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EX-31.1 - EXHIBIT 31.1 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex31_1.htm
EX-31.2 - EXHIBIT 32.1 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex31_2.htm
EX-10.49 - EXHIBIT 10.49 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex10_49.htm
EX-10.50 - EXHIBIT 10.50 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex10_50.htm


UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2011
 
o
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 þ    No o
 
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  þ   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No  þ
 
The number of shares of the registrant’s common stock outstanding on October 21, 2011 was 23,786,193.
 


 
 

 
 
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
 
  Page 
  Numbers
   
PART I.  FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Unaudited Condensed Consolidated Balance Sheets September 30, 2011 and December 31, 2010  3-4
     
  Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010  5
     
  Unaudited Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Nine Months Ended September 30, 2011 and the Year Ended December 31, 2010  6
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010  7-8
     
  Notes to Unaudited Condensed Consolidated Financial Statements 9-14
     
Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations 15-32
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
     
Item 4.   33
     
PART II. OTHER INFORMATION  
     
Item 1A.  Risk Factors  34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  34
     
Item 6. Exhibits  35
     
  Signatures  36
     
  Exhibit Index  37
 
 
2

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

ASSETS
 
September 30,
 2011
   
December 31, 2010
 
             
Current Assets
           
Cash and cash equivalents
  $ 21,862     $ 27,453  
Accounts receivable, net
    20,915       20,634  
Income taxes receivable
    6,470       2,576  
Materials and supplies
    5,310       6,360  
Prepaid expenses and other
    3,932       3,770  
Assets held for sale
    6,967       9,305  
Deferred income taxes
    620       702  
Total current assets
    66,076       70,800  
                 
Investments, including $2,041 and $2,287 carried at fair value
    8,453       9,090  
                 
Property, plant and equipment, net
    300,110       280,051  
                 
Other Assets
               
Intangible assets, net
    83,201       90,389  
Cost in excess of net assets of businesses acquired
    10,962       10,962  
Deferred charges and other assets, net
    4,339       5,145  
Net other assets
    98,502       106,496  
Total assets
  $ 473,141     $ 466,437  

See accompanying notes to unaudited condensed consolidated financial statements.
 
(Continued)
 
 
3


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

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
September 30, 2011
   
December 31, 2010
 
             
Current Liabilities
           
Current maturities of long-term debt
  $ 21,911     $ 14,823  
Accounts payable
    7,790       12,237  
Advanced billings and customer deposits
    10,022       8,067  
Accrued compensation
    2,627       3,278  
Liabilities held for sale
    1,017       910  
Accrued liabilities and other
    7,590       5,583  
Total current liabilities
    50,957       44,898  
                 
Long-term debt, less current maturities
    164,087       180,289  
                 
Other Long-Term Liabilities
               
Deferred income taxes
    41,901       35,902  
Deferred lease payable
    4,056       3,734  
Asset retirement obligations
    6,905       6,542  
Other liabilities
    4,656       4,767  
Total other liabilities
    57,518       50,945  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock
    21,086       19,833  
Retained earnings
    179,493       170,472  
Total shareholders’ equity
    200,579       190,305  
                 
Total liabilities and shareholders’ equity
  $ 473,141     $ 466,437  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4

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

     
Three Months Ended September 30,
     
Nine Months Ended
 September 30,
 
     
2011
     
2010
     
2011
     
2010
 
                                 
Operating revenues
    62,657     $ 53,233     $ 184,640     $ 137,192  
                                 
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and  amortization shown separately below
    25,514       21,265       76,792       50,601  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    14,199       14,180       41,438       32,770  
Depreciation and amortization
    13,774       12,202       42,155       28,927  
Total operating expenses
    53,487       47,647       160,385       112,298  
Gain on sale of directory
    -       4,000       -       4,000  
Operating income
    9,170       9,586       24,255       28,894  
                                 
Other income (expense):
                               
Interest expense
    (2,003 )     (2,416 )     (6,668 )     (2,992 )
Gain (loss) on investments, net
    (250 )     (11 )     (499 )     (153 )
Non-operating income, net
    195       275       703       543  
Income from continuing operations before income taxes
    7,112       7,434       17,791       26,292  
                                 
Income tax expense
    3,497       3,229       8,070       10,994  
Net income from continuing operations
    3,615       4,205       9,721       15,298  
Earnings (loss) from discontinued operations, net of tax  (expense) benefit of $392, $109, $436 and $(41), respectively
    (613 )     (171 )     (700 )     62  
Net income
  $ 3,002     $ 4,034     $ 9,021     $ 15,360  
                                 
Basic and diluted income (loss) per share:
                               
                                 
Net income from continuing operations
  $ 0.15     $ 0.17     $ 0.41     $ 0.65  
Net earnings (loss) from discontinued operations
    (0.02 )     -       (0.03 )     -  
Net income
  $ 0.13     $ 0.17     $ 0.38     $ 0.65  
                                 
Weighted average shares outstanding, basic
    23,781       23,738       23,773       23,724  
                                 
Weighted average shares, diluted
    23,823       23,883       23,823       23,799  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
5

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

    Shares      
Common
Stock
     
Retained
Earnings
     
Accumulated
Other
Comprehensive
Income (Loss)
     
Total
 
                               
Balance, December 31, 2009
    23,681     $ 17,890     $ 160,230     $ (2,448 )   $ 175,672  
Comprehensive income:
                                       
Net income
    -       -       18,075       -       18,075  
Reclassification adjustment for unrealized loss from pension plans included in net income, net of tax
      -         -         -         2,596         2,596  
Net unrealized gain from pension plans, net of tax
    -       -       -       (148 )     (148 )
Total comprehensive income
                                    20,523  
Dividends declared ($0.33 per share)
    -       -       (7,833 )     -       (7,833 )
Dividends reinvested in common stock
    29       520       -       -       520  
Stock-based compensation
    -       792       -       -       792  
Common stock issued through  exercise of incentive stock  options
    57       561       -       -       561  
Net excess tax benefit from stock options exercised
    -       70       -       -       70  
                                         
