FairPoint in flux: bankruptcy possible

Following months of financial setbacks and disastrous customer service problems at FairPoint Communications, the Vermont Public Service Department has asked state regulators to determine if the company is capable of recovering from its present situation and continuing to conduct business in the state. At stake is the company's Certificate of Public Good, their license to conduct business as a regulated utility in the state.

In a July 14 press release, the Vermont Public Service Department announced that it had filed a “Show Cause” Petition with the Public Service Board, requesting an investigation into the current status of FairPoint. The document explained that the department had taken action after assessing the Stabilization Plan Status Report released by FairPoint on July 8. The status report was supposed to summarize the steps taken by the company to correct its course and provide a plan for recovery. According to the public service department, the report did neither.

“FairPoint released a report that was overly optimistic and incomplete,” wrote Steven Wark, spokesperson for the public service department. “The report failed to provide a detailed plan on how it will get on track. We are therefore compelled to seek other avenues to get the answers we need.” According to Wark, the “Show Cause” petition had been under consideration for some time, and it had been a topic of daily discussion with staff.

FairPoint's eight-page status report was released to show the results of a stabilization plan created by the company on March 31. As stated in the report, the purpose of the plan was to identify areas that needed improvement and develop an action plan to return service to pre-cutover quality before the end of the second quarter of 2009. The report focused on five different categories: call centers, order flow, billing, order backlog, and customer escalations. Although not every aspect had been restored to normalized levels, FairPoint cited significant improvements across the board, including a known error rate of below 1 percent for retail billing, decreased wait time at call centers, and a substantial improvement in late pending orders.

However, an assessment of the status report compiled by the Liberty Consulting Group took issue with a number of conclusions made by FairPoint. The assessment said that the company's call centers had been suffering from service related problems as recently as June, and questioned whether stability had actually been established. The assessment also said that the report appeared to have overstated flow-through rates, and failed to mention that bill adjustments were more than twice what the company had been aiming for. In addition, the assessment said that some of the data in the report was inconsistent with data from daily reports from FairPoint, and consequently, the accuracy of the data could not be completely verified.

FairPoint spokesperson Beth Fastiggi said that she didn't know why there were inconsistencies in the status report or why the state had found it to be insufficient. Fastiggi said that the report was not written to be a complete summary, just an overview of the ongoing process. She also added that FairPoint considered the “Show Cause” petition to be unnecessary, and would continue to update the state through daily updates and monthly workshops.

News of the state's decision to investigate the viability of FairPoint arrives at moment when the company's financial future is uncertain. In late June, FairPoint announced through a press release that it would be unable to pay back the $530 million in debt owed to its investors before an October 1 deadline. In the press release, the company cited shrinking revenue and low cash collections as ongoing problems, and requested that investors allow to company to delay interest payments on notes higher that 13 percent until the company was better footing.

FairPoint did not state what would happen if their private debt exchange offer was not accepted by investors, but in a report with SEC they said that that the company would be forced to consider alternative options – including bankruptcy.

This was the first time that FairPoint had acknowledged bankruptcy as a possibility. In its press release, it explained that it was necessary to restructure no less than 95 percent of that debt, and stated that the debt exchange offer was “critical to its continued viability.” The offer was set to expire on July 22, but the expiration date was recently extended to the 24. According to FairPoint, 82 percent of outstanding debt had been tendering through the offer as of July17.

On July 15, FairPoint CEO David Hauser announced that Vicky Weatherwax had been appointed to vice president of business solutions and will report directly to Hauser on the company's attempts to address its systems problems. Hauser also announced that Executive Vice President Jeff Allen will now be overseeing all Northern New England operations. Allen previously led the company's systems stabilization plan.

"I want to be clear that it is our preference for FairPoint to restructure our debt outside of bankruptcy," wrote FairPoint spokesperson Beth Fastiggi in an e-mail to VBM. Fastiggi declined to speculate on how bankruptcy might affect service and broadband expansion in Vermont, saying only that the company would keep on operating as best as it could.

Fastiggi said that FairPoint was continuing to move towards improving service. She said that FairPoint had expanded broadband availability in Vermont from 66 percent to 76 percent in 2009 and that the company is planning to provide 100 percent broadband coverage to customers in half of its Vermont telephone exchanges by 2010. She also added that the company will be investing $90 million in a next-gen network over the next five years. When asked how those initiatives might be affected by bankruptcy, Fastiggi again declined to comment.

"We don't know, frankly, if it's going to be bankruptcy or not," said Stephen Wark, of the Vermont Department of Public Service. Wark cautioned that it was still too early to predict the financial fate of FairPoint, and that he couldn't say what a FairPoint bankruptcy might mean for the state.

Still, the state of Vermont has already begun to take preemptive action. In late July, the Department of Public Service hired Paul Frank and Collins, a Burlington-based law firm with a background in corporate bankruptcy cases, to help guide the state through the current situation. According to Wark, the Department had been closely observing FairPoint for months and the hiring of legal advisors had been under consideration for a long time. Wark said that hiring the law firm was a precautionary measure and that it was necessary for the Department to understand all of the different options that FairPoint has available for restructuring its debt.

Wark admitted that some of the initial reservations held by Public Service Board members about FairPoint's ability to handle debt had been validated. Still, he also cited the national economy as a contributing factor.

"Nobody could have foreseen the market upheaval that has happened," he said.

Wark said that that there was a very strong possibility that FairPoint would emerge better than ever from a bankruptcy proceeding, agreeing with similar statements made by Public Service Commissioner David O'Brien. Wark stated that a number of recent improvements at FairPoint were all good signs that the company could make a full recovery. When asked to provide specifics, Wark said that the number of customer service complaints and outages had not gotten any worse.

"That's still not acceptable," he added. "Don't get me wrong."

For the moment, FairPoint's future remains still uncertain. When asked what would happen if FairPoint was judged to be incapable of continued service, Wark responded that he couldn't say.

“We will not engage in that type of speculation,” he wrote. “But it is fair to say that no changes will be allowed until such a time that a clear plan for restoration exists – regardless of the carrier.”