| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, |
| ☐ | 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 (Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
| Common Stock (No Par Value) | NASDAQ Global Select Market | |
| (Title of Class) | (Name of Exchange on which Registered) | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑☐
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 ☑☐ 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 ☑
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant at June 30, 20142016 based on the closing price of such stock on the Nasdaq Global Select Market on such date was approximately $682,000,000.$1.8 billion.
The number of shares of the registrant’s common stock outstanding on February 19, 2015March 10, 2017 was 24,157,215.49,097,761.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 20152017 annual meeting of shareholders (the “2015“2017 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 20152017 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Item Number | Page Number | |
| PART I | ||
| 1. | 4 | |
| 1A. | 21 | |
| 1B. | 34 | |
| 2. | 34 | |
| 3. | 34 | |
| 4. | 34 | |
| PART II | ||
| 5. | 35 | |
| 6. | 37 | |
| 7. | 38 | |
| 7A. | 60 | |
| 8. | 60 | |
| 9. | 61 | |
| 9A. | 61 | |
| 9B. | 61 | |
| PART III | ||
| 10. | 62 | |
| 11. | 62 | |
| 12. | 62 | |
| 13. | 63 | |
| 14. | 63 | |
| PART IV | ||
| 15. | 63 |
| SHENANDOAH TELECOMMUNICATIONS COMPANY | ||
| TABLE OF CONTENTS | ||
Item Number | Page Number | |
| PART I | ||
| 1. | ||
| 1A. | ||
| 1B. | ||
| 2. | ||
| 3. | ||
| 4. | ||
| PART II | ||
| 5. | ||
| 6. | ||
| 7. | ||
| 7A. | ||
| 8. | ||
| 9. | ||
| 9A. | ||
| 9B. | ||
| PART III | ||
| 10. | ||
| 11. | ||
| 12. | ||
| 13. | ||
| 14. | ||
| PART IV | ||
| 15. | ||
| 16. | ||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report 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. The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “continue” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flow and other operating results, business strategy, financing plans, forecasted trends related to the markets in which we operate and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in this report under “Business” and “Risk Factors.” The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances, except as required by law.
PART I
Some of the information contained in this report concerning the markets and industry in which we operate is derived from publicly available information and from industry sources. Although we believe that this publicly available information and the information provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.
Unless we indicate otherwise, references in this report to “we,” “us,” “our,” “Shentel” and “the Company” means Shenandoah Telecommunications Company and its subsidiaries.
| ITEM 1. | BUSINESS |
Overview
Shenandoah Telecommunications Company is a diversified telecommunications holding company that, through its operating subsidiaries, provides both regulated and unregulated telecommunications services to end-user customers andother telecommunications providers in Virginia, West Virginia, central Pennsylvania, western Maryland, and western Maryland.portions of Kentucky and Ohio. The Company offers a comprehensive suite of voice, video and data communications services based on the products and services provided by the Company’s seven operating subsidiaries.
Acquisition of nTelos and Exchange with Sprint
On May 6, 2016, we completed our previously announced acquisition of NTELOS Holdings Corp. (“nTelos”) for $667.8 million, net of cash acquired. The purchase price was financed by a credit facility arranged by CoBank, ACB, Royal Bank Of Canada, Fifth Third Bank, Bank of America, N.A., Capital One, National Association, Citizens Bank, N.A., and Toronto Dominion (Texas) LLC. We have included the operations of nTelos for financial reporting purposes for the period subsequent to the acquisition.
Shenandoah Personal Communications, LLC ("PCS") a wholly-owned subsidiary of the Company, completed its previously announced transaction with SprintCom, Inc., an affiliate of Sprint Corporation ("Sprint"). Pursuant to this transaction, among other things, we exchanged with Sprint spectrum licenses valued at $198.2 million and customer-based contract rights, valued at $206.7 million, acquired from nTelos, and received an expansion of our affiliate service territory to include most of the service area served by nTelos, valued at $284.1 million, as well as additional customer-based contract rights, valued at $120.9 million, relating to nTelos’ and Sprint’s legacy customers in our newly acquired affiliate service territory. The value of the affiliate agreement expansion is based on changes to the amended affiliate agreement that include an increase in the price to be paid by Sprint from 80% to 90% of the entire business value of Shentel's wireless operations if the affiliate agreement is not renewed and an extension of the affiliate agreement with Sprint by five years to 2029. Also included in the value is the expanded territory in the nTelos service area and the accompanying right to serve all future Sprint customers in the expanded territory, our commitment to upgrade certain coverage and capacity in the newly-acquired service area, the waiver of a portion of the management fee charged by Sprint, as well as other items defined in the amended affiliate agreement.
Operating Segments
The Company provides integrated voice, video and data communications services to end-user customers and other telecommunications providers. 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.maker. The Company has three reportable segments: (1) Wireless, (2) Cable and (3) Wireline; and a fourth segment, Other, which primarily consists of parent company activities.
Wireless Segment
The business of the Wireless segment is conducted principally by the Company’s Shenandoah Personal Communications, LLC (“PCS”) subsidiary. As a Sprint PCS Affiliate of Sprint Communications, Inc. (“Sprint”), thissubsidiary, PCS. This subsidiary provides digital wireless service to a portion of a four-state area extending from Harrisburg, York and Altoona, Pennsylvania, to Harrisonburg, Virginia.Virginia, and continuing south and west throughout southern and western Virginia and almost the entire state of West Virginia, as well as portions of Kentucky and Ohio. The Company’s Shenandoah
Mobile, LLC subsidiary owns 154196 towers, in the Company’s PCS service area, leases space on 153170 towers to PCS and has 198202 leases with other wireless communications providers at December 31, 2014.2016.
PCS has offered personal communications services through a digital wireless telephone and data network since 1995. In 1999, this subsidiary executed a Management Agreement with Sprint. The network, which utilizes code division multiple access, or CDMA, currently covers 269 milesmuch of the territory between Pittsburgh and Philadelphia including substantial coverage along Interstates 81, and 83 and a 177 mile section of the Pennsylvania Turnpike between Pittsburgh and Philadelphia,in this region, as well as many of the communities near these routes.routes; the Interstate 81 corridor through Maryland, West Virginia, and the Shenandoah Valley region of Virginia, much of south-central and western Virginia south of Interstate 64, and much of West Virginia. The Sprint Affiliate area includes approximately 2.45.5 million residents, and our network currently covers more than 91%4.8 million of them. In early 2012, the Company amended its Management Agreement with Sprint in connection with the Company’s commitment to build a 4G LTE network in the Company’s service area. Under its agreements with Sprint, the Company is the exclusive provider of wireless mobility communications network products and services in the 800 andmegahertz (MHz), 1900 megahertz (MHz) and 2.5 gigahertz (GHz) spectrum ranges. The Company had 287,867722,562 postpaid PCS customers at December 31, 2014,2016, an increase of 5.2%131% compared to December 31, 2013.2015. The Company had 145,162236,138 prepaid wireless customers at December 31, 2014,2016, an increase of 5.9%65% compared to December 31, 2013. 2015. These increases primarily resulted from the nTelos acquisition. Of the Company’s total operating revenues, 67.2% in 2016, 56.3% in 2015 and 58.5% in 2014 59.2% in 2013 and 58.6% in 2012 were generated by or through Sprint and its customers using the Company's portion of Sprint’s nationwide PCS network. No other customer relationship generated more than 1.5%10.0% of the Company’s total operating revenues in 2014, 20132016, 2015 or 2012.2014.
Under the Sprint agreements, Sprint provides the Company significant support services, such as customer service, billing, collections, long distance, national network operations support, inventory logistics support, use of the Sprint brand names, national advertising, national distribution and product development.
The Company records its postpaid PCSwireless revenues, with the exception of certain roaming and equipment sales revenues, based on the net PCSwireless revenues billed by Sprint, net of an 8% Management Fee and a Net Service Fee retained by Sprint. The Net Service Fee was 12.0%14.0% for 2011, 2012,2014 and early 2013. Effective August2015. The Company amended its agreements with Sprint, effective January 1, 2013, this fee increased2016, in order to better allocate certain costs covered by the Net Service Fee. The Net Service Fee was reduced from 14.0% to 8.6%, and certain costs and revenues previously included within the maximum allowed underNet Service Fee were broken out of the Net Service Fee and are now separately settled. Separately settled revenues primarily consist of revenues associated with Sprint’s wholesale subscribers’ use of our network and net travel revenue. In addition, the Company will be charged for the costs of subsidized handsets sold through Sprint’s national channels as well as commissions paid by Sprint agreement.to third-party resellers in our service territory. Net PCSwireless revenues billed by Sprint consist of gross monthly recurring charges for service, net of both recurring and non-recurring customer credits, account write offs and other billing adjustments. Neither the Management Fee nor the Net Service Fee areis deferred.
Prepaid wireless revenues are recorded net of a 6% Management Fee retained by Sprint. Sprint charges the Company separately to acquire and support prepaid customers. These charges are calculated based on Sprint’s national averages for its prepaid programs, and are billed per user or per gross additional customer, as appropriate. The customer acquisition costs include handset subsidies.
Under our amended affiliate agreement, Sprint agreed to waive the Management Fees charged on both postpaid and prepaid revenues, up to $4.2 million per month, until the total amount waived reaches $252 million, which is expected to take just under six years. The Company is recognizing this fee reduction on a straight-line basis over the remaining initial term of the Management Agreement with Sprint, which ends November 5, 2029.
Cable Segment
The business of the Company’s Cable segment is conducted through Shenandoah Cable Television, LLC (“Shenandoah Cable”). Shenandoah Cable provides video, voice and data services to customers in portions of Virginia, West Virginia and western Maryland, and leases fiber optic facilities throughout its service area. It does not include video, internet and voice services provided to customers in Shenandoah County, Virginia, which are included in the Wireline segment.
The Company has acquired several cable networks since 2008, and as of December 31, 2014,2016, the Company has upgraded substantially all of the markets acquired in these transactions.transactions in order to offer robust video, high speed data and telephone services throughout its territory. Most of these markets are connected by a fiber network of 2,8343,137 miles, which interconnects with the Wireline segment’s 1,5561,971 mile fiber network.
There were 121,716132,465 cable revenue generating units at December 31, 2014,2016, an increase of 6.9%5.5% compared to December 31, 2013.2015. A revenue generating unit consists of each separate service (video, voice and internet) subscribed to by a customer.
Wireline Segment
The Wireline segment provides regulated and unregulated voice services, DSL internet access, cable modem and long distance access services throughout Shenandoah County and portions of Rockingham, Frederick, Warren and Augusta counties, Virginia. The segment also provides video services in portions of Shenandoah County, and leases fiber optic facilities throughout the northern Shenandoah Valley of Virginia, northern Virginia and adjacent areas along the Interstate 81 corridor through West Virginia, Maryland and portions of Pennsylvania.
