Operating expenses

For the nine months ended September 30, 2010, operating expenses increased $26.0 million, or 30.2%, compared to the 2009 period.  Expenses recognized in connection with the final settlement of the Company’s defined benefit pension plan, and the curtailment loss associated with the Company’s SERP plan, totaled $3.8 million during the second quarter of 2010.  The incremental costs of the acquired JetBroadBand operations included within the Company’s Cable segment totaled $10.9 million, including approximately $3.1 million of expenses associated with closing the transaction.  Existing Shentel Cable operations accounted for $5.5 million of the year over year increase.  Operating costs associated with prepaid wireless subscribers totaled $4.1 million as noted previously.  All other operating expenses increased $1.7 million, net, in the first nine months of 2010, compared to the comparable 2009 period.

Gain on sale of directory

The Company sold its telephone directory for $4 million in cash during the third quarter of 2010.

 

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Other income (expense)

The change in other income (expense) resulted primarily from an increase in interest expense of $1.9 million due to the increase in indebtedness during the third quarter of 2010 due to the JetBroadBand acquisition.

Income tax expense

The Company’s effective tax rate on income from continuing operations decreased from 42.1% in the first nine months of 2009 to 41.8% in the first nine months of 2010 due primarily to non-recurring adjustments recognized during the early months of the 2009 period.

Net income from continuing operations

For the nine months ended September 30, 2010, net income from continuing operations decreased $4.1 million, due to the various factors described above.

 

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 Company (“PCS”), a Sprint PCS Affiliate of Sprint Nextel.  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”).

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 fees, as defined, retained by Sprint Nextel.  Through May 31, 2010, such fees totaled 16.8% of net billed revenue; effective June 1, 2010, the net service fee component increased from 8.8% to 12.0%, bringing the total fee retained by Sprint Nextel to 20%.  The fee increase will result in Sprint Nextel retaining an additional $0.3 million of revenue per month at current levels of revenue.

Beginning in July 2010, the Company began offering prepaid wireless 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.

The following tables show selected operating statistics of the Wireless segment as of the dates shown:

		As of								As of
		Sept. 30,				Dec. 31,				Sept. 30,				Dec. 31,
		2010				2009				2009				2008
Retail PCS Subscribers - Postpaid			230,612				222,818				219,353				211,462
Retail PCS Subscribers - Prepaid			56,203				-				-				-
PCS Market POPS (000) (1)			2,339				2,327				2,324				2,310
PCS Covered POPS (000) (1)			2,052				2,033				1,988				1,931
CDMA Base Stations (sites)			484				476				448				411
EVDO-enabled sites			346				334				306				211
EVDO Covered POPS (000) (1)			1,960				1,940				1,874				1,663
Towers			142				140				132				118
Non-affiliate cell site leases			211				196				191				183

 

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		Three Months Ended								Nine Months Ended
		Sept. 30,				Sept. 30,				June 30,				Sept. 30,
		2010				2009				2010				2009
Net PCS Subscriber Additions - Postpaid			3,175				3,286				7,794				7,891
Net PCS Subscriber Additions – Prepaid (2)			6,296				-				6,296				-
PCS Average Monthly Retail Churn % - Postpaid (3)			1.88	%			2.17	%			1.82	%			2.13	%
PCS Average Monthly Retail Churn %  - Prepaid (3)			5.02	%			n/a				n/a				n/a

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.

2)	Excludes prepaid subscribers purchased.

3)	PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period.

Operating Results for the Three Months Ended September 30, 2010

(in thousands)		Three Months Ended September 30,								Change
		2010				2009				$					%
Segment operating revenues
Wireless service revenue		$	28,624			$	25,287			$	3,337				13.2
Tower lease revenue			2,078				1,813				265				14.6
Equipment revenue			1,712				1,046				666				63.7
Other revenue			1,314				544				770				141.5
Total segment operating revenues			33,728				28,690				5,038				17.6
Segment operating expenses
Cost of goods and services, exclusive of depreciation and amortization shown separately below			12,237				9,594				2,643				27.5
Selling, general and administrative, exclusive of depreciation and amortization shown separately below			5,885				4,123				1,762				42.7
Depreciation and amortization			6,401				5,178				1,223				23.6
Total segment operating expenses			24,523				18,895				5,628				29.8
Segment operating income		$	9,205			$	9,795			$	(590	)			(6.0	)

Operating revenues

Wireless service revenue increased $3.3 million, or 13.2%, for the three months ended September 30, 2010, compared to the comparable 2009 period.  Net service revenue from prepaid subscribers accounted for $2.5 million of the increase in revenue.  The Company purchased approximately 50,000 prepaid subscribers in July 2010, and began offering prepaid plans under the Boost and Virgin Mobile brands.  Postpaid wireless service revenue increased $1.7 million, or 4.8%, in the third quarter of 2010 over 2009.  Average postpaid subscribers increased 5.2% in the current quarter compared to the 2009 third quarter.  Billed revenue per user has declined 0.8% due to an increase in all-inclusive plans, which reduce revenue from higher usage customers, and to increased additions of second phones, such as to a family plan, at lower revenue than the primary phone.  Total credits against gross billed revenue, including fees retained by Sprint Nextel and bad debt write-offs, increased $0.8 million from the third quarter of 2009.   Fees retained by Sprint Nextel increased by $1.4 million, or 27.1%, while bad debt write-offs declined by $0.5 million, or 26.1%.  The increase in fees retained by Sprint Nextel was primarily due to the increase in the net service fee to 12% from 8.8% effective June 1, 2010, as described more fully below.

