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 June 30, 2014
 
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 July 24, 2014 was 24,113,100.
 



SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
 
 
 
Page
 
 
Numbers
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
3-4
 
 
 
 
5
 
 
 
 
6
 
 
 
7-8
 
 
9-13
 
Item 2.
14-28
 
Item 3.
29
 
 
 
Item 4.      
30
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1A.
31
 
 
 
Item 2.
31
 
 
 
Item 6.
32
 
 
 
 
33
 
 
34

2

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

ASSETS
 
June 30,
2014
   
December 31,
2013
 
 
 
   
 
Current Assets
 
   
 
Cash and cash equivalents
 
$
72,085
   
$
38,316
 
Accounts receivable, net
   
26,844
     
25,824
 
Income taxes receivable
   
-
     
16,576
 
Materials and supplies
   
7,595
     
10,715
 
Prepaid expenses and other
   
4,411
     
5,580
 
Deferred income taxes
   
866
     
963
 
Total current assets
   
111,801
     
97,974
 
 
               
Investments, including $2,656 and $2,528 carried at fair value
   
9,668
     
9,332
 
 
               
Property, plant and equipment, net
   
405,810
     
408,963
 
 
               
Other Assets
               
Intangible assets, net
   
69,165
     
70,816
 
Deferred charges and other assets, net
   
7,559
     
9,921
 
Net other assets
   
76,724
     
80,737
 
Total assets
 
$
604,003
   
$
597,006
 
 
See accompanying notes to unaudited consolidated financial statements.

(Continued)
3

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

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
June 30,
2014
   
December 31,
2013
 
 
 
   
 
Current Liabilities
 
   
 
Current maturities of long-term debt
 
$
17,250
   
$
5,750
 
Accounts payable
   
8,478
     
12,604
 
Advanced billings and customer deposits
   
11,912
     
11,661
 
Accrued compensation
   
2,961
     
4,192
 
Income taxes payable
   
581
     
-
 
Accrued liabilities and other
   
8,333
     
9,787
 
Total current liabilities
   
49,515
     
43,994
 
 
               
Long-term debt, less current maturities
   
212,750
     
224,250
 
 
               
Other Long-Term Liabilities
               
Deferred income taxes
   
68,228
     
74,547
 
Deferred lease payable
   
6,658
     
6,156
 
Asset retirement obligations
   
6,763
     
6,485
 
Other liabilities
   
8,326
     
7,259
 
Total other long-term liabilities
   
89,975
     
94,447
 
 
               
Commitments and Contingencies
               
 
               
Shareholders’ Equity
               
Common stock
   
28,236
     
26,759
 
Accumulated other comprehensive income
   
1,334
     
2,594
 
Retained earnings
   
222,193
     
204,962
 
Total shareholders’ equity
   
251,763
     
234,315
 
 
               
Total liabilities and shareholders’ equity
 
$
604,003
   
$
597,006
 

See accompanying notes to unaudited consolidated financial statements.

4

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
 
 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
 
 
   
   
   
 
 
 
   
   
   
 
Operating revenues
 
$
81,416
   
$
77,454
   
$
161,868
   
$
153,463
 
 
                               
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
32,403
     
30,528
     
64,639
     
61,229
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
16,625
     
16,355
     
33,773
     
32,484
 
Depreciation and amortization
   
16,595
     
16,071
     
31,983
     
30,042
 
Total operating expenses
   
65,623
     
62,954
     
130,395
     
123,755
 
Operating income
   
15,793
     
14,500
     
31,473
     
29,708
 
 
                               
Other income (expense):
                               
Interest expense
   
(2,065
)
   
(2,068
)
   
(4,112
)
   
(4,220
)
Gain on investments, net
   
114
     
30
     
96
     
178
 
Non-operating income, net
   
459
     
458
     
1,086
     
979
 
Income before taxes
   
14,301
     
12,920
     
28,543
     
26,645
 
 
                               
Income tax expense
   
5,686
     
5,078
     
11,312
     
10,452
 
Net income
 
$
8,615
   
$
7,842
   
$
17,231
   
$
16,193
 
 
                               
Other comprehensive income (loss):
                               
Unrealized gain (loss) on interest rate hedge, net of tax
   
(913
)
   
2,775
     
(1,260
)
   
3,307
 
Comprehensive Income
 
$
7,702
   
$
10,617
   
$
15,971
   
$
19,500
 
 
                               
Earnings per share:
                               
Basic
 
$
0.36
   
$
0.33
   
$
0.72
   
$
0.67
 
Diluted
 
$
0.35
   
$
0.33
   
$
0.71
   
$
0.67
 
 
                               
Weighted average shares outstanding, basic
   
24,102
     
23,996
     
24,080
     
23,985
 
 
                               
Weighted average shares outstanding, diluted
   
24,320
     
24,078
     
24,271
     
24,055
 
5

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED 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, 2012
   
23,962
   
$
24,688
   
$
184,023
   
$
(863
)
 
$
207,848
 
 
                                       
Net income
   
-
     
-
     
29,586
     
-
     
29,586
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
3,457
     
3,457
 
Dividends declared ($0.36 per share)
   