Balance, December 31, 2010
    23,767     $ 19,833     $ 170,472     $ -     $ 190,305  
Comprehensive income:
                                       
Net income
    -       -       9,021       -       9,021  
Total comprehensive income
                                    9,021  
Stock-based compensation
    -       1,335       -       -       1,335  
Common stock issued for share awards
    19       -       -       -       -  
Common stock repurchased
    (5 )     (92 )     -       -       (92 )
Common stock issued
    -       10       -       -       10  
Balance, September 30, 2011
    23,781     $ 21,086     $ 179,493     $ -     $ 200,579  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
6


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
             
Cash Flows From Operating Activities
           
Net income
  $ 9,021     $ 15,360  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Non-cash impairment charge
    645       -  
Depreciation
    33,732       26,040  
Amortization
    8,423       2,887  
Provision for bad debt
    2,559       844  
Stock based compensation expense
    1,335       539  
Pension settlement and curtailment expenses
    -       3,964  
Excess tax benefits on stock option exercises
    -       (70 )
Deferred income taxes
    6,081       152  
Net (gain) loss on disposal of equipment
    (1,035 )     316  
Realized (gain) on sale of directory
    -       (4,000 )
Realized loss on disposal of investments
    27       147  
Unrealized (gains) losses on investments
    236       (229 )
Net (gain) loss from patronage and equity investments
    13       67  
Other
    51       576  
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
    (2,876 )     (4,031 )
Materials and supplies
    1,050       707  
Income taxes receivable
    (3,894 )     5,531  
Increase (decrease) in:
               
Accounts payable
    (4,449 )     (841 )
Deferred lease payable
    319       237  
Income taxes payable
    -       512  
Other prepaids, deferrals and accruals
    3,283       4,989  
Net cash provided by operating activities
  $ 54,521     $ 53,697  
                 
Cash Flows From Investing Activities
               
Purchase and construction of property, plant and equipment
  $ (52,505 )   $ (33,940 )
Cash paid for acquisition of business
    -       (147,613 )
Cash received on sale of directory
    -       4,000  
Cash paid to acquire prepaid subscriber rights
    -       (6,884 )
Proceeds from sale of assets
    1,170       -  
Proceeds from sale of equipment
    60       503  
Purchase of investment securities
    (84 )     (114 )
Proceeds from sale of investment securities
    444       54  
                 
Net cash used in investing activities
  $ (50,915 )   $ (183,994 )
 
(Continued)
 
 
7

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

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
             
Cash Flows From Financing Activities
           
Principal payments on long-term debt
  $ (9,115 )   $ (25,595 )
Amounts borrowed under debt agreements
    -       189,800  
Cash paid for debt issuance costs
    -       (3,445 )
Excess tax benefits on stock option exercises
    -       70  
Repurchases of stock
    (92 )     -  
Proceeds from exercise of incentive stock options
    10       557  
                 
Net cash provided by (used in) financing activities
  $ (9,197 )   $ 161,387  
                 
Net increase (decrease) in cash and cash equivalents
  $ (5,591 )   $ 31,090  
                 
Cash and cash equivalents:
               
Beginning
    27,453       12,054  
Ending
  $ 21,862     $ 43,144  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
Interest
  $ 5,600     $ 2,392  
                 
Income taxes
  $ 5,447     $ 5,225  

During the third quarter of 2011, the Company traded in certain PCS equipment for equipment with additional capacity and received credits of $2.2 million against the purchase price of the new equipment.

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
8

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

1.  Basis of Presentation

The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein.  All such adjustments were of a normal and recurring nature.  These statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  The balance sheet information at December 31, 2010 was derived from the audited December 31, 2010 consolidated balance sheet. Operating revenues and income from operations for any interim period are not necessarily indicative of results that may be expected for the entire year.

2.  Discontinued Operations

In September 2008, the Company announced its intention to sell its Converged Services operation, and the related assets and liabilities were reclassified as held for sale in the consolidated balance sheet and the historical operating results were reclassified as discontinued operations.  Depreciation and amortization on long-lived assets was also discontinued.

During 2009 and 2010, the Company determined that the fair value of Converged Services had declined.  Accordingly, the Company recorded an impairment loss of $17.5 million ($10.7 million, net of taxes) as of March 31, 2009, and recorded an additional impairment loss of $1.9 million ($1.1 million, net of taxes) as of December 31, 2010, to reduce the carrying value of these assets to their estimated fair value less cost to sell.  Enhancements to the physical assets since the impairment recorded at December 31, 2010, have been capitalized and immediately expensed during 2011, in the amount of $0.2 million and $0.4 million in the three months and nine months ended September 30, 2011, respectively.

During the first quarter of 2011, the Company made the decision to transfer service contracts and related equipment for five Converged Services’ properties that were within the Shentel Cable franchised cable footprint and could be serviced by the Company’s nearby cable headends.  These properties, with an aggregate net book value of approximately $0.4 million, were transferred to Shentel Cable and have been reclassified from discontinued operations for all prior periods.  The Company recorded an adjustment to depreciation expense of $0.1 million to reduce the carrying value of the assets transferred to the lower of their carrying value net of the impairment charge or the carrying value as if depreciation had been recorded on these assets at all times.

During the second quarter of 2011, the Company sold service contracts and related equipment for seven Converged Services’ properties to a third-party purchaser, receiving cash proceeds of $0.9 million (with an additional $0.1 million in proceeds placed in escrow for twelve months).  The total proceeds approximated the carrying value of the assets sold.

During the third quarter of 2011, the Company sold service contracts and related equipment for two Converged Services’ properties to third party purchasers, receiving cash proceeds of $0.3 million.  The total proceeds approximated the carrying value of the assets sold.

At September 30, 2011, negotiations with potential purchasers continue.  Based upon indications of interest made by potential buyers in recent months, the Company has determined that the fair value of Converged Services has declined.  Accordingly, the Company recorded an impairment loss of $0.6 million ($0.4 million, net of taxes) as of September 30, 2011, to reduce the carrying value of these assets to their estimated fair value less cost to sell.