The business of the Company’s Wireline segment is conducted primarily by its Shenandoah Telephone Company subsidiary. This subsidiary provides both regulated and unregulated telephone services and fiber optic facilities in Virginia, primarily throughout the Northernnorthern Shenandoah Valley.
Shenandoah Telephone Company provides local telephone services to 21,61218,443 customers as of December 31, 2014,2016, primarily in Shenandoah County and small service areas in Rockingham, Frederick, Warren, and Augusta counties in Virginia. This subsidiary provides access for interexchange carriers to the local exchange network and switching for voice products offered through the Cable segment. This subsidiary has a 20 percent ownership interest in Valley Network Partnership (“ValleyNet”), which offers fiber network facility capacity to business customers and other telecommunications providers in western, central, and northern Virginia, as well as the Interstate 81 corridor from Johnson City, Tennessee to Carlisle, Pennsylvania.
Shentel Cable of Shenandoah County, LLC was createdprovides video services to 5,264 customers and high speed data to 1,072 customers as a new subsidiary of the Wireline segment in December 2013.31, 2016. The video services offered in Shenandoah County share much of the network which the regulated telephone company uses to serve its customers. These services had previously been includedcustomers in the Cable segment. The subsidiary provides video servicesaddition to 5,692 customers as of December 31, 2014.its own coaxial network.
The Wireline segment also includes Shentel Communications, LLC, which was created through the 2012 merger of four other of the Company’s Wireline subsidiaries into Shentel Communications, LLC. The following services are provided through this entity:
| Operation of the Maryland, |
| Facility leases of fiber optic capacity, owned by itself and affiliates, in surrounding counties and into Herndon, Virginia. |
Effective for the fourth quarter of 2015, the Company expanded its data offerings in its legacy telephone service area. Previously, the Company only offered DSL-based internet access, and a phone line was required to obtain this service. Subscribers who have access to our video services (the video network overlaps a portion of our legacy telephone network) are able to purchase higher-speed internet packages over the coaxial cable network, while subscribers in our regulated telephone service area who do not have access to our video network can purchase DSL for internet access, without having to purchase telephone service.
Other Segment
The Other segment includes Shenandoah Telecommunications Company, which provides investing and management services to its subsidiaries.
Additional information concerning the Company’s operating segments is set forth in Note 1517 of the Company’s consolidated financial statements appearing elsewhere in this report.
Competition
The telecommunications industry is highly competitive. We compete primarily on the basis of the price, availability, reliability, variety and quality of our offerings and on the quality of our customer service. Our ability to compete effectively depends on our ability to maintain high-quality services at prices competitive with those charged by our competitors. In particular, price competition in the integrated telecommunications services markets generally has been intense and is expected to increase. Our competitors include, among others, larger providers such as AT&T Inc., Verizon Communications Inc., T-Mobile USA, Inc., U.S. Cellular Corp., CenturyLink, Inc., Frontier Communications Corp., DISH Network Corporation, DIRECTV, and various competitive service providers. The larger providers have substantially greater infrastructure, financial, personnel, technical, marketing and other resources, larger numbers of established customers and more prominent name recognition than the Company.
In markets where we provide video services, we also compete in the provision of local telephone and high speed data services against the incumbent local telephone company. Incumbent carriers enjoy substantial competitive advantages arising from their historical monopoly position in the local telephone market, including pre-existing customer relationships with virtually all end-users. Wireless communications providers also are competing with wireline service providers, which further increasesincrease competition.
Competition is intense in the wireless communications industry. Competition has caused and we anticipate that competition will continue to cause, the market prices for wireless products and services to decrease. This has resulted in some carriers introducing pricing plans that are structurally different and often more aggressively priced than in the past. Wireless providers are upgrading their wireless services to better accommodate real-time and downloadable audio and video content as well as Internet browsing capabilities and other services. Our ability to compete effectively will depend, in part, on our ability to anticipate and respond to various competitive factors affecting the wireless industry.
Competition is also intense and growing in the market for video services. Incumbent cable television companies, which have historically provided video service, face competition from direct broadcast satellite providers, on-line video services and from large wireline providers of telecommunications services (such as Verizon, Centurylink, Frontier and AT&T) which have begun to upgradeupgraded their networks to provide video services in addition to voice and high-speed Internet access services. These entities are large and have substantially greater infrastructure, financial, personnel, technical, marketing and other resources, larger numbers of established customers and more prominent name recognition than the Company. Our ability to compete effectively will depend, in part, on the extent to which our service offerings overlap with these entities, and on our ability to anticipate and respond to the competitive forces affecting the market for video and other services.
A continuing trend toward consolidation, mergers, acquisitions and strategic alliances in the telecommunications industry could also increase the level of competition we face by further strengthening our competitors.
Regulation
Our operations are subject to regulation by the Federal Communications Commission (“FCC”), the Virginia State Corporation Commission (“VSCC”), the West Virginia Public Service Commission, the Maryland Public Service Commission, the Pennsylvania Public Utility Commission and other federal, state, and local governmental agencies. The laws governing these agencies, and the regulations and policies that they administer, are subject to constant review and revision, and some of these changes could have material impacts on our revenues and expenses.
Regulation of Wireless Operations
We operate our wireless business using radio spectrum licensed frommade available by Sprint under the Sprint management agreements. Our wireless business is directly or indirectly subject to, or affected by, a number of regulations and
requirements of the FCC and other governmental authorities that apply to providers of commercial mobile radio services (“CMRS”).
Interconnection.Federal law and FCC regulations impose certain obligations on CMRS providers to interconnect their networks with other telecommunications providers (either directly or indirectly) and to enter into interconnection agreements (“ICAs”) with certain types of telecommunications providers. Interconnection agreements typically are negotiated on a statewide basis and are subject to state approval. If an agreement cannot be reached, parties to interconnection negotiations can submit unresolved issues to federal or state regulators for arbitration. In addition, FCC regulations previously required that local exchange carriers (“LECs”) and CMRS providers establish reciprocal compensation arrangements for the termination of traffic to one another. Disputes regarding intercarrier compensation can be brought in a number of forums (depending on the nature and jurisdiction of the dispute) including state public utility commissions (“PUCs”), FCC and the courts. The Company does not presently have any material interconnection or intercarrier compensation disputes with respect to its wireless operations.
On October 27, 2011, the FCC adopted a report and order which comprehensively reformed and modernized the agency’s intercarrier compensation (“ICC”) rules governing the telecommunications industry. Under the newcurrent FCC regime, effectivesince December 29, 2011, local traffic between CMRS providers and most LECs must be compensated pursuant to a default bill-and-keep framework if there was no pre-existing agreement between the CMRS provider and the LEC. A federal appeals court has affirmed the FCC’s report and order, but a further appeal has been filed.order. Additionally, the FCC is considering a number of petitions for declaratory ruling and other proceedings regarding disputes among carriers relating to interconnection payment obligations. Resolution of these proceedings and any additional FCC rules regarding interconnection could directly affect us in the future. Interconnection costs represent a significant expense item for us and any significant changes in the intercarrier compensation scheme may have a material impact on our business. We are unable to determine with any certainty at this time whether any such changes would be beneficial to or detrimental to our wireless operations.
On December 18, 2014 the FCC issued a declaratory ruling which provides additional guidance concerning how the agency will evaluate the reasonableness of data roaming agreements. The agency clarified that it will consider the reasonableness of data roaming rates based upon, in part, whether such rates exceed retail, international and resale rates, as well as how such rates compare to other providers’ rates. The ruling also clarifies other aspects of the FCC’s 2011 data roaming order concerning the appropriate presumptions applied to certain contract terms and the inclusion of build-out terms when considering the reasonableness of roaming rates and terms. The ruling is expected to provide improved negotiating leverage to Sprint, and other providers, in negotiating new data roaming agreements with AT&T and Verizon. It is unclear whether such leverage will result in lower data roaming rates for Sprint, or whether such reduced rates will accrue to the benefit of our operations. There is also a possibility that the ruling could provide a basis for smaller wireless providers to seek more beneficial terms in their roaming agreements with Sprint, which may impact roaming costs in our territory.
Universal Service Contribution Requirements.Consistent with the terms of our management agreements, Sprint is required to contribute to the federal universal service fund (the “USF”) based in part on the revenues it receives in connection with our wireless operations. The purpose of this fund is to subsidize telecommunications and broadband services in rural areas, for low-income consumers and for schools, libraries and rural healthcare facilities. Sprint is permitted to, and does, pass through these mandated payments as surcharges paid by our customers.
Transfers, Assignments and Changes of Control of PCS Licenses. The FCC must give prior approval to the assignment of ownership or control of a PCS license, as well as transfers involving substantial changes in such ownership or control. The FCC also requires licensees to maintain effective working control over their licenses. Our agreements with Sprint reflect an alliance that the parties believe meets the FCC requirements for licensee control of licensed spectrum. If the FCC were to determine that the Sprint management agreements need to be modified to increase the level of licensee control, we have agreed with Sprint under the terms of our Sprint PCS agreements to use our best efforts to modify the agreements as necessary to cause the agreements to comply with applicable law and to preserve to the extent possible the economic arrangements set forth in the agreements. If the agreements cannot be modified, the agreements may be terminated pursuant to their terms. The FCC could also impose sanctions on the Company for failure to meet these requirements.
PCS licenses are granted for ten-year terms. Sprint’s PCS licenses for our service area are scheduled to expire on various dates betweenfrom the date of publication of this disclosure through June 2015 and December 2024.2025. Licensees have an expectation of license renewal if they have provided “substantial” service during its past license terms, and have “substantially”
complied with FCC rules and policies, and with the Communications Act of 1934. All of the PCS licenses used in our wireless business have been successfully renewed since their initial grant.
Construction and Operation of Wireless Facilities.Wireless systems must comply with certain FCC and Federal Aviation Administration (“FAA”) regulations regarding the registration, siting, marking, lighting and construction of transmitter towers and antennas. The FCC also requires that aggregate radio frequency emissions from every site meet certain standards. These regulations affect site selection for new network build-outs and may increase the costs of improving our network. We cannot predict what impact the costs and delays from these regulations could have on our operations.
The FCC’s decision to authorize a proposed tower may also be subject to environmental review pursuant to the National Environmental Policy Act of 1969 (“NEPA”), which requires federal agencies to evaluate the environmental impacts of their decisions under some circumstances. FCC regulations implementing NEPA place responsibility on each applicant to investigate any potential environmental effects of a proposed operation, including health effects relating to radio frequency emissions, and impacts on endangered species such as certain migratory birds, and to disclose any significant effects on the environment to the agency prior to commencing construction. Pursuant to FCC rules, the public is afforded an opportunity to comment on the environmental effects of a proposed antenna structure that requires registration with the FCC. The FCC may then determine if further environmental review is necessary. In the event that the FCC determines that a proposed tower would have a significant environmental impact, the FCC would require preparation of an environmental impact statement.
