The Vermont Public Service Board rejected yesterday the Chapter 11 bankruptcy restructuring plan put forth by FairPoint Communications. The board simply did not believe what it considered overly optimistic revenue projections. It also rejected the idea that previously agreed to broadband expansion should be put off another six months, that penalties incurred over service problems should be forgiven and that service quality had returned to a level close enough to what it was when Verizon owned the system.
The PSB’s order stated: ‘After careful consideration of FairPoint's requests, the Board concludes that FairPoint has not demonstrated that the approvals would promote the general good of the state. Specifically, based upon the record before us, we cannot find that FairPoint has demonstrated the financial capability to meet its obligations under Vermont law and its CPG (Certificate of Public Good) as a telecommunications carrier.’
The PSB said in its order that it believes FairPoint could win approval from the board for a restructuring, but would need to come back to the board with a more suitable plan. The PSB did praise FairPoint in making substantial gains in service quality since it bought Verizon’s landline telecommunications business in the three northern New England states in March 2008.
Meanwhile, regulators in Maine approved, in a split vote, the restructuring plan last week (STORY). New Hampshire regulators have yet to rule. All three states would need to approve the plan. Whether FairPoint would need to re-file in all three states, or just in Vermont, is unclear.
FairPoint filed for bankruptcy protection in October 2009 and hoped to emerge from it sometime this fall. The PSB noted that the debt relief the restructuring would provide would make a substantial difference in the company’s finances going forward. But even with that, the plan put forth would not be in the best interest of either Vermont or even FairPoint itself.
Under the plan, the debt would be reduced by $1.7 billion dollars and turn most of the ownership of the company over to debt holders. Delaying deployment of broadband service for another six months would also save money. Ratepayers would also forego $12 million in penalties incurred because of the service problems. The PSB acknowledged all those changes would save the company substantially on the expense side. However, the PSB said that the revenue growth projections were unclear, especially given the increasing competition from other telecommunications providers, including cable and wireless.
What many observers feared about a small North Carolina telephone company buying such a large and eroding service area quickly appeared to have come to fruition. The initial transaction called for Verizon to sell its landline business in Vermont, New Hampshire and Maine to FairPoint for $2.7 billion. Regulators initially rejected the sale in late 2007 and the parties came back with a $2.3 billion offer, which was eventually accepted. Indeed, the current debt has swelled to $2.7 billion.
Along with concerns over the total pricetag for a diminishing industry and the subsequent debt load for such a small company, skeptics questioned whether service quality would suffer. When FairPoint eventually cut over from the Verizon system in February 2009, customers encountered a myriad of problems from unanswered service calls, to errors in billing to loss of email. The PSB noted that FairPoint has made substantial gains in service, but that it is still not to the level that Verizon left it.
This is also something of a blow to the Douglas Administration which supported the restructuring. The Department of Public Service, which represents ratepayers before the PSB, had also offered financial information to justify FairPoint’s position.
The PSB Final Order, Docket 7599, dated June 28,2010, can be found at: http://psb.vermont.gov/sites/psb/files/orders/2010/7599_fiinal.pdf
The ruling reads in part:
‘After careful consideration of FairPoint's requests, the Board concludes that FairPoint has not demonstrated that the approvals would promote the general good of the state. Specifically, based upon the record before us, we cannot find that FairPoint has demonstrated the financial capability to meet its obligations under Vermont law and its CPG as a telecommunications carrier.
‘Under the Reorganization Plan, FairPoint would substantially reduce its debt levels. These reduced debt levels could be expected to materially reduce FairPoint's expenses relative to the levels that the Company faced prior to bankruptcy and represent a major benefit of the Plan. FairPoint has presented financial projections that indicate the Company can meet its obligations under the new debt agreements and substantially improve its financial performance. These projections, however, are based upon the assumption that FairPoint's losses in local revenue due to competition will be less than the Company has experienced recently, that it can increase revenues from broadband services and special access services faster than it has recently, and that operating costs will trend downwards relative to recent experience. FairPoint has not demonstrated that these assumptions are reasonable. If we assume that the recent past is a reasonable indicator of trends in the telecommunications industry, rather than accept projections that assume substantial improvement on that past, FairPoint's projections suggest that the Company may not be able to meet its debt covenants as early as 2011.