 
9


Assets and liabilities held for sale consisted of the following:

   
September 30, 2011
   
December 31, 2010
 
Assets held for sale:
           
Property, plant and equipment, net
  $ 4,966     $ 6,614  
Intangible assets, net
    640       706  
Deferred charges
    670       1,310  
Other assets
    691       675  
    $ 6,967     $ 9,305  
Liabilities:
               
Other liabilities
  $ 1,017     $ 910  

Discontinued operations included the following amounts of operating revenue and income (loss) before income taxes:

   
Three Months Ended
 
   
September 30,
 
   
2011
   
2010
 
Operating revenues
$ 2,531     $ 2,816  
Earnings (loss) before income taxes
$ (1,005 )   $ (280 )

   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
Operating revenues
$ 8,868     $ 9,358  
Earnings (loss) before income taxes
 $ (1,136 )   $ 103  

3.  Property, Plant and Equipment

Property, plant and equipment consisted of the following:

   
September 30, 2011
   
December 31, 2010
 
Plant in service
  $ 516,853     $ 466,658  
Plant under construction
    18,775       25,515  
      535,628       492,173  
Less accumulated amortization and depreciation
    235,518       212,122  
Net property, plant and equipment
  $ 300,110     $ 280,051  

During the third quarter of 2011, the Company traded in certain PCS equipment for equipment with additional capacity and received credits of $2.2 million against the purchase price of the new equipment.  The Company recognized a gain of $1.4 million on the trade-in.

4.  Earnings per share

Basic net income (loss) per share was computed on the weighted average number of shares outstanding.  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.  Of 511 thousand and 383 thousand shares and options outstanding at September 30, 2011 and 2010, respectively, 363 thousand and 213 thousand were anti-dilutive, respectively.  These options have been excluded from the computations of diluted earnings per share for their respective period.  There were no adjustments to net income for either period.

 
10


5.  Investments Carried at Fair Value

Investments include $2.0 million and $2.3 million of investments carried at fair value as of September 30, 2011 and December 31, 2010, respectively, consisting of equity, bond and money market mutual funds.  These investments were acquired under a rabbi trust arrangement related to a non-qualified supplemental retirement plan maintained by the Company.  During the nine months ended September 30, 2011, the Company recognized $27 thousand in net losses on dispositions of investments, recognized $17 thousand in dividend and interest income from investments, and recognized net unrealized losses of $236 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.

6.  Financial Instruments

Financial instruments on the consolidated balance sheets that approximate fair value include:  cash and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, and long-term debt.  Due to the relatively short time frame to maturity of the Company’s fixed rate debt, fair value approximates its carrying value.

The Company measures its interest rate swap at fair value based on information provided by the counterparty and recognizes it as a liability on the Company’s condensed consolidated balance sheet.  Changes in the fair value of the swap are recognized in interest expense, as the Company did not designate the swap agreement as a cash flow hedge for accounting purposes.

7.  Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers.  The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Wireline, and (3) Cable TV.   A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company as well as certain general and administrative costs historically charged to Converged Services that cannot be allocated to discontinued operations.

The Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate of Sprint Nextel.  This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.

The Wireline segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long distance access services throughout Shenandoah County and portions of northwestern Augusta County, Virginia, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor, including portions of West Virginia and Maryland.

The Cable TV segment provides video, internet and voice services in Virginia, West Virginia and Maryland.  It includes the operations acquired from JetBroadBand, LLC, since July 30, 2010, and the operations acquired from Suddenlink since November 30, 2010.

The financial information below includes revenues and related expenses billed by one segment of the Company to another segment within the Company.  These internal revenues and related expenses are eliminated in order to arrive at the consolidated total revenues and expenses as shown below.  All individual segment financial results include these internal revenues and expenses, which are only eliminated at the consolidated level.
 
 
11

 
Selected financial data for each segment is as follows:

Three months ended September 30, 2011
 
(In thousands)
 
 
 
 
Wireless
   
 
 
 
Wireline
   
 
 
 
Cable TV
   
 
 
 
Other
   
 
 
 
Eliminations
   
 
 
Consolidated
Totals
 
External revenues
                                   
Service revenues
  $ 34,403     $ 3,604     $ 14,532     $ -     $ -     $ 52,539  
Other
    3,286       4,829       2,003       -       -       10,118  
Total external revenues
    37,689       8,433       16,535       -       -       62,657  
Internal revenues
    800       3,994       83       -       (4,877 )     -  
Total operating revenues
    38,489       12,427       16,618       -       (4,877 )     62,657  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
      12,667         4,887         12,082         36       (4,158 )       25,514  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
      7,028         1,891         5,271         728       (719 )       14,199  
Depreciation and amortization
    5,868       2,156       5,692       58       -       13,774  
Total operating expenses
    25,563       8,934       23,045       822       (4,877 )     53,487  
Operating income (loss)
    12,926       3,493       (6,427 )     (822 )     -       9,170  

Three months ended September 30, 2010
 
(In thousands)
 
 
 
Wireless
   
 
 
Wireline
   
 
 
Cable TV
   
 
 
Other
   
 
 
Eliminations
   
 
Consolidated
Totals
 
External revenues
                                   
Service revenues
  $ 28,624     $ 3,596     $ 10,663     $ -     $ -     $ 42,883  
Other
    4,341       4,715       1,294       -       -       10,350  
Total external revenues
    32,965       8,311       11,957       -       -       53,233  
Internal revenues
    763       3,375       14       -       (4,152 )     -  
Total operating revenues
    33,728       11,686       11,971       -       (4,152 )     53,233  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
      12,236         4,318         8,318         56       (3,663 )       21,265  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
      5,886         1,828         6,200         755       (489 )       14,180  
Depreciation and amortization
    6,401       2,000       3,746       55       -       12,202  
Total operating expenses
    24,523       8,146       18,264       866       (4,152 )     47,647  
Gain on sale of directory
    -       4,000       -       -       -       4,000  
Operating income (loss)
    9,205       7,540       (6,293 )     (866 )     -       9,586  

Nine months ended September 30, 2011
(In thousands)
 
