SureWest Communications Reports Second Quarter 2008 Results

Thu. August 07, 2008; Posted: 08:00 AM

(Logo: http://www.newscom.com/cgi-bin/prnh/20050908/SFSUREWESTLOGO) Financial Highlights: -- Revenues from continuing operations increased 36% year-over-year and 17% sequentially -- EBITDA from continuing operations increased 29% year-over-year and 35% sequentially -- Income from continuing operations decreased to $1.7 million from $2.7 million year-over-year due to depreciation and interest expense related to the Kansas City acquisition, and increased sequentially from a loss of $11 thousand due to a full quarter capture of the Kansas City market earnings compared to six weeks in the first quarter -- Net income increased to $20.9 million ($0.12 earnings per share) from $1.5 million year-over-year and $283 thousand sequentially; $19.0 million was due to the sale of SureWest Wireless in the second quarter

Pro Forma Highlights (captures Kansas City results prior to the acquisition):

-- Broadband revenues increased 11% year-over-year and 3% sequentially to $35.6 million -- Consolidated voice revenue generating units (RGUs) decreased just 1% sequentially (loss of 1,100) compared to 6% year-over-year as 1,400 of the 3,900 sequential Telecom voice losses migrated to the new Voice over IP (VoIP) Broadband product resulting in a loss of 2,000 ILEC voice RGUs and a gain of 900 CLEC voice RGUs -- Broadband Residential RGUs increased 7% year-over-year and 3% sequentially, and subscribers grew 6% year-over-year and 2% sequentially, driven by significant growth in the Sacramento region -- Broadband Business revenues grew 15% year-over-year and 6% sequentially, and customers grew 13% year-over-year and 3% sequentially, driven by solid results in Sacramento and 26% year-over- year (7% sequential) growth in Kansas City

The following table highlights financial results for continuing operations on both a Consolidated and Pro Forma basis to include the acquisition of the Kansas City operations (dollars are in thousands):

Y-O-Y comparison Q-O-Q comparison Consolidated Q208 Q207 Growth Q108 Growth Revenue $60,250 $44,442 36% $51,620 17% EBITDA $20,086 $15,547 29% $14,825 35% Income (loss) from continuing operations $1,697 $2,670 -36% ($11) nm Pro Forma Revenue $60,250 $59,404 1% $59,177 2% EBITDA $20,086 $20,388 -1% $17,663 14% Income (loss) from operations $5,894 $5,730 3% $4,287 37% See Non-GAAP measure notes near end of release

Steve Oldham, SureWest's president and chief executive officer, said, "It is clear that the decision we made several years ago to focus SureWest on Broadband and advanced network services was the correct move, evidenced in part by our excellent second quarter results. While still in the early stages of our long-term Broadband growth strategy, we expect continued success moving forward.

"In the Sacramento market we experienced considerable Broadband segment growth, demonstrating there is a substantial market for our triple-play bundle and great demand for our new Voice over IP service. This exciting new product has created an appetite for higher ARPU services which are peripheral to the voice product itself. We are working hard to ensure continued success in coming quarters as we increase VoIP marketing in previously untapped areas of our ILEC territory in the Sacramento market. We recently began proactively marketing VoIP to our DSL customers, which make up nearly 50% of the total ILEC market.

"As predicted, the Kansas City region has proven to be a great growth opportunity for SureWest and we have achieved immediate success in our efforts to obtain new Broadband Business customers. With new network expansion and aggressive marketing campaigns underway in the area, we expect to see sizeable residential growth in the second half of the year with a goal of improving on the already high penetration rates and ARPU that made the Kansas City operations so appealing initially."

Consolidated Financial Results

Consolidated revenues for the second quarter of 2008 totaled $60.3 million, an increase of 36% year-over-year and 17% sequentially. Consolidated EBITDA totaled $20.1 million, an increase of 29% year-over-year and 35% sequentially. This growth was due to continued Broadband Residential and Business growth offsetting Telecom revenue declines in Sacramento and the positive impact of the new market in Kansas City.

Operating expenses, exclusive of depreciation and amortization, increased 39% to $40.2 million in the second quarter of 2008 from $28.9 million in the second quarter of 2007, and increased 9% sequentially from $36.8 million. Cost of services and selling expenses increased primarily as a result of the Kansas City acquisition and increases in programming, sales, advertising and new product offerings related to the growth in Broadband subscribers. General and administrative expenses declined primarily due to labor savings associated with ongoing cost reduction initiatives and a decrease in legal fees related to certain regulatory matters.

Consolidated income from continuing operations was $1.7 million in the second quarter of 2008 compared to a gain of $2.7 million in the second quarter of 2007 and a loss of $11 thousand in the first quarter of 2008. The year-over-year decline is primarily due to interest expense related to the Kansas City acquisition and the majority of the sequential quarter improvement is due to a full quarter capture of the Kansas City earnings compared to only six weeks in the first quarter of 2008. Earnings per share from continuing operations for the second quarter was $0.12, compared to $0.18 for the same period last year and zero earnings per share sequentially.

