Shenandoah Telecommunications Company (Shentel) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise. Shentel provides broadband and related services across Mid-Atlantic markets and owns cell towers.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $71.3 | $66.0 | $143.0 | $130.4 |
| Operating income (loss) | $2.4 | ($3.1) | $5.1 | ($3.5) |
| Operating margin | 3.3% | (4.8%) | 3.6% | (2.7%) |
| Net income (loss) | $1.8 | ($3.2) | $3.9 | ($3.8) |
| Net margin | 2.5% | (4.9%) | 2.7% | (2.9%) |
| Operating cash flow | Not separately provided | Not separately provided | $69.8 | $38.7 |
| Capital expenditures | Not separately provided | Not separately provided | $136.2 | $88.7 |
- Q2 revenue rose 8.1%; first-half revenue rose 9.7%. Broadband drove growth, while first-half Tower revenue declined 2.3%.
- Q2 operating expenses were nearly flat year over year; lower impairment and restructuring costs were offset in part by higher selling, general and administrative expenses and depreciation. First-half operating expenses increased 3.0%.
- At June 30, cash was $26.3, total assets $1,027.5, and shareholders’ equity $649.4. Gross debt was $125.0 ($124.9 net of loan fees), versus $75.0 gross at December 31, 2022. The debt’s stated effective interest rate was 5.71%; the term-loan rate was 6.64% at quarter-end.
- Reported available liquidity was $301.3, comprising cash and $275.0 available under the delayed-draw term loans and revolving facility. Current assets were $78.9 versus current liabilities of $81.8.
Material changes and operating developments
- Glo Fiber expansion was a major growth driver: Glo Fiber passings increased to 182,847 from 112,505 a year earlier, and Glo Fiber residential and SMB revenue more than doubled in both Q2 and the first half. Total broadband passings reached 396,035.
- Broadband revenue increased 8.6% in Q2 and 10.5% in the first half. Commercial Fiber growth included non-recurring T-Mobile early termination fees ($0.4 in Q2; $2.5 in the first half); T-Mobile disconnected 210 backhaul circuits in the first half, with 151 additional disconnects expected in 2023.
- First-half operating cash flow benefited from tax refunds and working-capital changes. The company reported $25.5 of income-tax refunds and approximately $29.0 of net income- and sales-tax refunds during the period.
- First-half capital spending rose $47.5 year over year, principally to support Glo Fiber expansion. Net property, plant and equipment increased to $786.4 from $687.6 at year-end.
Outlook, risks, and unusual items
- Management expects 2023 capital expenditures of $260–$300, primarily for Glo Fiber expansion and government-subsidized broadband builds. It expects spending to exceed operating cash flow through 2025 and aims for Glo Fiber to potentially reach more than 450,000 passings.
- Management expects to draw the remaining $175.0 of delayed-draw term-loan commitments by December 31, 2023 to fund planned capital spending. Borrowing availability expires on that date; principal repayments begin March 31, 2024. The company reported covenant compliance and said anticipated liquidity should be sufficient for the next 12 months.
- In May, Shentel amended its credit agreement to replace LIBOR with SOFR and extend the term-loan borrowing deadline and first repayment date. It also entered into $150.0 of pay-fixed, receive-variable interest-rate swaps; payments begin May 2024 and extend through June 2026. A 1 percentage-point increase in market rates was estimated to add about $1.2 annually to interest expense on debt outstanding at June 30.
- The pension plan was terminated and benefits distributed in June. Shentel contributed an additional $2.9 and recorded a $0.7 settlement gain. The company also recognized a $2.1 after-tax unrealized gain on the swaps in other comprehensive income.
- The planned sale of Beam-related spectrum licenses closed July 6, 2023, after quarter-end, for approximately $21.1 in total consideration, including $17.3 cash and $3.8 of liabilities assumed by the buyer.
- Shentel reported no material expected adverse effect from current litigation and no risk-factor updates from its 2022 Form 10-K. Risks discussed include customer demand and retention, competition, inflation, regulation, technology, labor and capital availability, and adverse external events. Government grants are milestone-dependent; the company said it had not recognized material grant amounts as of June 30.
Important facts for investors to verify
- Whether Glo Fiber’s rapid passings and subscriber growth translate into sustained revenue, margins, and cash generation as capital spending remains elevated.
- Actual timing and amount of the planned $175.0 additional borrowing, borrowing availability before its expiration, covenant headroom, and the effect of higher debt and interest costs.
- Whether T-Mobile’s further circuit disconnects and the expiration of non-recurring termination fees affect Commercial Fiber revenue.
- Timing and conditions for government grant receipts, spectrum-sale proceeds and assumed liabilities, and the remaining 2023 capital-expenditure program.
- The composition and sustainability of first-half cash flow, particularly the significant tax refunds and working-capital effects.