Rural Regional & Remunerative

Want to be an integrated full-service provider in a rural area? Be known for stellar customer service? Wring every last cent out of your facilities?

Want to make money?

You should take a look at CFW Communications.

Who?

CFW Communications -- not exactly a household word in the wireless arena -- is a 101-year-old telephone company in western Virginia that has changed with the times. Today CFW offers its customers local and long-distance, cellular, paging, Internet, wireless and wireline cable, PCS and more.

While the big boys on Wall Street may not be writing about CFW yet, it has caught the eye of researchers at regional investment companies who apparently like what they see. They just aren't quite sure what they're seeing.

Wheat First Union, Richmond, VA, reported, "We remain hard pressed to find an adequate comparable to CFW that blends a broad wireline telecom product portfolio ... with high-growth opportunities like CFW's 5 million PCS POPs."

Scott & Stringfellow, also of Richmond, noted that CFW really is two companies under one umbrella: an early-stage wireless company and a traditional local telephone company. Comparing CFW with companies such as GTE or the RBOCs doesn't work because those companies are so much larger. Other rural phone companies offering wireless differ in the comparison of wireless POPs to access lines. Although these companies can range as high as 20 times more wireless POPs than access lines, CFW has 140 times the POPs.

So why not just value CFW like a wireless company?

"The reason to us is simple," Scott & Stringfellow said in its analysis. "CFW is making money."

Although CFW's goals are not unlike those of other telcos, it seems to be ahead of the pack in maximizing opportunities.

THE ART OF THE DEALThe fastest way from Point A to Point B is not always a straight line for CFW. Take its PCS strategy.

"When you look at PCS and all the reports that come out, you never see us showing up anywhere because of the way we acquired our licenses," said Jim Quarforth, president & CEO since 1990.

* CFW started out by developing a business plan that led to the formation of the Virginia PCS Alliance -- nine other independent telephone companies with CFW as the managing partner and largest equity holder. As the Virginia PCS Alliance, CFW acquired its first 1.2 million POPs by partitioning them from PrimeCo in the Richmond, VA, MTA.

* In the C-block auction, CFW bought the Winchester-Charlottesville, VA, BTA, "paying too much," according to Quarforth, but obtaining 300,000 POPs in a move that CFW considered strategic.

* Next CFW and R&B Communications agreed to each sell their interests in the Roanoke cellular market to GTE. In return, GTE provided them with its West Virginia PCS licenses, which covered most of the state, about 1.5 million POPs.

* CFW then created the West Virginia PCS Alliance with R&B Communications and Hardy Telecommunications (both are also partners in the Virginia PCS Alliance).

* Both the Virginia and West Virginia PCS alliances participated on the D-, E- and F-block auctions to fill in with 2 million more POPs.

The end result is two operating entities, with CFW as managing partner for each, plus a consortium (CFW and R&B) holding additional licenses that eventually may go into the two alliances or into a third entity. The total is about 5 million POPs.

"We kind of patched this thing together, and as a result we had the second-lowest-cost licenses in the nation, $8.40 a POP," Quarforth said.

PLAIN OLD TELEPHONEWhen Quarforth became president & CEO at CFW, the business was much simpler. CFW had a long, successful track record of providing local telephone service (39,000 access lines) to residents of Clifton Forge, Covington and Waynesboro, VA.

The first telephone company in the state to go totally digital back in 1984, CFW uses fiber extensively in its wireline plant, which allows higher quality service in its rural environment, Quarforth said.

The Virginia State Corporation Commission (similar to a PUC) ranks the telephone companies in the state based on such criteria as network performance, service calls and response time. Time after time, the No. 1 provider is CFW.

"Anyone can charge $19.95 for Internet access or $20 for PCS, but not everybody can provide high-quality customer care," Quarforth said.

This quality service is one facet of CFW's corporate strategy in becoming an integrated communications provider across the 5-million POP footprint included in its PCS licenses.

"The fact that we have been able to acquire all these different platforms or types of infrastructure in the same geographical region allows us to share our costs," Quarforth added. CFW's 20 retail stores offer all of its products; some towers contain paging, cellular, wireless and PCS; many services are on one bill now, and he hopes to have everything on one bill by year-end.

STRATEGIC SERVICESThe Waynesboro, VA,-based telco sees carrier services, local telephone, long distance, Internet access and PCS as its strategic services although its portfolio also includes cable television, cellular, paging and security.

CFW began offering cellular in 1991, serving as managing partner with nine other telephone companies in a 200,000-population area. Penetration today is 11% with CFW's market share at 50%.

Next came paging, which involved a lot of partnering and interconnection with other carriers, all transparent to the paging customer, Quarforth said. In most cases, CFW is the managing and largest equity partner. Paging has exploded in CFW's market with 30% to 50% growth in each of the last five years.

Cable television is not what Quarforth considers a strategic service for his company, but the wireless cable infrastructure is important. CFW got involved in cable in 1994, one of the first companies to get FCC permission to offer cable in its telephone operating area. It offers wireless cable in the multichannel multipoint distribution service (MMDS) spectrum and owns a wired system as well.

As an Internet service provider since 1995, CFW serves 7,000 customers. Along with standard dial-up Internet service, CFW also is using MMDS spectrum to offer hybrid high-speed Internet access.

"Downstream is wireless and the return path is dial-up," said Bud Zirkle, president of Virginia operations. Now that the FCC allows 2-way transmission in the MMDS frequencies, Zirkle said the hybrid plant will be converted to 2-way Internet access. Downloading a 10Mb file on the CFW system takes less than 2 minutes, compared with 45 minutes using a 28.8b/s wired modem.

In November, CFW introduced digital subscriber line (DSL) high-speed data service, which uses a single pair of copper wires as a broadband medium to transmit voice and data simultaneously. DSL speeds are 512Kb/s to 8Mb/s, about 25 times faster than conventional dial-up speeds.

Two of the most expensive elements of providing Internet access are provisioning the primary rate interfaces and the actual network facilities. CFW can provide both because it is a CLEC with a fiber network.

CFW began offering long-distance service in 1997 and continues to expand service throughout its footprint. In doing so, it has flipped the national model by offering less expensive in-state rates and more expensive national rates because CWF's customers call more in state.

CFW is certified as a CLEC in Staunton, Charlottesville and Harrisonburg, VA, and will be in Winchester, Lynchburg and the northern sector of its footprint by the second quarter of this year. It has applied to be a CLEC for all of West Virginia. Plans call for both facility-based and resale CLEC applications, Quarforth said.

Integral to CFW's strategy in several areas is its 450-mile fiber-optic network. Much of this network is included in ValleyNet, 525 miles of fiber running from Bristol, TN, to Harrisburg, PA. CFW is one of five entities owning ValleyNet, each with a 20% share. To the south of ValleyNet is Carolina Fibernet extending through Georgia, North Carolina and South Carolina, while the American Electrical Power (AEP) Network extends west through Ohio and West Virginia.

The network allows CFW to be a "carrier's carrier."

"If Sprint comes to ValleyNet and says, 'I'd like a DS3 from Charlottesville to Roanoke,' ValleyNet would sell that and provide a single bill," Quarforth explained. "Companies like us work behind the scenes and provision it for Sprint."

This year, CFW is building 500 miles of fiber to connect the balance of its cities in Virginia, allowing it to offer CLEC, long distance and Internet more cost-effectively. In 2000, it will build fiber in West Virginia.

"Part of the strategy is you've got to be there first, build a quality network and price it in a manner that would really incent companies to use you rather than expend their own capital," Quarforth said. If a number of the large players are participants, then everyone wins, he said. "It doesn't make sense for everyone to build, whether it be fiber networks or PCS in a rural environment."

This requires flexibility. An operator can be a head-on competitor in one part of the business; then you turn around and that same competitor becomes a customer.

"It's a real emotional or intellectual thing," Quarforth said. "Some of the big guys haven't gotten that. Take Bell Atlantic or GTE. A CLEC may be in there eroding their business, but guess what? (The CLEC) may be one of their biggest customers in selling unbundled loops. So they need to change the way they think, and that's tough sometimes."

DIRECTORY ASSISTANCEAt first glance, CFW's directory services operation might appear to be a less obvious service for a rural telecommunications operator. In fact, it fits well with CFW's overall strategy.

In June 1994 CFW signed a contract with AT&T to provide directory assistance for Maryland, Virginia and West Virginia.

AT&T was looking for an alternative to working with the RBOCs and asked CFW if the company had an interest in this opportunity.

"When we signed this contract, we had no directory service, no land and no employees," Quarforth said. But by December of the same year, a building had been built and employees hired for that building. In February 1995, service began. Today CFW has two callcenters with 400 employees handling 5 million calls a month and a third center under construction. It has since added Delaware, New Jersey and Pennsylvania for AT&T and picked up other customers including GTE Mobilnet's PCS and cellular business.

"Talk about synergy," Quarforth said. "Not only do we generate earnings and revenue from our (directory) business, but AT&T has to buy DS3s from our network to get access to the centers, so we generate revenues for our network. All that goes through our telephone switch so we generate revenues for our telephone company." In all, a triple play.

CFW spent a year evaluating all of the different databases and has invested in LSSI, which it found to have the freshest and best quality data. Quarforth believes that by having a national database in Waynesboro, others will want CFW's services and will have to ride the CFW fibers to get access.

INTELOS FOR PCSCFW launched its PCS service in October 1997, marketing it as Intelos (integrated telecommunications operating system). Arrangements with PrimeCo and Sprint allow nationwide CDMA roaming; arrangements with cellular carriers allow customers to use dual-mode phones. The Intelos rate plan is a simple one, designed to encourage customers to use wireless for all of their calls: $20 per month for 100 minutes statewide, toll-free; $50 for 750 minutes, statewide, toll-free. For $15 more a month, the local calling area expands to include five adjacent states and the District of Columbia; for $25 more, it includes the continental United States.

In fall 1998, CFW launched service in West Virginia.

Quarforth said that launching PCS has brought expected earnings' hits. This year will be the peak year for PCS-related losses.

"Then the reduction in losses will be pretty dramatic," he said. "By 2001 we should break even, and we will be profitable in 2002."

He doesn't anticipate much competition in PCS, except perhaps in some of the bigger cities or along critical interstates. CFW can offer the CDMA players access to the CFW network at a cheaper cost than building one, so he believes others will resell service, which will benefit everyone.

As far as its CLEC business is concerned, the PCS spectrum provides a way for CFW to serve the residential customer along with the mobile one.

"If you look at how companies are in the CLEC business today, it is primarily a business of reselling local loops, reselling copper loops," Zirkle said. "That's a formula that works for businesses, but if you try reselling copper loops into residential, there's just not enough margin there to make any money."

Wireless local loop (WLL) is the answer. CFW currently offers WLL over its CDMA spectrum to "friendly users" in selected areas, and plans a full roll out by midyear. A Motorola terminal in the home acts like a cordless phone. It is packaged with one or more wireless handsets. With multiring service, a household can have up to four numbers in a package; conversations can take place simultaneously on the home phone and up to three mobile phones.

OTHER SPECTRUM OPTIONSCFW also is considering offering WLL through its MMDS spectrum.

"I've got gobs of bandwidth at MMDS, up to 200MHz of bandwidth that I can use to provide WLL service," Zirkle said, adding that the PCS frequencies are more scarce. CFW conducted a trial last year with Motorola and American Telecasting where they took Motorola base stations and Motorola WLL products, upbanding them to MMDS and MDS frequencies. They were able to broadcast from a central cell site to WLL terminals out in the field at distances up to 30 miles, getting 2-way voice with landline quality.

In last year's LMDS auctions, CFW acquired spectrum in Virginia and West Virginia, and the staff is determining how to best use that spectrum. In delivering its CLEC, Internet, long-distance and mobile services, CFW will use the medium -- copper, fiber, PCS, MMDS, LMDS or wireless communications service -- that makes the most economic sense, Zirkle said.

PLANNING FOR CHANGECFW's strategy has its roots in a time when cellular was the newtechnology, and PCS and wireless cable didn't even exist. But back in 1984, CFW knew regulatory constraints would be going away, and the local telephone company would become a facet of something bigger, said Quarforth, who joined the company in 1980.

"We knew we would have to become competitive at some point and generate all future growth and earnings off new businesses to continue to maintain full-service capability for our customers," he said.

Quarforth admitted that the biggest challenge has been controlling the growth of the company. CFW is integrating its services, establishing a single point of contact from a customer-care and billing standpoint. At the same time it is growing in each industry segment while dramatically increasing its geographic presence. This has meant growing pains, especially in the human resources area. A few years back, CFW had 130 employees; today it is near 800.

But the company has made no major mistakes, and Quarforth has no regrets.

"We're more bullish about wireless today than we were a year ago, and we were pretty high on it then," he said. He cites recent reports that in seven to 10 years, 60% of the population will have wireless devices. "I really believe that," he said.

ACQUISITION TARGET?Looking down the road, a crucial question looms. If CFW looks so attractive to the financial market, will some big fish come along and gulp it up? Branch Cabell Investment Research said in May that the Baby Bells and long-distance companies are seeking to acquire well-positioned, independent, full-service telecommunications providers, and CFW meets this profile.

Quarforth admits this could happen, but CFW is not out there looking to be acquired.

"We have a pretty well-defined strategic plan, and if we execute that plan, our shareholders are going to do extremely well," he said. If an opportunity presented itself, CFW would look closely at how its shareholders and communities would benefit.

The last thing the region wants is for someone to acquire CFW who only is interested in earnings, Quarforth said.

>SBHome-Grown High Tech

Greg Campbell, Shenandoah Valley Regional Airport executive director & manager, credits CFW Communications with "bringing technology to the valley."

Campbell and his airport staff use many CFW services: telephone, cellular, paging, PCS, security, wireless cable, Internet access. He explained: "It's a winter day and bad weather is coming. I find out first via my pager. I use the wireless phone to make calls to my staff. I trace the weather on The Weather Channel and find additional information on the Internet. We use phones, pagers, e-mail throughout the day.

"Without (CFW's) services, we would be paralyzed," Campbell continued. He is impressed that the technology is available in a rural area, and a valley-based company is responsible for it.

He also gives CFW credit for its customer service. If phones go out, CFW supplies loaners because it knows the phones are crucial to the airport staff.

"They're good corporate citizens. CFW sets a good example for us to follow," he said. "Here people respond to home-grown," Campbell added.

Stan Quillen agreed.

Quillen said he learned the value of a mobile phone on a dark, foggy night many years ago. He and his family were driving in the mountains "in the middle of the boonies" when the van broke down. Quillen had to leave his wife and two small children behind and hitchhike for help. Since that time, he makes sure his wife has a cellular phone with her, and he still has an early Motorola "bag" phone in his car.

"It's better than the AAA," Quillen said.

At his business, the Waynesboro Landscape and Garden Center, Quillen uses Intelos, CFW's PCS service, which enables him to keep in touch with his crews, foremen and designers at all times. And now that he has moved outside town, he subscribes to CFW's wireless cable service, which he said is better than wired cable. Wireless cable is less expensive and not affected by the weather, Quillen said.

Quillen, also a CFW shareholder, likes doing business with a local provider.

"I know Jim (Quarforth, CFW CEO). I know he'll answer the phone if I call."

When Michael Moneymaker left Ernst & Young in 1995 to become CFO for CFW Communications, he was hired for his qualifications, not his name. But perhaps there was a subliminal message that got through.

"Even though we start all these businesses and incur significant start-up costs and losses, we've been able to maintain about a 50% margin," Moneymaker said. "That's our report card when we talk to investors."

"We occasionally look at some of our peer groups," said Jim Quarforth, president & CEO. "We have a hard time finding companies that do everything that we do."

He said CFW's margins are higher than other telephone companies that have gotten into wireless because it can spread the costs of billing, sales, customer care and its retail stores.

"We don't participate in the hype some of the other companies do, because we're capable of raising money," Quarforth said. "We have strong financials and earnings."

CFW posted record results at the end of 1997, announcing its 33rd consecutive dividend increase. In 1998, operating income was up 20% for the three quarters ending Sept. 30.