-
     
-
     
(8,647
)
   
-
     
(8,647
)
Dividends reinvested in common stock
   
20
     
475
     
-
     
-
     
475
 
Stock based compensation
   
-
     
1,938
     
-
     
-
     
1,938
 
Common stock issued through exercise of incentive stock  options
   
66
     
1,186
     
-
     
-
     
1,186
 
Common stock issued for share awards
   
68
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
10
     
-
     
-
     
10
 
Common stock repurchased
   
(77
)
   
(1,600
)
   
-
     
-
     
(1,600
)
Net excess tax benefit from stock options exercised
   
-
     
62
     
-
     
-
     
62
 
 
                                       
Balance, December 31, 2013
   
24,040
   
$
26,759
   
$
204,962
   
$
2,594
   
$
234,315
 
 
                                       
Net income
   
-
     
-
     
17,231
     
-
     
17,231
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(1,260
)
   
(1,260
)
Stock based compensation
   
-
     
1,730
     
-
     
-
     
1,730
 
Stock options exercised
   
50
     
1,119
     
-
     
-
     
1,119
 
Common stock issued for share awards
   
81
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
5
     
-
     
-
     
5
 
Common stock repurchased
   
(59
)
   
(1,771
)
   
-
     
-
     
(1,771
)
Net excess tax benefit from stock options exercised
   
-
     
394
     
-
     
-
     
394
 
Balance, June  30, 2014
   
24,113
   
$
28,236
   
$
222,193
   
$
1,334
   
$
251,763
 

6

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
Six Months Ended
June 30,
 
 
 
2014
   
2013
 
 
 
   
 
Cash Flows From Operating Activities
 
   
 
Net income
 
$
17,231
   
$
16,193
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
30,325
     
27,714
 
Amortization
   
1,658
     
2,328
 
Provision for bad debt
   
550
     
952
 
Stock based compensation expense
   
1,730
     
1,045
 
Excess tax benefits on stock awards
   
(394
)
   
(61
)
Deferred income taxes
   
(4,983
)
   
253
 
Net (gain) loss on disposal of equipment
   
(313
)
   
167
 
Realized gain on disposal of investments
   
-
     
(2
)
Unrealized gains on investments
   
(74
)
   
(103
)
Net gains from patronage and equity investments
   
(289
)
   
(311
)
Other
   
263
     
1,152
 
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
   
(1,570
)
   
(722
)
Materials and supplies
   
3,120
     
1,778
 
Income taxes receivable
   
16,576
     
(84
)
Increase (decrease) in:
               
Accounts payable
   
2,367
     
2,444
 
Deferred lease payable
   
502
     
679
 
Income taxes payable
   
581
     
-
 
Other prepaids, deferrals and accruals
   
(704
)
   
(1,267
)
Net cash provided by operating activities
 
$
66,576
   
$
52,155
 
 
               
Cash Flows From Investing Activities
               
Purchase and construction of property, plant and equipment
 
$
(32,804
)
 
$
(48,482
)
Proceeds from sale of assets
   
-
     
25
 
Proceeds from sale of equipment
   
223
     
290
 
(Purchase) sale of investment securities
   
-
     
(12
)
Proceeds from sale of investment securities
   
27
     
64
 
Net cash used in investing activities
 
$
(32,554
)
 
$
(48,115
)
 
(Continued)

7

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

 
 
Six Months Ended
June 30,
 
 
 
2014
   
2013
 
 
 
   
 
Cash Flows From Financing Activities
 
   
 
Principal payments on long-term debt
 
$
-
   
$
(1,460
)
Excess tax benefits on stock awards
   
394
     
61
 
Repurchases of stock
   
(1,771
)
   
(330
)
Proceeds from issuances of stock
   
1,124
     
5
 
Net cash used in financing activities
 
$
(253
)
 
$
(1,724
)
 
               
Net increase in cash and cash equivalents
 
$
33,769
   
$
2,316
 
 
               
Cash and cash equivalents:
               
Beginning
   
38,316
     
71,086
 
Ending
 
$
72,085
   
$
73,402
 
 
               
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
Interest
 
$
3,930
   
$
4,390
 
 
               
Income taxes (received) paid
 
$
(580
)
 
$
10,283
 
 
During the first six months of 2013, the Company traded in certain PCS equipment and received credits of $10,778 against the purchase price of new equipment.

At December 31, 2013, accounts payable included approximately $7.6 million associated with the capital expenditures related to the Network Vision project. These payables were disbursed during 2014.

See accompanying notes to unaudited consolidated financial statements.
8

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.
Basis of Presentation

The interim 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, 2013.  The balance sheet information at December 31, 2013 was derived from the audited December 31, 2013 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.
Property, Plant and Equipment

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

 
 
June 30,
 2014
   
December 31,
2013
 
Plant in service
 
$
666,830
   
$
633,480
 
Plant under construction
   
16,118
     
23,181
 
 
   
682,948
     
656,661
 
Less accumulated amortization and depreciation
   
277,138
     
247,698
 
Net property, plant and equipment
 
$
405,810
   
$
408,963
 

3.
Earnings per share

Basic net income per share was computed on the weighted average number of shares outstanding.  Diluted net income per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options.  Of 694 thousand and 809 thousand shares and options outstanding at June 30, 2014 and 2013, respectively, zero and 345 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.

