SHENANDOAH TELECOMMUNICATIONS CO/VA/ (SHEN) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Annual Report on Form 10-K, including those set forth under “Part I. Cautionary Statement Regarding Forward-Looking Statements” and “Part I. Item 1A. Risk Factors”.
Overview
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. Refer to Item 1 above for our description of our reporting segments and a description of their respective business activities. Also see Note 15, Discontinued Operations, and Note 14, Segment Reporting, in our consolidated financial statements for additional information.
2022 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 $3.8 million of liabilities to be assumed by the wireless carrier (the “Spectrum Transaction”). The Spectrum Transaction is expected to close in the first half of 2023, subject to the receipt of regulatory approvals and other customary closing conditions. As a result of the Spectrum Transaction, the Company ceased its Beam service at the remaining Beam fixed wireless sites in the fourth quarter 2022. The Company is no longer reporting Beam customers as part of its Broadband Revenue Generating Units (“RGUs”).
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Results of Operations
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
The Company’s consolidated results from operations are summarized as follows:
| Year Ended December 31, | Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | % of Revenue | 2021 | % of Revenue | $ | % | |||||||||||
| Revenue | $ | 267,371 | 100.0 | $ | 245,239 | 100.0 | 22,132 | 9.0 | |||||||||
| Operating expenses | 275,329 | 103.0 | 247,669 | 101.0 | 27,660 | 11.2 | |||||||||||
| 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
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 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.
Broadband
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. 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
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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 following table indicates selected operating statistics of Broadband:
| December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Broadband homes and businesses passed (1) | 359,529 | 286,309 | 237,343 | ||||||||
| Incumbent Cable | 212,050 | 211,120 | 208,691 | ||||||||
| Glo Fiber | 147,479 | 75,189 | 28,652 | ||||||||
| Residential & SMB RGUs: | |||||||||||
| Broadband Data | 133,930 | 117,722 | 102,713 | ||||||||
| Incumbent Cable | 109,644 | 106,345 | 98,555 | ||||||||
| Glo Fiber | 24,286 | 11,377 | 4,158 | ||||||||
| Video | 46,975 | 49,945 | 52,817 | ||||||||
| Voice | 39,951 | 34,513 | 32,646 | ||||||||
| Total Residential & SMB RGUs (excludes RLEC) | 220,856 | 202,180 | 188,176 | ||||||||
| Residential & SMB Penetration (2) | |||||||||||
| Broadband Data | 37.3 | % | 41.1 | % | 43.3 | % | |||||
| Incumbent Cable | 51.7 | % | 50.4 | % | 47.2 | % | |||||
| Glo Fiber | 16.5 | % | 15.1 | % | 14.5 | % | |||||
| Video | 13.1 | % | 17.4 | % | 22.3 | % | |||||
| Voice | 11.7 | % | 12.8 | % | 14.8 | % | |||||
| Residential & SMB ARPU (3) | |||||||||||
| Broadband Data | $ | 80.14 | $ | 78.62 | $ | 77.93 | |||||
| Incumbent Cable | $ | 81.31 | $ | 79.00 | $ | 77.97 | |||||
| Glo Fiber | $ | 73.48 | $ | 74.02 | $ | 78.90 | |||||
| Video | $ | 102.80 | $ | 100.35 | $ | 93.17 | |||||
| Voice | $ | 26.23 | $ | 28.60 | $ | 29.44 | |||||
| Fiber route miles | 8,346 | 7,392 | 6,794 | ||||||||
| Total fiber miles (4) | 656,033 | 518,467 | 394,316 |
_______________________________________________________
(1)Homes and businesses are considered passed (“passings”) if we can connect them to our network without further extending the distribution system. Passings is an estimate based upon the best available information. 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.
(3)Average Revenue Per Data RGU calculation = (Residential & SMB Revenue * 1,000) / average data RGUs / 12 months
(4)Total fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.