In addition, tower construction is subject to regulations implementing the National Historic Preservation Act. Compliance with FAA, environmental or historic preservation requirements could significantly delay or prevent the registration or construction of a particular tower or make tower construction more costly. On July 15, 2016, Congress enacted new tower marking requirements for certain towers located in rural areas, which may increase our operational costs.In some jurisdictions, local laws or regulations may impose similar requirements.
Wireless Facilities Siting. States and localities are authorized to engage in forms of regulation, including zoning and land-use regulation, which may affect our ability to select and modify sites for wireless facilities. States and localities may not engage in forms of regulation that effectively prohibit the provision of wireless services, discriminate among functionally equivalent services or regulate the placement, construction or operation of wireless facilities on the basis of the environmental effects of radio frequency emissions. Courts and the FCC are routinely asked to review whether state and local zoning and land-use actions should be preempted by federal law, and the FCC also is routinely asked to consider other issues affecting wireless facilities siting in other proceedings. We cannot predict the outcome of these proceedings or the effect they may have on us.
Communications Assistance for Law Enforcement Act. The Communications Assistance for Law Enforcement Act (“CALEA”) was enacted in 1994 to preserve electronic surveillance capabilities by law enforcement officials in the face of rapidly changing telecommunications technology. CALEA requires telecommunications carriers, including the Company, to modify their equipment, facilities and services to allow for authorized electronic surveillance based on either industry or FCC standards. Following adoption of interim standards and a lengthy rulemaking proceeding, including an appeal and remand proceeding, all carriers were required to be in compliance with the CALEA requirements as of June 30, 2002. We are currently in compliance with the CALEA requirements.
Local Number Portability. All covered CMRS providers, including the Company, are required to allow wireless customers to retain their existing telephone numbers when switching from one telecommunications carrier to another. These rules are generally referred to as wireless local number portability (“LNP”). The future volume of any porting requests, and the processing costs related thereto, may increase our operating costs in the future. We are currently in compliance with LNP requirements. The FCC is considering recommendations to selecthas selected a new Local Number Portability Administrator, afterand the current administrator’s contract expires in June 2015. The potential transition to a new Local Number Portability Administrator may impact our ability to manage number porting and related tasks, or may result in additional costs related to the transition.
Number Pooling. The FCC regulates the assignment and use of telephone numbers by wireless and other telecommunications carriers to preserve numbering resources. CMRS providers in the top 100 markets are required to be capable of sharing blocks of 10,000 numbers among themselves in subsets of 1,000 numbers (“1000s-block number pooling”); the FCC considers state requests to implement 1000s-block number pooling in smaller markets on a case-by-case basis, and has granted such requests in the past. In addition, all CMRS carriers, including those operating outside the top 100 markets, must be able to support roaming calls on their network placed by users with
pooled numbers. Wireless carriers must also maintain detailed records of the numbers they have used, subject to audit. The pooling requirements may impose additional costs and increase operating expenses on us and limit our access to numbering resources. We are currently in compliance with the FCC number pooling requirements.
Telecommunications Relay Services (“TRS”).Federal law requires wireless service providers to take steps to enable the hearing impaired and other disabled persons to have reasonable access to wireless services. The FCC has adopted rules and regulations implementing this requirement to which we are subject, and requires that we pay a regulatory assessment to support such telecommunications relay services for the disabled. The Company is in compliance with these requirements.
Consumer Privacy.The Company is subject to various federal and state laws intended to protect the privacy of end-users who subscribe to the Company’s services. For example, the FCC has regulations that place restrictions on the permissible uses that we can make of customer-specific information, known as Customer Proprietary Network Information (“CPNI”), received from subscribers, and that govern procedures for release of such information in order to prevent identity theft schemes. Other laws impose criminal and other penalties for the violation of certain CPNI requirements and related privacy protections. In addition, as explained below, the FCC has determined that broadband Internet access services are subject to the statutory protections afforded to CPNI and has implemented regulations that require broadband internet access service providers to provide additional notice of privacy policies and practices, opt-in and opt-out consent for certain use and disclosure of CPNI and to implement reasonable data security practices. Numerous parties have petitioned for reconsideration of this order, and the FCC may revisit its decision to extend Title II obligations to broadband providers.
Our operations are also subject to federal and state laws governing information security. In the event of an information security breach, such rules may require consumer and government agency notification and may result in regulatory enforcement actions with the potential of monetary forfeitures.
In addition, restrictions exist, and new restrictions are considered from time to time by Congress, federal agencies and states, on the extent to which wireless customers may receive unsolicited telemarketing calls, text messages, junk e-mail or spam. Congress, federal agencies and certain states also are considering, and may in the future consider imposing, additional requirements on entities that possess consumer information to protect the privacy of consumers. The Company is required to file an annual certification of compliance with the FCC’s CPNI rules. Complying with these requirements may impose costs on us or compel us to alter the way we provide or promote our services.
Consumer Protection. Many members of the wireless industry, including us, have voluntarily committed to comply with the CTIA Consumer Code for Wireless Service, which includes consumer protection provisions regarding the content and format of bills; advance disclosures regarding rates, terms of service, contract provisions, and network coverage; and the right to terminate service after a trial period or after changes to contract provisions are implemented. The FCC and/or some state commissions have considered or are considering imposing additional consumer protection requirements upon wireless service providers, including billing-related disclosures and usage alerts, as well as the adoption of standards for responses to customers and limits on early termination fees. On December 12, 2013, CTIA filed a letter with the FCC detailing voluntary commitments by large wireless providers, including Sprint, which will permit subscribers and former subscribers to unlock their mobile devices, subject to contract fulfillment timeframestime frames for postpaid plans, or after one year for prepaid plans. The carriers have agreed to fully implement the voluntary commitments within 12 months of adoption. Subsequently, on February 11, 2014, CTIA-The Wireless Association adopted six standards on mobile wireless device unlocking into the CTIA Consumer Code for Wireless Service. Finally, on August 1, 2014, the Unlocking Consumer Choice and Wireless Competition Act was enacted to make it easier for consumers to change their cell phone service providers without paying for a new phone. This new statute reverses a decision made by the Library of Congress in 2012 that said it was illegal for consumers to “unlock” their cell phones for use on other networks without their service provider’s permission. Adoption of these and other similar, consumer protection requirements could increase the expenses or decrease the revenue of our wireless business. Courts have also had, and in the future may continue to have, an effect on the extent to which matters pertaining to the content and format of wireless bills can be regulated at the state level. Any further changes to these and similar requirements could increase our costs of doing business and our costs of acquiring and retaining customers.
Net Neutrality. For information concerning the FCC’s non-discrimination requirements for wireless broadband providers, see the discussion under “Regulation of Wireline Operations – Broadband Services / Net Neutrality” below.
Radio Frequency Emission from Handsets. Some studies (and media reports) have suggested that radio frequency emissions from handsets, wireless data devices and cell sites may raise various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Most of the expert reviews conducted to date have concluded that the evidence does not support a finding of adverse health effects but that further research is appropriate. Courts have dismissed a number of lawsuits filed against other wireless service operators and manufacturers, asserting claims relating to radio frequency transmissions to and from handsets and wireless data devices. However, there can be no assurance that the outcome of other lawsuits, or general public concerns over these issues, will not have a material adverse effect on the wireless industry, including us.
Accessibility. The FCC imposes obligations on telecommunications service providers, including wirelessbroadband internet access service providers and multi-channel video programming distributors ("MVPDs"), intended to ensure that individuals with disabilities receiveare able to access toand use telecommunications and video programming services and equipment. In 2012, certain FCC rules became effective that require telecommunications service providers, including wireless providers, to be capable of transmitting 911 calls from persons who are deaf, hard of hearing or speech disabled, including through TTY capability over the public switched telephone network ("PSTN"), various forms of PSTN-based and internet protocol ("IP")-based TRS, and text-to-911 (where available). The FCC recently amended its rules to allow wireless telecommunications service providers to transition to use of real time text ("RTT") in lieu of TTY technology for communications using wireless IP-based voice services. In addition, telecommunications services, including interconnected voice over internet protocol ("VoIP"), and advanced communications services (ACS)("ACS") (such as email and text messaging) to make their services and productsmust be accessible to and usable by disabled persons, including by ensuring that email and texts are compatible with commonly used screen readers, unless doing so is not achievable. The 2012FCC rules require that customer support for covered services (included website based) is accessible and also imposes extensive recordkeeping for both telecommunications services and ACS, and subject providers to significant penalties for non-compliance with accessibility requirements as well as for falsely certifying compliance with recordkeeping obligations. Similarly, existing FCC rules require us to offer a minimum number of hearing aid-compatible handsets to consumers. The FCC recently proposed rules that would update technical specifications for hearing-aid compatible ("HAC") handsets and extend HAC compatibility requirements to VoIP handsets. We cannot predict if or when additional changes will be made to the current FCC accessibility rules, or whether and how such changes will affect us.
911 Services. We are subject to FCC rules that require wireless carriers to make emergency 911 services available to their subscribers, including enhanced 911 services that convey the caller’s telephone number and detailed location information to emergency responders. The FCC has also sought public comment to investigate further requirements regarding the accuracy of wireless location information transmitted during an emergency 911 call. Additionally, the FCC has recently proposed rules that would require all wireless carriers to support the ability of consumers to send text messages to 911 in all areas of the country where 911 Public Safety Answering Points (“PSAP”) are capable of receiving text messages. Also, in May 2013, the FCC adopted rules which require CMRS providers to provide an automatic “bounce-back” text message when a subscriber attempts to send a text message to 911 in a location where text-to-911 is not available. In August of 2014, the FCC ordered that all CMRS and interconnected text providers must be capable of supporting text-to-911 by December 31, 2014. Such covered text providers have until June 30, 2015, to begin delivering text-to-911 messages to PSAPs that have submitted requests for such delivery by December 31, 2014, unless otherwise agreed with the PSAP, and six months to begin delivery after any such request made after December 31, 2014. We are not able to predict the effect that these, or any other, changes to the 911 service rules will have on our operations.
Regulation of Wireline Operations
As an ILEC, Shenandoah Telephone Company’s (“Shenandoah Telephone”) operations are regulated by federal and state regulatory agencies.
State Regulation. Shenandoah Telephone’s rates for local exchange service, intrastate toll service, and intrastate access charges are subject to the approval of the VSCC. The VSCC also establishes and oversees implementation of certain provisions of the federal and state telecommunications laws, including interconnection requirements, promotion of competition, and consumer protection standards. The VSCC also regulates rates, service areas, service standards, accounting methods, affiliated transactions and certain other financial transactions. Pursuant to the FCC’s October 27, 2011 order adopting comprehensive reforms to the federal intercarrier compensation and universal service policies and rules (as discussed above and further below), the FCC preempted state regulatory commissions’
jurisdiction over all terminating access charges, including intrastate terminating access charges, which historically have been within the states’ jurisdiction. However, the FCC vested in the states the obligation to monitor the tariffing of intrastate rate reductions for a transition period, to oversee interconnection negotiations and arbitrations, and to determine the network edge, subject to FCC guidance, for purposes of the new “bill-and-keep” framework. A federal appeals court has affirmed the decision, but a further appeal has been filed.decision. The outcome of those further challenges could modify or delay the effectiveness of the FCC’s rule changes. Although we are unable to predict the ultimate effect that the FCC’s order will have on the state regulatory landscape or our operations, the rules may decrease or eliminate revenue sources or otherwise limit our ability to recover the full value of our network assets.
