Document
 
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 March 31, 2017
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from__________ to __________

Commission File No.: 000-09881
https://cdn.kscope.io/b3da03f8effe3e2b68d3158af5ab8df3-shenimagea01.jpg
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company☐
Emerging growth company☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 April 26, 2017 was 49,109,626. 
 
 




SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX

 
 
Page
Numbers
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-
 
 
 
 
 
 
-
 
 
 
 
 
Item 2.
-
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 



Index



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

ASSETS
 
March 31,
2017
 
December 31,
2016
 
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
39,927

 
$
36,193

Accounts receivable, net
 
68,709

 
69,789

Inventory, net
 
24,855

 
39,043

Prepaid expenses and other
 
16,989

 
16,440

Total current assets
 
150,480

 
161,465

 
 
 
 
 
Investments, including $3,058 and $2,907 carried at fair value
 
10,607

 
10,276

 
 
 
 
 
Property, plant and equipment, net
 
689,948

 
698,122

 
 
 
 
 
Other Assets
 
 

 
 

Intangible assets, net
 
443,308

 
454,532

Goodwill
 
144,001

 
145,256

Deferred charges and other assets, net
 
14,645

 
14,756

Total assets
 
$
1,452,989

 
$
1,484,407




(Continued)



4

Index

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

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
March 31,
2017
 
December 31,
2016
 
 
 
 
 
Current Liabilities
 
 
 
 
Current maturities of long-term debt, net of unamortized loan fees
 
$
38,124

 
$
32,041

Accounts payable
 
25,390

 
72,810

Advanced billings and customer deposits
 
21,029

 
20,427

Accrued compensation
 
3,678

 
9,465

Income taxes payable
 
3,958

 
435

Accrued liabilities and other
 
18,174

 
29,085

Total current liabilities
 
110,353

 
164,263

 
 
 
 
 
Long-term debt, less current maturities, net of unamortized loan fees
 
810,873

 
797,224

 
 
 
 
 
Other Long-Term Liabilities
 
 

 
 

Deferred income taxes
 
149,763

 
151,837

Deferred lease payable
 
19,230

 
18,042

Asset retirement obligations
 
19,386

 
15,666

Retirement plan obligations
 
17,892

 
17,738

Other liabilities
 
26,057

 
23,743

Total other long-term liabilities
 
232,328

 
227,026

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Shareholders’ Equity
 
 

 
 

Common stock
 
46,083

 
45,482

Retained earnings
 
245,965

 
243,624

Accumulated other comprehensive income, net of taxes
 
7,387

 
6,788

Total shareholders’ equity
 
299,435

 
295,894

 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
1,452,989

 
$
1,484,407


See accompanying notes to unaudited condensed consolidated financial statements.


5

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
 
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
 
 
 
 
 
Operating revenues
 
$
153,880

 
$
92,571

 
 
 
 
 
Operating expenses:
 
 

 
 

Cost of goods and services, exclusive of depreciation and amortization shown separately below
 
53,761

 
31,762

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
40,153

 
21,426

Integration and acquisition expenses
 
4,489

 
332

Depreciation and amortization
 
44,804

 
17,739

Total operating expenses
 
143,207

 
71,259

Operating income
 
10,673

 
21,312

 
 
 
 
 
Other income (expense):
 
 

 
 

Interest expense
 
(9,100
)
 
(1,619
)
Gain on investments, net
 
120

 
88

Non-operating income, net
 
1,255

 
468

Income before income taxes
 
2,948

 
20,249

 
 
 
 
 
Income tax expense
 
607

 
6,368

Net income
 
2,341

 
13,881

 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

Unrealized gain (loss) on interest rate hedge, net of tax
 
599

 
(1,048
)
Comprehensive income
 
$
2,940

 
$
12,833

 
 
 
 
 
Earnings per share:
 
 

 
 

Basic
 
$
0.05

 
$
0.29

Diluted
 
$
0.05

 
$
0.28

Weighted average shares outstanding, basic
 
49,050

 
48,563

Weighted average shares outstanding, diluted
 
49,834

 
49,249

 
See accompanying notes to unaudited condensed consolidated financial statements.


6

Index

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,
net of tax
 
Total
Balance, December 31, 2015
 
48,475

 
$
32,776

 
$
256,747

 
$
415

 
$
289,938

 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 
(895
)
 

 
(895
)
Other comprehensive gain, net of tax
 

 

 

 
6,373

 
6,373

Dividends declared ($0.25 per share)
 

 

 
(12,228
)
 

 
(12,228
)
Dividends reinvested in common stock
 
19

 
524

 

 

 
524

Stock based compensation
 

 
3,506

 

 

 
3,506

Stock options exercised
 
371

 
3,359

 

 

 
3,359

Common stock issued for share awards
 
190

 

 

 

 

Common stock issued
 
2

 
14

 

 

 
14

Common stock issued to acquire non-controlling interests of nTelos
 
76

 
10,400

 

 

 
10,400

Common stock repurchased
 
(198
)
 
(5,097
)
 

 

 
(5,097
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
48,935

 
$
45,482

 
$
243,624

 
$
6,788

 
$
295,894

Net income
 

 

 
2,341

 

 
2,341

Other comprehensive gain, net of tax
 

 

 

 
599

 
599

Stock based compensation
 

 
1,822

 

 

 
1,822

Common stock issued for share awards
 
129

 

 

 

 

Common stock issued
 
1

 
5

 

 

 
5

Common stock issued to acquire non-controlling interests of nTelos
 
76

 

 

 

 

Common stock repurchased
 
(43
)
 
(1,226
)
 

 

 
(1,226
)
Balance, March 31, 2017
 
49,098

 
$
46,083

 
$
245,965

 
$
7,387

 
$
299,435


See accompanying notes to unaudited condensed consolidated financial statements.


