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 September 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 o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
Accelerated filer 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 October 23, 2009 was 23,640,510.
 


 
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 6.
 
29
       
   
30
       
   
31

2

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


ASSETS
 
 
September 30,
2009
   
December 31,
2008
 
             
Current Assets
           
Cash and cash equivalents
  $ 14,918     $ 5,240  
Accounts receivable, net
    15,621       16,131  
Vendor credits receivable
    178       5,232  
Income taxes receivable
    -       7,366  
Materials and supplies
    4,706       6,376  
Prepaid expenses and other
    2,663       2,283  
Assets held for sale
    10,870       28,310  
Deferred income taxes
    1,848       1,483  
Total current assets
    50,804       72,421  
                 
Investments, including $1,880 and $1,440 carried at fair value
    8,666       8,388  
                 
Property, Plant and Equipment
               
Plant in service
    344,678       323,096  
Plant under construction
    22,647       5,076  
      367,325       328,172  
Less accumulated amortization and depreciation
    172,447       151,695  
Net property, plant and equipment
    194,878       176,477  
                 
Other Assets
               
Intangible assets, net
    2,711       3,163  
Cost in excess of net assets of businesses acquired
    4,547       4,547  
Deferred charges and other assets, net
    1,391       1,841  
Net other assets
    8,649       9,551  
Total assets
  $ 262,997     $ 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
 
 
September 30,
2009
   
December 31,
2008
 
             
Current Liabilities
           
Current maturities of long-term debt
  $ 6,357     $ 4,399  
Accounts payable
    4,698       5,607  
Advanced billings and customer deposits
    6,343       5,151  
Accrued compensation
    1,414       2,584  
Liabilities held for sale
    1,092       1,013  
Income taxes payable
    6,209       -  
Accrued liabilities and other
    3,450       5,631  
Total current liabilities
    29,563       24,385  
                 
Long-term debt, less current maturities
    22,718       36,960  
                 
Other Long-Term Liabilities
               
Deferred income taxes
    22,435       29,505  
Deferred lease payable
    3,259       3,142  
Other liabilities
    8,881       6,533  
Total other liabilities
    34,575       39,180  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock
    17,094       16,139  
Retained earnings
    161,540       152,706  
Accumulated other comprehensive loss, net of tax
    (2,493 )     (2,533 )
Total shareholders’ equity
    176,141       166,312  
                 
Total liabilities and shareholders’ equity
  $ 262,997     $ 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
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
                         
Operating revenues
  $ 40,115     $ 37,408     $ 120,356     $ 107,304  
                                 
Operating expenses:
                               
Cost of goods and services, exclusive of depreciation and  amortization shown separately below
    13,703       10,712       39,452       31,394  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    7,692       7,724       22,569       21,052  
Depreciation and amortization
    8,151       6,484       24,116       19,304  
Total operating expenses
    29,546       24,920       86,137       71,750  
Operating income
    10,569       12,488       34,219       35,554  
                                 
Other income (expense):
                               
Interest expense
    (193 )     (103 )     (1,128 )     (783 )
Gain (loss) on investments, net
    201       (386 )     (203 )     (746 )
Non-operating income, net
    95       153       449       638  
Income from continuing operations before income taxes
    10,672       12,152       33,337       34,663  
                                 
Income tax expense
    4,326       4,774       14,019       13,881  
Net income from continuing operations
    6,346       7,378       19,318       20,782  
Loss from discontinued operations, net of tax  benefits of $24, $429, $6,415 and $1,357, respectively
    (39 )     (636 )     (10,484 )     (2,128 )
Net income
  $ 6,307     $ 6,742     $ 8,834     $ 18,654  
                                 
Basic and diluted income (loss) per share:
                               
                                 
Net income from continuing operations
  $ 0.27     $ 0.31     $ 0.81     $ 0.88  
Loss from discontinued operations
    -       (0.03 )     (0.44 )     (0.09 )
Net income
  $ 0.27     $ 0.28     $ 0.37     $ 0.79  
                                 
Weighted average shares outstanding, basic
    23,640       23,541       23,633       23,532  
                                 
Weighted average shares, diluted
    23,706       23,610       23,696       23,591  


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
    -       -       8,834       -       8,834  
Reclassification adjustment for  unrealized loss from pension plans included in net income, net of tax
    -       -       -       40       40  
Total comprehensive income
                                    8,874  
Stock-based compensation
    -       497       -       -       497  
Conversion of liability classified awards to equity classified awards
    -       85       -       -       85  
Common stock issued through exercise of incentive stock  options
    35       310       -       -       310  
Net excess tax benefit from stock options exercised
    -       63       -       -       63  
                                         
Balance, September 30, 2009
    23,640     $ 17,094     $ 161,540     $ (2,493 )   $ 176,141  


See accompanying notes to unaudited condensed consolidated financial statements.

