SEC Filing - Shenandoah Telecommunications Co

View:

Download DOC

Download PDF

Download XLS

Download XBRL

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 June 30, 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

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 July 27, 2017 was 49,125,226.

SHENANDOAH TELECOMMUNICATIONS COMPANY

INDEX



		Page Numbers
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	3	-	4

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016	5

	Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2017 and the Year Ended December 31, 2016	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	7	-	8

	Notes to Unaudited Condensed Consolidated Financial Statements	9	-	22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23	-	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 6.	Exhibits	44

	Signatures	46

	Exhibit Index	47

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



ASSETS	June 30, 2017		December 31, 2016

Current Assets
Cash and cash equivalents	$	59,774	$	36,193
Accounts receivable, net of allowance of $436 and $449, respectively	65,797		69,789
Income taxes receivable	1,739		—
Inventory, net	13,994		39,043
Prepaid expenses and other	16,765		16,440
Total current assets	158,069		161,465

Investments, including $3,137 and $2,907 carried at fair value	10,849		10,276

Property, plant and equipment, net	679,463		698,122

Other Assets
Intangible assets, net	436,656		454,532
Goodwill	146,497		145,256
Deferred charges and other assets, net	11,465		14,756
Total assets	$	1,442,999	$	1,484,407

(Continued)

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



LIABILITIES AND SHAREHOLDERS’ EQUITY	June 30, 2017		December 31, 2016

Current Liabilities
Current maturities of long-term debt, net of unamortized loan fees	$	44,247	$	32,041
Accounts payable	22,433		72,810
Advanced billings and customer deposits	20,883		20,427
Accrued compensation	7,100		9,465
Income taxes payable	—		435
Accrued liabilities and other	17,552		29,085
Total current liabilities	112,215		164,263

Long-term debt, less current maturities, net of unamortized loan fees	799,782		797,224

Other Long-Term Liabilities
Deferred income taxes	143,197		151,837
Deferred lease payable	20,303		18,042
Asset retirement obligations	18,367		15,666
Retirement plan obligations	17,973		17,738
Other liabilities	32,499		23,743
Total other long-term liabilities	232,339		227,026

Commitments and Contingencies

Shareholders’ Equity
Common stock	46,766		45,482
Retained earnings	245,885		243,624
Accumulated other comprehensive income, net of taxes	6,012		6,788
Total shareholders’ equity	298,663		295,894

Total liabilities and shareholders’ equity	$	1,442,999	$	1,484,407

See accompanying notes to unaudited condensed consolidated financial statements.

Index

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,
	2017			2016			2017			2016

Operating revenues	$	153,258		$	130,309		$	307,138		$	222,880

Operating expenses:
Cost of goods and services, exclusive of depreciation and amortization shown separately below	53,381			50,296			107,142			82,057
Selling, general and administrative, exclusive of depreciation and amortization shown separately below	43,022			33,694			83,175			55,120
Integration and acquisition expenses	3,678			20,054			8,167			20,386
Depreciation and amortization	44,925			32,415			89,729			50,154
Total operating expenses	145,006			136,459			288,213			207,717
Operating income (loss)	8,252			(6,150		)	18,925			15,163

Other income (expense):
Interest expense	(9,389		)	(5,904		)	(18,489		)	(7,524		)
Gain on investments, net	73			21			193			109
Non-operating income, net	1,224			146			2,479			614
Income (loss) before income taxes	160			(11,887		)	3,108			8,362

Income tax expense (benefit)	240			(4,892		)	847			1,477
Net income (loss)	(80		)	(6,995		)	2,261			6,885

Other comprehensive income (loss):
Unrealized loss on interest rate hedge, net of tax	(1,375		)	(3,238		)	(776		)	(4,285		)
Comprehensive income (loss)	$	(1,455	)	$	(10,233	)	$	1,485		$	2,600

Earnings (loss) per share:
Basic	$	0.00		$	(0.14	)	$	0.05		$	0.14
Diluted	$	0.00		$	(0.14	)	$	0.05		$	0.14
Weighted average shares outstanding, basic	49,115			48,830			49,083			48,696
Weighted average shares outstanding, diluted	49,115			48,830			49,850			49,415

See accompanying notes to unaudited condensed consolidated financial statements.