7

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Cash Flows From Operating Activities
 
 
 
 
Net income
 
$
2,341

 
$
13,881

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
37,878

 
17,454

Amortization reflected as operating expense
 
6,926

 
285

Amortization reflected as contra revenue
 
4,978

 

Amortization reflected as rent expense
 
258

 

Provision for bad debt
 
420

 
345

Straight line adjustment to management fee revenue
 
4,206

 

Stock based compensation expense
 
1,566

 
1,048

Deferred income taxes
 
(2,910
)
 
(1,489
)
Net gain on disposal of equipment
 
(28
)
 
(15
)
Unrealized gain on investments
 
(120
)
 
(16
)
Net gains from patronage and equity investments
 
(200
)
 
(210
)
Amortization of long term debt issuance costs
 
1,202

 
132

Other
 

 
3,039

Changes in assets and liabilities:
 
 

 
 

(Increase) decrease in:
 
 

 
 

Accounts receivable
 
1,629

 
2,470

Inventory, net
 
14,188

 
(267
)
Other assets
 
(190
)
 
988

Increase (decrease) in:
 
 

 
 

Accounts payable
 
(39,399
)
 
1,895

Income taxes payable
 
3,523

 
6,981

Deferred lease payable
 
1,331

 
208

Other deferrals and accruals
 
(13,101
)
 
(3,559
)
Net cash provided by operating activities
 
24,498

 
43,170

 
 
 
 
 
Cash Flows From Investing Activities
 
 

 
 

Acquisition of property, plant and equipment
 
(38,587
)
 
(20,537
)
Proceeds from sale of equipment
 
117

 
145

Cash distributions from investments
 
3

 
45

Additional contributions to investments
 
(14
)
 

Cash disbursed for acquisition
 

 
(2,480
)
Net cash used in investing activities
 
(38,481
)
 
(22,827
)

(Continued)


8

Index

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

 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Cash Flows From Financing Activities
 
 
 
 
Principal payments on long-term debt
 
$
(6,062
)
 
$
(5,750
)
Amounts borrowed under debt agreements
 
25,000

 

Cash paid for debt issuance costs
 

 
(1,528
)
Repurchases of common stock
 
(1,226
)
 
(3,526
)
Proceeds from issuances of common stock
 
5

 
2,809

Net cash provided by/(used in) financing activities
 
17,717

 
(7,995
)
 
 
 
 
 
Net increase in cash and cash equivalents
 
3,734

 
12,348

 
 
 
 
 
Cash and cash equivalents:
 
 

 
 

Beginning
 
36,193

 
76,812

Ending
 
$
39,927

 
$
89,160

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 

 
 

Cash payments for:
 
 

 
 

Interest, net of capitalized interest of $577 and $146, respectively
 
$
8,380

 
$
1,632

 
 
 
 
 
Income taxes paid, net of refunds received
 
$

 
$
876


Non-cash investing and financing activities:
 
At March 31, 2017 and 2016, accounts payable included approximately $6.4 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.

During the quarter ended March 31, 2017, the Company recorded an increase in the fair value of interest rate swaps of $972 thousand, an increase in deferred tax liabilities of $373 thousand, and an increase to accumulated other comprehensive income of $599 thousand.

See accompanying notes to unaudited condensed consolidated financial statements.


9

Index

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.  Prior year amounts have been reclassified in some cases to conform to the current year presentation. 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, 2016.  The accompanying balance sheet information at December 31, 2016 was derived from the audited December 31, 2016 consolidated balance sheet. Operating revenues and income (loss) from operations for any interim period are not necessarily indicative of results that may be expected for the entire year.

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 $667.8 million, net of cash acquired.  The acquisition was entered into to improve shareholder value through the expansion of the Company's Wireless service area and customer base while strengthening our relationship with Sprint Corporation ("Sprint"). The purchase price was financed by a credit facility arranged by CoBank, ACB, Royal Bank of Canada, Fifth Third Bank, Bank of America, N.A., Capital One, National Association, Citizens Bank N.A., and Toronto Dominion (Texas) LLC.  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 has accounted for 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. During the first quarter of 2017, the Company made adjustments to the preliminary estimates of fair value resulting in immaterial changes to previously estimated fair values of fixed assets, asset retirement obligation liabilities, accounts receivable and deferred taxes. These adjustments resulted in a $1.3 million reduction to goodwill as shown in the table below. The Company continues to review certain tax positions acquired in the nTelos acquisition.

