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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 162 added, 117 removed, 164 unchanged (63% of the section changed)

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Shenandoah Telecommunications Company (“Shentel”, “we”, “our”, “us”, or the “Company”), is a provider of a comprehensive range of broadband communication services and cell tower colocation space in the Mid-Atlantic portion of the United States.

Management’s Discussion and Analysis is organized around our reporting segments.

Management’s Discussion and Analysis (“MD&A”) is organized around our reporting segments.

Refer to Item 1 above for our description of our reporting segments and a description of their respective business activities.

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2023 Developments

Beam fixed wireless:

In the fourth quarter of 2021, due to the availability of grants awarded under various governmental initiatives, and in support of rural fiber to the home (“FTTH”) broadband network expansion projects, we decided to cease further expansion of our Beam branded fixed wireless edge-out strategy.

During the second quarter of 2022, the Company permanently ceased operating 20 of our Beam fixed wireless sites.

On August 23, 2022, the Company entered into a definitive asset purchase agreement (the “Spectrum Purchase Agreement”) with a wireless carrier pursuant to which the Company agreed to sell certain Federal Communications Commission (“FCC”) spectrum licenses and leases utilized in the Company's Beam branded fixed wireless service for total consideration of approximately $21.5 million, composed of $17.7 million cash and approximately $3.8 million of liabilities to be assumed by the wireless carrier (the “Spectrum Transaction”).

The Spectrum Transaction is expected to close in the first half of 2023, subject to the receipt of regulatory approvals and other customary closing conditions.

As a result of the Spectrum Transaction, the Company ceased its Beam service at the remaining Beam fixed wireless sites in the fourth quarter 2022.

The Company is no longer reporting Beam customers as part of its Broadband Revenue Generating Units (“RGUs”).

Amendment to the Credit Agreement

On May 17, 2023, Shentel entered into Amendment No.

1 to Credit Agreement (the “Amendment”) to its existing Credit Agreement, dated as of July 1, 2021, with various financial institutions party thereto (the “Lenders”) and CoBank, ACB, as administrative agent for the Lenders (the “Credit Agreement”).

The Amendment extended the period during which the Company could borrow under the (i) $150 million five-year delay draw amortizing term loan (the “Term Loan A-1”) and (ii) $150 million seven-year delay draw amortizing term loan (the “Term Loan A-2” and, together with the Term Loan A-1, the “Term Loans”) from July 1, 2023 to December 31, 2023.

The Amendment also extended the date on which the Term Loans must begin to be repaid in quarterly principal installments from September 30, 2023 to March 31, 2024.

In addition, the Amendment amended the Credit Agreement to update the benchmark interest rate to a rate based on Term SOFR (as defined in the Amendment), added a 10 bps credit spread adjustment for loans that bear interest based on Term SOFR and made certain other conforming changes.

All other material terms and conditions of the Credit Agreement were unchanged.

Hedging Arrangements

In May 2023, Shentel entered into pay fixed, receive variable interest rate swaps totaling $150.0 million of notional principal (the “Swaps”).

The Swaps contain monthly payment terms beginning in May 2024, which extend through their maturity dates in June 2026.

The Swaps are designated as a cash flow hedges, representing 50% of the Company’s expected outstanding debt.

The Company uses the Swaps to manage its exposure to interest rate risk for its long-term variable-rate Term Loans.

Pension Plan Termination

In 2021, Shentel’s Board of Directors adopted a resolution to terminate its pension plan.

The Company terminated the pension plan and all benefits were distributed in June 2023 through the combination of lump sum payments and the purchase of non-participating annuity contracts at the option of the pension plan participants.

The Company made an additional $2.9 million contribution from its cash balance as a result of the settlement and recognized a settlement gain of $0.7 million in other income (expense).

The Spectrum Transaction

On August 23, 2022, the Company entered into a definitive asset purchase agreement (the “Spectrum Purchase Agreement”) with a wireless carrier pursuant to which the Company agreed to sell certain FCC spectrum licenses and leases previously utilized in the Company’s Beam branded fixed wireless service for total consideration of approximately $21.1 million, composed of $17.3 million cash and approximately $3.8 million of liabilities to be assumed by the wireless carrier (the “Spectrum Transaction”).

The Spectrum Transaction closed on July 6, 2023.

The Horizon Transaction

On October 24, 2023, Shentel entered into a definitive agreement to acquire 100% of the equity interests Horizon for $385 million (the “Horizon Transaction”).

Consideration will consist of $305 million in cash and $80 million of Shentel common stock.

Horizon is a leading commercial fiber provider in Ohio and adjacent states serving national wireless providers, carriers, enterprises, and government, education and healthcare customers.

Based in Chillicothe, Ohio, Horizon was founded in 1895 as the incumbent local exchange carrier in Ross County, Ohio and rapidly expanded its fiber network over the past 14 years.

Most recently, Horizon has pursued a strategy of investing in Fiber-to-the-Home (“FTTH”) in tier 3 & 4 markets in Ohio.

• Shentel intends to fund the Horizon Transaction with a combination of existing cash resources, revolving credit facility capacity and an amended and upsized credit facility.