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	—		—			2,261			—			2,261
Unrealized loss on interest rate hedge, net of tax	—		—			—			(776		)	(776		)
Stock based compensation	—		2,805			—			—			2,805
Stock options exercised	15		108			—			—			108
Common stock issued for share awards	153		—			—			—			—
Common stock issued	1		10			—			—			10
Common stock issued to acquire non-controlling interests of nTelos	76		—			—			—			—
Common stock repurchased	(55	)	(1,639		)	—			—			(1,639		)
Balance, June 30, 2017	49,125		$	46,766		$	245,885		$	6,012		$	298,663

See accompanying notes to unaudited condensed consolidated financial statements.

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Six Months Ended June 30,
	2017			2016
Cash Flows From Operating Activities
Net income	$	2,261		$	6,885
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	76,779			42,753
Amortization reflected as operating expense	12,950			7,401
Amortization reflected as contra revenue	10,321			3,290
Amortization reflected as rent expense	593			—
Provision for bad debt	886			752
Straight line adjustment to management fee revenue	8,640			3,406
Stock based compensation expense	2,418			1,957
Deferred income taxes	(11,954		)	(53,238		)
Net (gain) loss on disposal of equipment	(84		)	12
Unrealized (gain) on investments	(187		)	(83		)
Net (gains) from patronage and equity investments	(1,447		)	(315		)
Amortization of debt issuance costs	2,385			1,205
Other	—			2,120
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable	5,196			(4,332		)
Inventory, net	25,049			(11,424		)
Income taxes receivable	(1,908		)	7,694
Other assets	(126		)	2,066
Increase (decrease) in:
Accounts payable	(40,558		)	5,529
Income taxes payable	(435		)	34,195
Deferred lease payable	2,493			1,228
Other deferrals and accruals	(6,478		)	(708		)
Net cash provided by operating activities	$	86,794		$	50,393

Cash Flows From Investing Activities
Acquisition of property, plant and equipment	(68,766		)	(60,123		)
Proceeds from sale of equipment	269			185
Cash distributions from investments	22			53
Additional contributions to investments	(15		)	—
Cash disbursed for acquisition, net of cash acquired	—			(644,432		)
Acquisition of Expansion Area	(6,000		)	—
Net cash used in investing activities	$	(74,490	)	$	(704,317	)

(Continued)

Index

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Six Months Ended June 30,
	2017			2016
Cash Flows From Financing Activities
Principal payments on long-term debt	$	(12,125	)	$	(201,257	)
Amounts borrowed under debt agreements	25,000			835,000
Cash paid for debt issuance costs	—			(14,825		)
Repurchases of common stock	(1,598		)	(4,183		)
Proceeds from issuance of common stock	—			2,948
Net cash provided by/(used in) financing activities	$	11,277		$	617,683

Net increase (decrease) in cash and cash equivalents	$	23,581		$	(36,241	)

Cash and cash equivalents:
Beginning	36,193			76,812
Ending	$	59,774		$	40,571

Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest, net of capitalized interest of $1,035 and $454, respectively	$	17,085		$	6,659

Income taxes paid, net of refunds received	$	15,150		$	12,796

Non-cash investing and financing activities:

At June 30, 2017 and 2016, accounts payable included approximately $4.6 million and $5.2 million, respectively, associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.

During the six months ended June 30, 2017, the Company recorded a decrease in the fair value of interest rate swaps of $1.3 million, a decrease in deferred tax liabilities of $0.4 million, and a decrease to accumulated other comprehensive income of $0.8 million.

During the six months ended June 30, 2016, 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.

During the six months ended June 30, 2016, the Company adopted Accounting Standards Update 2015-15 and reclassified $4.3 million of unamortized loan fees and costs previously included in deferred charges and other assets to long term debt in connection with the new Term loan A-1 an A-2 borrowing related to the acquisition of nTelos.

See accompanying notes to unaudited condensed consolidated financial statements.

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.

Management has made an immaterial error correction to the accompanying prior period unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2016 to decrease both the amount of net cash provided by operating activities and the amount of net cash used in investing activities by approximately $10.4 million to properly reflect the common stock issued (non-cash) by the Company to acquire non-controlling interests in a subsidiary of nTelos held by third parties in conjunction with the nTelos acquisition. This immaterial error correction had no effect on the net increase (decrease) in cash and cash equivalents for the period or the beginning or ending balance of cash and cash equivalents for the period.