4.
Investments Carried at Fair Value

Investments include $2.7 million and $2.5 million of investments carried at fair value as of June 30, 2014 and December 31, 2013, 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 six months ended June 30, 2014, the Company recognized $104 thousand in dividend and interest income from investments, and recorded net unrealized gains of $74 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.

5.
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.

6.
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.
9

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.  The changes in fair value recorded in interest expense for the three and six months ended June 30, 2013 were decreases of $102 thousand and $206 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 June 30, 2014.

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 qualify as a cash flow hedge are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of June 30, 2014, 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 hedge interest rate exceeds the variable interest rate on the debt.

The table below presents the fair value of the Company’s derivative financial instruments as well as its classification on the consolidated balance sheet as of June 30, 2014 and December 31, 2013 (in thousands; amounts in parentheses indicate debits):

Derivatives
 
  
 
Fair Value as of
 
Balance Sheet
 
June 30,
   
December 31,
 
Location
 
2014
   
2013
 
 
 
   
 
Derivatives designated as hedging instruments:
 
   
 
Interest rate swaps
 
   
 
Accrued liabilities and other
 
$
1,613
   
$
1,590
 
Deferred charges and other assets net
   
(3,846
)
   
(5,926
)
Total derivatives designated as hedging instruments
 
$
(2,233
)
 
$
(4,336
)

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).
10

The table below presents change in accumulated other comprehensive income by component for the six months ended June 30, 2014 (in thousands):

 
 
Gains and
(Losses) on
 Cash Flow
 Hedges
   
Income
Tax
Expense
(Benefit)
   
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
   
   
 
Balance as of December 31, 2013
 
$
4,336
   
$
(1,742
)
 
$
2,594
 
Other comprehensive income before reclassifications
   
(2,957
)
   
1,184
     
(1,773
)
Amounts reclassified from accumulated other comprehensive income (to interest expense)
   
854
     
(341
)
   
513
 
Net current period other comprehensive income (loss)
   
(2,103
)
   
843
     
(1,260
)
Balance as of June 30, 2014
 
$
2,233
   
$
(899
)
 
$
1,334
 

7.
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.

The Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate of Sprint.  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.  It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.

The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia and Maryland.

Three months ended June 30, 2014
 
(in thousands)
 
 
 
Wireless
   
 
 
Cable
   
 
 
Wireline
   
 
 
Other
   
 
 
Eliminations
   
 
Consolidated
Totals
 
External revenues
 
   
   
   
   
   
 
Service revenues
 
$
47,868
   
$
17,416
   
$
5,120
   
$
-
   
$
-
   
$
70,404
 
Other
   
2,813
     
3,388
     
4,811
     
-
     
-
     
11,012
 
Total external revenues
   
50,681
     
20,804
     
9,931
     
-
     
-
     
81,416
 
Internal revenues
   
1,094
     
33
     
5,713
     
-
     
(6,840
)
   
-
 
Total operating revenues
   
51,775
     
20,837
     
15,644
     
-
     
(6,840
)
   
81,416
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
18,476
     
12,421
     
7,737
     
-
     
(6,231
)
   
32,403
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
7,657
     
4,735
     
1,493
     
3,349
     
(609
)
   
16,625
 
Depreciation and amortization
   
8,071
     
5,766
     
2,653
     
105
     
-
     
16,595
 
Total operating expenses
   
34,204
     
22,922
     
11,883
     
3,454
     
(6,840
)
   
65,623
 
Operating income (loss)
   
17,571
     
(2,085
)
   
3,761
     
(3,454
)
   
-
     
15,793
 

11

Three months ended June 30, 2013
 
(in thousands)
 
 
 
Wireless
   
 
 
Cable
   
 
 
Wireline
   
 
 
Other
   
 
 
Eliminations
   
 
Consolidated
Totals
 
External revenues
 
   
   
   
   
   
 
Service revenues
 
$
46,362
   
$
16,325
   
$
5,558
   
$
-
   
$
-
   
$
68,245
 
Other
   
2,328
     
2,357
     
4,524
     
-
     
-
     
9,209
 
Total external revenues
   
48,690
     
18,682
     
10,082
     
-
     
-
     
77,454
 
Internal revenues
   
1,076
     
53
     
5,169
     
-
     
(6,298
)
   
-
 
Total operating revenues
   
49,766
     
18,735
     
15,251
     
-
     
(6,298
)
   
77,454
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
17,854
     
11,239
     
7,198
     
-
     
(5,763
)
   
30,528
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,068
     
4,500
     
1,251
     
3,071
     
(535
)
   
16,355
 
Depreciation and amortization
   
7,781
     
5,479
     
2,802
     
9
     
-
     
16,071
 
Total operating expenses
   
33,703
     
21,218
     
11,251
     
3,080
     
(6,298
)
   
62,954
 
Operating income (loss)
   
16,063
     
(2,483
)
   
4,000
     
(3,080
)
   
