10-Q 1 form10q.htm SHENANDOAH TELECOMMUNICATIONS 10-Q 6-30-2009 form10q.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 June 30, 2009
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
 
 
For the transition period from__________ to __________
 

Commission File No.: 000-09881

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

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

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

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

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

The number of shares of the registrant’s common stock outstanding on July 24, 2009 was 23,639,517.


 


 
1

 
 
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
 

   
Page
Numbers
     
PART I.
FINANCIAL INFORMATION
 
     
Item 1
Financial Statements
 
     
 
3-4
     
 
5
     
 
6
     
 
7-8
     
 
9-14
     
Item 2.
15-27
     
Item 3.
27
     
Item 4.
28
     
PART II.
OTHER INFORMATION
 
     
Item 1A.
29
     
Item 2.
29
     
Item 4.
29
     
Item 6.
30
     
 
31
     
 
32

 
2


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

 
ASSETS
 
June 30,
2009
   
December 31,
2008
 
             
             
Current Assets
           
Cash and cash equivalents
  $ 13,266     $ 5,240  
Accounts receivable, net
    16,921       16,131  
Vendor credits receivable
    178       5,232  
Income taxes receivable
          7,366  
Materials and supplies
    4,600       6,376  
Prepaid expenses and other
    2,512       2,283  
Assets held for sale
    10,782       28,310  
Deferred income taxes
    1,848       1,483  
Total current assets
    50,107       72,421  
                 
Investments, including $1,635 and $1,440 carried at fair value
    8,406       8,388  
                 
Property, Plant and Equipment
               
Plant in service
    336,598       323,096  
Plant under construction
    20,797       5,076  
      357,395       328,172  
Less accumulated amortization and depreciation
    166,284       151,695  
Net property, plant and equipment
    191,111       176,477  
                 
                 
Other Assets
               
Intangible assets, net
    2,871       3,163  
Cost in excess of net assets of businesses acquired
    4,547       4,547  
Deferred charges and other assets, net
    1,523       1,841  
Net other assets
    8,941       9,551  
Total assets
  $ 258,565     $ 266,837  
                 
 
See accompanying notes to unaudited condensed consolidated financial statements.

(Continued)
 
 
3


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

 LIABILITIES AND SHAREHOLDERS’ EQUITY
 
June 30, 
2009
   
December 31,
2008
 
             
Current Liabilities
           
Current maturities of long-term debt
  $ 5,703     $ 4,399  
Accounts payable
    6,823       5,607  
Advanced billings and customer deposits
    6,305       5,151  
Accrued compensation
    2,041       2,584  
Liabilities held for sale
    827       1,013  
Income taxes payable
    2,308       -  
Accrued liabilities and other
    5,189       5,631  
 Total current liabilities
    29,196       24,385  
                 
Long-term debt, less current maturities
    24,476       36,960  
                 
Other Long-Term Liabilities
               
Deferred income taxes
    23,416       29,505  
Deferred lease payable
    3,208       3,142  
Other liabilities
    8,665       6,533  
 Total other liabilities
    35,289       39,180  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock
    16,877       16,139  
Retained earnings
    155,233       152,706  
Accumulated other comprehensive loss, net of tax
    (2,506 )     (2,533 )
Total shareholders’ equity
    169,604       166,312  
                 
Total liabilities and shareholders’ equity
  $ 258,565     $ 266,837  
                 
                 
   
See accompanying notes to unaudited condensed consolidated financial statements.
 
   

 
4

 
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 
   
Three Months Ended
June 30, 2008
   
Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
                         
Operating revenues
  $ 40,140     $ 36,309     $ 80,241     $ 69,896  
                                 
Operating expenses:
                               
                                 
Cost of goods and services, exclusive of  depreciation and amortization shown separately below
    13,044       10,017       25,749       20,682  
Selling, general and administrative, exclusive of depreciation and amortization  shown separately below
    7,348       6,255       14,878       13,328  
Depreciation and amortization
    8,111       6,459       15,965       12,820  
Total operating expenses
    28,503       22,731       56,592       46,830  
Operating income
    11,637       13,578       23,649       23,066  
                                 
Other income (expense):
                               
Interest expense
    (405 )     (346 )     (935 )     (680 )
Gain (loss) on investments, net
    223       90       (404 )     (359 )
Non-operating income, net
    188       279       355       484  
Income from continuing operations before income taxes
    11,643       13,601       22,665       22,511  
                                 
                                 
Income tax expense
    4,828       5,596       9,693       9,106  
Net income from continuing operations
    6,815       8,005       12,972       13,405  
Loss from discontinued operations, net of tax (expense) benefits of $(363), $514, $6,391 and $928, respectively
    (75 )     (820 )     (10,445 )     (1,493 )
Net income
  $ 6,740     $ 7,185     $ 2,527     $ 11,912  
                                 
Basic and diluted income (loss) per share:
                               
                                 
Net income from continuing operations
  $ 0.29     $ 0.34     $ 0.55     $ 0.57  
Loss from discontinued operations
          (0.03 )     (0.44 )     (0.06 )
Net income
  $ 0.29     $ 0.31     $ 0.11     $ 0.51  
                                 
Weighted average shares outstanding,  basic
    23,637       23,533       23,629       23,527  
 
                               
Weighted average shares, diluted
    23,732       23,575       23,715       23,582  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
5

 
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
 
   
Shares
   
Common
Stock
   
Retained
Earnings
   
Accumulated Other 
Comprehensive 
Income (Loss)
   
Total
 
Balance, December 31, 2007, as previously reported
    23,509     $ 14,691     $ 136,667     $ (1,739 )     149,619  
Prior period adjustment (see note 3)
                (1,036 )           (1,036 )
Balance, December 31, 2007, as adjusted
    23,509     $ 14,691     $ 135,631     $ (1,739 )   $ 148,583  
Comprehensive income:
                                       
Net income
                24,145             24,145  
Reclassification adjustment for unrealized loss from pension plans included in net income, net of tax
                      137       137  
Net unrealized loss from pension plans,net of tax
                      (931 )     (931 )
Total comprehensive income
                                    23,351  
Dividends declared ($0.30 per share)
                (7,070 )           (7,070 )
Dividends reinvested in common stock
    24       550                   550  
Stock—based compensation
          161                   161  
Conversion of liability classified awards to equity classified awards
          65                   65  
Common stock issued through  exercise of incentive stock  options
    72       597                   597  
Net excess tax benefit from stock options exercised
          75                   75  
                                         
Balance, December 31, 2008
    23,605     $ 16,139     $ 152,706     $ (2,533 )   $ 166,312  
                                         
Comprehensive income:
                                       
Net income
                2,527             2,527  
Reclassification adjustment for unrealized loss from pension plansincluded in net income, net of tax
                      27       27  
Total comprehensive income
                                    2,554  
                                         
Stock—based compensation
          318                   318  
Conversion of liability classified awards to equity classified awards
          85                   85  
Common stock issued through exercise of incentive  stock  options
    32       277                   277  
Net excess tax benefit from stock optionsexercised
          58                   58  
                                         
Balance, June 30, 2009
    23,637     $ 16,877     $ 155,233     $ (2,506 )   $ 169,604  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
6


