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EX-31.2 - EXHIBIT 31.2 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex31_2.htm
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EX-32 - EXHIBIT 32 - SHENANDOAH TELECOMMUNICATIONS CO/VA/ex32.htm

UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to __________

Commission File No.: 000-09881


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

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

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

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



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes     No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☑
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 

The number of shares of the registrant’s common stock outstanding on July 23, 2015 was 24,198,020.
 


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
 
June 30,
2015
   
December 31,
2014
 
         
Current Assets
       
Cash and cash equivalents
 
$
92,137
   
$
68,917
 
Accounts receivable, net
   
29,806
     
30,371
 
Income taxes receivable
   
-
     
14,752
 
Materials and supplies
   
5,708
     
8,794
 
Prepaid expenses and other
   
5,577
     
4,279
 
Deferred income taxes
   
1,174
     
1,211
 
Total current assets
   
134,402
     
128,324
 
                 
Investments, including $2,752 and $2,661 carried at fair value
   
10,526
     
10,089
 
                 
Property, plant and equipment, net
   
402,877
     
405,907
 
                 
Other Assets
               
Intangible assets, net
   
67,535
     
68,260
 
Deferred charges and other assets, net
   
6,917
     
6,662
 
Other assets, net
   
74,452
     
74,922
 
Total assets
 
$
622,257
   
$
619,242
 

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
 
June 30,
2015
   
December 31, 2014
 
         
Current Liabilities
       
Current maturities of long-term debt
 
$
23,000
   
$
23,000
 
Accounts payable
   
9,410
     
11,151
 
Advanced billings and customer deposits
   
11,373
     
12,375
 
Accrued compensation
   
3,480
     
5,466
 
Income taxes payable
   
499
     
-
 
Accrued liabilities and other
   
7,926
     
7,162
 
Total current liabilities
   
55,688
     
59,154
 
                 
Long-term debt, less current maturities
   
189,750
     
201,250
 
                 
Other Long-Term Liabilities
               
Deferred income taxes
   
72,241
     
76,777
 
Deferred lease payable
   
7,686
     
7,180
 
Asset retirement obligations
   
7,522
     
6,928
 
Other liabilities
   
9,653
     
9,607
 
Total other long-term liabilities
   
97,102
     
100,492
 
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock
   
30,904
     
29,712
 
Accumulated other comprehensive income
   
541
     
1,122
 
Retained earnings
   
248,272
     
227,512
 
Total shareholders’ equity
   
279,717
     
258,346
 
                 
Total liabilities and shareholders’ equity
 
$
622,257
   
$
619,242
 
 
See accompanying notes to unaudited consolidated financial statements.
 
4

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

 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                 
Operating revenues
 
$
85,701
   
$
81,416
     
169,989
   
$
161,868
 
                                 
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
30,280
     
32,403
     
60,970
     
64,639
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
19,008
     
16,625
     
37,742
     
33,773
 
Depreciation and amortization
   
17,663
     
16,595
     
34,001
     
31,983
 
Total operating expenses
   
66,951
     
65,623
     
132,713
     
130,395
 
Operating income
   
18,750
     
15,793
     
37,276
     
31,473
 
                                 
Other income (expense):
                               
Interest expense
   
(1,940
)
   
(2,065
)
   
(3,855
)
   
(4,112
)
Gain on investments, net
   
98
     
114
     
200
     
96
 
Non-operating income, net
   
442
     
459
     
874
     
1,086
 
Income before income taxes
   
17,350
     
14,301
     
34,495
     
28,543
 
                                 
Income tax expense
   
6,876
     
5,686
     
13,735
     
11,312
 
Net income
 
$
10,474
   
$
8,615
   
$
20,760
   
$
17,231
 
                                 
Other comprehensive income:
                               
Unrealized gain (loss) on interest rate hedge, net of tax
   
326
     
(913
)
   
(581
)
   
(1,260
)
Comprehensive income
 
$
10,800
   
$
7,702
   
$
20,179
   
$
15,971
 
                                 
Earnings per share:
                               
Basic
 
$
0.43
   
$
0.36
   
$
0.86
   
$
0.72
 
Diluted
 
$
0.43
   
$
0.35
   
$
0.85
   
$
0.71
 
                                 
Weighted average shares outstanding, basic
   
24,190
     
24,102
     
24,172
     
24,080
 
                                 
Weighted average shares outstanding, diluted
   
24,502
     
24,320
     
24,463
     
24,271
 
 
See accompanying notes to unaudited consolidated financial statements.
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
   
Total
 
Balance, December 31, 2013
   
24,040
   
$
26,759
   
$
204,962
   
$
2,594
   
$
234,315
 
                                         
Net income
   
-
     
-
     
33,883
     
-
     
33,883
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(1,472
)
   
(1,472
)
Dividends declared ($0.47 per share)
   
-
     
-
     
(11,333
)
   
-
     
(11,333
)
Dividends reinvested in common stock
   
19
     
572
     
-
     
-
     
572
 
Stock based compensation
   
-
     
2,624
     
-
     
-
     
2,624
 
Common stock issued through exercise of incentive stock  options
   
51
     
1,141
     
-
     
-
     
1,141
 
Common stock issued for share awards
   
81
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
6
     
-
     
-
     
6
 
Common stock repurchased
   
(60
)
   
