SURW Surewest Communications (MM)

ROSEVILLE, Calif., Feb. 29, 2012 /PRNewswire/ -- SureWest Communications (NASDAQ: SURW) today announced operating results for the fourth quarter and full year ended December 31, 2011.

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Steve Oldham, SureWest's president and chief executive officer, said, "Our strong 2011 results were highlighted by top-line business and residential services revenue growth, driving an increase in adjusted EBITDA. Our core Broadband segment now accounts for 77% of the company's total revenues and 54% of total adjusted EBITDA. SureWest's business services revenues continue to be an important part of delivering long-term, sustainable growth due to positive trends in Kansas City and increased bandwidth demands for backhaul services to wireless carriers. We continue to increase the take rates of our residential products like Advanced Digital TV, high-speed Internet and Broadband Voice over IP. During the year, we also added 15,400 new fiber homes in Kansas City that we are aggressively targeting.

"The investments we've made over the last several years to expand our extensive fiber-to-the-home network and enhance our suite of services have delivered excellent returns and offer many opportunities for additional value creation. Our knowledge and innovation is what drives SureWest's strong continued growth and underscores the strategic benefits of the recently announced acquisition of our company by Consolidated Communications. The combination with Consolidated is highly accretive and brings together Consolidated's strong cash flow with SureWest's proven broadband growth strategy. Customers and shareholders alike will benefit from the combined company's greater scale, scope and financial resources."

The following table highlights financial results for continuing operations on a consolidated basis (dollars are in thousands):

Fourth Quarter Financial Results

Consolidated revenues increased 3% year-over-year to $63.5 million as Broadband revenues grew by $4 million, or 9%, more than offsetting Telecom revenue declines of $2.1 million, or 13%. Adjusted EBITDA declined 1% year-over-year to $21.6 million, with Broadband adjusted EBITDA increasing 8% to account for 54% of total adjusted EBITDA, offsetting most of the Telecom adjusted EBITDA decline of 10%. SureWest expects to continue increasing its Broadband revenues and adjusted EBITDA through expansion of both residential and business product offerings. The long-term strategy remains growing the Broadband segment while continuing to successfully offset industry-wide structural declines in the traditional Telecom segment.

Operating expenses, exclusive of depreciation and amortization, increased 5% year-over-year to $43.0 million due primarily to increases in residential video license fees and transport charges associated with commercial services growth and advertising expense offset slightly by office consolidation savings.

Net income for the quarter was $1.48 million compared to net income of $1.95 million in the same period last year. Earnings per share from continuing operations were $0.11 compared to $0.14 in the fourth quarter 2010 and $0.05 in the third quarter 2011.

Capital expenditures totaled $21.7 million for the fourth quarter and $72.5 million for the full year 2011, an increase from $52.6 million in 2010. During the quarter, SureWest added 5,800 new marketable homes on its fiber-to-the-home (FTTH) network in Kansas City and a total of 15,400 new fiber homes for the full year 2011. Also during the quarter, the company upgraded 2,800 ILEC territory copper homes with Advanced Digital TV service and completed 8,600 upgrades during 2011. These upgrades increased the percentage of fiber and copper triple-play marketable homes in the ILEC to 66%, up from 57% in the fourth quarter of 2010. The 2012 capital plan prioritizes spending where the company has experienced the greatest return on investment. This includes continued business sales growth opportunities, residential RGU growth and increased residential penetration. The company plans to pass 11,000 additional fiber homes during 2012 in Kansas City where it has experienced superior penetration levels. SureWest is reiterating projected capital expenditures of $60-70 million in 2012.

Free cash flow, defined as income from continuing operations plus depreciation and amortization less capital expenditures, was negative $4.2 million for the quarter and negative $6.8 million for the full year 2011, compared to positive $12.6 million in 2010. This decline was expected as a result of the $23.4 million investment in network expansion in 2011 compared to $1.3 million in 2010. Adjusted free cash flow, defined as free cash flow excluding capital investments in network expansion, increased 20% year-over-year to $16.7 million.

Cash and cash equivalents increased year-over-year to $4.2 million from $2.9 million. Total debt net of cash and cash equivalents (net debt) was $200.2 million, resulting in a net debt to adjusted EBITDA ratio of 2.37x.

Broadband Segment Results

Broadband revenues increased 9% year-over-year and accounted for 77% of the company's total revenues, compared to 73% in the fourth quarter 2010. Broadband adjusted EBITDA increased 8% year-over-year and now represents 54% of the company's total adjusted EBITDA. Broadband adjusted EBITDA will be impacted in the first quarter when the company incurs increases in video license fees that do not coincide with a customer price increase, which in 2012, is scheduled for the second quarter.

