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 June 30, 2016
 
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 ☑   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 July 28, 2016 was 48,913,327.
 

 


SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX

   
Page
Numbers
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
3-4
     
 
5
     
 
6
     
 
7-8
     
 
9-24
     
Item 2.
25-43
     
Item 3.
44
     
Item 4.
45
     
PART II.
OTHER INFORMATION
 
     
Item 1A.
46
     
Item 2.
46
     
Item 6.
47
     
 
48
     
 
49
 
2

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

ASSETS
 
June 30,
2016
   
December 31,
2015
 
             
Current Assets
           
Cash and cash equivalents
 
$
40,571
   
$
76,812
 
Restricted cash
   
2,167
     
-
 
Accounts receivable, net
   
77,392
     
29,778
 
Income taxes receivable
   
-
     
7,694
 
Inventory, net
   
19,419
     
4,183
 
Prepaid expenses and other
   
18,562
     
8,573
 
Deferred income taxes
   
-
     
907
 
Total current assets
   
158,111
     
127,947
 
                 
Investments, including $2,784 and $2,654 carried at fair value
   
12,526
     
10,679
 
                 
Building held for sale
   
4,950
     
-
 
Property, plant and equipment, net
   
653,523
     
410,018
 
                 
Other Assets
               
Intangible assets, net
   
464,146
     
66,993
 
Goodwill
   
151,730
     
10
 
Deferred charges and other assets, net
   
10,855
     
11,504
 
Other assets, net
   
626,731
     
78,507
 
Total assets
 
$
1,455,841
   
$
627,151
 

(Continued)
 
3

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

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
June 30,
2016
   
December 31,
2015
 
             
Current Liabilities
           
Current maturities of long-term debt, net of unamortized loan fees
 
$
20,147
   
$
22,492
 
Accounts payable
   
27,951
     
13,009
 
Advanced billings and customer deposits
   
23,024
     
11,674
 
Accrued compensation
   
6,020
     
5,915
 
Income taxes payable
   
29,717
     
-
 
Accrued liabilities and other
   
31,615
     
7,639
 
Total current liabilities
   
138,474
     
60,729
 
                 
Long-term debt, less current maturities, net of unamortized loan fees
   
795,426
     
177,169
 
                 
Other Long-Term Liabilities
               
Deferred income taxes
   
142,181
     
74,868
 
Deferred lease payable
   
9,370
     
8,142
 
Asset retirement obligations
   
15,769
     
7,266
 
Other liabilities
   
50,514
     
9,039
 
Total other long-term liabilities
   
217,834
     
99,315
 
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock
   
44,344
     
32,776
 
Retained earnings
   
263,633
     
256,747
 
Accumulated other comprehensive income (loss), net of taxes
   
(3,870
)
   
415
 
Total shareholders’ equity
   
304,107
     
289,938
 
                 
Total liabilities and shareholders’ equity
 
$
1,455,841
   
$
627,151
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
4

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME(LOSS)
(in thousands, except per share amounts)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Operating revenues
 
$
130,309
   
$
85,701
   
$
222,880
   
$
169,989
 
                                 
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and  amortization shown separately below
   
50,296
     
30,280
     
82,057
     
60,970
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
33,694
     
18,606
     
55,120
     
36,718
 
Integration and acquisition expenses
   
20,054
     
402
     
20,386
     
1,024
 
Depreciation and amortization
   
32,415
     
17,663
     
50,154
     
34,001
 
Total operating expenses
   
136,459
     
66,951
     
207,717
     
132,713
 
Operating income (loss)
   
(6,150
)
   
18,750
     
15,163
     
37,276
 
                                 
Other income (expense):
                               
Interest expense
   
(5,904
)
   
(1,940
)
   
(7,524
)
   
(3,855
)
Gain on investments, net
   
21
     
98
     
109
     
200
 
Non-operating income, net
   
146
     
442
     
614
     
874
 
Income (loss) before income taxes
   
(11,887
)
   
17,350
     
8,362
     
34,495
 
                                 
Income tax expense (benefit)
   
(4,892
)
   
6,876
     
1,477
     
13,735
 
Net income (loss)
   
(6,995
)
   
10,474
     
6,885
     
20,760
 
                                 
Other comprehensive income (loss):
                               
Unrealized gain (loss) on interest rate hedge, net of tax
   
(3,238
)
   
326
     
(4,285
)
   
(581
)
Comprehensive income (loss)
 
$
(10,233
)
 
$
10,800
   
$
2,600
   
$
20,179
 
                                 
Earnings (loss) per share:
                               
Basic
 
$
(0.14
)
 
$
0.22
   
$
0.14
   
$
0.43
 
Diluted
 
$
(0.14
)
 
$
0.21
   
$
0.14
   
$
0.42
 
                                 
Weighted average shares outstanding, basic
   
48,830
     
48,380
     
48,696
     
48,343
 
                                 
Weighted average shares outstanding, diluted
   
48,830
     
49,004
     
49,415
     
48,927
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
5

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

    
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss),
net of tax
   
Total
 
Balance, December 31, 2014
   
48,265
   
$
29,712
   
$
227,512
   
$
1,122
   
$
258,346
 
                                         
Net income
   
-
     
-
     
40,864
     
-
     
40,864
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(707
)
   
(707
)
Dividends declared ($0.24 per share)
   
-
     
-
     
(11,629
)
   
-
     
(11,629
)
Dividends reinvested in common stock
   
22
     
544
     
-
     
-
     
544
 
Stock based compensation
   
-
     
2,719
     
-
     
-
     
2,719
 
Common stock issued through exercise of incentive stock  options
   
87
     
996
     
-
     
-
     
996
 
Common stock issued for share awards
   
212
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
11
     
-
     
-
     
11
 
Common stock repurchased
   
(111
)
   
(1,885
)
   
-
     
-
     
(1,885
)
Net excess tax benefit from stock options exercised
   
-
     
679
     
-
     
-
     
679
 
                                         
Balance, December 31, 2015
   
48,475
   
$
32,776
   
$
256,747
   
$
415
   
$
289,938
 
                                         
Net income
   
-
     
-
     
6,885
     
-
     
6,885
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(4,285
)
   
(4,285
)
Stock based compensation
   
-
     
2,404
     
-
     
-
     
2,404
 
Stock options exercised
   
319
     
2,942
     
-
     
-
     
2,942
 
Common stock issued for share awards
   
188
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
5
     
-
     
-
     
5
 
Common stock issued to acquire non-controlling interests of nTelos
   
76
     
10,400
     
-
     
-
     
10,400
 
Common stock repurchased
   
(177
)
   
(4,183
)
   
-
     
-
     
(4,183
)
Balance, June 30, 2016
   
48,883
   
$
44,344
   
$
263,633
   
$
(3,870
)
 
$
304,107
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
6

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
Six Months Ended
June 30,
 
   
2016
   
2015
 
             
Cash Flows From Operating Activities
           
Net income
 
$
6,885
   
$
20,760
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
42,753
     
33,189
 
Amortization reflected as operating expense
   
7,401
     
812
 
Amortization reflected as contra revenue
   
3,290
     
-
 
Provision for bad debt
   
752
     
905
 
Straight line adjustment to reduce management fee revenue
   
3,406
     
-
 
Stock based compensation expense
   
1,957
     
1,430
 
Excess tax benefits on stock awards
   
-
     
(450
)
Deferred income taxes
   
(53,238
)
   
(3,656
)
Net loss on disposal of equipment
   
12
     
227
 
Unrealized (gain) on investments
   
(83
)
   
(54
)
Net gains from patronage and equity investments
   
(315
)
   
(385
)
Amortization of long term debt issuance costs
   
1,205
     
289
 
Other
   
2,120
     
647
 
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
   
(4,332
   
(339
)
Inventory, net
   
(11,424
)
   
(414
)
Income taxes receivable
   
7,694
     
14,752
 
Other assets
   
2,066
     
(3,421
)
Increase (decrease) in:
               
Accounts payable
   
5,529
 
   
(2,911
)
Income taxes payable
   
34,195
     
499
 
Deferred lease payable
   
1,228
     
506
 
Other deferrals and accruals
   
9,692
     
(2,116
)
Net cash provided by operating activities
 
$
60,793
   
$
60,270
 
                 
Cash Flows From Investing Activities
               
Acquisition of property, plant and equipment
 
$
(60,123
)
 
