (3,562 | ) |
| Dividends paid, net of dividends reinvested | | | (7,403 | ) | | | (7,320 | ) | | | (7,313 | ) |
| Excess tax benefits on stock option exercises | | | 106 | | | | 5 | | | | 70 | |
| Repurchases of stock | | | (143 | ) | | | (92 | ) | | | - | |
| Proceeds from exercise of incentive stock options | | | 414 | | | | 50 | | | | 561 | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | $ | 42,159 | | | $ | (21,895 | ) | | $ | 150,936 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 55,212 | | | $ | (11,579 | ) | | $ | 15,399 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | | | | | |
| Beginning | | | 15,874 | | | | 27,453 | | | | 12,054 | |
| Ending | | $ | 71,086 | | | $ | 15,874 | | | $ | 27,453 | |
| | | | | | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | |
| Cash payments for: | | | | | | | | | | | | |
| Interest, net of capitalized interest of $486 in 2012, $215 in 2011, and $488 in 2010 | | $ | 6,598 | | | $ | 7,076 | | | $ | 3,991 | |
| Income taxes paid (refunded), net | | $ | (2,482 | ) | | $ | 4,248 | | | $ | 5,657 | |
During 20122015, 2014 and 2011,2013, the Company traded in certain PCS equipment and received credits of $20,307$711, $863 and $2,923,$14,533, respectively, against the purchase price of new equipment. The increase in accountsAccounts payable for 2012at December 31, 2015, 2014 and 2013 included $24,675$5,597, $6,492 and $7,635, respectively, associated with PCS Network Vision capital expenditures.
See accompanying notes to consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of business: Shenandoah Telecommunications Company and its subsidiaries (collectively, the “Company”) provide wireless personal communications service (“PCS”) under the Sprint brand, and telephone service, cable television, unregulated communications equipment sales and services, and Internet access under the Shentel brand. In addition, the Company leases towers and operates and maintains an interstate fiber optic network. Pursuant to a management agreement with Sprint Nextel and its related parties (collectively, “Sprint Nextel”“Sprint”), the Company is the exclusive Sprint PCS Affiliate providing wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 1900 megahertz 2.5 GHz spectrum rangeranges in the geographic area extending from Altoona, Harrisburg and York, Pennsylvania, south through Western Maryland and the panhandle of West Virginia to Harrisonburg, Virginia. The Company is licensed to use the Sprint brand name in this territory, and operates its network under the Sprint Nextel radio spectrum license (See Note 7)6). The Company's other operations are located in the four-state region surrounding the Northern Shenandoah Valley of Virginia. The Company, through its subsidiary Shentel Converged Services, provides local and long distance voice, video, and Internet services on an exclusive and non-exclusive basis to multi-dwelling unit (“MDU”) communities (primarily off-campus college student housing) throughout the southeastern United States. The Company presents its Converged Services assets and liabilities as held for sale, and its operating results as discontinued operations (See Note 2).
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The consolidated financial statements include the accounts of all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.The Company has no involvement with variable interest entities. The Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.
On October 19, 2015, the Board of Directors declared a two-for-one stock split, effective for shareholders of record as of the close of business on December 31, 2015. Shareholders received one additional share of common stock of the Company for each share held on the record date. All share and per share data presented herein for prior periods have been retroactively amended to reflect the effect of the additional shares issued and outstanding as a result of the stock split.
Use of estimates: Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements the fair value less cost to sell of the Converged Services assets held for sale, and the reported amounts of revenues and expenses during the reporting periods. Management reviews its estimates, including those related to recoverability and useful lives of assets as well as liabilities for income taxes and pension benefits. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those reported estimates.
Cash and cash equivalents: The Company considers all temporary cash investments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents included $40.1 million and $40.0 million invested in institutional cash management funds at December 31, 2015 and 2014, respectively. The Company places its temporary cash investments with high credit quality financial institutions. At times,Generally, these investments may beare in excess of FDIC or SIPC insurance limits. No cash equivalents were held at December 31, 2011. Cash equivalents (comprised entirely of U. S. Treasury bills) were $20.0 million at December 31, 2012.
Accounts receivable: Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience and industry and local economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances meeting specific criteria are reviewed individually for collectability. All other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Accounts receivable are concentrated among customers within the Company's geographic service area and large telecommunications companies. Changes in the allowance for doubtful accounts for trade accounts receivable for the years ended December 31, 2012, 20112015, 2014 and 20102013 are summarized below (in thousands):
| | | 2015 | | | 2014 | | | 2013 | |
| | | | |
| Balance at beginning of year | | $ | 762 | | | $ | 924 | | | $ | 1,113 | |
| Bad debt expense | | | 1,640 | | | | 1,678 | | | | 2,019 | |
| Losses charged to allowance | | | (2,586 | ) | | | (2,218 | ) | | | (2,390 | ) |
| Recoveries added to allowance | | | 602 | | | | 378 | | | | 182 | |
| Balance at end of year | | $ | 418 | | | $ | 762 | | | $ | 924 | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | |
| Balance at beginning of year | | $ | 838 | | | $ | 460 | | | $ | 330 | |
| Bad debt expense | | | 2,870 | | | | 3,243 | | | | 1,437 | |
| Losses charged to allowance | | | (2,854 | ) | | | (3,304 | ) | | | (1,569 | ) |
| Recoveries added to allowance | | | 259 | | | | 439 | | | | 262 | |
| Balance at end of year | | $ | 1,113 | | | $ | 838 | | | $ | 460 | |
Investments: The classifications of debt and equity securities are determined by management at the date individual investments are acquired. The appropriateness of such classification is periodically reassessed. The Company monitors the fair value of all investments, and based on factors such as market conditions, financial information and industry conditions, the Company will reflect impairments in values as is warranted. The classification of those securities and the related accounting policies are as follows:
Investments Carried at Fair Value: Investments in stockequity and bond mutual funds and investment trusts held within the Company’s rabbi trust, which is related to the Company’s unfunded Supplemental Executive Retirement Plan, are reported at fair value using net asset value which approximates fair value. Unrealizedper share. The Company has elected to recognize unrealized gains and losses are recognizedon investments carried at fair value in earnings.earnings, pursuant to the fair value option in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurement.
Investments Carried at Cost: Investments in common stock in which the Company does not have a significant ownership (less than 20%) and for which there is no ready market, are carried at cost. This category includes required investments to obtain services, primarily with CoBank. Information regarding investments carried at cost is reviewed for evidence of impairment in value. Impairments are charged to earnings and a new cost basis for the investment is established.
Equity Method Investments: Investments in partnerships and in unconsolidated corporations where the Company's ownership is 20% or more, but less than 50%, or where the Company otherwise has the ability to exercise significant influence, are reported under the equity method. Under this method, the Company's equity in earnings or losses of investees is reflected in earnings. Distributions received reduce the carrying value of these investments. The Company recognizes a loss when there is a decline in value of the investment which is other than a temporary decline. Equity method investments include one investment limited partnership and several smaller investments in pooled projects.
Materials and supplies: New and reusable materials are carried in inventory at the lower of average cost or market value. Inventory held for sale, such as telephones and accessories, are carried at the lower of average cost or market value. Non-reusable material is carried at estimated salvage value.
Property, plant and equipment: Property, plant and equipment is stated at cost.cost less accumulated depreciation and amortization. The Company capitalizes all costs associated with the purchase, deployment and installation of property, plant and equipment, including interest costs on major capital projects during the period of their construction. Expenditures, including those on leased assets, which extend the useful life or increase its utility, are capitalized. Maintenance expense is recognized when repairs are performed. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Depreciation and amortization is not included in the income statement line items “Cost of goods and services” or “Selling, general and administrative.” Depreciable lives are assigned to assets based on their estimated useful lives. Leasehold improvements are depreciated over the lesser of their useful lives or respective lease terms. The Company takes technology changes into consideration as it assigns the estimated useful lives, and monitors the remaining useful lives of asset groups to reasonably match the remaining economic life with the useful life and makes adjustments when necessary.
Valuation of long-lived assets: Long-livedLong‑lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Fair value:Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial instruments presented on the consolidated balance sheets that approximatefor which the carrying value approximates fair value include: cash and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, interest rate swaps and variable-rate long-term debt.
The Company measures its interest rate swaps at fair value based on information provided by the counterparty and third party software, and recognizes itsuch derivative instruments as either assets or liabilities on the Company’s consolidated balance sheet. Changes in the fair value of the swap acquired in 2010 are recognized in interest expense, as the Company did not designate this swap agreement as a cash flow hedge for accounting purposes. Changes in the fair value of the swap acquired in 2012 are recognized in other comprehensive income, as this swap was designated as a cash flow hedge for accounting purposes. Changes in the fair value of the swap acquired in 2010 were recognized in interest expense, as the Company did not designate this swap agreement as a cash flow hedge for accounting purposes. This swap expired in 2013. The Company entered into these swaps to manage a portion of its exposure to interest rate movements by converting a portion of its variable rate long-term debt from variable to fixed rates.rate debt.
Asset retirement obligations: The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset, which is depreciated over the life of the tangible long-lived asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company records the retirement obligation on towers owned and cell site improvements where there is a legal obligation to remove the tower or cell site improvements and restore the site to its original condition, as required by certaincondition. The terms associated with its operating leases, and applicable zoning ordinances of certain jurisdictions, atdefine the time the Company discontinues its use. TheCompany’s obligations which are estimated and vary based on the size of the towers. The Company’s cost to remove the tower or cell site improvements is amortized over the life of the tower or cell site assets.
During the third quarter of 2015, new information was received regarding the cost to remove tower site improvements. The Company recorded an adjustment to the wireless segment asset retirement obligation liabilities to reflect changes in the estimated future cash flows underlying the obligation to remove tower site improvements.
Changes in the liability for asset removal obligations for the years ended December 31, 2012, 20112015, 2014 and 20102013 are summarized below (in thousands):
| | | 2015 | | | 2014 | | | 2013 | |
| | | | |
| Balance at beginning of year | | $ | 6,928 | | | $ | 6,485 | | | $ | 5,896 | |
| Additional liabilities accrued | | | 490 | | | | 403 | | | | 1,189 | |
| Changes to prior estimates | | | (467 | ) | | | - | | | | - | |
| Payments made | | | (77 | ) | | | (334 | ) | | | (909 | ) |
| Accretion expense | | | 392 | | | | 374 | | | | 309 | |
| Balance at end of year | | $ | 7,266 | | | $ | 6,928 | | | $ | 6,485 | |
| | | 2012 | | 2011 | | 2010 | |
| | | | |
| Balance at beginning of year | | $ | 7,610 | | | $ | 6,542 | | | $ | 5,966 | |
| Additional liabilities accrued | | | 1,148 | | | | 556 | | | | 309 | |
| Changes to prior estimates | | | (2,265 | ) | | | - | | | | - | |
| Payments made | | | (846 | ) | | | - | | | | - | |
| Accretion expense | | | 249 | | | | 512 | | | | 267 | |
| Balance at end of year | | $ | 5,896 | | | $ | 7,610 | | | $ | $6,542 | |
Cost in excess of net assets of businesses acquired (goodwill)Goodwill and intangible assets: In connection with the acquisition of a business, a portion of the purchase price may be allocated to identifiable intangible assets with indefinite lives, such as franchise rights, and goodwill, which is an asset representing the excessfuture economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company carries an immaterial amount of goodwill in the total purchase price over the fair values of the net tangible and identifiable intangible assets. Goodwill and intangibleWireline segment. Intangible assets with indefinite lives, primarily cable franchise rights, are assessed annually, at November 30, for impairment and in interim periods if certain triggering events occur indicating that the carrying value may be impaired. No impairments were required to be recorded in the years ended December 31, 2011 or 2010. In the fourth quarter of 2012, the Company determined that goodwill in the Cable segment had become impaired, and an impairment charge of $11.0 million was recognized. The Company determined that no impairment of Cable segment franchise rights was required for the yearyears ended December 31, 2012.2015, 2014 and 2013. The fair value of cable franchise rights, which is determined by a “greenfield” analysis (Level 3 fair value), was determined to exceed its $64.1 million carrying value by approximately $3.4$11.3 million at December 31, 2012, down from $6.72015, and $5.3 million of excess fair value at December 31, 2011. Goodwill is allocated to the reporting segment responsible for the acquisition that gave rise to the goodwill.2014.
The following table presents the goodwill balance allocated by segment and changes in the balances for the years ended
December 31, 2012 and 2011 (in thousands):
| | | CATV Segment | | | Wireline Segment | | | Total | |
| Balance as of December 31, 2010 | | $ | 10,952 | | | $ | 10 | | | $ | 10,962 | |
| No activity | | | - | | | | - | | | | - | |
| Balance as of December 31, 2011 | | $ | 10,952 | | | $ | 10 | | | $ | 10,962 | |
| Impairment recognized | | | (10,952 | ) | | | - | | | | (10,952 | ) |
| Balance as of December 31, 2012 | | $ | - | | | $ | 10 | | | $ | 10 | |
Intangible assets consist of the following at December 31, 20122015 and 20112014 (in thousands):
| | | | | | 2012 | | | | | | 2011 | |
| | | Gross Carrying Amount | | | Accum -ulated Amort-i zation | | | Net | | | Gross Carrying Amount | | | Accum- ulated Amort- ization | | | Net | |
| | | | | | | | | | | | | | | | | | | |
| Intangible assets subject to amortization: | |
| Business contracts | | $ | 2,069 | | | $ | (354 | ) | | $ | 1,715 | | | $ | 2,054 | | | $ | (238 | ) | | $ | 1,816 | |
| Cable franchise rights | | | 122 | | | | (122 | ) | | | - | | | | - | | | | - | | | | - | |
| Acquired subscriber base | | | 32,325 | | | | (23,206 | ) | | | 9,119 | | | | 32,203 | | | | (16,893 | ) | | | 15,310 | |
| | | $ | 34,516 | | | $ | (23,682 | ) | | $ | 10,834 | | | $ | 34,257 | | | $ | (17,131 | ) | | $ | 17,126 | |
Non-amortizing intangible assets:
| | | | | | | | | | | | | | | 2015 | | | 2014 | |
| | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net | |
| | | | | | | | | | | | | | | | | | | | |
| Intangible assets subject to amortization: | | Intangible assets subject to amortization: | |
| Business contracts | | | $ | 1,938 | | | $ | (564 | ) | | $ | 1,374 | | | $ | 1,898 | | | $ | (495 | ) | | $ | 1,403 | |
| Cable franchise rights | | | | - | | | | - | | | | - | | | | 122 | | | | (122 | ) | | | - | |
| Acquired subscriber base | | | | 25,326 | | | | (23,805 | ) | | | 1,521 | | | | 32,315 | | | | (29,556 | ) | | | 2,759 | |
| | | | $ | 27,264 | | | $ | (24,369 | ) | | $ | 2,895 | | | | 34,335 | | | $ | (30,173 | ) | | $ | 4,162 | |
| | | | |
| Non-amortizing intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cable franchise rights | | $ | 64,059 | | | $ | - | | | $ | 64,059 | | | $ | 64,181 | | | $ | - | | | $ | 64,181 | | | $ | 64,059 | | | $ | - | | | $ | 64,059 | | | $ | 64,059 | | | $ | - | | | $ | 64,059 | |
| Railroad crossing rights | | | 39 | | | | - | | | | 39 | | | | 39 | | | | - | | | | 39 | | | | 39 | | | | - | | | | 39 | | | | 39 | | | | - | | | | 39 | |
| | | $ | 64,098 | | | $ | - | | | $ | 64,098 | | | $ | 64,220 | | | $ | - | | | $ | 64,220 | | | $ | 64,098 | | | $ | - | | | $ | 64,098 | | | $ | 64,098 | | | $ | - | | | $ | 64,098 | |
| Total intangibles | | $ | 98,614 | | | $ | (23,682 | ) | | $ | 74,932 | | | $ | 98,477 | | | $ | (17,131 | ) | | $ | 81,346 | | | $ | 91,362 | | | $ | (24,369 | ) | | $ | 66,993 | | | $ | 98,433 | | | $ | (30,173 | ) | | $ | 68,260 | |
For the years ended December 31, 2012, 20112015, 2014 and 2010,2013, amortization expense related to intangible assets was approximately $6.5$1.4 million, $10.4$2.6 million and $6.1$4.1 million, respectively. The 2011 increase reflects the full year impact of the 2010 acquisitions of cable subscriber base intangibles and the PCS prepaid subscriber acquisition asset, both acquired in July 2010. As these assets are amortized on an accelerated basis, amortization declines rapidly after the initial year. During 2012, the Company determined that, beginning in early 2013, it would not continue to provide service under two franchises acquired in 2010, and the Company reclassified and began amortizing the franchise rights associated with these markets over the expected remaining period during which services would be provided.