(1,785
)
   
-
     
-
     
(1,785
)
Net excess tax benefit from stock options exercised
   
-
     
395
     
-
     
-
     
395
 
                                         
Balance, December 31, 2014
   
24,132
   
$
29,712
   
$
227,512
   
$
1,122
   
$
258,346
 
                                         
Net income
   
-
     
-
     
20,760
     
-
     
20,760
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(581
)
   
(581
)
Stock based compensation
   
-
     
1,662
     
-
     
-
     
1,662
 
Stock options exercised
   
23
     
525
     
-
     
-
     
525
 
Common stock issued for share awards
   
87
     
-
     
-
     
-
     
-
 
Common stock issued
   
1
     
5
     
-
     
-
     
5
 
Common stock repurchased
   
(45
)
   
(1,450
)
   
-
     
-
     
(1,450
)
Net excess tax benefit from stock options exercised
   
-
     
450
     
-
     
-
     
450
 
 
Balance, June 30, 2015
   
24,198
   
$
30,904
   
$
248,272
   
$
541
   
$
279,717
 

See accompanying notes to unaudited consolidated financial statements.
 
6

SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
Six Months Ended
June 30,
 
   
2015
   
2014
 
         
Cash Flows From Operating Activities
       
Net income
 
$
20,760
   
$
17,231
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
33,189
     
30,325
 
Amortization
   
812
     
1,658
 
Provision for bad debt
   
905
     
550
 
Stock based compensation expense
   
1,430
     
1,560
 
Excess tax benefits on stock awards
   
(450
)
   
(394
)
Deferred income taxes
   
(3,656
)
   
(4,983
)
Net (gain) loss on disposal of equipment
   
227
     
(313
)
Unrealized (gain) loss on investments
   
(54
)
   
(74
)
Net gains from patronage and equity investments
   
(385
)
   
(289
)
Amortization of long term debt issuance costs
   
289
     
300
 
Other
   
647
     
133
 
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
   
(339
)
   
(1,570
)
Materials and supplies
   
(414
)
   
3,120
 
Income taxes receivable
   
14,752
     
17,157
 
Other assets
   
(3,421
)
   
950
 
Increase (decrease) in:
               
Accounts payable
   
(2,911
)
   
2,367
 
Income taxes payable
   
499
     
-
 
Deferred lease payable
   
506
     
502
 
Other deferrals and accruals
   
(2,116
)
   
(1,654
)
 
Net cash provided by operating activities
 
$
60,270
   
$
66,576
 
                 
Cash Flows From Investing Activities
               
Acquisition of property, plant and equipment
 
$
(25,135
)
 
$
(32,804
)
Proceeds from sale of equipment
   
52
     
223
 
Cash distributions from investments
   
3
     
27
 
 
Net cash used in investing activities
 
$
(25,080
)
 
$
(32,554
)
 
(Continued)
 
7

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

   
Six Months Ended
June 30,
 
   
2015
   
2014
 
         
Cash Flows From Financing Activities
       
Principal payments on long-term debt
 
$
(11,500
)
 
$
-
 
Excess tax benefits on stock awards
   
450
     
394
 
Repurchases of stock
   
(1,450
)
   
(1,771
)
Proceeds from issuances of stock
   
530
     
1,124
 
 
Net cash used in financing activities
 
$
(11,970
)
 
$
(253
)
                 
Net increase in cash and cash equivalents
 
$
23,220
   
$
33,769
 
                 
Cash and cash equivalents:
               
Beginning
   
68,917
     
38,316
 
Ending
 
$
92,137
   
$
72,085
 
                 
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
 
Interest
 
$
3,782
   
$
3,930
 
                 
Income taxes paid (refunded)
 
$
2,139
   
$
(580
)

At June 30, 2015, accounts payable included approximately $1.2 million associated with capital expenditures. Cash flows for accounts payable and acquisition of property, plant and equipment exclude this activity.

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 audited consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  The balance sheet information at December 31, 2014 was derived from the audited December 31, 2014 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):

   
June 30,
2015
   
December 31, 2014
 
Plant in service
 
$
692,038
   
$
675,321
 
Plant under construction
   
22,550
     
18,078
 
     
714,588
     
693,399
 
Less accumulated amortization and depreciation
   
311,711
     
287,492
 
Net property, plant and equipment
 
$
402,877
   
$
405,907
 

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 the 696 thousand and 694 thousand shares and options outstanding at June 30, 2015 and 2014, respectively, 79 thousand and zero were anti-dilutive, respectively.  These shares and options have been excluded from the computations of diluted earnings per share for their respective period.  There were no adjustments to net income for either period.