-
     
14,500
 

Six months ended June 30, 2014
 
(in thousands)
 
 
 
Wireless
   
 
 
Cable
   
 
 
Wireline
   
 
 
Other
   
 
 
Eliminations
   
 
Consolidated
Totals
 
External revenues
 
   
   
   
   
   
 
Service revenues
 
$
95,100
   
$
34,840
   
$
10,220
   
$
-
   
$
-
   
$
140,160
 
Other
   
5,569
     
6,418
     
9,721
     
-
     
-
     
21,708
 
Total external revenues
   
100,669
     
41,258
     
19,941
     
-
     
-
     
161,868
 
Internal revenues
   
2,184
     
59
     
11,478
     
-
     
(13,721
)
   
-
 
Total operating revenues
   
102,853
     
41,317
     
31,419
     
-
     
(13,721
)
   
161,868
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
37,132
     
24,811
     
15,219
     
-
     
(12,523
)
   
64,639
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
16,089
     
9,381
     
2,737
     
6,764
     
(1,198
)
   
33,773
 
Depreciation and amortization
   
15,268
     
11,170
     
5,350
     
195
     
-
     
31,983
 
Total operating expenses
   
68,489
     
45,362
     
23,306
     
6,959
     
(13,721
)
   
130,395
 
Operating income (loss)
   
34,364
     
(4,045
)
   
8,113
     
(6,959
)
   
-
     
31,473
 
 
Six months ended June 30, 2013
 
(in thousands)
 
 
 
Wireless
   
 
 
Cable
   
 
 
Wireline
   
 
 
Other
   
 
 
Eliminations
   
 
Consolidated
Totals
 
External revenues
                                               
Service revenues
 
$
90,427
   
$
32,487
   
$
11,021
   
$
-
   
$
-
   
$
133,935
 
Other
   
5,347
     
4,659
     
9,522
     
-
     
-
     
19,528
 
Total external revenues
   
95,774
     
37,146
     
20,543
     
-
     
-
     
153,463
 
Internal revenues
   
2,149
     
102
     
9,808
     
-
     
(12,059
)
   
-
 
Total operating revenues
   
97,923
     
37,248
     
30,351
     
-
     
(12,059
)
   
153,463
 
 
                                               
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
35,385
     
22,461
     
14,364
     
-
     
(10,981
)
   
61,229
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
15,955
     
8,924
     
2,612
     
6,071
     
(1,078
)
   
32,484
 
Depreciation and amortization
   
13,809
     
10,684
     
5,532
     
17
     
-
     
30,042
 
Total operating expenses
   
65,149
     
42,069
     
22,508
     
6,088
     
(12,059
)
   
123,755
 
Operating income (loss)
   
32,774
     
(4,821
)
   
7,843
     
(6,088
)
   
-
     
29,708
 

12

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

 
 
Three Months
Ended
June 30,
 
 
 
2014
   
2013
 
Total consolidated operating income
 
$
15,793
   
$
14,500
 
Interest expense
   
(2,065
)
   
(2,068
)
Non-operating income (expense), net
   
573
     
488
 
Income before taxes
 
$
14,301
   
$
12,920
 

 
 
Six Months Ended
June 30,
 
 
 
2014
   
2013
 
Total consolidated operating income
 
$
31,473
   
$
29,708
 
Interest expense
   
(4,112
)
   
(4,220
)
Non-operating income (expense), net
   
1,182
     
1,157
 
Income before taxes
 
$
28,543
   
$
26,645
 

The Company’s assets by segment are as follows:
 
(in thousands)
 
June 30,
2014
   
December 31,
2013
 
 
 
   
 
Wireless
 
$
233,637
   
$
229,038
 
Cable
   
208,092
     
199,184
 
Wireline
   
89,487
     
92,455
 
Other
   
417,790
     
435,804
 
Combined totals
   
949,006
     
956,481
 
Inter-segment eliminations
   
(345,003
)
   
(359,475
)
Consolidated totals
 
$
604,003
   
$
597,006
 

8.
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.  No other state or federal income tax audits were in process as of June 30, 2014.

13

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, 2013.  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, 2013, 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. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.
 
* The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia and Maryland.
 
* A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.
14

Results of Operations

Three Months Ended June 30, 2014 Compared with the Three Months Ended June 30, 2013

Consolidated Results

The Company’s consolidated results for the second quarters of 2014 and 2013 are summarized as follows:

 
(in thousands)
 
Three Months Ended
June 30,
   
 
Change
 
 
2014
   
2013
   
$
     
 %
 
                   
Operating revenues
 
$
81,416
   
$
77,454
   
$
3,962
     
5.1
 
Operating expenses
   
65,623
     
62,954
     
2,669
     
4.2
 
Operating income
   
15,793
     
14,500
     
1,293
     
8.9
 
                               
Interest expense
   
(2,065
)
   
(2,068
)
   