 
Wireless
   
 
Wireline
   
 
Cable TV
   
 
Other
   
 
Eliminations
   
Consolidated
Totals
 
External revenues
                                   
Service revenues
  $ 100,413     $ 10,850     $ 43,594     $ -     $ -     $ 154,857  
Other
    9,687       13,906       6,190       -       -       29,783  
Total external revenues
    110,100       24,756       49,784       -       -       184,640  
Internal revenues
    2,391       12,021       199       -       (14,611 )     -  
Total operating revenues
    112,491       36,777       49,983       -       (14,611 )     184,640  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
      39,671         14,238         35,441         100       (12,658 )       76,792  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
      21,225         5,558         14,134         2,474       (1,953 )       41,438  
Depreciation and amortization
    18,242       6,260       17,478       175       -       42,155  
Total operating expenses
    79,138       26,056       67,053       2,749       (14,611 )     160,385  
Operating income (loss)
    33,353       10,721       (17,070 )     (2,749 )     -       24,255  
 
 
12

 
Nine months ended September 30, 2010
 
(In thousands)
 
 
 
Wireless
   
 
 
Wireline
   
 
 
Cable TV
   
 
 
Other
   
 
 
Eliminations
   
 
Consolidated
Totals
 
External revenues
                                   
Service revenues
  $ 81,415     $ 10,595     $ 17,955     $ -     $ -     $ 109,965  
Other
    10,309       14,852       2,066       -       -       27,227  
Total external revenues
    91,724       25,447       20,021       -       -       137,192  
Internal revenues
    2,268       10,076       37       -       (12,381 )     -  
Total operating revenues
    93,992       35,523       20,058       -       (12,381 )     137,192  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
      32,108         13,075         16,152         188       (10,922 )       50,601  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
      14,808         6,994         9,957         2,470       (1,459 )       32,770  
Depreciation and amortization
    16,927       5,860       5,945       195       -       28,927  
Total operating expenses
    63,843       25,929       32,054       2,853       (12,381 )     112,298  
Gain on sale of directory
    -       4,000       -       -       -       4,000  
Operating income (loss)
    30,149       13,594       (11,996 )     (2,853 )     -       28,894  

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

   
Three Months Ended
 September 30,
 
   
2011
   
2010
 
Total consolidated operating income
  $ 9,170     $ 9,586  
Interest expense
    (2,003 )     (2,416 )
Non-operating income (expense), net
    (55 )     264  
Income from continuing operations before income taxes
  $ 7,112     $ 7,434  

   
Nine Months Ended
 September 30,
 
   
2011
   
2010
 
Total consolidated operating income
  $ 24,255     $ 28,894  
Interest expense
    (6,668 )     (2,992 )
Non-operating income (expense), net
    204       390  
Income from continuing operations before income taxes
  $ 17,791     $ 26,292  

The Company’s assets by segment are as follows:
 
(In thousands)
 
September 30,
2011
   
December 31,
2010
 
             
Wireless
  $ 135,428     $ 124,854  
Wireline
    82,195       78,552  
Cable TV
    207,087       208,039  
Other (includes assets held for sale)
    393,878       393,340  
Combined totals
    818,588       804,785  
Inter-segment eliminations
    (345,447 )     (338,348 )
Consolidated totals
  $ 473,141     $ 466,437  

 
13


8.  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 2008 are no longer subject to examination. The Company is under audit in the state of Maryland for the 2007, 2008 and 2009 tax years.   No other state or federal income tax audits were in process as of September 30, 2011.

9.  Long-Term Debt

As of September 30, 2011 and December 31, 2010, the Company’s outstanding long-term debt consisted of the following:

(In thousands)
 
September
2011
   
December
2010
 
       
CoBank (fixed term loan)
  $ 5,157     $ 6,984  
Term Loan A
    180,310       187,428  
Other debt
    531       700  
      185,998       195,112  
Current maturities
    21,911       14,823  
Total long-term debt
  $ 164,087     $ 180,289  
 
As of September 30, 2011, the Company was in compliance with the covenants in its Credit Agreement.

10.  Subsequent Events

On October 17, 2011, the Company’s Board of Directors declared a dividend of $0.33 per share payable on December 1, 2011, to shareholders of record as of November 9, 2011.  The Company expects to pay out approximately $7.8 million excluding the effect of dividend reinvestments.
 
In November 2011, the Company executed two asset purchase agreements to sell certain Converged Services properties to two buyers for a total of $4.7 million. The Company closed on the sale of some of these properties and received $2.2 million on November 7, 2011. Two additional closings are expected in the next 60 to 90 days following receipt of consents necessary for the transfer of the properties. The Company continues to negotiate with purchasers on the remaining Converged Services properties.
 
 
14

 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements.  All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters are forward-looking statements.  We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct.  The Company’s actual results could be materially different from its expectations because of various factors, including those discussed below and under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010.  The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010, including the financial statements and related notes included therein.
 
General

Overview. Shenandoah Telecommunications Company is a diversified telecommunications company providing both regulated and unregulated telecommunications services through its wholly owned subsidiaries.  These subsidiaries provide wireless personal communications services (as a Sprint PCS Affiliate of Sprint Nextel) and local exchange telephone services, as well as cable television, video, Internet and data services, long distance, fiber optics facilities, and leased tower facilities. The Company has the following three reporting segments, which it operates and manages as strategic business units organized by lines of business:

 
*
The Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, as a Sprint PCS Affiliate of Sprint Nextel.  This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
 
 
*
The Wireline segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long-distance access services throughout Shenandoah County and portions of Rockingham and Augusta Counties, Virginia, and leases fiber optic facilities, throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor, including portions of West Virginia and Maryland.
 
 
*
The Cable TV segment provides video, internet and voice services in franchise areas throughout Virginia, West Virginia and Maryland.
 
 
*
A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company, as well as certain general and administrative costs historically charged to Converged Services that cannot be allocated to discontinued operations.
 
In September 2008, the Company announced its intention to sell its Converged Services operation, and the related assets and liabilities were reclassified as held for sale in the consolidated balance sheet and the historical operating results were reclassified as discontinued operations.  Depreciation and amortization on long-lived assets was discontinued.
 
