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

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 ☑  No
 
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 ☑  No
 
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
Accelerated filer ☑
Non-accelerated filer ☐
Smaller reporting company ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☑
 
The number of shares of the registrant’s common stock outstanding on October 22, 2015 was 24,222,433.
 



SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
 
   
Page
Numbers
     
PART I. FINANCIAL INFORMATION  
     
Item 1.
Financial Statements
 
     
 
3-4
     
 
5
     
  6
     
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
7-8
     
  9-14
     
Item 2 15-31
     
Item 3
32
     
Item 4.
Controls and Procedures 33
     
PART II. OTHER INFORMATION
     
Item 1A.
34
     
Item 2.
34
     
Item 6.
35
     
  36
     
  37

2

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
ASSETS
 
September 30,
2015
   
December 31,
2014
 
         
Current Assets
       
Cash and cash equivalents
 
$
87,288
   
$
68,917
 
Accounts receivable, net
   
32,025
     
30,371
 
Income taxes receivable
   
-
     
14,752
 
Materials and supplies
   
5,008
     
8,794
 
Prepaid expenses and other
   
6,196
     
4,279
 
Deferred income taxes
   
1,111
     
1,211
 
Total current assets
   
131,628
     
128,324
 
                 
Investments, including $2,515 and $2,661 carried at fair value
   
10,380
     
10,089
 
                 
Property, plant and equipment, net
   
398,435
     
405,907
 
                 
Other Assets
               
Intangible assets, net
   
67,274
     
68,260
 
Deferred charges and other assets, net
   
12,527
     
6,662
 
Other assets, net
   
79,801
     
74,922
 
Total assets
 
$
620,244
   
$
619,242
 

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
 
September 30,
2015
   
December 31,
2014
 
         
Current Liabilities
       
Current maturities of long-term debt
 
$
23,000
   
$
23,000
 
Accounts payable
   
8,008
     
11,151
 
Advanced billings and customer deposits
   
11,818
     
12,375
 
Accrued compensation
   
3,956
     
5,466
 
Income taxes payable
   
1,675
     
-
 
Accrued liabilities and other
   
8,294
     
7,162
 
Total current liabilities
   
56,751
     
59,154
 
                 
Long-term debt, less current maturities
   
184,000
     
201,250
 
                 
Other Long-Term Liabilities
               
Deferred income taxes
   
67,511
     
76,777
 
Deferred lease payable
   
7,913
     
7,180
 
Asset retirement obligations
   
7,159
     
6,928
 
Other liabilities
   
9,469
     
9,607
 
Total other long-term liabilities
   
92,052
     
100,492
 
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock
   
31,611
     
29,712
 
Accumulated other comprehensive income (loss)
   
(438
)
   
1,122
 
Retained earnings
   
256,268
     
227,512
 
Total shareholders’ equity
   
287,441
     
258,346
 
                 
Total liabilities and shareholders’ equity
 
$
620,244
   
$
619,242
 
 
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
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
                 
Operating revenues
 
$
85,212
   
$
82,268
     
255,202
   
$
244,136
 
                                 
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
30,570
     
33,330
     
91,541
     
97,970
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
20,435
     
18,063
     
58,177
     
51,836
 
Depreciation and amortization
   
19,118
     
16,731
     
53,119
     
48,714
 
Total operating expenses
   
70,123
     
68,124
     
202,837
     
198,520
 
Operating income
   
15,089
     
14,144
     
52,365
     
45,616
 
                                 
Other income (expense):
                               
Interest expense
   
(1,808
)
   
(2,007
)
   
(5,663
)
   
(6,119
)
Gain (loss) on investments, net
   
(211
)
   
239
     
(12
)
   
335
 
Non-operating income, net
   
391
     
409
     
1,265
     
1,496
 
Income before income taxes
   
13,461
     
12,785
     
47,955
     
41,328
 
                                 
Income tax expense
   
5,465
     
4,782
     
19,199
     
16,094
 
Net income
 
$
7,996
   
$
8,003
     
28,756
   
$
25,234
 
                                 
Other comprehensive income:
                               
Unrealized gain (loss) on interest rate hedge, net of tax
   
(979
)
   
476
     
(1,560
)
   
(784
)
Comprehensive income
 
$
7,017
   
$
8,479
     
27,196
   
$
24,450
 
                                 
Earnings per share:
                               
Basic
 
$
0.33
   
$
0.33
   
$
1.19
   
$
1.05
 
Diluted
 
$
0.33
   
$
0.33
   
$
1.17
   
$
1.04
 
                                 
Weighted average shares outstanding, basic
   
24,203
     
24,113
     
24,182
     
24,091
 
                                 
Weighted average shares outstanding, diluted
   
24,535
     
24,393
     
24,483
     
24,334
 
 
     See accompanying notes to unaudited consolidated financial statements.
 
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, 2013
   
24,040
   
$
26,759
   
$
204,962
   
$
2,594
   
$
234,315
 
                                         
Net income
   
-
     
-
     
33,883
     
-
     
33,883
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(1,472
)
   
(1,472
)
Dividends declared ($0.47 per share)
   
-
     
-
     
(11,333
)
   
-
     
(11,333
)
Dividends reinvested in common stock
   
19
     
572
     
-
     
-
     
572
 
Stock based compensation
   
-
     
2,624
     
-
     
-
     
2,624
 
Stock options exercised
   
51
     
1,141
     
-
     
-
     
1,141
 
Common stock issued for share awards
   
81
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
6
     
-
     
-
     
6
 
Common stock repurchased
   
(60
)
   
(1,785
)
   
-
     
-
     
(1,785
)
Net excess tax benefit from stock options exercised
   
-
     
395
     
-
     
-
     
395
 
                                         
Balance, December 31, 2014
   
24,132
   
$
29,712
   
$
227,512
   
$
1,122
   
$
258,346
 
                                         
Net income
   
-
     
-
     
28,756
     
-
     
28,756
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(1,560
)
   
(1,560
)
Stock based compensation
   
-
     
2,217
     
-
     
-
     
2,217
 
Stock options exercised
   
35
     
818
     
-
     
-
     
818
 
Common stock issued for share awards
   
105
     
-
     
-
     
-
     
-
 
Common stock issued
   
2
     
8
     
-
     
-
     
8
 
Common stock repurchased
   
(54
)
   
(1,799
)
   
-
     
-
     
(1,799
)
Net excess tax benefit from stock options exercised
   
-
     
655
     
-
     
-
     
655
 
Balance, September 30, 2015
   
24,220
   
$
31,611
   
$
256,268
   
$
(438
)
 
$
287,441
 

See accompanying notes to unaudited consolidated financial statements.
 