Interconnection.Federal law and FCC regulations impose certain obligations on incumbent local exchange carriers to interconnect their networks with other telecommunications providers (either directly or indirectly) and to enter into interconnection agreements (“ICAs”)ICAs with certain types of telecommunications providers. Interconnection agreements typically are negotiated on a statewide basis and are subject to state approval. If an agreement cannot be reached, parties to interconnection negotiations can submit unresolved issues to federal or state regulators for arbitration. Disputes regarding intercarrier compensation can be brought in a number of forums (depending on the nature and jurisdiction of the dispute) including state public utility commissions (“PUCs”),PUCs, the FCC, and the courts. The Company is working to resolve several routine interconnection and intercarrier compensation-related disputes concerning the appropriate rates and terms for the origination and termination of traffic on third-party networks.
Regulation of Intercarrier Compensation. Shenandoah Telephone participates in the access revenue pools administered by the FCC-supervised National Exchange Carrier Association (“NECA”), which collects and distributes the revenues from interstate access charges that long-distance carriers pay us for originating and terminating interstate calls over our network. Shenandoah Telephone also participates in some NECA tariffs that govern the rates, terms, and conditions of our interstate access offerings. Some of those tariffs are under review by the FCC, and we may be obligated to refund affected access charges collected in the past or in the future if the FCC ultimately finds that the tariffed rates were unreasonable. We cannot predict whether, when, and to what extent such refunds may be due.
On October 27, 2011, the FCC adopted a number of broad changes to the ICC rules governing the interstate access rates charged by small-to-mid-sized ILECs such as Shenandoah Telephone. For example, the FCC adopted a national “bill-and-keep” framework, which will result in substantial reductions in the access charges paid by long distance carriers and other interconnecting carriers, possibly to zero, accompanied by increases to the subscriber line charges paid by business and residential end users. In addition, the FCC has changed some of the rules that determine what compensation voice service providers, including but not limited to wireless carriers, competitive local exchange carriers, Voice over Internet Protocol (“VoIP”)VoIP providers and providers of other Internet-enabled services, should pay and receive for originating and terminating traffic that is interconnected with ILEC networks.
The VSCC has jurisdiction over local telephone companies’ intrastate access charges, and has indicated in the past that it might open a generic proceeding on the rates charged for intrastate access, although the scope and likelihood of such a proceeding is unclear in light of the FCC’s overhaul of the intercarrier compensation rules (discussed above), which affect states’ jurisdiction over intrastate access charges. The VSCC issued a Final Order on August 9, 2011 that required service providers to eliminate their common carrier line charges in three stages. Pursuant to the order, the Company’s intrastate common line revenue hashad declined in each of the lastprevious three years, and was eliminated in mid-2014.
Interstate and intrastate access charges are important sources of revenue for Shenandoah Telephone’s operations. Unless these revenues can either be replaced through a new universal service mechanism, or unless they can be reflected in higher rates to local end users, or replaced through other newly created methods of cost recovery, the loss of revenues to us could be significant. There can be no assurance that access charges in their present form will be continued or that sufficient substitutes for the lost revenues will be provided. If access charges are reduced without sufficient substitutes for the lost revenues, this could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, changes to the intercarrier compensation rules and policies could have a material impact on our competitive position vis-à-vis other service providers, particularly in our ability to proactively make improvements to our networks and systems.
Universal Service Fund. Shenandoah Telephone receives disbursements from the USF. In October 2011, the FCC adopted comprehensive changes to the universal service program that are intended in part to stabilize the USF, the total funding of which had increased considerably in recent years. Some of the FCC’s reforms impact the rules that govern disbursements from the USF to rural ILECs such as Shenandoah Telephone, and to other providers. Such changes, and additional future changes, may reduce the size of the USF and payments to Shenandoah Telephone, which could have an adverse impact on the Company’s financial position, results of operations, and cash flows. The Company is not able to predict if or when additional changes will be made to the USF, or whether and how such changes would affect the extent of our total federal universal service assessments, the amounts we receive, or our ability to recover costs associated with the USF.
If the Universal Service Administrative Company (“USAC”) were required to account for the USF program in accordance with generally accepted accounting principles for federal agencies under the Anti-Deficiency Act (the “ADA”), it could cause delays in USF payments to fund recipients and significantly increase the amount of USF contribution payments charged to wireline and wireless consumers. Each year since 2004, Congress has adopted short-term exemptions for the USAC from the ADA. Congress has from time to time considered adopting a longer term exemption for the USAC from the ADA, but we cannot predict whether any such exemption will be adopted or the effect it may have on the Company.
In February, 2012, the FCC released an order making substantial changes to the rules and regulations governing the USF Lifeline Program, which provides discounted telephone services to low income consumers. The order imposes greater recordkeeping and reporting obligations, and generally subjects providers of Lifeline-supported services to greater oversight. As a result of our Company providing Lifeline-supported services, it is subject to increased reporting and recordkeeping requirements, and could be subject to increased regulatory oversight, investigations or audits. The FCC, USAC and other authorities have conducted, and in the future are expected to continue to conduct, more extensive audits of USF support recipients, as well as other heightened oversight activities. The impact of these activities on the Company, if any, is uncertain. In 2016, the FCC released a second substantial Lifeline order that amended the program to provide support for broadband services. Included among the new rules was a requirement that any eligible telecommunications carrier (ETC) which offered broadband service, on its own or through an affiliate, must also offer Lifeline-supported broadband service. Due to this requirement, our company will begin offering Lifeline-supported broadband in areas where it operates as an ETC.
Broadband Services.
In December 2010, the FCC adopted so-called “net neutrality” rules that it deemed necessary to ensure an “open” Internet that is not unduly restricted by network “gatekeepers.” Those rules subjected wireline and wireless broadband Internet access service providers to varying regulations (depending upon the nature of the service) including three key requirements: 1) a prohibition against blocking websites or other online applications; 2) a prohibition against unreasonable discrimination among Internet users or among different websites or other sources of information; and 3) a transparency requirement compelling the disclosure of network management policies. Our wireline subsidiaries that provide broadband Internet access services were subject to these rules. However, on January 14, 2014, the U.S. Court of Appeals for the D.C. Circuit, in Verizon v. FCC, struck down major portions of the FCC’s net neutrality rules governing the operating practices of broadband Internet access providers like us. The Court struck down the first two components of the rules, the prohibition against blocking and unreasonable discrimination, concluding that they constitute “common carrier” restrictions that are not permissible given the FCC’s earlier decision to classify Internet access as an “information service,” rather than a “telecommunications service.” The Court simultaneously upheld the FCC’s transparency requirement, concluding that this final requirement does not amount to impermissible common carrier regulation.
underlying concerns. The FCC may revisit its decision to extend Title II obligations to broadband providers at some point in the future. We do not know at the current time if the new regulations proposed by the Chairman will go into effect,survive judicial review, nor do we know how they would be administered if they do, but they could adversely affect the potential development of advantageous relationships with Internet content providers. Rules or statutes increasing the regulation of our Internet services could limit our ability to efficiently manage our networks and respond to operational and competitive challenges.
As the Internet has matured, it has become the subject of increasing regulatory interest. Congress and Federal regulators have adopted a wide range of measures directly or potentially affecting Internet use. The adoption of new Internet regulations or policies could adversely affect our business.
On January 29, 2015, the FCC, in a nation-wide proceeding evaluating whether “advanced broadband” is being deployed in a reasonable and timely fashion, increased the minimum connection speeds required to qualify as advanced broadband service to 25 Mbps for downloads and 3 Mbps for uploads. As a result, the FCC concluded that advanced broadband was not being sufficiently deployed and initiated a new inquiry into what steps it might take to encourage broadband deployment. This action may lead the FCC to adopt additional measures affecting our broadband business. At the same time, the FCC has ongoing proceedings to allocate additional spectrum for advanced wireless service, which could provide additional wireless competition to our broadband business.
In addition, in 2015 the West Virginia Office of the Attorney General recently initiated an informal inquiry into the marketing practices and performance of all sizable West Virginia Internet service providers, including Shenandoah Cable Television, LLC, within West Virginia. Pursuant to requests from the Attorney General’s office the Company provided all requested information concerning terms of service, pricing, packaging, advertising, service intervals, infrastructure investments and related information (including the results of internal speed tests). It is unclear when this inquiry will be completed, or whether the Attorney General’s office will request additional information, or take any further action. The impact of these activities on the Company, if any, is uncertain.
Other Regulatory Obligations. Shenandoah Telephone is subject to requirements relating to CPNI, CALEA implementation, interconnection, access to rights of way, number portability, number pooling, accessibility of telecommunications for those with disabilities, protection for consumer privacy, and other obligations similar to those discussed above for our wireless operations.
The FCC and other authorities continue to consider policies to encourage nationwide advanced broadband infrastructure development. For example, the FCC has largely deregulated DSL and other broadband services offered by ILECs. Such changes benefit our ILEC, but could make it more difficult for us (or for NECA) to tariff and pool DSL costs. Broadband networks and services are subject to CALEA rules, network management disclosure and prohibitions, requirements relating to consumer privacy, and other regulatory mandates.
911 Services. We are subject to FCC rules that require telecommunications carriers to make emergency 911 services available to their subscribers, including enhanced 911 services that convey the caller’s telephone number and detailed location information to emergency responders. In December 2013 the FCC adopted a rule requiring all 911 service providers that serve a public safety answering point or other local emergency responder, to take reasonable measures to ensure 911 circuit diversity, availability of backup power at central offices that directly serve PSAPs, and diversity of network monitoring links.
Long Distance Services. We offer long distance service to our customers through our subsidiary, Shentel Communications, LLC. Our long distance rates are not subject to FCC regulation, but we are required to offer long distance service through a subsidiary other than Shenandoah Telephone, to disclose our long distance rates on a website, to maintain geographically averaged rates, to pay contributions to the USF and make other mandatory payments based on our long-distance revenues, and to comply with other filing and regulatory requirements. In November 2013 the FCC issued an order imposing greater recordkeeping and reporting obligations on certain long distance providers delivering calls to rural areas. The order imposes greater recordkeeping and quarterly reporting obligations on such providers, and generally subjects such providers to greater oversight. At this time, the Company is exempt from these rules.