Aggregate amortization expense for intangible assets for the periods shown is expected to be as follows:
Year Ending December 31, | | Amount | |
| | | (in thousands) | |
| 2016 | | $ | 969 | |
| 2017 | | | 540 | |
| 2018 | | | 221 | |
| 2019 | | | 116 | |
| 2020 | | | 115 | |
Year Ending December 31, | | Amount | |
| | | (in thousands) | |
| 2013 | | $ | 4,139 | |
| 2014 | | | 2,566 | |
| 2015 | | | 1,411 | |
| 2016 | | | 943 | |
| 2017 | | | 514 | |
Deferred charges and other assets: Deferred charges and other assets consist of derivatives used for hedging purposes and debt issuance costs, which are amortized using the effective yield method over the life of the underlying debt agreement.
Retirement plans: Prior to January 31, 2007, the Company maintained a noncontributory defined benefit plan covering substantially all employees. Effective January 31, 2007, the Company froze benefits payable under this plan, and following the receipt of a favorable tax determination letter from the IRS, the Company completed the settlement of the defined benefit plan in June 2010.
The Company also maintains a Supplemental Executive Retirement Plan (“SERP”) for selected employees. This is an unfunded defined contribution plan and is maintained primarily for the purpose of providing additional retirement benefits for a select group of management employees.plan. The Company created and funded a rabbi trust to hold assets equal to the liabilities under this plan. Effective in June 2010, the Company ceased making employer contributions to this plan. Participant balances and earnings on themthereon continue to be maintained for this plan.plan, but no new participants or contributions have been added to the plan since 2010.
The Company also maintains a defined contribution 401(k) plan under which substantially all employees may defer a portion of their earnings on a pretax basis, up to the allowable federal maximum.maximum annual contribution amount. The Company may make matching and discretionary contributions to this plan.
Neither the rabbi trust nor the defined contribution 401(k) plan directly holds Company common stock in the plan’s investment portfolio.
Income taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the recoverability of tax assets generated on a state-by-state basis from net operating losses apportioned to that state. Management uses a more likely than not threshold to make that determination and has concluded that at December 31, 20122015 and 2011,2014, a valuation allowance against certain state deferred tax assets is necessary, as discussed in Note 6.5. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest related to unrecognized tax benefits in interest expense and penalties in selling, general, and administrative expenses.
Revenue recognition: The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or products have been delivered, the price to the buyer is fixed and determinable and collectability is reasonably assured. Revenues are recognized by the Company based on the various types of transactions generating the revenue. For services, revenue is recognized as the services are performed. For equipment sales, revenue is recognized when the sales transaction is complete.
Under the Sprint Nextel Management Agreement, postpaid wireless service revenues are reported net of an 8% Management Fee and, since its imposition effective January 1, 2007, an 8.8%August 2013, a 14% Net Service Fee (increased from 12%), retained by Sprint Nextel. The Net Service Fee increased to 12% effective June 1, 2010, and the maximum Net Service Fee will increase to 14% effective July 1, 2013.Sprint. Prepaid wireless service revenues are reported net of a 6% Management Fee retained by Sprint Nextel. See Note 7 for additional information about the Management Fee and Net Service Fee.Sprint.
The Company enters into revenue arrangements that may involve multiple revenue-generating activities, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In accounting for these arrangements, separate contracts with the same party, entered into at or near the same time, will be presumed to be a bundled transaction, and the consideration will be measured and allocated to the separate units based on their relative fair values. The Company has evaluated each arrangement entered into by the Company for each sales channel, and the Company continues to monitor arrangements with its sales channels to determine if any changes in revenue recognition need to be made. Substantially all of the activation fee revenue recognized at the time a related wireless handset is sold is classified as equipment revenue.
Earnings per share: Basic net income per share was computed on the weighted average number of shares outstanding. Diluted net income per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Of 6611,312 thousand, 5031,394 thousand, and 4351,496 thousand shares and options outstanding at December 31, 2012, 20112015, 2014 and 2010,2013, respectively, 34392 thousand, 35222 thousand and 265258 thousand were anti-dilutive, respectively. These options have been excluded from the computation of diluted earnings per share shown below. There were no adjustments to net income in the computation of diluted earnings per share for any of the years presented.
The following tables show the computation of basic and diluted earnings per share for the years ended December 31, 2012, 20112015, 2014 and 2010:2013:
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Basic income per share | | (in thousands, except per share amounts) | |
| Net income | | $ | 40,864 | | | $ | 33,883 | | | $ | 29,586 | |
| Weighted average shares outstanding | | | 48,388 | | | | 48,198 | | | | 48,002 | |
| Basic income per share | | $ | 0.84 | | | $ | 0.70 | | | $ | 0.62 | |
| | | | | | | | | | | | | |
| Effect of stock options outstanding: | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 48,388 | | | | 48,198 | | | | 48,002 | |
| Assumed exercise, at the strike price at the beginning of year | | | 1,302 | | | | 1,410 | | | | 970 | |
| Assumed repurchase of shares under treasury stock method | | | (666 | ) | | | (888 | ) | | | (742 | ) |
| Diluted weighted average shares | | | 49,024 | | | | 48,720 | | | | 48,230 | |
| Diluted income per share | | $ | 0.83 | | | $ | 0.70 | | | $ | 0.61 | |
Contingencies: The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
Recently Issued Accounting Standards:
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, delaying the effective date of ASU 2014-09. As amended, the new standard is effective for the Company on January 1, 2018. The standard permits the use of December 31, 2012, there were no recently issued buteither the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU No. 2015-2, “Consolidation (Topic 820): Amendments to the Consolidation Analysis”. The ASU provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities. All legal entities will be subject to reevaluation under this revised consolidation model. The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships. ASU 2015-2 is effective accounting pronouncementsfor fiscal years, and interim reporting periods within those fiscal years, beginning after September 1, 2016 (fiscal 2017). The Company is still evaluating what impact, if any, this ASU will have on the Company’s consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires that woulddebt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and will be effective for the Company beginning on January 1, 2016. Early adoption is permitted. The Company has not elected to early adopt and does not expect this adoption to have a material impact on its consolidated financial statements.
In November 2015, the Company’sFASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”, to simplify the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company will not elect to early adopt and does not expect this adoption to have a material impact on its consolidated financial statements.
Note 2. Discontinued Operations
The Company has announced its intention to sell its Converged Services operation, and the assets and liabilities related to this operation were reclassified as held for sale in the consolidated balance sheet. The historical operating results of the entity have been reclassified as discontinued operations for all periods presented, and depreciation and amortization on long-lived assets was discontinued.
Certain costs historically charged or allocated to the Converged Services segment cannot be allocated to discontinued operations. As a result, certain general corporate overhead costs, affiliated interest charges, and certain investment gains and losses have been excluded from the reported discontinued operations. These items have been reclassified to the “Other” category in the segment financial statements for all reported periods (see Note 16).
Assets and liabilities held for sale consisted of the following (in thousands):
| | | | December 31, | |
| | | | 2012 | | | | 2011 | |
| Assets: | | | | | | | | |
| Property, plant and equipment, net | | $ | 203 | | | $ | 2,424 | |
| Other assets | | | - | | | | 373 | |
| Assets held for sale | | $ | 203 | | | $ | 2,797 | |
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Other liabilities | | $ | - | | | $ | 267 | |
Discontinued operations included the following amounts of operating revenue and loss before income taxes:
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| | | | | | | | | | |
| Operating revenues | | $ | 1,091 | | | $ | 10,516 | | | $ | 12,929 | |
| Loss before income taxes | | $ | (496 | ) | | $ | (904 | ) | | $ | (1,179 | ) |
During the fourth quarter of 2010, based upon developments in the process of selling these assets, the Company determined that the fair value of Converged Services had declined from earlier estimates. Accordingly, the Company recorded an impairment loss of $1.9 million ($1.1 million, net of taxes) to further reduce the carrying value of these assets to their revised estimated fair value less cost to sell.
During the first quarter of 2011, the Company made the decision to transfer service contracts and related equipment for five Converged Services’ properties that were within the Shentel Cable franchised cable footprint and could be serviced by the Company’s nearby cable headends. These properties, with an aggregate net book value of approximately $0.4 million, were transferred to Shentel Cable and have been reclassified from discontinued operations for all prior periods. The Company recorded an adjustment to depreciation expense of $0.1 million to reduce the carrying value of the assets transferred to the lower of their carrying value net of the impairment charge or the carrying value as if depreciation had been recorded on these assets at all times.
The Company sold service contracts and related equipment for $1.2 million during the second and third quarters of 2011. Proceeds received approximated the carrying values of the assets sold. During the third quarter of 2011, based upon developments in the process of selling the remaining assets, the Company determined that the fair value of the remaining Converged Services had declined from earlier estimates. Accordingly, the Company recorded an impairment loss of $0.6 million ($0.4 million, net of taxes) to further reduce the carrying value of these assets to their revised estimated fair value less cost to sell.
During the fourth quarter of 2011, the Company sold service contracts and related equipment for $4.0 million, of which $2.2 million was in escrow at December 31, 2011. During 2012, the Company sold service contracts and assets for cash and receivables totaling approximately $1.9 million in cash and receivables, and collected $2.3 million of receivables. Approximately $0.1 million of receivables remain to be collected from these sales and, as of December 31, 2012, the Company was in the process of finalizing the dispositions of the remaining five properties for an expected aggregate of $0.2 million in cash.
Note 3. Investments
The Company has three classifications of investments: investments carried at fair value, investments carried at cost, and equity method investments. See Note 1 for definitions of each classification of investment.
At December 31, 20122015 and 2011,2014, investments carried at fair value consisted of:
| | 2015 | | | 2014 | |
| | | (in thousands) | |
| Taxable bond funds | | $ | 24 | | | $ | 10 | |
| Domestic equity funds | | | 2,564 | | | | 2,553 | |
| International equity funds | | | 66 | | | | 98 | |
| | | $ | 2,654 | | | $ | 2,661 | |
F-16
| | | | 2012 | | | | 2011 | |
| | | | (in thousands) | |
| Cash management trust | | $ | - | | | $ | 197 | |
| Taxable bond funds | | | 728 | | | | 96 | |
| Domestic equity funds | | | 1,265 | | | | 1,232 | |
| International equity funds | | | 71 | | | | 635 | |
| | | $ | 2,064 | | | $ | 2,160 | |
Investments carried at fair value were acquired under a rabbi trust arrangement related to the Company’s SERP. The Company purchases investments in the trust to mirror the investment elections of participants in the SERP; gains and losses on the investments in the trust are reflected as increases or decreases in the liability owed to the participants. The Company recorded unrealized gains of $191 thousand during 2012, unrealized losses of $132$141 thousand during 2011and $51 thousand in 2015 and 2014, respectively, and unrealized gains of $187$391 thousand during 2010. Sales of investments resulted in2013. Dividends received from the recognition of $66investment totaled $134 thousand, of realized gains in 2012, and $27$184 thousand, and $8$74 thousand of realized losses in 2011during 2015, 2014 and 2010,2013, respectively. Fair values for these investments are determined by quoted market prices (“levelLevel 1 fair values”) for the underlying mutual funds, which may be based upon net asset value.
At December 31, 20122015 and 2011,2014, other investments, comprised of equity securities which do not have readily determinable fair values, consist of the following:
| | | 2012 | | | 2011 | | | 2015 | | | 2014 | |
| Cost method: | | (in thousands) | | | (in thousands) | |
| NECA Services, Inc. | | $ | 505 | | | $ | 505 | | |
| CoBank | | | 2,968 | | | | 2,747 | | | $ | 4,137 | | | $ | 3,749 | |
| Other | | | 251 | | | | 255 | | |
| Other – Equity in other telecommunications partners | | | | 760 | | | | 755 | |
| | | | 3,724 | | | | 3,507 | | | | 4,897 | | | | 4,504 | |
| Equity method: | | | | | | | | | | | | | | | | |
| Burton Partnership | | | 2,086 | | | | 1,708 | | |
| Private equity limited partnerships | | | | 2,624 | | | | 2,419 | |
| Other | | | 340 | | | | 930 | | | | 504 | | | | 505 | |
| | | | 2,426 | | | | 2,638 | | | | 3,128 | | | | 2,924 | |
| Total other investments | | $ | 6,150 | | | $ | 6,145 | | | $ | 8,025 | | | $ | 7,428 | |
The Company’s investment in CoBank increased $221$388 thousand and $190$406 thousand in the years ended December 31, 20122015 and 2011,2014, respectively, due to the ongoing patronage earned from the outstanding investment and loan balances the Company has with CoBank.
