UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 
For the transition period from__________ to __________

Commission File No.: 000-09881
 

SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)

VIRGINIA
 
54-1162807
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

500 Shentel Way, Edinburg, Virginia    22824
(Address of principal executive offices)  (Zip Code)

(540) 984-4141
(Registrant's telephone number, including area code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer  þ
Non-accelerated filer  o
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No þ
 
The number of shares of the registrant’s common stock outstanding on October 24, 2013 was 24,016,499.
 



SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX

 
 
Page
Numbers
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
3-4
 
 
 
 
5
 
 
 
 
6
 
 
7-8
 
 
 
 
9-14
 
 
 
Item 2.
15-30
 
 
 
Item 3.
31
 
 
 
Item 4.
32
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1A.
33
 
 
 
Item 2.
33
 
 
 
Item 6.
34
 
 
 
 
35
 
 
 
 
36

2

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
ASSETS
 
September 30,
2013
   
December 31,
2012
 
 
 
   
 
Current Assets
 
   
 
Cash and cash equivalents
 
$
61,955
   
$
71,086
 
Accounts receivable, net
   
24,255
     
25,274
 
Income taxes receivable
   
10,329
     
4,705
 
Materials and supplies
   
8,807
     
9,789
 
Prepaid expenses and other
   
5,602
     
4,749
 
Deferred income taxes
   
1,022
     
832
 
Total current assets
   
111,970
     
116,435
 
 
               
Investments, including $2,325 and $2,064 carried at fair value
   
8,976
     
8,214
 
 
               
Property, plant and equipment, net
   
395,456
     
365,474
 
 
               
Other Assets
               
Intangible assets, net
   
71,673
     
74,942
 
Deferred charges and other assets, net
   
9,424
     
5,675
 
Net other assets
   
81,097
     
80,617
 
Total assets
 
$
597,499
   
$
570,740
 

See accompanying notes to unaudited condensed consolidated financial statements.

(Continued)

3

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


LIABILITIES AND SHAREHOLDERS' EQUITY
 
September 30,
2013
   
December 31,
2012
 
 
 
   
 
Current Liabilities
 
   
 
Current maturities of long-term debt
 
$
-
   
$
1,977
 
Accounts payable
   
23,631
     
31,729
 
Advanced billings and customer deposits
   
11,161
     
11,190
 
Accrued compensation
   
3,852
     
2,671
 
Accrued liabilities and other
   
9,823
     
10,573
 
Total current liabilities
   
48,467
     
58,140
 
 
               
Long-term debt, less current maturities
   
230,200
     
230,200
 
 
               
Other Long-Term Liabilities
               
Deferred income taxes
   
64,954
     
57,896
 
Deferred lease payable
   
5,884
     
4,903
 
Asset retirement obligations
   
6,214
     
5,896
 
Other liabilities
   
6,893
     
5,857
 
Total other liabilities
   
83,945
     
74,552
 
 
               
Commitments and Contingencies
               
 
               
Shareholders' Equity
               
Common stock
   
25,908
     
24,688
 
Accumulated other comprehensive income (loss)
   
2,046
     
(863
)
Retained earnings
   
206,933
     
184,023
 
Total shareholders' equity
   
234,887
     
207,848
 
 
               
Total liabilities and shareholders' equity
 
$
597,499
   
$
570,740
 

See accompanying notes to unaudited condensed consolidated financial statements.

4

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(in thousands, except per share amounts)

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
Operating revenues
 
$
77,513
   
$
72,876
   
$
230,976
   
$
213,077
 
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
31,778
     
32,995
     
93,006
     
92,067
 
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below
   
17,481
     
17,680
     
49,966
     
47,788
 
Depreciation and amortization
   
14,992
     
16,794
     
45,034
     
47,860
 
Total operating expenses
   
64,251
     
67,469
     
188,006
     
187,715
 
Operating income
   
13,262
     
5,407
     
42,970
     
25,362
 
 
                               
Other income (expense):
                               
Interest expense
   
(2,050
)
   
(2,323
)
   
(6,270
)
   
(5,641
)
Gain (loss) on investments, net
   
348
     
212
     
526
     
815
 
Non-operating income, net
   
377
     
169
     
1,356
     
616
 
Income from continuing operations before income taxes
   
11,937
     
3,465
     
38,582
     
21,152
 
 
                               
Income tax expense
   
5,220
     
2,050
     
15,672
     
9,608
 
Net income from continuing operations
   
6,717
     
1,415
     
22,910
     
11,544
 
Losses from discontinued operations, net of tax benefits of $0, $29, $0, and $97, respectively
   
-
     
(54
)
   
-
     
(157
)
Net income
 
$
6,717
   
$
1,361
   
$
22,910
   
$
11,387
 
Other comprehensive income:
                               
Unrealized (loss) gain on interest rate hedge, net of tax
   
(398
)
   
(1,136
)
   
2,909
     
(1,136
)
Comprehensive income
 
$
6,319
   
$
225
   
$
25,819
   
$
10,251
 
 
                               
Basic and diluted income (loss) per share:
                               
Net income from continuing operations
 
$
0.28
   
$
0.06
   
$
0.95
   
$
0.48
 
Losses from discontinued operations
   
-
     
-
     
-
     
(0.01
)
Net income
 
$
0.28
   
$
0.06
   
$
0.95
   
$
0.47
 
 
                               
Weighted average shares outstanding, basic
   
24,010
     
23,875
     
23,993
     
23,858
 
Weighted average shares, diluted
   
24,125
     
23,956
     
24,078
     
23,905
 

5

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)

 
 
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
Balance, December 31, 2011
   
23,838
   
$
22,043
   
$
175,616
   
$
-
   
$
197,659
 
 
                                       
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
   
23,963
   
$
24,688
   
$
184,023
   
$
(863
)
 
$
207,848
 
 
                                       