Changes in the carrying amount of goodwill during the three months ended March 31, 2017 are shown below (in thousands):
 
 
December 31,
2016
Purchase Accounting Adjustments
March 31,
2017
Goodwill - Wireline segment
$
10

$

$
10

Goodwill - Cable segment
104


104

Goodwill - Wireless segment
145,142

(1,255
)
143,887

Goodwill as of March 31, 2017
$
145,256

$
(1,255
)
$
144,001


Following are the unaudited pro forma results of the Company for the period ended March 31, 2016, as if the acquisition of nTelos had occurred at the beginning of the period. (in thousands)

 
 
March 31,
2016
Operating revenues
 
$
173,248

Income before income taxes
 
$
16,905



In connection with these transactions, the Company incurs costs which include the nTelos back office staff and support functions until the nTelos legacy customers are migrated to the Sprint billing platform; costs of the handsets to be provided to

10

Index

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 costs to shut down certain cell sites and related backhaul contracts. We have incurred $7.1 million of these costs in the three months ended March 31, 2017, including $0.1 million reflected in cost of goods and services and $2.5 million reflected in selling, general and administrative costs in the three months ended March 31, 2017.

3.
Property, Plant and Equipment

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

 
 
March 31,
2017
 
December 31,
2016
Plant in service
 
$
1,124,446

 
$
1,085,318

Plant under construction
 
61,980

 
73,759

 
 
1,186,426

 
1,159,077

Less accumulated amortization and depreciation
 
496,478

 
460,955

Net property, plant and equipment
 
$
689,948

 
$
698,122


4.
Earnings per share

Basic net income per share was computed on the weighted average number of shares outstanding.  Diluted net income per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options.  Of 913 thousand and 991 thousand shares and options outstanding at March 31, 2017 and 2016, respectively, 125 thousand and 136 thousand were anti-dilutive, respectively.  These shares and options have been excluded from the computations of diluted earnings per share for their respective period. There were no adjustments to net income for either period.

5.
Investments

Investments include $3.1 million and $2.9 million of investments carried at fair value as of March 31, 2017 and December 31, 2016, 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 three months ended March 31, 2017, the Company recognized $32 thousand in dividend and interest income from investments, and recorded net unrealized gains of $120 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.

At March 31, 2017 and December 31, 2016, other investments, comprised of equity securities which do not have readily determinable fair values, consist of the following:

 
3/31/2017
 
12/31/2016
Cost method:
(in thousands)
CoBank
$
6,296

 
$
6,177

Other – Equity in other telecommunications partners
740

 
742

 
7,036

 
6,919

Equity method:
 
 
 
Other
513

 
450

Total other investments
$
7,549

 
$
7,369




11

Index

6.
Financial Instruments

Financial instruments on the condensed consolidated balance sheets that approximate fair value include:  cash and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, interest rate swaps and variable rate long-term debt.

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

The Company’s objectives in using interest rate derivatives are to add stability to cash flows and to manage its exposure to interest rate movements. To accomplish these objectives, 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 outstanding notional amount of this cash flow hedge was $131.0 million as of March 31, 2017.  The outstanding notional amount decreases based upon scheduled principal payments on the 2012 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 outstanding notional amount of this cash flow hedge was $302.4 million as of March 31, 2017.  The outstanding notional amount increases based upon draws expected to be made under a portion of the Company's Term Loan A-2 debt and as the 2012 interest rate swap's notional principal decreases, and will decrease as the Company makes scheduled principal payments on the 2016 debt.  In combination with the swap entered into in 2012 described above, the Company is hedging approximately 50% of the expected outstanding debt.

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

Amounts reported in accumulated other comprehensive income related to the interest rate 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 March 31, 2017, the Company estimates that $237 thousand will be reclassified as a reduction of interest expense during the next twelve months.

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 March 31, 2017 and December 31, 2016 (in thousands): 
  
 
Derivatives
 
 
Fair Value as of
 
 
Balance Sheet
Location
 
March 31,
2017
 
December 31,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap
 
 
 
 

 
 

 
 
Prepaid expenses and other
 
$
237

 
$

 
 
Deferred charges and other assets, net
 
11,958

 
12,118

 
 
Accrued liabilities and other
 

 
(895
)
Total derivatives designated as hedging instruments
 
 
 
$
12,195

 
$
11,223


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).


12

Index

The table below presents change in accumulated other comprehensive income by component for the three months ended March 31, 2017 (in thousands):

 
 
Gains on
Cash Flow
 Hedges
 
Income
Tax
 Expense
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2016
 
$
11,223

 
$
(4,435
)
 
$
6,788

Other comprehensive income before reclassifications
 
541

 
(208
)
 
333

Amounts reclassified from accumulated other comprehensive income (to interest expense)
 
431

 
(165
)
 
266

Net current period other comprehensive income
 
972

 
(373
)
 
599

Balance as of March 31, 2017
 
$
12,195

 
$
(4,808
)
 
$
7,387



8. Intangible Assets, Net

Intangible assets consist of the following at March 31, 2017 and December 31, 2016:
 
March 31, 2017
 
December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Non-amortizing intangibles:
 
 
 
 
 
 
Cable franchise rights
$
64,334

 
$

 
$
64,334

 
$
64,334

 
$

 
$
64,334

Railroad crossing rights
97

 

 
97

 
97

 

 
97

 
64,431

 