Broadband Residential:

Broadband Residential revenues increased 7% year-over-year to $34 million as a result of 5% growth in average revenue per user (ARPU) and a 4% increase in RGUs. To illustrate growth trends, Broadband RGUs, subscriber counts and ARPU are detailed both year-over-year and sequentially in the table and text below:

The Sacramento region's Advanced Digital TV product continued to drive growth, helping to increase net video RGUs by 2,230 year-over-year and 530 sequentially. SureWest had 21,662 Advanced Digital TV subscribers through the fourth quarter, representing 78% of the company's overall video RGUs in the Sacramento market. Approximately 98% of the Advanced Digital TV subscribers bundle Internet and 79% subscribe to a triple-play with ARPU of $148.

ARPU for customers on SureWest's FTTH and hybrid fiber coaxial (HFC) networks increased 2% year-over-year to $117 due to video and data price increases in July 2011.

Residential customer churn improved year-over-year and sequentially in the fourth quarter from 1.6% to 1.4% as a result of churn reduction programs such as Advanced Digital TV video upgrades on the copper network, as well as ongoing superior customer service and value-added features like additional HD channels and increased Internet speeds.

Broadband Business:

Broadband Business revenues increased by $1.8 million, or 15%, year-over-year to $14.2 million. Business customers increased 3% year-over-year to 8,000 and ARPU grew 11% from the prior year to $592. The Kansas City market grew ARPU by 11% year-over-year while increasing customer counts by 3%. The Sacramento market grew customers by 4% while ARPU increased by 11% driven by wireless carrier backhaul and existing customers taking additional products. Broadband Business growth expectations remain high in both Sacramento and Kansas City.

As of December 31, 2011, SureWest was billing for 322 wireless backhaul access points at annualized revenues of $3.6 million. The company is now scheduled to bill for over 398 backhaul connections by third quarter 2012 with over $4.5 million in annualized revenues when those sites become active. Opportunities continue to be pursued to serve additional connections in both the Sacramento and Kansas City markets.

Telecom Segment Results

Telecom revenues declined $2.1 million, or 12.5%, year-over-year to $14.5 million, consistent with the industry-wide trend of declines in access lines, minutes of use and access revenues. This was partially due to the decrease of $1 million in regulatory support revenues that were reduced as scheduled in the first quarter 2011.  The company's scheduled state regulatory support declines began in 2006 and will be fully phased out in the first quarter 2012.

The Telecom segment has consistently generated adjusted EBITDA margins over 40% and continues to generate significant free cash flow, which is utilized to reduce debt and fund Broadband segment expansion. As the company focuses on growing its Broadband segment, the Telecom segment will continue to account for a smaller percentage of total revenues. For the fourth quarter 2011, Telecom revenues were 23% of total company revenues compared to 27% in the fourth quarter of 2010.

Additionally, voice line loss is declining and is having less of an impact on overall financial performance. Fourth quarter 2011 year-over-year consolidated ILEC voice RGU loss was 3,800, compared to a loss of 4,800 in the fourth quarter 2010. In addition, fourth quarter 2011 consolidated year-over-year loss in ILEC and CLEC voice RGUs combined was 4,400, compared to a loss of 6,000 in the fourth quarter 2010.  

Telecom Residential:

Telecom Residential revenues declined 21% year-over-year to $3.1 million resulting from a 20% decline in Telecom voice RGUs. However, of the 5,900 year-over-year Telecom Residential voice RGU losses, 2,600, or 44%, migrated to the SureWest Broadband Voice over IP service. The migration of existing Telecom ILEC access lines to Broadband VoIP enables the continued preservation of voice revenues on a consolidated basis. 

Telecom Business:

Telecom Business revenues declined 2% year-over-year to $8.4 million as a result of a 3% decrease in business customers in the ILEC territory. The company is experiencing competitive pressure in the very small business customer segments; however medium and large ILEC business customers remain stable.  

Telecom Access:

Telecom Access revenues decreased $1.1 million year-over-year to $3.0 million primarily due to the scheduled reduction in the California High Cost Fund (CHCF) subsidy, the elimination of the transport interconnection charge (TIC) and the decline in switched access revenues related to access line loss and declining minutes of use. The combined annual regulatory support related to CHCF and TIC declined roughly $4.0 million in 2011 from $6.1 million in 2010 to $2.0 million in 2011 - and will be zero in 2012. In the first quarter of 2012, the company will have an expected quarterly revenue decline of $500 thousand related to the final phase out of the CHCF.

Merger Update

As previously announced on February 6, 2012, SureWest entered into a definitive merger agreement under which Consolidated Communications (Nasdaq: CNSL) will acquire all the outstanding shares of SureWest in a cash and stock transaction valued at $23.00 per share, or a total of approximately $340.9 million, exclusive of debt. The consideration represents a 47% premium to SureWest's stock price as of the close on February 3, 2012.  Subject to the satisfaction of customary closing conditions, including federal and state regulatory approvals and the approval by both Consolidated and SureWest shareholders, the transaction is expected to close in the second half of 2012. The transaction was unanimously approved by the boards of directors of both companies.