 

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In March 2007, the Company and Sprint Nextel amended the Management Agreement to simplify the method that the companies used to settle certain 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 Net Service Fee percentage, and effective June 2010, the Net Service Fee increased to 12%, the maximum allowed by contract.  The Net Service Fee will remain at 12% until either party requests a review and the review determines that the underlying costs have changed, causing the Fee percentage to drop 100 basis points or more.  This increase is expected to reduce revenues by approximately $0.3 million per month, or nearly $4 million annually, at current levels of revenue.

The increase in tower lease revenue resulted primarily from additional cell site leases.

The increase in equipment revenue resulted from a 4.5% decrease in wireless handsets sold, but at 33% higher net revenue per phone.

The increase in other revenue primarily resulted from a one-time adjustment to straight-line rent accruals recorded in the third quarter of 2010 on a small number of leases due to a determination that the leases were longer-term than initially thought.

In March, 2010, PCS signed Addendum X to the Sprint PCS Management Agreement that allows PCS to sell 3G/4G datacards in our territory, with the expectation that PCS would be able to sell 3G/4G handsets when they became available later in 2010.  In May 2010, 4G services became available in portions of the Harrisburg and York, Pennsylvania, areas of the Company’s PCS territory.  During the third quarter of 2010, 4G capable handsets were our top sellers.

Cost of goods and services

Cost of goods and services increased $2.6 million, or 27.5%, in the 2010 third quarter from the third quarter of 2009.   Costs associated with the prepaid wireless plans included handset subsidies of $1.5 million.  Postpaid handset costs increased $0.7 million, principally due to higher cost smartphones and 4G phones.  Costs of the expanded network and EVDO coverage resulted in a $0.4 million increase in network costs including rent for additional tower and co-location sites, power and backhaul line costs.

Selling, general and administrative

Selling, general and administrative expenses increased $1.8 million, or 42.7%, in the third quarter of 2010 versus the 2009 third quarter, principally due to $1.4 million in pass-through charges related to prepaid wireless revenues.  Operating taxes also increased $0.2 million due to increases in tower and base station assets added during 2009.

Depreciation and amortization

Depreciation and amortization increased $1.2 million in 2010 over the 2009 third quarter, principally due to $1.1 million of amortization on the $6.9 million of acquired prepaid customer contract.

 

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Operating Results for the Nine Months Ended September 30, 2010

(in thousands)		Nine Months Ended September 30,								Change
		2010				2009				$					%
Segment operating revenues
Wireless service revenue		$	81,415			$	76,348			$	5,067				6.6
Tower lease revenue			6,032				5,268				764				14.5
Equipment revenue			4,218				3,485				733				21.0
Other revenue			2,327				1,453				874				60.2
Total segment operating revenues			93,992				86,554				7,438				8.6
Segment operating expenses
Cost of goods and services, exclusive of depreciation and amortization shown separately below			32,108				27,534				4,574				16.6
Selling, general and administrative, exclusive of depreciation and amortization shown separately below			14,808				12,237				2,571				21.0
Depreciation and amortization			16,927				15,021				1,906				12.7
Total segment operating expenses			63,843				54,792				9,051				16.5
Segment operating income		$	30,149			$	31,762			$	(1,613	)			(5.1	)

Operating revenues

Wireless service revenue increased $5.1 million, or 6.6%, for the nine months ended September 30, 2010, compared to the comparable 2009 period.  Net service revenue from prepaid subscribers accounted for $2.5 million of the increase in revenue.  The Company purchased approximately 50,000 prepaid subscribers in July 2010, and began offering prepaid plans under the Boost and Virgin Mobile brands.  Postpaid wireless service revenue increased $4.1 million, or 3.8%, in the first nine months of 2010 over the comparable 2009 period.   Average postpaid subscribers increased 5.4% in the first nine months of 2010 compared to 2009.  Billed revenue per user has declined 1.5% due to an increase in all-inclusive plans, which reduce revenue from higher usage customers, and to increased additions of second phones, such as to a family plan, at lower revenue than the primary phone.  Total credits against gross billed revenue, including fees retained by Sprint Nextel and bad debt write-offs, increased $1.5 million, or 4.7%, from 2009.   Fees retained by Sprint Nextel increased by $2.2 million, or 13.7%, while bad debt write-offs declined by $1.0 million, or 18.7%.  The increase in fees retained by Sprint Nextel resulted primarily from Sprint Nextel’s decision to exercise its right to adjust the net service fee from 8.8% to 12.0% effective June 1, 2010; this increase will reduce wireless service revenue by approximately $1.0 million per quarter at current revenue levels.