The Company has received $275 million in financing commitments from CoBank, Bank of America, Citizens Bank, N.A., and Fifth Third Bank, N.A..

This financing is expected to close in conjunction with the Horizon Transaction.

• GCM Grosvenor (“GCM”), a selling unit holder of Horizon, will exchange its equity interest in Horizon for 4.08 million shares of Shentel common stock with an aggregate value of $80 million based on a reference price of $19.60, resulting in GCM owning approximately 7% of Shentel’s fully diluted common shares after the transaction is closed.

• Shentel has entered into a 7% Participating Exchangeable Perpetual Preferred Stock (“Preferred Stock”) investment agreement with Energy Capital Partners (“ECP”), an existing Shentel shareholder and long-time infrastructure investor, to provide $81 million of growth capital to fund the FTTH network expansion, government grant projects and general corporate purposes.

The dividend on the Preferred Stock can be paid in cash or in-kind at the option of the Company.

The Preferred Stock can be exchanged for Shentel common stock at an exchange price of $24.50, a 25% premium to the reference price of $19.60, under certain conditions as outlined in the investment agreement.

This financing is expected to close in conjunction with the Horizon Transaction.

• The Company plans to raise additional growth capital for the FTTH network expansion, government grant projects and general corporate purposes, which may include the sale of some or all of its tower portfolio as well as exploring other strategic alternatives.

The closing of the Horizon Transaction remains subject to certain regulatory approvals and other customary closing conditions and is expected to close in the first half of 2024.

Results of Operations

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Year Ended December 31, 2023 Compared with the Year Ended December 31, 2022

The Company’s consolidated results from operations are summarized as follows:

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Operating expenses 277,755 96.7 275,329 103.0 2,426 0.9

Operating loss (7,958) (3.0) (2,430) (1.0) (5,528) 227.5

Other (expense) income, net (1,348) (0.5) 8,665 3.5 (10,013) (115.6)

(Loss) income before taxes (9,306) (3.5) 6,235 2.5 (15,541) (249.3)

Income tax benefit (927) (0.3) (1,694) (0.7) 767 45.3

(Loss) income from continuing operations (8,379) (3.1) 7,929 3.2 (16,308) (205.7)

Income from discontinued operations, net of tax — — 990,902 404.1 (990,902) (100.0)

Net (loss) income $ (8,379) (3.1) $ 998,831 407.3 (1,007,210) (100.8)

Revenue increased approximately $22.1 million, or 9.0%, in 2022 compared with 2021, driven by 9.2% growth in Broadband and 6.9% growth in the Tower segments.

Refer to the discussion of the results of operations for the Tower and Broadband segments, included within this annual report, for additional information.

Operating income (loss) 9,624 3.3 (7,958) (3.0) 17,582 (220.9)

Other income (expense), net 1,387 0.5 (1,348) (0.5) 2,735 (202.9)

Income (loss) before income taxes 11,011 3.8 (9,306) (3.5) 20,317 (218.3)

Income tax expense (benefit) 2,973 1.0 (927) (0.3) 3,900 NMF

Net income (loss) $ 8,038 2.8 $ (8,379) (3.1) 16,417 (195.9)

Revenue increased approximately $20.0 million, or 7.5%, in 2023 compared with 2022, primarily driven by growth of $20.2 million, or 8.1%, in the Broadband segment, partially offset by decline of $0.3 million, or 1.5%, in the Tower segment.

Refer to the discussion of the results of operations for the Broadband and Tower segments, included within this MD&A, for additional information.

Operating expenses

Operating expenses increased approximately $27.7 million, or 11.2%, in 2022 compared with 2021, primarily driven by $29.1 million in incremental Broadband operating expenses primarily incurred to support cessation of Beam operations and services and the continuing expansion of Glo Fiber.

Tower operating expenses were up $0.7 million.

Corporate operating expenses were down $2.1 million primarily due to lower professional fees.

Refer to the discussion of results of operations for the Tower and Broadband segments, included within this annual report, for additional information.

Other (expense) income, net

Other income, net decreased $10.0 million, or 115.6%, in 2022 compared with 2021, primarily driven by lower net actuarial gains recognized for the Company's pension plan in 2022, decreases in patronage income derived from the CoBank patronage program and decreases in transitional service agreement (“TSA”) income realized in 2022.

Income tax benefit

Income tax benefit of approximately $0.9 million decreased approximately $0.8 million compared with 2021, primarily driven by higher benefit realized in 2021 as a result of the 2021 disposition of Wireless assets and operations.

Income from discontinued operations, net of tax

Income from discontinued operations, net of tax, decreased $1.0 billion, or 100.0%.

The decrease was due to the completion of the disposition of our Wireless assets and operations in 2021, with no additional activity occurring in 2022.

Our Broadband segment provides broadband internet, video and voice services to residential and commercial customers in portions of Virginia, West Virginia, Maryland, Pennsylvania, and Kentucky, via hybrid fiber coaxial cable under the brand name of Shentel, fiber optics under the brand name of Glo Fiber.