In the year ended December 31, 2012,2015, the Company received distributions from its equity investments totaling $812$30 thousand in cash, principally due to the sale of the Company’s investment in the Dolphin Communications I and II funds for $752 thousand.cash. Equity method investments had a net gain of $600$266 thousand in the year ended December 31, 2012, including $3792015. During 2015, the Company accepted an offer for the sale of the remaining shares of VA Capital, LLC, an equity method investment. As a result of the transaction, the Company received $24 thousand in proceeds from the Burton Partnershipsale and $151recorded a loss totaling $20 thousand fromon the Dolphin investments.
remaining investment. There were no sales of investments during 2014 while sales in 2013 resulted in a $1 thousand realized loss. The Company’s ownership interests in the remaining equity method investees were unchanged during 2012, except for the disposal of the Dolphin investments.2015.
Note 4.3. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 20122015 and 2011:2014:
| | Estimated Useful Lives | | 2012 | | | 2011 | | Estimated Useful Lives | | 2015 | | | 2014 | |
| | | | (in thousands) | | | | (in thousands) | |
| Land | | | $ | 3,345 | | | $ | 3,087 | | | | $ | 4,181 | | | $ | 3,700 | |
| Buildings and structures | 10 – 40 years | | | 75,664 | | | | 71,934 | | 10 – 40 years | | | 108,341 | | | | 103,341 | |
| Cable and wire | 4 – 40 years | | | 175,833 | | | | 155,884 | | 4 – 40 years | | | 214,721 | | | | 201,938 | |
| Equipment and software | 2 – 16.7 years | | | 331,374 | | | | 305,362 | | 2 – 16.7 years | | | 391,260 | | | | 366,342 | |
| Plant in service | | | $ | 586,216 | | | $ | 536,267 | | | | $ | 718,503 | | | $ | 675,321 | |
| Plant under construction | | | | 25,469 | | | | 12,389 | | | | | 36,600 | | | | 18,078 | |
| Total property, plant and equipment | | | | 611,685 | | | | 548,656 | | | | | 755,103 | | | | 693,399 | |
| Less accumulated amortization and depreciation | Less accumulated amortization and depreciation | | | 246,211 | | | | 237,902 | | Less accumulated amortization and depreciation | | | 345,085 | | | | 287,492 | |
| Property, plant and equipment, net | | | $ | 365,474 | | | $ | 310,754 | | | | $ | 410,018 | | | $ | 405,907 | |
The Company traded in certain base station PCS equipment for 4G LTE base station equipment in 2012,2015 and in 2011, traded in certain base station PCS equipment for equipment with additional capacity,2014, and received credits of $20.3 million$711 thousand and $2.9 million,$863 thousand, respectively, against the fair value purchase price of the new equipment. The Company recognized gains of $1.8 million in 2011 for the difference between the book value of the equipment traded in and the trade-in credit received. For 2012, the Company adjusted depreciation on equipment to be traded in so that the net book value at trade intrade-in approximated the credit to be received.
Note 5.4. Long-Term Debt and Revolving Lines of Credit
Total debt consists of the following at December 31, 20122015 and 2011:
| | | Interest Rate | | | | 2012 | | | | 2011 | |
| | | | | | | (in thousands) | |
| CoBank (term loan) | Fixed | 7.37% | | | $ | 1,876 | | | $ | 4,524 | |
| CoBank Term Loan A | Variable | 2.96% | | | | 230,000 | | | | 175,565 | |
| Other debt | | Various | | | | 301 | | | | 486 | |
| | | | | | | 232,177 | | | | 180,575 | |
| Current maturities | | | | | | 1,977 | | | | 21,913 | |
| Total long-term debt | | | | | $ | 230,200 | | | $ | 158,662 | |
As of December 31, 2012, the Company’s indebtedness totaled $232.2 million, with an annualized overall weighted average interest rate of approximately 2.99%. The balance included $1.9 million fixed at 7.37% (the Fixed Term Loan Facility, described further below), and $230.0 million of the Term Loan A Facility at a variable rate (2.96% as of December 31, 2012) that resets monthly based on one month LIBOR plus a base rate of 2.75% currently.
| | | | Interest Rate | | | 2015 | | | 2014 | |
| | | | | | | (in thousands) | |
| CoBank Term Loan | Variable | | | 2.67 | % | | | 201,250 | | | | 224,250 | |
| Current maturities | | | | | | | | 23,000 | | | | 23,000 | |
| Total long-term debt | | | | | | | $ | 178,250 | | | $ | 201,250 | |
On September 14, 2012, the Company executed an Amended and Restated Credit Agreement with CoBank and with the participation of 16 additional Farm Credit institutions, for the purpose of refinancing the Company’s existing outstanding debt, funding planned capital expenditures to upgrade the Company’s wireless network in conjunction with Sprint Nextel’sSprint’s wireless network upgrade project known as Network Vision, and other corporate needs.
The Amended and Restated Credit Agreement provides for three facilities, a Term Loan Facility, a Revolver Facility, and an Incremental Term Loan Facility. The Term Loan Facility has two parts, the Fixed Term Loan Facility of approximately $1.9 million in aggregate principal amount, and the Term Loan A Facility of $230 million in aggregate principal amount. The Fixed Term Loan Facility is required to be repaid in monthly installments of approximately $235 thousand of principal, plus interest at 7.37%, through August 2013. The Term Loan A Facility requires quarterly principal repayments of $5.75 million beginningwhich began on December 31, 2014, with the remaining expected balance of approximately $120.75 million due at maturity on September 30, 2019. After an initial stub period, theThe Term Loan A Facility is expected to bearbears interest at 30-day LIBOR, currently 0.21%0.42%, plus a spread determined by the Company’s Total Leverage Ratio, initially 2.75%; thecurrently 2.25%. The Company may elect to use rates other ratesthan the 30-day LIBOR as the base, but does not currently expect to do so.
The Revolver Facility provides for $50 million in immediate availability for future capital expenditures and general corporate needs. In addition, the Amended and Restated Credit Agreement permits the Company to enter into one or more Incremental Term Loan Facilities, or to increase the Revolver Facility, in the aggregate principal amount not to exceed $100 million subject to compliance with certain covenants. No draw has been made or is currently contemplated under either of these facilities. When and if a draw is made, the maturity date and interest rate options would be substantially identical to the Term Loan A Facility. Repayment provisions would be agreed to at the time of each draw under the Incremental Term Loan Facility.
The Amended and Restated Credit Agreement contains affirmative and negative covenants customary to secured credit facilities, including covenants restricting the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions, or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of the Company’s and its subsidiaries’ businesses.
Indebtedness outstanding under any of the facilities may be accelerated by an Event of Default, as defined in the Amended and Restated Credit Agreement.
The Facilities are secured by a pledge by the Company of its stock in its subsidiaries, a guarantee by the Company’s subsidiaries other than Shenandoah Telephone Company, or Shentel Converged Services, Inc., and a security interest in all of the assets of the guarantors.
The Company is subject to certain financial covenants to be measured on a trailing twelve month basis each calendar quarter unless otherwise specified. These covenants include:
| · | a limitation on the Company’s total leverage ratio, defined as indebtedness divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than or equal to 3.00 to 1.00 from the closing date through March 31, 2014, then 2.50 to 1.00 from April 1, 2014 through March 31, 2015, and 2.00 to 1.00 thereafter; |
| · | a minimum debt service coverage ratio, defined as EBITDA divided by the sum of all scheduled principal payments on the Term Loans and regularly scheduled principal payments on other indebtedness plus cash interest expense, greater than 2.50 to 1.00 at all times; |
| · | a minimum equity to assets ratio, defined as consolidated total assets minus consolidated total liabilities, divided by consolidated total assets, of at least 0.30 to 1.00 from the amendment date through December 31, 2013; then at least 0.325 to 1.00 through December 31, 2014, and at least 0.35 to 1.00 thereafter, measured at each fiscal quarter end; |
As shown below, as of December 31, 2015, the Company was in compliance with the financial covenants in its credit agreements.
| | Actual | | Covenant Requirement |
| Total Leverage Ratio | | | 1.35 | | 2.00 or Lower |
| Debt Service Coverage Ratio | | | 4.24 | | 2.50 or Higher |
| Equity to Assets Ratio | | | 46.1 | % | 35.0% or Higher |
The Amended and Restated Credit Agreement requiresrequired the Company to obtain interest rate protection within 90 days of the amendment date for at least 33% of the aggregate principal balance of the Term Loan A then outstanding, for not less than three years after such date. In September 2012, the Company entered into a pay fixed, receive variable interest rate swap (the 2012 swap) agreement covering approximately 76% of the outstanding principal of the Term Loan A balance through its maturity. The 2012 swap effectively fixes the effective rate on this portion of the debt at 3.88%.1.13% over our margin, currently 2.25%, for an effective fixed rate of 3.38% at December 31, 2015. The Company has applied hedge accounting to this swap agreement. The Company also has an existing pay fixed, receive variable interest rate swap agreement (the 2010 swap). This agreement was executed in 2010 and expires in July 2013. As of the amendment date, it covered the remaining approximately 25% of the outstanding principal balance, and effectively fixed the rateSee Note 13 for additional information on this portion of the debt at 4.00%. The principal covered by this swap will decline quarterly until it expires. The Company did not elect to apply hedge accounting to the 2010 swap.
During 2012, the Company wrote-off approximately $0.8 million, pre-tax, of existing unamortized transaction costs as a result of replacing certain lenders from the original credit agreement.
As of December 31, 2012, the Company was in compliance with the financial covenants in its credit agreements.hedging transactions.
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 20122015 are as follows:
| Year | | Amount | |
| | | (in thousands) | |
| 2013 | | $ | 1,977 | |
| 2014 | | | 5,750 | |
| 2015 | | | 23,000 | |
| 2016 | | | 23,000 | |
| 2017 | | | 23,000 | |
| Later years | | | 155,450 | |
| | | $ | 232,177 | |
| Year | | Amount | |
| | | (in thousands) | |
| 2016 | | $ | 23,000 | |
| 2017 | | | 23,000 | |
| 2018 | | | 23,000 | |
| 2019 | | | 132,250 | |
| 2020 | | | - | |
| | | $ | 201,250 | |
The estimated fair value ofCompany has no fixed rate debt instruments as of December 31, 2012 and December 31, 2011 was approximately equal to its carrying value at each date, given the short term to maturity.2015. The estimated fair value of the variable rate debt approximates its carrying value. The fair value of the Company’s interest rate swapsswap was a liabilityan asset of $1.7$688 thousand and $1.9 million and $452 thousand at December 31, 20122015 and December 31, 2011,2014, respectively.
The Company receives patronage credits from CoBank and certain of its affiliated Farm Credit institutions, which are not reflected in the stated rates shown above. Patronage credits are a distribution of profits of CoBank as approved by its Board of Directors. During both the first quarters of 20122015, 2014 and 2011,2013, the Company received patronage credits of approximately 100 basis points on its outstanding CoBank debt balance (approximately 40% of the then outstanding balance).balance. The Company accrued 100 basis points$1.5 million in non-operating income in the year ended December 31, 2012,2015, in anticipation of the early 20132016 distribution of the credits by CoBank. Patronage credits are typicallyhave historically been paid 65% in a mix of cash with the balance paid inand shares of CoBank stock. The 2015 payout mix was 75% cash and 25% shares.
Merger-Related Financing Transaction
In connection with the Merger and the Sprint Transactions (as defined in Note 16), on December 18, 2015, the Company entered into a credit agreement (the “New Credit Agreement”) with various banks and other financial institutions party thereto (the “Lenders”) and CoBank, ACB, as administrative agent for the Lenders. The Credit Agreement provides for three facilities: (i) a five-year revolving credit facility of up to $75 million, (ii) a five-year term loan facility of up to $485 million and (iii) a seven-year term loan facility (with two years of interest-only payments) of up to $400 million (collectively, the “Facilities”), which the Company expects to use to pay the Merger Consideration (as defined in Note 16), to finance the network upgrades required by the Sprint Transactions, to refinance, in full, all indebtedness outstanding under the Company’s existing credit agreement, to repay all existing indebtedness of nTelos (as defined in Note 16), to pay fees and expenses in connection with the Merger and for working capital, capital expenditures and other corporate purposes of the Company and its subsidiaries (and, following the consummation of the Merger, of nTelos and its subsidiaries).
The Company will be the borrower under the New Credit Agreement. The availability of the Facilities is subject to the satisfaction or waiver of certain conditions set forth in the New Credit Agreement, including, among other things, the consummation of the Merger on or before June 28, 2016. The commitments of the Lenders with respect to the Facilities will terminate if the consummation of the Merger and the initial funding of the Facilities does not occur on or prior to June 28, 2016.
Subsequent to the closing of the nTelos transaction, the Company’s future requirements for debt service will increase, due to incremental interest on the larger outstanding loan balances, and increased amortization requirements to pay down the loan balances, compared to the terms of our existing debt arrangements.
Note 6.5. Income Taxes
Total income taxes for the years ended December 31, 2012, 20112015, 2014 and 20102013 were allocated as follows:
| | | 2012 | | | 2011 | | | 2010 | | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | | | (in thousands) | |
| Income tax expense on continuing operations | | $ | 12,008 | | | $ | 10,667 | | | $ | 13,393 | | | $ | 27,726 | | | $ | 22,151 | | | $ | 19,878 | |
| Income tax benefit on discontinued operations | | | (196 | ) | | | (359 | ) | | | (480 | ) | |
| Shareholders’ equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes | | | (106 | ) | | | (5 | ) | | | (70 | ) | | | (679 | ) | | | (395 | ) | | | (101 | ) |
| Other comprehensive income for changes in unrecognized actuarial losses on pensions | | | - | | | | - | | | | 1,549 | | |
| Other comprehensive income for changes in cash flow hedge | | | (574 | ) | | | | | | | | | | | (476 | ) | | | (993 | ) | | | 2,315 | |
| | | $ | 11,132 | | | $ | 10,303 | | | $ | 14,392 | | | $ | 26,571 | | | $ | 20,763 | | | $ | 22,092 | |
The Company and its subsidiaries file income tax returns in several jurisdictions. The provision for the federal and state income taxes attributable to income from continuing operations consists of the following components:
| | | Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (in thousands) | |
| Current expense | | | | | | | | | |
| Federal taxes | | $ | 23,579 | | | $ | 16,592 | | | $ | 3,404 | |
| State taxes | | | 5,275 | | | | 2,562 | | | | 2,305 | |
| Total current provision | | | 28,854 | | | | 19,154 | | | | 5,709 | |
| Deferred expense (benefit) | | | | | | | | | | | | |
| Federal taxes | | | (744 | ) | | | 1,636 | | | | 12,317 | |
| State taxes | | | (384 | ) | | | 1,361 | | | | 1,852 | |
| Total deferred provision | | | (1,128 | ) | | | 2,997 | | | | 14,169 | |
| Income tax expense on continuing operations | | $ | 27,726 | | | $ | 22,151 | | | $ | 19,878 | |
| Effective tax rate | | | 40.4 | % | | | 39.5 | % | | | 40.2 | % |
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| Current expense (benefit) | | | | | | | | | |
| Federal taxes | | $ | 3,741 | | | $ | (8,539 | ) | | $ | 6,240 | |
| State taxes | | | 1,868 | | | | 3,233 | | | | 2,535 | |
| Total current provision (benefit) | | | 5,609 | | | | (5,306 | ) | | | 8,775 | |
| Deferred expense (benefit) | | | | | | | | | | | | |
| Federal taxes | | | 5,618 | | | | 15,749 | | | | 3,991 | |
| State taxes | | | 781 | | | | 224 | | | | 627 | |
| Total deferred provision | | | 6,399 | | | | 15,973 | | | | 4,618 | |
| Income tax expense on continuing operations | | $ | 12,008 | | | $ | 10,667 | | | $ | 13,393 | |
A reconciliation of income taxes determined by applying the federal and state tax rates to income from continuing operations is as follows for the years ended December 31, 2012, 20112015, 2014 and 2010:2013:
| | Years Ended December 31, | | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | | | 2015 | | | 2014 | | | 2013 | |
| | (in thousands) | | (in thousands) | |
| Computed “expected” tax expense (35%) | | $ | 10,014 | | | $ | 8,472 | | | $ | 11,258 | | | $ | 24,007 | | | $ | 19,612 | | | $ | 17,312 | |
| State income taxes, net of federal tax effect | | | 1,722 | | | | 2,247 | | | | 2,055 | | | | 3,179 | | | | 2,550 | | | | 2,702 | |
| Other, net | | | 272 | | | | (52 | ) | | | 80 | | | | 540 | | | | (11 | ) | | | (136 | ) |
| Income tax expense on continuing operations | | $ | 12,008 | | | $ | 10,667 | | | $ | 13,393 | | | $ | 27,726 | | | $ | 22,151 | | | $ | 19,878 | |
The effective tax rates vary among the years presented primarily due to state income taxes. Changes in the mix of income and/or losses among the company’sCompany’s subsidiaries, which file separate state returns for various states, result in variations in the effective rates. The Company executed a legal entity restructuring during the year ended December 31, 2012 that reduced the effective tax rate from the prior year.rates.
