Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - SHENANDOAH TELECOMMUNICATIONS CO/VA/Financial_Report.xls
EX-32 - EXHIBIT 32 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex32.htm
EX-31.2 - EXHIBIT 31.2 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex31_1.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, 2014
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the transition period from__________ to __________

Commission File No.: 000-09881


SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)

VIRGINIA
54-1162807
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

500 Shentel Way, Edinburg, Virginia 22824
(Address of principal executive offices) (Zip Code)

(540) 984-4141
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s common stock outstanding on October 23, 2014 was 24,113,184.
 


SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX

   
Page
Numbers
   
PART I.
FINANCIAL INFORMATION  
     
Item 1.
Financial Statements
 
     
 
3-4
     
 
5
     
 
6
     
 
7-8
     
 
9-13
     
Item 2.
14-28
     
Item 3.
29
     
Item 4.
30
     
PART II.
OTHER INFORMATION
 
     
Item 1A.
31
     
Item 2.
31
     
Item 6.
32
     
 
33
     
  34
2

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

ASSETS
 
September 30,
2014
   
December 31,
2013
 
         
Current Assets
       
Cash and cash equivalents
 
$
78,643
   
$
38,316
 
Accounts receivable, net
   
27,747
     
25,824
 
Income taxes receivable
   
2,141
     
16,576
 
Materials and supplies
   
7,605
     
10,715
 
Prepaid expenses and other
   
4,980
     
5,580
 
Deferred income taxes
   
866
     
963
 
Total current assets
   
121,982
     
97,974
 
                 
Investments, including $2,628 and $2,528 carried at fair value
   
9,999
     
9,332
 
                 
Property, plant and equipment, net
   
405,843
     
408,963
 
                 
Other Assets
               
Intangible assets, net
   
68,680
     
70,816
 
Deferred charges and other assets, net
   
8,108
     
9,921
 
Net other assets
   
76,788
     
80,737
 
Total assets
 
$
614,612
   
$
597,006
 

See accompanying notes to unaudited consolidated financial statements.

(Continued)
3

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
September 30, 2014
   
December 31, 2013
 
         
Current Liabilities
       
Current maturities of long-term debt
 
$
23,000
   
$
5,750
 
Accounts payable
   
8,522
     
12,604
 
Advanced billings and customer deposits
   
12,336
     
11,661
 
Accrued compensation
   
4,850
     
4,192
 
Accrued liabilities and other
   
8,438
     
9,787
 
Total current liabilities
   
57,146
     
43,994
 
                 
Long-term debt, less current maturities
   
207,000
     
224,250
 
                 
Other Long-Term Liabilities
               
Deferred income taxes
   
66,637
     
74,547
 
Deferred lease payable
   
6,916
     
6,156
 
Asset retirement obligations
   
6,856
     
6,485
 
Other liabilities
   
9,384
     
7,259
 
Total other long-term liabilities
   
89,793
     
94,447
 
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock
   
28,667
     
26,759
 
Accumulated other comprehensive income
   
1,810
     
2,594
 
Retained earnings
   
230,196
     
204,962
 
Total shareholders’ equity
   
260,673
     
234,315
 
                 
Total liabilities and shareholders’ equity
 
$
614,612
   
$
597,006
 

See accompanying notes to unaudited consolidated financial statements.
4

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30
 
   
2014
   
2013
   
2014
   
2013
 
                 
Operating revenues
 
$
82,268
   
$
77,513
   
$
244,136
   
$
230,976
 
                                 
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
33,330
     
31,778
     
97,970
     
93,006
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
18,063
     
17,481
     
51,836
     
49,966
 
Depreciation and amortization
   
16,731
     
14,992
     
48,714
     
45,034
 
Total operating expenses
   
68,124
     
64,251
     
198,520
     
188,006
 
Operating income
   
14,144
     
13,262
     
45,616
     
42,970
 
                                 
Other income (expense):
                               
Interest expense
   
(2,007
)
   
(2,050
)
   
(6,119
)
   
(6,270
)
Gain on investments, net
   
239
     
348
     
335
     
526
 
Non-operating income, net
   
409
     
377
     
1,496
     
1,356
 
Income before taxes
   
12,785
     
11,937
     
41,328
     
38,582
 
                                 
Income tax expense
   
4,782
     
5,220
     
16,094
     
15,672
 
                                 
Net income
 
$
8,003
   
$
6,717
   
$
25,234
   
$
22,910
 
                                 
Other comprehensive income (loss):
                               
Unrealized gain (loss) on interest rate hedge, net of tax
   
476
     
(398
)
   
(784
)
   
2,909
 
Comprehensive Income
 
$
8,479
   
$
6,319
   
$
24,450
   
$
25,819
 
                                 
Earnings per share:
                               
Basic
 
$
0.33
   
$
0.28
   
$
1.05
   
$
0.95
 
Diluted
 
$
0.33
   
$
0.28
   
$
1.04
   
$
0.95
 
                                 
Weighted average shares outstanding, basic
   
24,113
     
24,010
     
24,091
     
23,993
 
Weighted average shares outstanding, diluted
   
24,393
     
24,125
     
24,334
     
24,078
 
5

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

   
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
Balance, December 31, 2012
   
23,962
   
$
24,688
   
$
184,023
   
$
(863
)
 
$
207,848
 
                                         
Net income
   
-
     
-
     
29,586
     
-
     
29,586
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
3,457
     
3,457
 
Dividends declared ($0.36 per share)
   
-
     
-
     
(8,647
)
   