Operating expenses increased approximately $2.4 million, or 0.9%, in 2023 compared with 2022, primarily driven by $2.9 million in incremental Corporate operating expenses, partially offset by a $0.2 million and a $0.3 million decrease in operating expenses in the Broadband and Tower segments, respectively.

Corporate operating expenses primarily increased due to transaction costs related to the Horizon Transaction.

Refer to the discussion of the results of operations for the Broadband and Tower segments, included within this MD&A, for additional information related to operating expenses for those segments.

Other income (expense), net

Other income (expense), net increased $2.7 million, or 202.9%, in 2023 compared with 2022, primarily driven by a gain recorded in connection with the sale of the Company’s FCC spectrum licenses upon the closing of the Spectrum Transaction in July 2023, sales taxes refunds received, interest income related to tax refunds and a pension settlement gain resulting from the termination of Shentel’s pension plan in June 2023, partially offset by an increase in interest expense.

Income tax expense (benefit)

The Company recognized $3.0 million of income tax expense in 2023, compared with $0.9 million of income tax benefit in 2022.

The $3.9 million increase in income tax expense was driven by higher pre-tax income in 2023.

Our Broadband segment provides broadband internet, video and voice services to residential and commercial customers in portions of Virginia, West Virginia, Maryland, Pennsylvania and Kentucky, via fiber optics under the brand name of Glo Fiber and hybrid fiber coaxial cable under the brand name of Shentel.

The Broadband segment also leases dark fiber and provides Ethernet and Wavelength fiber optic services to enterprise and wholesale customers throughout the entirety of our service area.

The Broadband segment also provides voice and DSL telephone services to customers in Virginia’s Shenandoah County and

portions of adjacent counties as a Rural Local Exchange Carrier (“RLEC”).

These integrated networks are connected by over 8,300 fiber route mile network.

The Broadband segment also provides voice and digital subscriber line (“DSL”) telephone services to customers in Virginia’s Shenandoah County and portions of adjacent counties as a Rural Local Exchange Carrier (“RLEC”).

These integrated networks are connected by 9,875 route miles of fiber.

The following table indicates selected operating statistics of Broadband:

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Broadband homes and businesses passed (1) 449,635 359,529 286,309

Incumbent Cable 212,050 211,120 208,691

Glo Fiber 147,479 75,189 28,652

Residential & SMB RGUs:

Cable Markets 215,763 212,050 211,120

Glo Fiber Markets 233,872 147,479 75,189

Residential & Small and Medium Business ("SMB") Revenue Generating Units ("RGUs"):

Broadband Data 151,389 133,930 117,722

Incumbent Cable 109,644 106,345 98,555

Glo Fiber 24,286 11,377 4,158

Cable Markets 109,679 109,644 106,345

Glo Fiber Markets 41,710 24,286 11,377

Video 43,152 46,975 49,945

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Broadband Data 33.7 % 37.3 % 41.1 %

Incumbent Cable 51.7 % 50.4 % 47.2 %

Glo Fiber 16.5 % 15.1 % 14.5 %

Cable Markets 50.8 % 51.7 % 50.4 %

Glo Fiber Markets 17.8 % 16.5 % 15.1 %

Video 9.6 % 13.1 % 17.4 %

Voice 9.5 % 11.7 % 12.8 %

Residential & SMB ARPU (3)

Residential & SMB Average Revenue per User ("ARPU") (3)

Broadband Data $ 81.27 $ 80.14 $ 78.62

Incumbent Cable $ 81.31 $ 79.00 $ 77.97

Glo Fiber $ 73.48 $ 74.02 $ 78.90

Cable Markets $ 82.75 $ 81.31 $ 79.00

Glo Fiber Markets $ 76.45 $ 73.48 $ 74.02

Video $ 105.71 $ 102.80 $ 100.35

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Passings will vary among video, broadband data and voice services.

(2) Penetration is calculated by dividing the number of users by the number of passings or available homes, as appropriate.

(2) Penetration is calculated by dividing the number of RGUs by the number of passings or available homes, as appropriate.

(3) Average Revenue Per Data RGU calculation = (Residential & SMB Revenue * 1,000) / average data RGUs / 12 months

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Broadband operating revenue

Residential & SMB $ 193,974 77.9 $ 177,530 77.8 16,444 9.3

Residential & SMB - Cable Markets (1) $ 176,879 65.7 $ 175,681 70.6 1,198 0.7

Residential & SMB - Glo Fiber Markets (1) 35,103 13.0 18,293 7.3 16,810 91.9

Commercial Fiber 42,141 15.7 38,830 15.6 3,311 8.5

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Broadband operating income $ 41,129 15.3 $ 20,707 8.3 20,422 98.6

Residential & SMB revenue

Residential & SMB revenue increased approximately $16.4 million, or 9.3%, in 2022 compared with 2021, primarily driven by launching services in new markets resulting in 13.8% growth in broadband RGUs.

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(1) Shentel has presented Residential & SMB - Cable Markets and Residential & SMB - Glo Fiber Markets separately for 2023.