6

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


   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
             
Cash Flows From Operating Activities
           
Net income
  $ 8,834     $ 18,654  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Impairment on assets held for sale
    17,545       -  
Depreciation
    23,666       22,318  
Amortization
    450       454  
Stock based compensation expense
    475       84  
Excess tax benefits on stock option exercises
    (63 )     (54 )
Deferred income taxes
    (7,463 )     1,265  
Loss on disposal of assets
    734       256  
Realized losses on investments carried at fair value
    188       94  
Unrealized (gains) losses on investments carried at fair value
    (515 )     398  
Net (gain) loss from patronage and equity investments
    395       275  
Other
    2,300       (3,735 )
Changes in assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
    685       (3,810 )
Materials and supplies
    1,694       (386 )
Increase (decrease) in:
               
Accounts payable
    (915 )     1,589  
Deferred lease payable
    114       210  
Other prepaids, deferrals and accruals
    11,384       (6,400 )
                 
Net cash provided by operating activities
  $ 59,508     $ 31,212  
                 
Cash Flows From Investing Activities
               
Purchase and construction of plant and equipment
  $ (37,648 )   $ (38,900 )
Proceeds from sale of equipment
    75       210  
Purchase of investment securities
    (360 )     (342 )
Proceeds from investment activities
    14       633  
                 
                 
Net cash used in investing activities
  $ (37,919 )   $ (38,399 )


(Continued)

7


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


   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
             
Cash Flows From Financing Activities
           
Principal payments on long-term debt
  $ (14,284 )   $ (3,172 )
Amounts borrowed under debt agreements
    2,000       -  
Excess tax benefits on stock option exercises
    63       54  
Proceeds from exercise of incentive stock options
    310       378  
                 
                 
Net cash used in financing activities
  $ (11,911 )   $ (2,740 )
                 
Net increase (decrease) in cash and cash equivalents
  $ 9,678     $ (9,927 )
                 
Cash and cash equivalents:
               
Beginning
    5,240       17,245  
Ending
  $ 14,918     $ 7,318  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
                 
Interest
  $ 1,437     $ 1,181  
                 
Income taxes
  $ 1,596     $ 7,853  


During the nine months ended September 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
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 nine months ended September 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 from continuing operations and net income of $66,000 and $195,000 for the three and nine months ended September 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 nine months ended September 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 September 30, 2008
                 
Cost of goods and services
  $ 10,662     $ 50     $ 10,712  
Depreciation and amortization
    6,424       60       6,484  
Total operating expenses
    24,810       110       24,920  
Operating income
    12,598       (110 )     12,488  
Income from continuing operations before income taxes
    12,262       (110 )     12,152  
Income tax expense
    4,818       (44 )     4,774  
Net income from continuing operations
    7,444       (66 )     7,378  
Net income
    6,808       (66 )     6,742  
                         
Nine months ended September 30, 2008
                       
Cost of goods and services
  $ 31,244     $ 150     $ 31,394  
Depreciation and amortization
    19,127       177       19,304  
Total operating expenses
    71,423       327       71,750  
Operating income
    35,881       (327 )     35,554  
Income from continuing operations before income taxes
    34,990       (327 )     34,663  
Income tax expense
    14,013       (132 )     13,881  
Net income from continuing operations
    20,977       (195 )     20,782  
Net income
    18,849       (195 )     18,654  

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 September 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:

   
September 30, 2009
   
December 31, 2008
 
Assets held for sale:
           
Property, plant and equipment, net
  $ 7,506     $ 15,414  
Goodwill
    -       6,539  
Intangible assets, net
    915       1,931  
Deferred charges
    1,628       3,384  
Other assets
    821       1,042  
    $ 10,870     $ 28,310  
Liabilities:
               
Other liabilities
  $ 1,092     $ 1,013  

10


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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Operating revenues
  $ 3,123     $ 3,387     $ 10,033     $ 9,005  
Loss before income taxes
  $ (63 )   $ (1,065 )   $ (16,899 )   $ (3,485 )

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 September 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 September 30, 2009, approximately 56,000 performance share units were outstanding, while at September 30, 2008, approximately 59,000 performance share units were outstanding. During February 2009, the Company issued options to purchase approximately 169,000 shares at an exercise price of $25.26 per share, and during both 2007 and 2008, the Company issued options to purchase 30,000 shares at exercise prices of $20.50 and $22.76, respectively.   Based upon the average daily closing price of the Company’s common stock as reported on the NASDAQ Stock Market, these options were anti-dilutive and were excluded from the dilutive net income (loss) per share calculation for the three months and nine months ended September 30, 2009.  There were no adjustments to net income.