Capital Expenditures

Consolidated capital expenditures totaled $23 million for the second quarter, an 86% increase over the same period in the prior year and a 29% increase sequentially. The company continues to focus its capital expenditures on its targeted network build and success-based capital associated with increased penetration and average revenue per user (ARPU) on the existing network. Capital expenditures for 2008 are expected to be approximately $80 million, which include improvements made to existing facilities to take advantage of additional demand for leasing data center floor space. As a result of the capital plan for 2008, the company expects to increase its fiber marketable homes during the year by 10,000 in the Kansas City region and approximately 14,000 homes in the Sacramento region.

Pro Forma Consolidated Results (includes Kansas City results in prior periods)

Revenues for the second quarter of 2008 totaled $60.3 million, a Pro Forma increase of 1% year-over-year and 2% sequentially. EBITDA for the second quarter of 2008 totaled $20.1 million, a Pro Forma decrease of 1% due to consulting and advisory fees related to strategic initiatives and a Pro Forma increase of 14% sequentially. Income from operations was $5.9 million in the second quarter of 2008 compared to Pro Forma income of $5.7 million in the second quarter of 2007 and Pro Forma income of $4.3 million in the first quarter of 2008.

The significant Pro Forma sequential quarter growth was due to continued Broadband Residential and Business growth offsetting Telecom revenue declines, as well as the company's continued focus to successfully drive cost efficiencies.

Pro Forma Broadband Segment Results

Total Broadband segment revenues were $35.6 million in the second quarter of 2008, a Pro Forma increase of 11% year-over-year and 3% sequentially. The Broadband segment accounted for 59% of the company's total revenue during the quarter and on a Pro Forma year-to-date basis.

Broadband Residential:

Broadband residential revenues increased 8% year-over-year and 1% sequentially. Broadband RGUs and subscriber counts increased year-over-year and sequentially, as detailed in the chart below:

Y-O-Y % change Q-O-Q % change Sacramento Kansas City Sacramento Kansas City Market Market Total Market Market Total Broadband Residential RGUs 12% 3% 7% 6% 1% 3% Data 9% 5% 7% 3% 1% 2% Video RGUs - Fiber & HFC 18% 4% 9% 8% 1% 4% Voice RGUs 18% 1% 7% 13% 1% 5% Total Residential Subscribers 8% 3% 6% 3% 1% 2%

While significantly growing RGUs and subscribers, the company maintained solid ARPU during the quarter. Triple-play capable marketable homes consisting of fiber-to-the-home (FTTH) in Sacramento and hybrid fiber coaxial (HFC) in Kansas City increased ARPU by 2% year-over-year (to $109 from $107) and remained relatively stable sequentially.

-- Data: Data growth in Sacramento during the quarter was partially tied to the success of SureWest VoIP, which requires customers to subscribe to a data package. Due to VoIP's online interactive services, over 82% of existing data subscribers who signed up for VoIP increased their Internet speeds to enhance the overall experience. Data ARPU increased to $37 from $36 in the second quarter of 2007 and remained stable sequentially. -- Video: The significant video results can be attributed to the acceptance of SureWest's feature-rich HD DVR and the continued growth of the HD channel lineup. In the Kansas City market, where DVR has been established since 2004, 48% of all video customers subscribe to DVR service. In the Sacramento region, SureWest began marketing DVR in early 2008 and has already achieved a 28% video subscriber penetration rate, with nearly 50% of all new video customers in the second quarter taking DVR service. Video ARPU increased to $62 from $60 in the second quarter of 2007 and remained relatively consistent sequentially. -- Voice: During the quarter, 2,800 Broadband voice RGUs were added -- 1,400 of which migrated from the Telecom segment to Broadband -- offsetting Telecom voice loss by 36%. Of the customer migrations, more than 25% added a SureWest data subscription to their services and 69% upgraded their calling plans. While a potentially higher-margin product when compared with SureWest's traditional land line service due to its bundling requirements for SureWest data and long-distance, VoIP is a cost-effective and reliable option for consumers because of the multiple package options and price flexibility. It includes such online interactive features as Find Me/Follow Me, Sequential Ringing and Selective Call Screening. Additionally, certain telephone regulatory taxes that provide no additional margin are not required with VoIP. At $32, voice ARPU remained relatively stable year-over-year and sequentially.

Oldham continued, "In addition to the success of VoIP, we made feature enhancements to our HD DVR in Sacramento and have seen rapid growth in DVR penetration rates. Adding to our video growth in both regions is the fact that more and more consumers are purchasing HD television sets and looking for the best programming option when it comes to value and channel lineup. We believe that customers are choosing SureWest because of the value our marketing bundles offer and the superior HD channel lineup our advanced network provides."

Residential marketable homes increased 4% to 292,200 year-over-year and 2% sequentially. The year-over-year increase was comprised of 19,100 new fiber homes in Sacramento, 7,700 homes upgraded from copper to fiber in Sacramento, where the expectation is to achieve greater than 35% penetration, and 900 new HFC homes in Kansas City. Sequentially, 5,800 new fiber homes were added in Sacramento and 1,100 homes were upgraded from copper to fiber. In Kansas City, 900 HFC homes were added late in the quarter, with plans to pass most new homes with FTTH.

