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FairPoint Communications, Inc. (NASDAQ:FRP)

Q4 2007 Earnings Call

February 28, 2008 8:30 am ET

Executives

Brett Ellis – Investor Relations

Eugene B. Johnson – Chairman of the Board & Chief Executive Officer

John P. Crowley – Chief Financial Officer & Executive Vice President

Operator

Good morning my name is Selena and I will be your conference operator today. At this time I would like to welcome everyone to the FairPoint Communications fourth quarter and year end 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) Mr. Ellis you may begin your conference.

Brett Ellis

Good morning everyone and thank you for joining the FairPoint earnings conference call. Participating on today’s call are Gene Johnson, Chief Executive Officer and John Crowley, Chief Financial Officer.

Before we begin I would like to remind you that certain statements made during this conference call which are not based on historical fact 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 filings with the Securities & Exchange Commission including without limitation the risks described in FairPoint’s most recent annual report on Form 10K on file with the Securities & 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, 2007 are subject to the completion and the filing with the Securities & Exchange Commission of its annual report on form 10K for such period.

Before we begin the substance of the call I want to take care of some housekeeping. First, the structure of today’s call is going to be a bit different from our traditional quarterly calls. Gene Johnson our chairman and CEO will provide you with a high level overview of where we stand in the process of acquiring Verizon’s wireline operations in Maine, New Hampshire and Vermont. Then, John Crowley our CFO will take you through the quarterly results. Due to the start of our road show to raise the debt required to fund the Verizon transaction and the associated regulatory quite period restrictions, there will not be a Q&A session during today’s call. However, because we understand that the Q&A session is a very important part of these calls and because we want you to have the opportunity to ask your questions, shortly after the closing we will be hosting another conference call. At that time we will discuss the transaction at length as well as answer any questions you may have related to the transaction and our fourth quarter and year end results.

Having said this, allow me to introduce Gene Johnson our chairman & CEO.

Eugene B. Johnson

Good morning everyone. As you are all aware on Monday we received the filing regulatory approvals necessary to move forward with closing the Verizon transaction. New Hampshire’s approval came on the heels of the previous approvals from Maine, Vermont, the FCC and a couple of other states. As you might imagine, I am feeling a lot of emotions, joy, excitement, anticipation particularly, exhaustion but really most of all a real sense of pride in the FairPoint people. Our team not just those directly involved in the transaction but all of the employees in our existing companies as well sacrifice a lot and worked unbelievably hard over the past year to be sure that we not only close the transaction but that our performance in our existing companies was not compromised in any way and I think that was extraordinarily important and I’m really proud of the results in the existing operations as a result of that focus.

The past 13 months it’s been now have been incredibly challenging, a unique experience to say the least. I’ve gained a real understanding and respect for the PUCs in Maine, New Hampshire and the PUC in Vermont. These folks work very hard for the citizens of their state, they were patient, they were firm, they were fair. On behalf of FairPoint I want to thank them for their transparency, for the objectivity and their flexibility in crafting conditions that serve the public interest but also serve the interest of our shareholders. I think I also would be remise if I didn’t thank Walt Leach for the tremendous job he’s done over the last 13 months in shepherding this through the various regulatory bodies, so Walt and his team did an extraordinary job here. We’re going to work very hard very day to deliver the high levels of customer service that justifies the faith put in us by the regulatory bodies and by our shareholders.

As John will address in a few minutes our financial results were sound as we underwent this 13 month process. In short, I think it’s fair to say we never took our eye off the ball, not even for a second. Lisa Hood, and her team did a terrific job really running the existing business and they clearly weren’t distracted at all by the transaction. And remember, I told you when we started this that there were three primary projects through the year: one, was to run our existing business, one was to run the process of getting the approvals and one was to prepare for the transition. We put three different senior executives in charge of each and that worked extraordinarily well and I can tell you all of these were done very well.