 
64,431

 
64,431

 

 
64,431

 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangibles:
Affiliate contract expansion
284,102

 
(19,008
)
 
265,094

 
284,102

 
(14,030
)
 
270,072

Acquired subscribers – wireless
120,855

 
(25,387
)
 
95,468

 
120,855

 
(18,738
)
 
102,117

Favorable leases - wireless
16,950

 
(1,531
)
 
15,419

 
16,950

 
(1,130
)
 
15,820

Acquired subscribers – cable
25,265

 
(24,802
)
 
463

 
25,265

 
(24,631
)
 
634

Other intangibles
3,230

 
(797
)
 
2,433

 
2,212

 
(754
)
 
1,458

Total finite-lived intangibles
450,402

 
(71,525
)
 
378,877

 
449,384

 
(59,283
)
 
390,101

Total intangible assets
$
514,833

 
$
(71,525
)
 
$
443,308

 
$
513,815

 
$
(59,283
)
 
$
454,532



13

Index

9.
Accrued and Other liabilities

Accrued liabilities and other includes the following (in thousands):

 
 
March 31,
2017
 
December 31,
2016
Sales and property taxes payable
 
$
4,742

 
$
6,628

Severance accrual, current portion
 
3,553

 
4,267

Asset retirement obligations, current portion
 
884

 
5,841

Other current liabilities
 
8,995

 
12,349

Accrued liabilities and other
 
$
18,174

 
$
29,085



Other liabilities include the following (in thousands):

  
 
March 31,
2017
 
December 31,
2016
Non-current portion of deferred revenues
 
$
7,735

 
$
8,933

Straight-line management fee waiver
 
16,180

 
11,974

Other
 
2,142

 
2,836

Other liabilities
 
$
26,057

 
$
23,743


10. Long-Term Debt and Revolving Lines of Credit

Total debt at March 31, 2017 and December 31, 2016 consists of the following:
(In thousands)
 
March 31, 2017
 
December 31, 2016
Term loan A-1
 
$
466,813

 
$
472,875

Term loan A-2
 
400,000

 
375,000

 
 
866,813

 
847,875

Less: unamortized loan fees
 
17,816

 
18,610

Total debt, net of unamortized loan fees
 
$
848,997

 
$
829,265

 
 
 
 
 
Current maturities of long term debt, net of unamortized loan fees
 
$
38,124

 
$
32,041

Long-term debt, less current maturities, net of unamortized loan fees
 
$
810,873

 
$
797,224


As of March 31, 2017, our indebtedness totaled $866.8 million in term loans with an annualized effective interest rate of approximately 3.91% after considering the impact of the interest rate swap contract and unamortized loan costs.  The balance consists of the $466.8 million Term Loan A-1 at a variable rate (3.73% as of March 31, 2017) that resets monthly based on one month LIBOR plus a margin of 2.75%, and the $400 million Term Loan A-2 at a variable rate (3.98% as of March 31, 2017) that resets monthly based on one month LIBOR plus a margin of 3.00%.  The Term Loan A-1 requires quarterly principal repayments of $6.1 million through June 30, 2017, then increasing to $12.1 million quarterly through June 30, 2020, with further increases at that time through maturity in June 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 balance due June 30, 2023.

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;

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Index

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 1.00;
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 shown below, as of March 31, 2017, the Company was in compliance with the financial covenants in its credit agreements.
     
 
Actual
 
Covenant Requirement
Total Leverage Ratio
2.88
 
3.75 or Lower
Debt Service Coverage Ratio
4.56
 
2.00 or Higher
Minimum Liquidity Balance
$113 million
 
$25 million or Higher

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.

Prior to the recent acquisition of nTelos, the Wireless segment had 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, the Company's wireless service 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.


15

Index

Three months ended March 31, 2017 
(in thousands)
 
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
108,186

 
$
26,411

 
$
5,048

 
$

 
$

 
$
139,645

Other
 
6,042

 
2,035

 
6,158

 

 

 
14,235

Total external revenues
 
114,228

 
28,446

 
11,206

 

 

 
153,880

Internal revenues
 
1,235

 
567

 
7,948

 

 
(9,750
)
 

Total operating revenues
 
115,463

 
29,013

 
19,154

 

 
(9,750
)
 
153,880

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of goods and services, exclusive of depreciation and amortization shown separately below
 
38,318

 
15,228

 
9,273

 

 
(9,058
)
 
53,761

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
28,464

 
4,858

 
1,676

 
5,847

 
(692
)
 
40,153

Integration and acquisition expenses
 
3,792

 

 

 
697

 

 
4,489

Depreciation and amortization
 
35,752

 
5,788

 
3,132

 
132

 

 
44,804

Total operating expenses
 
106,326

 
25,874

 
14,081

 
6,676

 
(9,750
)
 
143,207

Operating income (loss)
 
$
9,137

 
$
3,139

 
$
5,073

 
$
(6,676
)
 
$

 
$
10,673


Three months ended March 31, 2016
 (in thousands)
 
 
Wireless
 
Cable
 
Wireline
 
Other
 
Eliminations
 
Consolidated
Totals
External revenues
 
 
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$
52,179

 
$
24,340

 
$
4,960

 
$

 
$

 
$
81,479

Other
 
3,203

 
1,846

 
6,043

 