Net deferred tax assets and liabilities consist of the following temporary differences at December 31, 20122015 and 2011:2014:
| | | 2015 | | | 2014 | |
| | | (in thousands) | |
| Deferred tax assets: | | | |
| Lease obligations | | $ | 3,109 | | | $ | 2,733 | |
| Deferred activation charges | | | 78 | | | | 108 | |
| Allowance for doubtful accounts | | | 168 | | | | 306 | |
| Inventory reserves | | | 53 | | | | 189 | |
| State net operating loss carry-forwards, net of federal tax | | | 717 | | | | 717 | |
| Accrued pension costs | | | 1,023 | | | | 1,086 | |
| Transaction costs | | | 538 | | | | -- | |
| Accrued compensation costs | | | 1,915 | | | | 1,550 | |
| Asset retirement obligations | | | 2,922 | | | | 2,790 | |
| Intangible assets | | | 7,525 | | | | 7,921 | |
| Goodwill | | | 2,196 | | | | 2,434 | |
| Deferred revenues | | | 2,289 | | | | 2,691 | |
| Total gross deferred tax assets | | | 22,533 | | | | 22,525 | |
| Less valuation allowance | | | (709 | ) | | | (709 | ) |
| Net deferred tax assets | | | 21,824 | | | | 21,816 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Plant and equipment | | $ | 85,503 | | | $ | 87,941 | |
| Franchise rights | | | 9,396 | | | | 7,686 | |
| Section 481a deferred revenues | | | - | | | | 246 | |
| Deferred financing costs | | | 84 | | | | 106 | |
| Prepaid insurance | | | 125 | | | | 116 | |
| Gain on investments, net | | | 401 | | | | 409 | |
| Other, net | | | 276 | | | | 878 | |
| Total gross deferred tax liabilities | | | 95,785 | | | | 97,382 | |
| Net deferred tax liabilities | | $ | 73,961 | | | $ | 75,566 | |
| | | | 2012 | | | | 2011 | |
| | | | (in thousands) | |
| Deferred tax assets: | | | | |
| Lease obligations | | $ | 1,374 | | | $ | 1,168 | |
| Deferred activation charges | | | 105 | | | | 64 | |
| Allowance for doubtful accounts | | | 441 | | | | 320 | |
| Inventory reserves | | | 244 | | | | 80 | |
| State net operating loss carry-forwards, net of federal tax | | | 782 | | | | 590 | |
| Accrued pension costs | | | 879 | | | | 902 | |
| Loss on investments, net | | | 438 | | | | 783 | |
| Accrued compensation costs | | | 996 | | | | 697 | |
| Asset retirement obligations | | | 2,356 | | | | 3,131 | |
| Intangible assets | | | 7,966 | | | | 6,309 | |
| Goodwill | | | 4,091 | | | | 198 | |
| Deferred revenues | | | 1,401 | | | | - | |
| Other, net | | | 549 | | | | 256 | |
| Total gross deferred tax assets | | | 21,622 | | | | 14,498 | |
| Less valuation allowance | | | (538 | ) | | | (518 | ) |
| Net deferred tax assets | | | 21,084 | | | | 13,980 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Plant and equipment | | $ | 72,747 | | | | 62,719 | |
| Franchise rights | | | 4,211 | | | | 2,381 | |
| Section 481a deferred revenues | | | 737 | | | | - | |
| Deferred financing costs | | | 453 | | | | - | |
| Deferred activation charges | | | - | | | | 53 | |
| Total gross deferred tax liabilities | | | 78,148 | | | | 65,153 | |
| Net deferred tax liabilities | | $ | 57,064 | | | $ | $51,173 | |
In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generating future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes it more likely than not that the state net operating loss carry-forwards from its Converged Services segment will not be realized. Due to losses in Shentel Converged Services, the valuation allowance has been increased by $20 thousand during 2012, bringing the total valuation allowance to $538 thousand at December 31, 2012. The Company has a deferred tax asset of $782$717 thousand related to various state net operating losses, $244and carries this asset at $8 thousand, net of the valuation allowance.allowance of $709 thousand.
As of December 31, 20122015 and 2011,2014, the Company had no unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits in income before taxes.
The Company files U.S. federal income tax returns and various state and local income tax returns. With few exceptions, years prior to 20092012 are no longer subject to examination.�� The Company is under audit in the state of Maryland for the 2007, 2008 and 2009 tax years. The Company is under audit in the state of Pennsylvania for the 2009 tax year. No othernot currently subject to state or federal income tax audits were in process as of December 31, 2012.2015.
Note 7.6. Significant Contractual Relationship
In 1999, the Company executed a Management Agreement (the “Agreement”) with Sprint Nextel whereby the Company committed to construct and operate a PCS network using CDMA air interface technology. Under the Agreement, the Company was the exclusive PCS Affiliate of Sprint Nextel providing wireless mobility communications network products and services on the 1900 MHz band in its territory which extends from Altoona, York and Harrisburg, Pennsylvania, and south along the Interstate 81 corridor through Western Maryland, the panhandle of West Virginia, to Harrisonburg, Virginia. The Company is authorized to use the Sprint brand in its territory, and operate its network under Sprint NextelSprint’s radio spectrum licenses. As an exclusive PCS Affiliate of Sprint, Nextel, the Company has the exclusive right to build, own and maintain its portion of Sprint Nextel’sSprint’s nationwide PCS network, in the aforementioned areas, to Sprint Nextel'sSprint’s specifications. The initial term of the Agreement was initially set for 20 years and was automatically renewable for three 10-year options, unless terminated by either party under provisions outlined in the Agreement. The Agreement has been amended numerous times, most recently during 2012. Upon non-renewal by either party, the Company has either the right or the obligation to sell the business at 80% of “Entire Business Value” (“EBV”) as defined in the Agreement. EBV is defined as i) the fair market value of a going concern paid by a willing buyer to a willing seller; ii) valued as if the business will continue to utilize existing brands and operate under existing agreements; and, iii) valued as if Manager (Shentel) owns the spectrum. Determination of EBV is made by an independent appraisal process.
The Agreement has been amended numerous times, most recently during 2015. During 2012, the Company amended its Agreement with Sprint in order to build a 4G LTE network in the Company’s service area. In addition to adding 4G services to the Company’s network, the Company received access to additional 1900 and 800 MHz spectrum, extended the initial term of the contract five years from 2019 to 2024 and set the maximum contract length at 45 years. The agreement also increased the cap on the Net Service Fee related to postpaid revenues. Effective August 1, 2013, the Net Service Fee increased to its 14% maximum. There is also a management fee of 8% on postpaid revenues which has remained constant for the life of the contract.
During 2013, the Company amended its Agreement with Sprint in order to allow Sprint to recover the capital costs incurred in providing the Company hardware and software components of the network. These components control and direct LTE traffic between LTE devices in the Company’s service area and the internet, in order to assure interoperability of the Company’s network with Sprint’s PCS network. The Company pays a one-time fee of $9.23 per incremental LTE device activated in the Company’s service area. The Company incurred $1.1 million, $1.1 million and $1.3 million of these fees during 2015, 2014 and 2013, respectively.
During 2014, the Company amended its Agreement with Sprint in order to allow the Company’s PCS stores to begin participating in Sprint’s handset financing programs, whereby Sprint enters into a financing agreement with the subscriber and the subscriber receives a handset from Sprint. The equipment revenue from the subscriber, the handset expense and any related bad debt are Sprint’s responsibility and are not recorded by the Company.
During 2015, effective January 1, 2016, the Company amended its Agreement with Sprint in order to better allocate certain costs covered by the Net Service Fee and extended the initial term to 2029. The Net Service Fee was reduced to 8.6%, and certain costs and revenues previously included within the Net Service Fee were broken out of the Net Service Fee and will be separately settled in the future. Separately settled revenues primarily consist of revenues associated with Sprint’s wholesale subscribers using the Company’s network and net travel revenue. In addition, the Company will be charged for the costs of subsidized handsets sold through Sprint’s national channels as well as commissions paid by Sprint to third-party resellers in our service territory. The Company does not expect this treatment to result in a significant change in wireless postpaid results, though it will increase total revenue and total operating expenses.
Under the Sprint Nextel agreements, Sprint Nextel provides the Company significant support services such as customer service, billing, collections, long distance, national network operations support, inventory logistics support, use of the Sprint Nextel brand names, national advertising, national distribution and product development. Cost of equipment transactions between the Company and Sprint Nextel relate to inventory purchased and subsidized costs of handsets. These costs also included transactions related to subsidized costs on handsets and commissions paid to Sprint Nextel for sales of handsets through Sprint Nextel’sSprint’s national distribution programs.
In 2007, the Company and Sprint Nextel amended the Management Agreement to simplify the method that the companies used to settle certain postpaid revenues and expenses between them. The revenues and expenses for 2006 were used as the basis for the calculation. For 2006, the ratio of net expense due Sprint Nextel for each net revenue dollar (net of credits and bad debt) generated by the Company’s wireless customers was 8.8%, known as the Net Service Fee. The Net Service Fee percentage was applied to future net revenues to compensate Sprint Nextel for the net expenses due. The amendment allowed either party to annually request a review of the Net Service Fee, with the percentage needing to change by 100 basis points or more in either direction before there would be a change in the Net Service Fee, with the maximum Net Service Fee not exceeding 12%.
In the second quarter of 2010, Sprint Nextel for the first time exercised their option to review the postpaid Net Service Fee percentage, and effective June 2010, the Net Service Fee increased to 12%, the maximum then allowed by contract.
On July 8, 2010, the Company acquired the right to receive a share of revenues from approximately 50,000 Virgin Mobile customers in our service area, and effective July 11, 2010, the Company began selling Virgin Mobile and Boost prepaid products and services in its PCS network coverage area. Prepaid revenues received from Sprint Nextel are reported gross of expenses passed through from Sprint Nextel. The Company pays handset subsidies to Sprint Nextel for the difference between the selling price of handsets and their cost, in the aggregate and as a net cost. Many of the revenue and expense components reported to us by Sprint Nextel are based on Sprint Nextel’s national averages for prepaid services, rather than being specifically determined by customers homed in our geographic service areas. In December 2012, Sprint Nextel paid the Company $11.8 million to reimburse the Company for handset subsidies and other costs per gross add that had been calculated incorrectly by Sprint Nextel from inception of the prepaid program through September 30, 2012.
The Company recognizes amortization on the $6.9 million capitalized purchase price of the acquired subscriber base for the 50,000 acquired Virgin Mobile subscribers. The amortization of the acquired subscriber base will approximate the life of the customers acquired, gradually decreasing over the expected four year life of this asset.
On February 1, 2012, the Company signed Addendum XII to its Affiliate Agreement with Sprint Nextel that paved the way to building a 4G LTE network in the Company’s service area. The Company is mirroring Sprint’s Network Vision architecture using Alcatel Lucent equipment. During 2012, the Company upgraded 224 cell sites to the new technology, and all remaining sites are expected to be upgraded during 2013.
In addition to adding 4G services to the Company’s network, the Addendum gives the Company access to additional 1900 and 800 MHz spectrum, extends the initial term of the contract five years from 2019 to 2024 and increases the cap on the Net Service Fee from 12% to 14% on July 1, 2013.
The Company's PCS subsidiary is dependent upon Sprint Nextel'sSprint’s ability to execute certain functions such as billing, customer care, collections and other operating activities under the Company's agreements with Sprint Nextel.Sprint. Due to the high degree of integration within many of the Sprint Nextel systems, and the Company’s dependency on these systems, in many cases it would be difficult for the Company to perform these services in-house or to outsource the services to another provider. If Sprint Nextel is unable to perform any such service, the change could result in increased operating expenses and have an adverse impact on the Company's operating results and cash flow. In addition, the Company's ability to attract and maintain a sufficient customer base is critical to generating positive cash flow from operations and profits for its PCS operation. Changes in technology, increased competition, or economic conditions in the wireless industry or the economy in general, individually and/or collectively, could have an adverse effect on the Company's financial position and results of operations.
The Sprint Nextel agreements require the Company to maintain certain minimum network performance standards and to meet other performance requirements. The Company was in compliance in all material respects with these requirements as of December 31, 2012.
Note 8.7. Related Party Transactions
ValleyNet, an equity method investee of the Company, resells capacity on the Company’s fiber network under an operating lease agreement. Facility lease revenue from ValleyNet was approximately $3.2$2.7 million, $3.1$3.0 million and $3.3$3.0 million in the years ended December 31, 2012, 20112015, 2014 and 2010,2013, respectively. At both December 31, 20122015 and 2011,2014, the Company had accounts receivable from ValleyNet of approximately $0.3 million and $0.2 million, respectively.million. The Company's PCS operating subsidiary leases capacity through ValleyNet. Payment for usage of these facilities was $0.8$2.4 million, $0.8$2.3 million and $0.8$1.7 million in the years ended December 31, 2012, 20112015, 2014 and 2010,2013, respectively.