Net income
   
-
     
-
     
22,910
     
-
     
22,910
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
2,909
     
2,909
 
Stock based compensation
   
-
     
1,540
     
-
     
-
     
1,540
 
Stock options exercised
   
52
     
939
                     
939
 
Common stock issued for share awards
   
68
     
-
     
-
     
-
     
-
 
Common stock issued
   
-
     
8
     
-
     
-
     
8
 
Common stock repurchased
   
(66
)
   
(1,297
)
   
-
     
-
     
(1,297
)
Net excess tax benefit from stock options exercised
   
-
     
30
     
-
     
-
     
30
 
Balance, September 30, 2013
   
24,017
   
$
25,908
   
$
206,933
   
$
2,046
   
$
234,887
 

6

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
 
Nine Months Ended
September 30,
 
 
 
2013
   
2012
 
 
 
   
 
Cash Flows From Operating Activities
 
   
 
Net income
 
$
22,910
   
$
11,387
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
41,749
     
42,692
 
Amortization
   
3,285
     
5,168
 
Provision for bad debt
   
1,504
     
2,135
 
Stock based compensation expense
   
1,540
     
1,425
 
Excess tax benefits on stock awards
   
(69
)
   
(106
)
Deferred income taxes
   
4,950
     
(4,473
)
Net loss on disposal of equipment
   
234
     
64
 
Realized (gain) loss on disposal of investments
   
1
     
(35
)
Unrealized gains on investments
   
(233
)
   
(250
)
Net (gain) loss from patronage and equity investments
   
(627
)
   
(764
)
Write-off unamortized loan fees
   
-
     
780
 
Other
   
1,976
     
1,215
 
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
   
(510
)
   
(5,298
)
Materials and supplies
   
982
     
220
 
Income taxes receivable
   
(5,609
)
   
12,495
 
Increase (decrease) in:
               
Accounts payable
   
885
     
(1,671
)
Deferred lease payable
   
981
     
446
 
Income taxes payable
   
-
     
12,984
 
Other prepaids, deferrals and accruals
   
(431
)
   
(959
)
 
               
Net cash provided by operating activities
 
$
73,518
   
$
77,455
 
 
               
Cash Flows from Investing Activities
               
Purchase and construction of property, plant, and equipment
   
(80,784
)
   
(53,611
)
Proceeds from sale of assets
   
271
     
161
 
Cash received from sales of Converged Services' properties
   
25
     
3,265
 
Purchase of investment securities
   
(13
)
   
-
 
Proceeds from sale of investment securities
   
110
     
1,203
 
 
               
Net cash used in investing activities
 
$
(80,391
)
 
$
(48,982
)
 
(Continued)
7

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
 
Nine Months Ended
September 30,
 
 
 
2013
   
2012
 
 
 
   
 
Cash Flows From Financing Activities
 
   
 
Principal payments on long-term debt
 
$
(1,977
)
 
$
(177,655
)
Amount borrowed under debt agreements
   
-
     
230,000
 
Cash paid for debt issuance costs
   
-
     
(2,418
)
Excess tax benefits on stock awards
   
69
     
106
 
Repurchases of stock
   
(1,297
)
   
(144
)
Proceeds from stock issuances
   
947
     
411
 
 
               
Net cash (used in) / provided by financing activities
 
$
(2,258
)
 
$
50,300
 
 
               
Net (decrease) increase in cash and cash equivalents
 
$
(9,131
)
 
$
78,773
 
 
               
Cash and cash equivalents:
               
Beginning
   
71,086
     
15,874
 
Ending
 
$
61,955
   
$
94,647
 
 
               
Supplemental Disclosures of Cash flow Information
               
Cash payments for:
               
 
               
Interest
 
$
6,476
   
$
4,738
 
 
               
Income taxes (received) paid
 
$
16,330
   
$
(11,491
)

During 2013, the Company traded in certain PCS equipment and received credits of $14,242 against the purchase price of new equipment.

At September 30, 2013, accounts payable included approximately $15.6 million associated with capital expenditures related to the Network Vision project, down from approximately $25 million at December 31, 2012

See accompanying notes to unaudited condensed consolidated financial statements.
8

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein.  All such adjustments were of a normal and recurring nature.  These statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  The balance sheet information at December 31, 2012 was derived from the audited December 31, 2012 consolidated balance sheet.  Operating revenues and income from operations for any interim period are not necessarily indicative of results that may be expected for the entire year.

2.  Discontinued Operations

In September 2008, the Company announced its intention to sell its Converged Services operation, the related assets and liabilities were reclassified as held for sale in the consolidated balance sheet and the historical operating results were reclassified as discontinued operations, and depreciation and amortization on long-lived assets was discontinued.
As of June 30, 2013, all properties had been disposed of.  Revenues and losses before taxes associated with discontinued operations were $96 thousand and $83 thousand, respectively, for the three months ended September 30, 2012, and $1,061 thousand and $254 thousand, respectively, for the nine months ended September 30, 2012.  Comparable amounts for 2013 were not significant.

3.  Property, Plant and Equipment

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


 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
Plant in service
 
$
619,302
   
$
586,216
 
Plant under construction
   
21,535
     
25,469
 
 
   
640,837
     
611,685
 
Less accumulated amortization and depreciation
   
245,381
     
246,211
 
Net property, plant and equipment
 
$
395,456
   
$
365,474
 

During the first quarter of 2012, the Company entered into agreements with Sprint and Alcatel-Lucent to begin updating the Company’s Wireless network.  The update uses base station equipment acquired from Alcatel-Lucent in conjunction with Sprint’s wireless network upgrade plan known as Network Vision.  Beginning in the second quarter of 2012, the Company began replacing cell site equipment at a number of its cell sites.  As of September 30, 2013, 500 of its 525 sites had been upgraded. The remaining 25 sites will be upgraded when outstanding leasing and zoning issues are resolved. The Company accelerated depreciation on these assets so that net book value at time of trade-in would equal the value to be realized upon trade-in.  During 2012, the Company recognized approximately $8.4 million of accelerated depreciation expense for Network Vision related activities, including $7.1 million in the first nine months of 2012; the first nine months of 2013 included $3.1 million of accelerated depreciation expense.

