FairPoint Communications reports 2015 Q1 results, revenues down

by Timothy McQuiston Vermnt Busness MagazineFairPoint Communications, Inc(Nasdaq: FRP), Vermont's largest communications provider, today announced its financial results for the first quarter endedMarch 31, 2015. The landline phone and Internet company reported thataccrued pension and other post-employment benefit obligations have declined a combined $680.3 million from December 31, 2014 to March 31, 2015, based primarily on the new collective bargaining agreements following the resolution of the prolonged strike, which ended in February. Also, unlevered Free Cash Flow minus Estimated Avoided Costs(1) of $32.9 million for the quarter; adjusted EBITDA minus Estimated Avoided Costs(1) were $61.7 million for the quarter; capital expenditures were $26.4 million; net loss was $45.2 million; and revenues were down $3.1 million.

The report was released before markets opened Wednesday morning and the stock was immediately down, after riding high since the end of the strike. Shares peaked at nearly $21 on April 15, but have slipped early today to about $19 (52-week range: $12.54-$20.98).

"Our incumbent workforce is back in place and our trouble loads have been reduced to some of the lowest levels since 2008 as we continue to implement improvements in our operations," saidPaul HSunu, Chief Executive Officer. "Our sales teams are successfully filling the pipeline with new residential and business orders and we continue to invest in and leverage northern New England's most robust fiber network. While the impact of the strike and harsh winter weather are evident in our results for the quarter, we remain focused on improving service, managing costs and delivering on our commitment to drive unlevered free cash flow," Sunu concluded.

Operating Highlights

Two of our collective bargaining agreements that cover approximately 1,700 employees in the aggregate in northern New England expired onAugust 2, 2014. OnOctober 17, 2014, the two labor unions initiated a work stoppage. OnFebruary 22, 2015, the two unions ratified their respective agreements and returned to work onFebruary 25, 2015. Among other items, accrued pension and other post-employment benefit obligations ("OPEB") declined a combined$680.3 millionfromDecember 31, 2014toMarch 31, 2015based primarily on these new collective bargaining agreements.

Despite the operational challenges of the strike, the Company experienced revenue growth in business services including advanced data services such as Ethernet, high-capacity data transport and other IP-based services. In the first quarter of 2015, products like FairPoint's retail and wholesale Ethernet service offerings continued to attract new customers and additional cellular towers were connected with fiber.

Ethernet services contributed approximately$23.0 millionof revenue or 10.7% of total revenue in the first quarter of 2015 as compared to$19.9 millionor 8.6% of total revenue a year ago, as retail and wholesale Ethernet circuits grew 29.7% year-over-year. Growth in the Company's Ethernet products is expected to continue based on demand from customers like regional banks, healthcare networks and wireless carriers.

As ofMarch 31, 2015, FairPoint had 2,994 employees, a decrease of 172 employees versus a year ago.

Labor Matters

For the three months endedMarch 31, 2015and 2014, we recognized$49.5 millionand$1.4 millionof labor negotiation related expenses, respectively, primarily for contracted services, contingent workforce expenses (including training) and legal, communications and public relations expenses. The$49.5 millionwas higher than expected due to significant winter storm activity. During the first quarter of 2015, these labor negotiation related expenses were partially offset by estimated lower union employee and vehicle expenses and other related expenses of approximately$27 million.

OnFebruary 22, 2015, the membership of both labor unions ratified their respective collective bargaining agreements that expire inAugust 2018. Highlights of the collective bargaining agreements are as follows:

• The qualified defined benefit pension plan for represented employees (the "Represented Pension Plan") was closed to new participants and benefits under the prior formula were frozen as ofOctober 14, 2014. For existing participants, future benefit accruals for service on and afterFebruary 22, 2015are at 50% of prior rates and capped at 30 years of total credited service. Pension plan participants on strike received no credited service fromOctober 14, 2014toFebruary 21, 2015.
• Post-employment healthcare benefits for active represented employees (the "Represented OPEB Plan") were eliminated as ofAugust 28, 2014. A transitional monthly reimbursement arrangement for eligible represented employees who retire in the first 30 months of the contract period was established (the "Reimbursement Arrangement"). To be eligible for the Reimbursement Arrangement, the represented employee must, among other criteria, have commenced a service pension under the Represented Pension Plan immediately upon termination of employment. The monthly reimbursement amount cannot exceed$800per retiree, plus an additional$400for a retiree's spouse, and may only be paid for reimbursement of medical insurance premiums for coverage of the retiree and spouse. The Reimbursement Arrangement is only available until the retiree reaches the earlier of age 65, or dies, among other limitations, at which time the benefit will cease for the spouse as well. Approximately 290 active represented employees are expected to be eligible to receive benefits under the Reimbursement Arrangement.
• Represented employees may elect to participate in the National Electrical Contractors Association, Inc. ("NECA") and International Brotherhood of Electrical Workers multi-employer medical plan. For 2015, our contribution is expected to be approximately equal to 79% of the cost had these employees been in our management health plan.

Upon ratification of the collective bargaining agreements onFebruary 22, 2015, a remeasurement of the net obligation of the Represented Pension Plan was required as of that date. The net pension obligation was$166.8 millionatMarch 31, 2015, or a reduction of$46.0 millionfrom$212.8 millionatDecember 31, 2014. The net pension obligation includes the net obligation for management employees, which was not affected by the collective bargaining agreements, in addition to the Represented Pension Plan.

The Represented OPEB Plan was terminated onJanuary 1, 2015. Retirees receiving benefits under the Represented OPEB Plan were transferred to the management post-employment benefit plan on that date. The combined obligations for the remaining post-employment benefit plan and the Reimbursement Arrangement were$107.1 millionatMarch 31, 2015($5.1 millionin other accrued liabilities and$102.0 millionin accrued other post-employment benefit obligations), or a reduction of$634.3 millionfrom$741.4 millionatDecember 31, 2014.

For 2015, we expect an increase to our net long-term deferred tax liabilities on our balance sheet due to a decrease in the deferred income tax asset associated with the qualified pension and post-employment healthcare obligations, partially offset by a decrease in the valuation allowance.

We expect to recognize a net benefit of$167.6 millionfor the above described other post-employment benefits expense and pension expense ratably over the remainder of 2015, absent any future events that require a remeasurement. Our estimated annualized effective tax is expected to be a benefit due primarily to the impact of the decrease in the valuation allowance. Since the first quarter of 2015 resulted in a pre-tax loss, the application of the annual effective tax rate resulted in tax expense for the first quarter.

We do not expect a change in cash taxes or our net operating loss carryforwards as a result of this remeasurement.

Financial Highlights

First Quarter 2015 as compared to Fourth Quarter 2014

Revenue decreased$3.1 millionduring the first quarter of 2015 to$214.0 million.

• Voice services revenue decreased$3.9 millionprimarily due to fewer lines in service, lower long-distance minutes of use and seasonality.
• Access revenue increased$1.5 millionprimarily due to wholesale Ethernet growth, higher revenue assurance activity, lower service quality penalties in the first quarter and increased rates partially offset by the continued loss and conversion of legacy transport circuits.
• Data and Internet services revenue decreased$0.9 milliondue to fewer broadband subscribers, partially offset by growth in retail Ethernet revenue.
• Other services revenue increased$0.2 million.

Operating expenses, excluding depreciation, amortization and reorganization, decreased$11.6 millionto$183.3 millionin the first quarter of 2015 compared to$194.9 millionin the fourth quarter of 2014 primarily due to lower OPEB expense partially offset by higher compensated absences expense. The expense for compensated absences for certain employees is accrued in the first quarter and released as paid time off is incurred.

Adjusted operating expenses were$152.3 millionin the first quarter of 2015 compared to$149.7 millionin the fourth quarter of 2014. The increase was primarily due to the one-time, non-operating income of$6.7 millionfrom the FairPoint Litigation Trust (the "settlement proceeds") received in the fourth quarter of 2014, partially offset by lower employee expenses (after consideration of Estimated Avoided Costs).

Adjusted EBITDA minus Estimated Avoided Costs decreased$5.8 millionto$61.7 millionin the first quarter of 2015 compared to$67.5 millionin the fourth quarter of 2014. The decrease was primarily driven by the receipt of settlement proceeds of$6.7 millionin the fourth quarter and lower revenue in the first quarter offset by decreased operating expenses.