 
15


In March, 2009, the Company recorded an impairment loss of $17.5 million ($10.7 million, net of taxes) to reduce the carrying value of these assets to their estimated fair value less cost to sell.    In December 2010, the Company recorded an additional impairment charge of $1.9 million ($1.1 million, net of tax), to reduce the carrying value of these assets to their revised estimated fair value less cost to sell.  In March, 2011, the Company transferred service contracts for five properties from Converged Services to Shentel Cable, as these properties are located in the Company’s franchise cable footprint as a result of the JetBroadBand acquisition.  Operating results for these properties have been reclassified as continuing operations for all periods presented, and the Company recorded an adjustment to depreciation expense of $0.1 million to reduce the carrying value of assets transferred to the lower of their carrying value net of the impairment charge or the carrying value as if depreciation had been recorded on these assets at all times.

During the second quarter of 2011, the Company sold service contracts and related equipment for seven Converged Services’ properties to a third-party purchaser, receiving cash proceeds of $0.9 million (with an additional $0.1 million in proceeds placed in escrow for twelve months).  During the third quarter of 2011, the Company sold service contracts and related equipment for two Converged Services’ properties to third-party purchasers, receiving cash proceeds of $0.3 million.  The total proceeds approximated the carrying value of the assets sold in these transactions.

At September 30, 2011, negotiations with several potential purchasers continue.  Based upon indications of interest made by potential buyers in recent months, the Company has determined that the fair value of Converged Services has declined.  Accordingly, the Company recorded an impairment loss of $0.6 million ($0.4 million, net of taxes) as of September 30, 2011, to reduce the carrying value of these assets to their estimated fair value less cost to sell.
 
In November 2011, the Company executed two asset purchase agreements to sell certain Converged Services properties to two buyers for a total of $4.7 million. The Company closed on the sale of some of these properties and received $2.2 million on November 7, 2011. Two additional closings are expected in the next 60 to 90 days following receipt of consents necessary for the transfer of the properties. The Company continues to negotiate with purchasers on the remaining Converged Services properties.
 
Acquisition of Virgin Mobile Customers and Initiation of Prepaid Wireless Sales

In July 2010, the Company amended its agreement with Sprint Nextel to incorporate approximately 50,000 Virgin Mobile customers in our service area, and effective July 11, 2010, the Company began selling Virgin Mobile and Boost prepaid products and services.  The Company incurs significant costs of acquisition (including handset subsidies, commissions, and other sales and marketing costs) in the month of customer activation.   Due to expensing all costs of acquisition in the month of acquisition, the Company expected that the sale of prepaid products and services would have a net negative impact on operating results until the base of customers was sufficient such that the aggregate monthly revenue less recurring expenses exceeded the up-front costs for new activations.   During the third quarter of 2011, the Company reached this point on a monthly basis, and expects that monthly results will generally be positive in future periods.

Cable Acquisitions

On July 30, 2010, the Company completed the acquisition of cable operations and subscribers from JetBroadBand for approximately $148 million in cash.  The acquired cable operations offer video, high speed Internet and voice services that at the time of acquisition represented approximately 66,000 revenue generating units in southern Virginia and southern West Virginia.  The acquired networks pass approximately 115,000 homes.  The operating results of the acquired cable operations are now included in the Company’s Cable Television segment, significantly impacting that segment’s operating revenues and expenses in subsequent periods.

On November 30, 2010, the Company completed the acquisition of two small cable systems from Suddenlink for $4.5 million.  These systems are located in West Virginia and Maryland, pass approximately 7,000 homes and represented approximately 4,200 revenue generating units.

Sale of Directory

In September 2010, the Company sold the rights to publish telephone directories in its service territories for $4.0 million and recorded an equivalent gain on the sale.
 
Results of Operations

Three Months Ended September 30, 2011 Compared with the Three Months Ended September 30, 2010

Consolidated Results

The Company’s consolidated results from continuing operations for the third quarters of 2011 and 2010 are summarized as follows:
 
 
16


(in thousands)
 
Three Months Ended
September 30,
   
Change
 
   
2011
   
2010
    $       %  
                           
Operating revenues
  $ 62,657     $ 53,233     $ 9,424       17.7  
Operating expenses
    53,487       47,647       5,840       12.3  
Gain on sale of directory
    -       4,000       (4,000 )     (100.0 )
Operating income
    9,170       9,586       (416 )     (4.3 )
                                 
Interest expense
    (2,003 )     (2,416 )     413       (17.1 )
Other income (expense)
    (55 )     264       (319 )     (120.8 )
Income before taxes
    7,112       7,434       (322 )     (4.3 )
Income tax expense
    3,497       3,229       268       8.3  
Net income from continuing operations
  $ 3,615     $ 4,205     $ (590 )     (14.0 )

Operating revenues

For the three months ended September 30, 2011, operating revenues increased $9.4 million, or 17.7%. The increase was due to incremental cable segment revenues of $4.6 million (primarily from the additional month of revenue in 2011 from the cable acquisition which occurred at the end of July 2010), $3.5 million in incremental net revenues from prepaid PCS customers, and $1.1 million in increased postpaid PCS revenues, all compared to the third quarter of 2010.  All other revenues (Wireline, tower revenues, and PCS equipment revenues) increased $0.2 million, net, in the third quarter of 2011 from the third quarter of 2010.

Operating expenses

For the three months ended September 30, 2011, operating expenses increased $5.8 million, or 12.3%, compared to the 2010 period.  This increase included $1.6 million of additional depreciation and amortization expense, including $1.9 million associated with the cable systems acquired in July and December of 2010, offset by a reduction of $0.6 million in the amortization resulting from the acquisition of prepaid subscribers in the third quarter of 2010.  Other cable segment operating expenses increased $2.9 million overall; the 2010 cable segment operating expenses included $3.0 million in transaction related expenses, approximately offsetting the additional month of expenses in 2011.  Costs associated with prepaid PCS offerings increased $1.8 million in the 2011 third quarter, excluding amortization on the acquired subscribers. Costs related to the expansion of the wireless network and the provision of high-speed wireless internet data access services added $0.8 million in incremental site rent, power and backhaul costs.  The Company recognized gains totaling $1.4 million on trade-ins of PCS equipment during the third quarter of 2011.