4.
Investments Carried at Fair Value

Investments include $2.8 million and $2.7 million of investments carried at fair value as of June 30, 2015 and December 31, 2014, respectively, consisting of equity, bond and money market mutual funds.  These investments were acquired under a rabbi trust arrangement related to the Company’s nonqualified Supplemental Executive Retirement Plan (the “SERP”). The Company purchases investments in the trust to mirror the investment elections of participants in the SERP; gains and losses on the investments in the trust are reflected as increases or decreases in the liability owed to the participants. During the six months ended June 30, 2015, the Company recognized $37 thousand in dividend and interest income from investments, and recorded net unrealized gains of $54 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 $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 $161.5 million as of June 30, 2015.  The outstanding notional amount decreases as the Company makes scheduled principal payments on the debt.

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

Amounts reported in accumulated other comprehensive income related to the interest rate 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 June 30, 2015, the Company estimates that $1.2 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 June 30, 2015 and December 31, 2014 (in thousands):

Derivatives
 
    
Fair Value as of
 
 
Balance Sheet
Location
 
June 30,
2015
   
December 31,
2014
 
         
Derivatives designated as hedging instruments:
       
 
Interest rate swap
Accrued liabilities and other
 
$
(1,167
)
 
$
(1,309
)
Deferred charges and other assets, net
   
2,065
     
3,180
 
Total derivatives designated as hedging instruments
 
$
898
   
$
1,871
 

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 six months ended June 30, 2015 (in thousands):
 
   
Gains and (Losses) on Cash Flow Hedges
   
Income Tax (Expense) Benefit
   
Accumulated Other Comprehensive Income
 
Balance as of December 31, 2014
 
$
1,871
   
$
(749
)
 
$
1,122
 
Other comprehensive loss before reclassifications
   
(1,771
)
   
711
     
(1,060
)
Amounts reclassified from accumulated other comprehensive income (to interest expense)
   
798
     
(319
)
   
479
 
Net current period other comprehensive loss
   
(973
)
   
392
     
(581
)
Balance as of June 30, 2015
 
$
898
   
$
(357
)
 
$
541
 

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 June 30, 2015

(in thousands)

   
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                       
Service revenues
 
$
48,749
   
$
22,117
   
$
4,889
   
$
-
   
$
-
   
$
75,755
 
Other
   
2,848
     
1,850
     
5,248
     
-
     
-
     
9,946
 
Total external revenues
   
51,597
     
23,967
     
10,137
     
-
     
-
     
85,701
 
Internal revenues
   
1,105
     
186
     
6,326
     
-
     
(7,617
)
   
-
 
Total operating revenues
   
52,702
     
24,153
     
16,463
     
-
     
(7,617
)
   
85,701
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
15,903
     
13,635
     
7,677
     
(16
)
   
(6,919
)
   
30,280
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,917
     
5,084
     
1,736
     
3,969
     
(698
)
   
19,008
 
Depreciation and amortization
   
8,612
     
5,859
     
3,083
     
109
     
-
     
17,663
 
Total operating expenses
   
33,432
     
24,578
     
12,496
     
4,062
     
(7,617
)
   
66,951
 
Operating income (loss)
 
$
19,270
   
$
(425
)
 
$
3,967
   
$
(4,062
)
 
$
-
   
$
18,750
 
 
11

Three months ended June 30, 2014

(in thousands)
 
   
Wireless
   
Cable (1)
   
Wireline (1)
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                       
Service revenues
 
$
47,868
   
$
18,981
   
$
4,795
   
$
-
   
$
-
   
$
71,644
 
Other
   
2,813
     
1,823
     
5,136
     
-
     
-
     
9,772
 
Total external revenues
   
50,681
     
20,804
     
9,931
     
-
     
-
     
81,416
 
Internal revenues
   
1,094
     
33
     
5,713
     
-
     
(6,840
)
   
-
 
Total operating revenues
   
51,775
     
20,837
     
15,644
     
-
     
(6,840
)
   
81,416
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
18,476
     
12,421
     
7,737
     
-
     
(6,231
)
   
32,403
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
7,657
     
4,735
     
1,493
     
3,349
     
(609
)
   
16,625
 
Depreciation and amortization
   
8,071
     
5,766
     
2,653
     
105
     
-
     
16,595
 
Total operating expenses
   
34,204
     
22,922
     
11,883
     
3,454
     
(6,840
)
   
65,623
 
Operating income (loss)
   
17,571
     
(2,085
)
   
3,761
     
(3,454
)
   
-
     
15,793
 

Six months ended June 30, 2015
 
(in thousands)
 
 
 
Wireless
   
Cable
   
Wireline
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                       
Service revenues
 
$
97,124
   
$
43,518
   
$
9,639
   
$
-
   
$
-
   
$
150,281
 
Other
   
5,878
     
3,613
     
10,217
     
-
     
-
     
19,708
 
Total external revenues
   
103,002
     
47,131
     
19,856
     
-
     
-
     
169,989
 
Internal revenues
   
2,209
     
334
     
12,192
     
-
     
(14,735
)
   
-
 
Total operating revenues
   
105,211
     
47,465
     
32,048
     
-
     
(14,735
)
   
169,989
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
32,090
     
27,253
     
15,011
     
-
     
(13,384
)
   
60,970
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
17,969
     
9,976
     
3,234
     
7,914
     
(1,351
)
   
