SHEN

Business Context and Reporting Period

Company: Shenandoah Telecommunications Company (Shentel)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2005
Business Overview: A diversified telecommunications provider offering regulated and unregulated services including local exchange telephone, wireless PCS (as a Sprint Nextel affiliate), cable television, internet, long-distance, and fiber optic leasing. The company operates six reportable segments: PCS, Telephone, Converged Services (NTC), Mobile, Holding, and Other.

Key Financial Metrics

Margins (9 Months 2005): Operating Margin approx. 13.9%; Net Margin approx. 7.5%.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 20.0% ($6.2M) for the quarter and 20.9% ($18.5M) for the nine months compared to 2004. Growth was driven by the PCS segment (+17.1% quarterly) and the new Converged Services segment (NTC), which had no prior-year comparable data.
• Operating Income: Remained relatively flat, decreasing slightly by 0.1% ($5k) for the quarter and 0.1% ($14k) for the nine months, despite revenue growth, due to increased operating expenses.
• Net Income: Increased 1.5% ($47k) for the quarter but decreased 2.9% ($238k) for the nine months compared to the prior year.
• Segment Performance:
  • PCS: Operating income rose 46.8% quarterly and 40.4% year-to-date, aided by subscriber growth and a $750k settlement from Verizon.
  • Converged Services (NTC): Reported an operating loss of $1.5M for the quarter and $3.2M for the nine months, reflecting the integration of the November 2004 acquisition.
  • Telephone: Operating income increased 9.0% quarterly and 10.6% year-to-date.
• Debt Reduction: The company reduced its revolving line of credit with CoBank by $12 million during the second quarter of 2005.

Outlook, Risks, and Unusual Items

• Sprint Nextel Merger Impact: The merger of Sprint and Nextel creates uncertainty regarding the Company's PCS management agreement. A "Forbearance Agreement" was signed in August 2005 to avoid litigation while negotiations continue. The Company anticipates potential increases in capital expenditures and operating expenses to meet new program requirements.
• NTC Acquisition Contingency: The Company has claims for the entire $1 million held in escrow from the NTC acquisition regarding specified liabilities. Sellers have disputed these claims, and resolution is expected via arbitration in 2005.
• Rural Telephone Bank (RTB) Dissolution: The RTB is set to dissolve. If legislation passes, the Company expects to receive the full par value of its shares ($10.8M) in 2006, resulting in an estimated net gain of $6.1M.
• Verizon Settlement: In September 2005, the Company settled a claim against Verizon for $750,000 regarding overcharges, which was recorded as a reduction in PCS network costs.
• Dividends: A cash dividend of $0.46 per share was declared, payable December 1, 2005.
• Capital Expenditures: Budgeted at $37.0M for 2005. Approximately $25.6M was spent in the first nine months.

Investor Verification Checklist

• Sprint Nextel Negotiations: Monitor the outcome of discussions regarding the management agreement post-merger and the expiration of the Forbearance Agreement on January 1, 2006.
• NTC Escrow Arbitration: Track the resolution of the $1 million escrow dispute and its potential impact on the Converged Services segment's profitability.
• RTB Legislation: Verify the passage of the agricultural appropriations bill to confirm the timing and amount of the expected $6.1M gain from RTB dissolution.
• PCS Churn and Bad Debt: Review trends in retail churn (2.1% in Q3 2005) and bad debt expense (4.0% of service revenue in Q3 2005), which have shown slight increases.
• Capital Allocation: Assess the sustainability of the $37M capital expenditure budget, particularly the $20M allocated to PCS network enhancements, against operating cash flows.