 


 
11,092

Total external revenues
 
55,382

 
26,186

 
11,003

 

 

 
92,571

Internal revenues
 
1,136

 
260

 
7,376

 


 
(8,772
)
 

Total operating revenues
 
56,518

 
26,446

 
18,379

 

 
(8,772
)
 
92,571

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 

 
 

 
 

 
 

 
 

 
 

Costs of goods and services, exclusive of depreciation and amortization shown separately below
 
16,578

 
14,647

 
8,643

 

 
(8,106
)
 
31,762

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
11,514

 
5,108

 
1,605

 
3,865

 
(666
)
 
21,426

Integration and acquisition expenses
 

 

 

 
332

 

 
332

Depreciation and amortization
 
8,494

 
6,095

 
3,033

 
117

 

 
17,739

Total operating expenses
 
36,586

 
25,850

 
13,281

 
4,314

 
(8,772
)
 
71,259

Operating income (loss)
 
$
19,932

 
$
596

 
$
5,098

 
$
(4,314
)
 
$

 
$
21,312




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Index

A reconciliation of the total of the reportable segments’ operating income (loss) to consolidated income (loss) before taxes is as follows:
 
 
Three Months Ended
March 31,
(in thousands)
 
2017
 
2016
Total consolidated operating income
 
$
10,673

 
$
21,312

Interest expense
 
(9,100
)
 
(1,619
)
Non-operating income, net
 
1,375

 
556

Income before income taxes
 
$
2,948

 
$
20,249


The Company’s assets by segment are as follows:
 
(in thousands)
 
March 31,
2017
 
December 31,
2016
Wireless
 
$
1,039,211

 
$
1,101,716

Cable
 
220,519

 
218,471

Wireline
 
116,390

 
115,282

Other
 
1,070,204

 
1,059,898

Combined totals
 
2,446,324

 
2,495,367

Inter-segment eliminations
 
(993,335
)
 
(1,010,960
)
Consolidated totals
 
$
1,452,989

 
$
1,484,407


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 2013 are no longer subject to examination; net operating losses acquired in the nTelos acquisition are open to examination from 2002 forward. The Company is not subject to any state or federal income tax audits as of March 31, 2017.

13.
Adoption of New Accounting Principles

During the first quarter of 2017, the Company adopted one new accounting principle: Accounting Standards Update ("ASU") No. 2015-11, "Inventory: Simplifying the Measurement of Inventory". This ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The ASU also eliminates the requirement for entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The adoption of this ASU did not have a significant impact on our financial statements.

14. Subsequent Events

On March 9, 2017, the Company and Sprint entered into Addendum XX to the Sprint PCS Management Agreement. Addendum XX provides for (i) an expansion of the Company’s “Service Area” (as defined in the Sprint PCS Management Agreement) to include certain areas in Kentucky, Maryland, Ohio and West Virginia (the “Expansion Area”), (ii) certain network build out requirements in the Expansion Area over the next three years, (iii) the Company’s provision of prepaid field sales support to Sprint and its affiliates in the Service Area, (iv) Sprint’s provision of spectrum use to the Company in the Expansion Area, (v) the addition of Horizon Personal Communications, LLC, as a party to the Sprint PCS Management Agreement and the Sprint PCS Services Agreement (collectively, the “Affiliate Agreements”) and (vi) certain other amendments to the Affiliate Agreements.
In connection with the execution of Addendum XX, on March 9, 2017, the Company and certain affiliates of Sprint entered into an agreement to, among other things, transfer to Sprint certain customers in the Expansion Area and the underlying customer agreements, and to transition the provision of network coverage in the Expansion Area from Sprint to the Company. The expanded territory includes approximately 500 thousand market POPs and approximately 21 thousand Sprint customers.
The Company and Sprint closed on this transaction on April 6, 2017.

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Index

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, 2016.  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, 2016, 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 on May 6, 2016, the Company’s wireless service area expanded to include south-central and western Virginia, West Virginia, and small portions of Kentucky and Ohio.  In these areas, we are the exclusive provider of Sprint-branded wireless mobility communications network products and services on the 800 MHz, 1900 MHz and 2.5 GHz bands.  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, and includes corporate costs of executive management, information technology, legal, finance, and human resources. This segment also 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.

Acquisition of nTelos and Exchange with Sprint: On May 6, 2016, we completed our previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $667.8 million, 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.