4.  Earnings per share

Basic net income (loss) per share was computed on the weighted average number of shares outstanding.  Diluted net income (loss) 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 764 thousand and 668 thousand shares and options outstanding at September 30, 2013 and 2012, respectively, 293 thousand and 346 thousand were anti-dilutive, respectively.  These options have been excluded from the computations of diluted earnings per share for their respective period.  There were no adjustments to net income for either period.
9

5.  Investments Carried at Fair Value

Investments include $2.3 million and $2.1 million of investments carried at fair value as of September 30, 2013 and December 31, 2012, respectively, consisting of equity, bond and money market mutual funds.  These investments were acquired under a rabbi trust arrangement related to a non-qualified supplemental retirement plan maintained by the Company.  During the nine months ended September 30, 2013, the Company recognized $1 thousand in net losses on dispositions of investments, recognized $28 thousand in dividend and interest income from investments, and recorded net unrealized gains of $233 thousand on these investments.  Fair values for these investments held under the rabbi trust were determined by level 1 quoted market prices for the underlying mutual funds.

6.  Financial Instruments

Financial instruments on the consolidated balance sheets that approximate 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.

7.  Derivative Instruments, Hedging Activities and Accumulated Other Comprehensive Income

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.

The Company entered into a pay-fixed, receive-variable interest rate swap of $63.3 million of notional principal in August 2010.  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 are recorded in interest expense each reporting period.  Changes in fair value recorded in interest expense for the three months ended September 30, 2013 and 2012 were decreases of $33 thousand and $55 thousand, respectively; for the nine months ended September 30, 2013 and 2012, the changes were decreases of $239 thousand and $106 thousand, respectively. This swap expired in July 2013.

The Company entered into a pay-fixed, receive-variable interest rate swap of $174.6 million of 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 million as of September 30, 2013.

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 swap designated and that qualifies as a cash flow hedge are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 30, 2013, the Company estimates that $1.6 million will be reclassified as an increase to interest expense during the next twelve months due to the interest rate swap since the fixed interest rate paid on the hedge exceeds the variable interest rate on the debt.

10

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 September 30, 2013 and December 31, 2012 (in thousands; amounts in parentheses indicate debits):


 
Derivatives
 
 
  
 
Fair Value as of
 
 
Balance Sheet
 
September 30,
   
December 31,
 
 
Location
 
2013
   
2012
 
Derivatives not designated as hedging instruments:
 
   
 
Interest rate swaps
Accrued liabilities and other
 
$
-
   
$
239
 
 
  
 
$
-
   
$
239
 
 
 
               
Derivatives designated as hedging instruments:
               
Interest rate swaps
Accrued liabilities and other
 
$
1,598
   
$
1,613
 
 
Deferred charges, and other assets net
   
(5,019
)
   
(177
)
Total derivatives designated as hedging instruments
 
$
(3,421
)
 
$
1,436
 

The fair value of interest rate swaps is determined using a pricing model with inputs that are observable in the market (level 2 fair value inputs).

The table below presents change in accumulated other comprehensive income by component for the nine months ended September 30, 2013 (in thousands; amounts in parentheses indicate debits):

 
 
Gains and (Losses) on Cash Flow Hedges
   
Income
Taxes
   
Accumulated Other Comprehensive Income (Loss)
 
Balance as of December 31, 2012
 
$
(1,436
)
 
$
573
   
$
(863
)
Other comprehensive income before reclassifications
   
3,623
     
(1,452
)
   
2,171
 
Amounts reclassified from accumulated other comprehensive income (to interest expense)
   
1,234
     
(496
)
   
738
 
Net current period other comprehensive income
   
4,857
     
(1,948
)
   
2,909
 
Balance as of September 30, 2013
 
$
3,421
   
$
(1,375
)
 
$
2,046
 

8.  Segment Information

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.  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.   A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.
11

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.  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.

The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of northwestern Rockingham County and 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.

Selected financial data for each segment is as follows:

Three months ended September 30, 2013
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
(in thousands)
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
 
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
 
   
   
   
   
   
 
Service revenues
 
$
45,938
   
$
17,630
   
$
3,860
   
$
-
   
$
-
   
$
67,428
 
Other
   
2,550
     
2,874
     
4,661
     
-
     
-
     
10,085
 
Total external revenues
   
48,488
     
20,504
     
8,521
     
-
     
-
     
77,513
 
Internal revenues
   
1,090
     
19
     
5,127
     
-
     
(6,236
)
   
-
 
Total operating revenues
   
49,578
     
20,523
     
13,648
     
-
     
(6,236
)
   
77,513
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
17,969
     
13,333
     
6,099
     
-
     
(5,623
)
   
31,778
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
9,317
     
6,188
     
1,777
     
812
     
(613
)
   
17,481
 
Depreciation and amortization
   
6,799
     
5,682
     
2,502
     
9
     
-
     
14,992
 
Total operating expenses
   
34,085
     
25,203
     
10,378
     
821
     
(6,236
)
   
64,251
 
Operating income (loss)
 
$
15,493
   
$
(4,680
)
 
$
3,270
   
$
(821
)
 
$
-
   
$
13,262
 
 
Three months ended September 30, 2012
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
(in thousands)
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
 
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
 
   
   
   
   
   
 
Service revenues
 
$
41,517
   
$
16,509
   
$
3,741
   
$
-
   
$
-
   
$
61,767
 
Other
   
3,307
     
2,413
     
5,389
     
-
     
-
     
11,109
 
Total external revenues
   
44,824
     
18,922
     
9,130
     
-
     
-
     
72,876
 
Internal revenues
   
837
     
79
     
4,597
     
-
     
(5,513
)
   