6.  Investments include $1.9 million and $1.4 million of investments carried at fair value as of September 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 September 30, 2009, the Company contributed $28 thousand to the trust, recognized no net losses on dispositions of investments, recognized $8 thousand in dividend and interest income from investments, and recognized net unrealized gains of $209 thousand on these investments.  During the nine months ended September 30, 2009, the Company contributed $92 thousand to the trust, recognized net losses on dispositions of investments of $188 thousand, recognized $27 thousand in dividend and interest income from investments, and recognized net unrealized gains of $509 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, fair 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 as well as certain general and administrative costs historically charged to Converged Services that cannot be allocated to discontinued operations.  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 September 30, 2009
 
(In thousands)
   
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                                   
Service revenues
  $ 25,287     $ 3,340     $ 3,526     $ -     $ -     $ 32,153  
Access charges
    -       2,078       -       -       -       2,078  
Facilities and tower lease
    1,135       1,860       -       -       -       2,995  
Equipment
    1,046       24       41       -       -       1,111  
Other
    543       945       290       -       -       1,778  
Total external revenues
    28,011       8,247       3,857       -       -       40,115  
Internal revenues
    679       3,440       8       -       (4,127 )     -  
Total operating revenues
    28,690       11,687       3,865       -       (4,127 )     40,115  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
    9,594       4,346       3,285       84       (3,606 )     13,703  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    4,123       1,934       1,309       847       (521 )     7,692  
Depreciation and amortization
    5,178       1,999       895       79       -       8,151  
Total operating expenses
    18,895       8,279       5,489       1,010       (4,127 )     29,546  
Operating income (loss)
    9,795       3,408       (1,624 )     (1,010 )     -       10,569  
                                                 
Non-operating income (expense)
    111       100       35       450       (400 )     296  
Interest expense
    (64 )     (68 )     (74 )     (387 )     400       (193 )
Income (loss) from continuing operations before income taxes
    9,842       3,440       (1,663 )     (947 )     -       10,672  
Income taxes
    (4,030 )     (1,286 )     630       360       -       (4,326 )
Net income (loss) from continuing operations
  $ 5,812     $ 2,154     $ (1,033 )   $ (587 )   $ -     $ 6,346  


Three months ended September 30, 2008

(In thousands)
   
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated
Totals
 
External revenues
                                   
Service revenues
  $ 24,240     $ 3,249     $ 1,187     $ -     $ -     $ 28,676  
Access charges
    -       2,968       -       -       -       2,968  
Facilities and tower lease
    1,017       1,576       -       -       -       2,593  
Equipment
    1,409       433       19       -       -       1,861  
Other
    254       943       113       -       -       1,310  
Total external revenues
    26,920       9,169       1,319       -       -       37,408  
Internal revenues
    606       2,789       8       -       (3,403 )     -  
Total operating revenues
    27,526       11,958       1,327       -       (3,403 )     37,408  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
    8,583       4,082       902       98       (2,953 )     10,712  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    4,557       1,883       383       1,351       (450 )     7,724  
Depreciation and amortization
    4,259       1,887       265       73       -       6,484  
Total operating expenses
    17,399       7,852       1,550       1,522       (3,403 )     24,920  
Operating income (loss)
    10,127       4,106       (223 )     (1,522 )     -       12,488  
                                                 
Non-operating income (expense)
    129       29       (15 )     375       (751 )     (233 )
Interest expense
    (85 )     (114 )     (67 )     (588 )     751       (103 )
Income (loss) from continuing operations  before income taxes
    10,171       4,021       (305 )     (1,735 )     -       12,152  
Income taxes
    (4,230 )     (1,516 )     115       857       -       (4,774 )
Net income (loss) from continuing operations
  $ 5,941     $ 2,505     $ (190 )   $ (878 )   $ -     $ 7,378  

12


Nine months ended September 30, 2009

(In thousands)
   