CLEC Operations. We are authorized to operate as a CLEC in Maryland, Virginia, West Virginia and Pennsylvania. CLECs generally are subject to federal and state regulations that are similar to, but not as stringent as, those that apply to our ILEC operations. Both the FCC and the state regulatory authorities require that, in most circumstances, CLEC access charges be no higher than the access charges of the ILECs in areas where they operate.
Regulation of Cable Television, Interconnected VoIP and Other Video Service Operations
Through Shenandoah Cable Television, LLC, we provide cable service in a number of jurisdictions throughout West Virginia, numerous communities across southern and southwestern Virginia, and a small area of western Maryland. We also provide cable service in Shenandoah County, Virginia through Shentel Cable of Shenandoah County, LLC.
The provision of cable service generally is subject to regulation by the FCC, and cable operators typically also must comply with the terms of the franchise agreement between the cable operator and the local franchising authority. Some states, including Virginia and West Virginia, have enacted regulations and franchise provisions that also can affect certain aspects of a cable operator’s operations.
Pricing and Packaging. Federal law limits cable rate regulation to communities that are not subject to “effective competition,” as defined by law. Absent a findingfederal regulation. In the absence of effective competition, by the FCC, federal law authorizes local franchising authorities to regulate the monthly rates charged for the minimum level of video programming service (the “basic service tier”) and for the installation, sale and lease of equipment used by end users to receive the basic service tier. Although none of ourtier, but no additional cable communities have been found to be subject to effective competition, noneofferings. None of the local franchise authorities presently regulate our rates. Congress and the FCC from time to time have considered imposing new pricing and packaging restrictions on cable operators, including possible requirements to unbundle existing service tiers and provide cable programming on an a la carte basis. We cannot predict whether or when such new pricing and packaging restrictions may be imposed on us or what effect they would have on our ability to provide cable service.
Must-Carry/Retransmission Consent.Local commercial and non-commercial broadcast television stations can require a cable operator to carry their signals pursuant to federal “must-carry” requirements. Alternatively, local television stations may require that a cable operator obtain “retransmission consent” for carriage of the station’s signal, which can enable a popular local television station to obtain concessions from the cable operator for the right to carry the station’s signal. When stations choose retransmission consent over must-carry, both the station and the cable operator have a duty to negotiate in good faith for such consent. Although some local television stations today are carried by cable operators under the must-carry obligation, popular broadcast network affiliated stations (like ABC, CBS, FOX, CW and NBC) typically are carried pursuant to retransmission consent agreements. The cable industry’s retransmission consent costs are increasing rapidly. In the past, proposals have been advanced in Congress and at the FCC to reform or eliminate retransmission consent, and legislation adopted in 2014 included limited reform measures while extending certain existing retransmission consent restraints.consent. We are unable to predict what future changes, if any, Congress or the FCC might adopt in connection with retransmission consent and how such rules may affect our business.
Copyright Fees.Cable operators pay compulsory copyright fees (in addition to possible retransmission consent fees) to retransmit broadcast programming. Although the cable compulsory copyright license has been in place for almost 40 years, there have been legislative and regulatory proposals to replace the compulsory license with privately negotiated licenses. We cannot predict whether such proposals will be enacted and how they might affect our business. The Copyright Office adopted rules in 2014 governing private audits of cable operators’ compulsory copyright payments, and any resulting audits initiated by copyright owners could lead to demands for increased copyright payments.
Programming Costs. Satellite-delivered cable programming, such as ESPN, HBO and the Discovery Channel, is not subject to must-carry/retransmission consent regulations or a compulsory copyright license. The Company negotiates directly or through the National Cable Television Cooperative (“NCTC”) with satellite-delivered cable programmers for the right to carry their programming. The cost of acquiring the right to carry satellite-delivered cable programming can increase as the popularity of such programming increases, or as programmers demand rate increases. We cannot predict the extent to which such programming costs may increase in the future or the effect such cost increases may have on our ability to provide cable service.
Franchise Matters.Cable operators generally must apply for and obtain non-exclusive franchises from local or state franchising authorities before providing cablevideo service. The terms and conditions of franchises vary among jurisdictions, but franchises generally last for a fixed term, subject to renewal; require the cable operator to collect a franchise fee of as much as 5% of the cable operator’s gross revenue from video services; and contain certain service quality and customer service obligations. A significant number of states today have processes in place for obtaining state-wide franchises, and legislation has been introduced from time to time in Congress and in various states, including those in which we provide some form of video service, that would require the implementation of state-wide franchising processes. Although we cannot predict whether state-wide franchising will become ubiquitous, it would, if implemented, likely lower barriers to entry and increase competition in the marketplace for video services. In 2006, the FCC adopted new rules governing the terms and conditions under which franchising authorities can award franchises to entities that compete against incumbent cable service operators. These rules generally limit the ability of franchising authorities to impose certain requirements on and extract certain
concessions from new entrants. Also in 2006, Virginia adopted a new franchising statute. This statute largely leaves franchising responsibility in the hands of local municipalities and counties, but it governs the local government entities’ award of such franchises and their conduct of franchise negotiations. We cannot predict the extent to which these rules and other developments will accelerate the pace of new entry into the video market or the effect, if any, they may have on our cable operations.
Leased Access/PEG.The Communications Act permits franchising authorities to require cable operators to set aside the use of channels for public, education and governmental access (“PEG”) programming. The Communications Act also requires certain cable systems to make available a portion of their capacity for commercial leased access by third parties that would compete with programming offered on other channels of the cable system. Increases in the amount of required commercial leased access or PEG access usage could reduce the number of channels available to us to provide other types of programming to subscribers.
Pole Attachments. The Communications Act requires most utilities to provide cable systems with access to poles and conduits and simultaneously subjects the rates charged for this access to either federal or state regulation. In 2011 and again in 2015, the FCC amended its existing pole attachment rules to promote broadband deployment. The 2011 order allows for new penalties in certain cases involving unauthorized attachments, but generally strengthens the cable industry’s ability to access investor-owned utility poles on reasonable rates, terms and conditions. Additionally, the 2011 order reduces the federal rate formula previously applicable to “telecommunications” attachments to closely approximate the rate formula applicable to “cable” attachments. The 2015 order, which is currently on appeal by utility pole owners, continues that rate reconciliation, effectively closing the remaining “loophole” that potentially allowed for significantly higher rates for telecommunications attachments in certain scenarios. Neither the 2011 order nor the 2015 order directly affect the rate in states that self-regulate (rather than allow the FCC to regulate) pole rates, but many of those states have substantially the same rate for cable and telecommunications attachments.
Broadband Services. For information concerning the regulation of Broadband services, see the discussion under “Regulation of Incumbent Local Exchange Carrier Operations – Broadband Services” above.
Net Neutrality. For information concerning the FCC’s non-discrimination requirements for fixed broadband providers, see the discussion under “Regulation of Wireline Operations – Broadband Services / Net Neutrality” above.
VoIP Services. We provide voice communications services over our cable network utilizing interconnected VoIP technology and service arrangements. Although similar to telephone service in some ways, our VoIP service arrangement utilizes different technology and is subject to many of the same rules and regulations applicable to traditional telephone service. The FCC order adopted on October 27, 2011, established rules governing intercarrier compensation payments for the origination and termination of telephone traffic between carriers and VoIP providers. In May 2014 the United States Court of Appeals for the Tenth Circuit upheld the FCC order reducing intercarrier compensation payments. The rules are likely to substantially decrease intercarrier compensation payments we may have otherwise received over a multi-year period. The decreases over the multi-year transition will affect both the amounts that we pay to telecommunications carriers and the amounts that we receive from other carriers. The schedule and magnitude of these decreases, however, will vary depending on the nature of the carriers and the telephone traffic at issue. We cannot yet predict with certainty the balance of the impact on our revenues and expenses for voice services at particular times over this multi-year period.
Further regulatory changes are being considered that could impact our VoIP service. The FCC and state regulatory authorities are considering, for example, whether certain common carrier regulations traditionally applied to incumbent local exchange carriers should be modified or reduced, and the extent to which common carrier requirements should be extended to VoIP providers. The FCC has already determined that certain providers of voice services using Internet Protocol technology must comply with requirements relating to 911 emergency services, CALEA, USF contribution, customer privacy and CPNI issues, number portability, network outage, rural call completion, disability access, regulatory fees, and discontinuance of service. In March 2007, a federal appeals court affirmed the FCC’s decision concerning federal regulation of certain VoIP services, but declined to specifically find that VoIP service provided by cable companies, such as we provide, should be regulated only at the federal level. As a result, some states, including West Virginia, have begunbegan proceedings to subject cable VoIP services to state-level regulation. Although the West Virginia proceeding concluded without any new state-level regulation, it is difficult to predict whether it, or other state regulators, will continue to attempt to regulate our VoIP service. We have registered with, or obtained certificates or authorizations from, the FCC and the state regulatory authorities in those
states in which we offer competitive voice services in order to ensure the continuity of our services and to maintain needed network interconnection arrangements. It is not clear how the FCC Chairman’s proposalOrder to reclassify wireline and wireless broadband services as Title II common carrier services, and pursuant to Section 706, will affect the regulatory status of our VoIP services. Further, it is also unclear whether and how these and other ongoing regulatory matters ultimately will be resolved. In November 2014, the FCC adopted an order imposing limited backup power obligations on providers of facilities-based fixed, residential voice services that are not otherwise line-powered, including our VoIP services. This Order became effective for providers with fewer than 100,000 U.S. customer lines in August 2016 and now requires the Company to disclose certain information to customers and to make available back up power at the point of sale.
Prospective competitors of Shenandoah Cable may also receive disbursements from the USF. Some of those competitors have requested USF support under the Connect America Fund to build broadband facilities in areas already served by Shenandoah Cable. Although Shenandoah Cable has opposed such requests where we offer service, we cannot predict whether the FCC or another agency will grant such requests or otherwise fund broadband service in areas already served by the company.
Other Issues.Our ability to provide cable service may be affected by a wide range of additional regulatory and related issues, including FCC regulations pertaining to licensing of systems and facilities, set-top boxes, equipment connectivity,compatibility, program exclusivity blackouts, advertising, public files, accessibility to persons with disabilities, emergency alerts, pole attachments, equal employment opportunity, privacy, consumer protection, and technical standards. For example, following enactment of the 21st21st Century Communications and Video Accessibility Act, the FCC has adopted new rules and heightened enforcement of rules requiring captioning and description ofwhich require MVPDs to ensure that all non-exempt video programming accessibility ofthey distribute on television includes closed captions, certain IP delivered programming they delivered includes closed captions, certain video programming delivered on television and to second screen devices includes video descriptions, emergency information is delivered in a format that is accessible to both hearing and equipment and navigation devices.vision impaired viewers, program guides are accessible to persons who are visually impaired and/or blind. In addition, proceedings before the FCC and state regulatory bodies have examined the rates that cable operators must pay to use utility poles and conduits, and other terms and conditions of pole attachment agreements. In December 2014, as part ofPole attachment costs are significant and changes in pole attachment regulation and the Satellite Television Extension and Localism Act (“STELA”) reauthorization, Congress repealed a prohibitionresulting rates could have an adverse impact on cable operators offering set-top boxes with integrated security and navigational features (effective December 4, 2015), but also directed the FCC to establish a working group of “technical experts” to identify downloadable security design options to facilitate consumer use of retail navigation devices in lieu of set-top boxes provided by cable operators. Third parties may use this process to advocate for additional regulations, such as requirements for cable operators to support a new interface that can be accessed by retail devices.our operations. We cannot predict the nature and pace of these and other developments or the effect they may have on our operations.