6

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
         
Cash Flows From Operating Activities
       
Net income
 
$
28,756
   
$
25,234
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
51,985
     
46,569
 
Amortization
   
1,134
     
2,145
 
Provision for bad debt
   
1,335
     
1,155
 
Stock based compensation expense
   
1,893
     
1,850
 
Excess tax benefits on stock awards
   
(655
)
   
(395
)
Deferred income taxes
   
(7,463
)
   
(6,261
)
Net loss on disposal of equipment
   
229
     
1,739
 
Realized loss on disposal of investments
   
20
     
-
 
Unrealized (gain) loss on investments
   
190
     
(40
)
Net gains from patronage and equity investments
   
(540
)
   
(667
)
Amortization of long term debt issuance costs
   
430
     
453
 
Other
   
323
     
1,295
 
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
   
(2,989
)
   
(3,078
)
Materials and supplies
   
286
     
3,111
 
Income taxes receivable
   
14,752
     
14,434
 
Other assets
   
(3,990
)
   
354
 
Increase (decrease) in:
               
Accounts payable
   
(4,174
)
   
2,411
 
Deferred lease payable
   
733
     
760
 
Income taxes payable
   
1,675
     
-
 
Other deferrals and accruals
   
(807
)
   
269
 
                 
Net cash provided by operating activities
 
$
83,123
   
$
91,338
 
                 
Cash Flows From Investing Activities
               
Acquisition of property, plant and equipment
 
$
(39,644
)
 
$
(51,197
)
Proceeds from sale of equipment
   
242
     
390
 
Cash distributions from investments
   
38
     
40
 
 
Net cash used in investing activities
 
$
(39,364
)
 
$
(50,767
)
 
(Continued)
 
7

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

   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
         
Cash Flows From Financing Activities
       
Principal payments on long-term debt
 
$
(17,250
)
 
$
-
 
Cash paid for debt issuance costs
   
(7,820
)
   
-
 
Excess tax benefits on stock awards
   
655
     
395
 
Repurchases of stock
   
(1,799
)
   
(1,785
)
Proceeds from issuances of stock
   
826
     
1,146
 
                 
Net cash used in financing activities
 
$
(25,388
)
 
$
(244
)
                 
Net increase in cash and cash equivalents
 
$
18,371
   
$
40,327
 
                 
Cash and cash equivalents:
               
Beginning
   
68,917
     
38,316
 
Ending
 
$
87,288
   
$
78,643
 
                 
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
                 
Interest
 
$
5,550
   
$
5,927
 
                 
Income taxes paid
 
$
10,235
   
$
8,825
 
 
At September 30, 2015, accounts payable included approximately $1.0 million associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.
 
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 audited consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  The balance sheet information at December 31, 2014 was derived from the audited December 31, 2014 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):

   
September 30,
2015
   
December 31,
2014
 
Plant in service
 
$
700,828
   
$
675,321
 
Plant under construction
   
27,735
     
18,078
 
     
728,563
     
693,399
 
Less accumulated amortization and depreciation
   
330,128
     
287,492
 
Net property, plant and equipment
 
$
398,435
   
$
405,907
 

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 664 thousand and 698 thousand shares and options outstanding at September 30, 2015 and 2014, respectively, 46 thousand and zero were anti-dilutive, respectively.  These shares and 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 $2.5 million and $2.7 million of investments carried at fair value at September 30, 2015 and December 31, 2014, respectively, consisting of equity, bond and money market mutual funds.  Investments carried at fair value were acquired under a rabbi trust arrangement related to the Company’s nonqualified Supplemental Executive Retirement Plan (the “SERP”). The Company purchases investments in the trust to mirror the investment elections of participants in the SERP; gains and losses on the investments in the trust are reflected as increases or decreases in the liability owed to the participants. During the nine months ended September 30, 2015, the Company recognized $44 thousand in dividend and interest income from investments, and recorded net unrealized losses of $190 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.
 
9

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.

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 the cash flow hedge was $157.2 million as of September 30, 2015.  The outstanding notional amount decreases as the Company makes scheduled principal payments on the debt.

The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings through interest expense. No hedge ineffectiveness was recognized during any of the periods presented.

Amounts reported in accumulated other comprehensive income related to the interest rate 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, 2015, the Company estimates that $1.1 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 instrument as well as its classification on the consolidated balance sheet as of September 30, 2015 and December 31, 2014 (in thousands):
 
  Derivatives    
    
Fair Value as of
 
 
Balance Sheet
Location
 
September 30,
2015
   
December 31,
2014
 
         
Derivatives designated as hedging instruments:
       
 
Interest rate swap
Accrued liabilities and other
 
$
(1,141)
 
 
$
(1,309
)
Deferred charges and other assets, net
    402      
3,180
 
Total derivatives designated as hedging instruments
 
$
739
   
$
1,871
 
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 nine months ended September 30, 2015 (in thousands):
 
   
Gains and
(Losses) on
Cash Flow
Hedges
   
Income Tax
(Expense)
Benefit
   
Accumulated
 Other
 Comprehensive
Income (Loss)
 
Balance as of December 31, 2014
 
$
1,871
   
$
(749
)
 
$
1,122
 
Other comprehensive loss before reclassifications
   
(3,791
)
   
1,521
     
(2,270
)
Amounts reclassified from accumulated other comprehensive income (to interest expense)
   
1,181
     
(471
)
   
710
 
Net current period other comprehensive loss
   
(2,610
)
   
1,050
     
(1,560
)
Balance as of September 30, 2015
 
$
(739
)
 
$
301
   
$
(438
)

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.  This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.

The Cable segment provides video, internet and voice services in Virginia, West Virginia and Maryland, and leases fiber optic facilities throughout southern Virginia and West Virginia. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.

