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UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

			For the quarterly period ended			September 30, 2020

☐			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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Common Stock (No Par Value)			SHEN			NASDAQ Global Select Market			49,852,361
(Title of Class)			(Trading Symbol)			(Name of Exchange on which Registered)			(The number of shares of the registrant's common stock outstanding on November 02, 2020)

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 every Interactive Data File required to be submitted 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 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  ☒

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SHENANDOAH TELECOMMUNICATIONS COMPANY

INDEX

Page Numbers

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Unaudited Condensed Consolidated Balance Sheets

3

Unaudited Condensed Consolidated Statements of Comprehensive Income

4

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

5

Unaudited Condensed Consolidated Statements of Cash Flows

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

Item 4.

Controls and Procedures

30

PART II.

OTHER INFORMATION

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 6.

Exhibits

33

Signatures

34

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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

			September 30, 2020						December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents			$	184,050					$	101,651
Accounts receivable, net of allowance for doubtful accounts of $469 and $533, respectively			67,667						63,641
Income taxes receivable			94						10,306
Prepaid expenses and other			10,579						11,146
Current assets held for sale			1,148,601						55,109
Total current assets			1,410,991						241,853
Investments			13,034						12,388
Property, plant and equipment, net			413,602						363,087
Intangible assets, net and Goodwill			103,856						88,241
Operating lease right-of-use assets			48,844						42,568
Deferred charges and other assets			10,972						9,267
Non-current assets held for sale			—						1,141,498
Total assets			$	2,001,299					$	1,898,902
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt, net of unamortized loan fees			$	696,378					$	31,650
Accounts payable			25,602						40,295
Advanced billings and customer deposits			8,304						8,189
Accrued compensation			15,154						10,075
Current operating lease liabilities			1,875						1,731
Accrued liabilities and other			13,854						7,391
Current liabilities held for sale			470,943						54,246
Total current liabilities			1,232,110						153,577
Long-term debt, less current maturities, net of unamortized loan fees			—						688,464
Other long-term liabilities:
Deferred income taxes			146,771						137,567
Asset retirement obligations			4,870						6,152
Benefit plan obligations			2,255						2,277
Non-current operating lease liabilities			44,808						42,625
Other liabilities			22,303						16,776
Non-current liabilities held for sale			—						379,036
Total other long-term liabilities			221,007						584,433
Shareholders’ equity:
Common stock, no par value, authorized 96,000; 49,852 and 49,671 issued and outstanding at September 30, 2020 and December 31, 2019, respectively			—						—
Additional paid in capital			45,925						42,110
Retained earnings			507,458						430,010
Accumulated other comprehensive (loss) income, net of taxes			(5,201)						308
Total shareholders’ equity			548,182						472,428
Total liabilities and shareholders’ equity			$	2,001,299					$	1,898,902

See accompanying notes to unaudited condensed consolidated financial statements.

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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Service revenue and other			$	55,173					$	51,814					$	162,643					$	153,285
Operating expenses:
Cost of services			22,669						20,947						65,167						62,030
Selling, general and administrative			20,039						19,445						64,227						57,600
Depreciation and amortization			11,995						10,741						36,010						33,807
Total operating expenses			54,703						51,133						165,404						153,437
Operating income (loss)			470						681						(2,761)						(152)
Other income:
Other income, net			1,083						994						3,103						3,328
Income before income taxes			1,553						1,675						342						3,176
Income tax expense (benefit)			141						507						(684)						(108)
Income from continuing operations			1,412						1,168						1,026						3,284
Income from discontinued operations, net of tax			33,509						13,186						76,422						38,130
Net Income			34,921						14,354						77,448						41,414
Other comprehensive income:
Unrealized income (loss) on interest rate hedge, net of tax			539						(1,494)						(5,509)						(8,434)
Comprehensive income			$	35,460					$	12,860					$	71,939					$	32,980
Net income per share, basic and diluted:
Basic - Income from continuing operations			$	0.03					$	0.02					$	0.02					$	0.07
Basic - Income from discontinued operations, net of tax			$	0.67					$	0.27					$	1.53					$	0.76
Basic net income per share			$	0.70					$	0.29					$	1.55					$	0.83
Diluted - Income from continuing operations			$	0.03					$	0.02					$	0.02					$	0.07
Diluted - Income from discontinued operations, net of tax			$	0.67					$	0.27					$	1.53					$	0.76
Diluted net income per share			$	0.70					$	0.29					$	1.55					$	0.83
Weighted average shares outstanding, basic			49,911						49,857						49,889						49,827
Weighted average shares outstanding, diluted			50,105						50,129						50,049						50,110

See accompanying notes to unaudited condensed consolidated financial statements.