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated
Totals
 
External Revenues
                                   
Service revenues
  $ 76,348     $ 9,928     $ 10,682     $ -     $ -     $ 96,958  
Access charges
    -       6,695       -       -       -       6,695  
Facilities and tower lease
    3,322       4,630       -       -       -       7,952  
Equipment
    3,485       111       76       -       -       3,672  
Other
    1,451       2,880       748       -       -       5,079  
Total external revenues
    84,606       24,244       11,506       -       -       120,356  
Internal Revenues
    1,948       9,568       24       -       (11,540 )     -  
Total operating revenues
    86,554       33,812       11,530       -       (11,540 )     120,356  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
    27,534       12,563       9,211       235       (10,091 )     39,452  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    12,237       5,374       3,766       2,641       (1,449 )     22,569  
Depreciation and amortization
    15,021       6,334       2,513       248       -       24,116  
Total operating expenses
    54,792       24,271       15,490       3,124       (11,540 )     86,137  
Operating income (loss)
    31,762       9,541       (3,960 )     (3,124 )     -       34,219  
                                                 
Non-operating income (expense)
    179       202       55       834       (1,024 )     246  
Interest expense
    (231 )     (192 )     (166 )     (1,563 )     1,024       (1,128 )
Income (loss) from continuing operations before income taxes
    31,710       9,551       (4,071 )     (3,853 )     -       33,337  
Income taxes
    (13,095 )     (3,596 )     1,547       1,125       -       (14,019 )
Net income (loss) from continuing operations
  $ 18,615     $ 5,955     $ (2,524 )   $ (2,728 )   $ -     $ 19,318  


Nine months ended September 30, 2008

(In thousands)
   
Wireless
   
Wireline
   
Cable TV
   
Other
   
Eliminations
   
Consolidated
Totals
 
External Revenues
                                   
Service revenues
  $ 67,802     $ 9,789     $ 3,591     $ -     $ -     $ 81,182  
Access charges
    -       7,780       -       -       -       7,780  
Facilities and tower lease
    3,010       4,882       -       -       -       7,892  
Equipment
    4,221       574       50       -       -       4,845  
Other
    2,437       2,853       315       -       -       5,605  
Total external revenues
    77,470       25,878       3,956       -       -       107,304  
Internal Revenues
    1,804       8,623       24       -       (10,451 )     -  
Total operating revenues
    79,274       34,501       3,980       -       (10,451 )     107,304  
                                                 
Operating expenses
                                               
Costs of goods and services, exclusive of depreciation and amortization shown separately below
    25,731       11,723       2,745       307       (9,112 )     31,394  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    12,826       5,568       1,031       2,966       (1,339 )     21,052  
Depreciation and amortization
    12,802       5,498       784       220       -       19,304  
Total operating expenses
    51,359       22,789       4,560       3,493       (10,451 )     71,750  
Operating income (loss)
    27,915       11,712       (580 )     (3,493 )     -       35,554  
                                                 
Non-operating income (expense)
    375       95       (18 )     1,352       (1,912 )     (108 )
Interest expense
    (286 )     (340 )     (198 )     (1,871 )     1,912       (783 )
Income (loss) from continuing operations  before income taxes
    28,004       11,467       (796 )     (4,012 )     -       34,663  
Income taxes
    (11,599 )     (4,357 )     302       1,773       -       (13,881 )
Net income (loss) from continuing operations
  $ 16,405     $ 7,110     $ (494 )   $ (2,239 )   $ -     $ 20,782  

13


The Company’s assets by segment are as follows:

(In thousands)


   
September 30,
2009
   
December 31,
2008
 
             
             
Wireless
  $ 132,283     $ 121,453  
Wireline
    76,267       67,884  
Cable TV
    17,705       19,065  
Other (includes assets held for sale)
    183,952       196,932  
Combined totals
    410,207       405,334  
Inter-segment eliminations
    (147,210 )     (138,497 )
Consolidated totals
  $ 262,997     $ 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 September 30, 2009.

10. On October 20, 2009, the Companys Board of Directors declared a cash dividend of $0.32 per share, payable December 1, 2009 to shareholders of record as of November 10, 2009.
 
On November 2, 2009, the Company closed on the purchase of customers and assets of the North River Telephone Cooperative, serving the Mt. Solon, Virginia, area; the purchase price was approximately $0.6 million.  The Company has not completed its assessment of the fair values of the assets acquired.  With this acquisition, the Company added approximately 1,000 telephone access lines.  The Company has committed to spend $1.8 million through 2010 to upgrade and integrate North River’s network and provide high-speed broadband services to its customers.