Capital expenditures were$26.4 millionin the first quarter of 2015 compared to$27.7 millionin the fourth quarter of 2014.

Unlevered Free Cash Flow minus Estimated Avoided Costs, which measures Adjusted EBITDA minus Estimated Avoided Costs less capital expenditures, cash contributions towards our pension plans and cash payments for OPEB, was$32.9 millionin the first quarter of 2015 compared to$30.1 millionin the fourth quarter of 2014. Unlevered Free Cash Flow minus Estimated Avoided Costs was higher in the first quarter of 2015 primarily due to lower capital expenditures, pension contributions and OPEB payments partially offset by lower Adjusted EBITDA minus Estimated Avoided Costs.

Net loss was$45.2 millionin the first quarter of 2015 compared to$43.6 millionin the fourth quarter of 2014. The change was primarily due to a decrease in loss from operations of$8.0 million, mainly from lower operating expenses, excluding depreciation, amortization and reorganization, partially offset by lower revenue, as described above, as well as the settlement proceeds received in the fourth quarter of 2014 and lower income tax benefit of$2.6 millionin the first quarter compared to the fourth quarter.

Cash was$10.3 millionas ofMarch 31, 2015compared to$37.6 millionas ofDecember 31, 2014. The decrease is primarily due to changes in our working capital and the scheduled semi-annual interest payment towards the Company's senior notes in the first quarter. Total gross debt outstanding was$927.2 millionas ofMarch 31, 2015, after the regularly scheduled principal payment of$1.6 millionon the term loan made during the first quarter of 2015, as compared to$928.8 millionas ofDecember 31, 2014. The Company's$75.0 millionrevolving credit facility was undrawn, with$58.8 millionavailable for borrowing after applying$16.2 millionof outstanding letters of credit.

First Quarter 2015 as compared to First Quarter 2014

Revenue was$214.0 millionin the first quarter of 2015 compared to$230.6 milliona year earlier.

• Voice services revenue declined$9.0 millionresulting from the loss of voice access lines versus a year ago combined with lower long distance usage.
• Access revenue declined$4.2 milliondue to the continued loss and conversion of legacy transport circuits to next generation fiber-based services as well as higher service quality penalties in the first quarter of 2015, partially offset by an increase in wholesale Ethernet revenue primarily driven by conversion of legacy cellular tower circuits and higher revenue assurance activity in the first quarter of 2015 compared to the first quarter of 2014.
• Data and Internet services revenue increased$0.9 millionreflecting strength in retail Ethernet services and the mitigating impact of price increases on residential broadband products offsetting subscriber declines.
• Other services revenue decreased$4.3 millionprimarily driven by additional revenue from certain special purpose construction projects in the first quarter of 2014.

Operating expenses, excluding depreciation, amortization and reorganization, decreased$15.3 millionto$183.3 millionin the first quarter of 2015 compared to$198.6 millionin the first quarter of 2014 primarily due to lower employee costs related to the striking workforce partially offset by increased labor negotiation related expenses and contracted services.

Adjusted operating expenses were$152.3 millionin the first quarter of 2015 compared to$166.4 milliona year earlier. The decrease was primarily the result of lower employee costs, direct operating expenses, contracted services and marketing. Lower employee costs primarily resulted from decreased benefits, bonus and salaries due to lower headcount.

Adjusted EBITDA minus Estimated Avoided Costs was$61.7 millionin the first quarter of 2015 compared to$64.2 milliona year earlier. The decrease is due to lower revenue partially offset by adjusted operating expense savings.

Capital expenditures were$26.4 millionin the first quarter of 2015 compared to$28.1 milliona year earlier. The decrease is primarily driven by timing and a lower overall 2015 capital plan.

Unlevered Free Cash Flow minus Estimated Avoided Costs of$32.9 millionin the first quarter of 2015 increased$4.8 millioncompared to$28.1 milliona year earlier. The increase was due to lower capital expenditures, lower cash contributions towards our pension plans and OPEB payments partially offset by lower Adjusted EBITDA minus Estimated Avoided Costs in the first quarter of 2015.