3
     
0.1
 
Other income (expense), net
   
573
     
488
     
85
     
17.4
 
Income before taxes
   
14,301
     
12,920
     
1,381
     
10.7
 
Income tax expense
   
5,686
     
5,078
     
608
     
12.0
 
Net income
 
$
8,615
   
$
7,842
   
$
773
     
9.9
 

Operating revenues

For the three months ended June 30, 2014, operating revenues increased $4.0 million, or 5.1%. Wireless segment revenues increased $2.0 million compared to the second quarter of 2013. Net postpaid service revenues increased $1.2 million, driven by growth of data revenue and 4.2% year-over-year growth in average postpaid subscribers. Other Wireless revenue increased $0.6 million, as the prior year period included a $0.5 million adjustment to straight-line rent accruals related to the termination of iDEN tower leases. Cable segment revenue grew $2.1 million. A $1.1 million increase in cable service revenue reflected 6.3% growth in average subscriber counts and an increase in revenue per subscriber, while growth in equipment revenue of $1.0 million resulted primarily from an increase in customer premise equipment rents.  Wireline segment revenue increased $0.4 million due primarily to an increase in affiliate revenue, which is eliminated in consolidation.

Operating expenses

Total operating expenses were $65.6 million in the second quarter of 2014 compared to $63.0 million in the prior year period.  Cost of goods and services sold increased $1.9 million, including increases of $0.7 million in cable programming costs, $0.7 million in network maintenance costs and $0.6 million in PCS handset costs.  Selling, general and administrative expenses increased $0.3 million.  Depreciation and amortization expense increased $0.5 million, primarily due to completion of the Network Vision upgrade project.

Other income (expense), net

Other income increased in the current year period due primarily to higher investment gains.

Income tax expense

The Company’s effective tax rate increased to 39.8% in the quarter ended June 30, 2014 from 39.3% in the 2013 quarter.

Net income

For the three months ended June 30, 2014, net income increased $0.8 million, or 9.9%, primarily reflecting growth in subscriber counts and revenue per subscriber in both the wireless and cable segments.
15

Six Months Ended June 30, 2014 Compared with the Six Months Ended June 30, 2013

Consolidated Results

The Company’s consolidated results for the first six months of 2014 and 2013 are summarized as follows:

 
(in thousands)
 
Six Months Ended
June 30,
   
 
Change
 
 
2014
   
2013
   
$
       
%
 
                   
Operating revenues
 
$
161,868
   
$
153,463
   
$
8,405
     
5.5
 
Operating expenses
   
130,395
     
123,755
     
6,640
     
5.4
 
Operating income
   
31,473
     
29,708
     
1,765
     
5.9
 
                               
Interest expense
   
(4,112
)
   
(4,220
)
   
108
     
2.6
 
Other income (expense), net
   
1,182
     
1,157
     
25
     
2.2
 
Income before taxes
   
28,543
     
26,645
     
1,898
     
7.1
 
Income tax expense
   
11,312
     
10,452
     
860
     
8.2
 
Net income
 
$
17,231
   
$
16,193
   
$
1,038
     
6.4
 

Operating revenues

For the six months ended June 30, 2014, operating revenues increased $8.4 million, or 5.5%. Wireless segment revenues increased $4.9 million compared to the first six months of 2013.  Net postpaid service revenues increased $2.4 million, driven by data fees and 4.3% year-over-year growth in average postpaid subscribers.  Net prepaid service revenues grew $2.3 million, or 11.7%, due to 4.5% growth in average prepaid subscribers and higher average revenue per subscriber in 2014 over 2013. Cable segment revenues increased $4.1 million due to a 6.0% increase in average revenue generating units compared to the 2013 period and to a $1.1 million increase in rent revenues for customer premise equipment, due to a change in January 2014 of charging customers for their first set top box, which previously had been at no charge. Wireline segment revenue increased $1.1 million, due primarily to a $1.4 million increase in affiliate revenue, which is eliminated in consolidation.

Operating expenses

Total operating expenses were $130.4 million in the six months ended June 30, 2014 compared to $123.8 million in the prior year period.  Cost of goods and services sold increased $3.4 million, including increases of $1.5 million in network maintenance costs, $1.3 million in PCS handset costs and $0.8 million in video programming costs.  Selling, general and administrative expenses increased $1.3 million, due to higher personnel costs, partially offset by lower wireless prepaid and bad debt expenses.  Depreciation and amortization expense increased $1.9 million, primarily due to completion of the Network Vision upgrade project.

Interest and other income (expense), net

Interest expense declined $0.1 million from the prior year period. During the first six months of 2013, the company recorded $0.1 million of interest expense charges to reflect changes in the fair value of an interest rate swap not designated as a cash flow hedge. This swap expired in July 2013.

Income tax expense

The Company’s effective tax rate increased to 39.6% in the six months ended June 30, 2014 from 39.2% in the 2013 period.

Net income

For the six months ended June 30, 2014, net income increased $1.0 million, or 6.4%, reflecting growth in subscriber counts and revenue per subscriber in both the Wireless and Cable segments, partially offset by increases in operating expenses incurred in support of this growth.
16

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 postpaid and prepaid 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.  Effective August 1, 2013, the net service fee increased to 14%, the maximum allowed by the current Sprint Affiliate contract. The management fee remained unchanged at 8%. Sprint also retains a 6% management fee on prepaid revenues.