-
 
Total operating revenues
   
45,661
     
19,001
     
13,727
     
-
     
(5,513
)
   
72,876
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
19,121
     
12,521
     
6,302
     
2
     
(4,951
)
   
32,995
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
9,651
     
6,199
     
1,752
     
640
     
(562
)
   
17,680
 
Depreciation and amortization
   
8,643
     
5,908
     
2,233
     
10
     
-
     
16,794
 
Total operating expenses
   
37,415
     
24,628
     
10,287
     
652
     
(5,513
)
   
67,469
 
Operating income (loss)
 
$
8,246
   
$
(5,627
)
 
$
3,440
   
$
(652
)
 
$
-
   
$
5,407
 
12

Nine months ended September 30, 2013
 
   
   
   
   
 
 
 
   
   
   
   
 
(in thousands)
 
   
   
   
   
 
 
 
   
   
   
   
 
 
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
 
   
   
   
   
   
 
Service revenues
 
$
136,365
   
$
52,575
   
$
11,680
   
$
-
   
$
-
   
$
200,620
 
Other
   
7,897
     
7,875
     
14,584
     
-
     
-
     
30,356
 
Total external revenues
   
144,262
     
60,450
     
26,264
     
-
     
-
     
230,976
 
Internal revenues
   
3,238
     
121
     
14,935
     
-
     
(18,294
)
   
-
 
Total operating revenues
   
147,500
     
60,571
     
41,199
     
-
     
(18,294
)
   
230,976
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
53,354
     
37,974
     
18,282
     
-
     
(16,604
)
   
93,006
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
27,152
     
17,192
     
5,147
     
2,165
     
(1,690
)
   
49,966
 
Depreciation and amortization
   
20,608
     
17,094
     
7,308
     
24
     
-
     
45,034
 
Total operating expenses
   
101,114
     
72,260
     
30,737
     
2,189
     
(18,294
)
   
188,006
 
Operating income (loss)
 
$
46,386
   
$
(11,689
)
 
$
10,462
   
$
(2,189
)
 
$
-
   
$
42,970
 

Nine months ended September 30, 2012
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
(in thousands)
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
 
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
 
   
   
   
   
 
Service revenues
 
$
120,107
   
$
48,918
   
$
11,272
   
$
-
   
$
-
   
$
180,297
 
Other
   
9,991
     
7,446
     
15,343
     
-
     
-
     
32,780
 
Total external revenues
   
130,098
     
56,364
     
26,615
     
-
     
-
     
213,077
 
Internal revenues
   
2,495
     
233
     
13,803
     
-
     
(16,531
)
   
-
 
Total operating revenues
   
132,593
     
56,597
     
40,418
     
-
     
(16,531
)
   
213,077
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
52,432
     
36,381
     
18,048
     
25
     
(14,819
)
   
92,067
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
25,746
     
16,427
     
5,107
     
2,220
     
(1,712
)
   
47,788
 
Depreciation and amortization
   
23,153
     
17,963
     
6,691
     
53
     
-
     
47,860
 
Total operating expenses
   
101,331
     
70,771
     
29,846
     
2,298
     
(16,531
)
   
187,715
 
Operating income (loss)
 
$
31,262
   
$
(14,174
)
 
$
10,572
   
$
(2,298
)
 
$
-
   
$
25,362
 

A reconciliation of the total of the reportable segments’ operating income to consolidated income from continuing operations before income taxes is as follows:

 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
Total consolidated operating income
 
$
13,262
   
$
5,407
 
Interest expense
   
(2,050
)
   
(2,323
)
Non-operating income (expense), net
   
725
     
381
 
Income from continuing operations before income taxes
 
$
11,937
   
$
3,465
 

 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
Total consolidated operating income
 
$
42,970
   
$
25,362
 
Interest expense
   
(6,270
)
   
(5,641
)
Non-operating income (expense), net
   
1,882
     
1,431
 
Income from continuing operations before income taxes
 
$
38,582
   
$
21,152
 
13

The Company's assets by segment are as follows:

(in thousands)
 
 
 
September 30,
 
December 31,
 
 
2013
 
2012
 
 
 
 
Wireless
 
$
204,527
   
$
179,929
 
Cable
   
207,405
     
202,436
 
Wireline
   
90,892
     
88,776
 
Other
   
465,130
     
458,650
 
Combined totals
   
967,954
     
929,791
 
Inter-segment eliminations
   
(370,455
)
   
(359,051
)
Consolidated totals
 
$
597,499
   
$
570,740
 

9.  Income Taxes

The Company files U.S. federal income tax returns and various state and local income tax returns.  With few exceptions, years prior to 2010 are no longer subject to examination. The Company is under audit in the state of Maryland for the 2009, 2010 and 2011 tax years, and in the state of Pennsylvania for the 2009 tax year.  No other state or federal income tax audits were in process as of September 30, 2013.

10.  Long-Term Debt

As of September 30, 2013 and December 31, 2012, the Company’s outstanding long-term debt consisted of the following:

(In thousands)

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
   
 
CoBank (fixed term loan)
 
$
-
   
$
1,876
 
Term Loan A
   
230,000
     
230,000
 
Other debt
   
200
     
301
 
 
   
230,200
     
232,177
 
Current maturities
   
-
     
1,977
 
Total long-term debt
 
$
230,200
   
$
230,200
 

As of September 30, 2013, the Company was in compliance with the covenants in its Credit Agreement.

11.  Billing Dispute

In early 2012, the Company received notification from an interexchange carrier disputing charges of approximately $3.0 million included in the Company’s intrastate tariffed billings that have been in place since 1998.  While the Company believes that its billings were correct and appropriate, it is currently in discussions with the carrier regarding a settlement of the dispute.