Employees
At December 31, 2014,2016, we had approximately 7081,236 employees, of whom approximately 6421,187 were full-time employees. None of our employees is represented by a union or covered by a collective bargaining agreement.
Executive Officers of the Registrant
The following table presents information about our executive officers who, other than Christopher E. French, are not members of our board of directors. Our executive officers serve at the pleasure of the Board of Directors.
| Name | Title | Age | Date in Position |
| Christopher E. French | President and Chief Executive Officer | April 1988 | |
| Earle A. MacKenzie | Executive Vice President and Chief Operating Officer | June 2003 | |
| Adele M. Skolits | Vice President – Finance, Chief Financial Officer and Treasurer | September 2007 | |
| William L. Pirtle | Senior Vice President – Wireless | ||
| Raymond B. Ostroski | General Counsel, Vice | January 2013 | |
| Thomas A. Whitaker | Senior Vice President – Cable | ||
| Edward H. McKay | Senior Vice President – Wireline | ||
| Richard A. Baughman | Vice President – Information Technology | June 2010 | |
Mr. French is President and Chief Executive Officer of the Company, where he is responsible for the overall leadership and strategic direction of the Company. He has served as President since 1988, and has been a member and Chairman of the Board of Directors since 1996. Prior to appointment as President, Mr. French held a variety of positions with the Company, including Vice President Network Service and Executive Vice President. Mr. French holds a BS in electrical engineering and an MBA, both from the University of Virginia. He has held board and officer positions in both state and national telecommunications associations, including service as a director of the Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO) and was president and director of the Virginia Telecommunications Industry Association. Mr. French is currently a member of the Leadership Committee of the USTelecom Association.
Mr. MacKenzie is Executive Vice President and Chief Operating Officer (COO) of the Company. He joined the Company in 2003, and is responsible for Shentel's daily operations of its subsidiaries. Mr. MacKenzie began his career in the telecommunications industry in 1975. He was the co-founder and President of Broadslate Networks and Essex Communications. He served as COO of Digital Television Services and as Senior Vice President of Contel Cellular. Mr. MacKenzie is a graduate of The College of William and Mary and holds a BBA in accounting and holds a C.P.A. certificate from the Virginia State Board of Accountancy.accounting. Mr. MacKenzie is a member of the Board of Directors of the American Cable Association.
Ms. Skolits serves as Chief Financial Officer and Vice President - Finance at Shentel. She joined the Company in 2007 and is responsible for Shentel's daily financial decisions. Ms. Skolits’ industry experience began in 1995 and included three years with Revol Wireless where she served as Chief Financial Officer. Ms. Skolits' telecommunications experience also includes serving as Controller for Comcast Metrophone, Director of Financial Operations for Comcast Cellular Communications and Chief Financial Officer of City Signal Communications. Ms. Skolits earned a BS degree in Commerce with a concentration in Accounting from the University of Virginia and she holds a C.P.A. certificate from the Virginia State Board of Accountancy.Virginia.
Mr. Pirtle is Senior Vice President - Wireless for Shentel. He was promoted to Senior Vice President in September 2015. He is responsible for sales and marketing of Sprint branded wireless products and services, Shentel branded cable TV, Internet access, and voice products and services offered by the ongoing operations ofcompany. He is also responsible for the Shentel brand identity. His previous position was Vice President - Wireless, segment of the Company.responsible for Shentel’s Wireless segment. He joined the Company in 1992 as Vice President of- Network Services responsible for Shentel's technology decisions, and maintenance and operation of its networks – telephone, cable, cellular, paging and fiber optics.optics networks. He helped launch Shentel's Internet business in 1994, and led its participation in its wireless PCS business and Sprint affiliation beginning in 1995. He is a graduate of the University of Virginia. Mr. Pirtle is a co-founder of the Shenandoah Valley Technology Council.Council and
has represented the Company on the Board of ValleyNet and on the Board of the Competitive Carriers Association. He is a graduate of the University of Virginia.
Mr. Ostroski is General Counsel and Vice President -– Legal and Corporate Secretary for Shentel. PriorHe joined Shentel in 2013 and is responsible for all legal and regulatory compliance matters for the Company. He also acts as Corporate Secretary to joining the Company in January 2013, Mr. Ostroski was a Partner in the law firmCompany’s Board of Thomas, Long, Niesen & Kennard since 2012 and was the Principal at RBO Consulting from 2011 to 2012 and from 2007 to 2009. Mr. Ostroski also served as Executive Vice President and General Counsel for One Communications from 2009 to 2011 and Senior Vice President and General Counsel for Commonwealth Telephone Enterprises from 2001 to 2007.Directors. Mr. Ostroski began his career in the telecommunications industry in 1985 and alsohas served as Executive Vice President and General Counsel tofor One Communications, Senior Vice President and General Counsel for Commonwealth Telephone Enterprises, Executive Vice President and General Counsel for RCN Corporation and Senior Vice President and General Counsel of C-TEC Corporation prior to 2001.Corporation. Mr. Ostroski earned a B.S.BS degree in Social Science from Wilkes University and also earned a J.D.Juris Doctor degree from Temple University School of Law.
Mr. Whitaker is Senior Vice President - Cable for Shentel. He is responsiblewas promoted to Senior Vice President in September 2015. He was previously the Vice President - Cable with responsibility for the ongoing operations of the Cable segment of the Company.Shentel cable operations. Mr. Whitaker joined Shentel in 2004 through the Shentel acquisition of NTC Communications. Mr. Whitaker is responsible for Shentel cable operations, sales and marketing. Additionally, he supports the Shentel Network Operations Center. Mr. Whitaker began his career in 1983. Mr. WhitakerHe previously was previously COO of NTC Communications, and served as VPVice President of Network Operations at Broadslate Networks, Director of Wireless Operations for nTelos, and was Co-Founder and Vice President of Nat-Com, Incorporated. Mr. Whitaker is a graduate of West Virginia Wesleyan College in Buckhannon, WV.
Mr. McKay is Senior Vice President –- Wireline and Engineering for Shentel. He was promoted to Senior Vice President in September 2015. He is responsible for network planning and engineering for all Shentel’s networks and the marketing and sales of Shentel’s fiber and wireline network. Previously he was Vice President - Wireline and Engineering. Mr. McKay joined Shentel in 2004 and is responsible for the ongoing operations of the Wireline segment of the Company, as well as the network planning and engineering for Shentel’s networks. Mr. McKay began his telecommunications industry experiencecareer in 1996, including previous engineering management positions at UUNET and Verizon. He is a graduate of the University of Virginia, where he earned M.E.ME and B.S.BS degrees in Electrical Engineering. Mr. McKay serves asHe represents the Company’s designated representativeCompany on the ValleyNet Partnership Committee.Board of ValleyNet.
Mr. Baughman is Vice President - Information Technology of Shentel. He began his career in 1991 working with the Navy and entered the telecommunications industry in 1995, with telecommunications and operations experience from a variety of telecommunicationsworking for companies including Bellcore/Telcordia, AT&T, Lucent, WINfirst and SureWest. He joined the Company in 2006. He2006 and is responsible for all of the back-office software and infrastructure systems at Shentel. Mr. Baughman has a B.S.BS in Electrical Engineering from Lafayette College and an M.S.MS in Optics from the University of Rochester.
Websites and Additional Information
The Company maintains a corporate website at www.shentel.comwww.shentel.com..We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8‑K and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such reports with or to the SEC. The contents of our website are not a part of this report. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding the Company.
Our business and operations are subject to a number of risks and uncertainties, including thoseuncertainties. The risks set forth under “Business-Competition”"Business-Competition" and the following:following risk factors should be read carefully in connection with evaluating our business. The following risks (or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial) could materially affect our financial results and conditions.
Risks Related to the Telecommunications Industry
Intensifying competition in all segments of our business may limit our ability to sustain profitable operations.
As new technologies are developed and deployed by competitors in our service area, some of our subscribers may select other providers’ offerings based on price, capabilities andor personal preferences. Most of our competitors possess greater resources, have more extensive coverage areas and offer more services than we do. If significant numbers of our subscribers elect to move to other competing providers, or if market saturation limits the rate of new subscriber additions, we may not be able to sustain profitable operations.
Nationwide, incumbent local exchange carriers have experienced a decrease in access lines due to the effect of wireless and wireline competition. We have experienced comparatively modest reductions in the number of access lines to date, but based on industry experience we anticipate that the long-term trend toward declining telephone subscriber counts will continue. There is a significant risk that this downward trend couldwill have a material adverse effect on the Company’s landline telephone operations in the future.
The Company’s revenue from fiber leases may be adversely impacted by price competition for these facilities.
Alternative technologies, changes in the regulatory environment and current uncertainties in the marketplace may reduce future demand for existing telecommunication services.
The telecommunications industry is experiencing significant technological change, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products and enhancements and changes in end-user requirements and preferences. Technological advances, industry changes, changes in the regulatory environment and the availability of additional spectrum or additional flexibility with respect to the use of currently available spectrum could cause the technology we use to become obsolete. We and our vendors may not be able to respond to such changes and implement new technology on a timely basis, or at an acceptable cost.
Adverse economic conditions in the United States and in our market area involving significantly reduced consumer spending could have a negative impact on our results of operations.
Our customers are individual consumers and businesses that provide goods and services to others, and are located in a relatively concentrated geographic area.businesses. Any national economic weakness, restricted credit markets andor high unemployment rates could depress consumer spending and harm our operating performance. In addition, our customers are located in a relatively concentrated geographic area; therefore, any adverse economic conditions that affect our geographic markets in particular could have furthera disproportionately negative impactsimpact on our results.
Regulation by government and taxing agencies may increase our costs of providing service or require changes in services, either of which could impair our financial performance.
Our operations are subject to varying degrees of regulation by the FCC, the Federal Trade Commission, the FAA, the Environmental Protection Agency and the Occupational Safety and Health Administration, as well as by state and local regulatory agencies and franchising authorities. Action by these regulatory bodies could negatively affect our operations and our costs of doing business. For example, changes in tax laws or the interpretation of existing tax laws by state and local authorities could increase income, sales, property or other tax costs.
Our access revenue may be adversely impacted by legislative or regulatory actions or by technology developments that decrease access rates or exempt certain traffic from paying for access to our regulated telephone network.