The increase in tower lease revenue resulted primarily from additional cell site leases.

The increase in equipment revenue resulted primarily from a 4.5% decrease in wireless handsets sold, but at 33% higher net revenue per phone, during the third quarter of 2010 compared to 2009.

The increase in other revenue primarily resulted from a one-time adjustment to straight-line rent accruals recorded in the third quarter of 2010 on a small number of leases due to a determination that the leases were longer-term than initially thought.

Cost of goods and services

Cost of goods and services increased $4.6 million, or 16.6%, in 2010 from the first nine months of 2009.  Costs associated with the prepaid wireless plans included handset subsidies of $1.5 million.  Postpaid handset costs increased $0.8 million, principally due to higher cost smartphones and 4G phones.   Costs of the expanded network and EVDO coverage resulted in a $2.2 million increase in network costs including rent for additional tower and co-location sites, power and backhaul line costs.  Allocated pension costs totaled $0.2 million in the 2010 period.

 

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Network costs are expected to continue to increase for the remainder of 2010 as a result of the full-year impact of additional EVDO sites brought on-line during 2009.

Selling, general and administrative

The $2.6 million increase in selling, general and administrative expense in 2010 over 2009 resulted primarily from $1.4 million in pass-through charges related to prepaid wireless revenues and $0.8 million in allocated pension charges.

Depreciation and amortization

Depreciation and amortization increased $1.9 million in 2010 over the 2009 nine months, due to $1.1 million of amortization on the $6.9 million of acquired prepaid customer contract  and $0.8 million due to capital projects for EVDO capability and new towers and cell sites placed in service during 2009.  Depreciation is expected to continue to increase for the remainder of 2010 as a result of the full-year impact of additional towers, cell sites, and EVDO capability brought on-line during 2009, and as a result of amortization of the acquired prepaid customer contract.

Wireline

The Wireline segment is comprised of several subsidiaries providing telecommunications services.  Through these subsidiaries, this segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long distance access services throughout Shenandoah County and, since November 1, 2009, in portions of northwestern Augusta County, Virginia.  The Wireline segment 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 following table shows selected operating statistics of the Wireline segment as of the dates shown:

 

		Sept. 30, 2010				Dec. 31, 2009				Sept. 30, 2009				Dec. 31, 2008
Telephone Access Lines			23,848				24,358				23,547				24,042
Long Distance Subscribers			12,847				10,851				10,821				10,842
Total Fiber Miles			74,429				53,511				49,175				46,733
Fiber Route Miles			1,314				837				784				756
DSL Subscribers			11,774				10,985				10,549				9,918
Dial-up Internet Subscribers			2,403				3,359				3,787				4,866

 

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Operating Results for the Three Months Ended September 30, 2010

 

(in thousands)		Three Months Ended September 30,								Change
		2010				2009				$					%
Segment operating revenues
Service revenue		$	3,846			$	3,594			$	252				7.0
Access revenue			3,104				2,766				338				12.2
Facilities lease revenue			3,542				3,991				(449	)			(11.3	)
Equipment revenue			16				24				(8	)			(33.3	)
Other revenue			1,178				1,312				(134	)			(10.2	)
Total segment operating revenues			11,686				11,687				(1	)			-
Segment operating expenses
Cost of goods and services, exclusive of depreciation and amortization shown separately below			4,318				4,346				(28	)			(0.6	)
Selling, general and administrative, exclusive of depreciation and amortization shown separately below			1,828				1,934				(106	)			(5.5	)
Depreciation and amortization			2,000				1,999				1				0.1
Total segment operating expenses			8,146				8,279				(133	)			(1.6	)
Gain on sale of directory			4,000				-				4,000				n/m
Segment operating income		$	7,540			$	3,408			$	4,132				121.2

Operating revenues

Operating revenues overall were unchanged, net, in the third quarter of 2010 from the third quarter of 2009.  The increase in service revenue primarily resulted from a rate increase implemented in March 2010.  The increase in access revenues primarily resulted from carrier access billing adjustments related to calls to 800 numbers. The decrease in facilities lease revenue resulted primarily from replacements of higher cost circuits, such as T-1s, with lower cost circuits, while the decrease in other revenue resulted from lower directory advertising revenues.  The Virginia State Corporation Commission has requested information about access fees that will be used to determine the period over which access fees will be substantially reduced in future periods, and to what extent such reductions may be offset by in creases to local service rates.

Operating expenses

Operating expenses decreased slightly in the third quarter of 2010 from the corresponding 2009 period, primarily due to a decrease in bad debt expenses related to the Company’s telephone directory publishing operations.

Gain on sale of directory

The Company sold the telephone directory for $4 million during the third quarter of 2010.