-
     
(8,647
)
Dividends reinvested in common stock
   
20
     
475
     
-
     
-
     
475
 
Stock based compensation
   
-
     
1,938
     
-
     
-
     
1,938
 
Common stock issued through exercise of incentive stock options
   
66
     
1,186
     
-
     
-
     
1,186
 
Common stock issued for share awards
   
68
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
10
     
-
     
-
     
10
 
Common stock repurchased
   
(77
)
   
(1,600
)
   
-
     
-
     
(1,600
)
Net excess tax benefit from stock options exercised
   
-
     
62
     
-
     
-
     
62
 
                                         
Balance, December 31, 2013
   
24,040
   
$
26,759
   
$
204,962
   
$
2,594
   
$
234,315
 
                                         
Net income
   
-
     
-
     
25,234
     
-
     
25,234
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(784
)
   
(784
)
Stock based compensation
   
-
     
2,152
     
-
     
-
     
2,152
 
Stock options exercised
   
51
     
1,139
     
-
     
-
     
1,139
 
Common stock issued for share awards
   
81
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
7
     
-
     
-
     
7
 
Common stock repurchased
   
(60
)
   
(1,785
)
   
-
     
-
     
(1,785
)
Net excess tax benefit from stock options exercised
   
-
     
395
     
-
     
-
     
395
 
Balance, September 30, 2014
   
24,113
   
$
28,667
   
$
230,196
   
$
1,810
   
$
260,673
 
6

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

   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
         
Cash Flows From Operating Activities
       
Net income
 
$
25,234
   
$
22,910
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
46,569
     
41,749
 
Amortization
   
2,145
     
3,285
 
Provision for bad debt
   
1,155
     
1,504
 
Stock based compensation expense
   
2,152
     
1,540
 
Excess tax benefits on stock awards
   
(395
)
   
(69
)
Deferred income taxes
   
(6,261
)
   
4,950
 
Net loss on disposal of equipment
   
1,739
     
234
 
Realized gain on disposal of investments
   
-
     
1
 
Unrealized gains on investments
   
(40
)
   
(233
)
Net gains from patronage and equity investments
   
(667
)
   
(627
)
Other
   
1,446
     
1,976
 
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
   
(3,078
)
   
(510
)
Materials and supplies
   
3,111
     
982
 
Income taxes receivable
   
14,434
     
(5,609
)
Increase (decrease) in:
               
Accounts payable
   
2,411
     
885
 
Deferred lease payable
   
760
     
981
 
Other prepaids, deferrals and accruals
   
623
     
(431
)
Net cash provided by operating activities
 
$
91,338
   
$
73,518
 
                 
Cash Flows From Investing Activities
               
Purchase and construction of property, plant and equipment
 
$
(51,197
)
 
$
(80,784
)
Proceeds from sale of assets
   
-
     
271
 
Proceeds from sale of equipment
   
390
     
25
 
(Purchase) sale of investment securities
   
-
     
(13
)
Proceeds from sale of investment securities
   
40
     
110
 
Net cash used in investing activities
 
$
(50,767
)
 
$
(80,391
)

(Continued)
7

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

   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
         
Cash Flows From Financing Activities
       
Principal payments on long-term debt
 
$
-
   
$
(1,977
)
Excess tax benefits on stock awards
   
395
     
69
 
Repurchases of stock
   
(1,785
)
   
(1,297
)
Proceeds from issuances of stock
   
1,146
     
947
 
Net cash used in financing activities
 
$
(244
)
 
$
(2,258
)
                 
Net increase (decrease) in cash and cash equivalents
 
$
40,327
   
$
(9,131
)
                 
Cash and cash equivalents:
               
Beginning
   
38,316
     
71,086
 
Ending
 
$
78,643
   
$
61,955
 
                 
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
 
Interest
 
$
5,927
   
$
6,476
 
                 
Income taxes paid
 
$
8,825
   
$
16,330
 

During the first nine months of 2013, the Company traded in certain PCS equipment and received credits of $14.2 million against the purchase price of new equipment.

At December 31, 2013, accounts payable included approximately $7.6 million associated with the capital expenditures related to the Network Vision project. These payables were disbursed during 2014.

See accompanying notes to unaudited consolidated financial statements.
8

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The interim 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, 2013. The balance sheet information at December 31, 2013 was derived from the audited December 31, 2013 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. Property, Plant and Equipment

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

   
September 30, 2014
   
December 31, 2013
 
Plant in service
 
$
668,718
   
$
633,480
 
Plant under construction
   
18,493
     
23,181
 
     
687,211
     
656,661
 
Less accumulated amortization and depreciation
   
281,368
     
247,698
 
Net property, plant and equipment
 
$
405,843
   
$
408,963
 

3. Earnings per share

Basic net income per share was computed on the weighted average number of shares outstanding. Diluted net income per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. Of 698 thousand and 764 thousand shares and options outstanding at September 30, 2014 and 2013, respectively, zero and 293 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.

4. Investments Carried at Fair Value

Investments include $2.6 million and $2.5 million of investments carried at fair value as of September 30, 2014 and December 31, 2013, 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, 2014, the Company recognized $111 thousand in dividend and interest income from investments, and recorded net unrealized gains of $40 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.

5. Financial Instruments

Financial instruments on the consolidated balance sheets that approximate fair value include: cash and cash equivalents, receivables, investments carried at fair value, payables, accrued liabilities, interest rate swaps and variable rate long-term debt.
9

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

The Company’s objectives in using interest rate derivatives are to add stability to cash flows and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps (both those designated as cash flow hedges as well as those not designated as cash flow hedges) involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The Company entered into a pay-fixed, receive-variable interest rate swap of $63.3 million of notional principal in August 2010. This interest rate swap was not designated as a cash flow hedge. Changes in the fair value of interest rate swaps not designated as cash flow hedges are recorded in interest expense each reporting period. The changes in fair value recorded in interest expense for the three and nine months ended September 30, 2013 were decreases of $33 thousand and $239 thousand, respectively. This swap expired in July 2013.