$
(25,135
)
Proceeds from sale of equipment
   
185
     
52
 
Cash distributions from investments
   
53
     
3
 
Cash disbursed for acquisition, net of cash acquired
   
(654,832
)
   
-
 
Net cash used in investing activities
 
$
(714,717
)
 
$
(25,080
)

 (Continued)
 
7

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

   
Six Months Ended
June 30,
 
   
2016
   
2015
 
             
Cash Flows From Financing Activities
           
Principal payments on long-term debt
 
$
(201,257
)
 
$
(11,500
)
Amounts borrowed under debt agreements
   
835,000
     
-
 
Cash paid for debt issuance costs
   
(14,825
)
   
-
 
Excess tax benefits on stock awards
   
-
     
450
 
Repurchases of common stock
   
(4,183
)
   
(1,450
)
Proceeds from issuances of common stock
   
2,948
     
530
 
Net cash provided by/(used in) financing activities
 
$
617,683
   
$
(11,970
)
                 
Net increase (decrease) in cash and cash equivalents
 
$
(36,241
)
 
$
23,220
 
                 
Cash and cash equivalents:
               
Beginning
   
76,812
     
68,917
 
Ending
 
$
40,571
   
$
92,137
 
 
               
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
Interest
 
$
6,659
   
$
3,782
 
                 
Income taxes paid, net of refunds received
 
$
12,796
   
$
2,139
 

Non-cash investing and financing activities:
 
At June 30, 2016 and 2015, accounts payable included approximately $5.2 million and $1.2 million, respectively, associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.

In conjunction with the acquisition of nTelos, the Company issued common stock to acquire non-controlling interests held by third parties in a subsidiary of nTelos. The transaction was valued at $10.4 million.

The Company reclassified $4.3 million of unamortized loan fees and costs included in deferred charges and other assets to long term debt in connection with the new Term loan A-1 and A-2 borrowing related to the acquisition of nTelos.

See accompanying notes to unaudited condensed consolidated financial statements.
 
8

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

1. Basis of Presentation

The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein.  All such adjustments were of a normal and recurring nature.  These financial 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, 2015.  The accompanying balance sheet information at December 31, 2015 was derived from the audited December 31, 2015 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.

In connection with the nTelos acquisition and exchange transaction with Sprint (see Note 2), the Company has added the following significant accounting policies:

Revenue Recognition

Under the Company’s amended affiliate agreement, Sprint agreed to waive the management fee, which is historically presented as a contra-revenue by the Company, for a period of approximately six years.  The impact of Sprint’s waiver of the management fee over the approximate six-year period is reflected as an increase in revenue, offset by the non-cash adjustment to recognize this impact on a straight-line basis over the contract term of approximately 14 years.

Goodwill

Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that impairment is more likely than not to have occurred. In conducting its annual impairment testing, the Company may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The Company conducts its annual impairment testing of goodwill as of October 1.

Pension Benefits and Retirement Benefits Other Than Pensions
 
Through the Company’s acquisition of nTelos, the Company assumed nTelos’ non-contributory defined benefit pension plan (“Pension Plan”) covering all employees who met eligibility requirements and were employed by nTelos prior to October 1, 2003. The Pension Plan was closed to nTelos employees hired on or after October 1, 2003. Pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65. Effective December 31, 2012, nTelos froze future benefit accruals.  The Company uses updated mortality tables published by the Society of Actuaries that predict increasing life expectancies in the United States.

IRC Sections 412 and 430 and Sections 302 and 303 of the Employee Retirement Income Security Act of 1974, as amended establish minimum funding requirements for defined benefit pension plans. The minimum required contribution is generally equal to the target normal cost plus the shortfall amortization installments for the current plan year and each of the six preceding plan years less any calculated credit balance. If plan assets (less calculated credits) are equal to or exceed the funding target, the minimum required contribution is the target normal cost reduced by the excess funding, but not below zero. The Company’s policy is to make contributions to stay at or above the threshold required in order to prevent benefit restrictions and related additional notice requirements and is intended to provide not only for benefits based on service to date, but also for those expected to be earned in the future. The Company also assumed two qualified nonpension postretirement benefit plans that provide certain health care and life benefits for nTelos retired employees that meet eligibility requirements. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan also is contributory. These obligations, along with all of the pension plans and other postretirement benefit plans, are obligations assumed by the Company. Eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of January 5, 1994. Neither plan is eligible to employees hired after April 1993. The accounting for the plans anticipates that the Company will maintain a consistent level of cost sharing for the benefits with the retirees. The Company’s share of the projected costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees’ service periods to the dates they are fully eligible for benefits.
 
The Company records annual amounts relating to the Pension Plan and postretirement benefit plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, turnover rates and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income (loss) and amortized to net periodic cost over future periods using the corridor method.
 
9

2. Acquisition of NTELOS Holdings Corp. and Exchange with Sprint

On May 6, 2016, the Company completed its previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $663.7 million in cash, net of cash acquired.  The purchase price was financed by a credit facility arranged by CoBank, ACB (see Note 14).  The Company has included the operations of nTelos for financial reporting purposes for the period subsequent to the acquisition.  The Company has accounted for the acquisition of nTelos under the acquisition method of accounting, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations”, and will account for any measurement period adjustments under Accounting Standards Update (“ASU”) 2015-16, “Simplifying the Accounting for Measurement Period Adjustments”.  Under the acquisition method of accounting, the total purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed in connection with the acquisition based on their estimated fair values.

The preliminary allocation of the purchase price was based upon management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed of nTelos, with the excess recorded as goodwill. (in thousands):

Accounts receivable
 
$
48,476
 
Inventory
   
3,810
 
Restricted cash
   
2,167
 
Investments
   
1,501
 
Prepaids expenses and other assets
   
14,835
 
Building held for sale
   
4,950
 
Property, plant and equipment
   
223,900
 
Spectrum licenses
   
198,200
 
Customer based contract rights
   
198,200
 
Contract based intangible assets
   
11,000
 
Goodwill
   
151,627
 
Other long term assets
   
10,288
 
Total assets acquired
 
$
868,954
 
         
Accounts payable
 
$
8,648
 
Advanced billings and customer deposits
   
12,477
 
Accrued expenses
   
25,230
 
Capital lease liability
   
418
 
Deferred tax liabilities
   
124,964
 
Retirement benefits
   
19,461
 
Other long-term liabilities
   
14,056
 
Total liabilities assumed
   
205,254
 
         
Net assets acquired
 
$
663,700
 

Finalization of the purchase price allocations is dependent on final review and acceptance of the independent appraiser’s valuation report.

Immediately after acquiring nTelos, Shenandoah Personal Communications, LLC, (“PCS”) a wholly-owned subsidiary of the Company, completed its previously announced transaction with SprintCom, Inc., an affiliate of Sprint Corporation (“Sprint”).  Pursuant to this transaction, among other things,  the Company exchanged spectrum licenses valued at $198.2 million and customer based contract rights, valued at $198.2 million, acquired from nTelos with Sprint, and received an expansion of its affiliate service territory to include most of the service area served by nTelos, valued at $258.1 million, as well as additional customer based contract rights, valued at $138.3 million, relating to nTelos’ and Sprint’s legacy customers in the Company’s affiliate service territory. These exchanges were accounted for in accordance with ASC 845, “Nonmonetary Transactions”.
 
10

The value of the affiliate agreement expansion is based on changes to the amended affiliate agreement that include:

an increase in the price to be paid by Sprint from 80% to 90% of the entire business value of PCS if the affiliate agreement is not renewed;
extension of the affiliate agreement with Sprint by five years to 2029;
expanded territory in the nTelos service area;
rights to serve all future Sprint customers in the affiliate service territory;
the Company’s commitment to upgrade certain coverage and capacity in its newly acquired service area; and
a reduction of the management fee charged by Sprint under the amended affiliate agreement; not to exceed $4.2 million in an individual month until the total waived fee equals $251.8 million, as well as an additional waiver of the management fee charged with respect to the former nTelos customers until the earlier of migration to the Sprint back-office billing and related systems or six months following the acquisition; not to exceed $5.0 million.