The Company has evaluated subsequent events for potential recognition and/or disclosure through November 5, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

14

 
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 September 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:


   
Sept. 30,
2009
   
Dec. 31,
2008
   
Sept. 30,
2008
   
Dec. 31,
2007
 
                         
Retail PCS Subscribers
    219,353       211,462       205,777       187,303  
PCS Market POPS (000) (1)
    2,324       2,310       2,308       2,297  
PCS Covered POPS (000) (1)
    1,988       1,931       1,898       1,814  
PCS Average Monthly Retail Churn % (2)
    2.17 %     1.87 %     1.85 %     2.32 %
CDMA Base Stations (sites)
    448       411       378       346  
EVDO-enabled sites
    306       211       134       52  
EVDO Covered POPS (000) (1)
    1,874       1,663       1,292       624  
Towers (100 foot and over)
    113       103       103       101  
Towers (under 100 foot)
    19       15       15       14  
Telephone Access Lines
    23,547       24,042       24,193       24,536  
Total Switched Access Minutes (000)
    81,986       90,460       93,813       92,331  
Originating Switched Access Minutes (000)
    22,770       25,425       26,203       26,128  
Long Distance Subscribers
    10,821       10,842       10,884       10,689  
Long Distance Calls (000) (3)
    7,136       7,981       8,086       7,944  
Total Fiber Miles – Wireline
    49,175       46,733       39,528       35,872  
Fiber Route Miles – Wireline
    784       756       680       647  
DSL Subscribers
    10,549       9,918       9,754       8,136  
Dial-up Internet Subscribers
    3,787       4,866       5,347       7,547  
Cable Television Subscribers (4)
    24,117       24,933       8,142       8,303  
Employees (full time equivalents)
    454       445       401       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 September 30, 2009 Compared with the Three Months Ended September 30, 2008

Consolidated Results

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


(in thousands)
 
Three Months Ended
September 30,
   
Change
 
   
2009
   
2008
    $       %  
                           
Operating revenues
  $ 40,115     $ 37,408     $ 2,707       7.2  
Operating expenses
    29,546       24,920       4,626       18.6  
Operating income
    10,569       12,488       (1,919 )     (15.4 )
Other income (expense)
    103       (336 )     439       130.7  
Income tax expense
    4,326       4,774       (448 )     (9.4 )
Net income from continuing operations
  $ 6,346     $ 7,378     $ (1,032 )     (14.0 )


Operating revenues

For the three months ended September 30, 2009, operating revenue increased $2.7 million, or 7.2%, 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 September 30, 2009, Wireless operating revenues increased $1.2 million, or 4.2%, while Cable TV segment operating revenues increased $2.5 million.   All other Company revenues decreased by $1.0 million, compared to the three months ended September 30, 2008.

Operating expenses

For the quarter ended September 30, 2009, operating expenses increased $4.6 million, or 18.6%, compared to the 2008 period.  The incremental costs of the Shentel Cable operations accounted for $3.9 million of the year over year increase.  Capital improvements to the Company’s fiber optic network and to provide expanded wireless coverage and additional services, specifically EVDO high speed wireless internet data access availability, added $1.0 million of depreciation to operating expenses, while other costs in the Wireless segment increased $0.5 million.  The Company expensed approximately $0.5 million of one-time professional fees during the third quarter of 2008.

Income tax expense

The Company’s effective tax rate on income from continuing operations increased from 39.3% in the third quarter of 2008 to 40.5% in the third 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 September 30, 2009, net income from continuing operations decreased $1.0 million, as operating expenses increased faster than operating revenues, as described above.

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 fees totaling 16.8% of net billed revenue, as defined, retained by Sprint Nextel.

PCS had 448 PCS base stations in service at September 30, 2009, compared to 378 base stations in service at September 30, 2008.  As of September 30, 2009, PCS had 306 EVDO-enabled sites, up from 134 EVDO-enabled sites operating as of September 30, 2008, covering 94% of our currently covered population.  Approximately 25 additional base stations and 30 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 2.17% in the third quarter of 2009, compared to 1.85% in the third quarter of 2008.  As of September 30, 2009, the Company had 219,353 retail PCS subscribers compared to 205,777 subscribers at September 30, 2008.  The PCS operation added 3,286 net retail subscribers in the third quarter of 2009 compared to 5,380 net retail subscribers added in the third quarter of 2008.

Mobile owned 130 towers at September 30, 2009, up from 116 at September 30, 2008.  Mobile expects to complete 10 or more new towers during the remainder of 2009.  At September 30, 2009, Mobile had 192 leases for non-affiliate cell sites, and 127 affiliate leases, compared to 176 non-affiliate and 112 affiliate leases as of September 30, 2008.