Net loss was$45.2 millionin the first quarter of 2015 compared to$32.2 millionin the first quarter of 2014. The change was primarily due to an increase in loss from operations of$2.6 million, mainly from lower operating expenses, excluding depreciation, amortization and reorganization partially offset by lower revenue, as described above, as well as lower income tax benefit of$10.6 millionin the first quarter compared to the fourth quarter.

2015 Guidance

For full year 2015, the Company continues to expect to generate$105 million to $125 millionof Unlevered Free Cash Flow adjusted for Estimated Avoided Costs in the first quarter. Unlevered Free Cash Flow refers to Adjusted EBITDA minus capital expenditures, pension contributions and cash payments for OPEB. In addition, annual capital expenditures are expected to be less than$120 millionand aggregate annual pension contributions and OPEB payments are expected to be approximately$20 million.

Quarterly Report

The information in this press release should be read in conjunction with the financial statements and footnotes contained in the Company's quarterly report on Form 10-Q for the quarter endedMarch 31, 2015, which will be filed with the SEC no later thanMay 11, 2015. The Company's results for the quarter endedMarch 31, 2015are subject to the completion of such quarterly report.

Conference Call Information

As previously announced, FairPoint will hold a conference call and simultaneous webcast to discuss its first quarter 2015 results today at8:30 a.m. (EDT).

A live broadcast of the earnings conference call will be available online atwww.fairpoint.com/investors. An online replay will be available shortly thereafter.

As an alternative to the webcast, participants can also call(866) 700-6293(US/Canada) or(617) 213-8835(international) and enter passcode 55834875 when prompted. The title of the call is the First Quarter 2015 FairPoint Communications, Inc. Earnings Conference Call.

A telephonic replay will be available for anyone unable to participate in the live call. To access the replay, call(888) 286-8010(US/Canada) or(617) 801-6888(international) and enter the passcode 89593532 when prompted. The recording will be available fromWednesday, May 6, 2015, at12:30 p.m. (EDT)throughWednesday, May 13, 2015, at11:59 p.m. (EDT).

Use of Non-GAAP Financial Measures

This press release includes certain non-GAAP financial measures, including but not limited to Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Unlevered Free Cash Flow minus Estimated Avoided Costs, and the adjustments to the most directly comparable GAAP measure used to determine the non-GAAP measures. Management believes Adjusted EBITDA provides a useful measure of covenant compliance and Unlevered Free Cash Flow may be useful to investors in assessing the Company's ability to generate cash and meet its debt service requirements. The maintenance covenants contained in the Company's credit facility are based on Consolidated EBITDA, which is consistent with the calculation of Adjusted EBITDA included in the attachments to this press release.

For purposes of calculating Adjusted EBITDA (in accordance with the definition of Consolidated EBITDA in our credit agreement), costs, expenses and charges related to the renegotiation of labor contracts including, but not limited to, expenses for third-party vendors and losses related to disruption of operations (including any associated penalties under service level agreements and regulatory performance plans) are permitted to be excluded from the calculation. We believe this includes, among others, the costs paid to third-parties for the contingent workforce and service quality penalties due to the disruption of operations. OnOctober 17, 2014, two of our labor unions in northern New England initiated a work stoppage and returned to work onFebruary 25, 2015. As a result, significant union employee and vehicle and other related expenses related to northern New England were not incurred betweenOctober 17, 2014andFebruary 24, 2015(the "work stoppage period"). Therefore, to assist in the evaluation of the Company's operating performance without the impact of the work stoppage, we estimated the union employee and vehicle and other related expenses using historical data for the work stoppage period by quarter that we believe would have been incurred absent the work stoppage ("Estimated Avoided Costs"). Estimated Avoided Costs is a pro forma estimate only. Actual costs absent the strike may have been different. In the fourth quarter of 2014 and first quarter of 2015, had our incumbent workforce been in place, actual labor costs during the work stoppage period may have been higher than the$33 millionand$27 million, respectively, recorded as Estimated Avoided Costs due to significant winter storm activity that increased our service demands; however, those incremental storm-related costs would have been an allowed add back to Adjusted EBITDA under the credit agreement. Estimated employee expenses avoided during the work stoppage period include salaries and wages, bonus, overtime, capitalized labor, benefits, payroll taxes, travel expenses and other employee related costs based on a trailing 12-month average calculated per striking employee per day during the work stoppage period less any actual expense incurred. Estimated vehicle fuel and maintenance expense savings, which resulted from the contingent workforce utilizing their own vehicles, for the work stoppage period were estimated based on a trailing 12-month average of historical costs less actual expense incurred. "Adjusted EBITDA minus Estimated Avoided Costs" and "Unlevered Free Cash Flow minus Estimated Avoided Costs" may be useful to investors in understanding our operating performance without the impact of the two unions' work stoppage.