Intangible assets resulting from the acquisition of nTelos and the Sprint exchange, both described above, are noted below (dollars in thousands):

Useful Life 
 
Basis
 
Affiliate contract agreement
14 years
 
$
258,100
 
Customer based contract rights
4-10 years
   
138,300
 
Contract based intangible assets
3-19 years
   
11,000
 

The affiliate contract agreement intangible asset will be amortized on a straight-line basis and recorded as a contra-revenue over the 14 year contract term.  The other contract based intangible assets will be amortized on a straight-line basis and recorded through amortization expense.  The customer based contract rights will be amortized over the life of the customers, gradually decreasing over the expected life of this asset, and recorded through amortization expense.

The Company has recorded goodwill in its Wireless segment as a result of the nTelos acquisition.  This goodwill is not amortizable for tax purposes, as the Company acquired the common stock of nTelos.

Prior to the acquisition, nTelos was eligible to receive up to $5.0 million in connection with its winning bid in the Connect America Fund's Mobility Fund Phase I Auction ("Auction 901").  Pursuant to the terms of Auction 901, nTelos obtained a Letter of Credit (“LOC”) in the amount of $2.2 million for the benefit of the Universal Service Administrative Company (“USAC”) to cover each disbursement plus the amount of the performance default penalty (10% of the total eligible award).  In accordance with the terms of the LOC, nTelos deposited $2.2 million into a separate account at the issuing bank to serve as cash collateral and is presented as restricted cash.  Such funds will be released to the Company when the LOC is terminated without being drawn upon by USAC.

At the time of the acquisition, certain third party investors held a non-controlling interest in one of nTelos’ subsidiaries.  Immediately after the acquisition of nTelos, the Company acquired these interests in exchange for 380,000 shares of Company common stock, to be paid in five equal installments, with the first installment paid immediately and the remaining four to be paid over the next four years.  This transaction was valued at $10.4 million.

In connection with the acquisition, at closing, the Company borrowed $810.0 million in term loans with a weighted average effective interest rate of approximately 3.84%.  The proceeds were used to finance in part the acquisition, including the repayment of the Company’s term loan of $195.5 million, and the repayment of nTelos’ term loans at the outstanding principal amount of $519.7 million, without penalty.

Following are the unaudited pro forma results of the Company for the three and six months ended June 30, 2016 and 2015 as if the acquisition of nTelos had occurred at the beginning of each of the periods presented (in millions):
 
   
Three Months Ended
June 30,
 
   
2016
   
2015
 
Operating revenues
 
$
161.1
   
$
170.1
 
Income (loss) before income taxes
 
$
(7.5
)
 
$
13.6
 
 
11

   
Six Months Ended
June 30,
 
   
2016
   
2015
 
Operating revenues
 
$
334.4
   
$
342.8
 
Income before income taxes
 
$
9.4
   
$
37.1
 

The pro forma disclosures shown above are based upon estimated preliminary valuations of the assets acquired and liabilities assumed as well as preliminary estimates of depreciation and amortization charges thereon, that may differ from the final fair values of the acquired assets and assumed liabilities and the resulting depreciation and amortization charges thereon.   Other pro forma adjustments include the following:

changes in nTelos’ reported revenues from cancelling nTelos’ wholesale contract with Sprint;
the incorporation of the Sprint-homed customers formerly serviced under the wholesale agreement into the Company’s affiliate service territory under the Company’s affiliate agreement with Sprint;
the effect of other changes to revenues and expenses due to various provisions of the affiliate agreement, including fees charged under the affiliate agreement on revenues from former nTelos customers, a reduction of the net service fee charged by Sprint, the straight-line impact of the waived management fee, and the amortization of the affiliate agreement expansion intangible asset; and the elimination of non-recurring transaction related expenses incurred by the Company and nTelos;
the elimination of certain nTelos operating costs associated with billing and care that are covered under the fees charged by Sprint under the affiliate agreement;
historical depreciation expense was reduced for the fair value adjustment decreasing the basis of property, plant and equipment; this decrease was offset by a shorter estimated useful life to conform to the Company’s standard policy and the acceleration of depreciation on certain equipment; and
incremental amortization due to the customer-based contract rights associated with acquired customers.

In connection with these transactions, the Company committed to Sprint to migrate the former nTelos customers to devices which can interact with the Sprint billing and network systems and to maintain the nTelos billing, customer care and switching systems until the migration is complete, and expects to incur a total of between $106 million and $126 million of integration and acquisition expenses associated with this transaction, excluding approximately $24 million of debt issuance costs.  These costs include the nTelos back office staff and support functions until the nTelos legacy customers are migrated to the Sprint billing platform; cost of handsets to be provided to nTelos legacy customers as they migrate to the Sprint billing platform; severance costs for back office and other former nTelos employees who will not be retained permanently; and transaction related fees.  The Company has incurred $22.4 million and $22.7 million of these costs in the three months and six months ended June 30, 2016, respectively, including $0.3 million reflected in cost of goods and services and $2.0 million reflected in selling, general and administrative costs in both the three and six month periods ended June 30, 2016.
 
The amounts of operating revenue and income or loss before income taxes related to the former nTelos entity are not readily determinable due to intercompany transactions, allocations and integration activities that have occurred in connection with the operations of the combined company.

Former nTelos stockholders who held approximately one million shares of nTelos’ common stock have exercised their appraisal rights under Delaware law with respect to the merger consideration of $9.25 per share paid pursuant to the nTelos acquisition.  The Company has recorded a payable for the $9.3 million aggregate remaining purchase price due based upon the terms of the merger agreement with nTelos.  At this time, the Company is unable to determine an estimate of any final outcome of the appraisal action or the expected timing of resolving the appraisal action.  Under Delaware law, the former nTelos stockholders will be entitled to interest at the rate of 6.1% per annum on the unpaid amount when the appraisal action is resolved.
 
12

3. Intangible assets

Intangible assets consisted of the following (in thousands):

         
June 30,
2016
         
December 31,
2015
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
 
Non-amortizing intangibles:
                   
Cable franchise rights
 
$
64,374
   
$
-
   
$
64,374
   
$
64,098
   
$
-
   
$
64,098
 
                                                 
Finite-lived intangibles:
 
Affiliate contract expansion rights
 
$
258,100
   
$
(3,290
)
 
$
254,810
   
$
-
   
$
-
   
$
-
 
Acquired subscribers – wireless
   
138,300
     
(6,647
)
   
131,653
     
-
     
-
     
-
 
Favorable leases – wireless
   
11,000
     
(183
)
   
10,817
     
-
     
-
     
-
 
Acquired subscribers – cable
   
25,265
     
(24,246
)
   
1,019
     
25,326
     
(23,805
)
   
1,521
 
Other intangibles
   
2,168
     
(695
)
   
1,473
     
1,938
     
(564
)
   
1,374
 
Total finite-lived intangibles
 
$
434,833
   
$
(35,061
)
 
$
399,772
   
$
27,264
   
$
(24,369
)
   
2,895
 
Total intangible assets
 
$
499,207
   
$
(35,061
)
 
$
464,146
   
$
91,362
   
$
(24,369
)
 
$
66,993
 

Aggregate amortization expense for intangible assets for the periods shown is expected to be as follows:

Year Ending
December 31,
 
Amount
 
   
(in thousands)
 
2016 Remaining
 
$
26,061
 
2017
   
48,574
 
2018
   
41,377
 
2019
   
36,619
 
2020
   
33,363
 
2021
   
30,116
 
thereafter
183,662
Total
 
$
399,772
 
 
Changes in the carrying amount of goodwill during the six months ended June 30, 2016 are shown below (in thousands):
 
Goodwill as of December 31, 2015, Wireline segment
 
$
10
 
Goodwill recorded January 2016, Cable segment, Colane acquisition
   
93
 
Goodwill recorded May 2016, Wireless segment, nTelos acquisition
   
151,627
 
Goodwill as of June 30, 2016
 
$
151,730
 
 
13

4. Property, Plant and Equipment

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

   
June 30,
2016
   
December 31,
 2015
 
Plant in service
 
$
964,601
   
$
718,503
 
Plant under construction
   
75,949
     
36,600
 
     
1,040,550
     
755,103
 
Less accumulated amortization and depreciation
   
387,027
     
345,085
 
Net property, plant and equipment
 
$
653,523
   
$
410,018
 

5. Earnings (loss) per share

Basic net income (loss) 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 964 thousand and 696 thousand shares and options outstanding at June 30, 2016 and 2015, respectively, 22 thousand and 79 thousand were anti-dilutive, respectively.  These shares and options have been excluded from the computations of diluted earnings per share for the six months ended June 30, 2016, and the three and six month periods ended June 30, 2015.  Due to the net loss for the three months ended June 30, 2016, no adjustment was made to basic shares, as such adjustment would have been anti-dilutive.  There were no adjustments to net income for either period.