The Company entered into a pay-fixed, receive-variable interest rate swap of $174.6 million of notional principal in September 2012. This interest rate swap was designated as a cash flow hedge. The total outstanding notional amount of the cash flow hedge was $174.6 million as of September 30, 2014.

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

Amounts reported in accumulated other comprehensive income related to the interest rate swap designated and that qualifies as a cash flow hedge are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 30, 2014, the Company estimates that $1.5 million will be reclassified as an increase to interest expense during the next twelve months due to the interest rate swap since the hedge interest rate exceeds the variable interest rate on the debt.

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheet as of September 30, 2014 and December 31, 2013 (in thousands):

 
Derivatives
     
Fair Value as of
 
Balance Sheet
 
September 30,
 
December 31,
 
Location
 
2014
 
2013
         
Derivatives designated as hedging instruments:
Interest rate swap
       
 
Accrued liabilities and other
 
$                                   (1,459)
 
$                                   (1,590)
 
Deferred charges and other assets, net
 
4,482
 
5,926
Total derivatives designated as hedging instruments
 
$                                     3,023
 
$                                     4,336

The fair value of interest rate swaps is determined using a pricing model with inputs that are observable in the market (level 2 fair value inputs).
10

The table below presents change in accumulated other comprehensive income by component for the nine months ended September 30, 2014 (in thousands):

   
Gains and (Losses) on Cash Flow Hedges
   
Income Tax (Expense) Benefit
   
Accumulated Other Comprehensive Income (Loss)
 
Balance as of December 31, 2013
 
$
4,336
   
$
(1,742
)
 
$
2,594
 
Other comprehensive income before reclassifications
   
(2,603
)
   
1,043
     
(1,560
)
Amounts reclassified from accumulated other comprehensive income (to interest expense)
   
1,290
     
(514
)
   
776
 
Net current period other comprehensive income (loss)
   
(1,313
)
   
529
     
(784
)
Balance as of September 30, 2014
 
$
3,023
   
$
(1,213
)
 
$
1,810
 

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) Cable, and (3) Wireline. A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.

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. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.

The Cable segment provides video, internet and voice services in Virginia, West Virginia and Maryland, and leases fiber optic facilities throughout southern Virginia and West Virginia. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.

The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of Pennsylvania.

Three months ended September 30, 2014
 
(in thousands)
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated Totals
 
External revenues
                       
Service revenues
 
$
48,013
   
$
17,602
   
$
5,102
   
$
-
   
$
-
   
$
70,717
 
Other
   
3,083
     
3,370
     
5,098
     
-
     
-
     
11,551
 
Total external revenues
   
51,096
     
20,972
     
10,200
     
-
     
-
     
82,268
 
Internal revenues
   
1,099
     
32
     
5,724
     
-
     
(6,855
)
   
-
 
Total operating revenues
   
52,195
     
21,004
     
15,924
     
-
     
(6,855
)
   
82,268
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
18,322
     
14,157
     
7,078
     
-
     
(6,227
)
   
33,330
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,645
     
5,107
     
1,533
     
3,406
     
(628
)
   
18,063
 
Depreciation and amortization
   
7,895
     
5,864
     
2,875
     
97
     
-
     
16,731
 
Total operating expenses
   
34,862
     
25,128
     
11,486
     
3,503
     
(6,855
)
   
68,124
 
Operating income (loss)
   
17,333
     
(4,124
)
   
4,438
     
(3,503
)
   
-
     
14,144
 

11


Three months ended September 30, 2013
 
(in thousands)
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated Totals
 
External revenues
                       
Service revenues
 
$
45,938
   
$
16,415
   
$
5,075
   
$
-
   
$
-
   
$
67,428
 
Other
   
2,550
     
2,706
     
4,829
     
-
     
-
     
10,085
 
Total external revenues
   
48,488
     
19,121
     
9,904
     
-
     
-
     
77,513
 
Internal revenues
   
1,090
     
19
     
5,127
     
-
     
(6,236
)
   
-
 
Total operating revenues
   
49,578
     
19,140
     
15,031
     
-
     
(6,236
)
   
77,513
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
17,969
     
12,218
     
7,214
     
-
     
(5,623
)
   
31,778
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,313
     
5,147
     
1,457
     
3,177
     
(613
)
   
17,481
 
Depreciation and amortization
   
6,799
     
5,312
     
2,872
     
9
     
-
     
14,992
 
Total operating expenses
   
33,081
     
22,677
     
11,543
     
3,186
     
(6,236
)
   
64,251
 
Operating income (loss)
   
16,497
     
(3,537
)
   
3,488
     
(3,186
)
   
-
     
13,262
 

Nine months ended September 30, 2014
 
(in thousands)
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated Totals
 
External revenues
                       
Service revenues
 
$
143,112
   
$
52,442
   
$
15,322
   
$
-
   
$
-
   
$
210,876
 
Other
   
8,653
     
9,788
     
14,819
     
-
     
-
     
33,260
 
Total external revenues
   
151,765
     
62,230
     
30,141
     
-
     
-
     
244,136
 
Internal revenues
   
3,283
     
91
     
17,202
     
-
     
(20,576
)
   
-
 
Total operating revenues
   
155,048
     
62,321
     
47,343
     
-
     
(20,576
)
   
244,136
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
55,455
     
38,969
     
22,297
     
-
     
(18,751
)
   
97,970
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
24,734
     
14,487
     
4,270
     
10,170
     
(1,825
)
   
51,836
 
Depreciation and amortization
   
23,162
     
17,035
     
8,225
     
292
     
-
     
48,714
 
Total operating expenses
   
103,351
     
70,491
     
34,792
     
10,462
     
(20,576
)
   