The Company expects to incur approximately $23 million of integration and acquisition expenses associated with this transaction in 2017, in addition to the $54.7 million of such costs incurred during 2016.  We have incurred $7.1 million of these costs in the three months ended March 31, 2017. These costs include $0.1 million reflected in cost of goods and services and $2.5 million reflected in selling, general and administrative costs in the three month period ended March 31, 2017. In addition to the approximately $78 million of incurred and expected expenses described above, the Company also incurred

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Index

approximately $23 million of debt issuance costs in 2015 and 2016 relating to this transaction, for a total expected cost of $101 million.
Results of Operations

Three Months Ended March 31, 2017 Compared with the Three Months Ended March 31, 2016

Our consolidated results for the first quarter of 2017 and 2016 are summarized as follows:

 
 
Three Months Ended
March 31,
 
Change
(in thousands)
 
2017
 
2016
 
$
 
%
Operating revenues
 
$
153,880

 
$
92,571

 
$
61,309

 
66.2

Operating expenses
 
143,207

 
71,259

 
71,948

 
101.0

Operating income
 
10,673

 
21,312

 
(10,639
)
 
(49.9
)
 
 
 
 
 
 
 
 
 
Interest expense
 
(9,100
)
 
(1,619
)
 
(7,481
)
 
462.1

Other income, net
 
1,375

 
556

 
819

 
147.3

Income before taxes
 
2,948

 
20,249

 
(17,301
)
 
(85.4
)
Income tax expense
 
607

 
6,368

 
(5,761
)
 
(90.5
)
Net income
 
$
2,341

 
$
13,881

 
$
(11,540
)
 
(83.1
)

Operating revenues

For the three months ended March 31, 2017, operating revenues increased $61.3 million, or 66.2%. Wireless segment revenues increased $58.9 million compared to the first quarter of 2016; nearly all of this increase was a result of the acquisition of nTelos on May 6, 2016. Cable segment revenues grew $2.6 million primarily as a result of 2.2% growth in average subscriber counts and an increase in revenue per subscriber.  Wireline segment revenues increased $0.8 million, primarily due to increases in fiber sales.

Operating expenses

Total operating expenses were $143.2 million in the first quarter of 2017 compared to $71.3 million in the prior year period.  Operating expenses in the first quarter of 2017 included $4.5 million of integration and acquisition costs associated with the nTelos acquisition, including $3.8 million on the Wireless segment and $0.7 million in the Other segment.  Selling, general and administrative expenses and cost of goods and services in the Wireless segment included an additional $2.6 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 $63.3 million (excluding the $6.4 million of customer care, integration and acquisition expenses described above), primarily due to on-going costs associated with the acquired nTelos operations including $27.3 million of incremental depreciation and amortization expenses.  All other operating expenses increased $2.2 million, net of eliminations of intersegment activities.

Acquisition and integration costs on the Other segment primarily consisted of transaction related expenses such as 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, costs associated with terminating duplicative cell site leases and backhaul circuits, and personnel costs associated with short-term nTelos employees required to migrate former nTelos customers to the Sprint back-office.

Interest expense

Interest expense has increased primarily as a result of the incremental borrowings associated with closing the nTelos acquisition and the effect of two interest rate increases implemented by the Federal Reserve in late 2016 and early 2017. The impact of the interest rate increases has been offset by a swap that covers 50% of the outstanding principal under the new debt. Other changes include increased debt cost amortization reflecting the incremental costs of entering into the new debt, partially offset by increased capitalization of interest to capital projects.


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Index

Income tax expense

The Company's actual effective income tax rate decreased from 31.4% for the three months ended March 31, 2016 to 20.6% for the three months ended March 31, 2017.  The difference for both periods between the actual effective income tax rate and the statutory income tax rate results primarily from excess tax deductions on share grant vestings and certain stock option exercises, which are recognized as incurred. The Company recognized $1.7 million in excess deductions in the three months ended March 2017 compared to $4.5 million in excess deductions in the same period of 2016; however, the March 31, 2017 excess deductions represented a larger share of pre-tax income, reducing the effective rate more in in the three months ended March 31, 2017 than the three months ended March 31, 2016.

Net income

For the three months ended March 31, 2017, net income decreased $11.5 million, or 83.1% over March 31, 2016, primarily reflecting increased depreciation and amortization, straight-lining of certain Sprint fee credits, and higher interest on the increased balance of 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 acquisition of nTelos in May 2016, 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 multi-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.  Since January 1, 2016, the fees retained by Sprint are 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:

  
 
March 31,
2017
 
December 31,
2016
 
March 31, 2016
 
December 31,
2015
Retail PCS Subscribers – Postpaid
 
717,150

 
722,562

 
315,231

 
312,512

Retail PCS Subscribers – Prepaid
 
243,557

 
236,138

 
142,539

 
142,840

PCS Market POPS (000) (1)
 
5,536

 
5,536

 
2,437

 
2,433

PCS Covered POPS (000) (1)
 
4,836

 
4,807

 
2,230

 
2,224

CDMA Base Stations (sites)
 
1,476

 
1,467

 
556

 
552

Towers Owned
 
196

 
196

 
157

 
158

Non-affiliate Cell Site Leases
 
206

 
202

 
202

 
202


The changes from March 31, 2016 to December 31, 2016 shown above include the effects of the nTelos acquisition and the exchange with Sprint on May 6, 2016.