12.  Subsequent Event – Dividend Declaration

On October 22, 2013, the Company announced that the Board of Directors had declared a cash dividend of $0.36 per share, an increase of $0.03 per share or 9% over the 2012 dividend.  The dividend will be payable December 2, 2013, to shareholders of record on November 6, 2013.  The total payout to shareholders will be approximately $8.7 million.

14

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

This management’s discussion and analysis includes “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.  When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements.  All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters are forward-looking statements.  We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct.  The Company’s actual results could be materially different from its expectations because of various factors, including those discussed below and under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2012.  The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2012, including the financial statements and related notes included therein.

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), local exchange telephone services, video, internet and data services, long distance, fiber optics facilities, and leased tower facilities. The Company has the following three reportable segments, which it operates and manages as strategic business units organized by lines of business:

* 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.  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.
 
* The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long-distance access services throughout Shenandoah County and portions of Rockingham and Augusta Counties, 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.
 
* A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.

15

Results of Operations

Three Months Ended September 30, 2013 Compared with the Three Months Ended September 30, 2012

Consolidated Results

The Company’s consolidated results from continuing operations for the third quarters of 2013 and 2012 are summarized as follows:
 
 
 
Three Months Ended
   
   
 
(in thousands)
 
September 30,
   
Change
 
 
 
2013
   
2012
   
$
   
 
%
 
 
 
   
   
         
Operating revenues
 
$
77,513
   
$
72,876
   
$
4,637
     
6.4
 
Operating expenses
   
64,251
     
67,469
     
(3,218
)
   
(4.8
)
Operating income
   
13,262
     
5,407
     
7,855
     
145.3
 
 
                               
Interest expense
   
(2,050
)
   
(2,323
)
   
273
     
11.8
 
Other income (expense)
   
725
     
381
     
344
     
90.3
 
Income before taxes
   
11,937
     
3,465
     
8,472
     
244.5
 
Income tax expense
   
5,220
     
2,050
     
3,170
     
154.6
 
Net income from continuing operations
 
$
6,717
   
$
1,415
   
$
5,302
     
374.7
 

Operating revenues

For the three months ended September 30, 2013, operating revenues increased $4.6 million, or 6.4%. Intercompany revenues are included in each segment’s operating revenues, but are eliminated in consolidation.  These intercompany revenues increased $0.7 million over the third quarter of 2012.   Before consolidation, wireless segment revenues increased $3.7 million, cable segment revenues increased $1.6 million and wireline segment revenues decreased $0.6 million. In the wireless segment, postpaid service revenues increased $2.0 million over the third quarter of 2012, while prepaid service revenues grew $2.4 million. Wireless and cable segment revenue increases reflect growth in subscriber counts and revenue per subscriber.  Wireline segment revenue decreased due to the conclusion of billings for transition services to buyers of Converged Services’ properties.

Operating expenses

For the three months ended September 30, 2013, operating expenses decreased $3.2 million, or 4.8%, compared to the 2012 period.  Intercompany expenses are included in each segment’s operating expenses, but are eliminated in consolidation.  These intercompany expenses increased $0.7 million over the third quarter of 2012.  Before consolidation, wireless segment expenses decreased $3.3 million, driven by a $1.8 million reduction in depreciation and a $1.1 million reduction in cost of goods and services. Cable segment operating expenses increased $0.6 million, including $0.5 million in maintenance and third party costs.  Wireline segment operating expenses increased $0.1 million.

Interest and other income (expense)

The decrease in interest expense was primarily driven by the 2012 write-off of $0.8 million in unamortized loan costs for the purpose of refinancing existing debt. The decrease was partially offset by a $0.5 million increase in 2013 interest expense due to higher outstanding debt balances following the refinance in September 2012.

Other income increased due to higher patronage income, arising from the September 2012 Amended and Restated Credit Agreement, and higher investment gains.

16

Income tax expense

The Company’s effective tax rate on income from continuing operations decreased from 59.2% in the quarter ended September 30, 2012 to 43.7% in the 2013 quarter, principally due to changes in the form and simplification of the structure of the Company’s subsidiaries undertaken in 2012. The 2013 and 2012 third quarters included return-to-provision adjustments, of $0.5 million and $0.8 million, respectively, which increased the effective tax rate by 4.6% and 23% in 2013 and 2012, respectively. The 2013 adjustments primarily resulted from finalizing estimated state tax impacts of the organizational changes implemented during 2012. The effective tax rate in the 2012 quarter was impacted by return-to-provision adjustments related to the finalized 2011 tax returns.

Net income from continuing operations

For the three months ended September 30, 2013, net income from continuing operations increased $5.3 million, or 375%, reflecting growth in subscriber counts and revenue per subscriber in both the wireless and cable segments, reduction of operating expenses on the wireless segment, and improvements in interest expense and other income.  Additionally, the 2012 results were negatively impacted by the write-off of unamortized loan costs, storm damage and accelerated depreciation of 3rd generation wireless technology.

Nine Months Ended September 30, 2013 Compared with the Nine Months Ended September 30, 2012

Consolidated Results

The Company’s consolidated results from continuing operations for the first nine months of 2013 and 2012 are summarized as follows:

 
 
Nine Months Ended
   
   
 
(in thousands)
 
September 30,
   
Change
 
 
 
2013
   
2012
   
$
   
 
%
 
 
 
   
   
         
Operating revenues
 
$
230,976
   
$
213,077
   
$
17,899
     
8.4
 
Operating expenses
   
188,006
     
187,715
     
291
     
0.2
 
Operating income
   
42,970
     
25,362
     
17,608
     
69.4
 
 
                               
Interest expense
   
(6,270
)
   
(5,641
)
   
(629
)
   
(11.2
)
Other income (expense)
   