The Company believes that the non-GAAP measures may be useful to investors in understanding period-to-period operating performance and in identifying historical and prospective trends that may not otherwise be apparent when relying solely on GAAP financial measures. In addition, the non-GAAP measures are useful for investors because they enable them to view performance in a manner similar to the method used by the Company's management.

However, the non-GAAP financial measures, as used herein, are not necessarily comparable to similarly titled measures of other companies. Furthermore, these non-GAAP measures have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income or loss, operating income, cash flow or other combined income or cash flow data prepared in accordance with GAAP. Because of these limitations, Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow, Unlevered Free Cash Flow minus Estimated Avoided Costs and related ratios should not be considered as measures of discretionary cash available to invest in business growth or reduce indebtedness. The Company compensates for these limitations by relying primarily on its GAAP results and using the non-GAAP measures only supplementally. A reconciliation of Adjusted EBITDA, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Unlevered Free Cash Flow minus Estimated Avoided Costs to net loss or income is contained in the attachments to this press release.

About FairPoint Communications, Inc.

FairPoint Communications, Inc. (Nasdaq: FRP) provides advanced data, voice and video technologies to single and multi-site businesses, public and private institutions, consumers, wireless companies and wholesale re-sellers in 17 states. Leveraging an owned, fiber-core Ethernet network - including more than 16,000 route miles of fiber in northern New England - FairPoint has the network coverage, scalable bandwidth and transport capacity to support enhanced applications, including the next generation of mobile and cloud-based communications, such as small cell wireless backhaul technology, voice over IP, data center colocation services, managed services and disaster recovery. For more information, visitwww.FairPoint.com.

Cautionary Note Regarding Forward-looking Statements

Some statements herein or discussed on our earnings conference call are known as "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements about the Company's plans, objectives, expectations and intentions and other statements contained herein that are not historical facts. When used herein, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates", "should", "could", "will" and similar expressions are generally intended to identify forward-looking statements. 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, including the Company's plans, objectives, expectations and intentions and other factors, including the risk factors discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2014and the factors discussed in our Quarterly Report on Form 10-Q for the period endedMarch 31, 2015. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of the date hereof. Except as required by law, the Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in expectations or otherwise. However, your attention is directed to any further disclosures made on related subjects in the Company's subsequent reports filed with the SEC.

Certain information contained herein or discussed on our earnings conference call may constitute guidance as to projected financial results and the Company's future performance that represent management's estimates as of the date hereof. This guidance, which consists of forward-looking statements, is prepared by the Company's management and is qualified by, and subject to, certain assumptions. Guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither the Company's independent registered public accounting firm nor any other independent expert or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto. Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and are based upon specific assumptions with respect to future business decisions, some of which will change. Management generally states possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent actual results, which could fall outside of the suggested ranges. The principal reason that the Company releases this data is to provide a basis for management to discuss the Company's business outlook with analysts and investors. The Company does not accept any responsibility for any projections or reports published by any such outside analysts or investors. Guidance is necessarily speculative in nature and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, the Company's guidance is only an estimate of what management believes is realizable as of the date hereof. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.

¹Unlevered Free Cash Flow minus Estimated Avoided Costs, Adjusted EBITDA minus Estimated Avoided Costs, Unlevered Free Cash Flow and Adjusted EBITDA are non-GAAP financial measures. Additional information regarding the calculation of these non-GAAP measures and a reconciliation to net income (loss) are contained in the attachments to this press release.

CHARLOTTE, N.C.,May 6, 2015/PRNewswire/ -- FairPoint Communications, Inc