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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
						Shares of Common Stock (no par value)						Additional Paid in Capital						Retained Earnings						Accumulated Other Comprehensive (Loss) Income						Total
Balance, June 30, 2020						49,852						$	44,659					$	472,537					$	(5,739)					$	511,457
Net income						—						—						34,921						—						34,921
Other comprehensive gain, net of tax						—						—						—						538						538
Stock-based compensation						—						1,259						—						—						1,259
Common stock issued						—						7						—						—						7
Balance, September 30, 2020						49,852						$	45,925					$	507,458					$	(5,201)					$	548,182
						Shares of Common Stock (no par value)						Additional Paid in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total
Balance, December 31, 2019						49,671						$	42,110					$	430,010					$	308					$	472,428
Net income						—						—						77,448						—						77,448
Other comprehensive loss, net of tax						—						—						—						(5,509)						(5,509)
Stock-based compensation						152						5,974						—						—						5,974
Common stock issued						—						23						—						—						23
Shares retired for settlement of employee taxes upon issuance of vested equity awards						(47)						(2,182)						—						—						(2,182)
Common stock issued to acquire non-controlling interest in nTelos						76						—						—						—						—
Balance, September 30, 2020						49,852						$	45,925					$	507,458					$	(5,201)					$	548,182
						Shares of Common Stock (no par value)						Additional Paid in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total
Balance, June 30, 2019						49,857						$	47,138					$	415,556					$	1,340					$	464,034
Net income						—						—						14,354						—						14,354
Other comprehensive loss, net of tax						—						—						—						(1,494)						(1,494)
Stock-based compensation						—						936						—						—						936
Stock options exercised						—						—						—						—						—
Common stock issued						—						9						—						—						9
Balance, September 30, 2019						49,857						$	48,083					$	429,910					$	(154)					$	477,839
						Shares of Common Stock (no par value)						Additional Paid in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total
Balance, December 31, 2018						49,630						$	47,456					$	388,496					$	8,280					$	444,232
Net income						—						—						41,414						—						41,414
Other comprehensive loss, net of tax						—						—						—						(8,434)						(8,434)
Stock-based compensation						184						3,433						—						—						3,433
Stock options exercised						29						81						—						—						81
Common stock issued						—						25						—						—						25
Shares retired for settlement of employee taxes upon issuance of vested equity awards						(62)						(2,912)						—						—						(2,912)
Common stock issued to acquire non-controlling interest in nTelos						76						—						—						—						—
Balance, September 30, 2019						49,857						$	48,083					$	429,910					$	(154)					$	477,839

See accompanying notes to unaudited condensed consolidated financial statements.

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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
			Nine Months Ended September 30, 2020
			2020						2019
Cash flows from operating activities:
Net income			$	77,448					$	41,414
Income from operations of discontinued operations, net of tax			76,422						38,130
Income from continuing operations			1,026						3,284
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			35,522						33,500
Amortization			488						307
Accretion of asset retirement obligations			247						332
Bad debt expense			514						1,215
Stock based compensation expense, net of amount capitalized			5,306						2,769
Deferred income taxes			(279)						—
Gain from patronage and investments			(596)						(3,035)
Changes in assets and liabilities:
Accounts receivable			(1,189)						(269)
Current income taxes			(261)						—
Operating lease right-of-use assets			2,966						2,829
Other assets			(4,122)						(1,382)
Accounts payable			(276)						(2,956)
Lease liabilities			(1,890)						(961)
Other deferrals and accruals			7,344						(4,150)
Net cash provided by operating activities – continuing operations			44,800						31,483
Net cash provided by operating activities – discontinued operations			182,499						161,976
Net cash provided by operating activities			227,299						193,459
Cash flows used in investing activities:
Capital expenditures			$	(82,740)					$	(48,826)
Cash disbursed for acquisitions			—						(10,000)
Cash disbursed for deposit on FCC spectrum leases			(16,118)						(16,742)
Proceeds from sale of assets and other			252						100
Net cash used in investing activities – continuing operations			(98,606)						(75,468)
Net cash used in investing activities – discontinued operations			(17,794)						(58,156)
Net cash used in investing activities			(116,400)						(133,624)
Cash flows used in financing activities:
Principal payments on long-term debt			$	—					$	—
Taxes paid for equity award issuances			(2,182)						(2,912)
Other			(727)						72
Net cash used in financing activities – continuing operations			(2,909)						(2,840)
Net cash used in financing activities – discontinued operations			(25,591)						(44,666)
Net cash used in financing activities			(28,500)						(47,506)
Net increase in cash and cash equivalents			82,399						12,329
Cash and cash equivalents, beginning of period			101,651						85,086
Cash and cash equivalents, end of period			$	184,050					$	97,415