37,742
 
Depreciation and amortization
   
16,444
     
11,338
     
6,007
     
212
     
-
     
34,001
 
Total operating expenses
   
66,503
     
48,567
     
24,252
     
8,126
     
(14,735
)
   
132,713
 
Operating income (loss)
   
38,708
     
(1,102
)
   
7,796
     
(8,126
)
   
-
     
37,276
 
 
Six months ended June 30, 2014
 
(in thousands)
 
 
 
Wireless
   
Cable (1)
   
Wireline (1)
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                       
Service revenues
 
$
95,100
   
$
37,855
   
$
9,515
   
$
-
   
$
-
   
$
142,470
 
Other
   
5,569
     
3,403
     
10,426
     
-
     
-
     
19,398
 
Total external revenues
   
100,669
     
41,258
     
19,941
     
-
     
-
     
161,868
 
Internal revenues
   
2,184
     
59
     
11,478
     
-
     
(13,721
)
   
-
 
Total operating revenues
   
102,853
     
41,317
     
31,419
     
-
     
(13,721
)
   
161,868
 
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
   
37,132
     
24,811
     
15,219
     
-
     
(12,523
)
   
64,639
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
16,089
     
9,381
     
2,737
     
6,764
     
(1,198
)
   
33,773
 
Depreciation and amortization
   
15,268
     
11,170
     
5,350
     
195
     
-
     
31,983
 
Total operating expenses
   
68,489
     
45,362
     
23,306
     
6,959
     
(13,721
)
   
130,395
 
Operating income (loss)
   
34,364
     
(4,045
)
   
8,113
     
(6,959
)
   
-
     
31,473
 

(1) Prior year service and other revenue amounts have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue.
 
12

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

   
Three Months Ended
June 30,
 
(in thousands)
 
2015
   
2014
 
Total consolidated operating income
 
$
18,750
   
$
15,793
 
Interest expense
   
(1,940
)
   
(2,065
)
Non-operating income, net
   
540
     
573
 
Income before taxes
 
$
17,350
   
$
14,301
 

   
Six Months Ended
June 30,
 
   
2015
   
2014
 
Total consolidated operating income
 
$
37,276
   
$
31,473
 
Interest expense
   
(3,855
)
   
(4,112
)
Non-operating income, net
   
1,074
     
1,182
 
Income before taxes
 
$
34,495
   
$
28,543
 

The Company’s assets by segment are as follows:

(in thousands)
 
June 30,
2015
   
December 31,
2014
 
Wireless
 
$
227,089
   
$
218,887
 
Cable
   
208,584
     
201,232
 
Wireline
   
98,003
     
98,081
 
Other
   
445,039
     
446,028
 
Combined totals
   
978,715
     
964,228
 
Inter-segment eliminations
   
(356,458
)
   
(344,986
)
Consolidated totals
 
$
622,257
   
$
619,242
 

8. Income Taxes

The Company files U.S. federal income tax returns and various state and local income tax returns.  Years prior to 2011 are no longer subject to examination. The Company is not subject to any state or federal income tax audits as of June 30, 2015.
 

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, 2014.  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, 2014, including the financial statements and related notes included therein.

General

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

* The Wireless segment provides digital wireless service as a Sprint PCS Affiliate to a portion of a four-state area covering the region from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia.  In this area, the Company is the exclusive provider of wireless mobility communications network products and services on the 800 and 1900 MHz bands under the Sprint brand.  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 June 30, 2015 Compared with the Three Months Ended June 30, 2014

The Company’s consolidated results for the second quarter of 2015 and 2014 are summarized as follows:

   
Three Months Ended
June 30,
   
Change
 
(in thousands)
 
2015
   
2014
   
$
   
%
 
Operating revenues
 
$
85,701
   
$
81,416
   
$
4,285
     
5.3
 
Operating expenses
   
66,951
     
65,623
     
1,328
     
2.0
 
Operating income
   
18,750
     
15,793
     
2,957
     
18.7
 
                                 
Interest expense
   
(1,940
)
   
(2,065
)
   
125
     
(6.1
)
Other income, net
   
540
     
573
     
(33
)
   
(5.8
)
Income before taxes
   
17,350
     
14,301
     
3,049
     
21.3
 
Income tax expense
   
6,876
     
5,686
     
1,190
     
20.9
 
Net income
 
$
10,474
   
$
8,615
   
$
1,859
     
21.6
 

Operating revenues

For the three months ended June 30, 2015, operating revenues increased $4.3 million, or 5.3%. Cable segment revenue grew $3.3 million on higher internet and voice subscribers, a video price increase in January 2015, and internet customers upgrading to higher-priced plans. Wireless segment revenues increased $0.9 million compared to the second quarter of 2014. Net prepaid service revenue increased $1.2 million, driven by 6.3% subscriber growth, but was partially offset by a $0.4 million decline in net postpaid service revenues that resulted from lower revenue service plans associated with handset financing and leasing plans. Wireline segment revenue increased $0.8 million, primarily due to growth in fiber contracts.