198,520
 
Operating income (loss)
   
51,697
     
(8,170
)
   
12,551
     
(10,462
)
   
-
     
45,616
 

Nine months ended September 30, 2013
 
(in thousands)
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated Totals
 
External revenues
                       
Service revenues
 
$
136,365
   
$
48,902
   
$
15,353
   
$
-
   
$
-
   
$
200,620
 
Other
   
7,897
     
7,364
     
15,095
     
-
     
-
     
30,356
 
Total external revenues
   
144,262
     
56,266
     
30,448
     
-
     
-
     
230,976
 
Internal revenues
   
3,238
     
121
     
14,935
     
-
     
(18,294
)
   
-
 
Total operating revenues
   
147,500
     
56,387
     
45,383
     
-
     
(18,294
)
   
230,976
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
53,354
     
34,679
     
21,577
     
-
     
(16,604
)
   
93,006
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
24,268
     
14,071
     
4,069
     
9,248
     
(1,690
)
   
49,966
 
Depreciation and amortization
   
20,608
     
15,996
     
8,405
     
25
     
-
     
45,034
 
Total operating expenses
   
98,230
     
64,746
     
34,051
     
9,273
     
(18,294
)
   
188,006
 
Operating income (loss)
   
49,270
     
(8,359
)
   
11,332
     
(9,273
)
   
-
     
42,970
 

12

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

   
Three Months Ended
September 30,
 
   
2014
   
2013
 
Total consolidated operating income
 
$
14,144
   
$
13,262
 
Interest expense
   
(2,007
)
   
(2,050
)
Non-operating income (expense), net
   
648
     
725
 
Income before taxes
 
$
12,785
   
$
11,937
 

   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
Total consolidated operating income
 
$
45,616
   
$
42,970
 
Interest expense
   
(6,119
)
   
(6,270
)
Non-operating income (expense), net
   
1,831
     
1,882
 
Income before taxes
 
$
41,328
   
$
38,582
 

The Company’s assets by segment are as follows:

 
(in thousands)
 
September 30,
2014
   
December 31,
2013
 
Wireless
 
$
252,229
   
$
229,038
 
Cable
   
203,918
     
199,184
 
Wireline
   
92,875
     
92,455
 
Other
   
410,580
     
435,804
 
Combined totals
   
959,602
     
956,481
 
Inter-segment eliminations
   
(344,990
)
   
(359,475
)
Consolidated totals
 
$
614,612
   
$
597,006
 

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 2011 are no longer subject to examination. The Company is under audit in the state of Maryland for the 2010 and 2011 tax years. No other state or federal income tax audits were in process as of September 30, 2014.

9. Subsequent Event

On October 20, 2014, the Company’s Board of Directors declared a dividend of $0.47 per share payable on December 1, 2014, to shareholders of record as of November 5, 2014. The Company expects to pay out approximately $11.3 million excluding the effect of dividend reinvestments.
13

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, 2013. 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, 2013, including the financial statements and related notes included therein.

General

Overview. Shenandoah Telecommunications Company is a diversified telecommunications company providing both regulated and unregulated telecommunications services through its wholly-owned subsidiaries. These subsidiaries provide wireless personal communications services (as a Sprint PCS Affiliate), local exchange telephone services, video, internet and data services, long distance, fiber optics facilities, and leased tower facilities. The Company has the following three reportable 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. This segment also owns cell site towers built on leased land, and leases space on these towers to both affiliates and non-affiliated service providers.
 
*
The Cable segment provides video, internet and voice services in franchise areas in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia.
 
*
The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of Pennsylvania.
 
* A fourth segment, Other, primarily includes Shenandoah Telecommunications Company, the parent holding company.
14

Results of Operations
Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013
Consolidated Results

The Company’s consolidated results for the third quarters of 2014 and 2013 are summarized as follows:

   
Three Months Ended
September 30,
   
Change
 
(in thousands)
 
2014
   
2013
   
$
   
 
%
 
Operating revenues
 
$
82,268
   
$
77,513
   
$
4,755
     
6.1
 
Operating expenses
   
68,124
     
64,251
     
3,873
     
6.0
 
Operating income
   
14,144
     
13,262
     
882
     
6.7
 
                                 
Interest expense
   
(2,007
)
   
(2,050
)
   
43
     
(2.1
)
Other income (expense), net
   
648
     
725
     
(77
)
   
(10.6
)
Income before taxes
   
12,785
     
11,937
     
848
     
7.1
 
Income tax expense
   
4,782
     
5,220
     
(438
)
   
(8.4
)
Net income
 
$
8,003
   
$
6,717
   
$
1,286
     
19.1
 

Operating revenues

For the three months ended September 30, 2014, operating revenues increased $4.8 million, or 6.1%. Wireless segment revenues increased $2.6 million compared to the third quarter of 2013. Net postpaid service revenues increased $1.8 million, driven by 4.8% year-over-year growth in average postpaid subscribers. Other Wireless revenue increased $0.8 million, primarily due to growth in prepaid service revenue and equipment revenue. Cable segment revenue grew $1.9 million. This increase included a $1.2 million growth in cable service revenue as a result of a 6.7% growth in average subscriber counts and an increase in revenue per subscriber. Growth in Cable equipment revenue of $0.6 million resulted primarily from an increase in customer premises equipment rents. Wireline segment revenue increased $0.9 million due primarily to growth in facility lease revenues from new contracts with affiliates and third parties.