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Broadband results from operations are summarized as follows:
| Year Ended December 31, | Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | % of Revenue | 2021 | % of Revenue | $ | % | |||||||||||
| Broadband operating revenue | |||||||||||||||||
| Residential & SMB | $ | 193,974 | 77.9 | $ | 177,530 | 77.8 | 16,444 | 9.3 | |||||||||
| Commercial Fiber | 38,830 | 15.6 | 34,931 | 15.3 | 3,899 | 11.2 | |||||||||||
| RLEC & Other | 16,211 | 6.5 | 15,619 | 6.8 | 592 | 3.8 | |||||||||||
| Total broadband revenue | 249,015 | 100.0 | 228,080 | 100.0 | 20,935 | 9.2 | |||||||||||
| Broadband operating expenses | |||||||||||||||||
| Cost of services | 102,267 | 41.1 | 97,283 | 42.7 | 4,984 | 5.1 | |||||||||||
| Selling, general, and administrative | 56,776 | 22.8 | 47,840 | 21.0 | 8,936 | 18.7 | |||||||||||
| Restructuring expense | 849 | 0.3 | 202 | 0.1 | 647 | 320.3 | |||||||||||
| Impairment expense | 5,241 | 2.1 | 5,986 | 2.6 | (745) | (12.4) | |||||||||||
| Depreciation and amortization | 63,175 | 25.4 | 47,937 | 21.0 | 15,238 | 31.8 | |||||||||||
| Total broadband operating expenses | 228,308 | 91.7 | 199,248 | 87.4 | 29,060 | 14.6 | |||||||||||
| Broadband operating income | $ | 20,707 | 8.3 | $ | 28,832 | 12.6 | (8,125) | (28.2) |
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.
Commercial Fiber revenue
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 $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 $8.9 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
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 $15.2 million, or 31.8%, in 2022 compared with 2021, primarily driven by the Company's network expansion of our Glo Fiber network and the accelerated depreciation of Beam network assets associated with the Company’s decision to permanently cease Beam operations.
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Tower
Our Tower segment owns cell towers and leases colocation space on the towers to wireless communications providers. Substantially all of our owned towers are built on ground that we lease from the respective landlords.
The following table indicates selected operating statistics of the Tower segment:
| December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||
|---|---|---|---|---|---|---|---|
| Macro tower sites | 222 | 223 | 223 | ||||
| Tenants | 446 | 485 | 427 | ||||
| Average tenants per tower | 1.9 | 2.1 | 1.8 |
Tower results from operations are summarized as follows:
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | % of Revenue | 2021 | % of Revenue | $ | % | ||||||||||
| Tower revenue | $ | 18,919 | 100.0 | $ | 17,704 | 100.0 | % | 1,215 | 6.9 | |||||||
| Tower operating expenses | 9,407 | 49.7 | 8,688 | 49.1 | 719 | 8.3 | ||||||||||
| Tower operating income | $ | 9,512 | 50.3 | $ | 9,016 | 50.9 | 496 | 5.5 |
Revenue
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 $0.7 million, or 8.3%, in 2022 compared with 2021, primarily driven by higher costs of service as a result of higher rent costs and higher depreciation.
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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
The Company’s consolidated results from operations are summarized as follows:
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2021 | % of Revenue | 2020 | % of Revenue | $ | % | ||||||||||
| Revenue | $ | 245,239 | 100.0 | $ | 220,775 | 100.0 | 24,464 | 11.1 | ||||||||
| Operating expenses | 247,669 | 101.0 | 223,376 | 101.2 | 24,293 | 10.9 | ||||||||||
| Operating loss | (2,430) | (1.0) | (2,601) | (1.2) | 171 | (6.6) | ||||||||||
| 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 | ||||||||||
| Income tax benefit | (1,694) | (0.7) | (990) | (0.4) | (704) | (71.1) | ||||||||||
| Income from continuing operations | $ | 7,929 | 3.2 | $ | 1,576 | 0.7 | 6,353 | 403.1 | ||||||||
| Income from discontinued operations, net of tax | 990,902 | 404.1 | 124,097 | 56.2 | 866,805 | 698.5 | ||||||||||
| Net income | $ | 998,831 | 407.3 | $ | 125,673 | 56.9 | 873,158 | 694.8 |
Revenue
Revenue increased approximately $24.5 million, or 11.1%, in 2021 compared with 2020, driven by 11.6% growth in Broadband and 3.8% 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 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.
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 $0.3 billion of income tax expense.