The merger agreement is attached as Exhibit 2.1 to the Current Report on Form 8-K that SureWest filed with the Securities and Exchange Commission on February 8, 2012.

Non-GAAP Measures

In addition to the results presented in accordance with generally accepted accounting principles (GAAP) throughout this press release, the company has presented non-GAAP financial measures such as adjusted EBITDA, free cash flow, adjusted free cash flow and net debt. Adjusted EBITDA represents net income (loss) excluding amounts for income taxes, depreciation and amortization, non-cash pension and certain post-retirement benefits, non-cash stock compensation, severance and other related termination costs, and all other non-operating income/expenses. Free cash flow represents net income (loss) plus depreciation and amortization less capital expenditures. Adjusted free cash flow represents free cash flow as defined above, excluding the network expansion capital investments. Free cash flow and adjusted free cash flow are a measure of operating cash flows available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity. Net debt represents total long-term debt (including current maturities) less cash and cash equivalents. Net debt can be used as a component in measuring leverage. The company believes these non-GAAP measures, viewed in addition to but not in lieu of its reported GAAP results, provide useful information to investors as they are an integral part of the internal evaluation of operating performance. In addition, they are measures that the company uses to evaluate management's effectiveness. Reconciliations to the comparable GAAP measures are provided in the accompanying financial and operating summaries. SureWest's non-GAAP financial measures may not be comparable to similarly titled measures presented by other companies.

Conference Call and Webcast

SureWest Communications will not host an investor call with respect to the financial results.

Additional Information and Where to Find It

In connection with the proposed transaction, Consolidated will file a registration statement on Form S-4 with the SEC, which will include the proxy statement and also constitute a prospectus with respect to the Consolidated common stock. SureWest will mail the proxy statement/prospectus to its shareholders once the Form S-4 has been declared effective. INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS (INCLUDING ALL AMENDMENTS AND SUPPLEMENTS) BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Once filed with the SEC, investors may obtain free copies of the registration statement and proxy statement/prospectus, as well as other filings containing information about Consolidated and SureWest, without charge, at the SEC's website (www.sec.gov). These documents may also be obtained free of charge from SureWest's Investor Relations website (www.surw.com) or by directing a request to: SureWest Investor Relations, P.O. Box 969, Roseville, CA 95678 or by calling 916.786.1831. Copies of Consolidated's filings may be obtained free of charge from Consolidated's Investor Relations website (http://ir.consolidated.com) or by directing a request to: Consolidated Investor Relations, 121 South 17th Street, Mattoon, IL 61938.

SureWest, Consolidated and their respective officers and directors may be deemed, under SEC rules, to be participants in the solicitation of proxies from shareholders with respect to the proposed Merger. Information regarding the officers and directors of SureWest is included in its definitive proxy statement for its 2011 annual meeting filed with the SEC on April 7, 2011. Information regarding the officers and directors of Consolidated is included in its definitive proxy statement for its 2011 annual meeting filed with the SEC on March 30, 2011. More detailed information regarding the identity of potential participants in the solicitation, and their direct or indirect interests, by securities, holdings or otherwise, which interests may be different from those of the company's shareholders generally, will be set forth in the proxy statement/prospectus and other materials to be filed with the SEC in connection with the proposed transaction.

About SureWest

SureWest Communications is a leading integrated communications provider and the bandwidth leader in the markets it serves. Headquartered in Northern California for more than 95 years, SureWest offers bundled residential and commercial services in the greater Sacramento and Kansas City regions that include IP-based digital and high-definition television, high-speed Internet, Voice over IP, and local and long distance telephone. SureWest was the nation's first provider to launch residential HDTV over an IP network and offers one of the nation's fastest symmetrical Internet services with speeds of up to 50 Mbps in each direction on its fiber-to-the-home network. For up-to-date information on products and services, visit the company on Facebook and Twitter.

Safe Harbor Statement

Statements made in this news release that are not historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements may be identified by the use of words such as "may," "will," "should," "expect," "plan," "anticipate" or "project," or the negative of those words or other comparable words. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking statements are subject to a number of risks, assumptions and uncertainties that could cause the company's actual results to differ from those projected in such forward-looking statements. Important factors that could cause actual results to differ from those set forth in the forward-looking statements include, but are not limited to, advances in telecommunications technology, changes in the telecommunications regulatory environment, changes in the financial stability of other telecommunications providers who are customers of the company, changes in competition in markets in which the company operates, adverse circumstances affecting the economy in California, Kansas and Missouri in general, and in the greater Sacramento, California and greater Kansas City, Kansas and Missouri areas in particular, the availability of future financing, changes in the demand for services and products, new product and service development and introductions, and pending and future litigation.

Contacts:

Ron Rogers

Corporate Communications

916-746-3123

r.rogers@surewest.com

Misty Wells

Investor Relations

916-786-1799

m.wells@surewest.com