On October 27, 2011, the FCC adopted a number of broad changes to the intercarrier compensation rules governing the interstate access rates charged by small-to-mid-sized ILECs such as Shenandoah Telephone. For example, the
FCC adopted a national “bill and keep” framework, which may result in substantial reductions in the access charges paid by long distance carriers and other interconnecting carriers, possibly to zero, accompanied by increases to the subscriber line charges paid by business and residential end users. In addition, the FCC has changed some of the rules that determine what compensation carriers, including but not limited to wireless carriers, competitive local exchange carriers, VoIP providers and providers of other Internet-enabled services, should pay (and receive) for their traffic that is interconnected with ILEC networks. These changes, and potential future changes, to such compensation regulations could increase our expenses or reduce our revenues. In addition, the Company is working to resolve several routine interconnection and intercarrier compensation-related disputes concerning the appropriate access rates and terms for the origination and termination of traffic on third-party networks.
The VSCC has jurisdiction over local telephone companies’ intrastate access charges, and has indicated in the past that it might open a generic proceeding on the rates charged for intrastate access, although the scope and likelihood of such a proceeding is unclear in light of the FCC’s overhaul of the intercarrier compensation rules, which affect states’ jurisdiction over intrastate access charges. The VSCC issued a Final Order on August 9, 2011 that requires elimination of common carrier line charges in three stages. Pursuant to thethis order, the Company’s intrastate common line revenue has declined in each of the last three years2011, 2012 and 2013 and was ultimately eliminated in mid-2014.
Our distribution networks may be subject to weather-related events that may damage our networks and adversely impact our ability to deliver promised services or increase costs related to such events.
Our distribution networks may be subject to weather-related events that could damage our networks and impact service delivery. Some published reports predict that warming global temperatures will increase the frequency and severity of such weather relatedweather-related events. Should such predictions be correct or for other reasons there are more weather-related events, and should such events impact the Mid-Atlantic region covered by our networks more frequently than in the past, our revenues and expenses could be materially adversely impacted.
Risks Related to our Overall Business Strategy
We may not benefit from our acquisition strategy.
As part of our business strategy, we regularly evaluate opportunities to enhance the value of our companythe Company by pursuing acquisitions of other businesses, and we intend to evaluate whether to pursue such strategic acquisition opportunities as they arise, thoughbusinesses. Although we remain subject to financial and other covenants in our credit agreementsagreement that contain restrictions asmay limit our ability to thepursue certain strategic opportunities, we may be ableintend to pursue.continue to evaluate and, when appropriate, pursue strategic acquisition opportunities as they arise. We cannot provide any assurance, however, with respect to the timing, likelihood, size or financial effect of any potential transaction involving our company,the Company, as we may not be successful in identifying and consummating any acquisition or in integrating any newly acquired business into our operations.
The evaluation of business acquisition opportunities and the integration of any acquired businesses pose a number of significant risks, including the following:
| acquisitions may place significant strain on our management, financial and other resources by requiring us to expend a substantial amount of time and resources in the pursuit of acquisitions that we may not complete, or to devote significant attention to the various integration efforts of any newly acquired businesses, all of which will require the allocation of limited resources; |
our business plans and projections used to justify the acquisitions and expansion investments are based on assumptions of revenues per subscriber, penetration rates in specific markets where we operate and expected operating costs. These assumptions may not develop as projected, which may negatively impact our profitability or the value of our intangible assets; growth through acquisitions will increase our need for qualified personnel, who may not be available to us or, if they were employed by a business we acquire, remain with us after the acquisition; and acquired businesses may have unexpected liabilities and contingencies, which could be significant. |
Our ability to comply with the financial covenants in our credit agreement depends primarily on our ability to generate sufficient operating cash flow.
Our ability to comply with the financial covenants under the agreement governing our secured credit facilities will depend primarily on our success in generating sufficient operating cash flow. Under our credit agreement, we are subject to a total leverage ratio covenant, a minimum debt service coverage ratio covenant and a minimum equity to assets ratio covenant.liquidity test. Industry conditions and financial, business and other factors, including those we identify as risk factors in this and our other reports, will affect our ability to generate the cash flows we need to meetsatisfy those financial tests and ratios. Our failure to meetsatisfy the tests or ratios could result in a default and acceleration of repayment of the indebtedness under our credit facilities. If the maturity of our indebtedness were accelerated, we wouldmay not have sufficient funds to repay such indebtedness. In such event, to the extent permitted by our credit agreement and applicable law, our lenders would be entitled to proceed against the collateral securing the indebtedness, which includes substantially all of our entire assets toand the extent permitted byassets of our credit agreement and applicable law.subsidiaries.
Our level of indebtedness could adversely affect our financial health and ability to compete.
As of December 31, 2014,2016, we had $224.3$847.9 million of total long-term indebtedness, including the current portion of such indebtedness. Our level of indebtedness could have important adverse consequences. For example, it may:
| increase our vulnerability to general adverse economic and industry conditions, including interest rate increases, because as of December 31, 2016, a significant portion of our borrowings were, and may continue to be, subject to |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, dividends and other general corporate purposes; |
| limit our ability to borrow additional funds to alleviate liquidity constraints, as a result of financial and other restrictive covenants in our credit agreement; |
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and |
| place us at a competitive disadvantage relative to companies that have less indebtedness. |
In addition, our secured credit facilities impose operating and financial restrictions that limit our discretion on some business matters, which could make it more difficult for us to expand, finance our operations and engage in other business activities that may be in our interest. These restrictions limit our ability and that of our subsidiaries to:to, among other things:
| incur additional indebtedness and additional liens on our assets; |
| pay dividends or make other distributions; |
| voluntarily prepay other indebtedness; |
| enter into transactions with affiliated persons; |
| make certain investments; and |
| change the nature of our business. |
In addition to the term loan secured indebtedness we have incurred and the $50$75 million of revolving credit indebtedness we may incur from time to time, we may incur additional indebtedness under our credit facilities. Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.
Our ability to refinance our indebtedness in the future, should circumstances require it, will depend on our ability in the future to generate cash flows from operations and to raise additional funds, including through the offering of equity or debt securities.securities and through our access to bank debt markets. We may not be able to generate sufficient cash flows from operations or to raise additional funds in amounts necessary for us to repay our indebtedness when such indebtedness becomes due and to meet our other cash needs.
Disruptions of our information technology infrastructure could harm our business.
We depend on our information technology infrastructure to achieve our business objectives. A disruption of our infrastructure could be caused by a natural disaster, manufacturing failure, telecommunications system failure, cybersecurity attack, intrusion or incident, or defective or improperly installed new or upgraded business management systems. Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. In the event of any such disruption, we may be unable to conduct our business in the normal course. Moreover, our business involvesinvolves the processing, storage and transmission of data, which would also be negatively affected by such an event. A disruption of our infrastructure could cause us to lose customers and revenue, particularly during a period of heavy demand for our services. We also could incur significant expense in repairing system damage and taking other remedial measures.
We could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm and other serious negative consequences if we sustain cyber attackscyber-attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our customers or other third parties.
We utilize our information technology infrastructure to manage and store various proprietary information and sensitive or confidential data relating to our operations. We routinely process, store and transmit large amounts of data for our customers, including sensitive and personally identifiable information. We depend on our information technology infrastructure to conduct business operations and provide customer services. We may be subject to data breaches and disruptions of the information technology systems we use for these purposes. Experienced computer programmersOur industry has witnessed an increase in the number, intensity and sophistication of cybersecurity incidents caused by hackers and other malicious actors such as foreign governments, criminals, hacktivists, terrorists and insider threats. Hackers and other malicious actors may be able to penetrate our network security and misappropriate or compromise our confidential, sensitive, personal or proprietary information, or that of third parties, and engage in the unauthorized use or dissemination of such information. They may be able to create system disruptions, or cause shutdowns. Computer programmersHackers and hackers alsoother malicious actors may be able to develop and deploy viruses, worms, ransomware and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our systems. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including "bugs"“bugs,” cybersecurity vulnerabilities and other problems that could unexpectedly interfere with the operation or security of the system.our systems.
The consequences of a breach of our security measures, a cyber-related service or operational disruption, or a breach of personal, confidential, proprietary or sensitive data caused by a hacker or other malicious actor could be significant for us, our customers and other affected third parties. For example, the consequences could include damage to infrastructure and property, impairment of business operations, disruptions to customer service, financial costs and harm to our liquidity, costs associated with remediation, loss of revenues, loss of customers, competitive disadvantage, legal expenses associated with litigation, regulatory action, fines or penalties or damage to our brand and reputation.
In addition, the costs to us to eliminate or address the foregoing security problemschallenges and security vulnerabilities before or after a cyber incident could be significant. OurIn addition, our remediation efforts may not be successful and could
result in interruptions, delays or cessation of service, and loss of existing or potential customers that may impede our critical functions.service. We could also lose existing or potential customers for our services in connection with any actual or perceived security vulnerabilities in the services. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or other third parties could expose us, our customers, or other third parties affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise harm our business.
We are subject to laws, rules and regulations relating to the collection, use and security of user data. Our abilityoperations are also subject to execute transactionsfederal and to possess and use personalstate laws governing information and data in conducting our business subjects us to legislative and regulatory burdens that may require us to notify customers or employeessecurity. In the event of a data breach or operational disruption caused by an information security breach.incident, such rules may require consumer and government agency notification and may result in regulatory enforcement actions with the potential of monetary forfeitures as well as civil litigation. We have incurred, and will continue to incur, expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards orand contractual obligations.
Our balance sheet contains certain intangible assets including goodwill that we may be required to write off or write down in the future in the event of the impairment of certain of those assets arising from any deterioration in our future performance or other circumstances. Such write-offs or write-downs could adversely impact our earnings and stock price, and our ability to obtain financing in the future.
At December 31, 2016, we had $145.3 million in goodwill capitalized on our balance sheet and $454.5 million of other intangible assets capitalized on our balance sheet, which collectively represented 40.4% of our total assets at that date.
We test our goodwill and other intangible assets for impairment annually or when events or circumstances warrant. If the testing performed indicates that impairment has occurred, we are required to record an impairment charge for the difference between the carrying value of the intangible asset and the fair value of the intangible asset, in the period in which the determination is made.
We may be required in the future to write off or write down certain intangible assets including goodwill in the event of deterioration in our future performance, sustained slower growth or other circumstances. Such a write off or write down could adversely impact our earnings and stock price, and our ability to obtain financing in the future.
We have identified material weaknesses in our internal control over financial reporting that, if not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements.