Operating expenses

Total operating expenses were $67.0 million in the second quarter of 2015 compared to $65.6 million in the prior year period.  Cost of goods and services sold decreased $2.1 million, primarily due to a $3.1 million decrease in PCS postpaid handset costs, partially offset by a $1.0 million increase in cable programming costs. Selling, general and administrative expenses increased $2.4 million, including increases of $0.6 million to support the wireless prepaid business, $0.6 million to support marketing and selling functions in other areas of the business, $0.6 million for professional services, and $0.4 million related to growth in customer service and bad debt expenses. Depreciation and amortization expense increased $1.1 million, primarily due to ongoing projects to expand and upgrade the wireless, cable and fiber networks.

Income tax expense

The Company’s effective tax rate decreased from 39.8% for the three months ended June 30, 2014 to 39.6% for the three months ended June 30, 2015.  For the remainder of 2015, the Company expects that its effective tax rate, without unanticipated adjustments, will be approximately 40.0%.

Net income

For the three months ended June 30, 2015, net income increased $1.9 million, or 21.6%, primarily reflecting growth in Cable and Wireless segment operating results, offset by higher income tax expenses.
 
15

Six Months Ended June 30, 2015 Compared with the Six Months Ended June 30, 2014

Consolidated Results

The Company’s consolidated results for the first six months of 2015 and 2014 are summarized as follows:

 
(in thousands)
 
Six Months Ended
June 30,
   
Change
 
   
2015
   
2014
   
$
   
%
 
Operating revenues
 
$
169,989
   
$
161,868
   
$
8,121
     
5.0
 
Operating expenses
   
132,713
     
130,395
     
2,318
     
1.8
 
Operating income
   
37,276
     
31,473
     
5,803
     
18.4
 
                                 
Interest expense
   
(3,855
)
   
(4,112
)
   
257
     
(6.3
)
Other income (expense), net
   
1,074
     
1,182
     
(108
)
   
(9.1
)
Income before taxes
   
34,495
     
28,543
     
5,952
     
20.9
 
Income tax expense
   
13,735
     
11,312
     
2,423
     
21.4
 
Net income
 
$
20,760
   
$
17,231
   
$
3,529
     
20.5
 

Operating revenues

For the six months ended June 30, 2015, operating revenues increased $8.1 million, or 5.0%. Cable segment service revenue grew $5.7 million as a result of a 6.4% growth in average subscriber counts and an increase in revenue per subscriber. Wireless segment revenues increased $2.3 million compared to the first six months of 2014 primarily due to growth in net prepaid service revenue. Wireline segment revenues increased by $0.6 million due to growth of internet service revenue and fiber revenues.

Operating expenses

Total operating expenses were $132.7 million in the six months ended June 30, 2015 compared to $130.4 million in the prior year period.  Cost of goods and services sold decreased $3.7 million, primarily due to a $5.8 million decrease in PCS postpaid handset costs, partially offset by a $2.3 million increase in cable programming costs. Selling, general and administrative expenses increased $4.0 million, including increases of $1.5 million to support the wireless prepaid business, $1.1 million for professional services, $0.6 million of property and other operating taxes, and $0.4 million related to growth in bad debt expenses. Depreciation and amortization expense increased $2.0 million, primarily due to ongoing projects to expand and upgrade the wireless, cable and fiber networks.

Income tax expense

The Company’s effective tax rate increased from 39.6% for the six months ended June 30, 2014 to 39.8% for the six months ended June 30, 2015.  For the remainder of 2015, the Company expects that its effective tax rate, without unanticipated adjustments, will be approximately 40.0%.

Net income

For the six months ended June 30, 2015, net income increased $3.5 million, or 20.5%, primarily reflecting growth in subscriber counts in the Wireless and Cable segments, offset by higher depreciation expense and costs associated with prepaid wireless programs.

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”).
 
16

PCS receives revenues from Sprint for subscribers that obtain service in PCS’s network coverage area.  PCS relies on Sprint to provide timely, accurate and complete information to record the appropriate revenue for each financial period.  Postpaid revenues received from Sprint are recorded net of certain fees retained by Sprint.  These fees total 22% of net postpaid billed revenue, as defined in the Sprint PCS affiliate agreement.

The Company offers prepaid wireless products and services in its PCS network coverage area.  Sprint retains a 6% Management Fee on prepaid revenues.  Prepaid revenues received from Sprint are reported net of the cost of this fee.  Other fees charged on a per unit basis are separately recorded as expenses according to the nature of the expense.  The Company pays handset subsidies to Sprint for the difference between the selling price of prepaid handsets and their cost, in aggregate and as a net cost included in cost of goods sold.  The revenue and expense components reported to us by Sprint are based on Sprint’s national averages for prepaid services, rather than being specifically determined by customers assigned to our geographic service areas.

In April 2014, the Company’s PCS stores began participating in Sprint’s postpaid 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. In the second quarter of 2015, approximately 65% of postpaid handset transactions through Company channels involved a financing plan. All else being equal, the service plans for these subscribers generate less monthly service revenue compared to plans with a subsidized handset.