These revenues were previously reported in one line under the description “Residential & SMB”.

Shentel has amended the presentation for 2022.

Residential & SMB - Cable Markets revenue

Residential & SMB - Cable Markets revenue increased approximately $1.2 million, or 0.7%, in 2023 compared with 2022, primarily driven by 1.8% year-over-year growth in data ARPU.

Residential & SMB - Glo Fiber Markets revenue

Residential & SMB - Glo Fiber Markets revenue increased approximately $16.8 million, or 91.9%, in 2023 compared with 2022, primarily driven by 71.7% year-over-year growth in data RGUs resulting from the Company’s expansion of Glo Fiber and 4.0% increase in data ARPU.

Commercial Fiber revenue

Commercial Fiber revenue increased approximately $3.9 million, or 11.2%, in 2022 compared with 2021, primarily driven by increased connections.

Commercial Fiber revenue increased approximately $3.3 million, or 8.5%, in 2023 compared with 2022, primarily driven by $3.0 million in T-Mobile non-recurring early termination fees and $0.3 million in recurring revenue driven by year-over-year growth in connections.

T-Mobile disconnected 338 backhaul circuits during 2023 as part of their previously announced rationalization of the former Sprint network.

The Company expects approximately $1.0 million of additional annual revenue churn as part of the T-Mobile network rationalization.

RLEC & Other revenue

RLEC & Other revenue decreased approximately $1.1 million, or 6.7%, in 2023 compared with 2022, primarily driven by a decline in residential DSL subscribers.

Cost of services

Cost of services increased approximately $5.0 million, or 5.1%, in 2022 compared with 2021, primarily driven by the expansion of Glo Fiber and inflation.

Payroll related costs were up $3.9 million, primarily due to higher salaries, wages and incentive costs and headcount to support the Glo Fiber expansion.

Maintenance costs were up $1.6 million, primarily due to higher fuel, supplies, and contractor costs.

Cost of services decreased approximately $1.4 million, or 1.4%, in 2023 compared with 2022, primarily driven by lower payroll costs due to higher capitalized labor, partially offset by higher line costs due to the expansion of the network into new markets.

Selling, general and administrative

Selling, general and administrative expense increased $8.9 million, or 18.7%, in 2022 compared with 2021, primarily driven by the expansion of Glo Fiber and inflation.

Payroll related costs increased $2.7 million, primarily due to higher salaries, wages and incentive costs and headcount to support the Glo Fiber expansion.

Advertising costs increased $2.5 million due primarily to the expansion of Glo Fiber.

Software related costs and professional fees increased $2.0 million related to operational system upgrades.

Other costs, including bad debt and operating taxes increased $1.7 million.

Restructuring expense

Restructuring expense increased $0.6 million, or 320.3%, in 2022 compared with 2021, primarily driven by the ceasing of Beam operations.

Impairment expense decreased $0.7 million, or 12.4%, in 2022 compared with 2021.

Impairment expense in 2021 and 2022 was primarily driven by the Company's decision to permanently cease Beam operations.

Selling, general and administrative expense increased $6.1 million, or 10.7%, in 2023 compared with 2022, primarily driven by higher advertising costs associated with the Company’s expansion of Glo Fiber and a change in strategy to drive more gross subscriber additions to low cost sales channels and higher credit losses as uncollectible rates have returned to pre-Covid levels.

The Company recorded impairment charges of $2.6 million in 2023, compared with $5.2 million of impairment charges recorded in 2022.

Impairment charges in 2023 were primarily a result of colocation lease right-of-use and remaining Beam

fixed wireless assets that are no longer expected to be used and have no alternative use, while impairment charges in 2022 were primarily a result of the Company’s decommissioning of certain Beam fixed wireless sites.

Depreciation and amortization

Depreciation and amortization increased $15.2 million, or 31.8%, in 2022 compared with 2021, primarily driven by the Company's network expansion of our Glo Fiber network and the accelerated depreciation of Beam network assets associated with the Company’s decision to permanently cease Beam operations.

Depreciation and amortization decreased $1.3 million, or 2.0%, in 2023 compared with 2022, primarily driven by 2022 accelerated depreciation of Beam network assets associated with the Company’s decision to permanently cease Beam operations, for which no equivalent accelerated depreciation was present in 2023.

Our Tower segment owns cell towers and leases colocation space on the towers to wireless communications providers.

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Tower operating income $ 9,495 51.0 $ 9,512 50.3 (17) (0.2)

Revenue increased approximately $1.2 million, or 6.9%, in 2022 compared with 2021, primarily driven by a 4.1% increase in average revenue per tenant.

Revenue decreased approximately $0.3 million, or 1.5%, in 2023 compared with 2022, primarily driven by lower intercompany lease revenue from ceasing Beam operations in 2022.

Operating expenses

Operating expenses increased approximately $0.7 million, or 8.3%, in 2022 compared with 2021, primarily driven by higher costs of service as a result of higher rent costs and higher depreciation.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Operating expenses decreased approximately $0.3 million, or 2.8%, in 2023 compared with 2022, primarily driven by lower depreciation as a result of fewer depreciable tower assets in 2023 compared to 2022.