(in thousands)
 
Three Months Ended
September 30,
   
Change
 
   
2009
   
2008
   
$
   
%
 
                         
Segment operating revenues
 
 
         
 
   
 
 
Wireless service revenue
  $ 25,287     $ 24,240     $ 1,047       4.3  
Tower lease revenue
    1,813       1,623       190       11.7  
Equipment revenue
    1,046       1,409       (363 )     (25.8 )
Other revenue
    544       254       290       114.2  
Total segment operating revenues
    28,690       27,526       1,164       4.2  
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    9,594       8,583       1,011       11.8  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    4,123       4,557       (434 )     (9.5 )
Depreciation and amortization
    5,178       4,259       919       21.6  
Total segment operating expenses
    18,895       17,399       1,496       8.6  
Segment operating income
  $ 9,795     $ 10,127     $ (332 )     (3.3 )


Operating revenues

Wireless service revenue increased $1.0 million, or 4.3%, for the three months ended September 30, 2009, compared to the comparable 2008 period.  Average subscribers increased 7.0% in the current quarter compared to the 2008 third quarter.  Total credits against gross billed revenue and bad debt write-offs were essentially unchanged from the third quarter of 2008.

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

18


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.

Other revenue in 2008 reflected a reduction of $0.2 million to prior accruals for Universal Service Fund fees from Sprint Nextel.

Cost of goods and services

Cost of goods and services increased $1.0 million, or 11.8%, in 2009 from the third quarter of 2008.   Costs of the expanded network coverage and roll-out of EVDO coverage resulted in a $1.2 million increase in network costs including rent for additional tower and co-location sites, power and backhaul line costs.

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 decreased $0.4 million in 2009 from the third quarter of 2008 due approximately equally to a decrease in commissions and operating taxes.

Depreciation and amortization

Depreciation and amortization increased $0.9 million 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.

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
September 30,
   
Change
 
   
2009
   
2008
   
$
   
%
 
                         
Segment operating revenues
                       
Service revenue
  $ 3,594     $ 3,403     $ 191       5.6  
Access revenue
    2,766       3,581       (815 )     (22.8 )
Facilities lease revenue
    3,991       3,222       769       23.9  
Equipment revenue
    24       433       (409 )     (94.5 )
Other revenue
    1,312       1,319       (7 )     (0.5 )
Total segment operating revenues
    11,687       11,958       (271 )     (2.3 )
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    4,346       4,082       264       6.5  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    1,934       1,883       51       2.7  
Depreciation and amortization
    1,999       1,887       112       5.9  
Total segment operating expenses
    8,279       7,852       427       5.4  
Segment operating income
  $ 3,408     $ 4,106     $ (698 )     (17.0 )


Operating revenues

Operating revenues decreased $0.3 million overall in the third quarter of 2009 from the third quarter of 2008, principally due to a one-time sale of equipment recorded in the 2008 period.  Access revenue declined due to declining minutes of use, while facilities lease revenue increased due to new and revised contracts with third parties.

Cost of goods and services

Cost of goods and services increased $0.3 million, due primarily to increased line costs associated with facilities lease revenues.

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 September 30, 2009, it served 24,117 customers, up from 8,142 subscribers served as of September 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 completed upgrades in the Alleghany County, Virginia, market during the second quarter of 2009, and during the third quarter, in the Franklin and Petersburg, West Virginia markets.  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; spending through September 30, 2009 totaled approximately $10 million.


(in thousands)
 
Three Months Ended
September 30,
   
Change
 
   
2009
   
2008
   
$
   
%
 
         
 
             
Segment operating revenues
                       
Service revenue
  $ 3,526     $ 1,187     $ 2,339       197.1  
Equipment and other revenue
    339       140       199       142.1  
Total segment operating revenues
    3,865       1,327       2,538       191.3  
                                 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    3,285       902       2,383       264.2  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    1,309       383       926       241.8  
Depreciation and amortization
    895       265       630       237.7  
Total segment operating expenses
    5,489       1,550       3,939       254.1  
Segment operating loss
  $ (1,624 )   $ (223 )   $ (1,401 )     n/m  


Operating revenues and expenses

The newly acquired cable operations generated $1.3 million of the change in segment operating loss shown above as the Company rebuilds the networks in order to launch new services
 
21


Nine Months Ended September 30, 2009 Compared with the Nine Months Ended September 30, 2008

Consolidated Results

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


(in thousands)
 