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

   
Six Months Ended
June 30,
 
   
2009
   
2008
 
             
Cash Flows from Operating Activities
           
Net income
  $ 2,527     $ 11,912  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Impairment on assets held for sale
    17,545        
Depreciation
    15,676       15,075  
Amortization
    289       326  
Stock based compensation expense
    296       (18 )
Excess tax benefits on stock option exercises
    (58 )     (45 )
Deferred income taxes
    (6,453 )     (1,253 )
Loss on disposal of assets
    285       127  
Realized losses on investments carried at fair value
    188       39  
Unrealized (gains) losses on investments carried at fair value
    (307 )     198  
Net (gain) loss from patronage and equity investments
    422       203  
Other
    1,978       (777 )
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
    (502 )     (1,951 )
Materials and supplies
    1,801       277  
Increase (decrease) in:
               
Accounts payable
    1,225       (1,156 )
Deferred lease payable
    64       119  
Other prepaids, deferrals and accruals
    9,656       3,452  
 
Net cash provided by operating activities
  $ 44,632     $ 26,528  
                 
Cash Flows From Investing Activities
               
Purchase and construction of plant and equipment
  $ (25,506 )   $ (18,734 )
Proceeds from sale of equipment
    66       108  
Purchase of investment securities
    (331 )     (337 )
Proceeds from investment activities
    10       72  
 
Net cash used in investing activities
  $ (25,761 )   $ (18,891 )
 
(Continued)
 
 
7


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
Six Months Ended
June 30,
 
   
2009
   
2008
 
             
Cash Flows From Financing Activities
           
Principal payments on long—term debt
  $ (13,180 )   $ (2,106 )
Amounts borrowed under debt agreements
    2,000        
Excess tax benefits on stock option exercises
    58       45  
Proceeds from exercise of incentive stock options
    277       186  
                 
Net cash provided by (used in) financing activities
  $ (10,845 )   $ (1,875 )
                 
Net increase in cash and cash equivalents
  $ 8,026     $ 5,762  
                 
Cash and cash equivalents:
               
Beginning
    5,240       17,245  
Ending
  $ 13,266     $ 23,007  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
                 
Interest
  $ 1,017     $ 805  
                 
Income taxes
  $ 189     $ 4,889  

During the six months ended June 30, 2009, the Company utilized $5,054 of vendor credits receivable to reduce cash paid for acquisitions of property, plant and equipment.

See accompanying notes to unaudited condensed consolidated financial statements.

 
8


SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES

1.  The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the “Company”) are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein.  All such adjustments were of a normal and recurring nature.  These statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  The balance sheet information at December 31, 2008 was derived from the audited December 31, 2008 consolidated balance sheet.
 
2.  Operating revenues and income from operations for any interim period are not necessarily indicative of results that may be expected for the entire year.
 
3.  During the second quarter of 2009, the Company determined that it had understated its asset retirement obligations relating to co-located cell sites beginning with the year ended December 31, 2003.  As a result, the Company has corrected its consolidated balance sheet as of December 31, 2008 and its consolidated income statements for the three months and six months ended June 30, 2008, included in this report.

The cumulative effect of this correction, net of tax effects, is a reduction of retained earnings of $1,036,000 as of the beginning of fiscal year 2008 and a decrease to net income of $65,000 and $130,000 for the three and six months ended June 30, 2008, respectively.

The corrections do not affect historical net cash flows from operating, investing or financing activities.

Following is a summary of the effects of these changes on the Company’s consolidated balance sheet as of December 31, 2008, as well as the effects of these changes on the Company’s consolidated statements of income for the three months and six months ended June 30, 2008; and the effects of these changes on the consolidated statement of shareholders’ equity and comprehensive income for the year ended December 31, 2008:
 
Consolidated Statements of Income
   
As Previously Reported
   
Adjustments
   
As Adjusted
 
   
(in thousands)
 
Three months ended June 30, 2008
                 
Cost of goods and services
  $ 9,967     $ 50     $ 10,017  
Depreciation and amortization
    6,400       59       6,459  
Total operating expenses
    22,622       109       22,731  
Operating income
    13,687       (109 )     13,578  
Income from continuing operations before income taxes
    13,710       (109 )     13,601  
Income tax expense
    5,640       (44 )     5,596  
Net income from continuing operations
    8,070       (65 )     8,005  
Net income
    7,250       (65 )     7,185  
                         
Six months ended June 30, 2008
                       
Cost of goods and services
  $ 20,582     $ 100     $ 20,682  
Depreciation and amortization
    12,702       118       12,820  
Total operating expenses
    46,612       218       46,830  
Operating income
    23,284       (218 )     23,066  
Income from continuing operations before income taxes
    22,729       (218 )     22,511  
Income tax expense
    9,194       (88 )     9,106  
Net income from continuing operations
    13,535       (130 )     13,405  
Net income
    12,042       (130 )     11,912  
 
 
9


Consolidated Balance Sheet
   
As Previously Reported
   
Adjustments
   
As Adjusted
 
   
(in thousands)
 
December 31, 2008
                 
Plant in service
  $ 321,044     $ 2,052     $ 323,096  
Accumulated amortization and depreciation
    150,499       1,196       151,695  
Net property, plant and equipment
    175,621       856       176,477  
Total assets
    265,981       856       266,837  
Deferred income taxes
    30,401       (896 )     29,505  
Other liabilities
    3,485       3,048       6,533  
Total other liabilities
    37,028       2,152       39,180  
Retained earnings
    154,002       (1,296 )     152,706  
Total shareholders’ equity
    167,608       (1,296 )     166,312  
Total liabilities and shareholders’ equity
    265,981       856       266,837  
 
Consolidated Statement of Shareholders’ Equity and Comprehensive Income
 
   
As Previously Reported
   
Adjustments
   
As Adjusted
 
         
(in thousands)
       
As of December 31, 2007
                 
Retained earnings
  $ 136,667     $ (1,036 )   $ 135,631  
Total stockholders’ equity
    149,619       (1,036 )     148,583  

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

The Company began an auction process with respect to the sale of the Converged Services assets in the fourth quarter of 2008.  The Company determined, both at September 30, 2008 and December 31, 2008, based on its analysis of similar transactions, comparable values for other companies in the industry, and the broad range of values indicated by potential buyers during the early stages of the auction process, that no write-down of the carrying value of the net assets held for sale was required.

Subsequently, in connection with the preparation of the Company’s first quarter 2009 financial statements, based upon changes in the marketplace for this type of asset and further developments in the auction process, the Company determined that the fair value of Converged Services had declined from earlier estimates.  Accordingly, the Company recorded an impairment loss of $17.5 million ($10.7 million, net of taxes) to reduce the carrying value of these assets to their estimated fair value less cost to sell as of March 31, 2009.  At June 30, 2009, negotiations to complete the sale continue, and there has been no change in the estimated fair value of the assets.