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

Three months ended September 30, 2015
 
(in thousands)
 
   
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                       
Service revenues
 
$
47,793
   
$
22,284
   
$
4,904
   
$
-
   
$
-
   
$
74,981
 
Other
   
2,734
     
1,882
     
5,615
     
-
     
-
     
10,231
 
Total external revenues
   
50,527
     
24,166
     
10,519
     
-
     
-
     
85,212
 
Internal revenues
   
1,109
     
251
     
6,759
     
-
     
(8,119
)
   
-
 
Total operating revenues
   
51,636
     
24,417
     
17,278
     
-
     
(8,119
)
   
85,212
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
15,572
     
14,124
     
8,212
     
-
     
(7,338
)
   
30,570
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
9,027
     
4,948
     
1,688
     
5,553
     
(781
)
   
20,435
 
Depreciation and amortization
   
9,644
     
5,948
     
3,404
     
122
     
-
     
19,118
 
Total operating expenses
   
34,243
     
25,020
     
13,304
     
5,675
     
(8,119
)
   
70,123
 
Operating income (loss)
 
$
17,393
   
$
(603
)
 
$
3,974
   
$
(5,675
)
 
$
-
   
$
15,089
 
 
11

Three months ended September 30, 2014
 
(in thousands)
 
   
Wireless
   
Cable (1)
   
Wireline (1)
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                       
Service revenues
 
$
48,013
   
$
19,173
   
$
4,740
   
$
-
   
$
-
   
$
71,926
 
Other
   
3,083
     
1,799
     
5,460
     
-
     
-
     
10,342
 
Total external revenues
   
51,096
     
20,972
     
10,200
     
-
     
-
     
82,268
 
Internal revenues
   
1,099
     
32
     
5,724
     
-
     
(6,855
)
   
-
 
Total operating revenues
   
52,195
     
21,004
     
15,924
     
-
     
(6,855
)
   
82,268
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
18,322
     
14,157
     
7,078
     
-
     
(6,227
)
   
33,330
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,645
     
5,107
     
1,533
     
3,406
     
(628
)
   
18,063
 
Depreciation and amortization
   
7,895
     
5,864
     
2,875
     
97
     
-
     
16,731
 
Total operating expenses
   
34,862
     
25,128
     
11,486
     
3,503
     
(6,855
)
   
68,124
 
Operating income (loss)
 
$
17,333
   
$
(4,124
)
 
$
4,438
   
$
(3,503
)
 
$
-
   
$
14,144
 
 
Nine months ended September 30, 2015

(in thousands)
 
 
 
 
 
Wireless
   
 
Cable
   
 
Wireline
   
 
Other
   
 
Eliminations
   
Consolidated
Totals
 
External revenues
                       
Service revenues
 
$
144,917
   
$
65,802
   
$
14,543
   
$
-
   
$
-
   
$
225,262
 
Other
   
8,611
     
5,495
     
15,834
     
-
     
-
     
29,940
 
Total external revenues
   
153,528
     
71,297
     
30,377
     
-
     
-
     
255,202
 
Internal revenues
   
3,319
     
585
     
18,950
     
-
     
(22,854
)
   
-
 
Total operating revenues
   
156,847
     
71,882
     
49,327
     
-
     
(22,854
)
   
255,202
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
47,661
     
41,378
     
23,224
     
-
     
(20,722
)
   
91,541
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
26,996
     
14,924
     
4,923
     
13,466
     
(2,132
)
   
58,177
 
Depreciation and amortization
   
26,089
     
17,286
     
9,411
     
333
     
-
     
53,119
 
Total operating expenses
   
100,746
     
73,588
     
37,558
     
13,799
     
(22,854
)
   
202,837
 
Operating income (loss)
 
$
56,101
   
$
(1,706
)
 
$
11,769
   
$
(13,799
)
 
$
-
   
$
52,365
 
 
Nine months ended September 30, 2014
 
(in thousands)
 
 
 
 
 
Wireless
   
 
Cable (1)
   
 
Wireline (1)
   
 
Other
   
 
Eliminations
   
Consolidated
Totals
 
External revenues
                                               
Service revenues
 
$
143,112
   
$
57,028
   
$
14,255
   
$
-
   
$
-
   
$
214,395
 
Other
   
8,653
     
5,202
     
15,886
     
-
     
-
     
29,741
 
Total external revenues
   
151,765
     
62,230
     
30,141
     
-
     
-
     
244,136
 
Internal revenues
   
3,283
     
91
     
17,202
     
-
     
(20,576
)
   
-
 
Total operating revenues
   
155,048
     
62,321
     
47,343
     
-
     
(20,576
)
   
244,136
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
55,455
     
38,969
     
22,297
     
-
     
(18,751
)
   
97,970
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
24,734
     
14,487
     
4,270
     
10,170
     
(1,825
)
   
51,836
 
Depreciation and amortization
   
23,162
     
17,035
     
8,225
     
292
     
-
     
48,714
 
Total operating expenses
   
103,351
     
70,491
     
34,792
     
10,462
     
(20,576
)
   
198,520
 
Operating income (loss)
 
$
51,697
   
$
(8,170
)
 
$
12,551
   
$
(10,462
)
 
$
-
   
$
45,616
 

(1) Prior year figures have been recast to conform to current year presentation.
 
12

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

   
Three Months Ended
September 30,
 
(in thousands)
 
2015
   
2014
 
Total consolidated operating income
 
$
15,089
   
$
14,144
 
Interest expense
   
(1,808
)
   
(2,007
)
Non-operating income, net
   
180
     
648
 
Income before taxes
 
$
13,461
   
$
12,785
 

   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
Total consolidated operating income
 
$
52,365
   
$
45,616
 
Interest expense
   
(5,663
)
   
(6,119
)
Non-operating income (expense), net
   
1,253
     
1,831
 
Income before taxes
 
$
47,955
   
$
41,328
 

The Company’s assets by segment are as follows:

 
(in thousands)
 
September 30,
2015
   
December 31,
2014
 
Wireless
 
$
243,962
   
$
218,887
 
Cable
   
207,674
     
201,232
 
Wireline
   
98,975
     
98,081
 
Other
   
426,091
     
446,028
 
Combined totals
   
976,702
     
964,228
 
Inter-segment eliminations
   
(356,458
)
   
(344,986
)
Consolidated totals
 
$
620,244
   
$
619,242
 
 
During the third quarter of 2015, the Company discovered a programming logic error in its fixed assets system used to calculate depreciation expense.  As a result, the Company increased depreciation expense by $2.6 million in the third quarter of 2015 ($2.0 million for the nine months ended September 30, 2015) and increased accumulated depreciation by $2.6 million.  Most of the out-of-period depreciation expense correction affected the Company’s Wireless segment, by $1.9 million and $1.6 million for the three and nine months ended September 30, 2015, respectively.
 