Year Ended December 31, 2022 Compared with the Year Ended December 31, 2021

The Company’s consolidated results from operations are summarized as follows:

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Operating loss (7,958) (3.0) (2,430) (1.0) (5,528) 227.5

Other income, net 8,665 3.5 3,187 1.4 5,478 171.9

Income before taxes 6,235 2.5 586 0.3 5,649 964.0

Other (expense) income, net (1,348) (0.5) 8,665 3.5 (10,013) (115.6)

(Loss) income before income taxes (9,306) (3.5) 6,235 2.5 (15,541) (249.3)

Income tax benefit (927) (0.3) (1,694) (0.7) 767 45.3

Income from continuing operations $ 7,929 3.2 $ 1,576 0.7 6,353 403.1

(Loss) income from continuing operations $ (8,379) (3.1) $ 7,929 3.2 (16,308) (205.7)

Income from discontinued operations, net of tax — — 990,902 404.1 (990,902) (100.0)

Net income $ 998,831 407.3 $ 125,673 56.9 873,158 694.8

Net (loss) income $ (8,379) (3.1) $ 998,831 407.3 (1,007,210) (100.8)

Revenue increased approximately $22.1 million, or 9.0%, in 2022 compared with 2021, driven by 9.2% growth in Broadband and 6.9% growth in the Tower segments.

Refer to the discussion of the results of operations for the Tower and Broadband segments, included within this annual report, for additional information.

Refer to the discussion of the results of operations for the Tower and Broadband segments, included within this MD&A, for additional information.

Operating expenses

Operating expenses increased approximately $24.3 million, or 10.9%, in 2021 compared with 2020, primarily driven by $7.4 million in incremental Broadband operating expenses incurred to support the continuing expansion of Glo Fiber, $1.7 million of restructuring expenses and $6.0 million of impairment expenses incurred primarily as a result of our decision to cease expansion of Beam, $6.4 million in depreciation from growth in our broadband networks, $5.8 million in Broadband maintenance due primarily to higher cable replacements costs, obsolete inventory charges and expensing of software development costs related to our previous ERP system that was replaced in 2022, partially offset by a decline in corporate expenses.

Other income, net

Other income, net increased $5.5 million primarily due to actuarial gains recognized for the Company's post-retirement benefit plans and TSA income realized in 2021.

Tower operating expenses were up $0.7 million.

Corporate operating expenses were down $2.1 million primarily due to lower professional fees.

Refer to the discussion of results of operations for the Tower and Broadband segments, included within this MD&A, for additional information.

Other (expense) income, net

Other income, net decreased $10.0 million, or 115.6%, in 2022 compared with 2021, primarily driven by lower net actuarial gains recognized for the Company’s pension plan in 2022, decreases in patronage income derived from the CoBank patronage program and decreases in transitional service agreement income realized in 2022.

Income tax benefit

Income tax benefit of approximately $1.7 million increased approximately $0.7 million compared with 2020, primarily due to $5.0 million of non-cash tax benefits derived from the revaluation of our deferred tax liabilities.

This revaluation was driven by the change in our estimated state tax rate that was triggered by the disposition of our Wireless assets and operations and a change in West Virginia tax regulations, and was partially offset by a $1.6 million reclassification of income taxes from other comprehensive income resulting from termination of our interest rate swaps, a $1.1 million reduction in excess tax benefits from share based compensation and other, and $1.6 million as a result of changes in taxable income.

Income from discontinued operations, net of tax

Income from discontinued operations, net of tax, increased $0.9 billion, or 698.5%.

The increase was primarily due to the completion of the disposition of our Wireless assets and operations for proceeds of approximately $1.9 billion resulting in a gain of $1.2 billion, net of approximately $0.3 billion of income tax expense.

Income from discontinued operations, net of tax, decreased $1.0 billion, or 100.0%.

The decrease was due to the completion of the disposition of our Wireless assets and operations in 2021, with no additional activity occurring in 2022.

Broadband results from operations are summarized as follows:

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Broadband operating revenue

Residential & SMB $ 177,530 77.8 $ 155,017 75.9 22,513 14.5

Residential & SMB - Cable Markets (1) $ 175,681 70.6 $ 169,183 74.2 6,498 3.8

Residential & SMB - Glo Fiber Markets (1) 18,293 7.3 8,347 3.7 9,946 119.2

Commercial Fiber 38,830 15.6 34,931 15.3 3,899 11.2

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Broadband operating income $ 20,707 8.3 $ 28,832 12.6 (8,125) (28.2)

Residential & SMB revenue

Residential & SMB revenue increased approximately $22.5 million, or 14.5%, during 2021 primarily driven by launching services in new markets resulting in 15.9% growth in broadband RGUs.

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(1) Shentel has presented Residential & SMB - Cable Markets and Residential & SMB - Glo Fiber Markets separately for 2023.

These revenues were previously reported in one line under the description “Residential & SMB”.

Shentel has amended the presentation for 2022 and 2021.