See accompanying notes to unaudited condensed consolidated financial statements.

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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation and Other Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019.

The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingencies at the date of the unaudited interim condensed consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.

Revision of Prior Period Financial Statements

In connection with the preparation of our unaudited condensed consolidated financial statements for the three months ended March 31, 2020, we determined that certain errors existed in our previously issued financial statements. Specifically:

•Prepaid and other assets, a component of current assets held for sale, as of December 31, 2019, were understated by $2.7 million, deferred tax liabilities were understated by $0.7 million, and retained earnings were understated by $2.0 million as the result of a failure to properly account for handsets that were utilized as demo phones in certain wireless retail stores within our area of operation. All of the impact to retained earnings is attributable to 2017 and prior years.

•Property, plant and equipment, net, classified as held for sale, and deferred income tax liabilities, as of December 31, 2019 were understated by $1.4 million and $0.4 million, respectively. Depreciation, contained within discontinued operations, was overstated by $1.4 million for the year and quarter ended December 31, 2019. Income tax expense and net income were understated by $0.4 million and $1.0 million, respectively, for the year and quarter ended December 31, 2019.

We evaluated these errors under the U.S. Securities and Exchange Commission's ("SEC's") authoritative guidance on materiality and the quantification of the effect of prior period misstatements on financial statements, and we have determined that the impact of these errors on our prior period consolidated financial statements is immaterial. However, since the correction of these errors in the first quarter of 2020 could have become material to our results of operations for the year ending December 31, 2020, we revised our prior period financial statements to correct these errors herein. For the year and quarter ended December 31, 2019, the correction of these errors resulted in a $0.02 increase in both basic and diluted earnings per share from discontinued operations.

Adoption of New Accounting Principles

There have been no developments related to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's unaudited condensed consolidated financial statements and note disclosures, from those disclosed in the Company's 2019 Annual Report on Form 10-K, that would be expected to impact the Company except for the following:

The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses ("ASC 326"): Measurement of Credit Losses on Financial Instruments, as of January 1, 2020 using the modified retrospective transition method. ASC 326 requires the application of a current expected credit loss (“CECL”) impairment model to financial assets measured at amortized cost including trade accounts receivable, net investments in leases, and certain off-balance-sheet credit exposures. Under the CECL model, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. Furthermore, the CECL model requires financial assets with similar risk characteristics to be analyzed on a collective basis. There was no significant impact to unaudited condensed consolidated financial statements upon adoption.

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The Company adopted ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software ("ASC 350"): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, as of January 1, 2020. ASC 350 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Upon adoption of the standard, implementation costs were capitalized in the period incurred and will be amortized over the term of the hosting arrangement. There was no significant impact to unaudited condensed consolidated financial statements upon adoption.

In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This accounting update provides optional accounting relief to entities with contracts, hedge accounting relationships or other transactions that reference London Interbank Offering Rate (LIBOR) or other interest rate benchmarks for which the referenced rate is expected to be discontinued or replaced. This optional relief generally allows for contract modifications solely related to the replacement of the reference rate to be accounted for as a continuation of the existing contract instead of as an extinguishment of the contract, and therefore would not require reassessment of a previous accounting determination. The Company's Credit Agreement and interest rate swaps have LIBOR as a reference rate. We plan to apply the accounting relief as relevant contract modifications are made to our Credit Agreement and interest rate swap contracts during the course of the reference rate reform transition period. The optional relief can be applied beginning January 1, 2020, and ending December 31, 2022.