 

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Operating Results for the Nine Months Ended September 30, 2010

 

(in thousands)		Nine Months Ended September 30,								Change
		2010				2009				$					%
Segment operating revenues
Service revenue		$	11,324			$	10,566			$	758				7.2
Access revenue			9,965				8,576				1,389				16.2
Facilities lease revenue			10,647				10,583				64				0.6
Equipment revenue			45				111				(66	)			(59.5	)
Other revenue			3,542				3,976				(434	)			(10.9	)
Total segment operating revenues			35,523				33,812				1,711				5.1
Segment operating expenses
Cost of goods and services, exclusive of depreciation and amortization shown separately below			13,075				12,563				512				4.1
Selling, general and administrative, exclusive of depreciation and amortization shown separately below			6,993				5,374				1,619				30.1
Depreciation and amortization			5,860				6,334				(474	)			(7.5	)
Total segment operating expenses			25,928				24,271				1,657				6.8
Gain on sale of directory			4,000				-				4,000				n/m
Segment operating income		$	13,595			$	9,541			$	4,054				42.5

Operating revenues

Operating revenues increased $1.7 million overall in the first nine months of 2010 from the first nine months of 2009, principally due to a $1.0 million adjustment of access revenue, including $0.7 million for prior years, related to NECA traffic sensitive revenues; $0.4 million in overall revenue from the North River subscribers acquired in late 2009; and $0.3 million in additional service revenue due to the rate increase implemented in Shenandoah County in April 2010.  These increases were partially offset by a decrease in directory advertising revenue included in other revenue, and lost revenue due to the decline in average access lines in Shenandoah County during the same time period.

Operating expenses

Operating expenses overall increased $1.7 million, or 6.8%, due to $2.0 million in pension related charges recognized in the second quarter of 2010 in both cost of goods and services and selling, general and administrative, partially offset by a reduction in depreciation expense.  The decrease in depreciation expense primarily resulted from circuit equipment that reached the end of its depreciable life in 2009, while the Company also extended the service lives of certain equipment in late 2009.  Incremental expenses directly attributable to North River operations totaled $0.1 million, primarily in cost of goods and services.

Gain on sale of directory

The Company sold its telephone directory for $4 million during the third quarter of 2010.

 

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Cable Television

The Cable Television segment provides analog, digital and high-definition television service under franchise agreements in Virginia and West Virginia.  The Company has been upgrading its cable systems since early 2009, and currently expects to complete the first round of system upgrades by December 31, 2010.  The Company has introduced expanded video and internet service offerings as market upgrades were completed beginning in the second half of 2009, and began introducing voice service in several upgraded markets as the first quarter of 2010 ended.  The Company has continued rolling out expanded video and internet service offerings, as well as voice service, to additional markets as upgrades have been completed.  In July 2010, the Company acquired additional cable operations in Virginia and West Vi rginia, and has begun a program of upgrades in many of these markets that will continue into 2012.

The following table shows selected operating statistics of the Cable Television segment as of the dates shown:

 

		Sept. 30, 2010(1)				Dec. 31, 2009(1)				Sept. 30, 2009(1)				Dec. 31, 2008(1)
Video
Homes Passed (2)			171,662				56,268				64,365				64,365
Customers (3)			64,524				22,773				24,117				25,055
Penetration (4)			37.6	%			40.5	%			37.5	%			38.9	%
High-speed Internet
Available Homes (5)			136,998				25,748				21,962				19,405
Customers (3)			27,621				2,083				1,558				1,128
Penetration (4)			20.2	%			8.1	%			7.1	%			5.8	%
Voice
Available Homes (5)			118,627				-				-				-
Customers			5,206				-				-				-
Penetration (4)			4.4	%			n/a				n/a				n/a
Revenue Generating Units (6)			97,351				24,856				25,675				26,183
Total Fiber Miles			29,388				4,558				4,348				3,860
Fiber Route Miles			1,294				403				393				353

1)

In July 2010, the Company acquired cable operations covering approximately 115 thousand video homes passed, 101 thousand high-speed internet available homes, and 85 thousand voice available homes.  These systems served approximately 41 thousand video subscribers, 21 thousand high-speed internet subscribers, and 3 thousand voice subscribers.  In December 2009, the Company sold several small systems covering approximately 8,100 video homes passed, 840 high-speed internet available homes, approximately 1,700 video customers and less than 100 high-speed internet customers.

2)

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.

3)

Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer.  Where video or internet services are provided on a bulk basis, such as to hotels 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)

Homes and businesses are considered available (“available homes”) if we can connect them to our co-axial distribution system without further upgrading 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.

6)

Revenue generating units are the sum of video, voice and high-speed internet customers.

 

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The Company closed on the acquisition of cable operations from JetBroadBand effective July 30, 2010.  The acquired cable operations offer video, high speed Internet and voice services representing approximately 66,000 revenue generating units in southern Virginia and southern West Virginia.  The acquired networks pass approximately 115,000 homes. The Cable segment results include the operating results of the acquired operations from July 30, 2010 forward.