Note 9.8. Retirement Plans
The Company maintains a defined contribution 401(k) plan. The Company's matching and employer discretionary contributions to the defined contribution 401(k) plan were approximately $2.4$2.6 million, $1.9$2.5 million and $1.5$2.3 million for the years ended December 31, 2012, 20112015, 2014 and 2010,2013, respectively.
The Company previously maintained a noncontributory defined benefit pension plan which was frozen as of January 31, 2007. The Company received a favorable determination letter from the IRS in February 2010 and completed the settlement of benefits and termination of the plan in June 2010. The Company contributed approximately $1.0 million to the plan, distributed approximately $12.2 million to participants, and recognized $3.6 million of pension expense from other comprehensive income, mostly during the second quarter of 2010. Distributions included lump sum payments to individual participants, rollovers to other qualified plans, and purchases of non-participating annuities.
In May 2003, the Company adoptedmaintains an unfunded, nonqualified Supplemental Executive Retirement Plan (the “SERP”) for named executives. The SERP was amended effective January 1, 2007 from a defined benefit plan to a defined contribution plan. The amended plan is non-contributory. During JuneIn 2010, the Company curtailed future participation in the Company’s SERP. Current participants may remain in the SERP and will continue to earn returns (either gains or losses) on invested balances, but the Company will make no further contributions to the SERP and no new participants will be eligible to join the SERP. As a result of the curtailment, the Company recognized a curtailment loss of $666 thousand, consisting of actuarial losses previously recorded in other comprehensive income.
The Company contributed $67 thousand to the participants’ accounts under the SERP during 2010. During the first quarter of 2012, the Company distributed $402 thousand in connection with a payout from the plan to a participant. At December 31, 2012 and 2011, the total liability due to participants in the SERP was $2.1 million and $2.2 million, respectively.
In order to provide some protection to the participants, the Company created a rabbi trust to hold assets sufficient to pay obligations under the SERP. Assets within the trust were invested to mirror participant elections as to investment options (a mix of stock and bond mutual funds); investment income, gains and losses in the trust were used to determine investment returns on the participants’ balances in the SERP. At December 31, 2015 and 2014, the total liability due to participants in the SERP was $2.7 million and $2.7 million, respectively.
Note 10.9. Stock Incentive Plans
The Company maintainedmaintains two shareholder-approved Company Stock Incentive Plans providingallowing for the grant of equity based incentive compensation to essentially all employees. The 19952005 Plan authorized grants of up to 1,440,000 shares of common stock over a ten-year period beginning in 1996. The term of the 1995 Plan expired in February of 2006, and the last outstanding award of options was exercised in 2012. The 2005 Plan authorizes grants of up to 1,440,0002,880,000 shares over a ten-year period beginning in 2005. The term of the 2005 Plan expired in February 2014; outstanding awards will continue to vest and options may continue to be exercised, but no additional awards will be granted under the 2005 Plan. The 2014 Plan authorizes grants of up to an additional 3,000,000 shares over a ten-year period beginning in 2014. Under boththese Plans, grants may take the form of stock awards, awards of options to acquire stock, stock appreciation rights, and other forms of equity based compensation. Prior to 2007, most awards were granted in the form of options to acquire stock; since 2007,compensation; both options to acquire stock and stock awards were granted. The option price for all grants has been the current market price at the time of the grant.
Option Awards
The Company did not grant stock options during 2015 or 2014. During 2012, 2011 and 2010,2013, the Company granted stock options to certain management employees. These grants consisted of incentive and non-qualified stock options, vesting 25% annually on the first through fourth anniversaries of the grant date, and having a maximum ten year life. OptionsIn addition, during 2013 the Company granted priorstock options to 2010 had variousa then recently hired officer. This grant consisted of both incentive and non-qualified stock options, vesting schedules25% annually on the third, fourth, fifth and sixth anniversaries of the grant date, and having a maximum lives.
seven year life. These grants were accounted for as equity-classified stock options.
The fair values of these grants were estimated at the respective grant dates using a Black-Scholes option-pricing model with the following weighted-average assumptions:
| | | 2012 | | | 2011 | | | 2010 | |
| Dividend rate | | | 3.05% | | | | 1.99% | | | | 1.90% | |
| Risk-free interest rate | | | 1.22% | | | | 2.73% | | | | 2.45% | |
| Expected lives of options | | 6.25 years | | | 6.25 years | | | 6.25 years | |
| Price volatility | | | 38.80% | | | | 38.45% | | | | 39.48% | |
| | 2013 | |
| Dividend rate | | | 2.38% | |
| Risk-free interest rate | | | 1.15% | |
| Expected lives of options | | 6.14 years | |
| Price volatility | | | 40.66% | |
Volatility is based on the historical volatility of the price of the Company’s stock over the expected term of the options. The expected term represents the period of time that the options granted are expected to be outstanding. The risk free rate is based on the U.S. Treasury yield curve, in effect at the date the fair value of the options is calculated, with an equivalent term.
Management has made an estimate of expected forfeitures and recognizes compensation costs only for those awards expected to vest. Compensation cost recognized in 2012, 20112015, 2014 and 20102013 totaled $561 $142 thousand, $601$452 thousand and $501$612 thousand, respectively, and the income tax benefit for option-based compensation arrangements recognized in 2012, 20112015, 2014 and 20102013 was $129 $29 thousand, $80$78 thousand and $35$134 thousand, respectively.
A summary of outstanding options at December 31, 2012, 20112015, 2014 and 2010,2013, and changes during the years ended on those dates, is as follows:
| | | Number of Options | | | Weighted Average Grant Price Per Option | | | Fair Value Per Option | |
| | | | | | | | | | |
| Outstanding December 31, 2012 | | | 989,376 | | | $ | 8.91 | | | | |
| | | | | | | | | | | | |
| Granted | | | 266,096 | | | | 6.92 | | | $ | 2.16 | |
| Cancelled | | | (21,182 | ) | | | 12.63 | | | | | |
| Exercised | | | (133,276 | ) | | | 8.41 | | | | | |
| Outstanding December 31, 2013 | | | 1,101,014 | | | $ | 8.35 | | | | | |
| | | | | | | | | | | | | |
| Granted | | | - | | | | - | | | $ | N/A | |
| Cancelled | | | (2,146 | ) | | | 12.63 | | | | | |
| Exercised | | | (101,516 | ) | | | 11.21 | | | | | |
| Outstanding December 31, 2014 | | | 997,352 | | | $ | 8.05 | | | | | |
| | | | | | | | | | | | | |
| Granted | | | - | | | | - | | | $ | N/A | |
| Cancelled | | | (6,252 | ) | | | 12.63 | | | | | |
| Exercised | | | (86,942 | ) | | | 11.46 | | | | | |
| Outstanding December 31, 2015 | | | 904,158 | | | $ | 7.70 | | | | | |
| | | Options | | | Weighted Average Grant Price Per Option | | | Fair Value Per Option | |
| | | | | | | | | | |
| Outstanding December 31, 2009 | | | 338,482 | | | | 18.79 | | | | |
| | | | | | | | | | | | |
| Granted | | | 69,222 | | | | 16.50 | | | $ | 5.70 | |
| Cancelled | | | (7,381 | ) | | | 25.26 | | | | | |
| Exercised | | | (59,215 | ) | | | 10.10 | | | | | |
| Outstanding December 31, 2010 | | | 341,108 | | | | 19.69 | | | | | |
| | | | | | | | | | | | | |
| Granted | | | 81,343 | | | | 16.58 | | | $ | 5.62 | |
| Cancelled | | | (10,557 | ) | | | 21.87 | | | | | |
| Exercised | | | (5,000 | ) | | | 7.34 | | | | | |
| Outstanding December 31, 2011 | | | 406,894 | | | $ | 19.16 | | | | | |
| | | | | | | | | | | | | |
| Granted | | | 151,522 | | | | 10.82 | | | $ | 3.02 | |
| Cancelled | | | (8,728 | ) | | | 25.26 | | | | | |
| Exercised | | | (55,000 | ) | | | 7.34 | | | | | |
| Outstanding December 31, 2012 | | | 494,688 | | | $ | 17.82 | | | | | |
There were options for 494,688904,158 shares outstanding at December 31, 20122015 at a weighted average exercise price of $17.82$7.70 per share, an aggregate intrinsic value of $0.7$12.5 million and a weighted-average remaining contractual life of 6.35.2 years. There were options for 173,025665,340 shares exercisable at December 31, 20122015 at a weighted average exercise price of $21.72$8.15 per share, noan aggregate intrinsic value of $8.9 million and a weighted-average remaining contractual life of 4.94.6 years. The aggregate intrinsic value represents the total pretax intrinsic value of in-the-money options, based on the Company’s closing stock price of $15.31$21.53 as of December 31, 2012.2015.
During 2012,2015, the total fair value of options vested was $0.6 million;$0.3 million; the total intrinsic value of options exercised was $0.6 million. $0.7 million. The total cash received as a result of employee stock option exercises was $0.4$1.0 million. The tax benefit realized for this exercisefrom these exercises was $0.1$0.2 million.
As of December 31, 2012,2015, the total compensation cost related to non-vested options not yet recognized is $0.5$0.1 million, which will be recognized over a weighted-average period of 3.6 years.2.0 years.
Stock Awards
In September 2007, the Company granted 68,130136,260 performance shares to all members of the Board of Directors and essentially all employees during 2007. Directors and senior management in the aggregate were granted 23,40446,808 performance shares (“management shares”); all other employees in the aggregate were granted 44,72689,452 performance shares (“employee shares”). Management shares can vest at the fifth, sixth, seventh or eighth anniversary of the grant date if, for the thirty day period ending on the day prior to the respective anniversary date, the average closing price of a share of the Company’s common stock exceeds a defined target price. The target price for each anniversary date is equal to the grant date market price ($20.5010.25 per share) plus $1.64$0.82 for each year since the grant date. Shares will vest only if the target price is achieved and the recipient has remained employed through, or reached normal retirement age before, the anniversary date that the target price is achieved on. Employee shares could vest at the fourth, fifth or sixth anniversary of the grant date on otherwise similar terms. No shares have vested under these awards.
Due to the market condition of achieving a target stock price in order to vest, the Company determined the grant date fair value of the performance In September 2013, employee shares as well as the expected term of the awards, using a Monte Carlo simulation. The following assumptionsexpired without vesting and were used in deriving the grant date fair value and expected term:
| | | Management Shares | | | Employee Shares | |
| Assumptions: | | | | | | |
| Dividend rate | | | 1.5 | % | | | 1.5 | % |
| Risk free rate | | | 4.44 | % | | | 4.38 | % |
| Annual price volatility | | | 34 | % | | | 34 | % |
| | | | | | | | | |
| Derived values: | | | | | | | | |
| Fair value per share | | $ | 13.20 | | | $ | 12.20 | |
| Expected term (years) | | | 5.81 | | | | 5.38 | |
The Company estimated expected forfeitures of 40% for management shares and 35% for employee shares. During 2011, the Company revised its estimate of management share forfeitures to 15%, adding $48 thousand to recorded compensation expense. During 2013, the Company finalized its adjustment for employee share forfeitures to 39%, which lowered recorded compensation expense by $40 thousand. In September 2015, the management shares vested, and 37,826 shares were distributed and a final adjustment for management share forfeitures was posted, which reduced compensation expense by $37 thousand.
In June 2010,February 2013, 2014 and 2015, the Company made grants of 34,142124,566, 135,562 and 79,946 non-vested shares to 1618, 22 and 21 management employees.employees, respectively. The 2013 shares vest 25% annually. The award was valued at the market price of the Company’s common stock on the date of grant ($16.50 per share). The Company also made a grant of 7,272 non-vested shares to the non-employee members of the Company’s Board of Directors, valued at the market price of the Company’s common stock on the grant date ($16.50 per share). The shares vest 33% annually.
In February 20112014 and again in February 2012, the Company made grants of 54,075 and 66,384 non-vested shares to 18 and 17 management employees, respectively. The2015 shares vest 25% annually.annually; however, if an employee reaches the age of 55, has achieved 10 years of service with the Company and retires, the unvested shares are not forfeited. The first year of vesting for the 2015 shares is on the one-year anniversary of the issue date. The awards were valued at the market price of the Company’s common stock on the date of grant ($16.586.92, $13.00 and $10.82$15.01 per share, respectively). The Company also made grants of non-vested shares to the non-employee members of the Company’s Board of Directors. The Company granted 8,44823,120, 12,304 and 14,78431,984 shares in 20112013, 2014 and 2012,2015, respectively, valued at the market price of the Company’s common stock on the grant date ($16.586.92, $13.00 and $10.82$15.01 per share, respectively). The 2013 and 2014 shares vest 33% annually.annually, while the 2015 shares fully vest after one year.
In April 2011February 2015, the Company made grants of 48,576 non-vested share units to eight management employees. These grants were made under a Relative Total Shareholder Return (“RTSR”) plan structure. Under this structure, the Company’s stock performance over a three year period ended December 31, 2017, will be compared to a group of 38 peer companies, and againa payout will be determined based upon the Company’s performance relative to the performance of the peer group. The payout could range anywhere from zero shares awarded, up to 150% of the granted share units, or 72,858 shares. The fair value of the grant ($15.66) was determined as of the grant date using a Monte Carlo simulation. The following assumptions were utilized in the valuation:
| Stock price (closing price on issue date) | | $ | 15.01 | |
| Risk-free interest rate (interpolated rate between 2-year and 3-year U.S. treasury rates) | | | 0.95% | |
| Dividend yield | | | 1.57% | |
| Performance period | | 2.87 years | |
In May 2012,2013, 2014 and 2015, the Company made grants of non-vested shares to selectedselect other employees. TheIn May 2013, the Company granted 16,18449,686 shares, of which 8,15919,134 were vested and distributed immediately, in April 2011, andimmediately. In May 2014, the Company granted 38,18633,664 shares, of which 14,0409,390 were vested and distributed immediately, inimmediately. In May 2012.2015, the Company granted 29,752 shares, of which 10,180 were vested and distributed immediately. The remaining shares in each award vest in various schedules over the next four years. Beginning with the 2015 shares, if an employee reaches the age of 55, has achieved 10 years of service with the Company and retires, the unvested shares are not forfeited. The awards were valued at the market price of the Company’s common stock on the date of grant ($18.068.74, $12.83 and $10.51$17.23 per share in 20112013, 2014 and 2012,2015, respectively).