Operating expenses

Total operating expenses were $68.1 million in the third quarter of 2014 compared to $64.3 million in the prior year period. Cost of goods and services sold increased $1.6 million, including increases of $1.2 million in PCS handset costs and $0.9 million in cable programming costs. Disposal costs increased $2.0 million, as the company disposed of obsolete equipment that had been taken out of service while upgrading its cable and wireline networks. The increase in disposal costs was offset by reductions in network costs and maintenance expense, driven primarily by an increased percentage of labor capitalized to projects. Selling, general and administrative expenses increased $0.6 million. Depreciation and amortization expense increased $1.7 million, primarily due to completion of the Network Vision and cable network upgrade projects.

Income tax expense

The Company’s effective tax rate decreased from 43.7% for the three months ended September 30, 2013 to 37.4% for the three months ended September 30, 2014. The 2013 period included $0.5 million in unfavorable adjustments resulting from finalizing the estimated effects of restructuring entities during 2012. The 2014 period included $0.2 million in favorable adjustments to estimates made for the 2013 federal and state returns filed in September 2014. The Company anticipates that its effective tax rate, without unanticipated adjustments, will be approximately 39.5%.

Net income

For the three months ended September 30, 2014, net income increased $1.3 million, or 19.1%, primarily reflecting growth in subscriber counts and revenue per subscriber in the Wireless segment, along with a lower effective income tax rate in the current quarter.
15

Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
Consolidated Results

The Company’s consolidated results for the first nine months of 2014 and 2013 are summarized as follows:

   
Nine Months Ended
September 30,
   
Change
 
(in thousands)
 
2014
   
2013
   
$
   
%
 
Operating revenues
 
$
244,136
   
$
230,976
   
$
13,160
     
5.7
 
Operating expenses
   
198,520
     
188,006
     
10,514
     
5.6
 
Operating income
   
45,616
     
42,970
     
2,646
     
6.2
 
                                 
Interest expense
   
(6,119
)
   
(6,270
)
   
151
     
(2.4
)
Other income (expense), net
   
1,831
     
1,882
     
(51
)
   
(2.7
)
Income before taxes
   
41,328
     
38,582
     
2,746
     
7.1
 
Income tax expense
   
16,094
     
15,672
     
422
     
2.7
 
Net income
 
$
25,234
   
$
22,910
   
$
2,324
     
10.1
 

Operating revenues

For the nine months ended September 30, 2014, operating revenues increased $13.2 million, or 5.7%. Wireless segment service revenues increased $6.7 million compared to the first nine months of 2013. Net postpaid service revenues increased $4.2 million, driven by 4.5% year-over-year growth in average postpaid subscribers. Net prepaid service revenues grew $2.6 million, or 8.5%, due to 4.6% growth in average prepaid subscribers and higher average revenue per subscriber in 2014 over 2013. Cable segment revenues increased $5.9 million due to a 6.3% increase in average revenue generating units compared to the 2013 period and to a $1.7 million increase in rent revenues for customer premises equipment, due to a change in January 2014 of charging customers separately for their first set top box, which previously had been included in the service fee. Growth in fiber lease revenue contributed $0.4 million to the year-over-year increase of Cable segment revenue. Wireline segment revenue increased $2.0 million, primarily due to growth in facility lease revenues from new contracts with affiliates and third parties.

Operating expenses

Total operating expenses were $198.5 million in the nine months ended September 30, 2014 compared to $188.0 million in the prior year period. Cost of goods and services sold increased $5.0 million, including increases of $2.5 million in PCS handset costs, $1.8 million in video programming costs and $0.9 million in network maintenance costs. Disposal costs increased $1.6 million, as the company disposed of obsolete equipment that had been taken out of service while upgrading the cable and wireline networks. The increase in disposal costs was offset by reductions in network costs, driven primarily by lower backhaul expenses along with an increase in labor capitalized to projects. Selling, general and administrative expenses increased $1.9 million, due to higher personnel costs, partially offset by lower wireless prepaid and bad debt expenses. Depreciation and amortization expense increased $3.7 million, primarily due to completion of the Network Vision and cable network upgrade projects.

Interest and other income (expense), net

Interest expense declined $0.2 million from the prior year period. During the first nine months of 2013, the Company recorded $0.2 million of interest expense charges to reflect changes in the fair value of an interest rate swap not designated as a cash flow hedge. This swap expired in July 2013.

Income tax expense

The Company’s effective tax rate decreased from 40.6% for the nine months ended September 30, 2013 to 38.9% for the nine months ended September 30, 2014. The 2013 period included $0.5 million in unfavorable adjustments from finalizing the estimated effects of restructuring entities during 2012. The 2014 period included $0.2 million in favorable adjustments to estimates made for the 2013 federal and state returns filed in September 2014. The Company anticipates that its effective tax rate should be approximately 39.5%.
16

Net income

For the nine months ended September 30, 2014, net income increased $2.3 million, or 10.1%, reflecting growth in subscriber counts and revenue per subscriber in the Wireless segment, partially offset by increases in operating expenses incurred in support of this growth.

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, LLC (“PCS”), a Sprint PCS Affiliate. 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, LLC (“Mobile”).

PCS receives revenues from Sprint for postpaid and prepaid subscribers that obtain service in PCS’s network coverage area. PCS relies on Sprint to provide timely, accurate and complete information to record the appropriate revenue for each financial period. Through July 31, 2013, postpaid revenues received from Sprint were recorded net of certain fees totaling 20% of net postpaid billed revenue retained by Sprint. These fees included an 8% management fee and a 12% net service fee. Effective August 1, 2013, the net service fee increased to 14%, the maximum allowed by the current Sprint Affiliate contract. The management fee remained unchanged at 8%. Sprint also retains a 6% management fee on prepaid revenues.

During 2014, the Company’s PCS stores began participating in Sprint’s handset financing programs, whereby Sprint enters into a financing agreement with the subscriber and the subscriber receives a handset from Sprint. The equipment revenue from the subscriber and the handset expense are Sprint’s responsibility and are not recorded by the Company.