Operating Results for the Three Months Ended September 30, 2010

(in thousands)		Three Months Ended September 30,								Change
		2010				2009				$					%
Segment operating revenues
Service revenue		$	10,585			$	3,526			$	7,059				200.2
Equipment and other revenue			1,307				339				968				285.5
Total segment operating revenues			11,892				3,865				8,027				207.7
Segment operating expenses
Cost of goods and services, exclusive of depreciation and amortization shown separately below			8,272				3,285				4,987				151.8
Selling, general and administrative, exclusive of depreciation and amortization shown separately below			6,195				1,309				4,886				373.3
Depreciation and amortization			3,746				895				2,851				318.5
Total segment operating expenses			18,213				5,489				12,724				231.8
Segment operating loss		$	(6,321	)		$	(1,624	)		$	(4,697	)			(289.2	)

Operating revenues and expenses

The Company has acquired two sets of cable operations since late in 2008.  The most recent acquisition, of cable operations from JetBroadBand in July 2010, accounts for the major portion of the quarter over quarter changes shown above.  Operating revenues of these acquired cable operations included $6.7 million of service revenue and $0.7 million of other revenue for a total of $7.4 million of the just over $8 million total change.  The remainder of the increase, about $0.6 million, resulted primarily from expanded offerings in the cable markets acquired in 2008 following system upgrades in late 2009 and into early 2010, net of the impact of the sale of several smaller markets in late 2009.

Operating expenses also increased principally due to the new markets acquired, accounting for approximately $9.6 million of direct operating expenses plus an incremental $0.7 million in personnel and related expenses.  Approximately $3.0 million included in selling, general and administrative expenses above represents one-time costs of the acquisition, principally investment advisory fees.  The markets acquired in 2008 generated most of the remainder of the increase, reflecting costs of adding services and subscribers. Operating expenses are expected to continue at elevated levels until all networks are upgraded by 2012 and for a period of time thereafter while marketing efforts continue in recently upgraded markets.

 

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Operating Results for the Nine Months Ended September 30, 2010

(in thousands)		Nine Months Ended September 30,								Change
		2010				2009				$					%
Segment operating revenues
Service revenue		$	17,722			$	10,682			$	7,040				65.9
Equipment and other revenue			2,098				848				1, 250				147.4
Total segment operating revenues			19,820				11,530				8,290				71.9
Segment operating expenses
Cost of goods and services, exclusive of depreciation and amortization shown separately below			16,001				9,211				6,790				73.7
Selling, general and administrative, exclusive of depreciation and amortization shown separately below			9,939				3,766				6,173				163.9
Depreciation and amortization			5,944				2,513				3,431				136.5
Total segment operating expenses			31,884				15,490				16,394				105.8
Segment operating loss		$	(12,064	)		$	(3,960	)		$	(8,104	)			(204.6	)

Operating revenues and expenses

The Company has acquired two sets of cable operations since late in 2008.  The most recent acquisition, of cable operations from JetBroadBand in July 2010, accounts for the major portion of the changes shown above.  Operating revenues of these acquired cable operations included $6.7 million of service revenue and $0.7 million of other revenue for a total of $7.4 million of the $8.3 million total change.  The remainder of the increase, about $0.9 million, resulted primarily from expanded offerings in the cable markets acquired in 2008 following system upgrades in late 2009 and into early 2010, net of the impact of the sale of several smaller markets in late 2009.

Operating expenses also increased principally due to the new markets acquired, accounting for approximately $9.6 million of direct operating expenses plus an incremental $0.7 million in headcount and related expenses.  Approximately $3.1 million included in selling, general and administrative expenses above represents one-time costs of the acquisition, principally investment advisory fees.  The markets acquired in 2008 generated most of the remainder of the increase, reflecting costs of adding services and subscribers.

Operating expenses are expected to continue at elevated levels until all networks are upgraded by 2012 and for a period of time thereafter while marketing efforts continue in recently upgraded markets.

 

Performance Measure

In managing our business and assessing our financial performance, management supplements the information provided by financial statement measures with one measure, adjusted OIBDA, variations of which are used by many companies as a measure of operating performance.  Adjusted OIBDA is a non-GAAP financial measure.  A non-GAAP financial measure, within the meaning of Item 10(e) of Regulation S-K promulgated by the SEC, is a numerical measure of a company’s financial performance, financial position or cash flows that (a) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the consolidated balance sheets, consolidated statements of inco me or consolidated statements of cash flows; or (b) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.  A reconciliation of adjusted OIBDA to the most directly comparable GAAP financial measure follows at the end of this section.

Adjusted OIBDA is a non-GAAP financial measure defined by us as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of:  certain non-recurring transactions; impairment of assets; share based compensation expense; business acquisition costs; and pension settlement and curtailment expenses.  Adjusted OIBDA should not be construed as an alternative to operating income or net income as determined in accordance with GAAP, nor as a measure of liquidity.

 

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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 oth er 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;

·

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 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.

Management understands these limitations and considers adjusted OIBDA as a financial performance measure that supplements but does not replace the information provided to management by our GAAP results.