A summary of outstanding share grants at December 31, 2012, 2011,2015, 2014, and 2010,2013, and changes during the years ended on those dates, is as follows:
| | | Shares | |
| | | | |
Outstanding December 31, 20092012 | | | 55,946426,708 | |
| | | | | |
| Granted | | | 41,415197,372 | |
| Cancelled | | | (3,26161,988 | ) |
| Vested and issued | | | -(135,912 | ) |
Outstanding December 31, 20102013 | | | 94,100426,180 | |
| | | | | |
| Granted | | | 78,707181,530 | |
| Cancelled | | | (6,73310,764 | ) |
| Vested and issued | | | (18,931161,674 | ) |
Outstanding December 31, 20112014 | | | 147,143435,272 | |
| | | | | |
| Granted | | | 119,354190,258 | |
| Cancelled | | | (8,0986,736 | ) |
| Vested and issued | | | (45,045211,498 | ) |
Outstanding December 31, 20122015 | | | 213,354407,296 | |
Compensation cost recognized for share awards during 2012, 20112015, 2014 and 2010,2013, was $1.3$2.6 million, $1.1$2.2 million and $0.3$1.3 million, respectively. The income tax benefit for share-based compensation arrangements was $0.3 $1.3 million, $0.4$0.9 million, and $0.1$0.5 million for 2012, 20112015, 2014 and 2010.2013, respectively.
As of December 31, 2012,2015, the total compensation cost related to non-vested share awards not yet recognized is $1.0$1.5 million which will be recognized over a weighted-average period of 2.0 years.years.
Note 11.10. Major Customer
The Company has one major customer relationship with Sprint that is a significant source of revenue. Approximately 56% of total operating revenues for the year ended December 31, 2015, 58% of total operating revenues for the year ended December 31, 2014, and 59% of total operating revenues for the year ended December 31, 2012, 57% of total operating revenues for the year ended December 31, 2011, and 60% of total operating revenues for the year ended December 31, 20102013, were generated by or through Sprint Nextel and its customers using the Company's portion of Sprint Nextel’sSprint’s nationwide PCS network. No other customer relationship generated more than 2.5%1.0% of the Company’s total operating revenues for the years ended December 31, 2012, 20112015, 2014 or 2010.2013.
Note 12.11. Shareholder Rights Plan
Effective as of February 8, 2008, the Board of Directors adopted a Shareholder Rights Plan (the “Plan”) to replace an expiring plan which was adopted in 1998. Under certain circumstances, holders of each right (granted at one right per share of outstanding common stock) will be entitled to purchase for $40$20 one half a share of the Company’s common stock (or, in certain circumstances, $80$40 worth of cash, property or other securities of the Company for $40)$20). The rights are neither exercisable nor traded separately from the Company’s common stock. The rights are only exercisable if a person or group becomes or attempts to become, the beneficial owner of 15% or more of the Company’s common stock. Under the terms of both Shareholder Rights Plans,the Plan, such a person or group would not be entitled to the benefits of the rights. The new Shareholder Rights Plan provides that the Board of Directors may redeem the outstanding rights at any time for $.001$.0005 per right, and except with respect to the redemption price of the rights, any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company. The new Shareholder Rights Plan provides for the Board of Directors to appoint a committee (the “TIDE Committee”) that is comprised of independent directors of the Company to review and evaluate the Shareholder Rights Plan in order to consider whether it continues to be in the interest of the Company and its shareholders at least every three years. Following each such review, the TIDE Committee will communicate its conclusions to the full Board of Directors, including any recommendation as to whether the Shareholder Rights Plan should be modified or the Rights should be redeemed. In January 2011,2014, the TIDE Committee recommended to the full Board of Directors, and the Board of Directors approved, that the Shareholder Rights Plan be maintained as originally adopted. The purchase price applicable to each right and the redemption price have been adjusted under the terms of the Plan to reflect the two-for-one stock split implemented by the Company.
Note 13.12. Lease Commitments
The Company leases land, buildings and tower space under various non-cancelable agreements, which expire between the years 20132016 and 20392040 and require various minimum annual rental payments. These leases typically include renewal options and escalation clauses. In general, tower leases have five or ten year initial terms with four renewal terms of five years each. The other leases generally contain certain renewal options for periods ranging from five to twenty years.
Future minimum lease payments under non-cancelable operating leases, including renewals that are reasonably assured at the inception of the lease, with initial variable lease terms in excess of one year as of December 31, 20122015, are as
follows:
| Year Ending | | Amount | |
| | | (in thousands) | |
| 2013 | | $ | 11,648 | |
| 2014 | | | 11,531 | |
| 2015 | | | 11,287 | |
| 2016 | | | 10,899 | |
| 2017 | | | 10,939 | |
| 2018 and beyond | | | 60,489 | |
| | | $ | 116,793 | |
| Year Ending | | Amount | |
| | | (in thousands) | |
| 2016 | | $ | 14,605 | |
| 2017 | | | 14,767 | |
| 2018 | | | 14,557 | |
| 2019 | | | 14,187 | |
| 2020 | | | 13,554 | |
| 2021 and beyond | | | 71,732 | |
| | | $ | 143,402 | |
The Company’s total rent expense was $13.1$16.9 million, $12.4 $16.1 million, and $11.2$15.6 million for the years ended December 31, 2012, 20112015, 2014 and 2010,2013, respectively.
As lessor, the Company has leased buildings, tower space and telecommunications equipment to other entities under various non-cancelable agreements, which require various minimum annual payments. The total minimum rental receipts at December 31, 20122015 are as follows:
| Year Ending | | Amount | |
| | | (in thousands) | |
| 2016 | | $ | 4,954 | |
| 2017 | | | 4,186 | |
| 2018 | | | 3,289 | |
| 2019 | | | 2,636 | |
| 2020 | | | 1,858 | |
| 2021 and beyond | | | 2,102 | |
| | | $ | 19,025 | |
| Year Ending | | Amount | |
| | | (in thousands) | |
| 2013 | | $ | 5,169 | |
| 2014 | | | 4,750 | |
| 2015 | | | 4,237 | |
| 2016 | | | 2,405 | |
| 2017 | | | 1,400 | |
| 2018 and beyond | | | 9,334 | |
| | | $ | 27,295 | |
The Company’s total rent income was $6.1$6.3 million, $6.1$6.0 million, and $6.1$5.6 million for the years ended December 31, 2012, 20112015, 2014 and 2010,2013, respectively. Total rent income includes month-to-month leases which are excluded from the table above.
Note 14. 13. Derivative Instruments and Hedging Activities
The Company’s objectives in using interest rate derivatives are to add stability to cash flows and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps (both those designated as cash flow hedges as well as those not designated as cash flow hedges) involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
TheIn August 2010, the Company initially entered into a pay fixed, receive variable interest rate swap of $63.3 million of notional principal in August 2010.principal. This interest rate swap was not designated as a cash flow hedge. Changes in the fair value of interest rate swaps not designated as cash flow hedges arewere recorded in interest expense each reporting period. The total outstanding notional amount of interest rate swaps not designated as cash flow hedges was $52.2 million as of December 31, 2012. This swap expiresexpired in July 2013. Changes in fair value recorded in interest expense for the yearsyear ended December 31, 2012 and 2011, were2013 was a decrease of $213 thousand and an increase of $410 thousand, respectively.$239 thousand.
The Company entered into a pay fixed, receive variable interest rate swap of $174.6 million of initial notional principal in September 2012. This interest rate swap was designated as a cash flow hedge. The total outstanding notional amount of cash flow hedges was $174.6$152.8 million and $170.3 million as of December 31, 2012.2015 and 2014, respectively. The outstanding notional amount decreases as the Company makes scheduled principal payments on the debt.
The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings through interest expense. No hedge ineffectiveness was recognized during any of the periods presented.
Amounts reported in accumulated other comprehensive income related to the interest rate swapsswap designated and that qualify as cash flow hedges are reclassified to interest expense as interest payments are accrued on the Company’s variable-rate debt. As of December 31, 2012,2015, the Company estimates that $1.6$0.7 million will be reclassified as an increase to interest expense during the next twelve months due to the interest rate swapsswap since the hedge interest rate exceeds the variable interest rate on the debt.
The table below presents the fair value of the Company’s derivative financial instruments as well as its classification on the consolidated balance sheet as of December 31, 20122015 and 2011 (in thousands):
| | Liability Derivatives | |
| | | | | | Fair Value as of | |
| | Balance Sheet | | | | December 31, | | | | December 31, | |
| | Location | | | | 2012 | | | | 2011 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | |
| Interest rate swaps | Accrued liabilities and other | | | $ | 239 | | | $ | 331 | |
| | Other liabilities | | | | - | | | | 121 | |
| Total derivatives not designated as cash flow hedges | | | $ | 239 | | | $ | 452 | |
| | | | | | | | | | | |
| Derivatives designated as hedging instruments: | | | | | | | | | |
| Interest rate swaps | Accrued liabilities and other | | | $ | 1,613 | | | $ | - | |
| | Deferred charges and other assets, net | | | | 177 | | | | - | |
| Total derivatives designated as hedging instruments | | | $ | 1,436 | | | $ | - | |
The table below presents the effect of the Company’s derivative financial instruments designated as cash flow hedges on the consolidated income statements for the year ended December 31, 20122014 (in thousands):
| | | | Fair Value as of | |
| | | | | | | |
| Derivatives designated as hedging instruments: | | | | | | | |
| Interest rate swaps | | | | | | | |
| Accrued liabilities and other | | $ | (682 | ) | | $ | (1,309 | ) |
| Deferred charges and other assets, net | | | 1,370 | | | | 3,180 | |
| | | | | | | | | | |
| Total derivatives designated as hedging instruments | | | $ | 688 | | | $ | 1,871 | |
| Year Ended December 31, | | Derivative in Cash Flow Hedging Relationships | | Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) | | | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) | | | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) | |
| 2012 | | Interest rate swap | | $ | (1,436 | ) | | Interest expense | | | $ | 481 | |
The fair value of interest rate swaps is determined using a pricing model with inputs that are observable in the market (level(Level 2 fair value inputs).
Note 15. Acquisitions
Suddenlink Communications
On December 1, 2010, the Company acquired certain cable operations locatedThe table below presents changes in Oakland, Maryland and Salem West Virginia, from Cequel III Communications II, LLC, doing business as Suddenlink Communications, for $4.5 million less working capital adjustments. The Company has included these operations for financial reporting purposes for periods subsequent to the acquisition.
JetBroadBand Holdings, LLC
On July 30, 2010, the Company acquired the cable operations of JetBroadBand Holdings, LLC (“JetBroadBand”) for $147.4 million in cash. The Company has included these operations for financial reporting purposes for periods subsequent to the acquisition.
Operating revenues reported in the consolidated statements ofaccumulated other comprehensive income by component for the yeartwelve months ended December 31, 2010 included revenues of $18.9 million related to the former JetBroadBand entity. The amount of earnings before income taxes related to the former JetBroadBand entity is not readily determinable due to intercompany transactions and allocations that have occurred in connection with the operations of the combined company.2015 (in thousands):
| | | Gains and (Losses) on Cash Flow Hedges | | | Income Tax (Expense) Benefit | | | Accumulated Other Comprehensive Income | |
| | | | | | | | | | |
| Balance as of December 31, 2014 | | $ | 1,871 | | | $ | (749 | ) | | $ | 1,122 | |
| Other comprehensive income (loss) before reclassifications | | | (2,732 | ) | | | 1,095 | | | | (1,637 | ) |
| Amounts reclassified from accumulated other comprehensive income (to interest expense) | | | 1,549 | | | | (619 | ) | | | 930 | |
| Net current period other comprehensive income (loss) | | | (1,183 | ) | | | 476 | | | | (707 | ) |
| Balance as of December 31, 2015 | | $ | 688 | | | $ | (273 | ) | | $ | 415 | |
Note 16.14. Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers.maker. The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Wireline,Cable, and (3) Cable.Wireline. A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company as well as certain general and administrative costs historically charged to Converged Services that cannot be allocated to discontinued operations.company.
The Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate of Sprint Nextel.Affiliate. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
The Cable segment provides video, internet and voice services in Virginia, West Virginia and Maryland, and leases fiber optic facilities throughout southern Virginia and West Virginia. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.
The Wireline segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long distance access services throughout Shenandoah County and portions of northwesternRockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, Virginia, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor includingthrough West Virginia, Maryland and portions of West Virginia and Maryland.Pennsylvania.
The Cable segment provides video, internet and voice services in Virginia, West Virginia and Maryland. It includes the operations acquired from JetBroadband, LLC, since July 30, 2010, and the operations acquired from Suddenlink since November 30, 2010.
Prior year service and other revenue amounts in the Cable segment have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue.
For the Wireline segment, prior year categories of access revenue, facilities lease revenue and equipment revenue have been combined into the new category of carrier access and fiber revenue to conform to current year presentation. Additionally, set-top box revenues included in other revenue in the prior year are now presented within service revenue.