6. Investments Carried at Fair Value

Investments include $2.8 million and $2.7 million of investments carried at fair value as of June 30, 2016 and December 31, 2015, 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 six months ended June 30, 2016, the Company recognized $153 thousand in dividend and interest income from investments, and recorded net unrealized gains of $83 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.

7. Equipment Installment Plan Receivables

As part of the acquisition of nTelos, the Company assumed the accounts receivable associated with nTelos’ Equipment Installment Plan, (“EIP”).  This plan allowed EIP subscribers to pay for their devices in installments over a 24-month period. At the time of an installment sale, nTelos imputed interest on the installment receivable using current market interest rate estimates ranging from approximately 5% to 10%.  Additionally, the customer had the right to trade in their original device after a specified period of time for a new device and have the remaining unpaid balance satisfied. This trade-in right was measured at the estimated fair value of the device being traded in based on current trade-in values and the timing of the trade-in.

Immediately following the acquisition, the Company terminated the EIP offering but has continued to service the installment receivable and trade in obligation until such time that the customer migrates to Sprint.  The accounts receivable associated with EIP and the trade-in liability were estimated at its fair value at acquisition date in accordance with ASC 805, “Business Combinations”.

There was $26.0 million of EIP receivables as of June 30, 2016.  The short term portion of $19.5 million is included in accounts receivable, net.  The long term portion of $6.5 million is included in deferred charges and other assets, net.

As of June 30, 2016, the liability associated with the trade-in right was $5.3 million, and is reflected in accrued liabilities and other and other long term liabilities.
 
14

8. 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.  Derivative Instruments, Hedging Activities and Accumulated Other Comprehensive Income (Loss)

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 $144.1 million as of June 30, 2016.  The outstanding notional amount decreases as the Company makes scheduled principal payments on the debt.

In May 2016, the Company entered into a pay-fixed, receive-variable interest rate swap of $256.6 million of notional principal with three counterparties.   This interest rate swap was designated as a cash flow hedge.  The total outstanding notional amount of the cash flow hedge was $273.4 million as of June 30, 2016.  The outstanding notional amount increases with each expected draw on the term debt and decreases as the Company makes scheduled principal payments on the debt.  In combination with the swap entered into in 2012 described above, the Company is hedging approximately 50% of the expected outstanding debt (including expected draws under the delayed draw term loan) associated with the nTelos acquisition.

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 (loss) 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 (loss)  related to the interest rate swaps designated and  qualified 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, 2016, the Company estimates that $3.0 million will be reclassified as an increase to interest expense during the next twelve months due to the interest rate swaps 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 condensed consolidated balance sheet as of June 30, 2016 and December 31, 2015 (in thousands):
 
  
Derivatives
 
   
Fair Value as of
 
Balance Sheet
Location
  
June 30,
2016
     
December 31,
2015
  
             
Derivatives designated as hedging instruments:
             
Interest rate swap
                 
 
Accrued liabilities and other
 
$
(3,016
)
 
$
(682
)
 
Other liabilities
   
(3,502
)
   
-
 
 
Deferred charges and other assets, net
   
-
     
1,370
 
Total derivatives designated as hedging instruments
   
$
(6,518
)
 
$
688
 
 
15

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

The table below presents change in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2016 (in thousands):

   
Gains and
(Losses) on
Cash Flow
 Hedges
   
Income
Tax
 (Expense)
 Benefit
   
Accumulated
Other
Comprehensive
Income (Loss)
 
Balance as of December 31, 2015
 
$
688
   
$
(273
)
 
$
415
 
Other comprehensive loss before reclassifications
   
(7,997
)
   
3,243
     
(4,754
)
Amounts reclassified from accumulated other comprehensive income (to interest expense)
   
791
     
(322
)
   
469
 
Net current period other comprehensive loss
   
(7,206
)
   
2,921
     
(4,285
)
Balance as of June 30, 2016
 
$
(6,518
)
 
$
2,648
   
$
(3,870
)

10. Other liabilities

Other liabilities include the following (in thousands):

     
June 30,
2016
     
December 31,
2015
  
Retirement plan obligations
 
$
21,982
   
$
2,654
 
Due to dissenting shareholder
   
9,436
     
-
 
Non-current portion of deferred revenues
   
8,968
     
4,156
 
Other
   
10,128
     
2,229
 
Other liabilities
 
$
50,514
   
$
9,039
 

11. 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 maker.  The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Cable, and (3) Wireline.   A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.

The Wireless segment has provided 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.  With the recent acquisition of nTelos (see Note 2), the Company’s wireless service area has expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio. 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 and cable modem 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 central and southern Pennsylvania.
 
16

Three months ended June 30, 2016
 
(in thousands)
                                   
   
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                                   
Service revenues
 
$
86,873
   
$
24,167
   
$
4,820
   
$
-
   
$
-
   
$
115,860
 
Other
   
6,280
     
1,923
     
6,246
     
-
     
-
     
14,449
 
Total external revenues
   
93,153
     
26,090
     
11,066
     
-
     
-
     
130,309
 
Internal revenues
   
1,141
     
311
     
7,525
     
-
     
(8,977
)
   
-
 
Total operating revenues
   
94,294
     
26,401
     
18,591
     
-
     
(8,977
)
   
130,309
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
35,236
     
14,564
     
8,808
     
-
     
(8,312
)
   
50,296
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
23,010
     
4,794
     
1,670
     
4,885
     
(665
)
   
33,694
 
Integration and acquisition expenses
   
5,276
     
-
     
-
     
14,778
     
-
     
20,054
 
Depreciation and amortization
   
23,495
     
5,879
     
2,933
     
108
     
-
     
32,415
 
Total operating expenses
   
87,017
     
25,237
     
13,411
     
19,771
     
(8,977
)
   
136,459
 
Operating income (loss)
 
$
7,277
   
$
1,164
   
$
5,180
   
$
(19,771
)
 
$
-
   
$
(6,150
)

Three months ended June 30, 2015
 
(in thousands)
                                   
   
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                                   
Service revenues
 
$
48,749
   
$
22,117
   
$
4,889
   
$
-
   
$
-
   
$
75,755
 
Other
   
2,848
     
1,850
     
5,248
     
-
     
-
     
9,946
 
Total external revenues
   
51,597
     
23,967
     
10,137
     
-
     
-
     
85,701
 
Internal revenues
   
1,105
     
186
     
6,326
     
-
     
(7,617
)
   
-
 
Total operating revenues
   
52,702
     
24,153
     
16,463
     
-
     
(7,617
)
   
85,701
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
15,903
     
13,635
     
7,677
     
(16
)
   
(6,919
)
   
30,280
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,917
     
5,084
     
1,736
     
3,567
     
(698
)
   
18,606
 
Integration and acquisition expenses
   
-
     
-
     
-
     
402
     
-
     
402
 
Depreciation and amortization
   
8,612
     
5,859
     
3,083
     
109
     
-
     
17,663
 
Total operating expenses
   
33,432
     
24,578
     
12,496
     
4,062
     
(7,617
)
   
66,951
 
Operating income (loss)
 
$
19,270
   
$
(425
)
 
$
3,967
   
$
(4,062
)
 
$
-
   
$
18,750
 

Six months ended June 30, 2016
 
(in thousands)
                                   
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                                   
Service revenues
 
$
139,052
   
$
48,507
   
$
9,779
   
$
-
   
$
-
   
$
197,338
 
Other
   
9,484
     
3,768
     
12,290
     
-
     
-
     
25,542
 
Total external revenues
   
148,536
     
52,275
     
22,069
     
-
     
-
     
222,880
 
Internal revenues
   
2,276
     
572
     
14,901
     
-
     
(17,749
)
   
-
 
Total operating revenues
   
150,812
     
52,847
     
36,970
     
-
     
(17,749
)
   
222,880
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
51,815
     
29,210
     
17,450
     
-
     
(16,418
)
   
82,057
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
34,524
     
9,902
     
3,275
     
8,750
     
(1,331
)
   