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Broadband
Broadband results from operations are summarized as follows:
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2021 | % of Revenue | 2020 | % of Revenue | $ | % | ||||||||||
| Broadband operating revenue | ||||||||||||||||
| Residential & SMB | $ | 177,530 | 77.8 | $ | 155,017 | 75.9 | 22,513 | 14.5 | ||||||||
| Commercial Fiber | 34,931 | 15.3 | 32,759 | 16.0 | 2,172 | 6.6 | ||||||||||
| RLEC & Other | 15,619 | 6.8 | 16,571 | 8.1 | (952) | (5.7) | ||||||||||
| Total broadband revenue | 228,080 | 100.0 | 204,347 | 100.0 | % | 23,733 | 11.6 | |||||||||
| Broadband operating expenses | ||||||||||||||||
| Cost of services | 97,283 | 42.7 | 84,893 | 41.5 | 12,390 | 14.6 | ||||||||||
| Selling, general, and administrative | 47,840 | 21.0 | 39,472 | 19.3 | 8,368 | 21.2 | ||||||||||
| Restructuring expense | 202 | 0.1 | — | — | 202 | — | ||||||||||
| Impairment expense | 5,986 | 2.6 | — | — | 5,986 | — | ||||||||||
| Depreciation and amortization | 47,937 | 21.0 | 41,076 | 20.1 | 6,861 | 16.7 | ||||||||||
| Total broadband operating expenses | 199,248 | 87.4 | 165,441 | 81.0 | 33,807 | 20.4 | ||||||||||
| Broadband operating income | $ | 28,832 | 12.6 | $ | 38,906 | 19.0 | (10,074) | (25.9) |
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.
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.
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.
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.
Restructuring expense
Restructuring expense was primarily due to severance related expenses from the sale of Wireless assets and operations.
Impairment
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.
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Depreciation and amortization
Depreciation and amortization increased $6.9 million or 16.7%, compared with 2020, primarily as a result of our network expansion and the deployment of infrastructure necessary to support our new fiber-to-the-home service, Glo Fiber.
Tower
Tower results from operations are summarized as follows:
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2021 | % of Revenue | 2020 | % of Revenue | $ | % | ||||||||||
| Tower revenue | $ | 17,704 | 100.0 | $ | 17,055 | 100.0 | 649 | 3.8 | ||||||||
| Tower operating expenses | 8,688 | 49.1 | 8,232 | 48.3 | 456 | 5.5 | ||||||||||
| Tower operating income | $ | 9,016 | 50.9 | $ | 8,823 | 51.7 | 193 | 2.2 |
Revenue
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.
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.
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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. 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.
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%. Refer to Note 9, Debt in the Company's 2022 Consolidated Financial Statements for information about the Company's Credit Agreement.
As of December 31, 2022, 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. 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.
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 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. The foregoing events individually or collectively could affect our results.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect our
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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. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies in our consolidated financial statements. The following are the accounting policies that we believe involve a greater degree of judgment and complexity and are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from contracts with customers, (“ASC 606”).
Our Broadband segment provides broadband data, video and voice services to residential, small and midsize businesses (“SMB”) and commercial customers in portions of Virginia, West Virginia, Maryland, Pennsylvania and Kentucky, via fiber optic and hybrid fiber coaxial cable networks. 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. 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.
Our Broadband segment also provides Ethernet and Wavelength fiber optic services to commercial fiber customers under capacity agreements, and the related revenue is recognized over time. In some cases, non-refundable upfront fees are charged for connecting commercial fiber customers to our fiber network. Those amounts are recognized ratably over the initial contract term.
The Broadband segment also leases dedicated fiber optic strands to customers as part of “dark fiber” agreements, which are accounted for as leases under ASC 842, Leases (“ASC 842”).
Our Tower segment leases space on owned cell towers to our Broadband segment, and to other wireless carriers. Revenue from these leases is accounted for under ASC 842.
Cable franchise rights
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. Cable franchise rights have an indefinite life; therefore, no amortization is recorded for these assets. Costs incurred in negotiating and renewing cable franchise rights are expensed as incurred.
The terms and conditions of franchises vary among jurisdictions, but franchises generally last for a fixed term and are subject to renewal. The renewal process for our state franchises is specified by state law and tends to be a simple process, requiring the filing of a renewal application with information no more burdensome than that contained in our original application. Franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. If our local franchises are not renewed at expiration we would have to cease operations or, operate under either temporary operating agreements or without a franchise while negotiating renewal terms with the local franchising authorities.
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Although renewal is not assured, there are provisions in the law that protect the Company from arbitrary or unreasonable denial. In our experience, state and local franchising authorities encourage our entry into the market, and we have historically been successful in renewing these agreements.
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.
Recently Issued Accounting Standards
Recently issued accounting standards and their expected impact, if any, are discussed in Note 2, Summary of Significant Accounting Policies in our consolidated financial statements.
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