Year ended December 31, 2015
(In thousands)
| | Wireless | | | Cable | | | Wireline | | | Other | | | Eliminations | | | Consolidated Totals | |
| External revenues | | | | | | | | | | | | | | | | | | |
| Service revenues | | $ | 192,752 | | | $ | 88,980 | | | $ | 19,386 | | | | - | | | | - | | | $ | 301,118 | |
| Other revenues | | | 11,609 | | | | 7,793 | | | | 21,965 | | | | - | | | | - | | | | 41,367 | |
| Total external revenues | | | 204,361 | | | | 96,773 | | | | 41,351 | | | | - | | | | - | | | | 342,485 | |
| Internal revenues | | | 4,440 | | | | 849 | | | | 26,069 | | | | - | | | | (31,358 | ) | | | - | |
| Total operating revenues | | | 208,801 | | | | 97,622 | | | | 67,420 | | | | - | | | | (31,358 | ) | | | 342,485 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of goods and services, exclusive of depreciation and amortization shown separately below | | | 63,570 | | | | 54,611 | | | | 31,668 | | | | - | | | | (28,519 | ) | | | 121,330 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown below | | | 35,792 | | | | 19,412 | | | | 6,612 | | | | 17,390 | | | | (2,839 | ) | | | 76,367 | |
| Depreciation and amortization | | | 34,416 | | | | 23,097 | | | | 12,736 | | | | 453 | | | | - | | | | 70,702 | |
| Total operating expenses | | | 133,778 | | | | 97,120 | | | | 51,016 | | | | 17,843 | | | | (31,358 | ) | | | 268,399 | |
| Operating income (loss) | | $ | 75,023 | | | $ | 502 | | | $ | 16,404 | | | $ | (17,843 | ) | | $ | - | | | $ | 74,086 | |
Year ended December 31, 2014
(In thousands)
| | Wireless | | | Cable | | | Wireline | | | Other | | | Eliminations | | | Consolidated Totals | |
| External revenues | | | | | | | | | | | | | | | | | | | | | | | | |
| Service revenues | | $ | 191,147 | | | $ | 77,179 | | | $ | 18,919 | | | | - | | | | - | | | $ | 287,245 | |
| Other revenues | | | 11,867 | | | | 7,224 | | | | 20,610 | | | | - | | | | - | | | | 39,701 | |
| Total external revenues | | | 203,014 | | | | 84,403 | | | | 39,529 | | | | - | | | | - | | | | 326,946 | |
| Internal revenues | | | 4,440 | | | | 150 | | | | 23,506 | | | | - | | | | (28,096 | ) | | | - | |
| Total operating revenues | | | 207,454 | | | | 84,553 | | | | 63,035 | | | | - | | | | (28,096 | ) | | | 326,946 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of goods and services, exclusive of depreciation and amortization shown separately below | | | 73,290 | | | | 51,982 | | | | 30,088 | | | | - | | | | (25,617 | ) | | | 129,743 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown below | | | 33,171 | | | | 19,521 | | | | 6,009 | | | | 13,148 | | | | (2,479 | ) | | | 69,370 | |
| Depreciation and amortization | | | 31,111 | | | | 23,148 | | | | 11,224 | | | | 407 | | | | - | | | | 65,890 | |
| Total operating expenses | | | 137,572 | | | | 94,651 | | | | 47,321 | | | | 13,555 | | | | (28,096 | ) | | | 265,003 | |
| Operating income (loss) | | $ | 69,882 | | | $ | (10,098 | ) | | $ | 15,714 | | | $ | (13,555 | ) | | $ | - | | | $ | 61,943 | |
Selected financial data for each segment is as follows:
Year ended December 31, 2012 (In thousands) | | Wireless | | | Cable | | | Wireline | | | Other | | | Eliminations | | | Consolidated Totals | |
| External revenues | | | | | | | | | | | | | | | | | | |
| Service revenues | | $ | 162,912 | | | $ | 66,010 | | | $ | 15,021 | | | | - | | | | - | | | $ | 243,943 | |
| Other revenues | | | 13,398 | | | | 10,024 | | | | 20,710 | | | | - | | | | - | | | | 44,132 | |
| Total external revenues | | | 176,310 | | | | 76,034 | | | | 35,731 | | | | - | | | | - | | | | 288,075 | |
| Internal revenues | | | 3,328 | | | | 289 | | | | 18,927 | | | | - | | | | (22,544 | ) | | | - | |
| Total operating revenues | | | 179,638 | | | | 76,323 | | | | 54,658 | | | | - | | | | (22,544 | ) | | | 288,075 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of goods and services, exclusive of depreciation and amortization shown separately below | | | 63,906 | | | | 48,978 | | | | 24,785 | | | | 25 | | | | (20,287 | ) | | | 117,407 | |
| Goodwill impairment | | | - | | | | 10,952 | | | | - | | | | - | | | | - | | | | 10,952 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 30,716 | | | | 22,335 | | | | 6,859 | | | | 2,993 | | | | (2,257 | ) | | | 60,646 | |
| Depreciation and amortization | | | 31,660 | | | | 23,519 | | | | 9,171 | | | | 62 | | | | - | | | | 64,412 | |
| Total operating expenses | | | 126,282 | | | | 105,784 | | | | 40,815 | | | | 3,080 | | | | (22,544 | ) | | | 253,417 | |
| Operating income (loss) | | $ | 53,356 | | | $ | (29,461 | ) | | $ | 13,843 | | | $ | (3,080 | ) | | $ | - | | | $ | 34,658 | |
Year ended December 31, 2011 (In thousands) | | Wireless | | | Cable | | | Wireline | | | Other | | | Eliminations | | | Consolidated Totals | |
| External revenues | | | | | | | | | | | | | | | | | | |
| Service revenues | | $ | 137,118 | | | $ | 59,051 | | | $ | 14,428 | | | $ | - | | | $ | - | | | $ | 210,597 | |
| Other revenues | | | 13,129 | | | | 8,733 | | | | 18,686 | | | | - | | | | - | | | | 40,548 | |
| Total external revenues | | | 150,247 | | | | 67,784 | | | | 33,114 | | | | - | | | | - | | | | 251,145 | |
| Internal revenues | | | 3,191 | | | | 276 | | | | 16,414 | | | | - | | | | (19,881 | ) | | | - | |
| Total operating revenues | | | 153,438 | | | | 68,060 | | | | 49,528 | | | | - | | | | (19,881 | ) | | | 251,145 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of goods and services, exclusive of depreciation and amortization shown separately below | | | 56,705 | | | | 47,417 | | | | 19,702 | | | | 125 | | | | (17,309 | ) | | | 106,640 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 29,455 | | | | 18,827 | | | | 7,528 | | | | 3,207 | | | | (2,572 | ) | | | 56,445 | |
| Depreciation and amortization | | | 23,906 | | | | 23,198 | | | | 8,453 | | | | 213 | | | | - | | | | 55,770 | |
| Total operating expenses | | | 110,066 | | | | 89,442 | | | | 35,683 | | | | 3,545 | | | | (19,881 | ) | | | 218,855 | |
| Operating income (loss) | | $ | 43,372 | | | $ | (21,382 | ) | | $ | 13,845 | | | $ | (3,545 | ) | | $ | - | | | $ | 32,290 | |
Year ended December 31, 2013
Year ended December 31, 2010 (In thousands) | | Wireless | | | Cable | | | Wireline | | | Other | | | Eliminations | | | Consolidated Totals | |
| External revenues | | | | | | | | | | | | | | | | | | |
| Service revenues | | $ | 111,279 | | | $ | 32,527 | | | $ | 14,241 | | | $ | - | | | $ | - | | | $ | 158,047 | |
| Other revenues | | | 13,575 | | | | 4,241 | | | | 19,343 | | | | - | | | | - | | | | 37,159 | |
| Total external revenues | | | 124,854 | | | | 36,768 | | | | 33,584 | | | | - | | | | - | | | | 195,206 | |
| Internal revenues | | | 3,034 | | | | 51 | | | | 13,617 | | | | - | | | | (16,702 | ) | | | - | |
| Total operating revenues | | | 127,888 | | | | 36,819 | | | | 47,201 | | | | - | | | | (16,702 | ) | | | 195,206 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of goods and services, exclusive of depreciation and amortization shown separately below | | | 44,794 | | | | 26,904 | | | | 17,503 | | | | 226 | | | | (14,754 | ) | | | 74,673 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown separately below | | | 21,558 | | | | 13,858 | | | | 8,845 | | | | 3,259 | | | | (1,948 | ) | | | 45,572 | |
| Depreciation and amortization | | | 23,187 | | | | 11,314 | | | | 7,883 | | | | 246 | | | | - | | | | 42,630 | |
| Total operating expenses (1) | | | 89,539 | | | | 52,076 | | | | 34,231 | | | | 3,731 | | | | (16,702 | ) | | | 162,875 | |
| Gain on sale of directory | | | - | | | | - | | | | 4,000 | | | | | | | | | | | | 4,000 | |
| Operating income (loss) | | $ | 38,349 | | | $ | (15,257 | ) | | $ | 16,970 | | | $ | (3,731 | ) | | $ | - | | | $ | 36,331 | |
| | Wireless | | | Cable | | | Wireline | | | Other | | | Eliminations | | | Consolidated Totals | |
| External revenues | | | | | | | | | | | | | | | | | | |
| Service revenues | | $ | 182,955 | | | $ | 69,782 | | | $ | 20,244 | | | | - | | | | - | | | $ | 273,902 | |
| Other revenues | | | 10,842 | | | | 5,967 | | | | 19,152 | | | | - | | | | - | | | | 35,040 | |
| Total external revenues | | | 193,797 | | | | 75,749 | | | | 39,396 | | | | - | | | | - | | | | 308,942 | |
| Internal revenues | | | 4,328 | | | | 123 | | | | 20,074 | | | | - | | | | (24,525 | ) | | | - | |
| Total operating revenues | | | 198,125 | | | | 75,872 | | | | 59,470 | | | | - | | | | (24,525 | ) | | | 308,942 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Costs of goods and services, exclusive of depreciation and amortization shown separately below | | | 72,995 | | | | 45,767 | | | | 28,603 | | | | - | | | | (22,225 | ) | | | 125,140 | |
| Selling, general and administrative, exclusive of depreciation and amortization shown below | | | 32,812 | | | | 19,052 | | | | 5,344 | | | | 12,765 | | | | (2,300 | ) | | | 67,673 | |
| Depreciation and amortization | | | 28,177 | | | | 21,202 | | | | 11,308 | | | | 35 | | | | - | | | | 60,722 | |
| Total operating expenses | | | 133,984 | | | | 86,021 | | | | 45,255 | | | | 12,800 | | | | (24,525 | ) | | | 253,535 | |
| Operating income (loss) | | $ | 64,141 | | | $ | (10,149 | ) | | $ | 14,215 | | | $ | (12,800 | ) | | $ | - | | | $ | 55,407 | |
| (1) | Total operating expenses for 2010 includes $3.8 million of expense, pre-tax, resulting from the settlement of the qualified pension plan and curtailment of the SERP during the second quarter of 2010. |
A reconciliation of the total of the reportable segments’ operating income to consolidated income from continuing operations before income taxes is as follows:
| | | Years Ended December 31, | | | Years Ended December 31, | |
| (In thousands) | | 2012 | | | 2011 | | | 2010 | | | 2015 | | | 2014 | | | 2013 | |
| Total consolidated operating income | | $ | 34,658 | | | $ | 32,290 | | | $ | 36,331 | | | $ | 74,086 | | | $ | 61,943 | | | $ | 55,407 | |
| Interest expense | | | (7,850 | ) | | | (8,289 | ) | | | (4,716 | ) | | | (7,355 | ) | | | (8,148 | ) | | | (8,468 | ) |
| Non-operating income, net | | | 1,803 | | | | 204 | | | | 552 | | | | 1,859 | | | | 2,239 | | | | 2,525 | |
| Income from continuing operations before income taxes | | $ | 28,611 | | | $ | 24,205 | | | $ | 32,167 | | | $ | 68,590 | | | $ | 56,034 | | | $ | 49,464 | |
The Company’s assets by segment are as follows:
(In thousands)
(In thousands) | | December 31, 2012 | | | December 31, 2011 | |
| | | | | | | |
| Wireless | | $ | 179,929 | | | $ | 147,093 | |
| Cable | | | 202,436 | | | | 212,683 | |
| Wireline | | | 88,776 | | | | 84,456 | |
| Other (includes assets held for sale) | | | 458,650 | | | | 381,230 | |
| Combined totals | | | 929,791 | | | | 825,462 | |
| Inter-segment eliminations | | | (359,051 | ) | | | (345,483 | ) |
| Consolidated totals | | $ | 570,740 | | | $ | 479,979 | |
| | December 31, 2015 | | | December 31, 2014 | |
| | | | | | | |
| Wireless | | $ | 205,718 | | | $ | 218,887 | |
| Cable | | | 209,132 | | | | 201,232 | |
| Wireline | | | 105,369 | | | | 98,081 | |
| Other | | | 464,979 | | | | 446,028 | |
| Combined totals | | | 985,198 | | | | 964,228 | |
| Inter-segment eliminations | | | (356,458 | ) | | | (344,986 | ) |
| Consolidated totals | | $ | 628,740 | | | $ | 619,242 | |
Note 17.15. Quarterly Results (unaudited)
The following table shows selected quarterly results for the Company.
(in thousands except per share data)
| For the year ended December 31, 2015 | | First | | | Second | | | Third | | | Fourth | | | Total | |
| Operating revenues | | $ | 84,287 | | | $ | 85,701 | | | $ | 85,212 | | | $ | 87,285 | | | $ | 342,485 | |
| Operating income | | | 18,526 | | | | 18,750 | | | | 15,089 | | | | 21,721 | | | | 74,086 | |
| Net income | | | 10,286 | | | | 10,474 | | | | 7,996 | | | | 12,108 | | | | 40,864 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income per share – basic | | | 0.21 | | | | 0.22 | | | | 0.17 | | | | 0.24 | | | | 0.84 | |
| Net income per share – diluted | | | 0.21 | | | | 0.21 | | | | 0.17 | | | | 0.24 | | | | 0.83 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2014 | | First | | | Second | | | Third | | | Fourth | | | Total | |
| Operating revenues | | $ | 80,452 | | | $ | 81,416 | | | $ | 82,268 | | | $ | 82,810 | | | $ | 326,946 | |
| Operating income | | | 15,680 | | | | 15,793 | | | | 14,144 | | | | 16,326 | | | | 61,943 | |
| Net income | | | 8,616 | | | | 8,615 | | | | 8,003 | | | | 8,649 | | | | 33,883 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income per share - basic | | | 0.18 | | | | 0.18 | | | | 0.16 | | | | 0.18 | | | | 0.70 | |
| Net income per share - diluted | | | 0.18 | | | | 0.18 | | | | 0.16 | | | | 0.18 | | | | 0.70 | |
| For the year ended December 31, 2012 | | First | | | Second | | | Third | | | Fourth | | | Total | |
| Operating revenues | | $ | 68,823 | | | $ | 71,378 | | | $ | 72,876 | | | $ | 74,998 | | | $ | 288,075 | |
| Operating income | | | 8,817 | | | | 11,137 | | | | 5,407 | | | | 9,297 | | | | 34,658 | |
| Net income from continuing operations | | | 4,408 | | | | 5,722 | | | | 1,415 | | | | 5,058 | | | | 16,603 | |
| Net income | | | 4,466 | | | | 5,560 | | | | 1,361 | | | | 4,916 | | | | 16,303 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income from continuing operations per share – basic and diluted | | $ | 0.19 | | | $ | 0.24 | | | $ | 0.06 | | | $ | 0.21 | | | $ | 0.69 | |
| Net income per share – basic and diluted | | | 0.19 | | | | 0.23 | | | | 0.06 | | | | 0.21 | | | | 0.68 | |
Note 16. Subsequent Events
| For the year ended December 31, 2011 | | First | | | Second | | | Third | | | Fourth | | | Total | |
| Operating revenues | | $ | 60,428 | | | $ | 61,555 | | | $ | 62,657 | | | $ | 66,505 | | | $ | 251,145 | |
| Operating income | | | 7,091 | | | | 7,994 | | | | 9,170 | | | | 8,035 | | | | 32,290 | |
| Net income from continuing operations | | | 3,060 | | | | 3,038 | | | | 3,615 | | | | 3,825 | | | | 13,538 | |
| Net income (loss) | | | 3,027 | | | | 2,992 | | | | 3,002 | | | | 3,972 | | | | 12,993 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income from continuing operations per share – basic and diluted | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.57 | |
| Net income per share – basic and diluted | | | 0.13 | | | | 0.13 | | | | 0.13 | | | | 0.16 | | | | 0.55 | |
On August 10, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Gridiron Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), and NTELOS Holdings Corp. (“nTelos”), pursuant to which, subject to certain conditions, at the effective time of the Merger (as defined below), Merger Sub will merge with and into nTelos, with nTelos surviving the merger as the Company’s wholly-owned subsidiary (the “Merger”).