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

   
June 30,
2015
   
December 31,
2014
   
June 30,
2014
   
December 31,
2013
 
Retail PCS Subscribers – Postpaid
   
296,492
     
287,867
     
277,673
     
273,721
 
Retail PCS Subscribers – Prepaid
   
145,431
     
145,162
     
138,176
     
137,047
 
PCS Market POPS (000) (1)
   
2,421
     
2,415
     
2,406
     
2,397
 
PCS Covered POPS (000) (1)
   
2,213
     
2,207
     
2,100
     
2,067
 
CDMA Base Stations (sites)
   
546
     
537
     
528
     
526
 
Towers Owned
   
154
     
154
     
154
     
153
 
Non-affiliate Cell Site Leases (2)
   
202
     
198
     
195
     
217
 

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                 
Gross PCS Subscriber Additions - Postpaid
   
17,734
     
15,898
     
34,839
     
31,483
 
Net PCS Subscriber Additions - Postpaid
   
5,414
     
2,648
     
8,625
     
3,952
 
Gross PCS Subscriber Additions - Prepaid
   
19,958
     
15,286
     
43,578
     
34,485
 
Net PCS Subscriber Additions (Losses) - Prepaid
   
(2,352
)
   
(361
)
   
269
     
1,129
 
PCS Average Monthly Retail Churn % - Postpaid (3)
   
1.40
%
   
1.60
%
   
1.50
%
   
1.67
%
PCS Average Monthly Retail Churn % - Prepaid (3)
   
5.07
%
   
3.78
%
   
4.92
%
   
4.03
%

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. Covered POPS increased in 2014 primarily as a result of the Company’s deployment of the 800 megahertz spectrum at existing cell sites.
2) The decreases during 2014 are 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 June 30, 2015 Compared with the Three Months Ended June 30, 2014

(in thousands)
 
 
Three Months Ended
June 30,
   
Change
 
   
2015
   
2014
   
$
   
%
 
Segment operating revenues
                   
Wireless service revenue
 
$
48,749
   
$
47,868
   
$
881
     
1.8
 
Tower lease revenue
   
2,592
     
2,466
     
126
     
5.1
 
Equipment revenue
   
1,286
     
1,306
     
(20
)
   
(1.5
)
Other revenue
   
75
     
135
     
(60
)
   
(44.4
)
Total segment operating revenues
   
52,702
     
51,775
     
927
     
1.8
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
15,903
     
18,476
     
(2,573
)
   
(13.9
)
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
8,917
     
7,657
     
1,260
     
16.5
 
Depreciation and amortization
   
8,612
     
8,071
     
541
     
6.7
 
Total segment operating expenses
   
33,432
     
34,204
     
(772
)
   
(2.3
)
Segment operating income
 
$
19,270
   
$
17,571
   
$
1,699
     
9.7
 
 
Operating revenues

Wireless service revenue increased $0.9 million, or 1.8%, for the three months ended June 30, 2015, compared to the comparable 2014 period.  Net prepaid service revenues grew $1.2 million, or 11.1%, due to 6.3% growth in average prepaid subscribers over 2014 and improved product mix. Net postpaid service revenues decreased $0.4 million. Average postpaid subscribers increased 6.4% in 2015 over the 2014 period, but was more than offset by a switch to lower revenue service plans associated with handset financing plans.  Under these programs, the Company receives less service revenue from the subscriber, while the equipment revenue from the subscriber and the handset expense become Sprint’s responsibility and are not recorded by the Company.  The decreases in service revenues are currently more than offset by a decrease in handset expense within cost of goods and services.

Cost of goods and services

Cost of goods and services decreased $2.6 million, or 13.9%, in 2015 from the second quarter of 2014. Postpaid handset costs decreased $3.1 million, as handset expenses associated with financing and leasing plans are Sprint’s responsibility and are not recorded by the Company. Prepaid handset costs increased $0.3 million due to an increase in gross prepaid subscriber additions.  Network costs increased $0.2 million, driven by increases in rent and power expenses.

Selling, general and administrative

Selling, general and administrative costs increased $1.3 million, or 16.5%, in the second quarter of 2015 from the comparable 2014 period.  Advertising expenses grew $0.4 million. Costs to support the prepaid subscriber base grew $0.3 million, driven by subscriber growth, product mix, and higher expense rates. Costs associated with the addition of prepaid subscribers increased $0.3 million, driven by a 30.6% increase in prepaid gross additions over the prior year quarter. Personnel costs and other retail store expenses increased $0.3 million due to the addition of new stores.

Depreciation and amortization

Depreciation and amortization increased $0.5 million, or 6.7%, in the second quarter of 2015 over the comparable 2014 period. Depreciation expense grew $0.7 million due to ongoing investments in wireless network coverage and capacity. The increase was partially offset by a $0.2 million decline in amortization expense.
 