Recently Issued Accounting Standards

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's consolidated financial statements and note disclosures, from those disclosed in the Company's 2016 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, delaying the effective date of ASU 2014-09. Three other amendments have been issued during 2016 modifying the original ASU. As amended, the new standard is effective for the Company on January 1, 2018, using either a retrospective basis or a modified retrospective basis with early adoption permitted. The Company plans to adopt the standard effective January 1, 2018. The Company plans to adopt this standard using the modified retrospective transition approach. The Company is continuing to assess all potential impacts of the standard, including the impact to the pattern with which revenue is recognized, the impact of the standard on current accounting policies, practices and system of internal controls, in order to identify material differences, if any that would result from applying the new requirements. In 2016, the Company identified a project team and commenced an initial impact assessment process for ASU 2014-09. The Company is continuing its work toward establishing new policies and processes, and is implementing necessary changes to data and procedures necessary to comply with the new requirements. Based on the results of the project team’s assessment to date, the Company anticipates this standard will have an impact, which could be significant, to the consolidated financial statements. While continuing to assess all potential impacts of the standard, the Company believes the most significant impact relates to additional disclosures required for qualitative and quantitative information concerning the nature, amount, timing, and any uncertainty of revenue and cash flows from contracts with customers, the capitalization of costs of commissions, upfront contract costs, the pattern with which revenue is recognized, and other contract acquisition-based and contract fulfillment costs.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous generally accepted accounting principles. This change will result in an increase to recorded assets and liabilities on lessees’ financial statements, as well as changes in the categorization of rental costs, from rent expense to interest and depreciation expense. Other effects may occur depending on the types of leases and the specific terms of them utilized by particular lessees. The ASU is effective for us on January 1, 2019, and early application is permitted. Modified retrospective application is required. The Company is currently evaluating the ASU and expects that it will have a material impact on our consolidated financial statements.

During the first quarter of 2017, the Company adopted: 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

Index

less an approximate normal profit margin when measuring inventory. The adoption of this ASU did not have a significant impact on our financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements, nor does the Company expect to early adopt ASU 2017-07.


2.	Acquisitions

Acquisition of NTELOS Holdings Corp. and Exchange with Sprint

On May 6, 2016, (the "acquisition date"), the Company completed its acquisition of NTELOS Holdings Corp. (nTelos). nTelos, was a leading regional provider of wireless telecommunications solutions and was acquired to expand the Company's wireless service area and subscriber base, thus strengthening the Company's relationship with Sprint Corporation (Sprint).

Pursuant to the terms of the Agreement and Plan of Merger between the Company and nTelos (the "Merger Agreement"), nTelos became a direct wholly owned subsidiary of the Company. Pursuant to the terms of the Merger Agreement, the Company acquired all of the issued and outstanding capital stock of nTelos for an aggregate purchase price of $667.8 million. 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.

Transaction costs in connection with the acquisition were expensed as incurred and are included in integration and acquisition expenses in the condensed consolidated statement of operations. The results of operations related to nTelos are included in our consolidated statements of operations beginning from the date of acquisition.

The Company accounted for the acquisition of nTelos under the acquisition method of accounting, in accordance with FASB's Accounting Standards Codification (“ASC”) 805, “Business Combinations”, and has accounted for measurement period adjustments under ASU 2015-16, “Simplifying the Accounting for Measurement Period Adjustments”. Estimates of fair value included in the consolidated financial statements, in conformity with ASC 820, "Fair Value Measurements and Disclosures", represent the Company's best estimates and valuations. In accordance with ASC 805, "Business Combinations", the allocation of the consideration value was subject to adjustment until the Company completed its analysis, in a period of time, but not to exceed one year after the date of acquisition, or May 6, 2017, in order to provide the Company with the time to complete the valuation of its assets and liabilities. As of May 6, 2017, the Company has completed and finalized its analysis and allocation of the consideration value to assets acquired and liabilities assumed.