So, with all that as a backdrop now I’m happy to say the real work begins. Following the closing we will begin the integration of our company with the Northern New England assets that we will have acquired. As you know a large portion of this work is underway and in conjunction with our partners including Capgemini and a number of other blue chip companies we have been diligently working on the many assets of the integration for well over 13 months now. In fact, we started this before we even signed the agreement with Verizon so we’re well along the way. Peter Nixon is our executive that’s been responsible for that and I’m really proud of the tremendous job that he’s done and you’ll learn more of that in the conference call we’re going to have in a few weeks after we close the transaction.

We understand the extreme importance to all of you concerning the realization of the anticipated operating synergies. I know a lot of you have asked about that. It’s something we’re going to update you on as well when we host the post transaction close conference call next month, or actually I guess in early April. As to what happens next, let me give you a quick update. We’ve now received the necessary approvals of all three states and from the FCC so we expect to close the transaction on March 31st. As you know, we have a senior secured credit facility of $2.03 billion that’s fully committed and we’re about to begin the bond road show to raise the remaining $540 million. So, the financing process, certain customary closing conditions are essentially the final hurdles we need to jump in order to close the transaction and to being the transition services agreement phase or the TSA for short. The TSA is in place to ensure a smooth transition of the back office and the customer facing aspects of the transaction in a very orderly fashion. We’re moving in a very calculated but aggressive manner with the assistance of our mini partners as well as the oversight of a third party monitor to ensure that redundancies are in place and that we do not take control of systems until we are properly prepared to do so. We expect the TSA to be in place for approximately six months through the end of September but, we can extend it if we need to do that. We certainly don’t anticipate the need for an extension but should something arise regarding our detailed review of aspects of the systems that we maybe weren’t previously able to analysis we do have the option of extending it. We’re entirely committed and focused to ensure a smooth and seamless transition so that customer disruptions are minimized and the TSA is executed in a very cost efficient and conservative manner.

That’s all I really want to say by way of formal comments. Hopefully, I’ve effectively conveyed to you our enthusiasm about the continued progress of the transaction and our acknowledgement of the hard work that still remains before us and the seriousness, dedication and purpose we bring to the TSA phase of the transaction. Quite frankly, we’re chomping at the bit we’re ready to get going now and we’re looking forward to doing that in another month. We look forward to providing you with a detailed update regarding the transaction after it is officially closed where we will also have Peter Nixon on hand to discuss the TSA phase and of course, John Crowley to discuss the synergies.

With that I’m now going to turn the call over to John, our CFO to discuss the fourth quarter financial results.

John P. Crowley

Good morning everybody. We ended the year with strong financial results consistent with our performance throughout the year. We generated revenues of $68.2 million for the fourth quarter of 2007, a decrease of $2.2 million or 3.1% below the fourth quarter of 2006. This includes the impact of operations acquired in the last 12 months which accounted for approximately $400,000. Excluding the impact of operations acquired in the last 12 months, revenue for the fourth quarter of 2007 decreased $2.6 million or 3.7% compared to the fourth quarter of 2006. This decrease was primarily attributable to a decrease in interstate access revenue of $2.2 million and intrastate access revenue of $800,000. These decreases in access and other regulated revenue were partially offset by increases in data and Internet services revenue of $1.1 million and long distance revenue of $1.5 million.

Operating expenses excluding merger related expenses decreased $1.8 million. Decreases in SG&A were offset by an increase of cost of goods sold of $1.1 million principally related to the growth of our non-regulated business. In total, operating expenses were $62.8 million compared with $43.2 million that we reported in the fourth quarter of 2006. This increase of course in operating expenses was principally due to an increase in merger related expenses of $21.3 million. Adjusted EBITDA the key measure of our success was $126.1 million, ahead of guidance, and we earned adjusted EBITDA of $30.2 million for the quarter compared to $33.3 million in the same quarter the prior year. The decrease there was primarily due to a $2.3 million reduction in distributions from investments as a result of the sale of our investment in the Orange County-Poughkeepsie Limited Partnership which we did in April, 2007 to finance the merger costs.