During the second quarter of 2014, the Company’s PCS stores began participating in Sprint’s Easy Pay handset financing program, whereby Sprint enters into a financing agreement with the subscriber and the subscriber receives a handset from Sprint.  The equipment revenue from the subscriber and the expense of the handset are Sprint’s responsibility.

The following tables show selected operating statistics of the Wireless segment as of the dates shown:
 
 
 
June 30,
   
December 31,
   
June 30,
   
December 31,
 
 
 
2014
   
2013
   
2013
   
2012
 
Retail PCS Subscribers – Postpaid
   
277,673
     
273,721
     
266,297
     
262,892
 
Retail PCS Subscribers – Prepaid
   
138,176
     
137,047
     
131,372
     
128,177
 
PCS Market POPS (000) (1)
   
2,406
     
2,397
     
2,393
     
2,390
 
PCS Covered POPS (000) (1)
   
2,100
     
2,067
     
2,063
     
2,057
 
CDMA Base Stations (sites)
   
528
     
526
     
525
     
516
 
Towers
   
154
     
153
     
151
     
150
 
Non-affiliate cell site leases (2)
   
195
     
217
     
219
     
216
 
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
 
               
Gross PCS Subscriber Additions – Postpaid
   
15,898
     
15,184
     
31,483
     
31,088
 
Net PCS Subscriber Additions – Postpaid
   
2,648
     
2,340
     
3,952
     
3,405
 
Gross PCS Subscriber Additions – Prepaid
   
15,286
     
18,307
     
34,458
     
39,729
 
Net PCS Subscriber Additions (Losses) – Prepaid
   
(361
)
   
(3,032
)
   
1,129
     
3,195
 
PCS Average Monthly Retail Churn % - Postpaid (3)
   
1.60
%
   
1.62
%
   
1.67
%
   
1.74
%
PCS Average Monthly Retail Churn % - Prepaid (3)
   
3.78
%
   
5.33
%
   
4.03
%
   
4.62
%
 
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 Company’s network.
2) The decrease from December 31, 2013 to June 30, 2014 is primarily a result of termination of Sprint iDEN leases associated with the former Nextel network.
3) PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period.
17

Three Months Ended June 30, 2014 Compared with the Three Months Ended June 30, 2013
 
 
(in thousands)
 
Three Months Ended
June 30,
   
 
Change
 
 
 
2014
   
2013
    
$
        
%
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Wireless service revenue
 
$
47,868
   
$
46,362
   
$
1,506
     
3.2
 
Tower lease revenue
   
2,466
     
2,576
     
(110
)
   
(4.3
)
Equipment revenue
   
1,306
     
1,270
     
36
     
2.8
 
Other revenue
   
135
     
(442
)
   
577
     
(130.5
)
Total segment operating revenues
   
51,775
     
49,766
     
2,009
     
4.0
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
18,476
     
17,854
     
622
     
3.5
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
7,657
     
8,068
     
(411
)
   
(5.1
)
Depreciation and amortization
   
8,071
     
7,781
     
290
     
3.7
 
Total segment operating expenses
   
34,204
     
33,703
     
501
     
1.5
 
Segment operating income
 
$
17,571
   
$
16,063
   
$
1,508
     
9.4
 

Operating revenues

Wireless service revenue increased $1.5 million, or 3.2%, for the three months ended June 30, 2014, compared to the comparable 2013 period.  Net postpaid service revenues increased $1.2 million, driven by data revenues and 4.2% 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 $0.9 million, approximately $0.3 million per month.  Net prepaid service revenues grew $0.3 million, or 3.1%, due to 3.4% growth in average prepaid subscribers over 2013.

The decrease in tower lease revenue resulted from the termination of Sprint iDEN leases associated with the former Nextel network. Other revenue increased, as the prior year period included a $0.5 million unfavorable adjustment to straight-line rent accruals related to the termination of iDEN leases.

Cost of goods and services

Cost of goods and services increased $0.6 million, or 3.5%, in 2014 from the second quarter of 2013. Postpaid handset costs increased $1.0 million, as higher volume of handset upgrades drove a $0.6 million increase and higher volume of tablets drove $0.2 million of incremental cost. Prepaid handset subsidies decreased $0.5 million on lower volume of handsets sold.

Selling, general and administrative

Selling, general and administrative costs decreased $0.4 million, or 5.1%, in the second quarter of 2014 from the comparable 2013 period.  Costs to add new prepaid subscribers decreased $0.7 million due to lower volume of gross additions in the current year. This decrease was partially offset by growth in advertising expense and general and administrative support.