8. Income Taxes

The Company files U.S. federal income tax returns and various state and local income tax returns.  Years prior to 2012 are no longer subject to examination. The Company is not subject to any state or federal income tax audits as of September 30, 2015.

9. Acquisition of NTELOS Holdings Corporation

On August 11, 2015, the Company announced that it had entered into a definitive agreement to acquire NTELOS Holdings Corporation ("nTelos") for $9.25 per share in cash for a total equity value of approximately $208 million, after including shares expected to vest on change of control. At closing, the Company will pay off nTelos' outstanding debt, which was $523 million at June 30, 2015. Under the terms of the agreement, the Company will acquire all of nTelos' stock and operations including wireless network assets, retail stores and approximately 298,000 retail subscribers in the nTelos Western Markets. The Company will complete nTelos' plans to close down its Eastern Markets. The Company anticipates closing on the acquisition by early 2016.

Concurrent with the signing of the agreement with nTelos, the Company and Sprint Corporation ("Sprint") entered into a series of agreements, including an Addendum to the Shentel Affiliate Agreement and related agreements, whereby the Company and Sprint will, among other things, exchange certain assets in the nTelos Western Markets. The Company will convert approximately 290,000 nTelos retail wireless customers into Sprint branded affiliate customers, and an additional 8,000 nTelos retail wireless customers into Sprint branded retail customers. Sprint will transition its existing retail wireless operations in the nTelos footprint, including approximately 291,000 Sprint retail customers homed in the nTelos footprint, to Sprint branded affiliate customers. These existing Sprint retail customers, in combination with the nTelos customers, will enable the Company to serve approximately 581,000 additional customers under its affiliate arrangement with Sprint.
 
13

As part of the transaction, the Company and Sprint have also agreed to extend their Affiliate relationship by five years through 2029. Sprint will receive certain spectrum assets of nTelos, and has agreed to reduce the 8% and 6% Management Fee portions of the retained revenues that would otherwise be due to Sprint under the Affiliate Agreement by $252 million over an expected period of five to six years. In addition, at closing Sprint will purchase the nTelos equipment receivables for nTelos customers at a discounted amount to be paid over 24 months.

The Company will finance the nTelos acquisition and network upgrade with $960 million in credit facilities (including term loans totaling $885 million and a revolver of $75 million) from a syndicate of lenders. Proceeds will be used to finance the transaction and refinance the Company’s existing outstanding indebtedness. This commitment is fully underwritten by CoBank, ACB; Royal Bank of Canada; and Fifth Third Bank. Upon the closing of the merger, the Company expects to have total long-term debt outstanding of approximately $810 million and cash of $75 million. The revolver and an additional $75 million in a delayed draw term loan are not expected to be drawn at close.

During the three and nine months ended September 30, 2015, the Company has incurred $2.1 million and $3.2 million, respectively, of expenses associated with the planned acquisition of nTelos.

10. Subsequent Events

On October 19, 2015, the Company’s Board of Directors declared a dividend of $0.48 per share, payable on December 1, 2015, to shareholders of record as of November 5, 2015.  The Company expects to pay out approximately $11.6 million excluding the effect of dividend reinvestments.

On October 19, 2015, the Board of Directors also declared a two-for-one stock split, effective for shareholders of record as of the close of business on December 31, 2015. Shareholders will receive one additional share of common stock of the Company for each share held on the record date. After the split, the Company will have approximately 48.5 million shares outstanding, and 96 million total authorized shares.
 
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, 2014.  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, 2014, 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 services, fiber optics facilities, and leased tower facilities. The Company has three reportable segments, which it operates and manages as strategic business units organized by lines of business:

* The Wireless segment provides digital wireless service as a Sprint PCS Affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia.  In this area, the Company is the exclusive provider of wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz bands under the Sprint brand.  This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.

* The Cable segment provides video, internet and voice services in franchise areas in portions of southern Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.

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

A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.
 
15

Results of Operations
Three Months Ended September 30, 2015 Compared with the Three Months Ended September 31, 2014

The Company’s consolidated results for the third quarter of 2015 and 2014 are summarized as follows:

   
Three Months Ended
September 30,
   
Change
 
(in thousands)
 
2015
   
2014
   
$
   
%
 
Operating revenues
 
$
85,212
   
$
82,268
   
$
2,944
     
3.6
 
Operating expenses
   
70,123
     
68,124
     
1,999
     
2.9
 
Operating income
   
15,089
     
14,144
     
945
     
6.7
 
                                 
Interest expense
   
1,808
     
2,007
     
(199
)
   
(9.9
)
Other income, net
   
180
     
648
     
(468
)
   
(72.2
)
Income before taxes
   
13,461
     
12,785
     
676
     
5.3
 
Income tax expense
   
5,465
     
4,782
     
683
     
14.3
 
Net income
 
$
7,996
   
$
8,003
   
$
(7
)
   
(0.1
)

Operating revenues

For the three months ended September 30, 2015, operating revenues increased $2.9 million, or 3.6%. Cable segment revenue grew $3.4 million on an increase of internet and voice subscribers, a video price increase in January 2015, and internet customers upgrading to higher-priced plans. Wireline segment revenues, excluding affiliate revenues that eliminate in consolidation, grew $0.3 million, primarily due to higher internet service revenues on customer upgrades. Wireless segment revenues decreased $0.6 million compared to the third quarter of 2014. Net postpaid service revenues decreased $1.5 million, as a 7.2% increase in average subscribers was more than offset by lower revenue service plans associated with handset financing and leasing programs. Net prepaid service revenue increased $1.3 million, due to growth in average subscribers and improvements in product mix. Wireless equipment revenue decreased, primarily due to lower volume of subsidized handset sales.