18

Six Months Ended June 30, 2015 Compared with the Six Months Ended June 30, 2014

(in thousands)
 
 
Six Months Ended
June 30,
   
Change
 
   
2015
   
2014
   
$
   
%
 
                     
Segment operating revenues
                   
Wireless service revenue
 
$
97,124
   
$
95,100
   
$
2,024
     
2.1
 
Tower lease revenue
   
5,162
     
5,030
     
132
     
2.6
 
Equipment revenue
   
2,767
     
2,503
     
264
     
10.5
 
Other revenue
   
158
     
220
     
(62
)
   
(28.2
)
Total segment operating revenues
   
105,211
     
102,853
     
2,358
     
2.3
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
32,090
     
37,132
     
(5,042
)
   
(13.6
)
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
17,969
     
16,089
     
1,880
     
11.7
 
Depreciation and amortization
   
16,444
     
15,268
     
1,176
     
7.7
 
Total segment operating expenses
   
66,503
     
68,489
     
(1,986
)
   
(2.9
)
Segment operating income
 
$
38,708
   
$
34,364
   
$
4,344
     
12.6
 

Operating revenues

Wireless service revenue increased $2.0 million, or 2.1%, for the six months ended June 30, 2015, compared to the comparable 2014 period.  Net prepaid service revenues grew $2.2 million, or 9.9%, due primarily to 6.3% growth in average prepaid subscribers over 2014. Net postpaid service revenues decreased $0.1 million.  Average postpaid subscribers increased 5.9% in 2015 over the 2014 period, but was largely offset by a switch to lower revenue service plans associated with handset financing plans.  Under these programs, the Company receives less service revenue from the subscriber, while the equipment revenue from the subscriber and the handset expense become Sprint’s responsibility and are not recorded by the Company.  The decreases in service revenues are currently more than offset by a decrease in handset expense within cost of goods and services.

Equipment revenue increased due primarily to lower discounts on subsidized handset sales.

Cost of goods and services

Cost of goods and services decreased $5.0 million, or 13.6%, in 2015 from the first half of 2014. Postpaid handset costs decreased $5.8 million, as handset expenses associated with financing and leasing plans are Sprint’s responsibility and are not recorded by the Company. Prepaid handset costs increased $0.3 million due to an increase in gross prepaid subscriber additions. The prior year period included a one-time $0.4 million gain on disposal of 3G equipment.

Selling, general and administrative

Selling, general and administrative costs increased $1.9 million, or 11.7%, in the first six months of 2015 from the comparable 2014 period.  Costs to support the prepaid subscriber base grew $1.5 million, driven by subscriber growth, product mix, and higher expense rates. Advertising expenses increased $0.6 million. Personnel costs increased $0.3 million due to the addition of new retail stores.  The increases were partially offset by a $0.8 million decline in third party commissions expense due to lower volume of commissionable handsets activated through dealer channels.

Depreciation and amortization

Depreciation and amortization increased $1.2 million, or 7.7%, in the first six months of 2015 over the comparable 2014 period. Depreciation expense grew $1.6 million due to ongoing investments in wireless network coverage and capacity. The increase was partially offset by a $0.4 million decline in amortization expense.
 
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.
 
   
June 30,
2015
   
December 31,
2014
   
June 30,
2014
   
December 31,
2013
 
Homes Passed (1)
   
172,144
     
171,589
     
171,147
     
170,470
 
Customer Relationships (2)
                               
Video customers
   
48,659
     
49,247
     
50,159
     
51,197
 
Non-video customers
   
22,810
     
22,051
     
19,730
     
18,341
 
Total customer relationships
   
71,469
     
71,298
     
69,889
     
69,538
 
Video
                               
Customers (3)
   
50,892
     
52,095
     
51,699
     
53,076
 
Penetration (4)
   
29.6
%
   
30.4
%
   
30.2
%
   
31.1
%
Digital video penetration (5)
   
73.8
%
   
65.9
%
   
63.6
%
   
49.2
%
High-speed Internet
                               
Available Homes (6)
   
172,144
     
171,589
     
168,923
     
168,255
 
Customers (3)
   
53,097
     
51,359
     
48,096
     
45,776
 
Penetration (4)
   
30.8
%
   
29.9
%
   
28.5
%
   
27.2
%
Voice
                               
Available Homes (6)
   
169,407
     
168,852
     
166,186
     
163,282
 
Customers (3)
   
19,401
     
18,262
     
16,426
     
14,988
 
Penetration (4)
   
11.5
%
   
10.8
%
   
9.9
%
   
9.2
%
Total Revenue Generating Units (7)
   
123,390
     
121,716
     
116,221
     
113,840
 
Fiber Route Miles
   
2,839
     
2,834
     
2,463
     
2,636
 
Total Fiber Miles (8)
   
73,735
     
72,694
     
70,772
     
69,296
 

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

Three Months Ended June 30, 2015 Compared with the Three Months Ended June 30, 2014

(in thousands)
 
 
Three Months Ended
June 30,
   
Change
 
   
2015
   
2014
   
$
   
%
 
                     
Segment operating revenues
                   
Service revenue (1)
 
$
22,117
   
$
18,981
   
$
3,136
     
16.5
 
Other revenue (1)
   
2,036
     
1,856
     
180
     
9.7
 
Total segment operating revenues
   
24,153
     
20,837
     
3,316
     
15.9
 
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
13,635
     
12,421
     
1,214
     
9.8
 
Selling, general, and administrative, exclusive of depreciation and amortization shown separately below
   
5,084
     
4,735
     
349
     
7.4
 
Depreciation and amortization
   
5,859
     
5,766
     
93
     
1.6
 
Total segment operating expenses
   
24,578
     
22,922
     
1,656
     
7.2
 
Segment operating loss
 
$
(425
)
 
$
(2,085
)
 
$
1,660
     
79.6
 

(1) Prior year service and other revenue amounts have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue.