Note 2. Discontinued Operations

On August 26, 2020, Sprint Corporation (“Sprint”), an indirect subsidiary of T-Mobile US, Inc., on behalf of and as the direct or indirect owner of Sprint PCS, delivered notice to the Company exercising its option to purchase the assets and operations of our Wireless segment for 90% of the “Entire Business Value” (as defined under our affiliate agreement with Sprint PCS and determined pursuant to the appraisal process set forth therein). Shortly thereafter, the Company committed to a plan to sell the Wireless operations in a manner pursuant to the affiliate agreement’s terms. Our affiliate agreement provides a process and timeline for the sale that is expected to close within one year at a price to be determined through the appraisal process outlined in the affiliate agreement. Under the affiliate agreement, the appraised value should reflect the fair market value that a willing buyer would pay a willing seller for the entire on-going business in a change of control transaction.

On November 3, 2020, the parties aligned in principle on certain elements of the appraisal and sale process. Under the agreement in principle, the appraised valuation will be performed as of July 1, 2020. The appraisal will also value Shentel’s discontinued wireless operations as though Shentel were still an affiliate of Sprint with access to its brands and spectrum, without any regard to T-Mobile’s acquisition of Sprint or its subsequent integration efforts. It is currently expected that the appraisers will complete their assessment of the Entire Business Value on or about January 20, 2021. The transaction is expected to close in the second quarter of 2021, subject to receipt of customary regulatory approvals.

The assets and liabilities that are expected to transfer in the sale are presented as held for sale within our Unaudited Condensed Consolidated Balance Sheets. Under the affiliate agreement, the sale is to be structured as an asset sale for income tax purposes. As a result, no current or deferred tax assets or liabilities are included within the disposal group. While our long-term debt does not transfer in the sale, its provisions require us to repay all of the debt upon consummation of the sale. Our debt is therefore presented outside of the disposal group as a current liability at September 30, 2020. Our related swap liabilities are also presented outside of the disposal group as a current liability at September 30, 2020 because management intends to settle it at consummation.

The expected divestiture of our Wireless operations represents a strategic shift in the Company’s business and qualifies as a discontinued operation. As a result, the operating results and cash flows related to the Wireless segment have been reflected as discontinued operations in our Unaudited Condensed Consolidated Statements of Comprehensive Income and the Unaudited Condensed Consolidated Statements of Cash Flows. Similarly, the results of our Wireless operations are no longer presented as a reporting segment. Because repayment of the debt is contractually triggered by the sale, the related interest expense is presented within discontinued operations under the relevant authoritative guidance. Consistent with the internal reporting provided to our chief operating decision maker, we previously allocated certain corporate management overhead costs to the former Wireless segment which may no longer be allocated to discontinued operations under the relevant authoritative guidance. Accordingly, we have elected to recast our segment reporting footnote to reflect the reattribution of these expenses in all presented periods in a manner that is also consistent with our updated internal reporting.

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The carrying amounts of the major classes of assets and liabilities, which are classified as held for sale in the unaudited condensed consolidated balance sheets, are as follows:

(in thousands)			September 30, 2020						December 31, 2019
ASSETS
Inventory			$	4,240					$	5,728
Prepaid expenses and other			48,555						49,381
Property, plant and equipment, net			300,098						—
Intangible assets, net			186,885						—
Goodwill			146,383						—
Operating lease right-of-use assets			421,868						—
Deferred charges and other assets			40,572						—
Current assets held for sale			$	1,148,601					$	55,109
Property, plant and equipment, net			$	—					$	338,427
Intangible assets, net			—						228,593
Goodwill			—						146,383
Operating lease right-of-use assets			—						384,010
Deferred charges and other assets			—						44,085
Non-current assets held for sale			$	—					$	1,141,498
LIABILITIES
Advanced billings and customer deposits			$	—					$	169
Current operating lease liabilities			422,415						47,077
Accrued liabilities and other			5,333						7,000
Asset retirement obligations			33,168						—
Retirement plan obligations			10,027						—
Current liabilities held for sale			$	470,943					$	54,246
Non-current operating lease liabilities			$	—					$	337,661
Asset retirement obligations			—						30,762
Retirement plan obligations			—						10,398
Other non-current liabilities			—						215
Non-current liabilities held for sale			$	—					$	379,036

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Income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income consist of the following:

(in thousands)			Three Months Ended September 30,												Nine Months Ended September 30,
Revenue:			2020						2019						2020						2019
Service revenue and other			$	100,963					$	91,314					$	302,488					$	283,214
Equipment revenue			9,862						15,975						32,222						47,814
Total revenue			110,825						107,289						334,710						331,028
Operating expenses:
Cost of services			28,567						32,277						95,242						95,846
Cost of goods sold			9,600						15,571						31,565						45,740
Selling, general and administrative			7,696						8,879						25,931						28,774
Depreciation and amortization			15,077						25,886						62,804						86,350
Total operating expenses			60,940						82,613						215,542						256,710
Operating income			49,885						24,676						119,168						74,318
Other (expense) income:
Interest expense			(4,638)						(7,442)						(15,868)						(22,877)
Other			130						44						391						130
Income before income taxes			45,377						17,278						103,691						51,571
Income tax expense			11,868						4,092						27,269						13,441
Income from discontinued operations, net of tax			$	33,509					$	13,186					$	76,422					$	38,130

Our Broadband and Tower segments recognize revenue for their respective provision of cell site backhaul service and leased colocation space to the discontinued Wireless operations. That revenue is earned under contracts executed at our estimate of fair market value, which will transfer upon consummation of the sale. Accordingly, we expect to have a level of continuing involvement with the discontinued operations via these pre-existing contractual arrangements. Revenue recognized within continuing operations pursuant to these agreements is disclosed in Note 14, Segment Reporting. Because the right to use space on our owned cell towers and the related lease liability will be transferred in the sale, they have been included in our disposal group above under the relevant authoritative guidance. These right of use assets and lease liabilities were previously eliminated within our consolidated financial statements. Total assets and total liabilities as of December 31, 2019 therefore increased by $34 million as a result.

Under the relevant authoritative guidance, consummation of the sale will trigger or accelerate the recognition of certain expense related to: contingent deal advisory fees, recognition of our interest rate swap losses in net income, and loss on debt extinguishment. Our estimate of the related range of reasonably possible expense extends from $0 if the sale is not consummated to $40 million.

Note 3. Revenue from Contracts with Customers

Our Broadband segment provides broadband, video and voice services to residential and commercial customers in portions of Virginia, West Virginia, Maryland, and Kentucky, via fiber optic and hybrid fiber coaxial ("HFC") cable. The Broadband segment also provides voice and digital subscriber line (“DSL”) telephone services to customers in Virginia’s Shenandoah County as a Rural Local Exchange Carrier (“RLEC”).

These contracts are generally cancellable at the customer’s discretion without penalty at any time. We allocate the total transaction price in these transactions based upon the standalone selling price of each distinct good or service. We generally recognize these revenues over time as customers simultaneously receive and consume the benefits of the service, with the exception of equipment sales and home wiring, which are recognized as revenue at a point in time when control transfers and when installation is complete, respectively. Installation fees are allocated to services and are recognized ratably over the longer of the contract term or the period in which the unrecognized fee remains material to the contract, which we estimate to be about one year. Additionally, the Company incurs commission and installation costs related to in-house and third-party vendors which are capitalized and amortized over the expected weighted average customer life which is approximately five years.

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Our Broadband segment also provides Ethernet and Wavelength fiber optic services to enterprise and carrier customers under capacity agreements, and the related revenue is recognized over time. In some cases, non-refundable upfront fees are charged for connecting enterprise or carrier customers to our fiber network. Those amounts are recognized ratably over the longer of the contract term or the period in which the unrecognized fee remains material to the respective contract.

The Broadband segment also leases dedicated fiber optic strands to customers as part of “dark fiber” agreements, which are accounted for as leases under ASC 842 Leases.

Our Tower segment leases space on owned cell towers to our Wireless segment, and to other wireless carriers. Revenue from these leases is accounted for under ASC 842.

Refer to Note 14, Segment Reporting, for a summary of these revenue streams.

Below is a summary of the Broadband segment's capitalized contract acquisition and fulfillment costs:

						Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)						2020						2019						2020						2019
Beginning Balance						$	12,780					$	10,476					$	11,005					$	10,091
Contract payments						2,195						1,840						6,128						4,996
Contract amortization						(1,013)						(1,399)						(3,171)						(4,170)
Ending Balance						$	13,962					$	10,917					$	13,962					$	10,917

Future performance obligations

On September 30, 2020, the Company had approximately $2.9 million allocated to unsatisfied performance obligations that will be satisfied at the rate of approximately $0.8 million per year.