Nine Months Ended
September 30,
   
Change
 
   
2009
   
2008
   
$
   
%
 
                         
Operating revenues
  $ 120,356     $ 107,304     $ 13,052       12.2  
Operating expenses
    86,137       71,750       14,387       20.1  
Operating income
    34,219       35,554       (1,335 )     (3.8 )
Other income (expense)
    (882 )     (891 )     9       1.0  
Income tax expense
    14,019       13,881       138       1.0  
Net income from continuing operations
  $ 19,318     $ 20,782     $ (1,464 )     (7.0 )


Operating revenues

For the nine months ended September 30, 2009, operating revenue increased $13.1 million, or 12.2%, 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 $7.3 million, or 9.2%, while the incremental Shentel Cable revenues in the Cable TV segment totaled $6.9 million for 2009.   All other Company revenues decreased by $1.1 million, compared to the nine months ended September 30, 2008.

Operating expenses

For the nine months ended September 30, 2009, operating expenses increased $14.4 million, or 20.1%, compared to the 2008 period.  The incremental costs of the Shentel Cable operations accounted for $9.4 million of the year over year increase.  Additional depreciation expense of $3.3 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 $1.7 million of operating costs for rent and power, accounted for the remainder of the increase in operating expenses.

Income tax expense

The Company’s effective tax rate on income from continuing operations increased from 40.0% in the first nine months of 2008 to 42.1% in the first nine 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 nine months ended September 30, 2009, net income from continuing operations decreased $1.5 million, due primarily to operating losses in the Cable TV segment subsequent to the Shentel Cable acquisition in December 2008, and lower operating income in the Wireline segment, partially offset by increased operating income in the Wireless segment.

22


Wireless


(in thousands)
 
Nine Months Ended
September 30,
   
Change
 
   
2009
   
2008
   
$
   
%
 
                         
Segment operating revenues
 
 
         
 
   
 
 
Wireless service revenue
  $ 76,348     $ 67,802     $ 8,546       12.6  
Tower lease revenue
    5,268       4,812       456       9.5  
Equipment revenue
    3,485       4,221       (736 )     (17.4 )
Other revenue
    1,453       2,439       (986 )     (40.4 )
Total segment operating revenues
    86,554       79,274       7,280       9.2  
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    27,534       25,731       1,803       7.0  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    12,237       12,826       (589 )     (4.6 )
Depreciation and amortization
    15,021       12,802       2,219       17.3  
Total segment operating expenses
    54,792       51,359       3,433       6.7  
Segment operating income
  $ 31,762     $ 27,915     $ 3,847       13.8  


Operating revenues

Wireless service revenue increased $8.5 million, or 12.6%, for the nine months ended September 30, 2009, compared to the comparable 2008 period.  Average subscribers increased 8.9% in the first half of 2009 compared to the 2008 first half, while subscribers upgrading to higher revenue plans also added to revenue growth during the first half of the year.  Total credits against gross billed revenue decreased 1.1% to $11.1 million, while bad debt write-offs declined 15.7% to $5.2 million, compared to the first nine months 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 $0.3 million in lower handset revenue due to fewer handsets sold, and $0.4 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 approximately $0.9 million of 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 $1.8 million in the 2009 period compared to 2008.   Costs of the expanded network coverage and roll-out of EVDO coverage resulted in a $3.1 million increase in network costs and a $0.4 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 $1.9 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.   The rate of increase should begin to moderate in 2010 as future expansion efforts will primarily be success-based in order to address capacity requirements.

23


Depreciation and amortization

Depreciation and amortization increased approximately $2.2 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, though the rate of increase should begin to slow in 2010.


Wireline

 
(in thousands)
 
Nine Months Ended
September 30,
   
Change
 
   
2009
   
2008
   
$
   
%
 
                         
Segment operating revenues
                       
Service revenue
  $ 10,566     $ 10,258     $ 308       3.0  
Access revenue
    8,576       9,512       (936 )     (9.8 )
Facilities lease revenue
    10,583       10,182       401       3.9  
Equipment revenue
    111       574       (463 )     (80.7 )
Other revenue
    3,976       3,975       1       0.0  
Total segment operating revenues
    33,812       34,501       (689 )     (2.0 )
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    12,563       11,723       840       7.2  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    5,374       5,568       (194 )     (3.5 )
Depreciation and amortization
    6,334       5,498       836       15.2  
Total segment operating expenses
    24,271       22,789       1,482       6.5  
Segment operating income
  $ 9,541     $ 11,712     $ (2,171 )     (18.5 )


Operating revenues

Access revenue decreased $0.9 million, or 9.8%, for the nine months ended September 30, 2009, from the 2008 nine-month period, due to declining minutes of use.  Minutes of use have declined approximately 10% in 2009 from 2008 levels.  For 2008, equipment revenue included one large non-recurring sale of equipment.