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

   
September 30,
   
December 31,
   
September 30,
   
December 31,
 
   
2014
   
2013
   
2013
   
2012
 
Retail PCS Subscribers – Postpaid
   
282,976
     
273,721
     
267,667
     
262,892
 
Retail PCS Subscribers – Prepaid
   
140,126
     
137,047
     
132,669
     
128,177
 
PCS Market POPS (000) (1)
   
2,410
     
2,397
     
2,395
     
2,390
 
PCS Covered POPS (000) (1)
   
2,116
     
2,067
     
2,065
     
2,057
 
CDMA Base Stations (sites)
   
531
     
526
     
525
     
516
 
Towers
   
154
     
153
     
153
     
150
 
Non-affiliate cell site leases (2)
   
197
     
217
     
221
     
216
 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Gross PCS Subscriber Additions – Postpaid
   
20,095
     
15,754
     
51,578
     
46,762
 
Net PCS Subscriber Additions – Postpaid
   
5,303
     
1,370
     
9,255
     
4,775
 
Gross PCS Subscriber Additions – Prepaid
   
18,225
     
17,572
     
52,683
     
57,301
 
Net PCS Subscriber Additions – Prepaid
   
1,950
     
1,297
     
3,079
     
4,483
 
PCS Average Monthly Retail Churn % - Postpaid (3)
   
1.76
%
   
1.80
%
   
1.70
%
   
1.76
%
PCS Average Monthly Retail Churn % - Prepaid (3)
   
3.92
%
   
4.11
%
   
3.99
%
   
4.45
%

1) POPS refers to the estimated population of a given geographic area and is based on information purchased from third party sources. Market POPS are those within a market area which the Company is authorized to serve under its Sprint PCS affiliate agreements, and Covered POPS are those covered by the Company’s network.
2) The decrease from December 31, 2013 is primarily a result of termination of Sprint iDEN leases associated with the former Nextel network.
3) PCS Average Monthly Retail Churn is the average of the monthly subscriber turnover, or churn, calculations for the period.
17

Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013

   
Three Months Ended
September 30,
   
Change
 
(in thousands)
 
2014
   
2013
   
$
   
%
 
Segment operating revenues
                   
Wireless service revenue
 
$
48,013
   
$
45,938
   
$
2,075
     
4.5
 
Tower lease revenue
   
2,545
     
2,611
     
(66
)
   
(2.5
)
Equipment revenue
   
1,573
     
1,257
     
316
     
25.1
 
Other revenue
   
64
     
(228
)
   
292
     
(128.1
)
Total segment operating revenues
   
52,195
     
49,578
     
2,617
     
5.3
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
18,322
     
17,969
     
353
     
2.0
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,645
     
8,313
     
332
     
4.0
 
Depreciation and amortization
   
7,895
     
6,799
     
1,096
     
16.1
 
Total segment operating expenses
   
34,862
     
33,081
     
1,781
     
5.4
 
Segment operating income
 
$
17,333
   
$
16,497
   
$
836
     
5.1
 

Operating revenues

Wireless service revenue increased $2.1 million, or 4.5%, for the three months ended September 30, 2014, compared to the comparable 2013 period. Net postpaid service revenues increased $1.8 million, driven by 4.8% year-over-year growth in average postpaid subscribers. As stated above, the net service fee increased from 12% of net billed revenues to 14% on August 1, 2013, reducing net postpaid service revenue by $0.3 million in the three months ended September 30, 2014. Net prepaid service revenues grew $0.3 million due to 5.0% growth in average prepaid subscribers over 2013.

The decrease in tower lease revenue resulted from the termination of Sprint iDEN leases associated with the former Nextel network. Equipment revenue increased due to growth in accessories sales and fewer discounts on handset sales. Other revenue increased, as the prior year period included a $0.3 million unfavorable adjustment to straight-line rent accruals related to the termination of iDEN leases.

Cost of goods and services

Cost of goods and services increased $0.4 million, or 2.0%, in 2014 from the third quarter of 2013. Prepaid handset subsidies increased $0.6 million, as higher cost of handsets was partially offset by a decrease in the volume of upgraded handsets. Postpaid handset costs increased $0.5 million, as higher volume of handset upgrades and tablet sales were largely offset by a reduction in the volume of subsidized handsets. Network costs decreased $0.8 million, due primarily to a $0.5 million decrease in backhaul costs following completion of the Network Vision project. An increase in labor capitalized to projects also contributed to the decrease in network costs.

Selling, general and administrative

Selling, general and administrative costs increased $0.3 million, or 4.0%, in the third quarter of 2014 from the comparable 2013 period. Advertising and commissions expenses increased $0.2 million, or 3.9%.

Depreciation and amortization

Depreciation and amortization increased $1.1 million, or 16.1%, in the third quarter of 2014 over the comparable 2013 period, following completion of Network Vision upgrades.
18

Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013

   
Nine Months Ended
September 30,
   
Change
 
(in thousands)
 
2014
   
2013
   
$
   
%
 
Segment operating revenues
                   
Wireless service revenue
 
$
143,112
   
$
136,365
   
$
6,747
     
4.9
 
Tower lease revenue
   
7,576
     
7,748
     
(172
)
   
(2.2
)
Equipment revenue
   
4,076
     
3,859
     
217
     
5.6
 
Other revenue
   
284
     
(472
)
   