Index

The following table summarizes the final purchase price allocation to assets acquired and liabilities assumed, including measurement period adjustments:



	Initial Estimate		Measurement Period Adjustments			Purchase Price Allocation
Accounts receivable	$	48,476	$	(1,242	)	47,234
Inventory	3,810		762			4,572
Restricted cash	2,167		—			2,167
Investments	1,501		—			1,501
Prepaid expenses and other assets	14,835		—			14,835
Building held for sale	4,950		—			4,950
Property, plant and equipment	223,900		3,347			227,247
Spectrum licenses (1), (2)	198,200		—			198,200
Acquired subscribers - wireless (1), (2)	198,200		7,746			205,946
Favorable lease intangible assets (2)	11,000		6,029			17,029
Goodwill (3)	151,627		(5,244		)	146,383
Other long term assets	10,288		555			10,843
Total assets acquired	$	868,954	$	11,953		$	880,907

Accounts payable	8,648		(105		)	8,543
Advanced billings and customer deposits	12,477		—			12,477
Accrued expenses	25,230		(2,089		)	23,141
Capital lease liability	418		—			418
Deferred tax liabilities	124,964		4,327			129,291
Retirement benefits	19,461		(263		)	19,198
Other long-term liabilities	14,056		6,029			20,085
Total liabilities assumed	$	205,254	$	7,899		$	213,153

Net assets acquired	$	663,700	$	4,054		$	667,754

(1)

Concurrently with acquiring nTelos, the Company completed its previously announced transaction with SprintCom, Inc., a subsidiary of Sprint. Pursuant to this transaction, among other things, the Company exchanged spectrum licenses, valued at $198.2 million and acquired subscribers - wireless, valued at $206.0 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 $283.3 million, as well as additional acquired subscribers - wireless, valued at $120.9 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”. The transfer of spectrum to Sprint resulted in a taxable gain to the Company which will be recognized as the Company recognizes the cash benefit of the waived management fees over the remaining approximately five years.


(2)	Identifiable intangible assets were measured using a combination of an income approach and a market approach.

(3)

Goodwill is the excess of the consideration transferred over the net assets recognized and represents the future economic benefits, primarily as a result of other assets acquired that could not be individually identified and separately recognized. The Company has recorded goodwill in its Wireless segment as a result of the nTelos acquisition. Goodwill is not amortized. The goodwill that arose from the acquisition of nTelos is not deductible for tax purposes.

In addition to the changes in the balances reflected above, the Company revised provisional estimated useful lives of certain assets and recorded an adjustment to amortization expense of $0.1 million during the three and six months ended June 30, 2017, and recorded an adjustment during 2016 of $4.6 million to depreciation expense relating to the three and six months ended June 30, 2016.

Acquisition-related costs primarily related to legal services, professional services, and severance accruals, were expensed as incurred. For the three and six months ended June 30, 2016, the Company incurred acquisition-related costs of $14.8 million and $15.1 million, respectively.

Index

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.

The following table presents pro forma information, based on estimates and assumptions that the Company believes to be reasonable, for the Company as if the acquisition of nTelos had occurred at the beginning of 2016: (in millions)



	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
Operating revenues	$	161.1		$	334.4
Income (loss) before income taxes	$	(7.5	)	$	9.4

The pro forma information provided in the table above is not necessarily indicative of the consolidated results of operations for future periods or the results that actually would have been realized had the acquisition been completed at the beginning of the periods presented.

The pro forma information provided in the table above is based upon estimated valuations of the assets acquired and liabilities assumed as well as estimates of depreciation and amortization charges thereon. Other estimated 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 Acquired subscribers - wireless intangible asset.

In connection with the acquisition of nTelos, 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 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. The Company has incurred these costs as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
Statement of Operations location:	2017	2016	2017	2016
Cost of goods and services	0.4	0.3	1.2	0.3
Selling, general and administrative	1.3	2.0	3.1	2.0
Integration and acquisition	3.7	20.1	8.2	20.4
Total	5.4	22.4	12.5	22.7

The value of the affiliate agreement expansion discussed above 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 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

Index

•

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 (in thousands):



	Useful Life	Basis
Affiliate contract expansion	14 years	$	283,302
Acquired subscribers - wireless	4-10 years	$	120,855
Favorable lease intangible assets	3-19 years	$	17,029

The affiliate contract expansion intangible asset is amortized on a straight-line basis and recorded as a contra-revenue over the remaining 14 year initial contract term. The Acquired subscribers rights - wireless intangible is amortized over the life of the customers, gradually decreasing over the expected life of this asset, and recorded through amortization expense. The favorable lease intangible assets are amortized on a straight-line basis and recorded through rent expense. The value of these intangible assets includes measurement period adjustments.