Assets and liabilities held for sale consisted of the following:

   
June 30, 2009
   
December 31, 2008
 
Assets held for sale:
           
Property, plant and equipment, net
  $ 7,577     $ 15,414  
Goodwill
          6,539  
Intangible assets, net
    915       1,931  
Deferred charges
    1,603       3,384  
Other assets
    687       1,042  
    $ 10,782     $ 28,310  
Liabilities:
               
Other liabilities
  $ 827     $ 1,013  
 
 
10

 
Discontinued operations included the following amounts of operating revenue and income (loss) before income taxes:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Operating revenues
  $ 3,354     $ 2,827     $ 6,910     $ 5,727  
Income (loss) before income taxes
  $ 288     $ (1,334 )   $ (16,836 )   $ (2,421 )

 
5.  Basic net income (loss) per share was computed on the weighted average number of shares outstanding.  Diluted net income (loss) per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period for all dilutive stock options.  During 2007, the Company issued approximately 68,000 performance share units that are “contingently issuable shares” under the treasury stock method.  Based upon the Company’s stock price during the thirty day periods prior to June 30, 2009 and 2008, these shares did not meet the threshold to be considered dilutive shares, and were excluded from the respective diluted net income per share computations. At June 30, 2009, approximately 57,000 share units were outstanding, while at June 30, 2008, approximately 61,000 performance share units were outstanding. During February 2009, the Company issued approximately 169,000 options to purchase shares at an exercise price of $25.26 per share.  Based upon the Company’s average daily closing price, these options were anti-dilutive and were excluded from the dilutive net income (loss) per share calculation for the three months and six months ended June 30, 2009.  There were no adjustments to net income.

6.  Investments include $1.6 million and $1.4 million of investments carried at fair value as of June 30, 2009 and December 31, 2008, 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 three months ended June 30, 2009, the Company contributed $23 thousand to the trust, recognized net losses on dispositions of investments of $7 thousand, recognized $9 thousand in dividend and interest income from investments, and recognized net unrealized gains of $204 thousand on these investments.  During the six months ended June 30, 2009, the Company contributed $64 thousand to the trust, recognized net losses on dispositions of investments of $188 thousand, recognized $18 thousand in dividend and interest income from investments, and recognized net unrealized gains of $300 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.

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

8.  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.  During 2009, the Company restructured its business segments to reflect changes in the Company’s corporate direction and strategy in response to changes in the economic environment and other factors.  The Company has three reportable segments, which the Company operates and manages as strategic business units organized by lines of business: (1) Wireless, (2) Wireline, and (3) Cable TV.   The Other column primarily includes Shenandoah Telecommunications Company, the parent holding company.  Prior period comparative information has been restated to conform to the current structure.

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

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

The Cable TV segment provides cable television services in Shenandoah County, Virginia, and beginning December 1, 2008, in various franchise areas in West Virginia and Alleghany County, Virginia.

 
11


Selected financial data for each segment is as follows:
 
Three months ended June 30, 2009
 
(In thousands)
 
   
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated Totals
 
External revenues
                                   
Service revenues
  $ 25,701     $ 3,324     $ 3,549     $     $     $ 32,574  
Access charges
          2,152                         2,152  
Facilities and tower lease
    1,109       1,398                         2,507  
Equipment
    1,169       53       24                   1,246  
Other
    434       987       240                   1,661  
Total external revenues
    28,413       7,914       3,813                   40,140  
Internal revenues
    647       3,059       8             (3,714 )      
Total operating revenues
    29,060       10,973       3,821             (3,714 )     40,140  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
    8,904       4,212       3,089       86       (3,247 )     13,044  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    3,948       1,770       1,275       822       (467 )     7,348  
                                                 
Depreciation and amortization
    4,971       2,183       874       83             8,111  
Total operating expenses
    17,823       8,165       5,238       991       (3,714 )     28,503  
Operating income (loss)
    11,237       2,808       (1,417 )     (991 )           11,637  
Non-operating income (expense)
    91       121       33       490       (324 )     411  
Interest expense
    (54 )     (60 )     (54 )     (561 )     324       (405 )
Income (loss) from continuing operations before  income taxes
    11,274       2,869       (1,438 )     (1,062 )           11,643  
Income taxes
    (4,667 )     (1,081 )     549       371             (4,828 )
Net income (loss) from continuing operations
  $ 6,607     $ 1,788     $ (889 )   $ (691 )   $     $ 6,815  
 
Three months ended June 30, 2008
 
(In thousands)
 
 
 
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated Totals
 
External revenues
                                   
Service revenues
  $ 22,510     $ 3,273     $ 1,197     $     $     $ 26,980  
Access charges
          2,320                         2,320  
Facilities and tower lease
    1,006       1,652                         2,658  
Equipment
    1,511       58       15                   1,584  
Other
    1,710       957       100                   2,767  
Total external revenues
    26,737       8,260       1,312                   36,309  
Internal revenues
    604       2,861       8             (3,473 )      
Total operating revenues
    27,341       11,121       1,320             (3,473 )     36,309  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
     8,181        3,842        932        94       (3,032 )      10,017  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
     3,634        1,958        331        773       (441 )      6,255  
Depreciation and amortization
    4,261       1,864       262       72             6,459  
Total operating expenses
    16,076       7,664       1,525       939       (3,473 )     22,731  
Operating income (loss)
    11,265       3,457       (205 )     (939 )           13,578  
                                                 
Non—operating income (expense)
    170       86       8       711       (606 )     369  
Interest expense
    (118 )     (121 )     (66 )     (647 )     606       (346 )
Income (loss) from continuing operations  before income taxes
    11,317       3,422       (263 )     (875 )           13,601  
Income taxes
    (4,667 )     (1,306 )     100       277             (5,596 )
Net income (loss) from continuing operations
  $ 6,650     $ 2,116     $ (163 )   $ (598 )   $     $ 8,005  
 

 
  12

 
Six months ended June 30, 2009

(In thousands)
 
   
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated Totals
 
External Revenues
                                   
Service revenues
  $ 51,061     $ 6,589     $ 7,155     $     $     $ 64,805  
Access charges
          4,576                         4,576  
Facilities and tower lease
    2,187       2,811                         4,998  
Equipment
    2,439       87       35                   2,561  
Other
    908       1,934       459                   3,301  
Total external revenues
    56,595       15,997       7,649                   80,241  
Internal Revenues
    1,269       6,128       16             (7,413 )      
Total operating revenues
    57,864       22,125       7,665             (7,413 )     80,241  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
    17,939       8,218       5,926       151       (6,485 )     25,749  
Selling, general and administrative, exclusive of  depreciation and amortization shown separately below 8,115
    3,439       2,457       1,795       (928 )     14,878          
Depreciation and amortization
    9,843       4,334       1,619       169             15,965  
Total operating expenses
    35,897       15,991       10,002       2,115       (7,413 )     56,592  
Operating income (loss)
    21,967       6,134       (2,337 )     (2,115 )           23,649  
Non—operating income (expense)
    68       102       20       385       (624 )     (49 )
Interest expense
    (167 )     (124 )     (91 )     (1,177 )     624       (935 )
Income (loss) from continuing operations before income taxes
    21,868       6,112       (2,408 )     (2,907 )           22,665  
Income taxes
    (9,065 )     (2,310 )     916       766             (9,693 )
Net income (loss) from continuing operations
  $ 12,803     $ 3,802     $ (1,492 )   $ (2,141 )   $     $ 12,972  
 
Six months ended June 30, 2008

(In thousands)
   