As described in "Item 9A. Controls and Procedures", we have concluded that our internal control over financial reporting was ineffective as of December 31, 2016 because material weaknesses existed in our internal control over financial reporting related to the inadequate design and documentation of management review controls over the accounting for significant, complex and unusual transactions, accounting for income taxes, and the preparation of the consolidated statements of cash flows. For 2016, such transactions included the acquisition of nTelos and asset exchange transaction with Sprint that closed on May 6, 2016. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
The Company is in the process of identifying and implementing certain changes in our internal controls to address the material weaknesses. Specifically, the Company is documenting, implementing, and assessing necessary changes in the risk assessment process and in the design of the controls, and identifying additional controls and additional resources required to ensure effective management and technical review and documentation. Although the Company is taking the foregoing actions to remediate the material weakness and believe, based on our evaluation to date, that the material weakness will be remediated during 2017, we cannot assure you that this will occur within the contemplated timeframe. Moreover, we cannot assure you that we will not identify additional material weaknesses in our internal control over financial reporting in the future. If we are unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission, could be adversely affected. The occurrence of or failure to remediate the material weakness may adversely affect our reputation and business and the market price of our common stock and any other securities we may issue.
We have an underfunded non-contributory defined benefit pension plan.
Through our acquisition of nTelos, we assumed nTelos’ non-contributory defined benefit pension plan covering all employees who met eligibility requirements and were employed by nTelos prior to October 1, 2003. This pension
plan was closed to nTelos employees hired on or after October 1, 2003. As of December 31, 2016, the plan was underfunded under U.S. GAAP measures by $10.3 million. See Note 9 of the Notes to Consolidated Financial Statements for additional information regarding the accounting for the defined benefit pension and other postretirement benefit plans. We do not expect that we will be required to make a cash contribution to the underfunded pension plan in 2017, but we may be required to make cash contributions in future periods depending on the level of interest rates and investment returns on plan assets.
Increases in our costs of providing benefits under our non-contributory defined benefit pension plan and other postretirement benefit plans could negatively impact our results of operations and cash flows.
The measurement of the plan obligations and costs of providing benefits under our defined benefit pension and other postretirement benefit plans involves various factors, including the development of valuation assumptions and accounting policy elections. We are required to make assumptions and estimates that include the discount rate applied to benefit obligations, the long-term expected rate of return on plan assets, the anticipated rate of increase of health care costs, our expected level of contributions to the plans, the incidence of mortality, the expected remaining service period of plan participants, the level of compensation and rate of compensation increases, employee age, length of service, and the long-term expected investment rate credited to employees of certain plans, among other factors. See Note 9 of the Notes to Consolidated Financial Statements for additional information regarding the accounting for the defined benefit pension and other postretirement benefit plans. If our benefit plans' costs increase, due to adverse changes in the U.S. securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends, our financial condition and operating results could be adversely affected.
Risks Relating to the Recently Completed nTelos Acquisition and the Sprint Transactions
In connection with the nTelos acquisition, we incurred significant additional indebtedness, which could materially and adversely affect us, including by decreasing our business flexibility.
We have substantially increased indebtedness following completion of the nTelos acquisition in comparison to that of the Company on a recent historical basis, which has increased our interest expense and amortization requirements and could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions. The amount of cash required to pay interest on our increased indebtedness and the increased amortization requirements to pay down the loan balances following the nTelos acquisition, and thus the demands on our cash resources, could be greater than the amount of cash flows required to service our indebtedness prior to the nTelos acquisition. Our increased levels of indebtedness could also reduce funds available for working capital, capital expenditures, dividends and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the nTelos acquisition, or if the financial performance of the combined company does not meet current expectations, then our ability to service this indebtedness may be materially and adversely impacted.
It may be difficult to successfully integrate the business of nTelos and we may fail to realize the anticipated benefits from the nTelos acquisition, which could materially and adversely affect our operating results and the market price of our common stock.
If we experience greater than anticipated costs to integrate nTelos into our existing operations our business and results of operations could be materially and negatively affected. In addition, it is possible that the ongoing integration process could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the nTelos acquisition. Integration efforts also may divert management attention and resources.
The success of the nTelos acquisition will also depend, in significant part, on our ability to successfully integrate the acquired business, retain and migrate nTelos’s customers and realize the synergies anticipated with the nTelos acquisition. Many of these synergies are not expected to occur for a period of time and will require capital expenditures to be fully realized. If we are unable to integrate nTelos successfully, we may not realize the anticipated benefits of the nTelos acquisition, including the anticipated synergies.
Risks Related to the Wireless Industry
New disclosure or usage requirements could adversely affect the results of our wireless operations.
The FCC is considering imposing additional consumer protection requirements upon wireless service providers, including billing-related disclosures and usage alerts. Such requirements could increase costs related to or impact the amount of revenue we receive from our wireless services.
Customer concerns over radio frequency emissions may discourage use of wireless handsets or expose us to potential litigation.
In the past, media reports and certain professional studies have suggested that certain radio frequency emissions from wireless handsets may be linked to various health problems, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Additionally, the FCC has commenced a rulemaking and notice of inquiry that seeks public comment on a variety of issues, including whether revisions to the existing radio frequency standards and testing requirements are warranted. Any decrease in demand for wireless services, increases in the costs of litigation or damage awards resulting from substantiation of harm from such emissions could impair our ability to sustain profitablefinancial condition and results of operations.
Regulation by governmentgovernmental authorities or potential litigation relating to the use of wireless phoneshandsets while driving could adversely affect the results of our wireless operations.
Some studies have indicated that some aspects of using wireless phoneshandsets while driving may impair drivers'driver's attention in certain circumstances, making accidents more likely. These concerns could lead to litigation relating to accidents, deaths or serious bodily injuries, or to new restrictions or regulations on wireless phone use. A number of state and local governments are considering or have enacted legislation that would restrict or prohibit the use of a wireless handset while driving a vehicle or, alternatively, require the use of a hands-free handset. Additionally, certain federal agencies have adopted rules and proposed guidelines for the use of wireless handsets while operating commercial and non-commercial vehicles. These rules, and any legislation that could be enacted, may require wireless service providers to supply to their subscribers hands-free enhanced services, such as voice-activated dialing and hands-free speaker phones and headsets, in order to continue generating revenue from subscribers, who make many of their calls while on the road. If we are unable to provide hands-free services and products to subscribers in a timely and adequate fashion, the volume of wireless phone usage would likely decrease, and the ability of our wireless operations to generate revenues would suffer.
Risks Related to our Wireless Services
The performance of our wireless service provider Shenandoah Personal Communications, LLC, our largest operating subsidiary in terms of revenues and assets, may be adversely affected by any interruption in, or other adverse change to, Sprint’s business.
We rely significantly on Sprint’s ongoing operations to continue to offer our wireless subscribers the seamless national services that we currently provide. Any interruption in, or other adverse change to, Sprint’s business could adversely affect our results of operations, liquidity and financial condition. Our business could also be adversely affected if competing national or regional wireless carriers are able to introduce new products and services or otherwise satisfy customers’ service demands more rapidly or more effectively than Sprint.
Sprint is implementing a network modernization plan, known as Network Vision, which incorporates upgrades and improvementscontinues to modernize its wireless networks,network with the intention of improving voice quality, coverage and data speeds and simultaneously reducing future operating costs. We participatedparticipate in this plan and, to date, we have upgraded the networkmade significant upgrades in our service areas, on time and on budget.but ongoing modernization efforts are expected to continue.
The continuing success of the Network Vision planSprint’s modernization plans will depend on the timing, extent and cost of implementation and the performance of third parties.Future activities include incorporating the 2.5 gigahertz spectrum to be acquired from Sprint. Should Sprint’s implementation of the Network Vision plan be delayed, our margins could be adversely affected and such effects could be material. Should Sprint’s future delivery of services expected to be deployed on the upgraded network be delayed, it could potentially result in the loss of customers to our competitors and adversely affect our revenues, profitability and cash flows from operations.
Our business may suffer as a result of competitive pressures.
Our revenue growth is primarily dependent on the growth of theour subscriber base and monthly recurring charges to subscribers. InSince 2014, competitive pressures in the wireless services industry have moved the focus from unlimited individual plans to family shared data plans.increased. These competitive pressures in the wireless telecommunications market could cause some major carriers to offer plans with increasingly larger bundles of minutes of use and data services or unlimited plans at lower prices. Increased price competition will lead to lower monthly recurring charges or a loss of subscribers in the future. Continued competitive pressures in 2015 and beyond could require Sprint to lower its prices, which will limit growth in monthly recurring charges to subscribers.subscribers and could adversely affect our revenues, profitability and cash flows from operations.
We may not be able to implement our business plan successfully if our operating costs are higher than we anticipate.
Increased competition may lead to higher promotional costs to acquire subscribers. If these costs are more than we anticipate, the actual amount of funds available to implement our operating strategy and business plan may fall short of our estimates.
The dynamic nature of the wireless market may limit management’s ability to correctly identify causes of volatility in key operating performance measures.
Our business plan and estimated future operating results are based on estimates of key operating performance measures, including subscriber growth, subscriber turnover (commonly known as churn), average monthly revenue per subscriber, equipment revenue, and subscriber acquisition costs and other operating costs. RecentContinued moves by all carriers to offer installment billing and leasing for wireless handsets will have an effect on revenues, cost of goods sold and churn. Since these plans are new to the industry, the full impact of these changes cannot be determined at this time. The dynamic nature of the wireless market, economic conditions, increased competition in the wireless telecommunications industry, the entry of new competitors due to recent or future FCC spectrum auctions, new service offerings by Sprint or competitors at lower prices and other issues facing the wireless telecommunications industry in general have created a level of uncertainty that may adversely affect our ability to predict these key measures of performance.
We may experience a high rate of subscriber turnover, which could adversely affect our future financial performance.
Subscriber loss, or churn, has been relatively stable in recent years. Because of significant competition in the industry, the popularity of prepaid wireless service offerings, changes to Sprint’s competitive position and a new economic downturn,uncertainty, among other factors, this relative stability may not continue and the future rate of subscriber turnover may be higher than in recent periods.
A high rate of subscriber loss could increase the sales and marketing costs we incur in obtaining new subscribers, especially because, consistent with industry practice, even with the introduction of wireless handset installment billing and leasing, we expect to continue to subsidize a significant portion of the costs related to the purchases of wireless handsets by some subscribers.
We may incur significantly higher wireless handset subsidy costs than we anticipate for existing subscribers who upgrade to a new wirelesshandset.
As our subscriber base matures, and technological innovations occur, we anticipate that existing subscribers will continue to upgrade to new wireless handsets. To discourage customer defections to competitors, we offer price plans that subsidize a portion of the price of wireless handsets and, in some cases, incur sales commissions for wireless handset upgrades. If more subscribers upgrade to new subsidized wireless handsets than we project, or if the cost of such wireless handsets increases or the amount of wireless handset subsidies offered in the competitive marketplace increases more than we project, our results of operations wouldwill be adversely affected. If we do not continue to offer the option to subsidize the cost of thewireless handsets for handset upgrades, subscribers could choose to deactivate the service and move to other carriers.our competitors.