756
     
(160.2
)
Total segment operating revenues
   
155,048
     
147,500
     
7,548
     
5.1
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
55,455
     
53,354
     
2,101
     
3.9
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
24,734
     
24,268
     
466
     
1.9
 
Depreciation and amortization
   
23,162
     
20,608
     
2,554
     
12.4
 
Total segment operating expenses
   
103,351
     
98,230
     
5,121
     
5.2
 
Segment operating income
 
$
51,697
   
$
49,270
   
$
2,427
     
4.9
 

Operating revenues

Wireless service revenue increased $6.7 million, or 4.9%, for the nine months ended September 30, 2014, compared to the 2013 period. Net postpaid service revenues increased $4.2 million, or 3.9%, driven by 4.5% year-over-year growth in average postpaid subscribers. As stated above, the net service fee increased from 12% of net billed revenues to 14% on August 1, 2013, reducing net postpaid service revenue by $2.1 million, approximately $0.3 million per month. Net prepaid service revenues grew $2.6 million, or 8.5%, compared to the nine months ended September 30, 2013. Average prepaid subscribers increased 4.6% in 2014 over 2013, with changes in the mix of subscribers accounting for the remainder of the increase in prepaid service revenues.

The decrease in tower lease revenue resulted from the termination of Sprint iDEN leases associated with the former Nextel network. Equipment revenue increased due to growth in accessories sales and fewer discounts on handset sales. Other revenue increased, as the prior year period included a $0.8 million unfavorable adjustment to straight-line rent accruals related to the termination of iDEN leases.

Cost of goods and services

Cost of goods and services increased $2.1 million, or 3.9%, in 2014 from the first nine months of 2013. Postpaid handset costs increased $2.9 million, driven primarily by higher average cost per handset sold and a higher volume of handset upgrades. Prepaid handset subsidies decreased $0.5 million on lower volume of handsets sold. Network costs decreased $0.1 million, as a decrease in backhaul costs was partially offset by an increase in rent expense associated with the Network Vision project. An increase in labor capitalized to projects also contributed to the decrease in network costs. Maintenance expense grew $0.9 million due to increases in maintenance contracts that support the upgraded wireless network. These increases were largely offset by a one-time $0.4 million gain related to actual disposal costs for the Network Vision project being less than the previously accrued amounts and by $0.4 million lower costs from Sprint to service prepaid customers who take advantage of the “top-up” program.

Selling, general and administrative

Selling, general and administrative costs increased $0.5 million, or 1.9%, in the first nine months of 2014 over the comparable 2013 period primarily due to an increase in advertising and other marketing costs. Acquisition costs related to prepaid customers decreased due to lower volume of upgrades and new activations, but were partially offset by costs to support existing customers.

Depreciation and amortization

Depreciation and amortization increased $2.6 million, 12.4%, in 2014 over the first nine months of 2013, following completion of Network Vision upgrades.
19

Cable

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

   
September 30, 2014
   
December 31, 2013
   
September 30,
2013
   
December 31,
2012
 
Homes Passed (1)
   
171,382
     
170,470
     
168,746
     
168,475
 
Customer Relationships (2)
                               
Video customers
   
49,672
     
51,197
     
51,529
     
52,676
 
Non-video customers
   
21,630
     
18,341
     
17,687
     
15,709
 
Total customer relationships
   
71,302
     
69,538
     
69,216
     
68,385
 
Video
                               
Customers (3)
   
52,347
     
53,076
     
53,386
     
54,840
 
Penetration (4)
   
30.5
%
   
31.1
%
   
31.6
%
   
32.6
%
Digital video penetration (5)
   
64.8
%
   
49.2
%
   
48.7
%
   
39.5
%
High-speed Internet
                               
Available Homes (6)
   
170,728
     
168,255
     
166,898
     
163,273
 
Customers (3)
   
50,626
     
45,776
     
44,583
     
40,981
 
Penetration (4)
   
29.7
%
   
27.2
%
   
26.7
%
   
25.1
%
Voice
                               
Available Homes (6)
   
167,991
     
163,282
     
161,932
     
154,552
 
Customers (3)
   
17,493
     
14,988
     
14,338
     
12,262
 
Penetration (4)
   
10.4
%
   
9.2
%
   
8.9
%
   
8.0
%
Total Revenue Generating Units (7)
   
120,466
     
113,840
     
112,307
     
108,083
 
Fiber Route Miles
   
2,473
     
2,446
     
2,237
     
2,077
 
Total Fiber Miles (8)
   
71,022
     
69,715
     
41,562
     
39,418
 

1) Homes and businesses are considered passed (“homes passed”) if we can connect them to our distribution system without further extending the transmission lines. Homes passed is an estimate based upon the best available information.
2) Customer relationships represent the number of customers who receive at least one of our services.
3) Generally, a dwelling or commercial unit with one or more television sets connected to our distribution system counts as one video customer. Where services are provided on a bulk basis, such as to hotels and some multi-dwelling units, the revenue charged to the customer is divided by the rate for comparable service in the local market to determine the number of customer equivalents included in the customer counts shown above.
4) Penetration is calculated by dividing the number of customers by the number of homes passed or available homes, as appropriate.
5) Digital video penetration is calculated by dividing the number of digital video customers by total video customers. Digital video customers are video customers who receive any level of video service via digital transmission. A dwelling with one or more digital set-top boxes counts as one digital video customer.
6) Homes and businesses are considered available (“available homes”) if we can connect them to our distribution system without further extending the transmission lines and if we offer the service in that area.
7) Revenue generating units are the sum of video, voice and high-speed internet customers.
8) Fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles. Fiber counts were recalculated after a fiber audit and deployment of enhanced mapping software in the fourth quarter of 2013.
20

Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013

   
Three Months Ended
September 30,
   
Change
     
(in thousands)
 
2014
   
2013
   
$
   
%
 
Segment operating revenues
                   
Service revenue
 
$
17,602
   
$
16,415
   
$
1,187
     
7.2
 
Equipment and other revenue
   
3,402
     
2,725
     
677
     
24.8
 
Total segment operating revenues
   
21,004
     
19,140
     
1,864
     
9.7
 
                                 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
14,157
     
12,218
     
1,939
     
15.9
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
5,107
     
5,147
     
(40
)
   
(0.8
)
Depreciation and amortization
   
5,864
     
5,312
     
552
     
10.4
 
Total segment operating expenses
   
25,128
     
22,677
     
2,451
     
10.8
 
Segment operating loss
 
$
(4,124
)
 
$
(3,537
)
 
$
(587
)
   
16.6
 

Operating revenues

Cable segment service revenue increased $1.2 million, or 7.2%, due to a 6.7% increase in average revenue generating units, a video rate increase in January 2014, and customers selecting higher-priced digital TV services and higher-speed data access packages.