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated
Totals
 
External Revenues
                                   
Service revenues
  $ 43,562     $ 6,540     $ 2,403     $     $     $ 52,505  
Access charges
          4,813                         4,813  
Facilities and tower lease
    1,993       3,305                         5,298  
Equipment
    2,811       142       32                   2,985  
Other
    2,183       1,910       202                   4,295  
Total external revenues
    50,549       16,710       2,637                   69,896  
Internal Revenues
    1,199       5,833       16             (7,048 )      
Total operating revenues51
    51,748       22,543       2,653             (7,048 )     69,896  
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
    17,147       7,642       1,842       209       (6,158 )     20,682  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    8,268       3,685       648       1,617       (890 )     13,328  
Depreciation and amortization
    8,544       3,611       519       146             12,820  
Total operating expenses
    33,959       14,938       3,009       1,972       (7,048 )     46,830  
Operating income (loss)
    17,789       7,605       (356 )     (1,972 )           23,066  
                                                 
Non—operating income (expense)
    246       66       (3 )     977       (1,161 )     125  
Interest expense
    (202 )     (225 )     (131 )     (1,283 )     1,161       (680 )
Income (loss) from continuing operations before income taxes
    17,833       7,446       (490 )     (2,278 )           22,511  
Income taxes
    (7,368 )     (2,842 )     186       918             (9,106 )
Net income (loss) from continuing operations
  $ 10,465     $ 4,604     $ (304 )   $ (1,360 )   $     $ 13,405  
 
 
 
13

 
The Company’s assets by segment are as follows:
 
(In thousands)
 
 
 
 
June 30,
2009
   
December 31,
2008
 
             
             
Wireless
  $ 128,794     $ 121,453  
Wireline
    74,613       67,884  
Cable TV
    19,743       19,065  
Other (includes assets held for sale)
    182,578       196,932  
Combined totals
    405,728       405,334  
Inter-segment eliminations
    (147,163 )     (138,497 )
Consolidated totals
  $ 258,565     $ 266,837  
 
9. The Company files U.S. federal income tax returns and various state and local income tax returns.  With few exceptions, years prior to 2005 are no longer subject to examination.  No state or federal income tax audits were in process as of June 30, 2009.

10.  The Company has evaluated subsequent events for potential recognition and/or disclosure through August 3, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

 
14


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

This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements.  All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters are forward-looking statements.  We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct.  The Company’s actual results could be materially different from its expectations because of various factors, including those discussed below and under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2008.  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, 2008, 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 local exchange telephone services and wireless personal communications services (as a Sprint PCS Affiliate of Sprint Nextel), as well as cable television, video, Internet and data services, long distance, sale of telecommunications equipment, fiber optics facilities, paging and leased tower facilities. The Company has the following three reporting segments, which it operates and manages as strategic business units organized by lines of business:

·  
Wireless, which provides wireless personal communications services, or PCS, as a Sprint PCS Affiliate of Sprint Nextel, through Shenandoah Personal Communications Company, and tower facilities for personal communications services, leased to both affiliated and non-affiliated entities through Shenandoah Mobile Company;
 
·  
Wireline, which involves the provision of regulated and non-regulated telephone services, Internet access, and leased fiber optic facilities, primarily through Shenandoah Telephone Company, ShenTel Service Company, and Shenandoah Network Company, respectively, and long-distance and CLEC services through Shenandoah Long Distance Company, ShenTel Communications Company and Shentel Converged Services of West Virginia, Inc.; and
 
·  
Cable TV, which involves the provision of cable television services, through Shenandoah Cable Television Company in Shenandoah County, Virginia, and since December 1, 2008, in Alleghany County, Virginia and various locales throughout West Virginia, through Shentel Cable Company.
 
The Other category includes the provision of investments and management services to its subsidiaries, through Shenandoah Telecommunications Company.
 
In September 2008, the Company announced its intention to sell its Converged Services operation, and the related assets and liabilities were reclassified as held for sale in the consolidated balance sheet and the historical operating results were reclassified as discontinued operations.  Depreciation and amortization on long-lived assets was discontinued.

The Company began an auction process with respect to the sale of the Converged Services assets in the fourth quarter of 2008.  The Company determined, both at September 30, 2008 and December 31, 2008, based on its analysis of similar transactions, comparable values for other companies in the industry, and the broad range of values indicated by potential buyers during the early stages of the auction process, that no write-down of the carrying value of the net assets held for sale was required.
 
 
15

 
Subsequently, in connection with the preparation of the Company’s first quarter 2009 financial statements, based upon changes in the marketplace for this type of asset and further developments in the auction process, the Company determined that the fair value of Converged Services had declined from earlier estimates.  Accordingly, the Company recorded an impairment loss of $17.5 million ($10.7 million, net of taxes) to reduce the carrying value of these assets to their estimated fair value less cost to sell as of March 31, 2009.    At June 30, 2009, negotiations to complete the sale continue, and there has been no change in the estimated fair value of the assets.

Additional Information About the Company’s Business

The following table shows selected operating statistics of the Company for the three months ending on, or as of, the dates shown:

   
June 30,
   
Dec. 31,
   
June 30,
   
Dec. 31,
 
   
2009
   
2008
   
2008
   
2007
 
                         
Retail PCS Subscribers
    216,067       211,462       200,397       187,303  
PCS Market POPS (000) (1)
    2,324       2,310       2,308       2,297  
PCS Covered POPS (000) (1)
    1967       1,931       1,838       1,814  
PCS Average Monthly Retail Churn % (2)
    2.07 %     1.87 %     1.74 %     2.32 %
CDMA Base Stations (sites)
    432       411       364       346  
EVDO-enabled sites
    278       211       93       52  
EVDO Covered POPS (000) (1)
    1,858       1,663       1,041       624  
Towers (100 foot and over)
    108       103       101       101  
Towers (under 100 foot)
    17       15       15       14  
Telephone Access Lines
    24,046       24,209       24,325       24,536  
Total Switched Access Minutes (000)
    83,488       90,460       92,917       92,331  
Originating Switched Access Minutes (000)
    23,903       25,425       27,235       26,128  
Long Distance Subscribers
    10,769       10,842       10,840       10,689  
Long Distance Calls (000) (3)
    7,923       7,981       8,891       7,944  
Total Fiber Miles – Wireline
    47,654       46,733       39,260       35,872  
Fiber Route Miles – Wireline
    767       756       674       647  
DSL Subscribers
    10,526       10,038       8,951       8,136  
Dial-up Internet Subscribers
    4,417       5,151       6,287       7,547  
Cable Television Subscribers (4)
    25,260       25,369       8,193       8,303  
Employees (full time equivalents)
    465       445       414       411  

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 network’s service area.
2)  
PCS Average Monthly Retail Churn is the average of the three monthly subscriber turnover, or churn, calculations for the period.
3)  
Originated by customers of the Company’s Telephone subsidiary.
4)  
The increase at December 31, 2008 is primarily a result of the acquisition of cable customers from Rapid Communications, LLC, on December 1, 2008.
 