Cost of goods and services

Cost of goods and services increased $0.8 million, due to increased line costs in support of higher facilities lease revenue ($0.3 million); equipment disposals and inventory write-offs of obsolete inventory ($0.2 million); and costs associated with the equipment sale described above ($0.4 million).

Depreciation and amortization

Depreciation and amortization expense increased $0.8 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)
 
Nine Months Ended
September 30,
   
Change
 
   
2009
   
2008
   
$
   
%
 
         
 
             
Segment operating revenues
                       
Service revenue
  $ 10,682     $ 3,591     $ 7,091       197.5  
Equipment and other revenue
    848       389       459       118.0  
Total segment operating revenues
    11,530       3,980       7,550       189.7  
                                 
Segment operating expenses
                               
Cost of goods and services, exclusive of depreciation and amortization shown separately below
    9,211       2,745       6,466       235.6  
Selling, general and administrative, exclusive of depreciation and amortization shown separately below
    3,766       1,031       2,735       265.3  
Depreciation and amortization
    2,513       784       1,729       220.5  
Total segment operating expenses
    15,490       4,560       10,930       239.7  
Segment operating loss
  $ (3,960 )   $ (580 )   $ (3,380 )     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.    The newly acquired cable operations generated $3.0 million of the operating loss for the nine months ended September 30, 2009, while the Company rebuilds the acquired networks in order to launch new services.    However, operating results in the legacy Shenandoah County Cable TV unit have also declined $0.4 million, due approximately equally to declining revenue, increases in programming costs, and increased expenditures for system maintenance.

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 $59.5 million of net cash from operations in the first nine months of 2009, compared to $31.2 million in the first nine 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 September 30, 2009, the Company’s indebtedness totaled $29.1 million, with an annualized overall weighted average interest rate of approximately 5.13%.  The balance included $14.7 million at a variable rate of 2.85% that resets weekly, with the balance at a variety of fixed rates ranging from 6.67% to 8.05%.  As of September 30, 2009, the Company was in compliance with the covenants in its credit agreements.

The Company has the ability to borrow approximately $9.2 million as of September 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 September 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 $62 million, a decrease of approximately $11 million from initial estimates and down $2 million from the most recent projection.  Half of the decrease reflects delays in spending into 2010.  Expected spending for the remainder of the year includes approximately $10 million in our Wireless segment for  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 expects to spend approximately $6 million for telephone network operations and fiber projects and to add capacity and redundancy to our fiber networks in Virginia, Maryland and West Virginia, and the Cable segment expects to spend approximately $8 million, principally in the new markets acquired from Rapid Communications.  Capital spending for 2010 is currently expected to be substantially lower than that budgeted for 2009, and will be more evenly spread amongst our three major segments.  Capital spending may shift amongst these priorities as opportunities arise, and the Company is prepared to reduce spending in areas if market conditions change.

For the 2009 nine month period, the Company spent $37.6 million on capital projects, compared to $38.9 million in the comparable 2008 period.  Spending related to Wireless projects accounted for $15.7 million in the first nine months of 2009, while Wireline projects accounted for $6.4 million, Cable TV for $11.1 million, and other projects $4.4 million.  The Company expects the pace of spending to begin slowing in coming quarters, initially in the Wireless segment and then in the Cable TV segment.

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 on hand and from operations, 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 September 30, 2009, that are expected to have a material impact on the Company’s results of operations or financial condition.


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 September 30, 2009, the Company had $14.7 million of variable rate debt outstanding, bearing interest at a rate of 2.85% 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 $14.4 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 September 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


CONTROLS AND PROCEDURES

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 September 30, 2009.

Changes in Internal Control Over Financial Reporting

During the third 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

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 63% 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


PART II.
OTHER INFORMATION

Risk Factors

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.

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 September 30, 2009:


   
Number of Shares
Purchased
   
Average Price Paid per Share
 
July 1 to July 31
    -     $ 20.08  
August 1 to August 31
    -       -  
September 1 to September 30
    -     $ 17.37  
                 
Total
    1     $ 18.66  


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.

29


SIGNATURES

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: November 5, 2009

30


EXHIBIT INDEX


 
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.

 
31