Broadband Business:

Broadband Business revenues increased 15% year-over-year and 6% sequentially. Business subscriber counts grew 13% from the prior year and 3% sequentially. Total Business ARPU grew 1% from the prior year and 3% sequentially to $458.

Overall Broadband Business growth was substantial, with significant drivers consisting of new additions of large-sized business customers and the internal growth of large customers utilizing SureWest's Ethernet and Data Center services. Kansas City's business operations experienced solid customer growth rates of 26% year-over-year and 7% sequentially as the company has allocated more resources in this area to take advantage of significant growth opportunities.

Telecom Segment Results

Operating only in the Sacramento market, Telecom segment revenues were $24.7 million in the second quarter of 2008, declining 10% year-over-year and remaining stable sequentially due to an increase in Telecom Business revenue offsetting revenue loss in Telecom Residential and Telecom Access.

Telecom Residential:

Telecom Residential was impacted by anticipated losses in Telecom voice RGUs of 16% year-over-year and 6% sequentially. The company continues to mitigate access line loss through its new VoIP product, which allows Broadband to offer voice services in the ILEC territory. As a result of the company's VoIP launch in the ILEC service territory, 1,400 voice RGUs from the Telecom segment chose to switch their traditional voice service to the newly-offered VoIP product -- a 36% migration of the 3,900 sequential Telecom Residential voice RGU losses.

Telecom Residential will continue to see an increase in the movement of voice RGUs to the Broadband segment as existing and new voice customers demand SureWest VoIP and its feature-rich capabilities. This demand is expected to continue to reduce the trend of ILEC and consolidated voice loss as shown in the consolidated 1% decline of voice RGUs sequentially compared to 6% year- over-year.

Telecom Business:

Telecom Business revenues increased 2% in the second quarter compared to the prior year quarter and 8% sequentially. While Telecom Business subscriber counts decreased 3% from the prior year, they were unchanged sequentially while ARPU grew 6% from the prior year and 10% sequentially to $341. ARPU growth was due to significant revenue created by connecting multiple business locations to each other to share data.

The company derives a significant portion of its revenue streams from its business service offerings and continues to aggressively pursue Telecom Business customers by utilizing its advanced fiber network to offer customized voice and data services.

During the quarter, Verizon Wireless purchased approximately $450 thousand in long distance and backhaul support services previously recorded as intersegment revenue. These services are expected to continue through the latter part of 2008 and will have a minimal impact on EBITDA when discontinued.

Telecom Access:

Telecom Access consists of the company's switched access revenues and California High Cost Fund (CHCF) subsidies. Revenues decreased 14% year-over- year and 5% sequentially due to scheduled reductions in the CHCF subsidies of $510 thousand in the second quarter as well as a decline in switched access revenues due to access line loss.

Wireless

In January 2008 the company entered into a definitive agreement to sell the operating assets of its Wireless business to Verizon Wireless for an aggregate purchase price of $69 million. The sale closed in the second quarter of 2008. The company has reported the results of its Wireless segment as discontinued operations in the attached financial statements for all periods presented. The company is currently providing certain transition services to Verizon through a transition agreement which is expected to expire in the latter part of 2008. The company used $46 million of the net cash proceeds of the Wireless sale to repay certain amounts of its outstanding debt facilities and the remaining balance will be utilized to fund other corporate operations including the expansion of its Broadband network.

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 EBITDA, ARPU and Pro Forma. The company believes these non-GAAP measures, viewed in addition to and not in lieu of its reported GAAP results, provide useful information to investors because they are an integral part of its internal evaluation of operating performance. In addition, they are measures that the company uses to evaluate management's effectiveness. A reconciliation to the comparable GAAP measures is provided in the attached 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 provide details about its results and business strategy on Thursday, August 7, 2008 at 11:00 a.m. Eastern Time. A simultaneous live webcast of the call will be available at www.surw.com and will be archived shortly after the conclusion of the call. Additionally, a telephone replay of the call will be available through Thursday, August 14, 2008 by dialing (888) 286-8010 and entering passcode 25440442.

About SureWest

SureWest Communications (www.surewest.com) is one of the nation's leading integrated communications providers and is the bandwidth leader in the markets it serves. Headquartered in Northern California for more than 90 years, the company expanded into the Kansas City region in February 2008 and offers bundled residential and commercial services that include IP-based digital and high-definition television, high-speed Internet, Voice over IP, and local and long distance telephone. Its fiber-to-the-premise IP-based network in the Sacramento region features the fastest symmetrical Internet speeds in the nation at up to 50 Mbps. In its Kansas City market (www.everestkc.com), 75 percent of the company's customers subscribe to at least three services.

