Discontinued Operations

9 Months Ended

Sep. 30, 2020

Discontinued Operations and Disposal Groups [Abstract]

On August 26, 2020, Sprint Corporation (“Sprint”), an indirect subsidiary of T-Mobile US, Inc., on behalf of and as the direct or indirect owner of Sprint PCS, delivered notice to the Company exercising its option to purchase the assets and operations of our Wireless segment for 90% of the “Entire Business Value” (as defined under our affiliate agreement with Sprint PCS and determined pursuant to the appraisal process set forth therein). Shortly thereafter, the Company committed to a plan to sell the Wireless operations in a manner pursuant to the affiliate agreement’s terms. Our affiliate agreement provides a process and timeline for the sale that is expected to close within one year at a price to be determined through the appraisal process outlined in the affiliate agreement. Under the affiliate agreement, the appraised value should reflect the fair market value that a willing buyer would pay a willing seller for the entire on-going business in a change of control transaction.

On November 3, 2020, the parties aligned in principle on certain elements of the appraisal and sale process. Under the agreement in principle, the appraised valuation will be performed as of July 1, 2020. The appraisal will also value Shentel’s discontinued wireless operations as though Shentel were still an affiliate of Sprint with access to its brands and spectrum, without any regard to T-Mobile’s acquisition of Sprint or its subsequent integration efforts. It is currently expected that the appraisers will complete their assessment of the Entire Business Value on or about January 20, 2021. The transaction is expected to close in the second quarter of 2021, subject to receipt of customary regulatory approvals.

The assets and liabilities that are expected to transfer in the sale are presented as held for sale within our Unaudited Condensed Consolidated Balance Sheets. Under the affiliate agreement, the sale is to be structured as an asset sale for income tax purposes. As a result, no current or deferred tax assets or liabilities are included within the disposal group. While our long-term debt does not transfer in the sale, its provisions require us to repay all of the debt upon consummation of the sale. Our debt is therefore presented outside of the disposal group as a current liability at September 30, 2020. Our related swap liabilities are also presented outside of the disposal group as a current liability at September 30, 2020 because management intends to settle it at consummation.

The expected divestiture of our Wireless operations represents a strategic shift in the Company’s business and qualifies as a discontinued operation. As a result, the operating results and cash flows related to the Wireless segment have been reflected as discontinued operations in our Unaudited Condensed Consolidated Statements of Comprehensive Income and the Unaudited Condensed Consolidated Statements of Cash Flows. Similarly, the results of our Wireless operations are no longer presented as a reporting segment. Because repayment of the debt is contractually triggered by the sale, the related interest expense is presented within discontinued operations under the relevant authoritative guidance. Consistent with the internal reporting provided to our chief operating decision maker, we previously allocated certain corporate management overhead costs to the former Wireless segment which may no longer be allocated to discontinued operations under the relevant authoritative guidance. Accordingly, we have elected to recast our segment reporting footnote to reflect the reattribution of these expenses in all presented periods in a manner that is also consistent with our updated internal reporting.

The carrying amounts of the major classes of assets and liabilities, which are classified as held for sale in the unaudited condensed consolidated balance sheets, are as follows:


(in thousands)	September 30, 2020		December 31, 2019
ASSETS
Inventory	$	4,240	$	5,728
Prepaid expenses and other	48,555		49,381
Property, plant and equipment, net	300,098		—
Intangible assets, net	186,885		—
Goodwill	146,383		—
Operating lease right-of-use assets	421,868		—
Deferred charges and other assets	40,572		—
Current assets held for sale	$	1,148,601	$	55,109

Property, plant and equipment, net	$	—	$	338,427
Intangible assets, net	—		228,593
Goodwill	—		146,383
Operating lease right-of-use assets	—		384,010
Deferred charges and other assets	—		44,085
Non-current assets held for sale	$	—	$	1,141,498

LIABILITIES
Advanced billings and customer deposits	$	—	$	169
Current operating lease liabilities	422,415		47,077
Accrued liabilities and other	5,333		7,000
Asset retirement obligations	33,168		—
Retirement plan obligations	10,027		—
Current liabilities held for sale	$	470,943	$	54,246

Non-current operating lease liabilities	$	—	$	337,661
Asset retirement obligations	—		30,762
Retirement plan obligations	—		10,398
Other non-current liabilities	—		215
Non-current liabilities held for sale	$	—	$	379,036

Income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income consist of the following:


(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Revenue:	2020		2019		2020		2019
Service revenue and other	$	100,963	$	91,314	$	302,488	$	283,214
Equipment revenue	9,862		15,975		32,222		47,814
Total revenue	110,825		107,289		334,710		331,028
Operating expenses:
Cost of services	28,567		32,277		95,242		95,846
Cost of goods sold	9,600		15,571		31,565		45,740
Selling, general and administrative	7,696		8,879		25,931		28,774
Depreciation and amortization	15,077		25,886		62,804		86,350
Total operating expenses	60,940		82,613		215,542		256,710
Operating income	49,885		24,676		119,168		74,318
Other (expense) income:
Interest expense	(4,638)		(7,442)		(15,868)		(22,877)
Other	130		44		391		130
Income before income taxes	45,377		17,278		103,691		51,571
Income tax expense	11,868		4,092		27,269		13,441
Income from discontinued operations, net of tax	$	33,509	$	13,186	$	76,422	$	38,130

Our Broadband and Tower segments recognize revenue for their respective provision of cell site backhaul service and leased colocation space to the discontinued Wireless operations. That revenue is earned under contracts executed at our estimate of fair market value, which will transfer upon consummation of the sale. Accordingly, we expect to have a level of continuing involvement with the discontinued operations via these pre-existing contractual arrangements. Revenue recognized within continuing operations pursuant to these agreements is disclosed in Note 14, Segment Reporting. Because the right to use space on our owned cell towers and the related lease liability will be transferred in the sale, they have been included in our disposal group above under the relevant authoritative guidance. These right of use assets and lease liabilities were previously eliminated within our consolidated financial statements. Total assets and total liabilities as of December 31, 2019 therefore increased by $34 million as a result.

Under the relevant authoritative guidance, consummation of the sale will trigger or accelerate the recognition of certain expense related to: contingent deal advisory fees, recognition of our interest rate swap losses in net income, and loss on debt extinguishment. Our estimate of the related range of reasonably possible expense extends from $0 if the sale is not consummated to $40 million.