Operating expenses

Total operating expenses were $70.1 million in the third quarter of 2015 compared to $68.1 million in the prior year period.  Cost of goods and services sold decreased $2.8 million, primarily due to a $3.8 million decrease in PCS postpaid handset costs as a result of customers choosing non-subsidized service plans that require them to finance or lease handsets at full cost. Selling, general and administrative expenses increased $2.4 million, driven by $2.1 million of professional service expenses associated with the acquisition of nTelos Holdings Corporation (“nTelos”). Depreciation and amortization expense increased $2.4 million, primarily due to a one-time unfavorable adjustment of $2.6 million cumulative impact of additional depreciation on certain assets placed into service in one year and closed out in the fixed asset system in a subsequent year.

Income tax expense

The Company’s effective tax rate increased from 37.4% for the three months ended September 30, 2014 to 40.6% for the three months ended September 30, 2015. The 2014 period included $0.2 million in favorable adjustments to estimates made for the 2013 federal and state returns. The 2015 period included $0.2 million in unfavorable permanent differences arising from nTelos acquisition expenses.  For the remainder of 2015, the Company expects that its effective tax rate will be approximately 40.0%.

Net income

For the three months ended September 30, 2015, net income was flat. Growth in subscriber counts in the Wireless and Cable segments, along with a decrease in cost of goods and services sold in the Wireless segment contributed to an increase in net income, but were offset by expenses related to the acquisition of nTelos and a one-time adjustment to depreciation expense.
 
16

Nine Months Ended September 30, 2015 Compared with the Nine Months Ended September 30, 2014

Consolidated Results

The Company’s consolidated results for the first nine months of 2015 and 2014 are summarized as follows:

 
(in thousands)
 
Nine Months Ended
September 30,
   
 
Change
 
   
2015
   
2014
   
$
   
%
 
                     
Operating revenues
 
$
255,202
   
$
244,136
   
$
11,066
     
4.5
 
Operating expenses
   
202,837
     
198,520
     
4,317
     
2.2
 
Operating income
   
52,365
     
45,616
     
6,749
     
14.8
 
                                 
Interest expense
   
5,663
     
6,119
     
(456
)
   
(7.5
)
Other income, net
   
1,253
     
1,831
     
(578
)
   
(31.6
)
Income before taxes
   
47,955
     
41,328
     
6,628
     
16.0
 
Income tax expense
   
19,199
     
16,094
     
3,105
     
19.3
 
Net income
 
$
28,756
   
$
25,234
   
$
3,522
     
14.0
 

Operating revenues

For the nine months ended September 30, 2015, operating revenues increased $11.1 million, or 4.5%. Cable segment revenue grew $9.6 million as a result of a 5.8% growth in average subscriber counts and an increase in revenue per subscriber. Wireless segment revenues increased $1.8 million compared to the first nine months of 2014. Net prepaid service revenue increased $3.4 million, primarily due to 5.8% growth in prepaid subscribers. Net postpaid service revenues decreased $1.6 million as a 6.3% increase in average subscribers was more than offset by lower revenue service plans associated with handset financing and leasing programs.

Operating expenses

Total operating expenses were $202.8 million in the nine months ended September 30, 2015 compared to $198.5 million in the prior year period.  Cost of goods and services sold decreased $6.4 million, primarily due to a $9.6 million decrease in PCS postpaid handset costs, partially offset by increases in cable programming and retransmission costs. Selling, general and administrative expenses increased $6.3 million, driven by $3.2 million of expenses associated with the acquisition of nTelos and by a $2.0 million increase to support growth of the wireless prepaid business. Depreciation and amortization expense increased $4.4 million, due to a one-time unfavorable adjustment of $2.0 million related to assets placed into service in one year and closed out in the fixed asset system in a subsequent year and to ongoing projects to expand and upgrade the wireless, cable and fiber networks.

Income tax expense

The Company’s effective tax rate increased from 38.9% for the nine months ended September 30, 2014 to 40.0% for the nine months ended September 30, 2015.  For the remainder of 2015, the Company expects that its effective tax rate will be approximately 40.0%.

Net income

For the nine months ended September 30, 2015, net income increased $3.5 million, or 14.0%. Growth in subscriber counts in the Wireless and Cable segments, along with a decrease in cost of goods and services sold in the Wireless segment contributed to the increase, but were partially offset by expenses related to the acquisition of nTelos and a one-time adjustment to depreciation expense.
 
17

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.  Through Shenandoah Mobile, LLC (“Mobile”), this segment also leases land on which it builds Company-owned cell towers, which it leases to affiliated and non-affiliated wireless service providers, throughout the same four-state area described above,.

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.  Postpaid revenues received from Sprint are recorded net of certain fees retained by Sprint.  These fees total 22% of postpaid net billed revenue (gross customer billings net of credits, adjustments to customer accounts, and write-offs of uncollectible accounts), as defined by the Affiliate Agreement with Sprint.

The Company offers prepaid wireless products and services in its PCS network coverage area.  Sprint retains a Management Fee equal to 6% of prepaid customer billings.  Prepaid revenues received from Sprint are reported net of the cost of this fee.  Other fees charged on a per unit basis are separately recorded as expenses according to the nature of the expense.  The Company pays handset subsidies to Sprint for the difference between the selling price of prepaid handsets and their cost, recorded as a net cost in cost of goods sold.  The revenue and expense components reported to us by Sprint are based on Sprint’s national averages for prepaid services, rather than being specifically determined by customers assigned to our geographic service areas.

In April 2014, the Company’s PCS stores began participating in Sprint’s postpaid handset financing programs, whereby Sprint enters into a financing agreement with the subscriber and the subscriber receives a handset from Sprint.  In these instances, the equipment revenue from the subscriber and the handset expense are Sprint’s responsibility and are not recorded by the Company. In the third quarter of 2015, approximately 75% of postpaid handset transactions through Company channels involved a financing plan. All else being equal, the service plans for these subscribers generate less monthly service revenue compared to plans with a subsidized handset.
 
