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FairPoint Communications Inc. Reports Operating Results (10-Q)

May 05, 2009 | About:

FairPoint Communications Inc. (FRP) filed Quarterly Report for the period ended 2009-03-31.

FairPoint is a leading provider of communications services to rural communities across the country. FairPoint's mission is to acquire and operate telecommunications companies that set the standard of excellence for the delivery of service to rural communities. FairPoint Communications Inc. has a market cap of $121.1 million; its shares were traded at around $1.36 with and P/S ratio of 0.1.

Highlight of Business Operations:

•Verizon New England accelerated its payments totaling $30.0 million that could have been owed to us for certain potential line losses in New Hampshire (the "line loss payment"). The $30.0 million line loss payment was applied as a credit against the $34.0 million one-time fee owed by us at cutover to Verizon Information Technologies LLC ("Verizon Technologies") under the transition services agreement. The line loss payments were contemplated by an order of the NHPUC issued on February 25, 2008. The order required that Verizon pay $15.0 million to the Company on March 31, 2009 and also pay $15.0 million to the Company on March 31, 2010 if certain conditions were met. Verizon agreed that this line loss payment is not refundable to Verizon, regardless of whether the conditions to its payment set forth in the order are met. •Verizon provided additional credits totaling approximately $7.7 million (including $7.5 million related to the purchase of certain internet access hardware and $0.2 million related to other fees) against the total payments due in the first quarter of 2009 from the Company to Verizon. In accordance with the transition agreement, on February 20, 2009, we made a final payment to Verizon Technologies of approximately $7.7 million in respect of amounts owed under the transition services agreement and for the internet access hardware referred to above.

Access. Access revenues increased $18.0 million to $97.0 million during the first quarter of 2009 compared to the same period in 2008. Legacy FairPoint contributed $23.5 million to access revenues for the three months ended March 31, 2009. Excluding the impact of the merger, access revenues would have decreased by $5.5 million. Of this decrease, $3.6 million is attributable to a decrease in interstate

Data and Internet services. Data and Internet services revenues increased $6.4 million to $28.4 million in the first quarter of 2009 compared to the same period in 2008. Legacy FairPoint contributed $8.7 million to data and Internet services revenues in the three months ended March 31, 2009. Excluding the impact of the merger, data and Internet services revenues would have decreased $2.3 million.

Cost of services and sales. Cost of services and sales increased $9.3 million to $145.1 million in the first quarter of 2009 compared to the same period in 2008. Legacy FairPoint contributed $25.1 million to cost of services and sales expenses in the three months ended March 31, 2009. Also included in cost of services and sales for the three months ended March 31, 2009 are $6.1 million of expenses related to the transition services agreement. Excluding the impact of the merger and the transition services agreement, cost of services and sales would have declined $21.9 million. The decline reflects the elimination of costs allocated from Verizon affiliates prior to the closing of the merger, which has more than offset direct costs incurred by us to operate our Northern New England operations.

Selling, general and administrative. Selling, general and administrative expenses increased $29.3 million to $92.4 million in the first quarter of 2009 compared to the same period in 2008. Legacy FairPoint contributed $19.0 million to selling, general and administrative expenses in the three months ended March 31, 2009. Included in selling, general and administrative expenses for the three months ended March 31, 2009 are $9.8 million of expenses related to the transition services agreement and $36.6 million of non-recurring cutover related costs (which we are allowed to add back to adjusted EBITDA under our credit facility). Excluding the impact of the merger and the transition services agreement, selling, general and administrative expenses would have decreased $36.1 million. The decline reflects the elimination of costs allocated from Verizon affiliates prior to the closing of the merger, which has more than offset the direct costs incurred by us to operate our Northern New England operations.

Our $2,030 million senior secured credit facility consists of a non-amortizing revolving facility in an aggregate principal amount of $200 million, a senior secured term loan A facility in an aggregate principal amount of $500 million, a senior secured term loan B facility in the aggregate principal amount of $1,130 million and a delayed draw term loan facility in an aggregate principal amount of $200 million. Spinco drew $1,160 million under the term loan immediately prior to being spun off by Verizon, and then FairPoint drew $470 million under the term loan and $5.5 million under the delayed draw term loan concurrently with the closing of the merger.

Read the The complete ReportFRP is in the portfolios of John Keeley of Keeley Fund Management, Charles Brandes of Brandes Investment.

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