Gain on sale of directory

During the third quarter of 2010, the Company sold its telephone directory publishing rights for $4 million.

Interest expense

The decrease in interest expense resulted primarily from changes in the fair value of the Company’s interest rate swap, which added $0.5 million to interest expense during the third quarter of 2010, but only $0.2 million during the third quarter of 2011.

Income tax expense

The Company’s effective tax rate on income from continuing operations increased from 43.4% in the third quarter of 2010 to 49.2% in the third quarter of 2011 due to operating improvements in the Wireless segment adding to taxable income in generally higher tax states while operating losses in the Cable segment reduce taxable income in generally lower tax states.

 
17


Net income from continuing operations

For the three months ended September 30, 2011, net income from continuing operations decreased $0.6 million, reflecting primarily the $4.0 million gain on the directory sale in 2010 partially offset by the $3.0 million of one-time costs of the cable acquisition incurred in 2010, net of taxes.

Nine Months Ended September 30, 2011 Compared with the Nine Months Ended September 30, 2010

Consolidated Results

The Company’s consolidated results from continuing operations for the first nine months of 2011 and 2010 are summarized as follows:

(in thousands)
 
Nine Months Ended
September 30,
   
Change
 
   
2011
   
2010
     $       %  
                           
Operating revenues
  $ 184,640     $ 137,192     $ 47,448       34.6  
Operating expenses
    160,385       112,298       48,087       42.8  
Gain on sale of directory
    -       4,000       (4,000 )     (100.0 )
Operating income
    24,255       28,894       (4,639 )     (16.1 )
                                 
Interest expense
    (6,668 )     (2,992 )     (3,676 )     122.9  
Other income (expense)
    204       390       (186 )     (47.7 )
Income before taxes
    17,791       26,292       (8,501 )     (32.3 )
Income tax expense
    8,070       10,994       (2,924 )     (26.6 )
Net income from continuing operations
  $ 9,721     $ 15,298     $ (5,577 )     (36.5 )

Operating revenues

For the nine months ended September 30, 2011, operating revenues increased $47.4 million, or 34.6%. The increase was primarily due to incremental cable segment revenues of $29.9 million resulting largely from the cable acquisitions which occurred in the latter half of 2010, and to $13.3 million in incremental net revenues from prepaid PCS customers. Postpaid PCS revenues increased $5.7 million over the first nine months of 2010.  All other revenues decreased $1.4 million, net, in the first nine months of 2011 compared to 2010, principally due to the loss of directory revenues following the sale in third quarter 2010.

Operating expenses

For the nine months ended September 30, 2011, operating expenses increased $48.1 million, or 42.8%, compared to the 2010 period.  This included an increase of $13.2 million of depreciation and amortization expense, including $11.5 million associated with the cable systems acquired in late 2010 and $0.9 million of amortization associated with the prepaid subscribers acquired in the third quarter of 2010.  Excluding depreciation and one-time transaction related costs, cable segment operating costs increased $26.4 million overall in 2011 over 2010.  Costs (other than amortization) associated with prepaid PCS offerings increased $11.5 million in 2011 over 2010.  Costs related to the expansion of the wireless network and the provision of high-speed wireless internet data access services added $2.3 million in incremental site rent, power and backhaul costs.  All other operating expenses decreased $5.3 million in the first nine months of 2011, compared to the 2010 nine-month period.  This decrease is primarily attributable to recording certain non-recurring expenses in 2010.  These expenses included $3.8 million related to the settlement of the Company’s defined benefit pension plan and curtailment of the non-qualified supplemental retirement plan, and $3.1 million in cable acquisition transaction costs.

 
18


Interest expense

The increase in interest expense resulted primarily from the increased borrowings used to fund the JetBroadband cable acquisition in July 2010.  The Company also reversed $0.4 million of interest previously capitalized to plant under construction, increasing interest expense for 2011.

Income tax expense

The Company’s effective tax rate on income from continuing operations increased from 41.8% in the nine months ended September 30, 2010 to 45.4% in the first nine months of 2011 due to operating improvements in the Wireless segment adding to taxable income in generally higher tax states while operating losses in the Cable segment reduce taxable income in generally lower tax states.

Net income from continuing operations

For the nine months ended September 30, 2011, net income from continuing operations decreased $5.6 million, reflecting costs of acquiring prepaid PCS and cable customers, the higher interest costs associated with funding the cable acquisitions, and the absence in 2011 of the gain on the sale of the directory recorded in 2010.

Wireless

The Company’s Wireless segment provides digital wireless service to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia, through Shenandoah Personal Communications Company (“PCS”), a Sprint PCS Affiliate of Sprint Nextel.  This segment also leases land on which it builds Company-owned cell towers, which it leases to affiliated and non-affiliated wireless service providers, throughout the same four-state area described above, through Shenandoah Mobile Company (“Mobile”).

PCS receives revenues from Sprint Nextel for subscribers that obtain service in PCS’s network coverage area.  PCS relies on Sprint Nextel to provide timely, accurate and complete information to record the appropriate revenue for each financial period.  Postpaid revenues received from Sprint Nextel are recorded net of certain fees retained by Sprint Nextel.  These fees totaled 16.8% of net postpaid billed revenue, as defined, until June 2010, when Sprint Nextel exercised its right to re-evaluate the net service fee component, and increased the total fees retained by Sprint Nextel to 20%.   Sprint Nextel retains a 6% management fee on prepaid revenues.