55,120
 
Integration and acquisition expenses
   
5,276
     
-
     
-
     
15,110
             
20,386
 
Depreciation and amortization
   
31,988
     
11,974
     
5,967
     
225
     
-
     
50,154
 
Total operating expenses
   
123,603
     
51,086
     
26,692
     
24,085
     
(17,749
)
   
207,717
 
Operating income (loss)
 
$
27,209
   
$
1,761
   
$
10,278
   
$
(24,085
)
 
$
-
   
$
15,163
 
 
17

Six months ended June 30, 2015
 
(in thousands)
                                   
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                                   
Service revenues
 
$
97,124
   
$
43,518
   
$
9,639
   
$
-
   
$
-
   
$
150,281
 
Other
   
5,878
     
3,613
     
10,217
     
-
     
-
     
19,708
 
Total external revenues
   
103,002
     
47,131
     
19,856
     
-
     
-
     
169,989
 
Internal revenues
   
2,209
     
334
     
12,192
     
-
     
(14,735
)
   
-
 
Total operating revenues
   
105,211
     
47,465
     
32,048
     
-
     
(14,735
)
   
169,989
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
32,090
     
27,253
     
15,011
     
-
     
(13,384
)
   
60,970
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
17,969
     
9,976
     
3,234
     
6,890
     
(1,351
)
   
36,718
 
Integration and acquisition expenses
   
-
     
-
     
-
     
1,024
             
1,024
 
Depreciation and amortization
   
16,444
     
11,338
     
6,007
     
212
     
-
     
34,001
 
Total operating expenses
   
66,503
     
48,567
     
24,252
     
8,126
     
(14,735
)
   
132,713
 
Operating income (loss)
   
38,708
     
(1,102
)
   
7,796
     
(8,126
)
   
-
     
37,276
 

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

   
Three Months Ended
June 30,
 
(in thousands)
 
2016
   
2015
 
Total consolidated operating income (loss)
 
$
(6,150
)
 
$
18,750
 
Interest expense
   
(5,904
)
   
(1,940
)
Non-operating income, net
   
167
     
540
 
Income (loss) before income taxes
 
$
(11,887
)
 
$
17,350
 

   
Six Months Ended
June 30,
 
   
2016
   
2015
 
Total consolidated operating income (loss)
 
$
15,163
   
$
37,276
 
Interest expense
   
(7,524
)
   
(3,855
)
Non-operating income, net
   
723
     
1,074
 
Income before income taxes
 
$
8,362
   
$
34,495
 

The Company’s assets by segment are as follows:

 
(in thousands)
 
June 30,
2016
   
December 31,
2015
 
Wireless
 
$
1,142,459
   
$
205,718
 
Cable
   
210,542
     
209,132
 
Wireline
   
111,728
     
105,369
 
Other
   
1,083,152
     
463,390
 
Combined totals
   
2,547,881
     
983,609
 
Inter-segment eliminations
   
(1,092,040
)
   
(356,458
)
Consolidated totals
 
$
1,455,841
   
$
627,151
 
 
18

12.
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 2012 are no longer subject to examination. The Company is not subject to any state or federal income tax audits as of June 30, 2016.

13.
Adoption of New Accounting Principles

During 2016, the Company adopted four recent accounting principles: Accounting Standards Update 2015-03, “Interest – Imputation of Interest” (ASU 2015-03), ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, ASU 2016-09, “Improvements to Employee Share-based Payment Accounting,” and ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.”

ASU 2015-03 requires that premiums, discounts, and loan fees and costs associated with long term debt be reflected as a reduction of the outstanding debt balance.  Previous guidance had treated such loan fees and costs as a deferred charge on the balance sheet.  As a result of implementing ASU 2015-03, the Company reclassified $1.6 million of unamortized loan fees and costs included in deferred charges and other assets as of December 31, 2015 to long-term debt.  Approximately $0.5 million was allocated to current maturities of long-term debt, and $1.1 million to long term debt.  Total assets, as well as total liabilities and shareholders’ equity, were also reduced by the same $1.6 million.  In addition, the Company reclassified $4.3 million of unamortized loan fees and costs included in deferred charges and other assets to long term debt in connection with the new Term loan A-1 and A-2 borrowing related to the acquisition of nTelos.  Total assets, as well as total liabilities and shareholders’ equity, were also reduced by the same $4.3 million.  There was no impact on the statements of income or cash flows.

ASU 2015-17 simplifies accounting for deferred taxes by eliminating the requirement to present deferred tax assets and liabilities as current and non-current in a classified balance sheet.  Due to the immaterial balance of current deferred tax assets ($0.9 million as of December 31, 2015), the Company has elected to apply this guidance prospectively, and thus prior periods have not been retrospectively adjusted.

ASU 2016-09 simplifies certain provisions related to the accounting for the tax effects of stock-based compensation transactions.  In particular for the Company, it eliminates the requirement to determine for each award whether the difference between book compensation and tax compensation results in an excess tax benefit or a tax deficiency, which generally speaking, result in an entry to additional paid-in-capital.  Under the new guidance, all tax effects for exercised or vested awards are recognized as discrete items in income tax expense.  The new guidance also allows an employer to withhold shares to cover more than the minimum statutory withholding taxes (but not more than the maximum statutory withholding requirements) without causing an equity-classified award to become a liability classified award.  The other provisions of the new guidance are either not applicable or have no significant impact on the Company’s accounting for stock-based compensation transactions.  The Company has elected to early adopt the new guidance and apply it prospectively to tax effects on share-based compensation transactions.

ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
 
19

14. Long-term Debt and Revolving Line of Credit

Total debt consists of the following:

(In thousands)
 
 
June 30,
2016
   
December 31,
2015
 
             
Term loan A
 
$
-
   
$
201,250
 
Term loan A-1
   
485,000
     
-
 
Term loan A-2
   
350,000
     
-
 
Capital lease outstanding
   
413
     
-
 
     
835,413
     
201,250
 
Less: unamortized loan fees
   
19,840
     
1,589
 
Total debt, net of unamortized loan fees
 
$
815,573
   
$
199,661
 
                 
Current maturities, net of unamortized loan fees
 
$
20,147
   
$
22,492
 
Long-term debt, net of unamortized loan fees
 
$
795,426
   
$
177,169
 

As previously disclosed, on December 18, 2015, the Company entered into a Credit Agreement (as amended, the “2016 credit agreement”) with various banks and other financial institutions party thereto and CoBank, ACB, as administrative agent for the lenders, providing for three facilities: (i) a five year revolving credit facility of up to $75 million; (ii) a five-year term loan facility of up to $485 million (Term Loan A-1”); and (iii) a seven-year term loan facility of up to $400 million (“Term Loan A-2”).

In connection with the closing of the nTelos acquisition, the Company borrowed (i) $485 million under Term Loan A-1 and (ii) $325 million under Term Loan A-2, which amounts were used to, among other things, fund the payment of the nTelos merger consideration, to refinance, in full, all indebtedness under the Company’s existing credit agreement, to repay existing long-term indebtedness of nTelos and to pay fees and expenses in connection with the foregoing.  In connection with the consummation of the nTelos acquisition, nTelos and its subsidiaries became guarantors under the 2016 credit agreement and pledged their assets as security for the obligations under the 2016 credit agreement.  The 2016 credit agreement also includes $75 million available under the Term Loan A-2 as a “delayed draw term loan,” and in June 2016, the Company drew $25 million under this portion of the agreement.  Finally, the 2016 credit agreement also includes a $75 million revolver facility.

As of June 30, 2016, the Company’s indebtedness totaled $815.6 million, net of unamortized loan fees of $19.8 million, with an annualized overall weighted average interest rate of approximately 3.84%.  The Term Loan A-1 bears interest at one-month LIBOR plus a margin of 2.75%, while the Term Loan A-2 bears interest at one-month LIBOR plus a margin of 3.00%.  LIBOR resets monthly.  These loans are more fully described below.

The Term Loan A-1 requires quarterly principal repayments of $6.1 million beginning on September 30, 2016 through June 30, 2017, increasing to $12.1 million quarterly thereafter through June 30, 2021, with the remaining expected balance of approximately $242.5 million due September 30, 2021.  The Term Loan A-2 requires quarterly principal repayments of $10.0 million beginning on September 30, 2018 through March 31, 2023, with the remaining expected balance of approximately $210 million due June 30, 2023.