Depreciation and amortization

Depreciation and amortization increased $0.3 million, or 3.7%, in the second quarter of 2014 over the comparable 2013 period, following completion of Network Vision upgrades.
18

Six Months Ended June 30, 2014 Compared with the Six Months Ended June 30, 2013

 
(in thousands)
 
Six Months Ended
June 30,
   
 
Change
 
 
 
2014
   
2013
   
$
       
 %
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Wireless service revenue
 
$
95,100
   
$
90,427
   
$
4,673
     
5.2
 
Tower lease revenue
   
5,030
     
5,137
     
(107
)
   
(2.1
)
Equipment revenue
   
2,503
     
2,602
     
(99
)
   
(3.8
)
Other revenue
   
220
     
(243
)
   
463
     
(190.5
)
Total segment operating revenues
   
102,853
     
97,923
     
4,930
     
5.0
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
37,132
     
35,385
     
1,747
     
4.9
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
16,089
     
15,955
     
134
     
0.8
 
Depreciation and amortization
   
15,268
     
13,809
     
1,459
     
10.6
 
Total segment operating expenses
   
68,489
     
65,149
     
3,340
     
5.1
 
Segment operating income
 
$
34,364
   
$
32,774
   
$
1,590
     
4.9
 

Operating revenues

Wireless service revenue increased $4.7 million, or 5.2%, for the six months ended June 30, 2014, compared to the comparable 2013 period.  Net postpaid service revenues increased $2.4 million, driven by data revenues and 4.3% 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 $1.8 million, approximately $0.3 million per month.  Net prepaid service revenues grew $2.3 million, or 11.7%, compared to the six months ended June 30, 2013. Average prepaid subscribers increased 4.5% in 2014 over 2013, with changes in the mix of subscribers accounting for the remainder of the increase in prepaid service revenues.

The decrease in tower lease revenue resulted from the termination of Sprint iDEN leases associated with the former Nextel network. Other revenue increased, as the prior year period included a $0.5 million unfavorable adjustment to straight-line rent accruals related to the termination of iDEN leases.

Cost of goods and services

Cost of goods and services increased $1.7 million, or 4.9%, in 2014 from the first half of 2013. Postpaid handset costs increased $2.4 million, driven primarily by higher average cost per handset sold and a higher volume of handset upgrades. Prepaid handset subsidies decreased $1.1 million on lower volume of handsets sold. Network costs increased $0.7 million, primarily due to increases in rent and backhaul costs associated with the Network Vision project. Maintenance expense grew $0.7 million due to increases in maintenance contracts that support the upgraded wireless network. These increases were largely offset by a one-time $0.4 million gain related to actual disposal costs for the Network Vision project being less than the previously accrued amounts and by $0.3 million lower costs from Sprint to service prepaid customers who take advantage of the “top-up” program.

Selling, general and administrative

Selling, general and administrative costs increased $0.1 million in the first six months of 2014 over the comparable 2013 period.  Several factors contributed to this increase.  Costs to add new prepaid subscribers decreased $0.9 million on lower volume of gross additions. Advertising costs grew $0.4 million as the Company increased marketing of the 4G network that was completed in the fourth quarter of 2013. Commission costs grew $0.4 million as growth in sales of higher-tier rate plans resulted in higher commission rates, primarily during the first quarter of 2014.
19

Depreciation and amortization

Depreciation and amortization increased $1.5 million, 10.6%, in 2014 over the 2013 first half, following completion of Network Vision upgrades

Cable

The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.
 
 
 
June 30,
2014
   
December 31,
2013
   
June 30,
2013
   
December 31,
2012
 
 
 
   
   
   
 
Homes Passed (1)
   
171,147
     
170,470
     
168,523
     
168,475
 
Customer Relationships (2)
                               
Video customers
   
50,159
     
51,197
     
51,591
     
52,676
 
Non-video customers
   
19,730
     
18,341
     
16,731
     
15,709
 
Total customer relationships
   
69,889
     
69,538
     
68,322
     
68,385
 
Video
                               
Customers (3)
   
51,699
     
53,076
     
53,395
     
54,840
 
Penetration (4)
   
30.2
%
   
31.1
%
   
31.7
%
   
32.6
%
Digital video penetration (5)
   
63.6
%
   
49.2
%
   
40.2
%
   
39.5
%
High-speed Internet
                               
Available Homes (6)
   
168,923
     
168,255
     
166,675
     
163,273
 
Customers (3)
   
48,096
     
45,776
     
42,519
     
40,981
 
Penetration (4)
   
28.5
%
   
27.2
%
   
25.5
%
   
25.1
%
Voice
                               
Available Homes (6)
   
166,186
     
163,282
     
161,709
     
154,552
 
Customers (3)
   
16,426
     
14,988
     
13,576
     
12,262
 
Penetration (4)
   
9.9
%
   
9.2
%
   
8.4
%
   
8.0
%
Total Revenue Generating Units (7)
   
116,221
     
113,840
     
109,490
     
108,083
 
Fiber Route Miles
   
2,463
     
2,446
     
2,234
     
2,077
 
Total Fiber Miles (8)
   
70,772
     
69,715
     
41,394
     
39,418
 

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 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.
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. Fiber counts were recalculated after a fiber audit and deployment of enhanced mapping software in the fourth quarter of 2013.
20

Three Months Ended June 30, 2014 Compared with the Three Months Ended June 30, 2013

 
(in thousands)
 
Three Months Ended
June 30,
   
 
Change
 
 
 
2014
   
2013
   
$
      
%
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Service revenue
 
$
17,416
   
$
16,325
   
$
1,091
     
6.7
 
Equipment and other revenue
   
3,421
     
2,410
     
1,011
     
42.0
 
Total segment operating revenues
   
20,837
     
18,735
     
2,102
     
11.2
 
 
                               