The following tables show selected operating statistics of the Wireless segment as of the dates shown:
 
   
 
Sept. 30,
 
Dec. 31,
 
 
Sept. 30,
 
Dec. 31,
   
2011
2010
 
2010
2009
             
Retail PCS Subscribers – Postpaid (1)
 
243,548
234,809
 
230,612
222,818
Retail PCS Subscribers – Prepaid
 
98,272
66,956
 
56,203
n/a
PCS Market POPS (000) (2)
 
2,397
2,337
 
2,339
2,327
PCS Covered POPS (000) (2)
 
2,114
2,049
 
2,052
2,033
CDMA Base Stations (sites)
 
508
496
 
484
476
EVDO-enabled sites
 
402
381
 
346
334
EVDO Covered POPS (000) (2)
 
2,053
1,981
 
1,960
1,940
Towers, Company owned
 
149
146
 
142
140
Non-affiliate cell site leases
 
219
216
 
211
196
 
 
19

 
   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2011
2010
 
2011
2010
             
Gross PCS Subscriber Additions – Postpaid
 
16,126
16,716
 
46,285
48,587
Net PCS Subscriber Additions – Postpaid
 
2,686
3,175
 
8,739
7,794
Gross PCS Subscriber Additions – Prepaid
 
19,545
14,289
 
65,579
14,289
Net PCS Subscriber Additions – Prepaid (3)
 
6,940
6,296
 
31,316
6,296
PCS Average Monthly Retail Churn % - Postpaid
 
1.85%
1.88%
 
1.69%
1.82%
PCS Average Monthly Retail Churn % - Prepaid (4)
 
4.43%
5.02%
 
4.50%
5.02%
 
1)
Postpaid subscriber counts for December 31, 2010 have been reduced by 888 to exclude certain rate plans incorrectly counted as subscribers in the latter months of 2010.
 
2)
POPS refers to the estimated population of a given geographic area and is based on information purchased from third parties.  Market POPS are those within a market area which the Company is authorized to serve under its Sprint PCS affiliate agreements, and Covered POPS are those covered by the Company’s network.
 
3)
Net Prepaid Additions excludes 49,885 subscribers purchased July 1, 2010.
 
4)
Prepaid churn for 2010 reflects results for the three months ended September 30, 2010 in both the three months and nine months ended September 30, 2010, columns shown above.  Prepaid activity initiated effective July 1, 2010.

Three Months Ended September 30, 2011 Compared with the Three Months Ended September 30, 2010

 
(in thousands)
 
Three Months Ended
September 30,
   
Change
 
   
2011
   
2010
     $       %  
                           
Segment operating revenues
 
 
         
 
         
Wireless service revenue
  $ 34,403     $ 28,624     $ 5,779       20.2  
Tower lease revenue
    2,302       2,078       224       10.8  
Equipment revenue
    1,107       1,712       (605 )     (35.3 )
Other revenue
    677       1,314       (637 )     (48.5 )
Total segment operating revenues
    38,489       33,728       4,761       14.1  
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    12,667       12,236       431       3.5  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    7,028       5,886       1,142       19.4  
Depreciation and amortization
    5,868       6,401       (533 )     (8.3 )
Total segment operating expenses
    25,563       24,523       1,040       4.2  
Segment operating income
  $ 12,926     $ 9,205     $ 3,721       40.4  
 
Operating revenues

Wireless service revenue increased $5.8 million, or 20.2%, for the three months ended September 30, 2011, compared to the comparable 2010 period.  Net prepaid revenue represented $3.5 million of this increase.  Gross postpaid service revenues increased by $3.7 million.  Total credits against gross billed revenue, including fees retained by Sprint Nextel and bad debt write-offs, increased $1.4 million, or 11.4%, from the third quarter of 2010. These increases are primarily related to the growth in postpaid service revenue.  Fees retained by Sprint Nextel increased by $0.7 million, or 11.1%, while bad debt write-offs increased by $0.3 million, or 18.1%, and all other credits increased $0.4 million, primarily due to contract buy-out costs incurred in a marketing program to attract new customers.  A 5.8% increase in average subscribers in the current quarter compared to the 2010 third quarter, and $2.0 million in incremental data fees charged on smart phones activated since January 31, 2011, both contributed to the increase in gross postpaid service revenues.
 
 
20


The increase in tower lease revenue resulted primarily from additional cell site leases.

The decrease in equipment revenue resulted from decreases in both the number of handsets sold and the revenue recognized per handset in 2011 compared to the third quarter of 2010, while the decrease in other revenue resulted primarily from a one-time adjustment in 2010 to reflect longer lease terms on certain leases.

Cost of goods and services

Cost of goods and services increased $0.4 million, or 3.5%, in 2011 from the third quarter of 2010.  Costs of the expanded network coverage and expansion of EVDO coverage and capacity resulted in a $0.8 million increase in network costs including rent for additional tower and co-location sites, power and backhaul line costs. Handset costs associated with prepaid customer acquisitions generated $0.7 million of incremental costs, while postpaid handset costs decreased $0.2 million. Cost of service increased $0.4 million due to increased costs for 4G usage paid through Sprint to Clearwire.  These increases were partially offset by a $1.4 million gain on trade-in of wireless network assets.

Selling, general and administrative

Selling, general and administrative costs increased $1.1 million, or 19.4%, in the third quarter of 2011 over the comparable 2010 period.  Costs associated with prepaid customers accounted for $0.9 million of the increase, including $0.5 million to support the existing subscriber base and the remaining $0.4 million in costs associated with 37% growth in gross adds in the third quarter of 2011 over 2010’s third quarter.  Operating taxes and other sales and marketing costs accounted for the remainder of the increase.

Depreciation and amortization

Depreciation and amortization decreased $0.5 million in 2011 over the 2010 third quarter, due to a $0.6 million decrease in amortization of the initial purchase cost of acquired prepaid customers, which decreases each month in relation to churn in this customer base.