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 Sacramento, California Metropolitan and greater Kansas City Metropolitan 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 SUREWEST COMMUNICATIONS CONSOLIDATED STATEMENTS OF INCOME (Unaudited; Amounts in thousands, except per share amounts) Six Six Months Months Ended Ended June 30, June 30, $ % 2008 2007 Change Change Operating revenues: Broadband $62,642 $33,718 $28,924 86% Telecom 49,228 53,610 (4,382) -8% Total operating revenues 111,870 87,328 24,542 28% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 41,962 28,420 13,542 48% Customer operations and selling 16,324 13,316 3,008 23% General and administrative 18,673 17,217 1,456 8% Depreciation and amortization 26,376 22,522 3,854 17% Total operating expenses 103,335 81,475 21,860 27% Income from operations 8,535 5,853 2,682 46% Other income (expense): Investment income 558 1,628 (1,070) -66% Interest expense (5,941) (3,144) (2,797) 89% Other, net (43) (151) 108 -72% Total other income (expense), net (5,426) (1,667) (3,759) 225% Income from continuing operations before income taxes 3,109 4,186 (1,077) -26% Income tax expense 1,423 904 519 57% Income from continuing operations 1,686 3,282 (1,596) -49% Discontinued operations, net of tax: Income (loss) from discontinued operations 505 (445) 950 213% Gain (loss) on sale of discontinued operations 18,977 59,902 (40,925) nm Total discontinued operations 19,482 59,457 (39,975) -67% Net income $21,168 $62,739 $(41,571) -66% Basic earnings per common share: Income from continuing operations $0.12 $0.22 $(0.10) -45% Discontinued operations, net of tax 1.37 4.12 (2.75) -67% Net income per basic common share $1.49 $4.34 $(2.85) -66% Diluted earnings per common share: Income from continuing operations $0.12 $0.22 $(0.10) -45% Discontinued operations, net of tax 1.37 4.11 (2.74) -67% Net income per diluted common share $1.49 $4.33 $(2.84) -66% Shares of common stock used to calculate earnings per share: Basic 14,226 14,432 (206) -1% Diluted 14,234 14,482 (248) -2% SUREWEST COMMUNICATIONS CONSOLIDATED STATEMENTS OF INCOME (Unaudited; Amounts in thousands, except per share amounts) Quarter Quarter Ended Ended June 30, March 31, $ % 2008 2008 Change Change Operating revenues: Broadband $35,600 $27,042 $8,558 32% Telecom 24,650 24,578 72 0% Total operating revenues 60,250 51,620 8,630 17% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 22,994 18,968 4,026 21% Customer operations and selling 8,754 7,570 1,184 16% General and administrative 8,416 10,257 (1,841) -18% Depreciation and amortization 14,192 12,184 2,008 16% Total operating expenses 54,356 48,979 5,377 11% Income from operations 5,894 2,641 3,253 123% Other income (expense): Investment income 224 334 (110) -33% Interest expense (3,186) (2,755) (431) 16% Other, net (44) 1 (45) nm Total other income (expense), net (3,006) (2,420) (586) 24% Income from continuing operations before income taxes 2,888 221 2,667 nm Income tax expense 1,191 232 959 413% Income (loss) from continuing operations 1,697 (11) 1,708 nm Discontinued operations, net of tax: Income from discontinued operations 211 294 (83) -28% Gain on sale of discontinued operations 18,977 - 18,977 nm Total discontinued operations 19,188 294 18,894 nm Net income $20,885 $283 $20,602 nm Basic earnings per common share: Income (loss) from continuing operations $0.12 $(0.00) $0.12 nm Discontinued operations, net of tax 1.35 0.02 1.33 nm Net income per basic common share $1.47 $0.02 $1.45 nm Diluted earnings per common share: Income (loss) from continuing operations $0.12 $(0.00) $0.12 nm Discontinued operations, net of tax 1.35 0.02 1.33 nm Net income per diluted common share $1.47 $0.02 $1.45 nm Shares of common stock used to calculate earnings per share: Basic 14,141 14,310 (169) -1% Diluted 14,149 14,310 (161) -1% SUREWEST COMMUNICATIONS CONSOLIDATED STATEMENTS OF INCOME (Unaudited; Amounts in thousands, except per share amounts) Quarter Quarter Ended Ended June 30, June 30, $ % 2008 2007 Change Change Operating revenues: Broadband $35,600 $17,193 $18,407 107% Telecom 24,650 27,249 (2,599) -10% Total operating revenues 60,250 44,442 15,808 36% Operating expenses: Cost of services and products (exclusive of depreciation and amortization) 22,994 13,566 9,428 69% Customer operations and selling 8,754 6,552 2,202 34% General and administrative 8,416 8,777 (361) -4% Depreciation and amortization 14,192 11,447 2,745 24% Total operating expenses 54,356 40,342 14,014 34.7% Income from operations 