The 2016 credit agreement also required the Company to enter into one or more hedge agreements to manage its exposure to interest rate movements.  The Company elected to hedge the minimum required under the 2016 credit agreement, and entered into a pay fixed, receive variable swap on 50% of the aggregate principal balance of the term loans outstanding for at least three years from the closing date.  The Company will receive one month LIBOR and pay a fixed rate of 1.16%, in addition to the 2.75% initial spread on Term Loan A-1 and the 3.00% initial spread on Term Loan A-2.

The 2016 credit agreement contains affirmative and negative covenants customary to secured credit facilities, including covenants restricting the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of the Company’s and its subsidiaries’ businesses.
 
20

Indebtedness outstanding under any of the facilities may be accelerated by an Event of Default, as defined in the 2016 credit agreement.

The Facilities are secured by a pledge by the Company of its stock in its subsidiaries, a guarantee by the Company’s subsidiaries other than Shenandoah Telephone Company, and a security interest in substantially all of the assets of the Company and the guarantors.

The Company is subject to certain financial covenants to be measured on a trailing twelve month basis each calendar quarter unless otherwise specified.  These covenants include:

a limitation on the Company’s total leverage ratio, defined as indebtedness divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than or equal to 3.75 to 1.00 from the closing date through December 30, 2018, then 3.25 to 1.00 through December 30, 2019, and 3.00 to 1.00 thereafter;
a minimum debt service coverage ratio, defined as EBITDA minus certain cash taxes divided by the sum of all scheduled principal payments on the Term Loans and scheduled principal payments on other indebtedness plus cash interest expense, greater than 2.00 to 1.0;
the Company must maintain a minimum liquidity balance, defined as availability under the revolver facility plus unrestricted cash and cash equivalents on deposit in a deposit account for which a control agreement has been delivered to the administrative agent under the 2016 credit agreement, of greater than $25 million at all times.

These ratios are generally less restrictive than the covenant ratios the Company had been required to comply with under its previously existing debt arrangements.  As of June 30, 2016, the Company was in compliance with the covenants in the 2016 credit agreement.

Future maturities of long-term debt principal are as follows (in thousands):

2016
 
$
12,238
 
2017
   
36,714
 
2018
   
68,593
 
2019
   
88,593
 
2020
   
100,625
 
Thereafter
   
528,650
 
Total
 
$
835,413
 
 
21

15. Pension Plan and Other Postretirement Benefits

The Company assumed, through its acquisition of nTelos, a qualified pension plan and other postretirement benefit plans. The following tables provide the benefit obligations, fair value of assets and a statement of the funded status as of the acquisition date:

   
Defined Benefit Pension Plan
 
Other Postretirement
Benefit Plans
 
(In thousands)
 
 2016  
 
2016
 
         
Benefit obligations, at acquisition
 
$
37,443
 
 
$
4,568
 
Fair value of plan assets, at acquisition
 
$
22,813
 
 
$
 
Funded status:
           
Total liability, at acquisition
 
$
(14,630
)
 
$
(4,568
)

The accumulated benefit obligation for the defined benefit pension plan at May 6, 2016 was $37.4 million. The accumulated benefit obligation represents the present value of pension benefits based on service and salary earned to date.  The defined benefit plan was frozen for future benefit accruals as of December 31, 2012. Accordingly, the accumulated benefit obligation is equal to the projected benefit obligation.

The following table provides the components of net periodic benefit cost for the plans for the period from acquisition date to December 31, 2016:

   
Defined Benefit
Pension Plan
   
Other Postretirement
Benefit Plans
 
(In thousands)
 
2016
   
2016
 
Components of net periodic benefit cost:
           
Service cost
 
$
-
   
$
18
 
Interest cost
   
956
     
108
 
Recognized net actuarial loss
   
-
     
-
 
Expected return on plan assets
   
(1,018
)
   
-
 
Net periodic benefit cost
 
$
(62
)
 
$
126
 

Prior service costs assumed by the Company are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants.  The net periodic benefit cost from the defined benefit plans was $0.0 million for the period from acquisition through June 30, 2016.

The total amount reclassified out of accumulated other comprehensive loss related to actuarial losses from the defined benefit plans was $0.0 million for the period from acquisition through June 30, 2016.

The assumptions used in the measurements of the Company’s benefit obligations at May 6, 2016 for the plans are shown in the following table:

   
Defined
Benefit
Pension Plan
   
Other
Postretirement
Benefit Plans
 
   
2016
   
2016
 
Discount rate
   
3.85
%
   
3.85
%
 
22

The assumptions used in the measurements of the Company’s net cost for the consolidated statement of operations for the period from acquisition date through December 31, 2016 are:

   
Defined Benefit
Pension Plan
   
Other
Postretirement
Benefit Plans
 
   
2016
   
2016
 
Discount rate
   
3.85
%
   
3.85
%
Expected return on plan assets
   
6.75
%
   
 
Rate of compensation increase
   
     
 

The Company reviews the assumptions noted in the above table annually or more frequently to reflect anticipated future changes in the underlying economic factors used to determine these assumptions. The discount rates assumed reflect the rate at which the Company could invest in high quality corporate bonds in order to settle future obligations.
 
The Company uses updated mortality tables published by the Society of Actuaries that predict increasing life expectancies in the United States.

For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2016 for the obligation as of December 31, 2015. The rate was assumed to decrease one-half percent per year to a rate of 5.0% for 2022 and remain at that level thereafter.

Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. The effect of a 1% change on the medical trend rate per future year, while holding all other assumptions constant, to the service and interest cost components of net periodic postretirement health care benefit costs and accumulated postretirement benefit obligation would be a $0.1 million increase and a $0.6 million increase, respectively, for a 1% increase in medical trend rate and a $0.1 million decrease and a $0.5 million decrease, respectively, for a 1% decrease in medical trend rate.

In developing the expected long-term rate of return assumption for the assets of the Defined Benefit Pension Plan, the Company evaluated input from its third-party pension plan administrator, including its review of asset class return expectations and long-term inflation assumptions.

The average actual asset allocations by asset category and the fair value by asset category as of May 6, 2016 were as follows:

   
Actual Allocation as of
   
Fair Value as of
May 6,
Asset Category (dollars in thousands)
 
May 6, 2016
   
2016
Large Cap Value
   
32
%
 
$
7,244
 
Mid Cap Blend
   
9
%
   
2,026
 
Small Cap Blend
   
5
%
   
1,151
 
Foreign Stock – Large Cap
   
30
%
   
6,867
 
Bond
   
20
%
   
4,611
 
Cash and cash equivalents
   
4
%
   
914
 
Total
   
100
%
 
$
22,813
 

The actual and target allocation for plan assets is broadly defined and measured as follows:

Asset Category
 
Actual
Allocation
   
Target
Allocation
 
Equity securities
   
76
%
   
65-75
%
Bond securities and cash equivalents
   
24
%
   
25-35
%
Total
   
100
%
   
100
%
 
23

It is the Company’s policy to invest pension plan assets in a diversified portfolio consisting of an array of asset classes. The investment risk of the assets is limited by appropriate diversification both within and between asset classes. The assets are primarily invested in investment funds that invest in a broad mix of publicly traded equities, bonds and cash equivalents (and fair value is based on quoted market prices (“Level 1” input)). The allocation between equity and bonds is reset quarterly to the target allocations. Updates to the allocation are considered in the normal course and changes may be made when appropriate. The bond holdings consist of two bond funds split relatively evenly between these funds at May 6, 2016. The maximum holdings of any one asset within these funds is under 4% of this fund and thus is well under 1% of the total portfolio. At May 6, 2016, the Company believes that there are no material concentrations of risk within the portfolio of plan assets.

The assumed long-term return noted above is the target long-term return. Overall return, risk adjusted return, and management fees are assessed against a peer group and benchmark indices. There are minimum performance standards that must be attained within the investment portfolio. Reporting on asset performance is provided quarterly and review meetings are held semi-annually. In addition to normal rebalancing to maintain an adequate cash reserve, projected cash flow needs of the plan are reviewed at least annually to ensure liquidity is properly managed.

The Company does not expect to contribute to the pension plan in 2016. The Company expects the net periodic benefit cost for the defined benefit pension plan in 2016 to be $0.1 million and expects the periodic benefit cost for the other postretirement benefit plans in 2016 to be $0.1 million.