In August 2015, the Company announced that it has entered into a definitive agreement to acquire nTelos. Under the terms of the agreement, Shentel will acquire all of nTelos' stock and operations including wireless network assets, retail stores and approximately 298,000 retail subscribers in the nTelos Western Markets. At closing Shentel will pay off nTelos' outstanding debt which was $523 million at June 30, 2015. Shentel will complete nTelos' plans to close down its Eastern Markets. The acquisition is expected to close by early 2016.
 
Concurrent with the signing of the agreement with nTelos, Shentel and Sprint Corporation entered into a series of agreements, including an Addendum to the Shentel Affiliate Agreement and related agreements, whereby Shentel and Sprint will, among other things, exchange certain assets in the nTelos Western Markets. Shentel will convert approximately 290,000 nTelos retail wireless customers into Sprint branded affiliate customers. Sprint will transition its existing retail wireless operations in the nTelos footprint, including approximately 291,000 retail customers homed in the nTelos footprint, to Sprint branded affiliate customers. These existing Sprint retail customers, in combination with the nTelos customers, will enable Shentel to serve approximately 581,000 additional customers under its affiliate arrangement with Sprint.
 
As part of the transaction, Shentel and Sprint have also agreed to extend their Affiliate relationship by five years through 2029. As part of the agreement, Sprint will reduce the 14% net service fee to 8.6% of postpaid net billed revenues, and separately settle a number of component pieces that were previously included in the higher net service fee. Although certain revenue and expense lines may change, Shentel does not expect an overall impact on operating results due to these changes. At close, Sprint will receive certain spectrum assets of nTelos, and has agreed to reduce the 8% and 6% Management Fee portions of the retained revenues that would otherwise be due to Sprint under the Affiliate Agreement by $252 million over an expected period of five to six years.
 
Except for the costs to consummate the transaction and the interest expenses associated with the expanded debt facility, the operating results of the acquired operation will primarily be included in the wireless segment’s operating results.
 
18

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

   
September 30,
2015
   
December 31,
2014
   
September 30,
2014
   
December 31,
2013
 
Retail PCS Subscribers – Postpaid
   
303,527
     
287,867
     
282,976
     
273,721
 
Retail PCS Subscribers – Prepaid
   
145,104
     
145,162
     
140,126
     
137,047
 
PCS Market POPS (000) (1)
   
2,421
     
2,415
     
2,410
     
2,397
 
PCS Covered POPS (000) (1)
   
2,213
     
2,207
     
2,116
     
2,067
 
CDMA Base Stations (sites)
   
548
     
537
     
531
     
526
 
Towers Owned
   
154
     
154
     
154
     
153
 
Non-affiliate Cell Site Leases (2)
   
203
     
198
     
197
     
217
 

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Gross PCS Subscriber Additions - Postpaid
   
19,638
     
20,095
     
54,477
     
51,578
 
Net PCS Subscriber Additions - Postpaid
   
7,035
     
5,303
     
15,660
     
9,255
 
Gross PCS Subscriber Additions - Prepaid
   
20,228
     
18,225
     
63,806
     
52,683
 
Net PCS Subscriber Additions (Losses) - Prepaid
   
(327
)
   
1,950
     
(58
)
   
3,079
 
PCS Average Monthly Retail Churn % - Postpaid (3)
   
1.40
%
   
1.76
%
   
1.47
%
   
1.70
%
PCS Average Monthly Retail Churn % - Prepaid (3)
   
4.72
%
   
3.92
%
   
4.85
%
   
3.99
%

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. Covered POPS increased in 2014 primarily as a result of the Company’s deployment of the 800 megahertz spectrum at existing cell sites.
2) The decreases during 2014 are 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.

Three Months Ended September 30, 2015 Compared with the Three Months Ended September 30, 2014

(in thousands)
 
 
Three Months Ended
September 30,
   
 
Change
 
   
2015
   
2014
   
$
   
%
 
Segment operating revenues
                   
Wireless service revenue
 
$
47,793
   
$
48,013
   
$
(220
)
   
(0.5
)
Tower lease revenue
   
2,610
     
2,545
     
65
     
2.6
 
Equipment revenue
   
1,104
     
1,573
     
(469
)
   
(29.8
)
Other revenue
   
129
     
64
     
65
     
101.6
 
Total segment operating revenues
   
51,636
     
52,195
     
(559
)
   
(1.1
)
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation     and amortization shown separately below
   
15,572
     
18,322
     
(2,750
)
   
(15.0
)
Selling, general and administrative, exclusive of   depreciation and amortization shown separately below
   
9,027
     
8,645
     
382
     
4.4
 
Depreciation and amortization
   
9,644
     
7,895
     
1,749
     
22.2
 
Total segment operating expenses
   
34,243
     
34,862
     
(619
)
   
(1.8
)
Segment operating income
 
$
17,393
   
$
17,333
   
$
60
     
0.3
 
 
19

Operating revenues

Wireless service revenue decreased $0.2 million, or 0.5%, for the three months ended September 30, 2015, compared to the comparable 2014 period.  Net postpaid service revenues decreased $1.5 million.  Average postpaid subscribers increased 7.2% in 2015 over the 2014 period, but was offset by marketing promotions and a switch to lower revenue service plans associated with handset financing and leasing plans.  Under these programs, the Company receives less service revenue from the subscriber, while the equipment revenue from the subscriber and the handset expense become Sprint’s responsibility and are not recorded by the Company.  The decreases in service revenues are currently more than offset by a decrease in handset expense within cost of goods and services. Net prepaid service revenues grew $1.3 million, or 11.7%, due to 4.7% growth in average prepaid subscribers over 2014 and to improvements in product mix.

Equipment revenue decreased, primarily due to lower volume of subsidized handset sales.

Cost of goods and services

Cost of goods and services decreased $2.8 million, or 15.0%, in 2015 from the third quarter of 2014. Postpaid handset costs decreased $3.8 million, as handset expenses associated with financing and leasing plans are Sprint’s responsibility and are not recorded by the Company.  Network costs increased $1.3 million, due to a decrease in labor capitalized to projects and to a $0.5 million increase in backhaul and rent expenses at cell sites and towers.