Residential & SMB - Cable Markets revenue

Residential & SMB - Cable Markets revenue increased approximately $6.5 million, or 3.8%, in 2022 compared with 2021, primarily driven by 4.7% growth in data RGUs and 2.9% growth in data ARPU.

Residential & SMB - Glo Fiber Markets revenue

Residential & SMB - Glo Fiber Markets revenue increased approximately $9.9 million, or 119.2%, in 2022 compared with 2021, primarily driven by launching services in new markets resulting in 113.5% growth in broadband RGUs.

Commercial Fiber revenue

Commercial Fiber revenue increased approximately $2.2 million, or 6.6%, during 2021 due primarily to $1.0 million of growth in circuit connections, $0.7 million non-recurring amortized revenue reduction in 2020 and $0.5 million in non-recurring dark fiber sales-type leases in 2021.

RLEC & Other revenue

RLEC & Other revenue decreased approximately $1.0 million, or 5.7%, compared with 2020 due primarily to a decline in residential DSL subscribers, lower switched access revenue, and lower intercompany phone service.

Commercial Fiber revenue increased approximately $3.9 million, or 11.2%, in 2022 compared with 2021, primarily driven by increased connections.

Cost of services

Cost of services increased approximately $12.4 million, or 14.6%, compared with 2020, primarily driven by $5.8 million increase in maintenance due primarily to higher cable replacements costs, obsolete network asset charges and expensing of software development costs related to our previous ERP system, $3.6 million in higher compensation costs to support the expansion of Glo Fiber and Beam, and $1.7 million in higher programming fees.

Cost of services increased approximately $5.0 million, or 5.1%, in 2022 compared with 2021, primarily driven by the expansion of Glo Fiber and inflation.

Payroll related costs were up $3.9 million, primarily due to higher salaries, wages and incentive costs and headcount to support the Glo Fiber expansion.

Maintenance costs were up $1.6 million, primarily due to higher fuel, supplies, and contractor costs.

Selling, general and administrative

Selling, general and administrative expense increased $8.4 million or 21.2% compared with 2020 primarily due to $3.8 million in higher compensation and advertising costs to support the expansion of Glo Fiber and Beam, a $2.4 million increase in software development and service fees as we upgrade our operating support, customer relationship and enterprise resource systems and a $1.7 million increase in property taxes, facility expense and other costs.

Selling, general and administrative expense increased $8.9 million, or 18.7%, in 2022 compared with 2021, primarily driven by the expansion of Glo Fiber and inflation.

Payroll related costs increased $2.7 million, primarily due to higher salaries, wages and incentive costs and headcount to support the Glo Fiber expansion.

Advertising costs increased $2.5 million due primarily to the expansion of Glo Fiber.

Software related costs and professional fees increased $2.0 million related to operational system upgrades.

Other costs, including provision for bad debt and operating taxes increased $1.7 million.

Restructuring expense

Restructuring expense was primarily due to severance related expenses from the sale of Wireless assets and operations.

During the fourth quarter, we ceased further expansion of our fixed wireless edge-out strategy.

As a result, in the fourth quarter of 2021, the Company incurred approximately $6.0 million of expenses for impairment of expansionary Beam construction assets.

Restructuring expense increased $0.6 million, or 320.3%, in 2022 compared with 2021, primarily driven by the ceasing of Beam operations.

Impairment expense decreased $0.7 million, or 12.4%, in 2022 compared with 2021.

Impairment expense in 2021 and 2022 was primarily driven by the Company’s decision to permanently cease Beam operations.

Depreciation and amortization

Depreciation and amortization increased $6.9 million or 16.7%, compared with 2020, primarily as a result of our network expansion and the deployment of infrastructure necessary to support our new fiber-to-the-home service, Glo Fiber.

Depreciation and amortization increased $15.2 million, or 31.8%, in 2022 compared with 2021, primarily driven by the Company’s network expansion of our Glo Fiber network and the accelerated depreciation of Beam network assets associated with the Company’s decision to permanently cease Beam operations.

Tower results from operations are summarized as follows:

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Tower operating income $ 9,512 50.3 $ 9,016 50.9 496 5.5

Revenue increased approximately $0.6 million, or 3.8%, in 2021 compared with 2020.

This increase was due to a 13.6% increase in tenants and was partially offset by a 3.2% decline in average revenue per tenant.

Revenue increased approximately $1.2 million, or 6.9%, in 2022 compared with 2021, primarily driven by a 4.1% increase in average revenue per tenant.

Operating expenses

Operating expenses increased approximately $0.5 million, or 5.5%, compared to the prior year period, due primarily to increases in ground lease rent expense, and expansion of our tower network team resulting in higher payroll costs, partially offset by a decrease in professional services.

Operating expenses increased approximately $0.7 million, or 8.3%, in 2022 compared with 2021, primarily driven by higher costs of service as a result of higher rent costs and higher depreciation.

Financial Condition, Liquidity and Capital Resources

Sources and Uses of Cash:

Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations, and borrowings under our Credit Agreement, dated July 1, 2021 (the “Credit Agreement”).