1,882
     
1,431
     
451
     
31.5
 
Income before taxes
   
38,582
     
21,152
     
17,430
     
82.4
 
Income tax expense
   
15,672
     
9,608
     
6,064
     
63.1
 
Net income from continuing operations
 
$
22,910
   
$
11,544
   
$
11,366
     
98.5
 

Operating revenues

For the nine months ended September 30, 2013, operating revenues increased $17.9 million, or 8.4%. Intercompany revenues are included in each segment’s operating revenues, but are eliminated in consolidation.  These intercompany revenues increased $1.8 million over the 2012 nine month period.  Before consolidation, wireless segment revenues increased $14.2 million, cable segment revenues increased $4.1 million and wireline segment revenues decreased $0.4 million.  Net postpaid service revenues increased $9.1 million, driven by smartphone fees and subscriber growth.  Net prepaid service revenues grew $7.1 million as average prepaid subscribers increased nearly 15% in 2013 over 2012. Other wireless segment revenues declined $1.8 million. Cable segment revenues increased due to a 2.9% increase in average revenue generating units and a 5.5% average price increase, compared to the 2012 period.

17

Operating expenses

For the nine months ended September 30, 2013, operating expenses increased $0.3 million, or 0.2%, compared to the 2012 period.  Intercompany expenses are included in each segment’s operating expenses, but are eliminated in consolidation.  These intercompany expenses increased $1.8 million over the nine months ended September 30, 2012.  Before consolidation, wireless segment operating expenses decreased $0.2 million. Increases included $3.1 million of network costs for rent and backhaul associated with the Network Vision upgrade and $1.2 million in selling, general and administrative costs for supporting the growing prepaid subscriber base. Partially offsetting these increases were decreases in prepaid cost of goods sold, which declined $2.0 million primarily due to lower costs for handsets, and depreciation and amortization expense, which declined $2.5 million primarily due to less accelerated depreciation in 2013 versus 2012.  Cable segment operating expenses increased $1.5 million, including $0.6 million in programming costs, $0.4 million in network costs and $0.4 in maintenance costs.  Wireline segment operating expenses increased $0.9 million, with an increase in depreciation of $0.6 million and network costs of $0.4 million, accounting for most of the increase.

Interest and other income (expense)

The increase in interest expense was driven by higher outstanding debt balances, partially offset by the $0.8 million write-off of unamortized loan costs in 2012. The changes were driven by the refinancing of debt in the third quarter of 2012.

Other income increased due to higher patronage income, arising from the September 2012 Amended and Restated Credit Agreement, and higher investment gains.

Income tax expense

The Company’s effective tax rate on income from continuing operations decreased from 45.4% in the nine months ended September 30, 2012 to 40.6% in the 2013 period, principally due to changes in the form and simplification of the structure of the Company’s subsidiaries undertaken in 2012. Both periods included return-to-provision adjustments, which increased the effective tax rate in each period, as discussed above.

Net income from continuing operations

For the nine months ended September 30, 2013, net income from continuing operations increased $11.4 million, or 98.5%, reflecting growth in subscriber counts and revenue per subscriber in both the wireless and cable segments, and lower depreciation expenses in the wireless segment.  These changes were partially offset by increases in other operating expenses incurred in support of this revenue growth and the network costs associated with the Company’s participation in the Network Vision project, and higher interest expenses.  Additionally, the 2012 results were negatively impacted by the write-off of unamortized loan costs, storm damage and accelerated depreciation of 3rd generation wireless technology.

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 Personal Communications, LLC (“PCS”), a Sprint PCS Affiliate.  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, LLC (“Mobile”).

PCS receives revenues from Sprint for subscribers that obtain service in PCS’s network coverage area.  PCS relies on Sprint to provide timely, accurate and complete information to record the appropriate revenue for each financial period.  Through July 31, 2013, postpaid revenues received from Sprint were recorded net of certain fees totaling 20% of net postpaid billed revenue retained by Sprint.  These fees included an 8% management fee and a 12% net service fee.

During the first quarter of 2012, the Company amended its affiliate agreement with Sprint to allow the Company to offer 4G LTE service on the Company’s Wireless network.  The 4G service uses base station equipment acquired from Alcatel-Lucent in conjunction with Sprint’s Network Vision project. Under the terms of this amendment, and based upon an analysis of the balance of payments between Sprint and Shentel, the net service fee increased to the maximum 14%, effective August 1, 2013. The management fee remained unchanged at 8%. Sprint also retains a 6% management fee on prepaid revenues.
18

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

 
 
September 30,
   
December 31,
   
September 30,
   
December 31,
 
 
 
2013
   
2012
   
2012
   
2011
 
 
 
   
   
   
 
Retail PCS Subscribers - Postpaid
   
267,667
     
262,892
     
258,867
     
248,620
 
Retail PCS Subscribers - Prepaid
   
132,669
     
128,177
     
122,454
     
107,100
 
PCS Market POPS (000) (1)
   
2,395
     
2,390
     
2,390
     
2,388
 
PCS Covered POPS (000) (1)
   
2,065
     
2,057
     
2,056
     
2,055
 
CDMA Base Stations (sites)
   
525
     
516
     
510
     
509
 
LTE-enabled sites (2)
   
458
     
200
     
36
     
-
 
LTE-covered POPS (000) (1)
   
1,961
     
1,131
     
121
     
-
 
EVDO-enabled sites
   
498
     
444
     
438
     
433
 
EVDO Covered POPS (000) (1)
   
2,052
     
2,029
     
2,028
     
2,027
 
Towers
   
153
     
150
     
149
     
149
 
Non-affiliate cell site leases
   
221
     
216
     
216
     
219
 
 
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
Gross PCS Subscriber Additions - Postpaid
   
15,754
     
18,427
     
46,762
     
50,500
 
Net PCS Subscriber Additions - Postpaid
   
1,370
     
3,842
     
4,775
     
10,247
 
Gross PCS Subscriber Additions - Prepaid
   
17,572
     
18,777
     
57,301
     
53,184
 
Net PCS Subscriber Additions - Prepaid
   
1,297
     
5,384
     
4,483
     
15,355
 
PCS Average Monthly Retail Churn % - Postpaid
   
1.80
%
   
1.89
%
   
1.76
%
   
1.77
%
PCS Average Monthly Retail Churn % - Prepaid
   
4.11
%
   
3.73
%
   
4.45
%
   
3.65
%

1) POPS refers to the estimated population of a given geographic area and is based on information purchased from third parties.  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 Company’s network.
2) LTE-enabled sites refer to cell sites with both 4G LTE equipment and Ethernet backhaul in service.