Acquisition of Expansion Area

On April 6, 2017, the Company expanded its affiliate service territory, under its agreements with Sprint, to include certain areas in North Carolina, Kentucky, Maryland, Ohio and West Virginia. The expanded territory includes the Parkersburg, WV, Huntington, WV, and Cumberland, MD, basic trading areas. Approximately 25,000 Sprint retail and former nTelos postpaid and prepaid subscribers in the new basic trading areas will become Sprint-branded affiliate customers managed by the Company. The Company plans to upgrade and expand the existing wireless network coverage in those regions. Once the expansion is complete, the Company plans to open multiple Sprint-branded retail locations in the new area.

The following table summarizes the preliminary allocation of the fair values of the assets acquired:



	Estimated Useful Life	April 6, 2017
Affiliate contract expansion	13	$	3,843
Acquired subscribers - wireless	2 - 7 years	2,157
Total		$	6,000

Identifiable intangible assets were measured using a combination of an income approach and a market approach. The fair values of the assets acquired were based on management's preliminary estimates or assumptions. While substantially complete, the allocation of value among the intangible assets is not yet final. If the final allocation of value among the intangible assets differs significantly from the Company's estimate provided above, then changes concerning amortization expense could result. Amortization expense of $0.2 million was recorded for the three-month period ended June 30, 2017.


3.	Property, Plant and Equipment

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



	June 30, 2017		December 31, 2016
Plant in service	$	1,145,594	$	1,085,318
Plant under construction	68,707		73,759
	1,214,301		1,159,077
Less accumulated amortization and depreciation	534,838		460,955
Net property, plant and equipment	$	679,463	$	698,122

Index


4.	Earnings (loss) per share ("EPS")

Basic net income (loss) per share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Diluted EPS was computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include stock options and restricted stock units and shares that the Company is contractually obligated to issue in the future.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	2017			2016			2017		2016
Basic income (loss) per share
Net income (loss)	$	(80	)	$	(6,995	)	$	2,261	$	6,885
Basic weighted average shares outstanding	49,115			48,830			49,083		48,696
Basic income (loss) per share	$	—		$	(0.14	)	$	0.05	$	0.14

Effect of stock options and awards outstanding:
Basic weighted average shares outstanding	49,115			48,830			49,083		48,696
Effect from dilutive shares and options outstanding	—			—			767		719
Diluted weighted average shares	49,115			48,830			49,850		49,415
Diluted income (loss) per share	$0.00			$	(0.14	)	$	0.05	$	0.14

Due to the net loss for the three months ended June 30, 2017 and 2016, no adjustment was made to basic shares, as such an adjustment would have been anti-dilutive.

The computation of diluted EPS does not include certain unvested awards, on a weighted average basis, for the three months ended June 30, 2017 and 2016, respectively, because their inclusion would have an anti-dilutive effect on EPS. The awards excluded because of their anti-dilutive effect are as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
(in thousands)	2017	2016	2017	2016
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive	786	703	87	22


5.	Investments

Investments include $3.1 million and $2.9 million of investments carried at fair value as of June 30, 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 six months ended June 30, 2017, the Company recognized $45 thousand in dividend and interest income from investments, and recorded net unrealized gains of $187 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. Changes in carrying value of investments are recorded within gain on investments, net on the Statement of Operations and Comprehensive Income (Loss).

At June 30, 2017 and December 31, 2016, other investments, comprised of equity securities which do not have readily determinable fair values, consist of the following (in thousands):

Index



	June 30, 2017		December 31, 2016
Cost method:
CoBank	$	6,470	$	6,177
Other – Equity in other telecommunications partners	738		742
	7,208		6,919
Equity method:
Other	504		450
Total other investments	$	7,712	$	7,369


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.