The following table shows adjusted OIBDA for the three and nine months ended September 30, 2010 and 2009:

 

(in thousands)		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Adjusted OIBDA		$	21,075			$	18,899			$	61,238			$	58,910

 

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The following table reconciles adjusted OIBDA to operating income, which we consider to be the most directly comparable GAAP financial measure to adjusted OIBDA:

 

(in thousands)		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Operating income		$	9,563			$	10,569			$	28,831			$	34,219
Plus depreciation and amortization			12,202				8,151				28,927				24,116
OIBDA			21,765				18,720				57,758				58,335
Less gain on directory sale			(4,000	)			-				(4,000	)			-
Plus share based compensation expense			260				179				539				475
Plus pension settlement and curtailment expense			-				-				3,781				-
Plus business acquisition expenses			3,050				-				3,160				100
Adjusted OIBDA		$	21,075			$	18,899			$	61,238			$	58,910

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 $53.7 million of net cash from operations in the first nine months of 2010, compared to $59.5 million in the first nine months of 2009.  Net income (adjusted for the non-cash impairment charge on assets held for sale, net of tax effects) and a difference in timing of income tax payments between 2010 and 2009, accounted for the decrease.

Capital Commitments. Capital expenditures originally budgeted for 2010 for existing operations total approximately $41 million, a decrease of approximately $12 million from total capital expenditures for the full year of 2009.  Capital spending for 2010 will be more evenly spread amongst our three major segments at approximately $12 million to $13 million in each segment.  Capital spending may shift amongst these priorities as opportunities arise, and the Company is prepared to adjust spending in areas based on capacity demands and market conditions.  Having closed on the acquisition of cable operations from JetBroadBand, the Company anticipates increased capital spending to upgrade portions of the JetBroadBand network, particularly related to headends and electronics associated with the cable plant.  The Company’s initial plans reflect an incremental $11 million in JetBroadBand-related capital spending in 2010.  This estimate is subject to change.

For the 2010 nine month period, the Company spent $33.9 million on capital projects, compared to $37.6 million in the comparable 2009 period.  Spending related to Cable TV projects accounted for $14.8 million in the first nine months of 2010 for plant and headend upgrades and additional set top boxes, while Wireline projects accounted for $8.9 million across a variety of projects, Wireless projects for $6.6 million for new and existing sites, and other projects totaling $3.7 million, largely related to information technology projects.

The Company spent $146.6 million during the third quarter of 2010 for the acquisition of cable systems and operations from JetBroadBand; the Company continues to review invoices presented for the period covering the date of the acquisition in order to make any adjustments to the preliminary working capital adjustment.  The Company does not expect any final adjustments to be material.  The Company also disbursed $6.9 million to acquire prepaid subscriber rights from Sprint Nextel, and received $4.0 million from the sale of its telephone directory.

Indebtedness. As of September 30, 2010, the Company’s indebtedness totaled $198.1 million, with an annualized overall weighted average interest rate of approximately 4.13%.  The balance included $7.6 million fixed at 7.37% (the Fixed Term Loan Facility, described further below), $63.3 million fixed at 4.5% (representing the approximately one third of the Term Loan A Facility where the Company has entered into a three year interest rate swap to fix the interest rate) , and the remainder, consisting of the balance of the Term Loan A Facility at a variable rate of 3.77% as of September 30, 2010,  that resets monthly based on one month LIBOR plus a base rate of 3.50% currently.  These loans are more fully described below.

 

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On July 30, 2010, the Company executed a Credit Agreement with CoBank, ACB as Co-Lead Arranger, Bookrunner and Administrative Agent; BB&T as Co-Lead Arranger and Syndication Agent; and Wells Fargo as Co-Lead Arranger and Documentation Agent, and with the participation of 15 additional banks, for the purpose of refinancing the Company’s existing outstanding debt, funding the purchase price of the JetBroadBand acquisition described above, funding planned capital expenditures to upgrade the acquired cable networks, and other corporate needs.

The Credit Agreement provides for three facilities, a Term Loan Facility, a Revolver Facility, and an Incremental Term Loan Facility.  The Term Loan Facility totals $198 million and was fully drawn for the purposes described above.  The Term Loan Facility has two parts, the Fixed Term Loan Facility of approximately $8 million in aggregate principal amount, and the Term Loan A Facility of approximately $190 million in aggregate principal amount.  The Fixed Term Loan Facility is required to be repaid in monthly installments of approximately $200 thousand of principal, plus interest at 7.37%, from August 2010 through August 2013.  The Term Loan A Facility requires quarterly principal repayments of $2.4 million beginning on December 31, 2010 through September 30, 2011, increasing to $4.7 million quarter ly thereafter through September 30, 2015, with the remaining expected balance of approximately $104 million due December 31, 2015.  The Term Loan A Facility is expected to bear interest at a base rate based upon three month LIBOR plus a spread determined by the Company’s Total Leverage Ratio, initially 3.50%; the Company may elect to use other rates as the base, but does not currently expect to do so.