Nine Months Ended September 30, 2011 Compared with the Nine Months Ended September 30, 2010


 
(in thousands)
 
Nine Months Ended
September 30,
   
Change
 
   
2011
   
2010
     $       %  
                           
Segment operating revenues
 
 
         
 
         
Wireless service revenue
  $ 100,413     $ 81,415     $ 18,998       23.3  
Tower lease revenue
    6,677       6,032       645       10.7  
Equipment revenue
    3,735       4,218       (483 )     (11.5 )
 
    1,666       2,327       (661 )     (28.4 )
Total segment operating revenues
    112,491       93,992       18,499       19.7  
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    39,671       32,108       7,563       23.6  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    21,225       14,808       6,417       43.3  
Depreciation and amortization
    18,242       16,927       1,315       7.8  
Total segment operating expenses
    79,138       63,843       15,295       24.0  
Segment operating income
    33,353     $ 30,149     $ 3,204       10.6  

 
21


Operating revenues

Wireless service revenue increased $19.0 million, or 23.3%, for the nine months ended September 30, 2011, compared to the comparable 2010 period.  Net prepaid revenue represented $13.3 million of this increase.  The Company first began offering prepaid services in July 2010 when it purchased 50,000 Virgin Mobile customers.  A substantial portion of the increase in prepaid revenues relates to offering prepaid products for all nine months of 2011 and less than three months of 2010.  In addition, prepaid customers have grown from the initial 50,000 acquired from Sprint Nextel to over 98,000 at September 30, 2011.

Postpaid revenues grew by $5.7 million in 2011 over 2010.  Average postpaid subscribers increased 5.7% in the 2011 nine months compared to the 2010 nine months while incremental data fees charged on smart phones added $4.2 million to 2011 postpaid wireless service revenue, contributing to an 8.8% increase in postpaid service revenue.  Total credits against gross billed revenue, including fees retained by Sprint Nextel and bad debt write-offs, increased $4.2 million from the first nine months of 2010, principally due to the increase in the net service fee from 8.8% to 12.0% effective June 1, 2010, and to the growth in service revenues.   Fees retained by Sprint Nextel increased by $2.9 million, or 20.1%, while bad debt write-offs decreased by $0.4 million, or 9.9%, and all other credits increased $1.0 million.

The increase in tower lease revenue resulted primarily from additional cell site leases.

The decrease in equipment revenue resulted from decreases in both the number of handsets sold and the average revenue per unit sold in 2011, while the decrease in other revenue resulted from a one-time adjustment in 2010 to reflect longer lease terms on certain leases.

Cost of goods and services

Cost of goods and services increased $7.6 million, or 23.6%, in 2011 from the first nine months of 2010.  Prepaid gross additions grew from 14,289 for the 2010 period to 65,579 for 2011, principally due to six additional months of activity in 2011.  This growth caused an increase in handset costs associated with prepaid customer acquisitions of $5.5 million, while postpaid handset costs increased $0.4 million. Costs of the expanded network coverage and expansion of EVDO coverage and capacity resulted in a $2.3 million increase in network costs including rent for additional tower and co-location sites, power and backhaul line costs. These increases were partially offset by a $1.4 million gain on trade-in of wireless network assets.

Selling, general and administrative

Selling, general and administrative costs increased $6.4 million, or 43.3%, in the nine months of 2011 over the comparable 2010 period.  Costs associated with prepaid customers accounted for $5.8 million of the increase in costs, principally marketing and selling costs, including $2.7 million in costs associated with having over four times as many prepaid gross adds in 2011 and $3.1 million to support the existing customer base, and supporting that base for over six additional months in 2011. Operating taxes accounted for $0.3 million of incremental costs, while sales and marketing costs for prepaid and postpaid sales accounted for the remainder of the increase.

Depreciation and amortization

Depreciation and amortization increased $1.3 million in 2011 over the first nine months of 2010, due principally to $0.9 million of amortization of the initial purchase cost of acquired prepaid customers.  The remainder of the increase resulted from capital projects for EVDO capability and new towers and cell sites placed in service since second quarter of 2010.

Shenandoah Mobile Company

As noted above, the Wireless segment includes the operations of the Company’s Mobile subsidiary that leases land from third-party landlords, builds cell towers on that land, and leases space on those towers to affiliates (principally PCS) and non-affiliated cell phone providers.  For the third quarter of 2011, Mobile generated $2.3 million in rent revenue, up from $2.1 million in the 2010 third quarter, primarily from additional non-affiliate leases.  Other revenue declined $0.8 million in the 2011 third quarter from 2010; the Company recorded a one-time adjustment in 2010 relating to revised lease terms on certain leases.  Operating expenses totaled $1.3 million in the 2011 third quarter, up from $1.2 million in 2010.  The increase resulted primarily from rents on additional tower sites added in late 2010 and early 2011 and the loss on disposal of certain equipment recorded in 2011.
 
 
22

 
For the year to date period, rent revenue increased $0.6 million to $6.7 million in the 2011 nine month period; other revenue declined $0.9 million, primarily related to the one-time charge described above.  Operating expenses increased $0.5 million, as in the third quarter due to increased rent expense for sites as well as the loss on disposed assets.  Depreciation expense also added $0.1 million to the 2011 nine month variance.

Cable Television

The Cable Television segment provides analog, digital and high-definition television service under franchise agreements in Virginia, West Virginia and Maryland, as well as internet and voice services in these markets.

The Company has been upgrading its cable systems since early 2009, and by December 2010 had completed upgrades to the systems acquired in late 2008.  The Company has introduced expanded video and internet service offerings as market upgrades were completed beginning in the second half of 2009, and began introducing voice service in several upgraded markets as the first quarter of 2010 ended.  The Company has continued rolling out expanded video services, internet and voice services to additional markets as upgrades have been completed.

The Company closed on the acquisition of cable operations from JetBroadBand effective July 30, 2010, and Suddenlink effective November 30, 2010.  For the cable operations acquired in July 2010, systems passing approximately 21% of the homes have been upgraded.   The Cable segment results include the operating results of the acquired operations from July 30, 2010 and November 30, 2010, forward, respectively.

The following table shows selected operating statistics of the Cable Television segment as of the dates shown:

    Sept. 30,  
2011
Dec. 31,
2010(1)
  Sept. 30,  
2011
Dec. 31,
2010(1)
             
Homes Passed (2)
 
181,351
178,763
 
171,662
56,268
Video
           
Customers (3)
 
66,179
67,235
 
64,524
23,022
Penetration (4)
 
36.5%
37.6%
 
37.6%
40.9%
Digital video customers (5)