19

Three Months Ended September 30, 2013 Compared with the Three Months Ended September 30, 2012

 
 
Three Months Ended
   
 
 
 
September 30,
   
Change
 
(in thousands)
 
2013
   
2012
   
$
   
 
%
 
Segment operating revenues
 
   
   
         
Wireless service revenue
 
$
45,938
   
$
41,517
   
$
4,421
     
10.6
 
Tower lease revenue
   
2,611
     
2,286
     
325
     
14.2
 
Equipment revenue
   
1,257
     
1,436
     
(179
)
   
(12.5
)
Other revenue
   
(228
)
   
422
     
(650
)
   
(154.0
)
Total segment operating revenues
   
49,578
     
45,661
     
3,917
     
8.6
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
17,969
     
19,121
     
(1,152
)
   
(6.0
)
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below
   
9,317
     
9,651
     
(334
)
   
(3.5
)
Depreciation and amortization
   
6,799
     
8,643
     
(1,844
)
   
(21.3
)
Total segment operating expenses
   
34,085
     
37,415
     
(3,330
)
   
(8.9
)
Segment operating income
 
$
15,493
   
$
8,246
   
$
7,247
     
87.9
 

Operating revenues

Wireless service revenue increased $4.4 million, or 10.6%, for the three months ended September 30, 2013, compared to the comparable 2012 period.  Net postpaid service revenues increased $2.0 million, driven by smartphone fees and 3.8% year-over-year growth in average postpaid subscribers. As stated above, the net service fee increased from 12% of net billed revenues to 14% on August 1, 2013, reducing net postpaid service revenue by $0.6 million, approximately $0.3 million per month.  Net prepaid service revenues grew $2.4 million, or 30.8%, due to improved product mix and 10.3% growth in average prepaid subscribers over 2012.

The increase in tower lease revenue resulted primarily from rent increases related to tenants installing 4G equipment on our towers.

The decrease in other revenue primarily resulted from a $0.3 million adjustment to straight-line rent accruals at a small number of sites related to termination of Sprint iDEN leases and from a $0.2 million decline in federal Universal Service Fund (“USF”) revenue from Sprint.

Cost of goods and services

Cost of goods and services decreased $1.2 million, or 6.0%, in 2013 from the third quarter of 2012. Prepaid cost of goods decreased $2.0 million primarily due to lower rates per handset sold. Network costs increased $0.9 million, primarily due to increases in rent and backhaul associated with the Network Vision project. Maintenance expense grew $0.3 million due to increases in maintenance contracts that support the upgraded wireless network.

Selling, general and administrative

Selling, general and administrative costs decreased $0.3 million, or 3.5%, in the third quarter of 2013 from the comparable 2012 period.  Costs associated with supporting the existing prepaid subscriber base increased $0.6 million, while costs to add new prepaid subscribers decreased $0.8 million due to lower rates per subscriber. All other activity, including advertising and commission expenses associated with postpaid activities, decreased a total of $0.1 million.

20

Depreciation and amortization

Depreciation and amortization decreased $1.8 million in the third quarter of 2013 over the comparable 2012 period. Network Vision-related accelerated depreciation in the third quarter of 2013 totaled $0.5 million, down from $3.2 million in the third quarter of 2012.

Nine Months Ended September 30, 2013 Compared with the Nine Months Ended September 30, 2012

 
 
Nine Months Ended
   
   
 
(in thousands)
 
September 30,
   
Change
 
 
 
2013
   
2012
   
$
   
 
%
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Wireless service revenue
 
$
136,365
   
$
120,107
   
$
16,258
     
13.5
 
Tower lease revenue
   
7,748
     
6,816
     
932
     
13.7
 
Equipment revenue
   
3,859
     
4,307
     
(448
)
   
(10.4
)
Other revenue
   
(472
)
   
1,363
     
(1,835
)
   
(134.6
)
Total segment operating revenues
   
147,500
     
132,593
     
14,907
     
11.2
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
53,354
     
52,432
     
922
     
1.8
 
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below
   
27,152
     
25,746
     
1,406
     
5.5
 
Depreciation and amortization
   
20,608
     
23,153
     
(2,545
)
   
(11.0
)
Total segment operating expenses
   
101,114
     
101,331
     
(217
)
   
(0.2
)
Segment operating income
 
$
46,386
   
$
31,262
   
$
15,124
     
48.4
 

Operating revenues

Wireless service revenue increased $16.3 million, or 13.5%, for the nine months ended September 30, 2013, compared to the comparable 2012 period.  Net postpaid service revenues increased $9.1 million, driven by smartphone fees and 4.6% growth in period-over-period average postpaid subscribers. Net prepaid service revenues grew $7.1 million, or 31.3%, compared to the nine months ended September 30, 2012.  Average prepaid subscribers increased nearly 15% in 2013 over 2012, with changes in the mix of subscribers accounting for the remainder of the increase in prepaid service revenues.

The increase in tower lease revenue resulted primarily from rent increases related to tenants installing 4G equipment on our towers.

The decrease in other revenue primarily resulted from a $0.8 million adjustment to straight-line rent accruals at a small number of sites related to termination of Sprint iDEN leases and from a $0.3 million decline in federal Universal Service Fund (“USF”) revenue from Sprint.