The Company has certain non-marketable long-term investments for which it is not practicable to estimate fair value with a total carrying value of $7.7 million and $7.4 million as of June 30, 2017 and December 31, 2016, respectively, of which $6.5 million and $6.2 million, respectively, represents the Company’s investment in CoBank. This investment is primarily related to patronage distributions of restricted equity and is a required investment related to the portion of the Credit Facility held by CoBank. This investment is carried under the cost method.


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 $126.6 million as of June 30, 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 June 30, 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 the outstanding notional amount 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 June 30, 2017, the Company estimates that $783 thousand will be reclassified as a reduction of interest expense during the next twelve months.

Index

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 (in thousands):



	June 30, 2017		December 31, 2016
Balance Sheet Location:
Prepaid expenses and other	$	783	$	—
Deferred charges and other assets, net	9,180		12,118
Accrued liabilities and other	—		(895		)
Total derivatives designated as hedging instruments	$	9,963	$	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).

The table below presents change in accumulated other comprehensive income by component for the six months ended June 30, 2017 (in thousands):



	Gains on Cash Flow Hedges			Income Tax Expense			Accumulated Other Comprehensive Income, net of taxes
Balance as of December 31, 2016	$	11,223		$	(4,435	)	$	6,788
Net change in unrealized losses	(1,867		)	717			(1,150		)
Amounts reclassified from accumulated other comprehensive income to interest expense	607			(233		)	374
Net current period accumulated other comprehensive income (loss)	(1,260		)	484			(776		)
Balance as of June 30, 2017	$	9,963		$	(3,951	)	$	6,012

Index

8. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill during the six months ended June 30, 2017 are shown below (in thousands):



	December 31, 2016		Measurement Period Adjustments		June 30, 2017
Goodwill - Wireline segment	$	10	$	—	$	10
Goodwill - Cable segment	104		—		104
Goodwill - Wireless segment	145,142		1,241		146,383
Goodwill as of June 30, 2017	$	145,256	$	1,241	$	146,497

Intangible assets consist of the following at June 30, 2017 and December 31, 2016:



	June 30, 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	287,102		(24,351		)	262,751		284,102		(14,030		)	270,072
Acquired subscribers – wireless	123,055		(31,258		)	91,797		120,855		(18,738		)	102,117
Favorable leases - wireless	16,950		(1,955		)	14,995		16,950		(1,130		)	15,820
Acquired subscribers – cable	25,265		(24,974		)	291		25,265		(24,631		)	634
Other intangibles	3,229		(838		)	2,391		2,212		(754		)	1,458
Total finite-lived intangibles	455,601		(83,376		)	372,225		449,384		(59,283		)	390,101
Total intangible assets	$	520,032	$	(83,376	)	$	436,656	$	513,815	$	(59,283	)	$	454,532

Index


9.	Accrued and Other liabilities

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



	June 30, 2017		December 31, 2016
Sales and property taxes payable	$	4,735	$	6,628
Severance accrual, current portion	2,491		4,267
Asset retirement obligations, current portion	1,621		5,841
Accrued programming costs	2,942		2,939
Other current liabilities	5,763		9,410
Accrued liabilities and other	$	17,552	$	29,085

Other liabilities include the following (in thousands):



	June 30, 2017		December 31, 2016
Non-current portion of deferred revenues	$	10,531	$	8,933
Straight-line management fee waiver	20,614		11,974
Other	1,354		2,836
Other liabilities	$	32,499	$	23,743

10. Long-Term Debt and Revolving Lines of Credit

Total debt at June 30, 2017 and December 31, 2016 consists of the following:



(In thousands)	June 30, 2017		December 31, 2016
Term loan A-1	$	460,750	$	472,875
Term loan A-2	400,000		375,000
	860,750		847,875
Less: unamortized loan fees	16,721		18,610
Total debt, net of unamortized loan fees	$	844,029	$	829,265

Current maturities of long term debt, net of unamortized loan fees	$	44,247	$	32,041
Long-term debt, less current maturities, net of unamortized loan fees	$	799,782	$	797,224

As of June 30, 2017, our indebtedness totaled $860.8 million in term loans with an annualized effective interest rate of approximately 4.06% after considering the impact of the interest rate swap contract and unamortized loan costs. The balance consists of the $460.8 million Term Loan A-1 at a variable rate (3.98% as of June 30, 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 (4.23% as of June 30, 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 $12.1 million 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 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;

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.