‘These analyses raise the same concerns that caused us to reject FairPoint's original petition seeking approval to acquire Verizon's northern New England service territories. At that time, the Board found that FairPoint had not demonstrated that its assumption of 6% access line losses was reasonable; after incorporating a 10% figure, the Board found that FairPoint might fail its covenants, leading to the conclusion that FairPoint had not demonstrated financial soundness. Experience proved that even the alternative, 10%, figure was conservative. We approved a revised transaction only after FairPoint restructured its arrangement in a way that effectively reduced its debt obligations.
‘We have the same concern here. We understand that the risk of financial failure rests most directly upon the new owners of FairPoint (the previous bank debt holders and their successors). However, the possibility of future financial difficulties affect Vermont ratepayers in several ways. First, as part of the Regulatory Settlement, ratepayers are asked to forego a substantial refund that they are owed by FairPoint for the substandard service quality they have received since cutover. Second, a major benefit that FairPoint promised as part of its acquisition and continues to put forward here is the expansion of broadband services in Vermont, both through serving new areas and by increasing bandwidth. If FairPoint faces financial difficulties, its ability to fulfill these commitments may be diminished. Moreover, under the Reorganization Plan, broadband expansion in some presently unserved areas would be delayed by six months (and for some customers, longer). Ratepayers should not be asked to accept these concessions if FairPoint has not demonstrated that it can prosper, that it can provide service quality consistent with its commitments in Docket No. 7270, and that it will not face more financial stress in the next several years.
‘It is, therefore, in the best interest of both ratepayers to ensure that FairPoint emerge from bankruptcy protection on a firm financial footing. We are convinced that it is also in the best interest of FairPoint and its new owners. FairPoint faces competition from a variety of sources including cable and wireless carriers. To compete, FairPoint will need to have the resources to expand broadband availability and bandwidth, roll out new products and bundles, and offer high-quality service. A FairPoint that may be close to defaulting on its debt covenants may be constrained in its ability to meet these obligations.
‘FairPoint has made significant strides towards fixing its systems. Its retail service quality is nearing the point where it would fully comply with the service quality standards that govern it ‘ an accomplishment that Verizon was unable (or unwilling) to achieve. Wholesale service quality still lags well behind pre-cutover performance substantially, but is improving. FairPoint has also deployed its new VantagePoint network, under which it will offer higher broadband speeds. These trends offer the prospect that FairPoint can meet the expectations for quality service we had when we approved its acquisition of Verizon's wireline business.
‘Financial difficulties could imperil these benefits. FairPoint bears the burden of demonstrating either that its assumptions are reasonable or that it will be financially sound over a range of reasonable assumptions. It has not done so. FairPoint has provided virtually no explanation as to why its projections are reasonable. In fact, FairPoint's testimony and exhibits do not even specifically reference the assumptions that it employed in developing its financial models ‘ only the Department's testimony filed just before hearings laid out this information. FairPoint also has not demonstrated why its assumptions, which vary materially from past performance, should be considered reasonable ‘ we have only generalized assertions that the Company expects to reduce operating costs, increase sales of other services, and reduce the declines in local service revenues. For these reasons, we conclude that FairPoint has not demonstrated that approval of the transactions would promote the general good.
‘Although we cannot grant the approvals based upon the evidence before us, we would welcome a new proposal that addresses our concerns. FairPoint could restructure its financial arrangements to reduce its debt obligations such that it can meet its debt covenants over a range of reasonable scenarios. In defining the range of reasonable scenarios, FairPoint must provide justification for its projections. The Board is prepared to consider a renewed request from FairPoint expeditiously.’
Source: Vermont Public Service Board. June 28, 2010