 
16


Results of Operations

Three Months Ended June 30, 2009 Compared with the Three Months Ended June 30, 2008

Consolidated Results

The Company’s consolidated results from continuing operations for the second quarter of 2009 and 2008 are summarized as follows:

(in thousands)
 
Three Months Ended
June 30,
   
Change
 
   
2009
   
2008
    $       %  
                           
Operating revenues
  $ 40,140     $ 36,309     $ 3,831       10.6  
Operating expenses
    28,503       22,731       5,772       25.4  
Operating income
    11,637       13,578       (1,941 )     (14.3 )
Other income (expense)
    6       23       (17 )     (73.9 )
Income tax expense
    4,828       5,596       (768 )     (13.7 )
Net income from continuing operations
  $ 6,815     $ 8,005     $ (1,190 )     (14.9 )

Operating revenues

For the three months ended June 30, 2009, operating revenue increased $3.8 million, or 10.6%, primarily due to increased service revenue in the Wireless segment and the additional revenue from the Shentel Cable acquisition in late 2008. For the quarter ended June 30, 2009, Wireless operating revenues increased $1.7 million, or 6.3%, while Cable TV segment operating revenues increased $2.5 million.   All other Company revenues decreased by $0.4 million, compared to the three months ended June 30, 2008.

Operating expenses

For the quarter ended June 30, 2009, operating expenses increased $5.8 million, or 25.4%, compared to the 2008 period.  The incremental costs of the Shentel Cable operations accounted for $3.7 million of the year over year increase.  Additional depreciation expense on improvements to the Company’s fiber optic network and to support expanded wireless coverage and additional services, specifically EVDO high speed wireless internet data access availability, added $1.3 million to operating expenses, while other costs in the Wireless segment increased $1.2 million.

Income tax expense

The Company’s effective tax rate on income from continuing operations increased from 41.1% in the second quarter of 2008 to 41.5% in the second quarter of 2009 due to changes in the allocation of taxable income to higher tax states.

Net income from continuing operations

For the three months ended June 30, 2009, net income from continuing operations decreased $1.2 million, as operating expenses increased faster than operating revenues.

 
17


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 PCS Company (“PCS”), a Sprint PCS Affiliate of Sprint Nextel.  This segment also leases land on which it builds Company-owned cell towers, which it leases to affiliated and non-affiliated wireless service providers, throughout the same four-state area described above, through Shenandoah Mobile Company (“Mobile”).

PCS receives revenues from Sprint Nextel for subscribers that obtain service in PCS’s network coverage area.  PCS relies on Sprint Nextel to provide timely, accurate and complete information to record the appropriate revenue for each financial period.  Revenues received from Sprint Nextel are recorded net of two fees, totaling 16.8% of net billed revenue as defined, retained by Sprint Nextel.

PCS had 432 PCS base stations in service at June 30, 2009, compared to 364 base stations in service at June 30, 2008.  As of June 30, 2009, PCS had 278 EVDO-enabled sites, up from 93 EVDO-enabled sites operating as of June 30, 2008, covering 94% of our currently covered population.  Approximately 50 additional base stations and 50 additional EVDO-enabled sites are expected to be added by year end 2009.

The Company’s average PCS retail customer turnover, or churn rate, was 2.07% in the second quarter of 2009, compared to 1.74% in the second quarter of 2008.  As of June 30, 2009, the Company had 216,067 retail PCS subscribers compared to 200,397 subscribers at June 30, 2008.  The PCS operation added 3,013 net retail customers in the second quarter of 2009 compared to 6,292 net retail subscribers added in the second quarter of 2008.

Mobile owned 123 towers at June 30, 2009, up from 114 at June 30, 2008.  Mobile expects to complete 10 or more new towers during the remainder of 2009.  At June 30, 2009, Mobile had 185 leases for non-affiliate cell sites, and 120 affiliate leases, compared to 173 non-affiliate and 111 affiliate leases as of June 30, 2008.

 
 (in thousands)
 
Three Months Ended
June 30,
   
Change
 
   
2009
   
2008
   
$
     
%
 
                           
Segment operating revenues
 
 
         
 
         
 Wireless service revenue
  $ 25,701     $ 22,510     $ 3,191       14.2  
 Tower lease revenue
    1,755       1,610       145       9.0  
 Equipment revenue
    1,169       1,511       (342 )     (22.6 )
 Other revenue
    435       1,710       (1,275 )     (74.6 )
  Total segment operating revenues
    29,060       27,341       1,719       6.3  
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    8,904       8,181       723       8.1  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    3,948       3,634       314       8.6  
Depreciation and amortization
    4,971       4,261       710       16.7  
  Total segment operating expenses
    17,823       16,076       1,747       10.9  
Segment operating income
  $ 11,237     $ 11,265     $ (28 )     (0.2 )
 
Operating revenues

Wireless service revenue increased $3.2 million, or 14.2%, for the three months ended June 30, 2009, compared to the comparable 2008 period.  Average subscribers increased 8.6% in the current quarter compared to the 2008 second quarter, while subscribers upgrading to higher revenue plans also added to revenue growth.  Total credits against gross billed revenue decreased 10.1% to $3.3 million, while bad debt write-offs declined 10.7% to $1.6 million, compared to the second quarter of 2008.
 
18

 
The increase in tower lease revenue resulted primarily from additional cell site leases to non-affiliates, while other revenue in 2008 included $0.9 million in a one-time pass-through of Universal Service Fund fees from Sprint Nextel.

The decrease in equipment revenue consists of $0.1 million in lower handset revenue due to fewer handsets sold, and $0.2 million less commission revenue due to fewer sales of phones that operate on the iDEN network, for which the Company is paid a commission for each phone sold.

Cost of goods and services

Cost of goods and services increased $0.7 million, or 8.1%, in 2009 from the second quarter of 2008.   Costs of the expanded network coverage and roll-out of EVDO coverage resulted in a $0.5 million increase in network costs and a $0.2 million increase in maintenance costs.  Network costs include rent for additional tower and co-location sites, and power and backhaul line costs.  Handset costs increased $0.1 million in 2009 over 2008, principally due to higher cost phones with new and expanded features.

Network costs are expected to increase in future periods as additional EVDO sites are brought on-line, and as new towers and base stations are added to expand our network coverage and capacity.

Selling, general and administrative

Selling, general and administrative expenses increased $0.3 million in 2009 from the second quarter of 2008, due to an increase in commissions paid to third parties and increased spending on advertising.

Depreciation and amortization

Depreciation and amortization increased $710 thousand in 2009 over 2008, due to capital projects for EVDO capability and new cell sites placed in service beginning in 2008 and into early 2009.  Depreciation is expected to continue to increase as additional sites are brought on-line in 2009.
 
 
19

 
Wireline

The Wireline segment is comprised of several subsidiaries providing telecommunications services.  Through these subsidiaries, this segment provides regulated and unregulated voice services, dial-up and DSL internet access, and long distance access services throughout Shenandoah County, Virginia, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor, including portions of West Virginia and Maryland.