The Revolver Facility provides for $30 million in immediate availability for future capital expenditures and general corporate needs, and an additional $20 million of availability once certain conditions have been met, for total availability of $50 million.  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.  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 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 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, 2011, then 2.50 to 1.00 December 31, 2012, 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 2.25 to 1.00 from the closing date through December 31, 2012, then 2.50 to 1.00 thereafter;

·

a minimum equity to assets ratio, defined as consolidated total assets minus consolidated total liabilities, divided by consolidated total assets, of at least 0.35 to 1.00 at all times, measured at each fiscal quarter end;

·

a minimum fixed charge coverage ratio, defined as EBITDA divided by fixed charges (defined as cash interest expense plus scheduled principal payments to be made on indebtedness plus capital expenditures other than capital expenditures acquired pursuant to a capital lease through the reinvestment of net proceeds of permitted asset dispositions or the sale of Shentel Converged Services, Inc. plus cash income taxes plus cash dividends and distributions), greater than 0.80 to 1.00 from the closing date through December 31, 2012, then 0.90 to 1.00 through December 31, 2013, and 1.00 to 1.00 thereafter; and,

·

the Company must maintain a minimum liquidity balance, defined as availability under the Revolver Facility plus unrestricted cash and cash equivalents other than cash and cash equivalents held in the name of an Excluded Subsidiary, of greater than $15 million at all times.

 

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These ratios are generally more restrictive than the covenant ratios the Company had been required to comply with under its previously existing debt arrangements.  As of September 30, 2010, the Company was in compliance with the covenants in its credit agreements.

Contractual Commitments. The Company is obligated to make future payments under various contracts it has entered into, including amounts pursuant to its various long-term debt facilities, 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 September 30, 2010, are as follows:

Payments due by periods

(in thousands)		Total				Less than 1 year				1-3 years				4-5 years				After 5 years
Long-term debt principal		$	198,137			$	12,508			$	43,079			$	37,960			$	104,590
Interest on long–term debt (1)			31,948				7,953				13,530				9,481				984
Operating leases (2)			76,374				9,397				16,150				14,402				36,425
Capital calls on investments			300				300				-				-				-
Purchase obligations (3)			14,449				14,449				-				-				-
Total obligations		$	321,208			$	44,607			$	72,759			$	61,843			$	141,999

_________

1)

Includes estimated interest payments on variable rate debt based upon outstanding balances and rates in effect at September 30, 2010.

2)

Amounts include payments over reasonably assured renewals.

3)

Represents open purchase orders at September 30, 2010.

 

The Company believes that cash on hand, cash flow from operations and borrowings expected to be available under the Revolving Facility will provide sufficient cash to enable the Company to fund planned capital expenditures, make scheduled principal and interest payments, meet its other cash requirements and maintain compliance with the terms of its 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 and complete planned upgrades to the cable networks. 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 and new market developments and opportunities.  The Company currently expects that it will fund its future capital expenditures and other cash needs primarily with cash on hand, from operations and borrowing capacity under the Company’s existing debt facilities, although there are events outside the control of the Company that could have an adverse impact on cash flows from operations.

Events that could have an adverse impact on cash flows from operations include, but are not limited to:  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’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 new products and services; and the subsidiary’s ability to effectively and economically manage other operating activities under the Company's agreements with Sprint Nextel.   The Company's ability to attract and maintain a su fficient customer base, particularly in the newly acquired cable markets, is also critical to its ability to maintain a positive cash flow from operations.  The foregoing events individually or collectively could affect the Company’s results.

Recently Issued Accounting Standards

There were no recently issued accounting standards, not adopted by the Company as of September 30, 2010, that are expected to have a material impact on the Company’s results of operations or financial condition.

 

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ITEM 3.

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 September 30, 2010, the Company had $189.8 million of variable rate debt outstanding, bearing interest at a rate of 3.77% as determined on a monthly basis. An increase in market interest rates of 1.00% would add approximately $1.9 million to annual interest expense.  The remaining approximately $7.6 million of the Company’s outstanding debt has a fixed rate of 7.37% through maturity in approximately three years  Due to the relatively short time frame to maturity of this fixed rate debt, market value approximate s carrying value of the fixed rate debt.  The Company entered into a swap agreement on $63 million notional principal to pay a fixed rate of 1.00% and receive a variable rate based on one month LIBOR for a three year term to manage a portion of its interest rate risk.

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.  The cash is currently invested in an institutional cash management fund that has limited interest rate risk.  Management continues to evaluate 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.  Management does not believe that this risk is currently significant because the Company’s existing sources, and its commitments for future sources, of liquidity are adequate to provide cash for operations, payment of debt, and subsequent to the acquisition of JetBroadBand, funding of near-term capital projects.

Management does not view market risk as having a significant impact on the Company's results of operations, although future results could be adversely affected if interest rates were to increase significantly for an extended period and the Company were to require additional external financing.  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 September 30, 2010, the Company has $6.8 million of cost and equity method investments.  Approximately $3.6 million was 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 and an additional $0.3 million committed under contracts the Company has signed with portfolio managers.

 

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ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our President and Chief Executive Officer, who is the principal executive officer, and the Vice President - Finance and Chief Financial Officer, who is the principal financial officer, conducted an evaluation of our disclosure controls and procedures, as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934.  The Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2010.

Changes in Internal Control Over Financial Reporting

During the third quarter of 2010, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Other Matters Relating to Internal Control Over Financial Reporting

Under the Company’s agreements with Sprint Nextel, Sprint Nextel provides the Company with billing, collections, customer care, certain network operations and other back office services for the PCS operation. As a result, Sprint Nextel remits to the Company approximately 60% of the Company’s total operating revenues.  Due to this relationship, the Company necessarily relies on Sprint Nextel to provide accurate, timely and sufficient data and information to properly record the Company’s revenues, and accounts receivable, which underlie a substantial portion of the Company’s periodic financial statements and other financial disclosures.