Under the terms of the Merger Agreement, which has been approved by the stockholders of nTelos and unanimously approved by the boards of directors of the Company and nTelos, at the effective time of the Merger, each share of common stock, par value $0.01 per share, of nTelos (“nTelos Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (other than shares held by the Company, nTelos and any subsidiaries (which will be cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), will be converted into the right to receive $9.25 in cash, without interest (the “Merger Consideration”). This results in a total equity value of nTelos of approximately $208 million, after including shares and other equity-based awards expected to vest on change of control. In accordance with the Merger Agreement, the Company will repay all existing indebtedness of nTelos as of the closing of the Merger, which was approximately $520 million as of December 31, 2015.
The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including the approval of the transaction by the Federal Communications Commission and the consummation of the Sprint Transactions (as defined below). The Company expects the Merger to close at the end of the first quarter, or the early part of the second quarter, of 2016.
On February 26, 2016, the Company entered into a letter agreement with nTelos pursuant to which the parties agreed to extend the date after which either the Company or nTelos may terminate the Merger Agreement, from February 29, 2016 to June 28, 2016, as permitted by the Merger Agreement. While the parties believe that closing will occur at the end of the first quarter or early in the second quarter, the purpose of the extension is to allow the parties additional time to satisfy certain conditions in order to complete the Merger, which would not have been satisfied by the end of February 29, 2016.
The Company expects to use a portion of the net proceeds from the Facilities (as defined in Note 4) to fund the Merger Consideration, refinance, in full, all indebtedness outstanding under the Company’s existing credit agreement, repay all existing indebtedness of nTelos and pay fees and expenses in connection with the Merger.
Exhibits Index
Operating results for the year ended December 31, 2015 included transaction costs totaling $2.7 million and financing costs totaling $7.9 million related to the Merger. Transaction costs were recorded to general and administrative expenses and financing costs were recorded to deferred charges and other assets as deferred financing costs.
Pending Sprint Transactions
In connection with the execution of the Merger Agreement, on August 10, 2015, Shenandoah Personal Communications, LLC, a subsidiary of the Company, and SprintCom, Inc. (“SprintCom”), an affiliate of Sprint Corporation, entered into a Master Agreement (the “Master Agreement”) and, along with certain affiliates of Sprint Corporation, entered into Addendum XVIII to the Sprint PCS Management Agreement (the “Affiliate Addendum”). The closing of the transactions contemplated by the Master Agreement and the effectiveness of certain provisions of the Affiliate Addendum (the “Sprint Transactions”) will occur simultaneously with, and are conditioned upon, the consummation of the Merger. These transactions include transferring all acquired spectrum assets and customers to Sprint, immediately cancelling nTelos’ wholesale services agreement with Sprint, expanding the Company’s affiliate service territory to include virtually all of nTelos’ western markets, transferring certain leases for Sprint’s retail stores located in the expanded territory to us, and incorporating all of nTelos’ and Sprint’s customers in this expanded territory into the Company’s wireless subscriber base.
Operating results for the year ended December 31, 2015 included transaction costs totaling $0.8 million related to the Sprint Transactions. Transaction costs were recorded to general and administrative expenses.
Exhibits Index
Exhibit | | |
Number | | Exhibit DescriptionDescription |
| | |
| 2.1 | Agreement and Plan of Merger, dated as of August 10, 2015, by and among Shenandoah Telecommunications Company, Gridiron Merger Sub, Inc. and NTELOS Holdings Corp., filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated August 11, 2015. |
| |
| 3.1 | | Amended and Restated Articles of Incorporation of Shenandoah Telecommunications Company filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2007.2007, as amended by the Articles of Amendment of Shenandoah Telecommunications Company filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K , filed January 5, 2016. |
| | |
| 3.2 | | Amended and Restated Bylaws of Shenandoah Telecommunications Company, effective September 17, 2012, filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K dated September 18, 2012. |
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| 4.1 | | Rights Agreement, dated as of February 8, 2008 between the Company and American Stock Transfer & Trust Company filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated January 25, 2008. |
| | | |
| 4.2 | | Specimen representing the Common Stock, no par value, of Shenandoah Telecommunications Company, filed as Exhibit 4.3 to the Company’s Report on Form 10-K for the year ended December 31, 2007. |
| | | |
| 10.1 | | Shenandoah Telecommunications Company Stock Incentive Plan filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333-21733). |
| | |
10.2 | | Shenandoah Telecommunications Company Dividend Reinvestment Plan filed as Exhibit 4.4 to the Company’s Registration Statement on Form S-3D (No. 333-74297). |
| | | |
10.3
10.2 | | Settlement Agreement and Mutual Release dated as of January 30, 2004 by and among Sprint Spectrum L.P., Sprint Communications Company L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P. and Shenandoah Personal Communications Company and Shenandoah Telecommunications Company, dated January 30, 2004; filed as Exhibit 10.3 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.4 | 10.3 | Sprint PCS Management Agreement dated as of November 5, 1999 by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.4 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.5 | 10.4 | Sprint PCS Services Agreement dated as of November 5, 1999 by and between Sprint Spectrum L.P. and Shenandoah Personal Communications Company filed as Exhibit 10.5 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.6 | 10.5 | Sprint Trademark and Service Mark License Agreement dated as of November 5, 1999 by and between Sprint Communications Company, L.P. and Shenandoah Personal Communications Company filed as Exhibit 10.6 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | |
10.7 | 10.6 | Sprint Spectrum Trademark and Service Mark License Agreement dated as of November 5, 1999 by and between Sprint Spectrum L.P. and Shenandoah Personal Communications Company filed as Exhibit 10.7 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
10.8
| |
| 10.7 | Addendum I to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.8 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.910.8 | | Asset Purchase Agreement dated November 5, 1999 by and among Sprint Spectrum L.P., Sprint Spectrum Equipment Company, L. P., Sprint Spectrum Realty Company, L.P., and Shenandoah Personal Communications Company, serving as Exhibit A to Addendum I to the Sprint PCS Management Agreement and as Exhibit 2.6 to the Sprint PCS Management Agreement filed as Exhibit 10.9 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.10 | 10.9 | Addendum II dated August 31, 2000 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.10 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.11
| 10.10 | Addendum III dated September 26, 2001 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.11 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.12 | 10.11 | Addendum IV dated May 22, 2003 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.12 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.13 | 10.12 | Addendum V dated January 30, 2004 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.13 to the Company’s Report on Form 10-K for the year ended December 31, 2003. |
| | | |
10.14 | 10.13 | Supplemental Executive Retirement Plan as amended and restated, filed as Exhibit 10.14 to the Company’s Current Report on Form 8-K dated March 23, 2007. |
| | | |
10.15
| 10.14 | Addendum VI dated May 24, 2004 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications Company filed as Exhibit 10.15 to the Company’s Report on Form 10-Q for the quarterly period ended June 30, 2004. |
| | | |
10.16 | | Interest Purchase Agreement dated November 30, 2004 by and among Shentel Converged Services, Inc., NTC Communications LLC and the Interest holders named therein filed as Exhibit 10.22 to the Company’s Current Report on Form 8-K dated January 21, 2005. |
| | |
10.17 | 10.15 | Description of the Shenandoah Telecommunications Company Incentive Plan filed as Exhibit 10.25 to the Company’s Current Report on Form 8-K dated January 21, 2005. |
10.18
| |
10.16 | Description of Compensation of Non-Employee Directors. Filed as Exhibit 10.26 to the Company’s Current Report on Form 8-K dated May 4, 2005. |
| 10.17 | | |
10.19
| | Description of Management Compensatory Plans and Arrangements. Filed as Exhibit 10.27 to the Company’s current report on Form 8-K dated April 20, 2005. |
| | | |
10.20
10.18 | | 2005 Stock Incentive Plan filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (No. 333-127342). |
| | | |
10.21
10.19 | | Form of Incentive Stock Option Agreement under the 2005 Stock Incentive Plan filed as Exhibit 10.29 to the Company’s Report on Form 10-K for the year ended December 31, 2005. |
| | | |
10.22
| 10.20 | Addendum VII dated March 13, 2007 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., Wireless Co., L.P., APC PCS, LLC, Phillieco, L.P., and Shenandoah Personal Communications Company, filed as Exhibit 10.31 to the Company’s Report on Form 10-K for the year ended December 31, 2006. |
| | | |
10.23
| 10.21 | Settlement Agreement and Mutual Release dated March 13, 2007 by and among Sprint Nextel Corporation, Sprint Spectrum L.P., Wireless Co., L.P., Sprint Communications Company L.P., APC PCS, LLC, Phillieco, L.P., and Shenandoah Personal Communications Company and Shenandoah Telecommunications, filed as Exhibit 10.32 to the Company’s Report on Form 10-K for the year ended December 31, 2006. |
| | | |
10.24 | 10.22 | Form of Performance Share Award to Executives filed as Exhibit 10.33 to the Company’s Current Report on Form 8-K dated September 20, 2007. |
| | | |
10.25 | 10.23 | Addendum VIII to the Sprint Management Agreement dated November 19, 2007, filed as Exhibit 10.36 to the Company’s Current Report on Form 8-K dated November 20, 2007. |
| | | |
10.26 | 10.24 | Asset Purchase Agreement dated August 6, 2008, between Rapid Communications, LLC, Rapid Acquisition Company, LLC, and Shentel Cable Company, filed as Exhibit 10.37 to the Company’s Report on Form 10-Q for the period ended June 30, 2008. |
| | | |
10.27 | 10.25 | Amendment Number 1 to the Asset Purchase Agreement dated August 6, 2008, between Rapid Communications, LLC, Rapid Acquisition Company, LLC, and Shentel Cable Company, filed as Exhibit 10.40 to the Company’s Current Report on Form 8-K dated November 7, 2008. |
| | | |
10.28 | 10.26 | Addendum IX to the Sprint Management Agreement dated as of April 14, 2009, and filed as Exhibit 10.42 to the Company’s Annual Report on Form 10-K dated March 8, 2010. |
| | | |
10.29 | 10.27 | Asset Purchase Agreement dated as of April 16, 2010, between JetBroadband VA, LLC, Helicon Cable Communications, LLC, JetBroadband WV, LLC, JetBroadband Holdings, LLC, Helicon Cable Holdings, LLC, Shentel Cable Company and Shenandoah Telecommunications Company, filed as Exhibit 10.43 to the Company’s Current Report on Form 8-K, dated April 16, 2010. |
| | | |
10.30
| 10.28 | Addendum X dated March 15, 2010 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.44 to the Company’s Current Report on Form 10-Q, dated May 7, 2010. |
10.31
10.29 | | Addendum XI dated July 7, 2010 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.45 to the Company’s Current Report on Form 8-K dated July 8, 2010. |
| | | |
10.32
10.30 | | Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.46 to the Company’s Current Report on Form 8-K dated July 30, 2010. |
| | | |
10.33
10.31 | | Second Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.47 to the Company’s Current Report on Form 8-K dated April 29, 2011. |
| | | |
10.34
10.32 | | Third Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q dated August 8, 2011. |
| | | |
10.35
| 10.33 | Letter Agreement modifying section 10.2.7.2 of Addendum X dated March 15, 2010 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.49 to the Company’s Quarterly Report on Form 10-Q dated August 8, 2011. |
| | | |
10.36 | 10.34 | Fourth Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q dated August 8, 2011. |
| | | |
10.37 | 10.35 | Addendum XII dated February 1, 2012 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications Company, filed as Exhibit 10.51 to the Company’s Current Report on Form 8-K dated February 2, 2012. |
| | | |
10.38 | 10.36 | Fifth Amendment to the Credit Agreement dated as of July 30, 2010, among Shenandoah Telecommunications Company, CoBank, ACB, Branch Banking and Trust Company, Wells Fargo Bank, N.A., and other Lenders, filed as Exhibit 10.52 to the Company’s Current Report on Form 8-K dated February 2, 2012. |
| | | |
10.39 | 10.37 | Addendum XIII dated September 14, 2012 to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.53 to the Company’s Current Report on Form 8-K dated September 17, 2012. |
| | | |
10.40
| 10.38 | Consent and Agreement dated September 14, 2012 related to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.54 to the Company’s Current Report on Form 8-K dated September 17, 2012. |
10.41
10.39 | | Amended and Restated Credit Agreement dated as of September 14, 2012, among Shenandoah Telecommunications Company, CoBank, ACB, and other Lenders, filed as Exhibit 10.55 to the Company’s Current Report on Form 8-K dated September 17, 2012. |
| | | | | |
| 10.40 | | Addendum XIV dated as of November 19, 2012, to Sprint PCS Management Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC.LLC, filed as Exhibit 10.42 to the Company’s Annual Report on Form 10-K dated March 5, 2013. |
| |
| 10.41 | Addendum XV dated as of March 11, 2013, to Sprint PCS Management Agreement by and among Sprint Spectrum, L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal communications, LLC, filed as Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q dated May 3, 2013. |
| |
| 10.42 | First Amendment dated January 30, 2014, to the Amended and Restated Credit Agreement among Shenandoah Telecommunications Company, CoBank, ACB, and other Lenders, filed as Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| |
| 10.43 | Joinder Agreement dated January 30, 2014, to the Amended and Restated Credit Agreement among Shenandoah Telecommunications Company, CoBank, ACB, and other Lenders, filed as Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| |
| 10.44 | Addendum XVI dated as of December 9, 2013 to Sprint PCS Management Agreement by and among Sprint Spectrum, L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| |
| 10.45 | Addendum XVII dated as of April 11, 2014, to Sprint PCS Management Agreement by and among Sprint Spectrum, L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., Sprint Communications Company L.P. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q dated May 2, 2014. |
| |
| 10.46 | 2014 Equity Incentive Plan filed as Appendix A to the Company’s Definitive Proxy Statement filed on March 13, 2014 (No. 333-196990). |
| |
| 10.47 | Master Agreement dated as of August 10, 2015, by and among SprintCom, Inc. and Shenandoah Personal Communications, LLC, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 11, 2015. |
| | |
| 10.48 | Addendum XVIII dated as of August 10, 2015, to Sprint PCS Management Agreement by and among SprintCom, Inc., PhillieCo, L.P., and Shenandoah Personal Communications, LLC, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated August 11, 2015. |
| | |
| 10.49 | Credit Agreement dated as of December 18, 2015, by and among Shenandoah Telecommunications Company, as Borrower, the guarantors party thereto from time to time, CoBank, ACB, as Administrative Agent, and various other agents and lenders named therein, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December 24, 2015. |
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| | List of Subsidiaries. |
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| | Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
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| | Certification of President and Chief Executive Officer of Shenandoah Telecommunications Company pursuant to Rule 13a-14(a)under the Securities Exchange Act of 1934. |
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| | Certification of Vice President and Chief Financial Officer of Shenandoah Telecommunications Company pursuant to Rule 13a-14(a)under the Securities Exchange Act of 1934. |
| | | | |
| | Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. |
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(101) | | Formatted in XBRL (Extensible Business Reporting Language) |
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| | 101.INS | | XBRL Instance Document |
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| | | 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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| | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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| | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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| | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewithherewith.