 
 (in thousands)
 
Three Months Ended
June 30,
   
Change
 
   
2009
   
2008
     $       %  
                           
Segment operating revenues
                         
Service revenue
  $ 3,524     $ 3,430     $ 94       2.7  
Access revenue
    2,795       2,895       (100 )     (3.5 )
Facilities lease revenue
    3,251       3,410       (159 )     (4.7 )
Equipment revenue
    53       58       (5 )     (8.6 )
Other revenue
    1,350       1,328       22       1.7  
Total segment operating revenues
    10,973       11,121       (148 )     (1.3 )
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
     4,212        3,842        370        9.6  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
     1,770        1,958       (188 )     (9.6 )
Depreciation and amortization
    2,183       1,864       319       17.1  
Total segment operating expenses
    8,165       7,664       501       6.5  
Segment operating income
  $ 2,808     $ 3,457     $ (649 )     (18.8 )

Operating revenues

Operating revenues declined slightly in the second quarter of 2009 compared to the second quarter of 2008.

Cost of goods and services

Cost of goods and services increased $0.4 million, due primarily to increase in various network costs.

Selling, general and administrative

Selling, general and administrative expenses decreased $0.2 million, due to small reductions in marketing and selling costs.

Depreciation and amortization

Depreciation and amortization expense increased $0.3 million, due to capital projects placed in service in 2008 and early 2009 relating to fiber related upgrades and redundancy projects, and improvements to our DSL plant to increase customer connection speeds.
 
 
20


Cable Television

The Cable TV segment provides analog, digital and high-definition television signals under franchise agreements within Shenandoah County, Virginia, and since December 1, 2008, in various locales in West Virginia and in Alleghany County, Virginia.  As of June 30, 2009, it served 25,260 customers, up from 8,193 subscribers served as of June 30, 2008.  Essentially all of the increase resulted from the acquisition of cable assets and customers from Rapid Communications, LLC, completed December 1, 2008.  Since the acquisition, the Company has been working to upgrade a number of the acquired systems, and has completed upgrades in the Alleghany County, Virginia, market.  The Company introduced expanded service offerings in the Alleghany County market late in the second quarter of 2009, and expects additional expansion as markets in West Virginia are upgraded through 2010.  The Company expects to spend approximately $23 million on these upgrades through 2010.

 (in thousands)
 
Three Months Ended
June 30,
   
Change
 
   
2009
   
2008
     $       %  
         
 
               
Segment operating revenues
                         
Service revenue
  $ 3,549     $ 1,197     $ 2,352       196.5  
Equipment and other revenue
    272       123       149       134.2  
Total segment operating revenues
    3,821       1,320       2,501       189.5  
                                 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
     3,089        932        2,157        231.4  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
     1,275        331        944        285.2  
Depreciation and amortization
    874       262       612       233.6  
Total segment operating expenses
    5,238       1,525       3,713       243.5  
Segment operating loss
  $ (1,417 )   $ (205 )   $ (1,212 )     n/m  
 
Operating revenues and expenses

The increases in operating revenues and expenses shown above primarily reflect the impact of the acquisition from Rapid Communications, LLC.

 
21

 
Six Months Ended June 30, 2009 Compared with the Six Months Ended June 30, 2008

Consolidated Results

The Company’s consolidated results from continuing operations for the six months ended June 30, 2009 and 2008, respectively, are summarized as follows:

(in thousands)
 
Six Months Ended
June 30,
   
Change
 
   
2009
   
2008
     $       %  
                           
Operating revenues
  $ 80,241     $ 69,896     $ 10,345       14.8  
Operating expenses
    56,592       46,830       9,762       20.8  
Operating income
    23,649       23,066       583       2.5  
Other income (expense)
    (984 )     (555 )     (429 )     77.3  
Income tax expense
    9,693       9,106       587       6.4  
Net income from continuing operations
  $ 12,972     $ 13,405     $ (433 )     (3.2 )

Operating revenues

For the six months ended June 30, 2009, operating revenue increased $10.3 million, or 14.8%, primarily due to increased service revenue in the Wireless segment and the additional revenue from the Shentel Cable acquisition in late 2008. For the 2009 period, Wireless operating revenues increased $6.1 million, or 11.8%, while the incremental Shentel Cable revenues in the Cable TV segment totaled $5.1 million for 2009.   All other Company revenues decreased by $0.9 million, compared to the six months ended June 30, 2008.

Operating expenses

For the six months ended June 30, 2009, operating expenses increased $9.8 million, or 20.8%, compared to the 2008 period.  The incremental costs of the Shentel Cable operations accounted for $6.8 million of the year over year increase.  Additional depreciation expense of $2.0 million on improvements to the Company’s fiber optic network and to support expanded wireless coverage and additional services, specifically EVDO high speed wireless internet data access availability, and the associated additional $1.3 million of operating costs for rent and power, accounted for the remainder of the increase in operating expenses.

Other income (expense)

The change of $0.4 million reflected in other income (expense) reflects losses on investments held by the Company, including several investments in technology-related development stage companies.

Income tax expense

The Company’s effective tax rate on income from continuing operations increased from 40.5% in the first six months of 2008 to 42.8% in the first six months of 2009 primarily due to revisions to certain tax estimates recorded in the first quarter of 2009, and the allocation of taxable income to higher tax states.

Net income from continuing operations

For the six months ended June 30, 2009, net income from continuing operations decreased $0.4 million, due primarily to losses on investments and increased taxes.

 
22


Wireless

 
(in thousands)
 
Six Months Ended
June 30,
   
Change
 
   
2009
   
2008
     $       %  
                           
Segment operating revenues
 
 
         
 
         
Wireless service revenue
  $ 51,061     $ 43,562     $ 7,499       17.2  
Tower lease revenue
    3,456       3,191       265       8.3  
Equipment revenue
    2,439       2,811       (372 )     (13.2 )
Other revenue
    908       2,184       (1,276 )     (58.4 )
Total segment operating revenues
    57,864       51,748       6,116       11.8  
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
     17,939        17,147        792        4.6  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
     8,115        8,268       (153 )     (1.9 )
Depreciation and amortization
    9,843       8,544       1,299       15.2  
Total segment operating expenses
    35,897       33,959       1,938       5.7  
Segment operating income
  $ 21,967     $ 17,789     $ 4,178       23.5  

Operating revenues

Wireless service revenue increased $7.5 million, or 17.2%, for the six months ended June 30, 2009, compared to the comparable 2008 period.  Average subscribers increased 9.9% in the first half of 2009 compared to the 2008 first half, while subscribers upgrading to higher revenue plans also added to revenue growth.  Total credits against gross billed revenue decreased 1.5% to $7.1 million, while bad debt write-offs declined 23.0% to $3.3 million, compared to the first half of 2008.

The increase in tower lease revenue resulted primarily from additional cell site leases to non-affiliates.

The decrease in equipment revenue consists of $0.2 million in lower handset revenue due to fewer handsets sold, and $0.2 million less commission revenue due to fewer sales of phones that operate on the iDEN network, for which the Company is paid a commission for each phone sold.

The decrease in other revenue reflects a one-time pass through of certain Universal Service Fund fees from Sprint Nextel in the second quarter of 2008, combined with subsequent declines in recurring Universal Service Fund fees.

Cost of goods and services

Cost of goods and services increased $0.8 million in 2009’s first half from the first half of 2008.   Costs of the expanded network coverage and roll-out of EVDO coverage resulted in a $2.1 million increase in network costs and a $0.3 million increase in maintenance costs.  Network costs include rent for additional tower and co-location sites, and power and backhaul line costs.  Customer retention costs (including the costs of handsets used for upgrades and warranty and insurance replacements) decreased $1.6 million from 2008, principally due to changes in warranty programs since June of 2008.