Selling, general and administrative

Selling, general and administrative costs increased $0.4 million, or 4.4%, in the third quarter of 2015 from the comparable 2014 period.  Costs to support the prepaid wireless business grew $0.5 million, driven by subscriber growth, product mix, and higher general and administrative costs. The increases were partially offset by a $0.2 million decline in third party commissions expense due to lower volume of commissionable handsets activated through dealer channels.

Depreciation and amortization

Depreciation and amortization increased $1.7 million, or 22.2%, in the third quarter of 2015 over the comparable 2014 period. The current year period included a one-time unfavorable adjustment of $1.9 million related to assets placed into service in one year and closed out in the fixed asset system in a subsequent year. The period also included a $0.3 million favorable adjustment to depreciation that resulted from a revision of the Company’s estimates regarding asset retirement obligations for towers.

Nine Months Ended September 30, 2015 Compared with the Nine Months Ended September 30, 2014


 
(in thousands)
 
Nine Months Ended
September 30,
   
 
Change
 
   
2015
   
2014
   
$
   
%
 
Segment operating revenues
                   
Wireless service revenue
 
$
144,917
   
$
143,112
   
$
1,805
     
1.3
 
Tower lease revenue
   
7,772
     
7,576
     
196
     
2.6
 
Equipment revenue
   
3,871
     
4,076
     
(205
)
   
(5.0
)
Other revenue
   
287
     
284
     
3
     
1.1
 
Total segment operating revenues
   
156,847
     
155,048
     
1,799
     
1.2
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
47,661
     
55,455
     
(7,794
)
   
(14.1
)
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
26,996
     
24,734
     
2,262
     
9.1
 
Depreciation and amortization
   
26,089
     
23,162
     
2,927
     
12.6
 
Total segment operating expenses
   
100,746
     
103,351
     
(2,605
)
   
(2.5
)
Segment operating income
 
$
56,101
   
$
51,697
   
$
4,404
     
8.5
 
 
20

Operating revenues

Wireless service revenue increased $1.8 million, or 1.3%, for the nine months ended September 30, 2015, compared to the comparable 2014 period.  Net prepaid service revenues grew $3.4 million, or 10.5%, due primarily to 5.8% growth in average prepaid subscribers over 2014 and improvements in product mix. Net postpaid service revenues decreased $1.6 million.  Average postpaid subscribers increased 6.3% in 2015 over the 2014 period, but the increase was more than offset by marketing promotions and a switch to lower revenue service plans associated with handset financing and leasing plans.  Under these programs, the Company receives less service revenue from the subscriber, while the equipment revenue from the subscriber and the handset expense become Sprint’s responsibility and are not recorded by the Company.  The decreases in service revenues are currently more than offset by a decrease in handset expense within cost of goods and services.

Equipment revenue decreased due primarily to a lower volume of subsidized handset sales, partially offset by lower discounts on those sales.

Cost of goods and services

Cost of goods and services decreased $7.8 million, or 14.1%, in 2015 from the first nine months of 2014. Postpaid handset costs decreased $9.6 million, as handset expenses associated with financing and leasing plans are Sprint’s responsibility and are not recorded by the Company.  Network costs increased $1.2 million, due to a decrease in labor capitalized to projects and to increases in rent and power expenses for cell sites and towers. Finally, the prior year period included a $0.4 million gain on disposal of 3G equipment.

Selling, general and administrative

Selling, general and administrative costs increased $2.3 million, or 9.1%, in the first nine months of 2015 from the comparable 2014 period.  Costs to support the prepaid wireless business grew $2.0 million, driven by subscriber growth, product mix, and higher general and administrative costs. Advertising expenses increased $0.5 million. Personnel costs increased $0.5 million due to the addition of new retail stores. Property taxes increased $0.4 million due to a prior year refund and a higher tax basis in network assets as a result of recent upgrades.  The increases were partially offset by a $1.1 million decline in third party commissions expense due to lower volume of commissionable handsets activated through dealer channels.

Depreciation and amortization

Depreciation and amortization increased $2.9 million, or 12.6%, in the first nine months of 2015 over the comparable 2014 period. The current year period included a one-time unfavorable adjustment of $1.6 million related to assets placed into service in one year and closed out in the fixed asset system in a subsequent year. Depreciation expense grew $1.7 million due to ongoing investments in wireless network coverage and capacity. The increase was partially offset by a $0.4 million decrease in amortization expense and a $0.3 million favorable adjustment to depreciation that resulted from a revision of the company’s estimates regarding asset retirement obligations for towers.
 
21

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.
 
   
September 30,
2015
   
December 31,
2014
   
September 30,
2014
   
December 31,
2013
 
Homes Passed (1)
   
172,388
     
171,589
     
171,382
     
170,470
 
Customer Relationships (2)
                               
Video customers
   
48,421
     
49,247
     
49,672
     
51,197
 
Non-video customers
   
23,816
     
22,051
     
21,630
     
18,341
 
Total customer relationships
   
72,237
     
71,298
     
71,302
     
69,538
 
Video
                               
Customers (3)
   
50,839
     
52,095
     
52,347
     
53,076
 
Penetration (4)
   
29.5
%
   
30.4
%
   
30.5
%
   
31.1
%
Digital video penetration (5)
   
75.2
%
   
65.9
%
   
64.8
%
   
49.2
%
High-speed Internet
                               
Available Homes (6)
   
172,388
     
171,589
     
170,728
     
168,255
 
Customers (3)
   
54,620
     
51,359
     
50,626
     
45,776
 
Penetration (4)
   
31.7
%
   
29.9
%
   
29.7
%
   
27.2
%
Voice
                               
Available Homes (6)
   
169,651
     
168,852
     
167,991
     
163,282
 
Customers (3)
   
19,723
     
18,262
     
17,493
     
14,988
 
Penetration (4)
   
11.6
%
   
10.8
%
   
10.4
%
   
9.2
%
Total Revenue Generating Units (7)
   
125,182
     
121,716
     
120,466
     
113,840
 
Fiber Route Miles
   
2,842
     
2,834
     
2,473
     
2,636
 
Total Fiber Miles (8)
   
75,021
     
72,694
     
71,022
     
69,296
 

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.
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, 2015 Compared with the Three Months Ended September 30, 2014

(in thousands)
 
Three Months Ended
September 30,
   
Change
 
   
2015
   
2014
   
$
   
%
 
Segment operating revenues
                   
Service revenue (1)
 
$
22,284
   
$
19,173
   
$
3,111
     
16.2
 
Other revenue (1)
   
2,133
     
1,831
     
302
     
16.5
 
Total segment operating revenues
   
24,417
     
21,004
     
3,413
     
16.2
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
14,124
     
14,157
     
(33
)
   
(0.2
)
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below
   
4,948
     
5,107
     
(159
)
   
(3.1
)
Depreciation and amortization
   
5,948
     
5,864
     
84
     
1.4
 
Total segment operating expenses
   
25,020
     
25,128
     
(108
)
   
(0.4
)
Segment operating loss
 
$
(603
)
 
$
(4,124
)
 
$
3,521
     
85.4
 

(1) Prior year service and other revenue amounts have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue.
 