5,894 4,100 1,794 43.8% Other income (expense): Investment income 224 1,131 (907) -80% Interest expense (3,186) (1,716) (1,470) 86% Other, net (44) (100) 56 -56% Total other income (expense), net (3,006) (685) (2,321) 339% Income from continuing operations before income taxes 2,888 3,415 (527) -15% Income tax expense 1,191 745 446 60% Income from continuing operations 1,697 2,670 (973) -36% Discontinued operations, net of tax: Income (loss) from discontinued operations 211 (885) 1,096 124% Gain (loss) on sale of discontinued operations 18,977 (279) 19,256 nm Total discontinued operations 19,188 (1,164) 20,352 nm Net income $20,885 $1,506 $19,379 nm Basic earnings per common share: Income from continuing operations $0.12 $0.18 $(0.06) -33% Discontinued operations, net of tax 1.35 (0.08) 1.43 nm Net income per basic common share $1.47 $0.10 $1.37 nm Diluted earnings per common share: Income from continuing operations $0.12 $0.18 $(0.06) -33% Discontinued operations, net of tax 1.35 (0.08) 1.43 nm Net income per diluted common share $1.47 $0.10 $1.37 nm Shares of common stock used to calculate earnings per share: Basic 14,141 14,440 (299) -2% Diluted 14,149 14,492 (343) -2% Consolidated Overview Unaudited Quarterly Pro Forma Selected Financial Data For the Quarters and Year-to-Date ended (In Thousands) PRO FORMA (3) Quarter Ended March 31, June 30, September 30, December 31, March 31, 2007 2007 2007 2007 2008 Operating revenues (1) Broadband $30,804 $32,155 $32,464 $33,188 $34,599 Telecom 26,361 27,249 26,197 26,175 24,578 Operating revenues $57,165 $59,404 $58,661 $59,363 $59,177 Income (loss) from operations Broadband $(5,853) $(4,459) $(5,118) $(10,317) $(5,950) Telecom 9,593 10,189 10,137 11,642 10,237 Income from operations $3,740 $5,730 $5,019 $1,325 $4,287 EBITDA(2) Broadband $2,164 $4,431 $4,041 $4,899 $3,758 Telecom 15,243 15,957 15,950 15,307 13,905 EBITDA $17,407 $20,388 $19,991 $20,206 $17,663 ACTUAL (3) Y-o-Y Qtr ended Q-o-Q change change June 30, 2008 Operating revenues (1) Broadband $35,600 3% 11% Telecom 24,650 0% -10% Operating revenues $60,250 2% 1% Income (loss) from operations Broadband $(6,056) 2% 36% Telecom 11,950 17% 17% Income from operations $5,894 37% 3% EBITDA(2) Broadband $4,390 17% -1% Telecom 15,696 13% -2% EBITDA $20,086 14% -1% (1) External customers only (2) EBITDA represents income (loss) from continuing operations excluding amounts for depreciation and amortization, and is a common measure of operating performance in the telecommunications industry. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. (3) The quarterly pro forma selected financial data is based on the historical consolidated financial statements and Everest historical consolidated financial statements and have been adjusted to reflect the Everest acquisition which was consummated on February 13, 2008. The unaudited condensed combined pro forma financial statements give the effect as if the acquisition had occurred on January 1, 2007. In addition, on May 9, 2008, the sale of the Wireless assets was completed and pro forma financials reflects the classification of all Wireless operations as discontinued operations. Q208 Actuals represent actual GAAP financials as the company recognized a full quarter of Everest financials and the Wireless business was classified as discontinued operations. SureWest Broadband Unaudited Quarterly Pro Forma Selected Financial Data For the Quarters and Year-to-Date ended (In Thousands) PRO FORMA (3) Quarter Ended March 31, June 30, September 30, December 31, March 31, 2007 2007 2007 2007 2008 Data $8,948 $9,283 $9,472 $9,629 $10,087 Video 9,208 9,538 9,544 9,735 10,424 Voice 5,197 5,236 5,218 5,254 5,205 Total residential revenues 23,353 24,057 24,234 24,618 25,716 Business 6,696 7,278 7,370 7,637 7,892 Access 229 232 296 187 319 Other 526 588 564 746 672 Total operating revenues from external customers 30,804 32,155 32,464 33,188 34,599 Intersegment revenues 159 162 142 144 140 Total operating revenues 30,963 32,317 32,606 33,332 34,739 Operating expenses (1) 28,799 27,886 28,565 28,433 30,981 Depreciation and amortization 8,017 8,890 9,159 9,762 9,708 Impairment loss on LMDS and related assets - - - 5,454 - Loss from operations $(5,853) $(4,459) $(5,118) $(10,317) $(5,950) Other Data: Operating EBITDA (2) 2,164 4,431 4,041 4,899 3,758 ACTUAL (3) Y-o-Y Qtr ended Q-o-Q change change June 30, 2008 Data $10,248 2% 10% Video 10,519 1% 10% Voice 5,292 2% 1% Total residential revenues 26,059 1% 8% Business 8,345 6% 15% Access 392 23% 69% Other 804 20% 37% Total operating revenues from external customers 35,600 3% 11% Intersegment revenues 141 1% -13% Total operating revenues 35,741 3% 11% Operating expenses (1) 31,351 1% 12% Depreciation and amortization 10,446 8% 18% Impairment loss on LMDS and related assets - 0% 0% Loss from operations $(6,056) 2% 36% Other Data: Operating EBITDA (2) 4,390 17% -1% (1) External customers only (2) EBITDA represents income (loss) from continuing operations excluding amounts for depreciation and amortization, and is a common measure of operating performance in the telecommunications industry. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. (3) The quarterly pro forma selected financial data is based on the historical consolidated financial statements and Everest historical consolidated financial statements and have been adjusted to reflect the Everest acquisition which was consummated on February 13, 2008. The unaudited condensed combined pro forma financial statements give the effect as if the acquisition had occurred on January 1, 2007. In addition, on May 9, 2008, the sale of the Wireless assets was completed and pro forma financials reflects the classification of all Wireless operations as discontinued operations. Q208 Actuals represent actual GAAP financials as the company recognized a full quarter of Everest financials and the Wireless business was classified as discontinued operations. SureWest Telephone Unaudited Quarterly Pro Forma Selected Financial Data For the Quarters and Year-to-Date ended (In Thousands) PRO FORMA (3) Quarter Ended March 31, June 30, September 30, December 31, March 31, 2007 2007 2007 2007 2008 Residential $10,543 $10,330 $9,769 $9,168 $8,902 Business 9,217 9,571 9,258 9,186 9,047 Access 6,382 7,010 6,842 7,518 6,342 Other 219 338 328 303 287 Total operating revenues from external customers 26,361 27,249 26,197 26,175 24,578 Intersegment revenues 4,434 4,633 4,779 4,684 4,343 Total operating revenues 30,795 31,882 30,976 30,859 28,921 Operating expenses (1) 15,552 15,925 15,026 15,552 15,016 Depreciation and amortization 5,650 5,768 5,813 3,665 3,668 Income from operations $9,593 $10,189 $10,137 $11,642 $10,237 Other Data: Operating EBITDA (2) 15,243 15,957 15,950 15,307 13,905 ACTUAL (3) Y-o-Y Qtr ended Q-o-Q change change June 30, 2008 Residential $8,523 -4% -17% Business 9,796 8% 2% Access 6,041 -5% -14% Other 290 1% -14% Total operating revenues from external customers 24,650 0% -10% Intersegment revenues 4,566 5% -1% Total operating revenues 29,216 1% -8% Operating expenses (1) 13,520 -10% -15% Depreciation and amortization 3,746 2% -35% Income from operations $11,950 17% 17% Other Data: Operating EBITDA (2) 15,696 13% -2% (1) External customers only (2) EBITDA represents income (loss) from continuing operations excluding amounts for depreciation and amortization, and is a common measure of operating performance in the telecommunications industry. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. (3) The quarterly pro forma selected financial data is based on the historical consolidated financial statements and Everest historical consolidated financial statements and have been adjusted to reflect the Everest acquisition which was consummated on February 13, 2008. The unaudited condensed combined pro forma financial statements give the effect as if the acquisition had occurred on January 1, 2007. In addition, on May 9, 2008, the sale of the Wireless assets was completed and pro forma financials reflects the classification of all Wireless operations as discontinued operations. Q208 Actuals represent actual GAAP financials as the company recognized a full quarter of Everest financials and the Wireless business was classified as discontinued operations. SUREWEST COMMUNICATIONS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited; Amounts in thousands) June 30, December 31, 2008 2007 ASSETS Current assets: Cash and cash equivalents $11,836 $31,114 Short-term investments 641 21,151 Accounts receivable, net 21,933 19,223 Income tax receivable 5,318 1,786 Inventories 7,748 4,251 Prepaid expenses 4,412 3,462 Deferred income taxes 4,604 9,480 Other currents assets 4,754 1,309 Assets of discontinued operations - 41,147 Total current assets 61,246 132,923 Property, plant and equipment, net 509,730 346,740 Intangible and other assets: Customer relationships, net 6,224 - Goodwill 55,340 2,171 Deferred charges and other assets 6,898 2,933 68,462 5,104 $639,438 $484,767 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $30,000 $- Current portion of long-term debt and capital lease obligations 15,643 3,642 Accounts payable 5,696 2,544 Other accrued liabilities 22,896 19,661 Current portion of contractual shareable earnings obligations 770 1,597 Advance billings and deferred revenues 9,012 7,288 Accrued compensation and pension benefits 9,349 8,755 Liabilities of discontinued operations - 8,969 Total current liabilities 93,366 52,456 Long-term debt and capital lease obligations 186,185 118,189 Deferred income taxes 64,006 26,030 Other liabilities and deferred revenues 17,072 17,089 Commitments and contingencies - - Shareholders' equity: Common stock, without par value; 100,000 shares authorized, 14,003 and 14,514 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively 147,541 158,870 Accumulated other comprehensive loss (4,133) (3,530) Retained earnings 135,401 115,663 Total shareholders' equity 278,809 271,003 $639,438 $484,767 SUREWEST COMMUNICATIONS OPERATING EBITDA RECONCILIATION TO NET INCOME (Unaudited; Amounts in thousands) Quarter Ended Quarter Ended June 30, 2008 March 31, 2008 Consol- Consol- Telecom Broadband idated Telecom Broadband idated Income (loss) from continuing operations $7,159 $(5,462) $1,697 $5,841 $(5,852) $(11) Add back : Income Taxes 4,888 (3,697) 1,191 4,583 (4,351) 232 Less : Other Income (Expense) 97 (3,103) (3,006) 187 (2,607) (2,420) Add back : Depreciation & Amortization 3,746 10,446 14,192 3,668 8,516 12,184 Operating EBITDA (1) $15,696 $4,390 $20,086 $13,905 $920 $14,825 (1) Operating EBITDA represents net income (loss) excluding amounts for income taxes, depreciation and amortization and all other non-operating income/expenses, and is a common measure of operating performance in the telecommunications industry. Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. SUREWEST COMMUNICATIONS OPERATING EBITDA RECONCILIATION TO NET INCOME (Unaudited; Amounts in thousands) Quarter Ended Quarter Ended June 30, 2008 June 30, 2007 Consol- Consol- Telecom Broadband idated Telecom Broadband idated Income (loss) from continuing operations $7,159 $(5,462) $1,697 $7,129 $(4,459) $2,670 Add back : Income Taxes 4,888 (3,697) 1,191 4,021 (3,276) 745 Less : Other Income (Expense) 97 (3,103) (3,006) 961 (1,646) (685) Add back : Depreciation & Amortization 3,746 10,446 14,192 5,768 5,679 11,447 Operating EBITDA (1) $15,696 $4,390 $20,086 $15,957 $(410) $15,547 (1) Operating EBITDA represents net income (loss) excluding amounts for income taxes, depreciation and amortization and all other non-operating income/expenses, and is a common measure of operating performance in the telecommunications industry. Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. SUREWEST COMMUNICATIONS OPERATING EBITDA RECONCILIATION TO NET INCOME (Unaudited; Amounts in thousands) Six Months ended Six Months Ended June 30, 2008 June 30, 2007 Consol- Consol- Telecom Broadband idated Telecom Broadband idated Income (loss) from continuing operations $13,000 $(11,314) $1,686 $13,003 $(9,721) $3,282 Add back : Income Taxes 9,471 (8,048) 1,423 8,045 (7,141) 904 Less : Other Income (Expense) 284 (5,710) (5,426) 1,266 (2,933) (1,667) Add back : Depreciation & Amortization 7,414 18,962 26,376 11,418 11,104 22,522 Operating EBITDA(1) $29,601 $5,310 $34,911 $31,200 $(2,825) $28,375 (1) Operating EBITDA represents net income (loss) excluding amounts for income taxes, depreciation and amortization and all other non- operating income/expenses, and is a common measure of operating performance in the telecommunications industry. Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. SUREWEST COMMUNICATIONS PRO FORMA OPERATING EBITDA RECONCILIATION TO INCOME (LOSS) FROM OPERATIONS (Unaudited; Amounts in thousands) Quarter Ended March 31, 2008 Telecom Broadband Consolidated Income (loss) from operations $10,237 $(5,950) $4,287 Add back : Depreciation & Amortization 3,668 9,708 13,376 Pro Forma Operating EBITDA (1) $13,905 $3,758 $17,663 (1) Pro Forma Operating EBITDA represents income (loss) from operations excluding amounts for depreciation and amortization, and is a common measure of operating performance in the telecommunications industry. Pro Forma Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. SUREWEST COMMUNICATIONS PRO FORMA OPERATING EBITDA RECONCILIATION TO INCOME (LOSS) FROM OPERATIONS (Unaudited; Amounts in thousands) Quarter Ended June 30, 2007 Telecom Broadband Consolidated Income (loss) from operations $10,189 $(4,459) $5,730 Add back : Depreciation & Amortization 5,768 8,890 14,658 Pro Forma Operating EBITDA (1) $15,957 $4,431 $20,388 (1) Pro Forma Operating EBITDA represents income (loss) from operations excluding amounts for depreciation and amortization, and is a common measure of operating performance in the telecommunications industry. Pro Forma Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. SUREWEST COMMUNICATIONS PRO FORMA OPERATING EBITDA RECONCILIATION TO INCOME (LOSS) FROM OPERATIONS (Unaudited; Amounts in thousands) Six Months ended Six Months Ended June 30, 2008 June 30, 2007 Consol- Consol- Telecom Broadband idated Telecom Broadband idated Income (loss) from operations $22,187 $(12,006) $10,181 $19,782 $(10,312) $9,470 Add back : Depreciation & Amortization 7,414 20,154 27,568 11,418 16,907 28,325 Pro Forma Operating EBITDA(1) $29,601 $8,148 $37,749 $31,200 $6,595 $37,795 (1) Pro Forma Operating EBITDA represents income (loss) from operations excluding amounts for depreciation and amortization, and is a common measure of operating performance in the telecommunications industry. Pro Forma Operating EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income as a measure of performance. SUREWEST COMMUNICATIONS - Consolidated Operations SELECTED OPERATING METRICS (inc KC results from periods prior to acquisition) As of and for the quarter ended 6/30/2008 6/30/2007 BROADBAND [1] [1] Chg Chg % Residential Video Marketable Homes - Fiber & HFC [2] 217,700 197,700 20,000 10% RGUs - Fiber & HFC 54,500 50,200 4,300 9% RGUs - Copper 2,600 2,900 (300) -10% Penetration - Fiber & HFC 25.0% 25.4% -0.4% -1% ARPU $62 $60 $3 4% Voice Marketable Homes 292,200 279,900 12,300 4% RGUs 56,600 52,800 3,800 7% Penetration 19.4% 18.9% 0.5% 3% ARPU $32 $33 ($1) -3% Data Marketable Homes 292,200 279,900 12,300 4% RGUs 94,000 87,600 6,400 7% Penetration 32.2% 31.3% 0.9% 3% ARPU $37 $36 $1 4% Total Marketable Homes - Fiber, HFC, Copper 292,200 279,900 12,300 4% RGUs 207,700 193,500 14,200 7% Subscriber totals Subscribers [3] 99,000 93,300 5,700 6% Penetration 33.9% 33.3% 0.5% 2% ARPU [4] $89 $86 $2 3% Triple Play ARPU [5] $109 $107 $2 2% Triple Play RGUs per Subscriber [5] 2.60 2.60 (0.00) 0% Churn 1.5% 1.7% -0.2% -13% Business [6] Customers 6,200 5,500 700 13% ARPU $458 $454 $4 1% TELECOM 6/30/2008 6/30/2007 [1] [1] Chg Chg % Residential Voice Marketable Homes 90,000 89,400 600 1% RGUs [7] 62,900 74,500 (11,600) -16% RGU Migration to Broadband Voice [8] 1,400 0 1,400 n/a Penetration 69.9% 83.3% -13.4% -16% ARPU $44 $46 ($2) -4% Churn 2.4% 2.6% -0.3% -10% Business [6] Customers 9,600 9,900 (300) -3% ARPU $341 $321 $20 6% CONSOLIDATED RESIDENTIAL VOICE RGUs ILEC Voice RGUs Broadband 2,000 0 2,000 n/a Telecom 62,900 74,500 (11,600) -16% Total ILEC Voice RGUs [9] 64,900 74,500 (9,600) -13% CLEC Residential Voice RGUs [10] 54,600 52,800 1,800 3% TOTAL Residential Voice RGUs [11] 119,500 127,300 (7,800) -6% NETWORK METRICS 6/30/2008 6/30/2007 [1] [1] Chg Chg % Marketable Homes - Fiber 125,700 106,600 19,100 18% Marketable Homes - HFC 92,000 91,100 900 1% Marketable Homes - Copper 74,500 82,200 (7,700) -9% Total 292,200 279,900 12,300 4% BROADBAND 3/31/2008 [1] Chg Chg % Residential Video Marketable Homes - Fiber & HFC [2] 211,000 6,700 3% RGUs - Fiber & HFC 52,500 2,000 4% RGUs - Copper 2,700 (100) -4% Penetration - Fiber & HFC 24.9% 0.2% 1% ARPU $63 ($1) -1% Voice Marketable Homes 286,600 5,600 2% RGUs 53,800 2,800 5% Penetration 18.8% 0.6% 3% ARPU $32 ($0) -1% Data Marketable Homes 286,600 5,600 2% RGUs 91,800 2,200 2% Penetration 32.0% 0.1% 0% ARPU $37 ($0) 0% Total Marketable Homes - Fiber, HFC, Copper 286,600 5,600 2% RGUs 200,800 6,900 3% Subscriber totals Subscribers [3] 96,900 2,100 2% Penetration 33.8% 0.1% 0% ARPU [4] $89 ($0) 0% Triple Play ARPU [5] $110 ($1) -1% Triple Play RGUs per Subscriber [5] 2.59 0.01 0% Churn 1.4% 0.1% 7% Business [6] Customers 6,000 200 3% ARPU $444 $14 3% TELECOM 3/31/2008 [1] Chg Chg % Residential Voice Marketable Homes 89,900 100 0% RGUs [7] 66,800 (3,900) -6% RGU Migration to Broadband Voice [8] 0 1,400 n/a Penetration 74.3% -4.4% -6% ARPU $44 ($0) 0% Churn 2.7% -0.3% -11% Business [6] Customers 9,600 0 0% ARPU $311 $31 10% CONSOLIDATED RESIDENTIAL VOICE RGUs ILEC Voice RGUs Broadband 100 1,900 1900% Telecom 66,800 (3,900) -6% Total ILEC Voice RGUs [9] 66,900 (2,000) -3% CLEC Residential Voice RGUs [10] 53,700 900 2% TOTAL Residential Voice RGUs [11] 120,600 (1,100) -1% NETWORK METRICS 3/31/2008 [1] Chg Chg % Marketable Homes - Fiber 119,900 5

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