Network costs are expected to continue to increase in future periods as additional EVDO sites are brought on-line, and as new towers and base stations are added to expand our network coverage and capacity.

 
23

 
Depreciation and amortization

Depreciation and amortization increased approximately $1.3 million in 2009 over 2008, due to capital projects for EVDO capability and new cell sites placed in service since 2007.  Depreciation is expected to continue to increase as additional sites are brought on-line.
 
Wireline

 
 (in thousands)
 
Six Months Ended
June 30,
   
Change
 
   
2009
   
2008
     $       %  
                           
Segment operating revenues
                         
Service revenue
  $ 6,972     $ 6,854     $ 118       1.7  
Access revenue
    5,810       5,931       (121 )     (2.0 )
Facilities lease revenue
    6,592       6,960       (368 )     (5.3 )
Equipment revenue
    87       142       (55 )     (38.7 )
Other revenue
    2,664       2,656       8       0.3  
Total segment operating revenues
    22,125       22,543       (418 )     (1.9 )
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
     8,218        7,642        576        7.5  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
     3,439        3,685       (246 )     (6.7 )
Depreciation and amortization
    4,334       3,611       723       20.0  
Total segment operating expenses
    15,991       14,938       1,053       7.0  
Segment operating income
  $ 6,134     $ 7,605     $ (1,471 )     (19.3 )

Operating revenues

Facilities lease revenue decreased $0.4 million, or 5.3%, due primarily to the termination of several short-term circuit leases during 2008.

Cost of goods and services

Cost of goods and services increased $0.6 million, due to a number of small items and changes, and a gain on an asset disposal recorded in early 2008.

Depreciation and amortization

Depreciation and amortization expense increased $0.7 million, due to capital projects placed in service in 2008 relating to fiber related upgrades and redundancy projects, and improvements to our DSL plant to increase customer connection speeds.

 
24


Cable Television

 
 (in thousands)
 
Six Months Ended
June 30,
   
 
Change
 
   
2009
   
2008
     $       %  
         
 
               
Segment operating revenues
                         
Service revenue
  $ 7,155     $ 2,403     $ 4,752       197.8  
Equipment and other revenue
    510       250       260       104.0  
Total segment operating revenues
    7,665       2,653       5,012       188.9  
                                 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
     5,926        1,842        4,084        221.7  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
     2,457        648        1,809        279.2  
Depreciation and amortization
    1,619       519       1,100       211.9  
Total segment operating expenses
    10,002       3,009       6,993       232.4  
Segment operating loss
  $ (2,337 )   $ (356 )   $ (1,981 )     n/m  

Operating revenues and expenses

The increases in operating revenues and expenses shown above primarily reflect the impact of the acquisition from Rapid Communications, LLC, in December 2008.

 
25

 
Liquidity and Capital Resources

The Company has four principal sources of funds available to meet the financing needs of its operations, capital projects, debt service, investments and potential dividends.  These sources include cash flows from operations, existing balances of cash and cash equivalents, the liquidation of investments and borrowings.  Management routinely considers the alternatives available to determine what mix of sources are best suited for the long-term benefit of the Company.

Sources and Uses of Cash. The Company generated $44.6 million of net cash from operations in the first six months of 2009, compared to $26.5 million in the first six months of 2008.  Net income (adjusted for the non-cash impairment charge on assets held for sale, net of tax effects) and the utilization of the year end 2008 tax receivable to offset 2009 estimated tax payments, generated most of the increase.  The income tax receivable at December 31, 2008, resulted from tax savings from bonus depreciation on capital spending for equipment placed in service during late 2008.

Indebtedness. As of June 30, 2009, the Company’s indebtedness totaled $30.2 million, with an annualized overall weighted average interest rate of approximately 5.19%.  The balance included $14.7 million at a variable rate of 2.86% that resets weekly, with the balance at a variety of fixed rates ranging from 6.67% to 8.05%.  As of June 30, 2009, the Company was in compliance with the covenants in its credit agreements.

The Company has the ability to borrow approximately $9.5 million as of June 30, 2009, under a revolving reducing credit facility established in 2004.  No balances are currently outstanding on this facility.

The Company entered into a $52 million delayed draw term loan in October, 2008, to fund capital expenditures, the Rapid Communications acquisition, and other corporate purposes.  The Company borrowed $2 million under this facility during the first quarter of 2009 and repaid $11 million during the second quarter.  The Company has $37.3 million available on this facility as of June 30, 2009, and it may make draws against this facility through December 31, 2009.  Repayments under this facility begin on March 31, 2010, in 24 equal quarterly installments based upon the outstanding balance as of December 31, 2009.

The Company has no off-balance sheet arrangements (other than operating leases) and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.

Capital Commitments. Capital expenditures budgeted for 2009, as adjusted, total approximately $64 million, a decrease of approximately $9 million from earlier estimates.  Most of the decrease reflects delays in spending into 2010.  Planned spending includes approximately $28 million in our Wireless segment for additional PCS base stations and towers to expand our network coverage and capacity (principally in Pennsylvania), new EVDO sites to provide EVDO service over more of our network, and additional switch capacity to handle the additional growth. The Wireline segment has budgeted approximately $13 million for telephone network operations and fiber projects and to add capacity and redundancy to our fiber networks in Virginia, Maryland and West Virginia, while the Cable segment expects to spend approximately $19 million, principally in the new markets acquired from Rapid Communications, while approximately $5 million is budgeted for other capital needs.  Capital spending may shift amongst these priorities as opportunities arise, and the Company is prepared to reduce spending in areas as market conditions change.

For the 2009 six month period, the Company spent $25.5 million on capital projects, compared to $18.7 million in the same period during 2008.  Spending related to Wireless projects accounted for $10.8 million in the first half of 2009, while Wireline projects accounted for $4.4 million, Cable TV for $7.5 million, and other projects $2.8 million.  The Company expects the pace of spending remain high in coming quarters, particularly in the Wireless and Cable TV segments.

The Company believes that cash on hand, cash flow from operations and borrowings expected to be available under the Company’s existing credit facilities will provide sufficient cash to enable the Company to fund its planned capital expenditures, make scheduled principal and interest payments, meet its other cash requirements and maintain compliance with the terms of its financing agreements for at least the next 12 months. Thereafter, capital expenditures will likely continue to be required to provide increased capacity to meet the Company’s expected growth in demand for its products and services. The actual amount and timing of the Company’s future capital requirements may differ materially from the Company’s estimate depending on the demand for its products and new market developments and opportunities.  The Company currently expects that it will fund its future capital expenditures primarily with cash from operations and with borrowings, although there are events outside the control of the Company that could have an adverse impact on cash flows from operations.

 
26

 
These events include, but are not limited to:  changes in overall economic conditions, regulatory requirements, changes in technologies, availability of labor resources and capital, changes in the Company’s relationship with Sprint Nextel, and other conditions.  The Wireless segment’s operations are dependent upon Sprint Nextel’s ability to execute certain functions such as billing, customer care, and collections; the subsidiary’s ability to develop and implement successful marketing programs and new products and services; and the subsidiary’s ability to effectively and economically manage other operating activities under the Company's agreements with Sprint Nextel.   The Company's ability to attract and maintain a sufficient customer base is also critical to its ability to maintain a positive cash flow from operations.  The foregoing events individually or collectively could affect the Company’s results.