Information provided by Sprint Nextel includes reports regarding the subscriber accounts receivable in the Company’s markets.  Sprint Nextel provides the Company with monthly accounts receivable, billing and cash receipts information on a market level, rather than a subscriber level.  The Company reviews these various reports to identify discrepancies or errors.  Under the Company’s agreements with Sprint Nextel, the Company is entitled to only a portion of the receipts, net of items such as taxes, government surcharges, certain allocable write-offs and, prior to June 1, 2010, the 16.8% of revenue retained by Sprint Nextel.  Effective June 1, 2010, Sprint Nextel retains 20% of revenue.  Because of the Company’s reliance on Sprint Nextel for financial information, the Comp any must depend on Sprint Nextel to design adequate internal controls with respect to the processes established to provide this data and information to the Company.  To address this issue, Sprint Nextel engages an independent registered public accounting firm to perform a periodic evaluation of these controls and to provide a “Report on Controls Placed in Operation and Tests of Operating Effectiveness for Affiliates” under guidance provided in Statement of Auditing Standards No. 70 (“SAS 70 reports”).  The report is provided to the Company on an annual basis and covers a nine-month period. The most recent report covers the period from January 1, 2009 to September 30, 2009.  The most recent report indicated there were no material issues which would adversely affect the information used to support the recording of the revenues provided by Sprint Nextel related to the Company’s relationship with them.

 

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PART II.

OTHER INFORMATION

ITEM 1A.

Risk Factors

As previously discussed, our actual results could differ materially from our forward looking statements. Except for the risk factors shown below, there have been no material changes in the risk factors  from those described in Part 1, Item 1A of  the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Our ability to comply with the financial covenants in our credit agreements depends primarily on our ability to generate sufficient operating cash flow.

Our ability to comply with the financial covenants under the agreements governing our secured credit facilities will depend primarily on our success in generating sufficient operating cash flow. Under our credit agreements, we are subject to a total leverage ratio covenant, a minimum debt service coverage ratio covenant, a minimum equity to assets ratio covenant, a minimum fixed charge coverage ratio covenant, and a minimum liquidity balance 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 mat urity of our indebtedness were accelerated, we would not have sufficient funds to pay 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 agreements and applicable law.

Our substantial level of indebtedness could adversely affect our financial health and ability to compete.

As of September 30, 2010, we have approximately $198 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 will 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 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;

•

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;

•

make investments; and

•

change the nature of our business.

We may incur indebtedness 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, 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 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.

 

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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 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 management 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 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;

•

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.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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 conjunction with exercises of stock options, the Company periodically repurchases shares from recipients to cover some of the exercise price of the options being exercised.  The following table provides information about the Company’s repurchases of shares during the three months ended September 30, 2010:

		Number of Shares Purchased				Average Price Paid per Share
July 1 to July 31			1			$	17.75
August 1 to August 31			3			$	17.82
September 1 to September 30			4			$	17.75
Total			8			$	17.78

 

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ITEM 6.

Exhibits

(a) The following exhibits are filed with this Quarterly Report on Form 10-Q:

 

10.45

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.

10.46

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.

31.1	Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2	Certification of Vice President - Finance and Chief Financial Officer 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.

 

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SIGNATURES

Pursuant to the requirements 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
	(Registrant)

 

 

	/s/Adele M. Skolits
	Adele M. Skolits
	Vice President - Finance and Chief Financial Officer
	Date: November 3, 2010

 

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EXHIBIT INDEX

	Exhibit No.		Exhibit
	10.45		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.
	10.46		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.
	31.1		Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
	31.2		Certification of Vice President - Finance and Chief Financial Officer 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.

 

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EXHIBIT 31.1

CERTIFICATION

I, Christopher E. French, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Shenandoah Telecommunications Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/S/ CHRISTOPHER E. FRENCH

Christopher E. French, President and Chief Executive Officer

Date:  November 3, 2010

 

 

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EXHIBIT 31.2

CERTIFICATION

I, Adele M. Skolits, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Shenandoah Telecommunications Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ADELE M. SKOLITS

Adele M. Skolits, Vice President - Finance and Chief Financial Officer

Date: November 3, 2010

 

 

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EXHIBIT 32

Written Statement of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Each of the undersigned, the President and Chief Executive Officer and the Vice President - Finance and Chief Financial Officer, of Shenandoah Telecommunications Company (the “Company”), hereby certifies that, on the date hereof:

(1)           The quarterly report on Form 10-Q of the Company for the three months ended June 30, 2010 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           Information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

	/S/CHRISTOPHER E. FRENCH
	Christopher E. French
	President and Chief Executive Officer
	November 3, 2010
	/S/ADELE M. SKOLITS
	Adele M. Skolits
	Vice President - Finance and
	Chief Financial Officer
	November 3, 2010

The foregoing certification is being furnished solely pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.  This certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to liability under that section.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

 

 

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