Growth in equipment and other revenue was driven primarily by a $0.6 million increase in equipment rents, due to a change in January 2014 of charging customers separately for their first set top box, which previously had been included in the service fee. Facility lease revenue grew $0.1 million due to new fiber to the tower contracts with third parties.

Operating expenses

Cable segment cost of goods and services increased $1.9 million, or 15.9%, in the third quarter of 2014 over the comparable 2013 period. Disposal costs increased $1.3 million, as the Company disposed of obsolete equipment that had previously been taken out of service. Video programming costs increased $0.9 million as the impact of rising rates per subscriber outpaced declining video subscriber counts. Maintenance costs decreased $0.3 million due to a reduction in materials and supplies expense.

Selling, general and administrative expenses were flat against the prior year quarter as a $0.3 million decrease in marketing and selling expense was largely offset by increases in bad debt expense and costs related to administrative functions.

The increase in depreciation and amortization expense consists of $0.8 million of higher depreciation expense on assets placed in service, offset by lower amortization on the customer base intangible asset recorded when the cable markets were acquired. The amortization of this asset declines on the anniversary of the acquisitions.
21

Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013

   
Nine Months Ended
September 30,
   
Change
 
(in thousands)
 
2014
   
2013
   
$
   
%
 
Segment operating revenues
                   
Service revenue
 
$
52,442
   
$
48,902
   
$
3,540
     
7.2
 
Equipment and other revenue
   
9,879
     
7,485
     
2,394
     
32.0
 
Total segment operating revenues
   
62,321
     
56,387
     
5,934
     
10.5
 
                                 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
38,969
     
34,679
     
4,290
     
12.4
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
14,487
     
14,071
     
416
     
3.0
 
Depreciation and amortization
   
17,035
     
15,996
     
1,039
     
6.5
 
Total segment operating expenses
   
70,491
     
64,746
     
5,745
     
8.9
 
Segment operating loss
 
$
(8,170
)
 
$
(8,359
)
 
$
189
     
(2.3
)

Operating revenues

Cable segment service revenue increased $3.5 million, or 7.2%, due to a 6.3% increase in average revenue generating units, a video rate increase in January 2014, and customers selecting higher-priced digital TV services and higher-speed data access packages.

Growth in equipment and other revenue was driven primarily by a $1.7 million increase in equipment rents, due to a change in January 2014 of charging customers separately for their first set top box, which previously had been included in the service fee. Facility lease revenue grew $0.4 million due to new fiber to the tower contracts with third parties. Installation revenue increased $0.2 million.

Operating expenses

Cable segment cost of goods and services increased $4.3 million, or 12.4%, in the nine months ended September 30, 2014 over the comparable 2013 period. Video programming costs increased $2.0 million as the impact of rising rates per subscriber outpaced declining video subscriber counts. Disposal costs increased $1.4 million, as the Company disposed of obsolete equipment that had been taken out of service while upgrading the network. Personnel costs increased $0.5 million and maintenance costs increased $0.2 million due to costs to support network growth.

Selling, general and administrative expenses grew $0.4 million against the prior year period as increases in costs related to customer service and administrative functions were partially offset by reductions of $0.4 million in marketing and selling expense and $0.1 million in bad debt expense.

The increase in depreciation and amortization expense consists of $2.0 million of higher depreciation expense on network upgrades, offset by lower amortization on the customer base intangible asset recorded when the cable markets were acquired. The amortization of this asset declines on the anniversary of the acquisitions.

Wireline

The Wireline segment provides regulated and unregulated voice services, DSL internet access, and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of Pennsylvania.
22

   
Sept. 30,
   
Dec. 31,
   
Sept. 30,
   
Dec. 31,
 
   
2014
   
2013
   
2013
   
2012
 
Telephone Access Lines
   
21,742
     
22,106
     
22,257
     
22,342
 
Long Distance Subscribers
   
9,645
     
9,851
     
9,920
     
10,157
 
Video Customers
   
5,787
     
6,342
     
6,405
     
6,719
 
DSL Subscribers
   
12,708
     
12,632
     
12,559
     
12,611
 
Fiber Route Miles
   
1,459
     
1,452
     
1,434
     
1,420
 
Total Fiber Miles (1)
   
85,398
     
85,135
     
84,487
     
84,107
 

(1) Total fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.

Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013

   
Three Months Ended
September 30,
   
Change
 
(in thousands)
 
2014
   
2013
   
$
   
%
 
Segment operating revenues
                   
Service revenue
 
$
5,627
   
$
5,587
   
$
40
     
0.7
 
Access revenue
   
3,098
     
3,177
     
(79
)
   
(2.5
)
Facility lease revenue
   
6,284
     
5,456
     
828
     
15.2
 
Equipment revenue
   
17
     
14
     
3
     
21.4
 
Other revenue
   
898
     
797
     
101
     
12.7
 
Total segment operating revenues
   
15,924
     
15,031
     
893
     
5.9