Recently Issued Accounting Standards
 
There were no recently issued accounting standards, not adopted by the Company as of June 30, 2009, that are expected to have a material impact on the Company’s results of operations or financial condition.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s market risks relate primarily to changes in interest rates on instruments held for other than trading purposes.  The Company’s interest rate risk generally involves three components.  The first component is outstanding debt with variable rates.  As of June 30, 2009, the Company had $14.7 million of variable rate debt outstanding, bearing interest at a rate of 2.86% as determined by CoBank on a weekly basis. An increase in market interest rates of 1.00% would add approximately $147 thousand to annual interest expense; if and when fully drawn, a 1.00% increase in market interest rates would add $520 thousand to annual interest expense.  The remaining approximately $15.5 million of the Company’s outstanding debt has fixed rates through maturity.  Due to the relatively short time frame to maturity of this fixed rate debt, market value approximates carrying value of the fixed rate debt.

The second component of interest rate risk consists of temporary excess cash, which can be invested in various short-term investment vehicles such as overnight repurchase agreements and Treasury bills with a maturity of less than 90 days.  The cash is currently invested in an institutional cash management fund that has limited interest rate risk.  Management continues to evaluate the most beneficial use of these funds.

The third component of interest rate risk is marked increases in interest rates that may adversely affect the rate at which the Company may borrow funds for growth in the future.  Management does not believe that this risk is currently significant because the Company’s existing sources of liquidity are adequate to provide cash for operations, payment of debt and near-term capital projects.

Management does not view market risk as having a significant impact on the Company's results of operations, although future results could be adversely affected if interest rates were to increase significantly for an extended period and the Company were to require additional external financing.  The Company’s investments in publicly traded stock and bond mutual funds under the rabbi trust, which are subject to market risks and could experience significant swings in market values, are offset by corresponding changes in the liabilities owed to participants in the Executive Supplemental Retirement Plan.  General economic conditions affected by regulatory changes, competition or other external influences may pose a higher risk to the Company’s overall results.

As of June 30, 2009, the Company has $6.8 million invested in privately held companies directly or through investments with portfolio managers.  Most of the companies are in an early stage of development and significant increases in interest rates could have an adverse impact on their results, ability to raise capital and viability.  The Company’s market risk is limited to the funds previously invested and an additional $0.2 million committed under contracts the Company has signed with portfolio managers.

 
27

 

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our President and Chief Executive Officer, who is the principal executive officer, and the Vice President - Finance and Chief Financial Officer, who is the principal financial officer, conducted an evaluation of our disclosure controls and procedures, as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934.  The Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2009.

Changes in Internal Control Over Financial Reporting

During the second quarter of 2009, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Other Matters Relating to Internal Control Over Financial Reporting

The Company continued to integrate the assets and operations of Shentel Cable Company that were acquired on December 1, 2008.  The full integration of its internal controls and processes for the material financial systems were completed during the second quarter of 2009.

Under the Company’s agreements with Sprint Nextel, Sprint Nextel provides the Company with billing, collections, customer care, certain network operations and other back office services for the PCS operation. As a result, Sprint Nextel remits to the Company approximately 67% of the Company’s total operating revenues.  Due to this relationship, the Company necessarily relies on Sprint Nextel to provide accurate, timely and sufficient data and information to properly record the Company’s revenues, and accounts receivable, which underlie a substantial portion of the Company’s periodic financial statements and other financial disclosures.

Information provided by Sprint Nextel includes reports regarding the subscriber accounts receivable in the Company’s markets.  Sprint Nextel provides the Company with monthly accounts receivable, billing and cash receipts information on a market level, rather than a subscriber level.  The Company reviews these various reports to identify discrepancies or errors.  Under the Company’s agreements with Sprint Nextel, the Company is entitled to only a portion of the receipts, net of items such as taxes, government surcharges, certain allocable write-offs and the 16.8% of revenue retained by Sprint Nextel.  Because of the Company’s reliance on Sprint Nextel for financial information, the Company must depend on Sprint Nextel to design adequate internal controls with respect to the processes established to provide this data and information to the Company and Sprint Nextel’s other Sprint PCS affiliate network partners.  To address this issue, Sprint Nextel engages an independent registered public accounting firm to perform a periodic evaluation of these controls and to provide a “Report on Controls Placed in Operation and Tests of Operating Effectiveness for Affiliates” under guidance provided in Statement of Auditing Standards No. 70 (“SAS 70 reports”).  The report is provided to the Company on an annual basis and covers a nine-month period. The most recent report covers the period from January 1, 2008 to September 30, 2008.  The most recent report indicated there were no material issues which would adversely affect the information used to support the recording of the revenues provided by Sprint Nextel related to the Company’s relationship with them.

 
28



ITEM 1A.

As previously discussed, our actual results could differ materially from our forward looking statements. There have been no material changes in the risk factors  from those described in Part 1, Item 1A of  the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds

The Company maintains a dividend reinvestment plan (the “DRIP”) for the benefit of its shareholders.  When shareholders remove shares from the DRIP, the Company issues a certificate for whole shares, pays out cash for any fractional shares, and cancels the fractional shares purchased.  The following table provides information about the Company’s repurchases of fractional shares during the three months ended June 30, 2009:

   
Number of Shares
Purchased
   
Average Price
Paid per Share
 
April 1 to April 30
    2     $ 22.13  
May 1 to May 31
    1     $ 18.20  
June 1 to June 30
    2     $ 20.05  
                 
Total
    5     $ 20.69  
 
ITEM 4.
Submission of Matters to a Vote of Security Holders

On May 5, 2009, the Company held its Annual Meeting of Shareholders.  At the meeting, the following directors were appointed to three year terms, and one proposal, to ratify the selection of KPMG LLP as the Company’s independent registered public accounting firm for 2009, was approved by shareholders voting by proxy or in person.  Vote totals for each director and the one proposal were as follows:

   
Votes
   
Votes
 
   
For
   
Withheld
 
             
Appointment of directors to three year terms:
       
                 
Ken L. Burch
    17,363,717       1,292,734  
                 
Richard L. Koontz, Jr.
    16,757,413       1,899,038  
                 
Jonelle St. John
    17,329,886       1,326,565  
                 
 
   
Votes For
   
Votes Against
   
Abstentions
 
                   
Ratify selection of KPMG
    18,209,148       75,954       371,349  

 
29

 
ITEM 6. 
Exhibits
 
(a) The following exhibits are filed with this Quarterly Report on Form 10-Q:
 
31.1
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
   
31.2
Certification of Vice President - Finance and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
   
32
Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350.
 
 
30



     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
SHENANDOAH TELECOMMUNICATIONS COMPANY
 
(Registrant)

 
 
/s/Adele M. Skolits
 
 
Adele M. Skolits
 
Vice President - Finance and Chief Financial Officer
 
Date: August 3, 2009
 
 
31

 
 
 
Exhibit No
 
Exhibit
 
         
   
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
         
   
Certification of Vice President - Finance and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
         
   
Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350.
 
 
 
32