Note 4.  Investments

Investments consist of the following:

(in thousands)			September 30, 2020						December 31, 2019
SERP investments at fair value			$	2,255					$	2,278
Cost method investments			10,240						9,497
Equity method investments			539						613
Total investments			$	13,034					$	12,388

SERP Investments at Fair Value: The Supplemental Executive Retirement Plan (“SERP”) is a benefit plan that provides deferred compensation to certain employees. The Company holds the related investments in a rabbi trust as a source of funding for future payments under the plan. The SERP’s investments were designated as trading securities and will be liquidated and paid out to the participants upon retirement. The benefit obligation to participants is always equal to the value of the SERP assets under ASC 710 Compensation. Changes to the investments' fair value are presented in Other income (expense), while the reciprocal changes in the liability are presented in selling, general and administrative expense.

Cost Method Investments: Our investment in CoBank’s Class A common stock represented substantially all of our cost method investments with a balance of $9.5 million and $8.7 million at September 30, 2020 and December 31, 2019, respectively. We recognized approximately $1.0 million and $0.9 million of patronage income in Other income (expense) in the three months ended September 30, 2020 and 2019, respectively, and approximately $3.0 million and $2.7 million in the nine months ended September 30, 2020 and 2019, respectively. Historically, approximately 75% of the patronage distributions were in cash and 25% in equity.

Equity Method Investments: At September 30, 2020, the Company had a 20.0% ownership interest in Valley Network Partnership (“ValleyNet”). The Company and ValleyNet purchase capacity on one another’s fiber network. We recognized revenue of $0.2 million from providing service to ValleyNet during both of the three months ended September 30, 2020 and 2019, and approximately $0.7 million during both of the nine months ended September 30, 2020 and 2019. We recognized cost

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of service of $0.7 million and $0.8 million for the use of ValleyNet’s network during the three months ended September 30, 2020 and 2019, respectively, and approximately $2.2 million and $2.4 million in the nine months ended September 30, 2020 and 2019, respectively.

Note 5.  Property, Plant and Equipment

Property, plant and equipment consisted of the following:

($ in thousands)			Estimated Useful Lives															September 30, 2020						December 31, 2019
Land																		$	6,806					$	6,297
Buildings and structures			10			-			40			years						88,996						85,835
Cable and fiber			15			-			30			years						368,144						334,260
Equipment and software			3			-			20			years						314,859						278,873
Plant in service																		778,805						705,265
Plant under construction																		54,678						31,226
Total property, plant and equipment																		833,483						736,491
Less: accumulated amortization and depreciation																		419,881						373,404
Property, plant and equipment, net																		$	413,602					$	363,087

Note 6. Goodwill and Intangible Assets

Other intangible assets consisted of the following:

			September 30, 2020																		December 31, 2019
(in thousands)			Gross Carrying Amount						Accumulated Amortization and Other						Net						Gross Carrying Amount						Accumulated Amortization and Other						Net
Goodwill - Broadband			$	2,687					$	—					$	2,687					$	2,687					$	—					$	2,687
Indefinite-lived intangibles:
Cable franchise rights			$	64,334					$	—					$	64,334					$	64,334					$	—					$	64,334
FCC spectrum licenses			13,839						—						13,839						13,839						—						13,839
Railroad crossing rights			141						—						141						141						—						141
Total indefinite-lived intangibles			78,314						—						78,314						78,314						—						78,314
Finite-lived intangibles:
FCC spectrum licenses			20,777						(280)						20,497						4,659						(97)						4,562
Acquired subscribers - Cable			28,065						(25,900)						2,165						28,065						(25,600)						2,465
Other intangibles			463						(270)						193						463						(250)						213
Total finite-lived intangibles			49,305						(26,450)						22,855						33,187						(25,947)						7,240
Total intangible assets			$	130,306					$	(26,450)					$	103,856					$	114,188					$	(25,947)					$	88,241

During the three months ended September 30, 2020, the Company completed the purchase of certain CBRS spectrum licenses for an aggregate cost of $16.1 million, within our Broadband segment. Spectrum licenses in the CBRS band are issued by the Federal Communications Commission (“FCC”) and provide us priority access rights over general access users other than incumbents, in that specific band, in accordance with the FCC’s three-tier CBRS band spectrum sharing framework to utilize designated radio frequency spectrum within specific geographic service areas to provide wireless communication services.

We acquired Big Sandy Broadband, Inc. (“Big Sandy”) on February 28, 2019. The $10 million acquisition price was allocated as follows within our Broadband segment: $4.6 million of property, plant and equipment; $2.8 million of subscriber relationships; and $2.6 million of goodwill.