In 2021, Congress passed the America Rescue Plan Act to subsidize the deployment of high-speed broadband internet access in unserved areas.

We were awarded approximately $71 million in grants to serve approximately 23,600 unserved homes in the states of Virginia, West Virginia and Maryland.

Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations, and borrowings under our Credit Agreement.

The Credit Agreement contains (i) a $100 million, five-year undrawn revolving credit facility (the “Revolver”), (ii) a $150 million five-year delayed draw amortizing term loan (“Term Loan A-1”) and (iii) a $150 million seven-year delayed draw amortizing term loan (“Term Loan A-2” and collectively with Term Loan A-1, the “Term Loans”).

In 2021, Congress passed the American Rescue Plan Act to subsidize the deployment of high-speed broadband internet access in unserved areas.

We have been awarded approximately $85.8 million in grants to serve approximately 25,000 unserved homes in the states of Virginia, West Virginia and Maryland.

The grants will be paid to the Company as certain milestones are completed.

The Company expects to its fulfill its performance obligations during the period from 2023 to 2025.

As of December 31, 2022, our cash and cash equivalents totaled $44.1 million and the availability under our delayed draw term loans and revolving line of credit was $325.0 million, for total available liquidity of $369.1 million.

Operating activities from continuing operations generated approximately $74.9 million in 2022, representing an increase of $11.4 million compared with 2021, driven by higher non-cash add backs to net loss, including higher depreciation, stock-based compensation, and bad debt expense, and lower non-cash add backs for income taxes benefits, partially offset by lower income (loss) from operations.

Net cash used in investing activities for continuing operations increased $24.4 million in 2022, compared with 2021, primarily due to a $29.5 million increase in capital expenditures for our Broadband segment to enable our Glo Fiber market expansion, partially offset by an increase in cash received for refunds of FCC spectrum licenses of $4.0 million and sales of assets, including a sale of investments from Shentel's rabbi trust which generated $0.8 million of proceeds.

Financing activities from continuing operations generated approximately $69.0 million in 2022, compared to net cash used in financing activities for continuing operations of $943.9 million in 2021.

The change was primarily the result of a decrease in dividend payments, as the Company made a special dividend payment of $936.3 million in 2021.

The Company also generated an additional $75.0 million in cash as a result of borrowings against its delayed draw term loans during 2022.

The Company expects to fulfill its obligations under these programs by 2026.

As of December 31, 2023, our cash and cash equivalents totaled $139.3 million and the availability under our revolving line of credit was $100.0 million, for total available liquidity of $239.3 million.

Net cash provided by operating activities from continuing operations was approximately $113.8 million in 2023, representing an increase of $38.9 million compared with 2022, primarily driven by tax refunds of $25.6 million received during 2023 and changes in working capital, partially offset by settlement of Shentel’s pension plan.

Net cash used in investing activities from continuing operations was approximately $236.7 million in 2023, representing an increase of $52.5 million compared with 2022, primarily driven by a $66.9 million increase in capital expenditures as a result of higher spending in the Broadband segment to enable our Glo Fiber market expansion, partially offset by $17.3 million in cash proceeds from the closing of the Spectrum Transaction in July 2023.

Net cash provided by financing activities from continuing operations was approximately $218.1 million in 2023, representing an increase of $149.1 million compared with 2022, primarily driven by an increase of $150.0 million in borrowings under the Term Loans.

The Company received approximately $29.0 million in net cash refunds for income and sales taxes during the year ended December 31, 2023.

Indebtedness :

Throughout 2022, we borrowed $37.5 million under each of the delayed draw term loan facilities available under the Credit Agreement for a total of $75.0 million.

We expect to borrow the remaining $225.0 million available under these term loans by June 2023 to fund planned capital expenditures to continue our Glo Fiber network expansion.

As of December 31, 2022, the Company’s indebtedness totaled approximately $75 million, net of unamortized loan fees of $46.0 thousand, with an annualized overall weighted average interest rate of approximately 4.63%.

To date, Shentel has borrowed $150 million under each of the Term Loans available under the Credit Agreement for a total of $300 million.

As of December 31, 2023, the Company’s indebtedness totaled approximately $300 million, net of unamortized loan fees of $0.1 million.

The borrowed amounts bear interest at a variable rate determined by one-month term SOFR, plus a margin of 1.6%.

This rate, including the margin, was 6.95% as of December 31, 2023.

Shentel’s Term Loans require quarterly payments based on a percentage of the outstanding balance.

Based on the outstanding balance as of December 31, 2023, Term Loan A-1 requires quarterly principal repayments of $0.9 million from March 31, 2024 through June 30, 2024;

then increasing to $1.9 million quarterly from September 30, 2024 through March 31, 2026, with the remaining balance due June 30, 2026.

Based on the outstanding balance as of December 31, 2023, Term Loan A-2 requires quarterly principal repayments of $0.4 million through March 31, 2028, with the remaining balance due June 30, 2028.

Refer to Note 9, Debt in the Company’s 2023 Consolidated Financial Statements for information about the Company's Credit Agreement.