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Index

  
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
Gross PCS Subscriber Additions – Postpaid
 
38,701

 
17,356

 
Net PCS Subscriber Additions (Losses) – Postpaid
 
(5,412
)
 
2,719

 
Gross PCS Subscriber Additions – Prepaid
 
42,168

 
21,231

 
Net PCS Subscriber Additions (Losses) – Prepaid
 
7,419

 
(301
)
 
PCS Average Monthly Retail Churn % - Postpaid (2)
 
2.05
%
 
1.56
%
 
PCS Average Monthly Retail Churn % - Prepaid (2)
 
4.86
%
 
5.05
%
 

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


Three Months Ended March 31, 2017 Compared with the Three Months Ended March 31, 2016

(in thousands)
 
 
Three Months Ended
March 31,
 
Change
 
 
2017
 
2016
 
$
 
%
Segment operating revenues
 
 
 
 
 
 
 
 

Wireless service revenue
 
$
108,186

 
$
52,179

 
$
56,007

 
107.3

Tower lease revenue
 
2,882

 
2,750

 
132

 
4.8

Equipment revenue
 
3,145

 
1,454

 
1,691

 
116.3

Other revenue
 
1,250

 
135

 
1,115

 
NM

Total segment operating revenues
 
115,463

 
56,518

 
58,945

 
104.3

Segment operating expenses
 
 

 
 

 
 

 
 

Cost of goods and services, exclusive of depreciation and amortization shown separately below
 
38,318

 
16,578

 
21,740

 
131.1

Selling, general and administrative, exclusive of depreciation and amortization shown separately below
 
28,464

 
11,514

 
16,950

 
147.2

Integration and acquisition expenses
 
3,792

 

 
3,792

 
NM

Depreciation and amortization
 
35,752

 
8,494

 
27,258

 
320.9

Total segment operating expenses
 
106,326

 
36,586

 
69,740

 
190.6

Segment operating income
 
$
9,137

 
$
19,932

 
$
(10,795
)
 
(54.2
)


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Index

Service Revenues

Wireless service revenue increased $56.0 million, or 107.3%, for the three months ended March 31, 2017, compared to the March 31, 2016, period. See table below.

(in thousands)
 
 
Three Months Ended
March 31,
 
Change
Service Revenues
 
2017
 
2016
 
$
 
%
Postpaid net billings (1)
 
$
92,989

 
$
45,638

 
$
47,351

 
103.8

Sprint fees
 
 
 
 
 
 

 
 

Management fee
 
(7,383
)
 
(3,651
)
 
(3,732
)
 
102.2

Net service fee
 
(7,200
)
 
(3,934
)
 
(3,266
)
 
83.0

Waiver of management fee
 
7,383

 

 
7,383

 
NM

 
 
(7,200
)
 
(7,585
)
 
385

 
(5.1
)
Prepaid net billings
 
 

 
 

 
 

 
 

Gross billings
 
25,945

 
13,083

 
12,862

 
98.3

Sprint management fee
 
(1,557
)
 
(785
)
 
(772
)
 
98.3

Waiver of management fee
 
1,557

 

 
1,557

 
NM

 
 
25,945

 
12,298

 
13,647

 
111.0

Travel and other revenues
 
5,636

 
1,828

 
3,808

 
208.3

Accounting adjustments
 
 
 
 
 
 

 
 

Amortization of expanded affiliate agreement
 
(4,978
)
 

 
(4,978
)
 
NM

Straight-line adjustment - management fee waiver
 
(4,206
)
 

 
(4,206
)
 
NM

 
 
(9,184
)
 

 
(9,184
)
 
NM

Total Service Revenues
 
$
108,186

 
$
52,179

 
$
56,007

 
107.3


(1) Postpaid net billings are defined under the terms of the affiliate contract with Sprint to be the gross billings to customers within our service territory less billing credits and adjustments and allocated write-offs of uncollectible accounts.

Operating revenues

The changes in Wireless segment service revenues shown in the table above are almost exclusively a result of the nTelos acquisition in May 2016. Postpaid subscribers have increased by 402 thousand from March 31, 2016 to March 31, 2017 with 387 thousand of them in the former nTelos service area as of March 31, 2017. Prepaid subscribers have increased by 101 thousand over the same time period. There were 110 thousand prepaid subscribers in the former nTelos service area as of March 31, 2017.

In addition to the subscribers acquired as a result of the acquisition, we recorded an asset related to the changes to the Sprint affiliate agreement, including the right to serve new subscribers in the nTelos footprint, as previously described.  That asset is being amortized through the expiration of the current initial term of that contract in 2029 and, as a result, we recorded $5.0 million in amortization in the first quarter of 2017.   Sprint agreed to waive certain management fees that they would otherwise be entitled to under the affiliate agreement in exchange for our commitment to buy nTelos, upgrade its network and support the former nTelos and Sprint customers.  The fees waived are being recognized on a straight-line basis over the remainder of the initial term of the contract through 2029 and, as a result, we recorded an adjustment of $4.2 million in the first quarter of 2017.

Other operating revenues

The increases in equipment revenue and other revenue also resulted primarily from the nTelos acquisition, with the increase in other revenue primarily representing regulatory recovery revenues related to billings to customers before migration to the Sprint billing system, whereas Sprint retains the billing and related expenses and liabilities under our affiliate agreement.


22

Index

Cost of goods and services

Cost of goods and services increased $21.7 million, or 131.1%, in 2017 from the first quarter of 2016. The increase results primarily from increases in cell site rent, power, maintenance and backhaul costs for the incremental 868 cell sites in the nTelos territory of $19.3 million, as well as the related growth in the cost of network technicians to service and maintain these sites of $1.1 million.   Cost of goods and services also included $0.1 million of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back office systems.

Selling, general and administrative

Selling, general and administrative costs increased $16.9 million, or 147.2%, in the first quarter of 2017 from the comparable 2016 period, again primarily due to the acquisition of nTelos in May 2016.  Increases include $3.2 million of incremental separately settled national channel commissions, $4.7 million related to incremental stores acquired as a result of the nTelos acquisition, $0.9 million in incremental sales and marketing efforts to communicate with and migrate the remaining nTelos legacy customers over to the Sprint platforms, and $1.3 million in other administrative costs related to the acquired operations. Costs associated with prepaid wireless offerings increased $4.3 million.  Selling, general and administrative costs also included $2.5 million of costs to support nTelos legacy billing operations until customers migrate to Sprint’s back office systems.

Integration and acquisition

Integration and acquisition expenses of $3.8 million in the first quarter of 2017 include approximately $3.7 million for replacement handsets issued to former nTelos subscribers migrated to the Sprint billing platform and $0.7 million in other expenses, partially offset by $0.6 million in reductions of previously estimated costs to terminate duplicative cell site leases and backhaul contracts.

Depreciation and amortization

Depreciation and amortization increased $27.3 million, or 321%, in the first quarter of 2017 over the comparable 2016 period, due primarily to $20.0 million in incremental depreciation largely on the acquired fixed assets, and $6.7 million in amortization of customer based intangibles recorded in the acquisition. 






























23

Index

Cable

The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia, which are included in the Wireline segment. Increases in homes passed, available homes and video customers between December 31, 2015 and March 31, 2016, resulted from the Colane acquisition on January 1, 2016.

 
 
March 31,
2017
 
December 31,
2016
 
March 31, 2016
 
December 31,
2015
Homes Passed (1)
 
184,819

 
184,710

 
181,375

 
172,538

Customer Relationships (2)
 
 
 
 
 
 
 
 

Video customers
 
47,160

 
48,512

 
50,195

 
48,184

Non-video customers
 
30,765

 
28,854

 
26,895

 
24,550

Total customer relationships
 
77,925

 
77,366

 
77,090

 
72,734

Video
 
 
 
 
 
 
 
 

Customers (3)
 
49,384

 
50,618

 
52,468

 
50,215

Penetration (4)
 
26.7
%
 
27.4
%
 
28.9
%
 
29.1
%
Digital video penetration (5)
 
77.1
%
 
77.4
%
 
74.8
%
 
77.9
%
High-speed Internet
 
 
 
 
 
 
 
 

Available Homes (6)
 
183,935

 
183,826

 
180,814

 
172,538

Customers (3)
 
61,815

 
60,495

 
58,273

 
55,131

Penetration (4)
 
33.6
%
 
32.9
%
 
32.2
%
 
32.0
%
Voice
 
 
 
 
 
 
 
 

Available Homes (6)
 
181,198

 
181,089

 
178,077

 
169,801

Customers (3)
 
21,647

 
21,352

 
20,786

 
20,166

Penetration (4)
 
11.9
%
 
11.8
%
 
11.7
%
 
11.9
%
Total Revenue Generating Units (7)
 
132,846

 
132,465

 
131,527

 
125,512

Fiber Route Miles
 
3,233

 
3,137

 
2,955

 
2,844

Total Fiber Miles (8)
 
100,799

 
92,615

 
80,727

 
76,949

Average Revenue Generating Units
 
132,419

 
131,218

 
129,604

 
124,054


1)
Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines.  Homes passed is an estimate based upon the best available information.
2)
Customer relationships represent the number of customers who receive at least one of our services.
3)
Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer.  Where services are provided on a bulk basis, such as to hotels and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above. 
4)
Penetration is calculated by dividing the number of customers by the number of homes passed or available homes, as appropriate.
5)
Digital video penetration is calculated by dividing the number of digital video customers by total video customers.  Digital video customers are video customers who receive any level of video service via digital transmission.  A dwelling with one or more digital set-top boxes or digital adapters counts as one digital video customer.
6)
Homes and businesses are considered available (“available homes”) if we can connect them to our distribution system without further extending the transmission lines and if we offer the service in that area.
7)
Revenue generating units are the sum of video, voice and high-speed internet customers.
8)
Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance.  For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.


24

Index

Three Months Ended March 31, 2017 Compared with the Three Months Ended March 31, 2016

(in thousands)
 
Three Months Ended
March 31,
 
Change
 
 
2017
 
2016
 
$
 
%
Segment operating revenues
 
 
 
 
 
 
 
  
Service revenue
 
$
26,411

 
$
24,340

 
$
2,071

 
8.5

Other revenue
 
2,602

 
2,106

 
496

 
23.6

Total segment operating revenues
 
29,013

 
26,446

 
2,567

 
9.7

Segment operating expenses
 
 

 
 

 
 

 
 

Cost of goods and services, exclusive of depreciation and amortization shown separately below
 
15,228

 
14,647

 
581

 
4.0

Selling, general, and administrative, exclusive of depreciation and amortization shown separately below
 
4,858

 
5,108

 
(250
)
 
(4.9
)
Depreciation and amortization
 
5,788

 
6,095

 
(307
)
 
(5.0
)
Total segment operating expenses
 
25,874

 
25,850