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Amortization expense was $0.2 million and $0.1 million during the three months ended September 30, 2020 and 2019, respectively, and $0.5 million and $0.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Note 7.     Other Assets and Accrued Liabilities

Prepaid expenses and other, classified as current assets, included the following:

(in thousands)						September 30, 2020						December 31, 2019
Prepaid maintenance expenses						$	4,630					$	3,065
Broadband contract acquisition and fulfillment costs						4,082						4,898
Interest rate swaps						—						1,382
Other						1,867						1,801
Prepaid expenses and other						$	10,579					$	11,146

Deferred charges and other assets, classified as long-term assets, included the following:

(in thousands)						September 30, 2020						December 31, 2019
Broadband contract acquisition and fulfillment costs						$	9,880					$	6,107
Prepaid expenses and other						1,092						1,908
Interest rate swaps						—						1,252
Deferred charges and other assets						$	10,972					$	9,267

Accrued liabilities and other, classified as current liabilities, included the following:

(in thousands)						September 30, 2020						December 31, 2019
Interest rate swaps						$	4,710					$	—
Accrued programming costs						2,997						3,023
Sales and property taxes payable						1,515						919
Other current liabilities						4,632						3,449
Accrued liabilities and other						$	13,854					$	7,391

Other liabilities, classified as long-term liabilities, included the following:

(in thousands)						September 30, 2020						December 31, 2019
Non-current portion of deferred lease revenue						$	18,420					$	12,449
FCC spectrum license obligations						1,688						1,699
Non-current portion of financing leases						1,537						1,591
Other						658						1,037
Other liabilities						$	22,303					$	16,776

Market expectations of the projected LIBOR decreased significantly during 2020, which drove the fair value of our interest rate swaps to a liability. Refer to Note 10, Derivatives and Hedging for more information.

Note 8. Leases

At September 30, 2020, our operating leases had a weighted average remaining lease term of 23 years and a weighted average discount rate of 4.7%. Our finance leases had a weighted average remaining lease term of 14 years and a weighted average discount rate of 5.2%.

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During the three and nine months ended September 30, 2020, we recognized $2.3 million and $5.1 million of operating lease expense, respectively. Comparatively, during the three and nine months ended September 30, 2019, we recognized $1.4 million and $2.9 million of operating lease expense, respectively.

We recognized $0.1 million and $0.4 million of interest and depreciation expense on finance leases during the three and nine months ended September 30, 2020 and $0.1 million and $0.5 million during the three and nine months ended September 30, 2019, respectively.

Operating lease expense is presented in cost of service or selling, general and administrative expense based on the use of the relevant facility. Variable lease payments and short-term lease expense were both immaterial. We remitted $1.2 million and $3.2 million of operating lease payments during the three and nine months ended September 30, 2020, respectively. We remitted $2.9 million of operating lease payments during the nine months ended September 30, 2019. We also obtained $2.4 million and $9.2 million of leased assets in exchange for new operating lease liabilities during the three and nine months ended September 30, 2020, respectively. We obtained $0.7 million of leased assets in exchange for new operating lease liabilities during the nine months ended September 30, 2019, respectively.

The following table summarizes the expected maturity of lease liabilities at September 30, 2020:

(in thousands)						Operating Leases						Finance Leases						Total
2020						$	755					$	63					$	818
2021						4,174						174						4,348
2022						3,959						174						4,133
2023						3,548						174						3,722
2024						3,193						174						3,367
2025 and thereafter						67,236						1,529						68,765
Total lease payments						82,865						2,288						85,153
Less: Interest						36,182						656						36,838
Present value of lease liabilities						$	46,683					$	1,632					$	48,315

We recognized $2.7 million and $6.9 million of operating lease revenue during the three and nine months ended September 30, 2020, respectively, and $2.1 million and $6.1 million during the three and nine months ended September 30, 2019, respectively, related to the cell site colocation space and dedicated fiber optic strands that we lease to our customers, which is included in Service and other revenue in the unaudited condensed consolidated statements of comprehensive income. Substantially all of our lease revenue relates to fixed lease payments.

Below is a summary of our minimum rental receipts under the lease agreements in place at September 30, 2020:

(in thousands)						Operating Leases
2020						$	1,885
2021						6,020
2022						4,957
2023						3,339
2024						2,090
2025 and thereafter						4,722
Total						$