Cost of goods and services

Cost of goods and services increased $0.9 million, or 1.8%, in 2013 from the first nine months of 2012.  Network costs increased $3.1 million, primarily due to increases in rent and backhaul associated with the Network Vision project. Maintenance expense grew $0.9 million due to increases in maintenance contracts that support the upgraded wireless network. Prepaid support costs increased $0.4 million as a result of the growing subscriber base. Prepaid cost of goods sold decreased $2.2 million due to lower rates per handset sold. Postpaid handset costs decreased $1.3 million primarily due to fewer handsets sold through Company-controlled channels in 2013.

Selling, general and administrative

Selling, general and administrative costs increased $1.4 million, or 5.5%, in the first nine months of 2013 over the comparable 2012 period.  Costs associated with supporting the existing prepaid subscriber base accounted for $2.0 million of the increase, while costs to add new prepaid subscribers were down $0.1 million. Advertising and commission expenses associated with postpaid activities decreased a total of $0.6 million.
21

Depreciation and amortization

Depreciation and amortization decreased $2.5 million in 2013 over the first nine months of 2012. Accelerated depreciation on assets to be replaced during Network Vision upgrades decreased from $7.1 million in the prior year period to $3.1 million in the current period.  The decrease in accelerated depreciation was partially offset by a 2012 favorable adjustment of $0.9 million related to asset retirement obligations associated with the upgrades.

Cable

The Cable segment provides analog, digital and high-definition television service under franchise agreements in portions of Virginia, West Virginia and western Maryland, as well as internet and voice services in these markets.

The following table shows selected operating statistics of the Cable segment as of the dates shown:
 
 
 
September 30,
   
December 31,
   
September 30,
   
December 31,
 
 
 
2013
   
2012
   
2012
   
2011
 
Homes Passed (1)
   
184,841
     
184,533
     
183,375
     
182,156
 
Customer Relationships (2)
                               
Video customers
   
57,637
     
59,089
     
60,443
     
62,835
 
Non-video customers
   
17,687
     
15,709
     
14,943
     
12,513
 
Total customer relationships
   
75,324
     
74,798
     
75,386
     
75,348
 
Video
                               
Customers (3)
   
59,791
     
61,559
     
62,526
     
64,979
 
Penetration (4)
   
32.3
%
   
33.4
%
   
34.1
%
   
35.7
%
Digital video penetration (5)
   
48.7
%
   
39.5
%
   
39.4
%
   
39.0
%
High-speed Internet
                               
Available Homes (6)
   
166,898
     
163,273
     
157,338
     
156,119
 
Customers (3)
   
44,630
     
41,025
     
40,387
     
37,021
 
Penetration (4)
   
26.7
%
   
25.1
%
   
25.7
%
   
23.7
%
Voice
                               
Available Homes (6)
   
161,932
     
154,552
     
150,944
     
143,235
 
Customers (3)
   
14,384
     
12,307
     
11,849
     
9,881
 
Penetration (4)
   
8.9
%
   
8.0
%
   
7.8
%
   
6.9
%
Total Revenue Generating Units (7)
   
118,805
     
114,891
     
114,762
     
111,881
 
Total Fiber Miles (8)
   
41,562
     
39,418
     
37,239
     
34,772
 
Fiber Route Miles
   
2,237
     
2,077
     
2,029
     
1,990
 

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 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.
22

Three Months Ended September 30, 2013 Compared with the Three Months Ended September 30, 2012

 
 
Three Months Ended
   
   
 
(in thousands)
 
September 30,
   
Change
 
 
 
2013
   
2012
   
$
   
 
%
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Cable service revenue
 
$
17,630
   
$
16,509
   
$
1,121
     
6.8
 
Equipment and other revenue
   
2,893
     
2,492
     
401
     
16.1
 
Total segment operating revenues
   
20,523
     
19,001
     
1,522
     
8.0
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
13,333
     
12,521
     
812
     
6.5
 
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below
   
6,188
     
6,199
     
(11
)
   
(0.2
)
Depreciation and amortization
   
5,682
     
5,908
     
(226
)
   
(3.8
)
Total segment operating expenses
   
25,203
     
24,628
     
575
     
2.3
 
Segment operating loss
 
$
(4,680
)
 
$
(5,627
)
 
$
947
     
16.8
 

Operating revenues

Cable segment service revenue increased $1.1 million, or 6.8%, due to a 3.6% increase in average revenue generating units, video price increases averaging 5.5% implemented in the first quarter of 2013 driven by rising programming costs, and customers selecting higher-priced digital TV services and higher-speed data access packages.

Operating expenses

Cable segment cost of goods and services increased $0.8 million, or 6.5%, in the third quarter of 2013 over the comparable 2012 period. Installation costs increased $0.3 million and maintenance costs increased $0.2 million over a prior year period that included $0.6 million of storm damage costs. Network costs increased a total of $0.2 million due to costs to support network growth. Cable programming costs increased $0.2 million as the impact of rising rates per subscriber outpaced declining video subscriber counts.

Selling, general and administrative expenses were flat against the prior year quarter as a $0.3 million reduction in current period bad debt expense was offset by increases in customer service costs, administrative expenses and operating taxes.

The decrease in depreciation and amortization expense consists of $0.5 million lower amortization on the customer base intangible asset recorded when the cable markets were acquired. The amortization of this asset declines on the anniversary of the acquisitions. The cost reduction was partially offset by higher depreciation expense on assets placed in service.
23

Nine Months Ended September 30, 2013 Compared with the Nine Months Ended September 30, 2012

 
 
Nine Months Ended
   
   
 
(in thousands)
 
September 30,
   
Change
 
 
 
2013
   
2012
   
$
   
 
%
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Cable service revenue
 
$
52,575
   
$
48,918
   
$
3,657
     
7.5
 
Equipment and other revenue
   
7,996
     
7,679
     
317
     
4.1
 
Total segment operating revenues
   
60,571
     
56,597
     
3,974
     
7.0
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
37,974
     
36,381
     
1,593