SHEN

Business Context and Reporting Period

Company: Shenandoah Telecommunications Company (Shentel)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: A diversified telecommunications provider operating in three primary segments: Wireless (Sprint PCS Affiliate), Wireline (voice, DSL, fiber), and Cable TV (video, internet, voice). The company is headquartered in Edinburg, Virginia.

Key Financial Metrics

Note: Net Income includes discontinued operations related to the Converged Services unit held for sale.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 32.5% ($13.0M) for the quarter and 13.8% ($16.6M) for the nine months compared to 2009. This growth was primarily driven by the July 30, 2010, acquisition of JetBroadBand cable operations and the launch of prepaid wireless services (Boost/Virgin Mobile) in July 2010.
• Operating Expenses: Expenses rose 61.1% ($18.0M) for the quarter and 30.2% ($26.0M) for the nine months. Increases were due to JetBroadBand integration costs, prepaid wireless handset subsidies, and a $3.8M pension settlement/curtailment charge in Q2 2010.
• Profitability: Net income from continuing operations decreased 34.0% for the quarter and 21.0% for the nine months due to higher interest expenses from new debt and acquisition-related costs, despite revenue growth.
• Balance Sheet: Total assets increased from $271.7M (Dec 2009) to $467.1M (Sep 2010), largely due to the JetBroadBand acquisition. Long-term debt increased significantly from $28.4M to $185.6M to finance the acquisition.
• One-Time Items: The company recorded a $4.0M gain on the sale of its telephone directory in Q3 2010.

Guidance, Outlook, and Risks

• Acquisition Impact: Management expects the JetBroadBand acquisition to cause a downward trend in net income over the next few years, with the most significant negative impact anticipated in 2011. Long-term positive impacts are expected to materialize in 2012 and beyond as network upgrades complete and penetration rates improve.
• Capital Expenditures: Budgeted capital expenditures for 2010 are approximately $41M, with an additional $11M anticipated for JetBroadBand network upgrades.
• Debt Covenants: The company entered a new Credit Agreement in July 2010 with restrictive covenants, including a maximum leverage ratio of 3.00:1 (decreasing to 2.00:1) and a minimum liquidity balance of $15M. The company was in compliance as of September 30, 2010.
• Key Risks:
  • Indebtedness: High leverage limits financial flexibility and increases vulnerability to interest rate fluctuations (approx. $190M variable rate debt).
  • Sprint Nextel Dependency: The Wireless segment relies on Sprint Nextel for billing and collections; a fee increase to 20% (from 16.8%) effective June 2010 reduces revenue retention.
  • Integration: Risks associated with integrating JetBroadBand and achieving projected synergies.

Investor Verification Checklist

• Debt Servicing: Verify the company's ability to meet the new, more restrictive debt covenants (leverage and coverage ratios) given the increased interest expense.
• JetBroadBand Integration: Monitor the timeline for network upgrades and the actual vs. projected revenue growth from the acquired cable systems.
• Prepaid Wireless Economics: Assess the long-term profitability of the new prepaid wireless segment, considering high upfront acquisition costs and handset subsidies.
• Discontinued Operations: Track the status of the sale of the Converged Services unit, which remains held for sale with no change in estimated fair value since 2009.
• Interest Rate Exposure: Evaluate the impact of rising interest rates on the $189.8M variable rate debt, noting the $63M interest rate swap hedge in place.