As of December 31, 2023, the Company was in compliance with the financial covenants in our Credit Agreement.

We expect our cash on hand, cash flow from continuing operations, and availability of funds from our Credit Agreement as well as government grants will be sufficient to meet our anticipated liquidity needs for business operations for the next twelve months.

We expect our cash on hand, cash flows from continuing operations, and availability of funds from our Credit Agreement as well as government grants will be sufficient to meet our anticipated liquidity needs for business operations for the next twelve months.

There can be no assurance that we will continue to generate cash flows at or above current levels.

We expect our capital expenditures to exceed the cash flow provided from continuing operations through 2025, as we expand our Glo Fiber broadband network to potentially reach over 450,000 passings.

During the year ended December 31, 2023, our capital expenditures of $256.6 million exceeded our net cash provided by operating activities from continuing operations by $142.8 million, and we expect our capital expenditures to exceed the net cash flows provided by continuing operations through 2026, as we expand our Glo Fiber broadband network.

The actual amount and timing of our future capital requirements may differ materially from our estimates depending on the demand for our products and services, new market developments and expansion opportunities.

Our cash flows from continuing operations could be adversely affected by events outside our control, including, without limitation, changes in overall economic conditions including rising inflation, regulatory requirements, changes in technologies, changes in competition, demand for our products and services, availability of labor resources and capital, natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as COVID-19, and other conditions.

Our cash flows from operations could be adversely affected by events outside our control, including, without limitation, changes in overall economic conditions including rising inflation, regulatory requirements, changes in technologies, changes in competition, demand for our products and services, availability of labor resources and capital, natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as COVID-19, and other conditions.

Our ability to attract and maintain a sufficient customer base, particularly in our Broadband markets, is critical to our ability to maintain a positive cash flow from operations.

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generally accepted accounting principles (“GAAP”).

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect our

reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures.

To the extent that there are material differences between these estimates and actual results, our financial condition or operating results would be affected.

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The Broadband segment also provides voice and DSL telephone services to customers in Virginia’s Shenandoah County and portions of adjacent counties as a RLEC.

These contracts are generally cancellable at the customer’s discretion without penalty at any time.

We allocate the total transaction price in these transactions based upon the standalone selling price of each distinct good or service.

We generally recognize these revenues over time as customers simultaneously receive and consume the benefits of the service, with the exception of equipment sales and home wiring, which are recognized as revenue at a point in time when control transfers and when installation is complete, respectively.

A significant portion of the Company’s revenues are derived from customers who may cancel their subscriptions at any time without penalty.

A significant portion of the Company’s revenues are derived from customers who may cancel their subscriptions at any time without substantial penalty.

As such, the amount of deferred revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from the Company’s existing customers.

Installation fees charged upfront without transfer of commensurate goods or services to the customer are allocated to services and are recognized ratably over the longer of the contract term or the period in which the unrecognized fee remains material to the contract, which we estimate to be one year.

Additionally, the Company incurs commission expenses related to in-house and third-party vendors which are capitalized and amortized over the expected customer benefit period.

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Cable franchise rights represent the value attributable to agreements with local franchising authorities, which allows access to homes and businesses via public rights of way.

Shentel's cable franchise rights were primarily acquired through business combinations.

Shentel’s cable franchise rights were primarily acquired through business

combinations.

Cable franchise rights have an indefinite life;

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Shentel evaluates the recoverability of its cable franchise rights at least annually on October 1, or more frequently whenever events or substantive changes in circumstances indicate that the assets might be impaired.

As a result of the 2022 analysis, we did not identify any cable franchise right assets in which the fair value was less than the carrying value, therefore we did not recognize any impairment charges for the year ended December 31, 2022.

To estimate fair value in the impairment analysis, we used a greenfield model, a method under the income approach, which reflected the expected discounted cash flows of a notional start-up business with no assets other than the cable franchise rights being valued.

The estimates and assumptions made in our impairment analysis are inherently subject to significant uncertainties, many of which are beyond our control, and there is no assurance that these results can be achieved.

The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would significantly affect the measurement value include the assumptions regarding revenue growth, the amount and timing of capital expenditures, EBITDA margins and the discount rate utilized.

This evaluation is either performed on a quantitative or qualitative basis.

When performing a quantitative evaluation, we estimate the fair values of our cable franchise rights primarily based on an income approach that involves significant judgment, including the estimate of revenue growth, the amount and timing of capital expenditures, EBITDA margins and the discount rate utilized.

When performing a qualitative assessment, we assess whether events and circumstances indicate that it is more likely than not (that is, a likelihood of more than 50%) that an impairment exists.

This includes evaluating changes in market conditions, competitive factors, laws and regulations and key assumptions made in quantitative assessments, including expected revenue growth, capital expenditures, EBITDA margins and discount rates.

Our current year evaluation was performed on a qualitative basis.

As a result of the current year evaluation, we did not identify any cable franchise right assets for which the fair value was less than the carrying value.

As a result, we did not recognize any impairment charges for the year ended December 31, 2023.

Recently Issued Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis