8-K

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FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)   February 21, 2007    

FairPoint Communications, Inc.

(Exact name of registrant as specified in its charter)

Delaware	333-56365	13-3725229
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

521 East Morehead Street, Suite 250, Charlotte, North Carolina	28202
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (704) 344-8150

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On February 21, 2007, FairPoint Communications, Inc. (the “Company”) issued a press release reporting the financial results for its fourth quarter and year ended December 31, 2006 (the “Earnings Announcement”). A copy of the Earnings Announcement is attached to this Current Report as Exhibit 99.1 and is incorporated herein solely for purposes of this Item 2.02 disclosure.

On February 21, 2007, the Company held a conference call to discuss the financial results of the Company for its fourth quarter and year ended December 31, 2006 (the “Earnings Call”). A copy of the transcript (the “Transcript”) of the Earnings Call is attached to this Current Report as Exhibit 99.2 and is incorporated herein solely for purposes of this Item 2.02 disclosure. The Transcript has been selectively edited to facilitate the understanding of the information communicated during the conference call.

Item  7.01 Regulation FD Disclosure.

A copy of the Earnings Announcement is being furnished by being attached hereto as Exhibit 99.1.

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits

Exhibit Number	Description
99.1 99.2	Earnings Announcement Transcript

The information in this Current Report, including the exhibits attached hereto, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of such section. The information in this Current Report, including the exhibits, shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any incorporation by reference language in any such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

FAIRPOINT COMMUNICATIONS, INC.

By: /s/ John P. Crowley

Name: John P. Crowley

Title: Executive Vice President and

Chief Financial Officer

Date: February 23, 2006

 

EX-99

Exhibit 99.1

FOR IMMEDIATE RELEASE

FAIRPOINT REPORTS RESULTS FOR THE FOURTH QUARTER

AND FULL YEAR ENDED DECEMBER 31, 2006;

Increases Cumulative Cash Available for Dividends by 10%

CHARLOTTE, N.C. (February 21, 2007) – FairPoint Communications, Inc. (NYSE:FRP) (“FairPoint” or the “Company”) today announced its financial results for the fourth quarter ended December 31, 2006.

• Revenues for the fourth quarter of 2006 increased $0.4 million or 0.6% over the fourth quarter of 2005. Excluding the impact of operations acquired in the last twelve months, revenues decreased $3.7 million or 5.3% compared to the fourth quarter of 2005 (principally due to a $2.4 million interstate access revenue adjustment recorded in the fourth quarter of 2005).

• Adjusted EBITDA¹ (as defined herein) for the fourth quarter of 2006 was $33.3 million versus $37.6 million for the same period last year (principally due to a $2.4 million interstate access revenue adjustment recorded in the fourth quarter of 2005).

• Earnings per share on a fully diluted basis for the fourth quarter of 2006 were $0.12 compared to earnings per share in the fourth quarter of 2005 of $0.23. The decline is principally due to $2.4 million of merger transaction expenses in the fourth quarter of 2006 related to the pending merger with Verizon’s Maine, Vermont and New Hampshire wireline operations and the interstate access revenue adjustment recorded in the fourth quarter of 2005.

“We finished 2006 strong, with positive results from our existing operations, and with plans underway to continue our next phase of growth, the acquisition of Verizon’s wireline operations in Maine, New Hampshire and Vermont,” said Gene Johnson, Chairman and CEO of FairPoint.  “Our core operations generated solid Cash Available for Dividends in excess of our dividend. That’s good news for our current and future shareholders as we continue to improve our dividend stability.”

Johnson continued, “Our broadband penetration continues to improve, now almost 24% of the lines we serve, and we continue to see new opportunities for our customers to benefit from our bundled services. We believe that our success in bringing broadband to the current markets we serve will translate into improved broadband access and services for our new customers in the Verizon transaction.”

_________________________

¹ Merger transaction related expenses of $2.4 million which were incurred in the fourth quarter of 2006 have been added back to Adjusted EBITDA. The Company amended its credit facility on January 25, 2007 which effectively allows the Company to exclude transition and transaction expenses related to the Company’s agreement to merge with Verizon’s Maine, Vermont and New Hampshire wireline operations.

 

Fourth quarter summary:

(in thousands, except per share and customer units)	Three Months Ended
	12/31/06	12/31/05	% Change
Revenues	$ 70,382	$ 69,934	0.6%
Income from operations	$ 13,751	$ 19,416	(29.2%)
Net income	$ 4,319	$ 8,096	(46.7%)
Diluted earnings per share	$ 0.12	$ 0.23
Adjusted EBITDA	$ 33,271	$ 37,592	(11.5%)
Cash Available for Dividends (as defined herein)	$ 18,178	$ 18,937	(4.0%)
Cumulative Cash Available for Dividends (as defined herein)	$ 45,246
Access line equivalents	311,150	289,658	7.4%
Voice access lines	251,706	244,293	3.0%
High speed data subscribers	59,444	45,365	31.0%

Results for the three month period ended December 31, 2006

Operating Revenues

Consolidated revenues for the three months ended December 31, 2006 were $70.4 million, an increase of $0.4 million or 0.6% compared to the three months ended December 31, 2005. Operations acquired in the last twelve months contributed approximately $4.2 million to total revenues. Excluding the impact of operations acquired in the previous twelve months, revenues decreased $3.7 million or 5.3% compared to the fourth quarter of the prior year. Items affecting the decrease in revenues were decreases in interstate access revenue of $3.1 million, intrastate access revenue of $1.2 million, local service revenue of $0.5 million and universal service fund revenue of $0.2 million. These decreases were partially offset by increases in data and internet services revenue of $0.7 million, other services revenue of $0.3 million and long distance revenue of $0.2 million. The decrease in interstate access revenue is partially due to the recognition of $2.4 million of revenue in the fourth quarter of 2005 related to the settlement of over-earnings reserves for the 2003-2004 regulatory earnings period.

Operating Expenses

Operating expenses (excluding depreciation and amortization) increased $6.0 million or 16.2% compared to the fourth quarter of 2005. Excluding the impact of operations acquired in the last twelve months, operating expenses increased $4.1 million or 10.9% compared to the prior year. The primary drivers of this increase were merger transaction related expenses of $2.4 million and increases in employee compensation expenses of $0.5 million, cost of goods sold of $0.3 million (including $0.1 million related to HSD and long distance services) and operating insurance expenses of $0.3 million, all partially offset by a decrease in legal expenses of $0.5 million.

Also included in operating expenses are expenses associated with stock based compensation which are non-cash expenses. Total stock based compensation expenses for the three months ended December 31, 2006 and December 31, 2005 were $0.8 million and $0.7 million, respectively. Depreciation and amortization expense increased $0.1 million compared to the same period in 2005.

Net Income and Earnings per Share

 

Net income decreased $3.8 million compared to the fourth quarter of 2005. This decrease was primarily driven by an increase in expenses and a decrease in interstate access revenue as discussed above. Earnings per share on a fully diluted basis were $0.12 for the three months ended December 31, 2006, compared to earnings per share on a fully diluted basis of $0.23 for the same period in 2005.

Adjusted EBITDA and Cash Available for Dividends

Adjusted EBITDA for the three months ended December 31, 2006 was $33.3 million ($2.4 million of merger transaction related expenses have been added back), compared to Adjusted EBITDA of $37.6 million for the same period in the prior year. Cash Available for Dividends of $18.2 million was generated during the three months ended December 31, 2006. Cash Available for Dividends for the three months ended December 31, 2006 is up from the $15.5 million generated in the three months ended September 30, 2006, principally because of lower capital expenditures and cash income taxes in the fourth quarter.

Year-to-Date Results (Twelve Months Ended December 31, 2006)

Consolidated revenues for the twelve months ended December 31, 2006 increased $7.2 million or 2.7% compared to the twelve months ended December 31, 2005. Operations acquired during 2005 and 2006 contributed approximately $10.6 million to the increase in total revenues. Excluding the impact of operations acquired, revenues decreased $3.4 million or 1.3% compared to the prior year.

Operating expenses (excluding depreciation and amortization) increased $12.0 million or 8.4% compared to the twelve months ended December 31, 2005. Excluding the impact of operations acquired in the last twelve months, operating expenses increased $5.9 million or 4.2% compared to the prior year. Included in operating expenses are merger transaction related expenses of $2.4 million.

The Company finished the twelve month period ended December 31, 2006 with a Cumulative Cash Available for Dividends balance of $45.2 million, up from $41.0 million at September 30, 2006.

Operational highlights

• Total HSD subscribers increased by 2,349 in the fourth quarter of 2006 to 59,444 at December 31, 2006. Excluding acquired lines, HSD subscribers increased by 1,635 in the fourth quarter of 2006.

• HSD penetration increased to 23.6% of voice access lines compared to 18.6% at December 31, 2005.

• HSD average revenue per subscriber (“ARPU”) was $42.02 for the fourth quarter of 2006. The Company’s quarterly HSD ARPU has remained consistent over the past year.

• Interstate long distance penetration as of December 31, 2006 increased to 45.2% of voice access lines compared to 44.5% at the end of the fourth quarter of 2005, primarily as a result of the Company’s continuing efforts to sell a voice bundled offering consisting of local voice, long distance and enhanced calling services.

• Total access line equivalents were 311,150 as of December 31, 2006, representing an increase of 2,292 or 0.7% from September 30, 2006. Total access line equivalents as of December 31, 2006

 

increased 7.4% compared to December 31, 2005 and increased 1.0% over the prior year including only lines owned for the full year.

• Voice access lines, excluding lines acquired in the last twelve months, as of December 31, 2006 decreased 3.4% compared to December 31, 2005.

Access Line Equivalents

	12/31/2006	9/30/2006	12/31/2005	% change 12/31/06 to 12/31/05
Access lines owned for full year(1):
Voice access lines	236,009	239,829	244,293	(3.4%)
HSD subscribers	55,602	53,967	44,310	25.5%
Subtotal: Access line equivalents	291,611	293,796	288,603	1.0%
Access lines acquired or disposed of during the last twelve months(1)(2):
Voice access lines	15,697	11,934	-	N/A
HSD subscribers	3,842	3,128	1,055	N/A
Subtotal: Access line equivalents	19,539	15,062	1,055	N/A
Total access line equivalents	311,150	308,858	289,658	7.4%

(1) In the third quarter of 2006, the Company began including access lines and HSD subscribers from its two competitive local exchange carrier (CLEC) companies. Historically, these access lines have not been included in the Company’s access line and subscriber counts. CLEC lines have been included in the line counts for all periods above for comparison purposes.

(2) Represents voice access lines and HSD subscribers for companies owned less than twelve months. The Company completed the acquisition of the assets of Cass County Telephone Limited Partnership in the third quarter of 2006, the acquisition of Unite Communication Systems, Inc. in the third quarter of 2006 and the acquisition of The Germantown Independent Telephone Company in the fourth quarter of 2006. The Company sold the operations of a subsidiary, Fremont Broadband, LLC, during the second quarter of 2006.

Cash Available for Dividends

The Company’s credit facility contains a covenant that limits its ability to pay cash dividends on its common stock to the amount of Cumulative Cash Available for Dividends that accumulates from April 1, 2005 through the end of the Company’s most recent fiscal quarter for which financial statements are available and a compliance certificate has been delivered (which, as of December 31, 2006, was the quarter ended September 30, 2006). Under this covenant, as of December 31, 2006, the Company had Cumulative Cash Available for Dividends of $41.0 million, from which it paid a dividend on January 18, 2007 of $13.9 million, resulting in a carryover of $27.1 million of Cumulative Cash Available for Dividends. In addition to this $27.1 million carryover, based on the Company’s financial performance through December 31, 2006 as described in this earnings release, the Company generated an additional $18.2 million of Cash Available for Dividends and as a result expects to have $45.2 million of Cumulative Cash Available for Dividends from which to declare and pay its next dividend. Cash Available for Dividends corresponds to the term “Available Cash” in the Company’s credit facility and

 

Cumulative Cash Available for Dividends corresponds to the term “Cumulative Distributable Cash” in the Company’s credit facility.

Merger Information

The Company announced on January 16, 2007 that it signed definitive agreements with Verizon Communications Inc. that will result in Verizon establishing a separate entity for its local exchange and related business assets in Maine, New Hampshire and Vermont, spinning off the capital stock of that new entity to Verizon’s stockholders, and merging it with and into FairPoint. The merger is expected to close within the next 12 months. For additional information on the merger and related agreements, please refer to the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on January 19, 2007.

Transaction Update

• Completed ETOM analysis (Enhanced Telephone Operations Manual) to establish system capabilities, processes and organizational functions required to define and operate the new infrastructure.

• Developed preliminary systems architecture plan.

• Established forty-one project work streams to prepare systems for conversion.

• Reviewed systems architecture plan with Verizon Communications Inc.

2007 Outlook

For 2007, FairPoint anticipates revenues of $281 to $284 million. Adjusted EBITDA, before adjusting for the sale of the Company’s investment in Orange County Poughkeepsie Limited Partnership, is expected to be $129 to $131 million (excluding merger transition expenses). Capital expenditures for 2007 are expected to be approximately $73 to $75 million, including $44 million related to the merger. FairPoint amended its credit facility on January 25, 2007 to allow the Company to exclude operating expenses and capital expenditures related to the merger agreement from certain covenant calculations.

The Company estimates that capital expenditures in the first quarter of 2007, excluding merger related expenditures, will be approximately $8.5 to $9.5 million. In addition, the Company expects cash interest expense for the first quarter of 2007 will be approximately $9.8 to $10.0 million.

The Company has also confirmed that the dividends paid to its shareholders in 2006 will be treated as qualified dividends for tax purposes, partially due to gains recognized on non-core asset sales in 2006.

Conference Call and Webcast

As previously announced, FairPoint will host a conference call and simultaneous webcast to discuss its fourth quarter results at 8:30 a.m. EST on February 21, 2007. Participants should call (888) 253-4456 (US/Canada) or (706) 643-3201 (International) and request the FairPoint Communications fourth quarter earnings call. A telephonic replay will be available for anyone unable to participate in the live call. To access the replay, call (800) 642-1687 and enter the confirmation code 7262648. The recording will be available from Wednesday, February 21, 2007 at 1:00 p.m. through Wednesday, February 28, 2007 at 11:59 p.m. (EST).

A live broadcast of the earnings conference call will be available via the Internet at www.fairpoint.com under the Investor Relations section. An online replay will be available beginning at 1:00 p.m. (EST) on February 21, 2007 and will remain available for one year. During the conference call, representatives of

 

FairPoint may discuss and answer one or more questions concerning FairPoint’s business and financial matters. The responses to these questions, as well as other matters discussed during the conference call, may contain information that has not been previously disclosed.

Non-GAAP Financial Measures

EBITDA (as defined herein), Adjusted EBITDA and Cash Available for Dividends are non-GAAP financial measures (i.e., they are not measures of financial performance under generally accepted accounting principles) and should not be considered in isolation or as a substitute for consolidated statements of operations and cash flows data prepared in accordance with GAAP. In addition, the non-GAAP financial measures used by FairPoint may not be comparable to similarly titled measures of other companies. For definitions of and additional information regarding EBITDA, Adjusted EBITDA and Cash Available for Dividends, and a reconciliation of such measures to the most comparable financial measures calculated in accordance with GAAP, please see the attachments to this press release.

FairPoint believes EBITDA is useful to investors because EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance, liquidity and leverage. FairPoint believes EBITDA allows a standardized comparison between companies in the industry, while minimizing the differences from depreciation policies, financial leverage and tax strategies.

Certain covenants in FairPoint’s credit facility contain ratios based on Adjusted EBITDA and the restricted payment covenant in FairPoint’s credit facility regulating the payment of dividends on its common stock is based on Adjusted EBITDA. If FairPoint’s Adjusted EBITDA were to decline below certain levels, covenants in FairPoint’s credit facility that are based on Adjusted EBITDA may be violated and could cause, among other things, a default under such credit facility, or result in FairPoint’s inability to pay dividends on its common stock.

FairPoint believes Cash Available for Dividends is useful to investors as a means to evaluate FairPoint’s ability to pay dividends on its common stock. However, FairPoint is not required to use such cash to pay dividends and any dividends are subject to declaration by FairPoint’s board of directors and compliance with Delaware law and the terms of its credit facility.

While FairPoint uses these non-GAAP financial measures in managing and analyzing its business and financial condition and believes they are useful to its management and investors for the reasons described above, these non-GAAP financial measures have certain shortcomings. In particular, Adjusted EBITDA does not represent the residual cash flows available for discretionary expenditures, since items such as debt repayment and interest payments are not deducted from such measure. FairPoint’s management compensates for the shortcomings of these measures by utilizing them in conjunction with their comparable GAAP financial measures.

The information in this press release should be read in conjunction with the financial statements and footnotes contained in FairPoint’s annual report on Form 10-K to be filed with the Securities and Exchange Commission.

About FairPoint

FairPoint is a leading provider of communications services to rural and small urban communities across the country. Incorporated in 1991, FairPoint’s mission is to acquire and operate communications companies that set the standard of excellence for the delivery of service to rural and small urban communities. Today, FairPoint owns and operates 31 local exchange companies located in 18 states,

 

offering an array of services, including local and long distance voice, data, Internet and broadband offerings.

Forward Looking Statements

This press release may contain forward-looking statements that are not based on historical fact, including without limitation, statements containing the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements. Such factors include those risks described from time to time in FairPoint’s filings with the Securities and Exchange Commission, including, without limitation, the risks described in FairPoint’s most recent Annual Report on Form 10-K on file with the Securities and Exchange Commission. These factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. All information is current as of the date this press release is issued, and FairPoint undertakes no duty to update this information. FairPoint’s results for the year ended December 31, 2006 are subject to the completion and filing with the Securities and Exchange Commission of its Annual Report on Form 10-K for such period.

Source: FairPoint Communications, Inc. www.fairpoint.com

Investor Contact: Brett Ellis (866) 377-3747, bellis@fairpoint.com

Media Contact: Jennifer Sharpe (704) 227-3629, jsharpe@fairpoint.com

# # #

Attachments

 

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
		December 31,		December 31,
		2006		2005
		(unaudited)
		(Dollars in thousands)
Assets
Current assets:
	Cash	$	3,805		$	5,083
	Accounts receivable, net		28,533			34,985
	Other		13,184			9,200
	Deferred income tax, net		33,648			29,190
	Assets of discontinued operations		—			90
Total current assets			79,170			78,548
Property, plant, and equipment, net			246,264			242,617
Investments			12,057			39,808
Goodwill			499,184			481,343
Deferred income tax, net			23,830			47,160
Deferred charges and other assets			24,725			18,663
Total assets		$	885,230		$	908,139
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable	$	14,337		$	12,030
	Dividends payable		13,908			13,789
	Current portion of long-term debt		714			677
	Demand notes payable		312			338
	Accrued interest payable		560			288
	Other accrued liabilities		16,017			20,808
	Liabilities of discontinued operations		486			2,495
Total current liabilities			46,334			50,425
Long-term liabilities:
	Long-term debt, net of current portion		607,272			606,748
	Deferred credits and other long-term liabilities		6,897			4,108
Total long-term liabilities			614,169			610,856
Minority interest			8			10
Stockholders' equity:
	Common stock		352			350

	Additional paid-in capital		530,536		590,131
	Unearned compensation		—		(6,475)
	Accumulated deficit		(311,545)		(342,635)
	Accumulated other comprehensive income, net		5,376		5,477
Total stockholders' equity			224,719		246,848
Total liabilities and stockholders' equity		$	885,230	$	908,139

 

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
			Three months ended				Twelve months ended
			December 31,				December 31,
			2006		2005		2006		2005
		(Dollars in thousands)
Revenues		$	70,382	$	69,934	$	270,069	$	262,843
Operating expenses:
	Operating expenses, excluding depreciation and amortization		43,221		37,191		155,463		143,425
	Depreciation and amortization		13,410		13,327		53,236		52,390
Total operating expenses			56,631		50,518		208,699		195,815
Income from operations			13,751		19,416		61,370		67,028
Other income (expense):
	Net gain (loss) on sale of investments and other assets		451		(1,012)		14,740		(1,211)
	Interest and dividend income		177		829		3,315		2,499
	Interest expense		(10,151)		(9,832)		(39,665)		(46,416)
	Equity in net earnings of investees		2,410		3,134		10,616		11,302
	Other non-operating, net		—		—		—		(87,746)
Total other income (expense)			(7,113)		(6,881)		(10,994)		(121,572)
Income (loss) before income taxes			6,638		12,535		50,376		(54,544)
Income tax (expense) benefit			(2,893)		(4,819)		(19,858)		83,096
Minority interest			—		—		(2)		(2)
Income from continuing operations			3,745		7,716		30,516		28,550
Income from discontinued operations			574		380		574		380
Net income		$	4,319	$	8,096	$	31,090	$	28,930
Weighted average shares outstanding:
	Basic		34,660		34,550		34,629		31,927
	Diluted		34,860		34,571		34,754		31,957
Basic earnings per share:
	Continuing operations	$	0.11	$	0.22	$	0.88	$	0.89
	Discontinued operations		0.01		0.01		0.02		0.02
	Net income		0.12		0.23		0.90		0.91
Diluted earnings per share:
	Continuing operations	$	0.11	$	0.22	$	0.88	$	0.89
	Discontinued operations		0.01		0.01		0.01		0.02
	Net income		0.02		0.23		0.89		0.91

 

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
						Twelve months ended
						December 31,
							2006		2005
						(Dollars in thousands)
Cash flows from operating activities:
	Net income					$	31,090	$	28,930
Adjustments to reconcile net income to net cash provided by
	operating activities of continuing operations:
		Loss on discontinued operations					(574)		(380)
		Dividends and accretion on shares subject to mandatory redemption					—		2,362
		Loss on preferred stock subject to mandatory redemption					—		9,899
		Deferred income taxes					17,473		(84,208)
		Amortization of debt issue costs					1,572		1,859
		Provision for uncollectible revenue					1,798		3,245
		Depreciation and amortization					53,236		52,390
		Loss on early retirement of debt					—		77,847
		Minority interest in income of subsidiaries					2		2
		Income from equity method investments					(10,616)		(11,302)
		Net (gain) loss on sale of investments and other assets					(14,740)		1,211
		Other non cash items					2,209		2,045
		Changes in assets and liabilities arising from operations:
			Accounts receivable and other current assets				4,710		(2,527)
			Accounts payable and accrued expenses				(3,664)		(19,399)
			Income taxes				29		(363)
			Other assets/liabilities				(759)		71
				Total adjustments			50,676		32,752
					Net cash provided by operating activities of continuing operations		81,766		61,682
Cash flows from investing activities of continuing operations:
	Acquisitions of telephone properties, net of cash acquired						(49,837)		(25,690)
	Acquisition of investments						—		(12)
	Net capital additions						(31,990)		(27,401)
	Distributions from investments						10,654		10,859
	Net proceeds from sales of investments and other assets						43,832		175
	Other, net						(20)		(738)
	Net cash used in investing activities of continuing operations						(27,361)		(42,807)

 

Cash flows from financing activities of continuing operations:
	Net proceeds from issuance of common stock			—		431,921
	Debt issue and offering costs			—		(8,975)
	Proceeds from issuance of long-term debt			129,200		699,959
	Repayments of long-term debt			(128,651)		(905,675)
	Repurchase of preferred and common stock			—		(129,281)
	Payment of fees and penalties associated with early retirement of
		long term debt		—		(61,037)
	Payment of deferred transaction fee			—		(8,445)
	Proceeds from exercise of stock options			24		184
	Dividends paid to common stockholders			(55,241)		(35,298)
		Net cash provided by (used in) financing activities of continuing operations		(54,668)		(16,647)
	Cash flows of discontinued operations:
		Operating cash flows, net used in		(1,015)		(740)
		Net (decrease) increase in cash		(1,278)		1,488
Cash, beginning of period				5,083		3,595
Cash, end of period			$	3,805	$	5,083

 

FairPoint Communications, Inc.

Non-GAAP Financial Measures Reconciliation

For the Three Months and Twelve Months Ended December 21, 2006 and 2005

			Three Months Ended		Three Months Ended
			12/31/06		12/31/05
		(Dollars in thousands)
Net cash provided by operating activities from continuing operations		$	22,771	$	22,857
Adjustments:
	Depreciation and amortization		(13,410)		(13,327)
	Other non-cash items		(2,429)		(15,707)
	Changes in assets and liabilities arising from continuing operations, net of acquisitions		(3,187)		13,893
Income from continuing operations			3,745		7,716
Adjustments:
	Interest expense		10,151		9,832
	Provision for income taxes		2,893		4,819
	Depreciation and amortization		13,410		13,327
EBITDA			30,199		35,694
Adjustments:
	Net (gain) loss on sale of investments and other assets		(451)		1,012
	Equity in net earnings of investees		(2,410)		(3,134)
	Distributions from investments		2,753		3,550
	Non-cash stock based compensation		823		691
	Merger transaction and transition expenses		2,371		-
	Other non-cash item		-		(212)
	Deferred patronage dividends		(14)		(9)
Adjusted EBITDA		$	33,271	$	37,592

 

			Three Months Ended		Three Months Ended
			12/31/06		12/31/05
Net cash provided by operating activities from continuing operations		$	81,766	$	61,682
Adjustments:
	Depreciation and amortization		(53,236)		(52,390)
	Dividends and accretion on shares subject to mandatory redemption		-		(2,362)
	Other non-cash items		2,302		(598)
	Changes in assets and liabilities arising from continuing operations, net of acquisitions		(316)		22,218
Income from continuing operations			30,516		28,550
Adjustments:
	Interest expense		39,665		46,416
	Provision for income taxes		19,858		(83,096)
	Depreciation and amortization		53,236		52,390
EBITDA			143,275		44,260
Adjustments:
	Net (gain) loss on sale of investments and other assets		(14,740)		1,211
	Equity in net earnings of investees		(10,616)		(11,302)
	Distributions from investments		10,654		10,859
	Non-cash stock based compensation		2,859		2,350
	Loss on early retirement of debt		-		77,847
	Loss on redemption of preferred stock		-		9,899
	Merger transaction and transition expenses		2,371		-
	Other non-cash item		(637)		(212)
	Deferred patronage dividends		(1)		(77)
Adjusted EBITDA		$	133,165	$	134,835
Plus (minus):
	Scheduled principal payments		(651)		(858)
	Cash interest expense (adjusted for amortization and swap interest)		(38,094)		(42,200)
	Capital expenditures and other		(33,144)		(28,142)
	Investments		(112)		-
	Cash received on account of non-cash income excluded from Adjusted EBITDA		4,000		-
	Gain on sale of investment/assets		14,848		-
	Cash income taxes		(23,369)		(309)

Cash Available for Dividends $ 77,643 $ 63,326

 

"EBITDA" means net income (loss) before income (loss) from discontinued operations, interest expense, income taxes, and depreciation and amortization.

"Adjusted EBITDA" is defined in FairPoint's credit facility as (i) the sum of Consolidated Net Income (which is defined in FairPoint's credit facility and includes expense, depreciation, amortization, losses on sales of assets and other extraordinary losses, certain one-time charges recorded as operating expenses related to the transactions contemplated by the Company's Merger Agreement with Verizon Communications Inc. and certain other non-cash items, each as defined, minus (ii) gains on sales of assets and other extraordinary gains and all non-cash items increasing Consolidated Net Income.

"Cash Available for Dividends" means Adjusted EBITDA, minus (i) cash interest expense (adjusted for amortization and swap interest), (ii) scheduled principal payments on indebtedness, (iii) capital expenditures, (iv) investments, (v) cash income taxes, and (vi) non-cash items excluded from Adjusted EBITDA and paid in cash, plus (i) the cash amount of any extraordinary gains and gains realized on asset sales other than in the ordinary course of business, and (ii) cash received on account of non-cash gains or non-cash income excluded from Adjusted EBITDA.

 

FairPoint Communications, Inc.

Sequential Financial Information for the Quarters ending

December 31, September 30, June 30, March 31, 2006 and December 31, 2005

(Dollars in thousands)				Three Months Ended		Three Months Ended		Three Months Ended		Three Months Ended		Three Months Ended
				December 31, 2006		September 30, 2006		June 30, 2006		March 31, 2006		December 31, 2005
Consolidated Results:
	Revenues:
		Local calling services	$	17,781	$	16,984	$	16,609	$	16,282	$	16,919
		USF - high cost loop support		5,380		5,116		4,731		4,819		5,189
		Interstate access revenue		18,768		19,399		16,589		17,636		20,627
		Intrastate access revenue		9,337		10,150		8,888		8,977		10,165
		Long distance services		5,983		6,525		5,630		5,399		5,694
		Data and internet services		7,550		7,119		6,890		6,683		6,409
		Other services		5,583		5,407		4,859		4,995		4,931
	Total revenues			70,382		70,700		64,196		64,791		69,934
	Operating expenses			56,631		53,201		49,627		49,240		50,518
	Income from operations			13,751		17,499		14,569		15,551		19,416
	Other income (expense)			(7,113)		(7,853)		10,151		(6,179)		(6,881)
	Earnings from continuing operations before income taxes			6,638		9,646		24,720		9,372		12,535
	Income taxes			(2,893)		(3,668)		(9,645)		(3,652)		(4,819)
	Minority interest in income of subsidiaries			-		(1)		(1)		-		-
	Income from discontinued operations			574		-		-		-		380
	Net income		$	4,319	$	5,977	$	15,074	$	5,720	$	8,096
Cash Available for Dividends:
Adjusted EBITDA			$	33,271	$	33,448	$	33,153	$	33,293	$	37,592
Plus (minus):
	Scheduled principal payments			(166)		(164)		(162)		(159)		(157)
	Cash interest expense (adjusted for amortization and swap interest)			(9,780)		(9,594)		(9,411)		(9,309)		(9,433)

	Capital expenditures and other			(6,412)	(8,100)	(12,688)	(5,944)	(9,523)
	Investments			-	-	(112)	-	-
	Cash received on account of non-cash income excluded from Adjusted EBITDA			1,000	1,000	1,000	1,000	-
	Gain on sale of investment/assets			350	59	14,264	175	-
	Cash income taxes			(85)	(1,160)	(504)	(620)	458
Cash Available for Dividends				$18,178	$15,489	$25,540	$18,436	$18,937
Cumulative Cash Available for Dividends: (1)
Beginning Balance				$40,964	$39,331	$27,616	$22,972	$17,800
Add:
	Cash Available for Dividends generated during the quarter			18,178	15,489	25,540	18,436	18,937
Less:
	Dividends declared and/or paid after July 30, 2005			(13,896)	(13,856)	(13,825)	(13,792)	(13,765)
Cumulative Cash Available for Dividends				$45,246	$40,964	$39,331	$27,616	$22,972
	Other information:
	Gross property, plant and equipment			$829,234	$815,543	$775,322	$764,431	$760,221
	Capital expenditures			6,354	8,100	11,592	5,944	9,325
	Interest expense (adjusted for amortization and swap interest)			(9,780)	(9,594)	(9,411)	(9,309)	(9,433)
	Access line equivalents (2)			311,150	308,858	293,603	291,461	289,658
		Residential access lines		194,119	194,002	186,316	186,669	188,490
		Business access lines		57,587	57,761	55,860	55,522	55,803
		High Speed Data subscribers		59,444	57,095	51,427	49,270	45,365
			DSL subscribers	54,752	52,655	47,313	44,360	41,021
			Other HSD subscribers (Wireless and Cable modems)	4,692	4,440	4,114	4,910	4,344

(1) Cumulative Cash Available for Dividends means the amount of Cash Available for Dividends generated beginning on April 1, 2005, minus the aggregate amount of dividends paid after July 30, 2005, minus the aggregate amount of investments made after April 1, 2005 using such cash, plus the aggregate amount of distributions received from such investments (not to exceed the amount originally invested).

(2) In the third quarter of 2006, the Company began including access lines and HSD subscribers from its two competitive local exchange carrier (CLEC) companies. Historically, these access lines have not been included in the Company’s access line and subscriber counts.

 

EX-99

Exhibit 99.2

FINAL TRANSCRIPT

Conference Call Transcript

FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

Event Date/Time: Feb. 21. 2007 / 8:30AM ET

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FINAL TRANSCRIPT

Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

CORPORATE PARTICIPANTS

Brett Ellis

FairPoint Communications, Inc. - Director, IR

Gene Johnson

FairPoint Communications, Inc. - Chairman, CEO

John Crowley

FairPoint Communications, Inc. - CFO

CONFERENCE CALL PARTICIPANTS

Tom Champion

JPMorgan - Analyst

Tom Seitz

Lehman Brothers - Analyst

Barry Sine

Oppenheimer & Company - Analyst

Viktor Shvets

Moon Capital - Analyst

PRESENTATION

Operator

At this time, I would like to welcome everyone to the FairPoint Communications fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. I will now turn the conference over to Mr. Brett Ellis, Director of Investor Relations. Sir, you may begin your conference.

Brett Ellis - FairPoint Communications, Inc. - Director, IR

Thank you. Good morning, everyone, and thank you for joining the FairPoint fourth quarter earnings conference call. Participating on today's call are Gene Johnson, our CEO; and John Crowley, our CFO. Before we begin, I would like to remind you that certain statements made during this conference call, which are not based on historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events, or developments to differ materially from those expressed or implied by these forward-looking statements. Such factors include those risks described from time to time in FairPoint's filings with the Securities and Exchange Commission, including without limitation the risks described in FairPoint's most recent annual report on Form 10-K on file with the Securities and Exchange Commission. All information is current as of the date of this earnings call, and FairPoint undertakes no duty to update this information. In addition, FairPoint's results for the quarter and year ended December 31, 2006, are subject to the completion and filings with the Securities and Exchange Commission of its annual report on Form 10-K for such periods. Having said this allow me to introduce Gene Johnson, our Chairman and CEO.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Thanks very much, Brett. Good morning, everyone. It's a real pleasure to speak to you this morning and provide you with an update on our performance in the fourth quarter. A lot has happened since we had our last earnings call, so we're also going to provide some more details and

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Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

updates where appropriate. Hopefully you've all had a chance to see the press release that details the fourth quarter and year-end numbers. We'll discuss it in more detail in a moment. We obviously have had a lot going on at FairPoint, with a lot of excitement over the last few months. I'll spend a few minutes on that before we turn the attention to the fourth quarter results.

Following my remarks I'm going to turn it over to John. He will give you the real detail on the numbers and the operational achievements. As a quick update, I'm sure you already know that on January 16, we announced that we entered into a definitive agreement whereby Verizon's local telephone and related operations in Maine, New Hampshire, and Vermont are going to be spun off and merged into FairPoint. As I said then I think this really is a transaction that marks kind of a historic day not only for our company but for our industry. I think it's a very, very important transaction.

We are going to be committed to providing you as much information as possible on the progress of the transaction, and it's only been about four weeks since the announcement but we're working feverishly to ensure a really smooth transition. When we actually announced the transaction, the transition and conversion planning had already begun and we were well into it at that point. Since that time we have inventoried all the business processes and functions that we need to either replicate, to determine which of those systems will be scaled and which are going to be superseded by new systems that we'll put in place. We've established a preliminary system architecture plan to reach successful operability and integration of that architecture. We have established 41 different work streams with plans to achieve the conversion. Last week we sat down with our partners at Verizon and reviewed all the system architecture plans and set up time schedules going forward and so on.

I have spent the last four weeks watching this transaction take shape, working feverishly on it, and I'm really pleased to report that we are moving forward according to our plan right now. We will be providing you additional updates as necessary, and as we have something important to tell you. I'm confident we are going to meet our timelines, and I'm confident we'll meet your expectations for a timely close. We really believe that this transaction will allow us to do what we do best, which is strengthen communities through communications, and it's going to provide real benefits to everyone. The shareholders of both companies, our customers, our employees, and the communities at large.

Now, let's talk about the real purpose of today's call, which is fourth quarter results. Operationally we think we had another really solid quarter. Excluding -- excuse me, including acquisitions in the quarter, we added over 2300 high-speed data subscribers. Excluding acquisitions we added more than 1600 high-speed data subscribers. Once again we see that the business model makes sense. It's offering valuable services to our existing customer base. We are going to continue to extend our high-speed data offerings to ensure that the markets we serve have access to high-speed data. We said that something like 88% of our customers do have access to high-speed data product that FairPoint provides.

We also looked very hard at our ARPU as proof that our service offerings are compelling to customers. The ARPU remained very steady in 2006 and in fact during the fourth quarter it increased to $42.02. That's $42.02. So we think we're providing products that make a lot of sense for our customers and the take rates I think prove that. I am also pleased with the trends I am seeing in access lines. Excluding acquisitions, we saw an increase in total access line equivalents for the fourth quarter compared to last year up about 1%. Overall for 2006 we saw a 3.4% decrease in voice access lines on a same store basis which is, as you know a pretty good number when compared with our peer group. We're growing access line equivalents and working to stabilize our voice access line losses. Our success, I think, is pretty obvious and really a credit to the hard work of the entire team.

Our existing companies continue to benefit from new opportunities to provide value and that's before we think about the Verizon announcement we want to continue to add value in the business we're running right now. We have completed the conversion of about 75% of our access line equivalents as of yesterday morning when we converted another Company over to a single outsource billing platform and we expect to have all of our customers converted to that platform certainly by the middle of the year right on schedule. We haven't missed a schedule by a day yet on what we laid out for you. It's been a real success so far, and I think the remaining conversions are going to go very smoothly as well.

Let's talk about cash available for dividends. We generated in the fourth quarter cash available for dividends of $18.2 million, which is up 17% from the $15.5 million generated in the third quarter. We know this metric is really important to our shareholders and we are really quite pleased with our performance during the quarter. Adjusted EBITDA was in line with the third quarter despite additional one-time expenses related to the call center consolidations.

Consistent with our previous disclosures our Board has responded to the prudent management by expressing its intention to continue paying the dividend at the current level through 2007. We'll continue to work to support the dividend even as we continue working towards the close of the Verizon transaction. You have my personal assurances that we'll never take our eyes off the dividend ball. We know how important it is to all of you.

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FINAL TRANSCRIPT

Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

Also want to mention that we closed the acquisition of the Germantown Independent Telephone Company in Ohio, another 4400 access lines in November, in a state that we already do business in. The perfect example of how we are increasing access lines which complement our existing businesses across the country. And I talked to you some last quarter about how we believe we can create value by applying our efficiencies to a broader base. I think the Verizon transaction will prove that belief and obviously support that belief quite strongly.

Obviously, we know that the Company is going to be largely judged by how well we execute over the next 12 to 18 months, predominantly in New England, but also in our existing core business. It's a valid expectation and we are going to work hard to meet those expectations in a way that you can all be proud of us and be satisfied with the results of the Company. What's really important to us really is two things right now. One is getting this transaction done, getting it done -- the transition done, getting it done well, then secondly to run our existing business as well as we can. The people that work in FairPoint today are fully committed to making sure that our customers are served very, very well, that we maintain the strong business that we have right now, and so I can assure you we'll continue to work hard to run our existing business well during the next year and a half as we go thru this complicated and very difficult transition. I think now I want to ask John to discuss the fourth quarter financials in greater detail. John, take it away.

John Crowley - FairPoint Communications, Inc. - CFO

Thanks, Gene. Good morning, everyone. I'm pleased to report to you another great quarter with good operating results, increased cash available for dividends, and, of course, major progress on our strategy of growth via acquisition. Let me first walk you through the details of the financial results. Revenues were up 0.6% this quarter from the previous year to $70.4 million. Excluding the contribution from acquisitions and the NECA settlement in the fourth quarter of 2005, revenues were down 2% compared to fourth quarter of 2005.

Excluding the impact of acquired companies in the fourth quarter, interstate access revenue decreased $3.1 million, principally due to that $2.4 million interstate adjustment that we had in 2005 that we talked about at the time. And intrastate revenue decreased $1.2 million. These decreases were partially offset by increases in data and Internet service revenues of about $700,000, primarily as a result of higher number of high-speed data subscribers, and long-distance revenue increased $200,000 primarily as a result of an increase in the subscribers due to bundled package offerings. Operating expenses excluding depreciation increased $4.1 million compared to the fourth quarter of 2005 excluding the impact of acquisitions. $2.4 million of this increase is due to the Verizon merger and related expenses, and therefore not core operations. This included mostly due diligence and legal expense related to the Noreaster transaction. The remaining increase is principally due to an increase in employee compensation of expense of $500,000, an increase of cost of goods sold that relates to our changing product mix of $300,000, and an increase in operating insurance expense of $300,000.

Adjusted EBITDA for the quarter was $33.3 million after adding back $2.4 million for merger-related expenses. This compares to $37.6 million in the fourth quarter last year but is in line with the $33.4 million in the third quarter of 2006. The difference relative to 2005 is that in the fourth quarter of 2005 we had a very large $2.4 million favorable adjustment to interstate revenues and our distribution from partnerships has continued to decline principally from Orange Poughkeepsie. These in line results, relative to third quarter confirm what we said in November, that the restructuring costs related to the call center consolidation were offset by increased contribution from the Germantown acquisition.

Before going on, let me explain the change in the definition of adjusted EBITDA that I just quoted. As we told you when we announced the Verizon acquisition there will be both merger-related capital investment and operating expenses associated with the systems development and conversion. In order to provide for dividend continuity, we have completed an amendment to our credit agreement. Under that amendment our banks will permit us to add back to various calculations the operating and capital expenditures related to the merger so that the adjusted EBITDA reflects our recurring cash generation from our existing business undiluted by these one-time costs.

As part of the change, the gain from the sale of Orange County Poughkeepsie, which, of course, has not happened yet, will not be added to cash available for dividends but capital expenditures related to the transition do not score against cash available for dividends. The proceeds from the Orange County Poughkeepsie sale will be used to offset the cash outlay merger-related capital expenditures so this treatment is kind of a wash. We also raised the dividend suspension leverage test to 5.25 times adjusted EBITDA and the total leverage to up to 5.5 times. This is just a quick conceptual simplification of the amendment the original will file with the SEC on January 26.

Net income for the quarter was $4.3 million. Earnings per share on a fully diluted basis for the quarter were $0.12. Obviously while adjusted EBITDA has been redefined to exclude transition expenses all GAAP measures such as income from operations and net income are reduced by these costs and reported to you that way. In the quarter, we generated cash available for dividends of $18.2 million and we declared a dividend in the quarter totaling $13.9 million. Added to our previous reserves we now have cumulative cash available for dividends of $45.2 million as of December 31.

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FINAL TRANSCRIPT

Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

I just want to let you know we expect to tap into that reserve of cumulative cash available for dividends in the first half in a modest amount, and then expect to refresh the balance in the second half. This is partly because adjusted EBITDA will be reduced by expenses related to the call center consolidation which we announced last fall, in the first quarter and some corporate overhead costs indirectly associated with the Verizon transition as well as the sale of Orange County Poughkeepsie, which will reduce our distributions. If the sale of Orange County Poughkeepsie were to happen in the first quarter, adjusted EBITDA would be, worst case, slightly below $30 million. So cumulative cash available for dividends would likely decline in the first half of the year, principally because of the capital expenditures in the first quarter associated with the expansion of the call centers in Ellensburg, Washington, and South China, Maine, and an expected increase in capital expenditures in the second quarter to take advantage of seasonal construction conditions. However, as the efficiencies from the call center consolidation kick in, in the third quarter, and CapEx returns to normal levels, we expect to restore the balance of cash available for dividends to current levels by year end.

At the end of December 2006 our access line equivalents, which are defined as access lines plus HSD subscribers, but excluding video subscribers, were more than 311,000 versus 290,000 last year. The increase of course, is primarily due to acquisitions but it is also because of a solid increase in HSD subscribers. In the quarter excluding acquisitions we added over 1600 HSD subscribers, a slightly lower number of adds than in previous quarters as some promotional offers were allowed to expire during the quarter but for the same reason, HSD ARPU climbed to over $42, as Gene just mentioned. One of the real highlights of the quarter was the HSD penetration in FairPoint Missouri. You'll recall, we completed that acquisition in July of last year and during the fourth quarter we raised HSD penetration there from 13.8% to 15.8%. It was only 12.5% when we closed.

The team in Peculiar, Missouri, which is the name of the town is a great addition to FairPoint, and I think this is another example of the success we bring to acquisition integration. Missouri has become an important part to our operation as we are integrating it with our network to provide video we have moved certain billing processes there and we've transferred a key executive to that office. We invested $6.4 million in the quarter in capital expenditures and for the 12 months ended December 31, 2006, we invested $32 million.

Looking forward into 2007, we expect revenues for the full year of between $281 and $284 million. Adjusted EBITDA before adjusting for the sale of Orange County Poughkeepsie is expected to be between $129 and $131 million after adding back the merger transition expenses. Capital expenditures for 2007 are expected to be approximately $73 to $75 million including $44 million related to the merger leaving $29 to $31 million in operational CapEx to be charged against cash available for dividends. I should note here that the estimated CapEx for 2007 is shown net of contributions from Verizon. As we have said, Verizon will pay up to $40 million of our preclosing capital expenditures. For the first quarter of 2007 we estimate that CapEx will be approximately $8.5 to $9.5 million, excluding merger related CapEx. We expect cash interest expense to be approximately $9.8 to $10 million. Finally, let me just add a little color to the capital expenditures.

Related to the Verizon merger we won't predict a quarter by quarter breakout of development costs and expenses, however, I will say that the larger merger related system acquisition costs are naturally more back end loaded and the less expensive, but equally more valuable planning is more front-end loaded. We'll update you with the actual numbers and the further status of the progress as it becomes appropriate. At this time, I think we will take questions. Thank you.

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FINAL TRANSCRIPT

Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

QUESTION AND ANSWER

Operator

[OPERATOR INSTRUCTIONS] And your first question sums from the line of Jonathan Chaplin.

Tom Champion - JPMorgan - Analyst

This is Tom Champion subbing in for Jonathan. Just looking for a little more color around DSL. We actually modeled slightly greater DSL net adds, and sort of just curious if you could provide a little more information on why they came in where they did. Also curious about ARPU which was about $2 higher than we anticipated. Any comment on that and where the trends might be going would be very helpful. Thanks very much.

John Crowley - FairPoint Communications, Inc. - CFO

Yes. This is John Crowley. Shirley, always gets upset when I talk about trends. Particularly, obviously we can't, it's difficult to predict the future. What I can say is, based on our January and February results so far, our HSD sales on a net basis has started to uptick a bit, more in line with what we've done historically. What essentially happened in the fourth quarter is we consciously allowed some of the promotional rates to expire on HSD and the consequence is that we did have a slightly lower rate of gain of high-speed data subscribers but the offset, of course, was that the people that stayed on paid the higher rates, so that lifted our HSD ARPU, which is obviously something that we're interested in continuing to do. So I think that answers your question to the extent that we can.

Tom Champion - JPMorgan - Analyst

Thanks.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

By the way, Shirley is Shirley Linn, our General Counsel for those of you that don't know her.

Operator

Next question comes from the line of Tom Seitz.

Tom Seitz - Lehman Brothers - Analyst

Thanks for taking the question. Actually, I have got a couple. The first is, have you been able to do any work related to whether or not the distribution will be qualified as a dividend after the transaction closes? I noticed this year you're saying it will be a qualified dividend but if you have done any due diligence on the -- what will happen after the transaction closes first. Then second, if you could, give us any sort of update that you've got -- that you have thus far with respect to scheduling PUC meetings, which obviously will be the -- I think the big milestone towards closing the transaction. And that's it.

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FINAL TRANSCRIPT

Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

John Crowley - FairPoint Communications, Inc. - CFO

Tom, let me take your first question first. This is John, by the way. Yes, as you say, we did mention in the press release that the dividends for 2006 would be treated as ordinary dividends. For 2007 and beyond, we do not have a firm view, but what I can say is this, for some of the reasons we talked about a second ago, while our adjusted EBITDA will maintain very close to where has historically, because of the fundamental soundness of our underlying business, our reported earnings, and therefore our E&P for tax purposes, will be down because of all of the cash expenses related to the transition.

Beyond the closing, as we have talked about, we are making substantial capital investments, and Verizon has historically made substantial capital investments in the network. So as a consequence we're going to have disproportionately higher depreciation and amortization expense. So I can't give you a specific answer to your question, but I can say that it's likely the degree to which our dividend continues as 100% qualified dividend beyond 2006 will probably come down.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

And let me answer the second question, Tom. It's Gene. We filed the documents with all three commissions in Maine, Vermont, and New Hampshire about slightly more than two weeks after we announced the transaction, and all three states are now in the process of having -- going through their process of determining the actual timing for the review, including some scheduling conferences that they have established already. We and Verizon have asked them to make this determination by the end of October so that we can be sure to close by the end of the year. We think we'll be on schedule to close by the end of the year. Don't see any problems with that right now. So the process has really started. The time schedule will be determined over the next few weeks as the commissions have those various scheduling processes, conferences, and so on.