During the quarter we incurred expenses of $23.7 million related to the pending Verizon merger. Our credit facility allows these merger related expenses to be added back in calculating adjusted EBITDA. The net loss for the quarter was $19.5 million, this represents an earnings decrease of $23.9 million relative to the fourth quarter last year and this is entirely due to merger related expense. We had transition and transaction expense of $23.7 million, non-cash loss of $11.5 million related to certain interest rate swap agreements comparable to what we talked about in the third quarter. Just as a note, these swaps are contingent on the closing the of the merger and are therefore directly related to the merger and not of the core business.

On a fully diluted basis we reported a net loss per share of $0.56 for the quarter compared with earnings per share on a fully diluted basis of $0.12 in the same period of 2006. If you exclude the merger related expenses and the loss on those contingent interest rate swaps earnings per share on a fully diluted basis would have been $0.13 positive obviously a favorable comparison to the $0.12 we reported in the fourth quarter 2006. During the quarter we generated cash available for dividends of $3.3 million and finished the year with accumulative cash available for dividends of $40.6 million. I just want to put out, as we reported last week under the recent amendment to our existing credit agreement we will surpass the dividend suspension covenant this quarter so we will pay the dividend only if the merger closes on March 31st. After that time of course, we’ll be operating under the new credit agreement and we’ll have consistently more flexibility.

At the end of December, access line equivalents which are access lines plus high speed data subscribers but exclude our video subscribers were 305.8 thousand, call it 306,000 compared with 311,150 for the 2006 December quarter and 309,857 for the quarter ended September 30, 2007. So total access line equivalent as of December 31st decreased 1.7% compared to December 31, 2006. When including only lines we owned for the full year the access line equivalents decreased 1.6% compared to the prior year. Voice access lines excluding lines acquired or disposed of in the last 12 months decreased 5.2% compared with the year ago period. Most of that bump in access line losses was due to non-pay disconnects which I think is only cyclical and appears to be regionally tied to weak housing markets. High speed data penetration increased to an impressive 28.4% of voice access line at December 31, 2007 compared to 23.6% at the end of the previous year and high speed data [RPOO] is continuing to be pretty consistent in the range of $41 to $42. Interstate long distance penetration at the end of the year increased to 54.4% of voice access lines compared with 45.2% at December of last year.

Typically at this point on our call I would provide some outlook for the rest of the year however, due to our pending merger with Verizon we will refrain from providing guidance at this time. However, please do not forget as Gene and Brett mentioned that following the close of the transaction which is expected to be March 31st we will be hosting a conference call to discuss the transaction in greater detail as well as provide some perspective about our financial and operating expectations going forward. Details regarding the date and time of that post close conference call will be distributed after the merger closes. And last, as Brett mentioned at the beginning of today’s call we will not be doing Q&A because of various capital raising activities and quite period. I would encourage you all to first review our 10K which will probably be filed later today.

Let me close just by saying everyone at FairPoint is really excited about partnering up with our colleague in New England and making the merger a success for our shareholders, our customers and our associates and none more so than Gene so I’ll give him the last word on today’s call. Thank you everyone.

Eugene B. Johnson

I guess I’d be remiss as CEO and as a significant shareholder of this company if I don’t say how impressed I’ve been with the hard work and diligence of lots of FairPoint people and quite frankly, Verizon people over the past 13 months. I’ve been patient with the rest of our shareholders to see some of this come to fruition. I’m very, very excited about what’s about to happen and I think we know that we’re getting a lot of terrific people from Verizon, we’re real excited about that and we’re just chomping at the bit and ready to go and we look forward to talking to you more about that in a month or so actually we’ve actually closed the transaction and we look forward to operating this company and do all the things we’ve talked about doing. Thanks very much, we appreciate your time, we appreciate your patience with us and we look forward to updating you in a month or so. Have a great day everyone.

Operator

This concludes today’s conference call. You may now disconnect.

Question-and-Answer Session

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