The following estimated future pension benefit payments and other postretirement benefit plan payments which reflect expected future service, as appropriate, are expected to be paid in the years indicated:

(In thousands)
 
Defined
Benefit
Pension
Plan
   
Other
Postretirement
Benefit Plans
 
2016
 
$
371
   
$
96
 
2017
   
700
     
136
 
2018
   
720
     
131
 
2019
   
768
     
134
 
2020
   
868
     
142
 
Aggregate of next five years
   
6,219
     
977
 
 
24

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, 2015.  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, 2015, 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. We have three reportable segments, which we operate and manage as strategic business units organized by lines of business: (1) Wireless, (2) Cable, and (3) Wireline.

* The Wireless segment has historically provided 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.  Following the acquisition of nTelos, the Company’s wireless service area expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio.  In this area, we are the exclusive provider of wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz bands under the Sprint brand.  This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.

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

* The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video and cable modem internet access 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 central and southern Pennsylvania.

A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company. This segment includes certain acquisition and integration costs primarily consisting of severance accruals for short-term nTelos employees to be separated as integration activities wind down and transaction related expenses such as investment advisor, legal and other professional fees.
 
25

Acquisition of nTelos and Exchange with Sprint: On May 6, 2016, we completed our previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $663.7 million in cash, net of cash acquired.  The purchase price was financed by a credit facility arranged by CoBank, ACB.  We have included the operations of nTelos for financial reporting purposes for periods subsequent to the acquisition.

Immediately after acquiring nTelos, we exchanged spectrum licenses valued at $198.2 million and customer based contract rights, valued at $198.2 million, acquired from nTelos with Sprint, and received an expansion of our affiliate service territory to include most of the service area served by nTelos, valued at $258.1 million, as well as additional customer based contract rights, valued at $138.3 million, relating to nTelos’ and Sprint’s legacy customers in the our affiliate service territory. The value of the affiliate agreement expansion is based on changes to the amended affiliate agreement that include an increase in the price to be paid by Sprint from 80% to 90% of the entire business value of PCS if the affiliate agreement is not renewed and an extension of the affiliate agreement with Sprint by five years to 2029. Also included in the value is the expanded territory in the nTelos service area and the accompanying right to serve all future Sprint customers in the expanded territory, our commitment to upgrade certain coverage and capacity in the newly acquired service area, the waiver of a portion of the management fee charged by Sprint, as well as other items defined in the amended affiliate agreement.

In connection with the acquisition, we committed to Sprint to migrate the former nTelos customers to devices that can interact with the Sprint billing and network systems and to maintain the nTelos billing, customer care and switching systems until the migration is complete, and expect to incur a total of between $106 million and $126 million of integration and acquisition expenses associated with this transaction, excluding approximately $24 million of debt issuance costs.  These costs include the nTelos back office staff and support functions until the nTelos legacy customers are migrated to the Sprint billing platform; cost of handsets to be provided to nTelos legacy customers as they migrate to the Sprint billing platform; severance costs for back office and other former nTelos employees who will not be retained permanently; and transaction related fees.  We have incurred $22.4 million and $22.7 million of these costs in the three months and six months ended June 30, 2016, respectively, including $0.3 million reflected in cost of goods and services and $2.0 million reflected in selling, general and administrative costs in both the three and six month periods ended June 30, 2016.

Critical Accounting Policies And Estimates

In connection with the nTelos acquisition and exchange transaction with Sprint, we have added the following critical accounting policies:

Revenue Recognition:  Under our amended affiliate agreement, Sprint agreed to waive the management fee, which is historically presented as a contra-revenue by us, for a period of approximately six years.  The impact of Sprint’s waiver of the management fee over the approximate six-year period is reflected as an increase in revenue, offset by the non-cash adjustment to recognize this impact on a straight-line basis over the contract term of approximately 14 years.

Goodwill:  Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that impairment is more likely than not to have occurred. In conducting our annual impairment testing, we may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. We conduct our annual impairment testing as of October 1.

Pension Benefits and Retirement Benefits Other Than Pensions:  Through our acquisition of nTelos, we assumed nTelos’ non-contributory defined benefit pension plan (“Pension Plan”) covering all employees who met eligibility requirements and were employed by nTelos prior to October 1, 2003. The Pension Plan was closed to nTelos employees hired on or after October 1, 2003. Pension benefits vest after five years of plan service and are based on years of service and an average of the five highest consecutive years of compensation subject to certain reductions if the employee retires before reaching age 65 and elects to receive the benefit prior to age 65. Effective December 31, 2012, nTelos froze future benefit accruals.  We use updated mortality tables published by the Society of Actuaries that predict increasing life expectancies in the United States.
 
26

IRC Sections 412 and 430 and Sections 302 and 303 of the Employee Retirement Income Security Act of 1974, as amended establish minimum funding requirements for defined benefit pension plans. The minimum required contribution is generally equal to the target normal cost plus the shortfall amortization installments for the current plan year and each of the six preceding plan years less any calculated credit balance. If plan assets (less calculated credits) are equal to or exceed the funding target, the minimum required contribution is the target normal cost reduced by the excess funding, but not below zero. Our policy is to make contributions to stay at or above the threshold required in order to prevent benefit restrictions and related additional notice requirements and is intended to provide not only for benefits based on service to date, but also for those expected to be earned in the future. We also assumed two qualified nonpension postretirement benefit plans that provide certain health care and life benefits for nTelos retired employees that meet eligibility requirements. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan also is contributory. These obligations, along with all of the pension plans and other postretirement benefit plans, are obligations assumed by us. Eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of January 5, 1994. Neither plan is eligible to employees hired after April 1993. The accounting for the plans anticipates that we will maintain a consistent level of cost sharing for the benefits with the retirees. Our share of the projected costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees’ service periods to the dates they are fully eligible for benefits.
 
We record annual amounts relating to the Pension Plan and postretirement benefit plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, turnover rates and healthcare cost trend rates. We reviews our assumptions on an annual basis and makes modifications to the assumptions based on current rates and trend when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprenhensive income (loss) and amortized to net periodic cost over future periods using the corridor method.
 
Results of Operations

Three Months Ended June 30, 2016 Compared with the Three Months Ended June 30, 2015

Our consolidated results for the second quarter of 2016 and 2015 are summarized as follows:

   
Three Months Ended
June 30,
   
Change
 
(in thousands)
 
2016
   
2015
    $    
%
 
Operating revenues
 
$
130,309
   
$
85,701
   
$
44,608
     
52.1
 
Operating expenses
   
136,459
     
66,951
     
69,508
     
103.8
 
Operating income (loss)
   
(6,150
)
   
18,750
     
(24,900
)
   
(132.8
)
                                 
Interest expense
   
(5,904
)
   
(1,940
)
   
(3,964
)
   
204.3
 
Other income, net
   
167
     
540
     
(373
)
   
(69.1
)
Income (loss) before taxes
   
(11,887
)
   
17,350
     
(29,237
)
   
(168.5
)
Income tax expense (benefit)
   
(4,892
)
   
6,876
     
(11,768
)
   
(171.1
)
Net income (loss)
 
$
(6,995
)
 
$
10,474
   
$
(17,469
)
   
(166.8
)

Operating revenues

For the three months ended June 30, 2016, operating revenues increased $44.6 million, or 52.1%. Wireless segment revenues increased $41.9 million compared to the second quarter of 2015; nearly all of this increase was a result of the acquisition of nTelos on May 6, 2016. Cable segment revenues grew $2.2 million primarily as a result of 6.7% growth in average subscriber counts and an increase in revenue per subscriber.  Wireline segment revenues increased $0.8 million, net of eliminations of intersegment activities, primarily due to increases in fiber sales.

Operating expenses

Total operating expenses were $136.5 million in the second quarter of 2016 compared to $67.0 million in the prior year period.  Operating expenses in the second quarter of 2016 included $20.1 million of overall integration and acquisition costs associated with the nTelos acquisition, including $5.3 million on the Wireless segment and $14.8 million in the Other segment.  Selling, general and administrative expenses and cost of goods and services in the Wireless segment included an additional $2.3 million of nTelos-related customer care and other back office costs related to supporting the nTelos legacy customers until the migration of these customers is completed. Wireless segment operating expenses increased $46.0 million (excluding the $7.6 million of customer care, integration and acquisition expenses described above), primarily due to on-going costs associated with the acquired nTelos operations including $12.8 million of incremental depreciation and amortization expenses.  All other operating expenses increased $1.5 million, net of eliminations of intersegment activities.