Operating revenues

Cable segment service revenue increased $3.1 million, or 16.5%. Internet service revenue increased $2.1 million, or 31.1%, due to a 10.4% increase in average internet subscribers, along with an improved product mix as customers upgrade to higher-speed plans. Video revenue, including retransmission consent fee surcharges, increased $1.1 million, driven by video rate increases in January 2015 and new customers selecting higher-priced digital TV services. Voice revenue increased $0.4 million due to 19.5% growth in average voice revenue generating units. These increases were partially offset by a $0.7 million increase in bundle discounts.

Other revenue grew $0.2 million, primarily due to new fiber contracts.

Operating expenses

Cable segment cost of goods and services increased $1.2 million, or 9.8%, in the second quarter of 2015 over the comparable 2014 period. Video programming costs, including retransmission consent fees, increased $1.0 million as the impact of rising rates per subscriber outpaced declining video subscriber counts.

Selling, general and administrative expenses grew $0.3 million against the prior year quarter as growth in bad debt expense, administrative expenses and operating taxes was partially offset by a decline in marketing and selling costs.
 
21

Six Months Ended June 30, 2015 Compared with the Six Months Ended June 30, 2014

 
(in thousands)
 
Six Months Ended
June 30,
   
Change
 
   
2015
   
2014
   
$
   
%
 
                     
Segment operating revenues
                   
Service revenue (1)
 
$
43,518
   
$
37,855
   
$
5,663
     
15.0
 
Other revenue (1)
   
3,947
     
3,462
     
485
     
14.0
 
Total segment operating revenues
   
47,465
     
41,317
     
6,148
     
14.9
 
 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
   
27,253
     
24,811
     
2,442
     
9.8
 
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
   
9,976
     
9,381
     
595
     
6.3
 
Depreciation and amortization
   
11,338
     
11,170
     
168
     
1.5
 
Total segment operating expenses
   
48,567
     
45,362
     
3,205
     
7.1
 
Segment operating loss
 
$
(1,102
)
 
$
(4,045
)
 
$
2,943
     
72.8
 

(1) Prior year service and other revenue amounts have been recast to conform to the current year presentation of video and internet equipment revenues being included in service revenue rather than other revenue

Operating revenues

Cable segment service revenue increased $5.7 million, or 15.0%. Internet service revenue increased $4.2 million, or 32.2%, due to a 10.8% increase in average internet subscribers, along with an improved product mix as customers upgrade to higher-speed plans. Video revenue, including retransmission consent fee surcharges, increased $1.9 million driven by video rate increases in January 2015 and new customers selecting higher-priced digital TV services. Voice revenue increased $0.7 million due to 20.6% growth in average voice revenue generating units. These increases were partially offset by a $1.6 million increase in bundle discounts.

Other revenue grew $0.5 million, primarily due to new fiber contracts.

Operating expenses

Cable segment cost of goods and services increased $2.4 million, or 9.8%, in the six months ended June 30, 2015 over the comparable 2014 period. Video programming costs, including retransmission consent fees, increased $2.3 million as the impact of rising rates per subscriber outpaced declining video subscriber counts.

Selling, general and administrative expenses grew $0.6 million against the prior year period as growth in administrative, bad debt and operating tax expenses was partially offset by a decline in customer service costs.

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

   
June 30,
2015
   
Dec. 31,
2014
   
June 30,
2014
   
Dec. 31,
2013
 
Telephone Access Lines
   
21,615
     
21,612
     
21,842
     
22,106
 
Long Distance Subscribers
   
9,560
     
9,571
     
9,730
     
9,851
 
Video Customers(1)
   
5,473
     
5,692
     
5,904
     
6,342
 
DSL Subscribers
   
12,856
     
12,742
     
12,707
     
12,632
 
Fiber Route Miles
   
1,590
     
1,556
     
1,455
     
1,452
 
Total Fiber Miles (2)
   
102,821
     
99,387
     
85,348
     
84,600
 

1) The Wireline segment’s video service passes approximately 16,000 homes.
2) 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 revised following a review of fiber records in the first quarter of 2015.
 
Three Months Ended June 30, 2015 Compared with the Three Months Ended June 30, 2014

   
Three Months Ended
June 30,
   
Change
 
(in thousands)
 
2015
   
2014
   
$
   
%
 
Segment operating revenues
                   
Service revenue (1)
 
$
5,530
   
$
5,301
   
$
229
     
4.3
 
Carrier access and fiber revenues (1)
   
10,151
     
9,639
     
512
     
5.3
 
Other revenue (1)
   
782
     
704
     
78