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
12,421
     
11,239
     
1,182
     
10.5
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
4,735
     
4,500
     
235
     
5.2
 
Depreciation and amortization
   
5,766
     
5,479
     
287
     
5.2
 
Total segment operating expenses
   
22,922
     
21,218
     
1,704
     
8.0
 
Segment operating loss
 
$
(2,085
)
 
$
(2,483
)
 
$
398
     
16.0
 

Operating revenues

Cable segment service revenue increased $1.1 million, or 6.7%, due to a 6.3% increase in average revenue generating units, a video rate increase in January 2014, and customers selecting higher-priced digital TV services and higher-speed data access packages.

Growth in equipment and other revenue was driven primarily by a $0.6 million increase in customer premise equipment rents, due to a change in January 2014 of charging customers for their first set top box, which previously had been at no charge. Facility lease revenue grew $0.2 million due to new fiber to the tower contracts with third parties.

Operating expenses

Cable segment cost of goods and services increased $1.2 million, or 10.5%, in the second quarter of 2014 over the comparable 2013 period. Video programming costs increased $0.7 million as the impact of rising rates per subscriber outpaced declining video subscriber counts. Maintenance costs increased $0.3 million due to costs to support network growth.

Selling, general and administrative expenses grew $0.2 million due to increases in costs related to customer service and administrative functions.

The increase in depreciation and amortization expense consists of $0.6 million of  higher depreciation expense on assets placed in service, offset by 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.
21

Six Months Ended June 30, 2014 Compared with the Six Months Ended June 30, 2013

 
(in thousands)
 
Six Months Ended
June 30,
   
 
Change
 
 
 
2014
   
2013
   
$
       
%
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Service revenue
 
$
34,840
   
$
32,487
   
$
2,353
     
7.2
 
Equipment and other revenue
   
6,477
     
4,761
     
1,716
     
36.0
 
Total segment operating revenues
   
41,317
     
37,248
     
4,069
     
10.9
 
 
                               
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
24,811
     
22,461
     
2,350
     
10.5
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
9,381
     
8,924
     
457
     
5.1
 
Depreciation and amortization
   
11,170
     
10,684
     
486
     
4.5
 
Total segment operating expenses
   
45,362
     
42,069
     
3,293
     
7.8
 
Segment operating loss
 
$
(4,045
)
 
$
(4,821
)
 
$
776
     
16.1
 

Operating revenues

Cable segment service revenue increased $2.4 million, or 7.2%, due to a 6.0% increase in average revenue generating units, a video rate increase in January 2014, and customers selecting higher-priced digital TV services and higher-speed data access packages.

Growth in equipment and other revenue was driven primarily by a $1.1 million increase in customer premise equipment rents, due to a change in January 2014 of charging customers for their first set top box, which previously had been at no charge. Also, facility lease revenue grew $0.3 million due to new fiber to the tower contracts with third parties.

Operating expenses

Cable segment cost of goods and services increased $2.4 million, or 10.5%, in the six months ended June 30, 2014 over the comparable 2013 period. Video programming costs increased $1.1 million as the impact of rising rates per subscriber outpaced declining video subscriber counts. Personnel costs increased $0.5 million due to incremental costs for health care claims and stock compensation. Maintenance costs increased $0.5 million due to costs to support network growth.

Selling, general and administrative expenses grew $0.5 million against the prior year period as increases in costs related to customer service and administrative functions were partially offset by reductions of $0.2 million in commission expense and $0.2 million in bad debt expense.

The increase in depreciation and amortization expense consists of $1.1 million of  higher depreciation expense on network upgrades, offset by 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.
22

Wireline

The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia and Maryland.
 
 
 
June 30,
   
Dec. 31,
   
June 30,
   
Dec. 31,
 
 
 
2014
   
2013
   
2013
   
2012
 
 
 
   
   
   
 
Telephone Access Lines
   
21,842
     
22,106
     
22,465
     
22,342
 
Long Distance Subscribers
   
9,730
     
9,851
     
10,065
     
10,157
 
Video Customers
   
5,904
     
6,342
     
6,534
     
6,719
 
DSL Subscribers
   
12,707
     
12,632
     
12,621
     
12,611
 
Fiber Route Miles
   
1,455
     
1,452
     
1,430
     
1,420
 
Total Fiber Miles (1)
   
85,348
     
85,135
     
84,414
     
84,107
 

  (1) Total 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.

Three Months Ended June 30, 2014 Compared with the Three Months Ended June 30, 2013

 (in thousands)
 
Three Months Ended
June 30,
   
 
Change
 
 
 
2014
   
2013
   
$
        
%
 
 
 
   
   
         
Segment operating revenues
 
   
   
         
Service revenue
 
$
5,627
   
$
5,558
   
$
69
     
1.2
 
Access revenue
   
2,903
     
3,066
     
(163
)
   
(5.3
)
Facilities lease revenue
   
6,241
     
5,642
     
599
     
10.6
 
Equipment revenue
   
15
     
13