And I would like to make one other comment about that. That is, Verizon has really been a great partnership with them. They have been extremely good partners here. They have done some things that they don't normally do because it's the way we normally do things, for instance, the way we actually file, we typically file immediately, they tend to take some time after they announce a transaction before they file, and they have worked very,very closely with us, and we're extremely pleased with the relationship with Verizon and the way they are cooperating and partnering with us as we move forward with this transaction. We think only good can come out of that.

Tom Seitz - Lehman Brothers - Analyst

That's terrific. Thanks. One follow-up, if I may. Has Verizon closed its books for the year on the Maine, Vermont, and New Hampshire properties, and have you had a look to see if the operational performance -- I think Walt said he was expecting maybe a revenue decline in the 3% range. Is that still -- have you seen the numbers, and are they coming in near expectations?

John Crowley - FairPoint Communications, Inc. - CFO

Tom this is John. We have not yet received Verizon's results, or Verizon New England results for the fourth quarter. We do, however, have the access lines. And as we talked about in January, the decline in EBITDA of the operation has been at a slower rate than the loss of access lines. The operation finished the year with 1.478 million, call it 1.479 million switched access lines, which is down 6.4% for the year. But they finished the year with 188,000 HSD subscribers, which is about a 37.5% increase and represents about a 12.7% penetration of their access lines. So I think we would expect that the rate of decline, EBITDA for the operation, would come in at a lower rate than the decline of access lines given the history of the operation.

Tom Seitz - Lehman Brothers - Analyst

Okay. Terrific. Thank you very much.

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FINAL TRANSCRIPT

Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

Operator

Your next question is from Barry Sine.

Barry Sine - Oppenheimer & Company - Analyst

Good morning. I wanted to zero in on the Orange County Poughkeepsie transaction and the timing. Do you have any expectation of when that may close and if you could also strip out how much of the adjusted EBITDA guidance includes Orange County, what would that number be without those properties?

John Crowley - FairPoint Communications, Inc. - CFO

I can just give you a little bit of color, Barry, on the Orange County Poughkeepsie sale. We are going before the New York State PSC, I believe, next week to request authorization to make that transfer. I won't try and make a prediction about that, but we would hope to settle it soon thereafter I would think. In terms of the guidance we are budgeting about $8 million from Orange Poughkeepsie this year, and so it's continued to trend downward at the rate of about 10, sometimes 12% a year relative to previous years. Barry, you, of course, are very familiar with the situation there, but just for the rest of the people on the call, the wholesale charges that the partnership charges the two principal resellers, or service providers up there, have been -- continued to be cut, and so that's been reflected in the decline in distributions to the partners.

Barry Sine - Oppenheimer & Company - Analyst

Okay. Also wanted to ask about, you mentioned that $2.4 million was your estimate for the merger related costs during the quarter?

John Crowley - FairPoint Communications, Inc. - CFO

Yes, that's not an estimate, that's the actual for the fourth quarter, right.

Barry Sine - Oppenheimer & Company - Analyst

Is that a net of taxes, or is that a gross expense number?

John Crowley - FairPoint Communications, Inc. - CFO

That is the gross expense number.

Barry Sine - Oppenheimer & Company - Analyst

Okay. Thank you very much.

Operator

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FINAL TRANSCRIPT

Feb. 21. 2007 / 8:30AM ET, FRP - Q4 2006 FairPoint Communications, Inc. Earnings Conference Call

Your next question is from Viktor Shvets.

Viktor Shvets - Moon Capital - Analyst

Thanks very much for taking the question. I actually have two questions. One relating to the tax position of FairPoint after the merger with Verizon Properties. It seems in my numbers that you will exhaust your tax losses pretty quickly after buying those properties. So what will happen to the dividend paying capacity of the Company, say within 12 months? Initially clearly your coverage ratios improved, but what will happen as we go, say 12 months after the transaction? And a second question relating, once again, to Verizon Properties. You indicated what sort of capital expenditure you'd expect initially in those properties, but looking at the extent of access line losses as well as low high-speed or DSL penetration, what kind of numbers should we look for in 2008 and 2009 to upgrade those properties? Thanks.

John Crowley - FairPoint Communications, Inc. - CFO

Hi, Viktor. We haven't heard from you in a couple of quarters. Let me give you a little background on the tax shield that we have. You identified correctly that we started out last year with about $292 million in net operating losses, and, of course, we will use some of those for 2006 because of the noncore asset sales is and to some extent in 2007 for similar reasons. But we'll still have a substantial NOL carry forward. The other component of this is that the GAAP basis in the assets that Verizon is selling is approximately $1.7 billion, and the tax basis from those assets is closer to $1 billion. Having said that, there is a very high level of capital expenditures continuing to be made by them, and, of course, by us. Much of the 100 million or so that we'll be spending this year will be capitalized and therefore depreciated over a reasonable period of time plus the capital expenditures that we would expect to make in 2008 so that, in fact, this is actually quite a tax efficient transaction. And as we said in January, we would still expect that our cash taxes would be quite modest for a period of four or five years.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

This is Gene. Let me try to answer the question about capital expenditures and access line losses, and so on. And I can only be kind of general right now about that because we're still developing the plans and we don't want to -- for obvious reasons we don't want to announce plans and then later on not be able to do exactly what we announced. It's very important that we do exactly what we said we'd do in those states, so that the customers and the Public Utility Commissions and so on will understand that. However, with that said, we expect a very, very significant capital budget in year one over and above the numbers we have previously disclosed to you.

And that, we have actually included in the acquisition projections, quite frankly, as part of the cost of doing the transaction, primarily to build out the high-speed data network so that we can provide a greater level of broadband. In the states -- in Maine and Vermont, in Maine I think our broadband availability to our customers, and remember we're the second largest phone company in the state of Maine, our broadband availability today, before the transaction, and our broadband availability today is well over 90% of our customers have broadband availability in Maine. In Vermont, it's even closer to 100%. Most of the customers in Vermont -- in Vermont we have a smaller number of customers, only about 7500 off the top of my head have -- John is rushing to look up the number to make sure I didn't give you a bad number here -- have access to our broadband products.

As we have previously said, in the Verizon territories only about 62% of their customers in those three states have access to broadband, so we actually have in the budget in year one for additional CapEx over and above the numbers we have previously disclosed substantial increase to get us closer to that 90% level that I think is FairPoint's 88% across the board, and so the first thing we'll do is spend a lot of capital on building out the broadband network. We think that's probably the single most important thing that we are hearing as we talk to customers and regulators and legislators and governors and so on in those three states is this is something that's very very important. And we'll do that very quickly. We'll give more color on that as the year goes on and as we have those plans more detailed.

Viktor Shvets - Moon Capital - Analyst

Thank you.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

You're welcome. Thank you.

Operator

At this time there are no further questions.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Why don't we give a second to see if anybody else wants to get in the queue. If they don't, and I don't see any names coming up, I just want to thank you all for your participation this morning. We'll try to keep you posted on how we're doing on the transaction as time goes on. Thanks very much for your support of the Company, and we look forward to talking to you. Thank you very much. Have a great day.

John Crowley - FairPoint Communications, Inc. - CFO

Thanks, everyone.

Operator

This concludes today's conference. You may now disconnect.

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