Acquisition and integration costs on the Other segment primarily consisted of severance accruals for short-term nTelos personnel to be separated as integration activities wind down and transaction related expenses such as investment advisor, legal and other professional fees.  On the Wireless segment, such costs included handsets provided to nTelos subscribers who needed a new phone to transition to the Sprint billing platform and personnel costs associated with short-term nTelos employees required to migrate the former nTelos customers to the Sprint back-office.
 
27

Income tax expense

Our effective tax rate increased from 39.6% for the three months ended June 30, 2015 to 41.2% for the three months ended June 30, 2016.  This increase primarily resulted from discrete tax benefits resulting from the change in accounting for stock option exercises and share award distributions in the second quarter of 2016 in accordance with ASU 2016-09 applied against our net loss for the quarter.  In prior year periods, such tax benefits were recorded directly to equity.

Net income

For the three months ended June 30, 2016, net income decreased $17.5 million, or 166.8%, primarily reflecting acquisition and integration costs incurred, increased depreciation and amortization, straight-lining of certain Sprint credits, and higher interest on the increased balance of outstanding debt as a result of the nTelos acquisition, net of taxes.

Six Months Ended June 30, 2016 Compared with the Six Months Ended June 30, 2015

The Company’s consolidated results for the first six months of 2016 and 2015 are summarized as follows:

   
Six Months Ended
June 30,
   
Change
 
(in thousands)
 
2016
   
2015
   
$
   
%
 
Operating revenues
 
$
222,880
   
$
169,989
   
$
52,891
     
31.1
 
Operating expenses
   
207,717
     
132,713
     
75,004
     
56.5
 
Operating income
   
15,163
     
37,276
     
(22,113
)
   
(59.3
)
                                 
Interest expense
   
(7,524
)
   
(3,855
)
   
(3,669
)
   
95.2
 
Other income, net
   
723
     
1,074
     
(351
)
   
(32.7
)
Income before taxes
   
8,362
     
34,495
     
(26,133
)
   
(75.8
)
Income tax expense
   
1,477
     
13,735
     
(12,258
)
   
(89.2
)
Net income
 
$
6,885
   
$
20,760
   
$
(13,875
)
   
(66.8
)

Operating revenues

For the six months ended June 30, 2016, operating revenues increased $52.9 million, or 31.1%. Wireless segment revenues increased $45.6 million compared to the first six months of 2015. The new revenues associated with the nTelos customers and the Sprint customers in the nTelos footprint, net of amortization of the expanded Sprint affiliate agreement asset and the straight line adjustment to certain Sprint Fee credits, accounted for most of this increase.  Cable segment revenues grew $5.4 million primarily as a result of 6.4% growth in average subscriber counts and an increase in revenue per subscriber.  Wireline segment revenues increased $1.9 million, net of eliminations of intersegment activities, primarily due to increases in fiber sales.

Operating expenses

Total operating expenses increased $75.0 million in the six months ended June 30, 2016 compared to the prior year period.  Operating expenses in the six months ended June 30, 2016 included $20.4 million of overall integration and acquisition costs associated with the nTelos acquisition, including $5.3 million on the Wireless segment and $15.1 million in the Other segment.  Selling, general and administrative expenses and cost of goods and services in the Wireless segment included an additional $2.3 million of nTelos-related customer care and other back office costs related to supporting the nTelos legacy customers until the migration of these customers is completed. Wireless segment operating expenses increased $49.5 million (excluding the $7.6 million of customer care, integration and acquisition expenses described above), primarily due to on-going costs associated with the acquired nTelos operations and $12.8 million of incremental depreciation associated with the related acquired assets.  All other operating expenses increased $2.8 million, net of eliminations of intersegment activities.

Acquisition and integration costs on the Other segment primarily consisted of severance accruals for short-term nTelos personnel to be separated as integration activities wind down, and transaction related expenses (such as investment advisor, legal and other professional fees).  On the Wireless segment, such costs included handsets provided to nTelos subscribers who needed a new phone to transition to the Sprint billing platform and personnel costs associated with short-term nTelos employees required to migrate the former nTelos customers to the Sprint back-office.
 
28

Income tax expense

Our effective tax rate decreased from 39.8% for the six months ended June 30, 2015 to 17.7% for the six months ended June 30, 2016.  This decrease primarily resulted from discrete tax benefits resulting from the change in accounting for stock option exercises and share award distributions in the first six months of 2016 in accordance with ASU 2016-09.  In prior year periods, such tax benefits were recorded directly to equity.

Net income

For the six months ended June 30, 2016, net income decreased $13.9 million, or 66.8%, primarily reflecting acquisition and integration costs incurred, increased depreciation and amortization, straight-lining of certain Sprint credits, and higher interest on the expanded outstanding debt as a result of the nTelos acquisition, net of taxes.

Wireless

Our Wireless segment historically provided 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.  Following the recent acquisition of nTelos, our wireless service territory expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio.  Through Shenandoah Mobile, LLC (“Mobile”), this segment also leases land on which it builds Company-owned cell towers, which it leases to affiliates 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.  Through December 31, 2015, these fees totaled 22% of postpaid net billed revenue (gross customer billings net of credits and adjustments to customer accounts, and write-offs of uncollectible accounts), as defined by the Affiliate Agreement with Sprint.  Effective January 1, 2016, the fees charged by Sprint declined to 16.6%, and certain revenue and expense items previously included in these fees became separately settled.

We also offer prepaid wireless products and services in our 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.  We pay 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.

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

     
June 30,
2016
     
December 31,
2015
     
June 30,
2015
     
December 31,
2014
  
Retail PCS Subscribers – Postpaid
   
717,563
     
312,512
     
296,492
     
287,867
 
Retail PCS Subscribers – Prepaid
   
289,311
     
142,840
     
145,431
     
145,162
 
PCS Market POPS (000) (1)
   
5,536
     
2,433
     
2,421
     
2,415
 
PCS Covered POPS (000) (1)
   
4,528
     
2,224
     
2,213
     
2,207
 
CDMA Base Stations (sites)
   
1,425
     
552
     
546
     
537
 
Towers Owned
   
177
     
158
     
154
     
154
 
Non-affiliate Cell Site Leases
   
211
     
202
     
202
     
198
 
 
29

The June 30, 2016 numbers shown above include the following amounts acquired in the nTelos acquisition:

Acquired PCS Subscribers – Postpaid
   
404,444
 
Acquired PCS Subscribers – Prepaid
   
154,944
 
Acquired PCS Market POPS (000) (1)
   
3,099
 
Acquired PCS Covered POPS (000) (1)
   
2,298
 
Acquired CDMA Base Stations (sites) (2)
   
868
 
Towers
   
20
 
Non-affiliate Cell Site Leases
   
10

     
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
   
2016
   
2015
   
2016
   
2015
 
                         
Gross PCS Subscriber Additions – Postpaid
   
26,185
     
17,734
     
43,541
     
34,839
 
Net PCS Subscriber Additions (Losses) – Postpaid
   
(1,319
)
   
5,414
     
1,400
     
8,625
 
Gross PCS Subscriber Additions – Prepaid
   
27,353
     
19,958
     
48,584
     
43,578
 
Net PCS Subscriber Additions (Losses) – Prepaid
   
(6,912
)
   
(2,352
)
   
(7,213
)
   
269
 
PCS Average Monthly Retail Churn % - Postpaid (3)
   
1.56
%
   
1.40
%
   
1.56
%
   
1.50
%
PCS Average Monthly Retail Churn % - Prepaid (3)
   
4.74
%
   
5.07
%
   
4.90
%
   
4.92
%

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 we are authorized to serve under our Sprint PCS affiliate agreements, and Covered POPS are those covered by our network.
2) Net of approximately 160 overlap cell sites we intend to shut down in coming months.
3) PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period.

In addition, 1,260 former nTelos prepaid subscribers switched to postpaid subscribers as they migrated to the Sprint back-office platforms during the three and six months ended June 30, 2016.

Three Months Ended June 30, 2016 Compared with the Three Months Ended June 30, 2015

(in thousands)
 
 
Three Months Ended
June 30,
   
Change
 
   
2016
   
2015
   
$
    %  
Segment operating revenues
                         
Wireless service revenue