As shown below, as of June 30, 2017, the Company was in compliance with the covenants in its credit agreements.



	Actual		Covenant Requirement
Total Leverage Ratio	2.91		3.75 or Lower
Debt Service Coverage Ratio	4.35		2.00 or Higher
Minimum Liquidity Balance	$	133.4	$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.

The Wireless segment provides digital wireless service as a PCS affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, south-central and western Virginia, West Virginia, and small portions of North Carolina, Kentucky and Ohio. The Wireless 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.

Index

Three Months Ended June 30, 2017

(in thousands)



	Wireless		Cable		Wireline		Other			Eliminations			Consolidated Totals
External revenues
Service revenues	$	107,681	$	26,883	$	5,128	$	—		$	—		$	139,692
Other	5,218		2,095		6,253		—			—			13,566
Total external revenues	112,899		28,978		11,381		—			—			153,258
Internal revenues	1,234		586		8,195		—			(10,015		)	—
Total operating revenues	114,133		29,564		19,576		—			(10,015		)	153,258

Operating expenses
Costs of goods and services, exclusive of depreciation and amortization shown separately below	38,469		14,911		9,330		—			(9,329		)	53,381
Selling, general and administrative, exclusive of depreciation and amortization shown separately below	29,637		4,867		1,683		7,521			(686		)	43,022
Integration and acquisition expenses	4,124		—		—		(446		)	—			3,678
Depreciation and amortization	35,551		6,090		3,155		129			—			44,925
Total operating expenses	107,781		25,868		14,168		7,204			(10,015		)	145,006
Operating income (loss)	$	6,352	$	3,696	$	5,408	$	(7,204	)	$	—		$	8,252

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	)

Index

Six Months Ended June 30, 2017

(in thousands)



	Wireless		Cable		Wireline		Other			Eliminations			Consolidated Totals
External revenues
Service revenues	$	215,867	$	53,294	$	10,176	$	—		$	—		$	279,337
Other	11,261		4,129		12,411		—			—			27,801
Total external revenues	227,128		57,423		22,587		—			—			307,138
Internal revenues	2,468		1,154		16,143					(19,765		)	—
Total operating revenues	229,596		58,577		38,730		—			(19,765		)	307,138

Operating expenses
Costs of goods and services, exclusive of depreciation and amortization shown separately below	76,788		30,139		18,603		—			(18,388		)	107,142
Selling, general and administrative, exclusive of depreciation and amortization shown separately below	58,101		9,725		3,359		13,367			(1,377		)	83,175
Integration and acquisition expenses	7,916		—		—		251			—			8,167
Depreciation and amortization	71,303		11,879		6,286		261			—			89,729
Total operating expenses	214,108		51,743		28,248		13,879			(19,765		)	288,213
Operating income (loss)	$	15,488	$	6,834	$	10,482	$	(13,879	)	$	—		$	18,925

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

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 June 30,						Six Months Ended June 30,
(in thousands)	2017			2016			2017			2016
Total consolidated operating income (loss)	$	8,252		$	(6,150	)	$	18,925		$	15,163
Interest expense	(9,389		)	(5,904		)	(18,489		)	(7,524		)
Non-operating income, net	1,297			167			2,672			723
Income before income taxes	$	160		$	(11,887	)	$	3,108		$	8,362

The Company’s assets by segment are as follows:



(in thousands)	June 30, 2017		December 31, 2016
Wireless	$	1,039,531	$	1,101,716
Cable	225,954		218,471
Wireline	123,123		115,282
Other	54,391		48,938
Consolidated totals	$	1,442,999	$	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 June 30, 2017.

The effective tax rate has fluctuated in recent periods due to the minimal base of pre-tax earnings or losses and has been further impacted by the impact of share based compensation tax benefits which are recognized as incurred under the provisions of ASC 740, "Income Taxes".

13. Related Party Transactions

ValleyNet, an equity method investee of the Company, resells capacity on the Company’s fiber network under an operating lease agreement. Additionally, the Company's PCS operating subsidiary leases capacity through ValleyNet.

The following tables summarize the financial statement impact from related party transactions with ValleyNet (in thousands):