Operating revenues

Cable segment service revenue increased $3.1 million, or 16.2%. Internet service revenue increased $2.1 million, or 28.6%, due to an 8.9% increase in average internet subscribers, along with an improved product mix as customers upgrade to higher-speed plans. Video revenue, including retransmission consent fee surcharges, increased $0.9 million, driven by video rate increases in January 2015. Voice revenue increased $0.3 million due to 15.4% growth in average voice revenue generating units. These increases were partially offset by a $0.2 million increase in bundle discounts.

Other revenue grew $0.3 million, primarily due to new fiber contracts.

Operating expenses

Cable segment cost of goods and services were flat in the third quarter of 2015 compared to the 2014 period. Video programming costs, including retransmission fees, increased $1.1 million as the impact of rising rates per subscriber outpaced declining video subscriber counts. Network and maintenance costs increased $0.4 million due primarily to capitalized labor adjustments in the prior year. The increases were offset by a $1.4 million decrease in disposal costs following a $1.6 million disposal of obsolete equipment in 2014.

Selling, general and administrative expenses decreased $0.2 million against the prior year quarter due to a reduction in bad debt expense.
 
23

Nine Months Ended September 30, 2015 Compared with the Nine Months Ended September 30, 2014

 
(in thousands)
 
Nine Months Ended
September 30,
   
 
Change
 
   
2015
   
2014
   
$
   
%
 
Segment operating revenues
                   
Service revenue (1)
 
$
65,802
   
$
57,028
   
$
8,774
     
15.4
 
Other revenue (1)
   
6,080
     
5,293
     
787
     
14.9
 
Total segment operating revenues
   
71,882
     
62,321
     
9,561
     
15.3
 
                                 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
41,378
     
38,969
     
2,409
     
6.2
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
14,924
     
14,487
     
437
     
3.0
 
Depreciation and amortization
   
17,286
     
17,035
     
251
     
1.5
 
Total segment operating expenses
   
73,588
     
70,491
     
3,097
     
4.4
 
Segment operating loss
 
$
(1,706
)
 
$
(8,170
)
 
$
6,464
     
79.1
 

(1) Prior year service and other revenue amounts have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue

Operating revenues

Cable segment service revenue increased $8.8 million, or 15.4%. Internet service revenue increased $6.4 million, or 30.9%, due to a 10.1% increase in average internet subscribers, along with an improved product mix as customers upgrade to higher-speed plans. Video revenue, including retransmission consent fee surcharges, increased $3.2 million driven by video rate increases in January 2015. Voice revenue increased $1.0 million due to 18.6% growth in average voice revenue generating units. These increases were partially offset by a $1.8 million increase in bundle discounts.

Other revenue grew $0.8 million, primarily due to new fiber contracts.

Operating expenses

Cable segment cost of goods and services increased $2.4 million, or 6.2%, in the nine months ended September 30, 2015 over the comparable 2014 period. Video programming costs, including retransmission fees, increased $3.1 million as the impact of rising rates per subscriber outpaced declining video subscriber counts. Network costs grew primarily due to $0.4 million increase in the Universal Service fees mandated by the U.S. government in the current year. The increases were offset by a $1.5 million decrease in disposal costs following a $1.6 million disposal of obsolete equipment in 2014.

Selling, general and administrative expenses grew $0.4 million against the prior year period as growth in administrative and operating tax expenses were partially offset by a decline in customer service costs.
 
24

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, Maryland and portions of Pennsylvania.
 
Effective for the fourth quarter of 2015, the Company is expanding its data offerings in its legacy telephone service area. Until now, the Company only offered DSL-based internet access, and a phone line was required to obtain this service. Going forward, subscribers who have access to our video services (the video network overlaps a portion of our legacy telephone network) will be able to purchase higher-speed internet packages over the video network, while DSL subscribers who do not have access to our video network can purchase DSL for internet access, without having to purchase telephone service as well. While the Company is unable to predict the impact on operating results, a decrease in DSL subscribers, offset by an increase in broadband internet subscribers, is likely, as well as a larger decrease in telephone access lines.
 
   
Sept. 30,
2015
   
Dec. 31,
2014
   
Sept. 30,
2014
   
Dec. 31,
2013
 
Telephone Access Lines
   
21,598
     
21,612
     
21,742
     
22,106
 
Long Distance Subscribers
   
9,651
     
9,571
     
9,645
     
9,851
 
Video Customers(1)
   
5,375
     
5,692
     
5,787
     
6,342
 
DSL Subscribers
   
12,834
     
12,742
     
12,708
     
12,632
 
Fiber Route Miles
   
1,625
     
1,556
     
1,459
     
1,452
 
Total Fiber Miles (2)
   
107,432
     
99,387
     
85,398
     
84,600
 

1) The Wireline segment’s video service passes approximately 16,000 homes.
2) 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 revised following a review of fiber records in the first quarter of 2015.

Three Months Ended September 30, 2015 Compared with the Three Months Ended September 30, 2014

   
Three Months Ended
September 30,
   
 
Change
 
(in thousands)
 
2015
   
2014
   
$
   
%
 
Segment operating revenues
                   
Service revenue (1)
 
$
5,596
   
$
5,266
   
$
330
     
6.3
 
Carrier access and fiber revenues (1)
   
10,854
     
9,926
     
928
     
9.3
 
Other revenue (1)
   
828
     
732
     
96