FairPoint Reorganization: Vermont Denies Post-Bankruptcy Plans

Just days after regulators in Maine approved FairPoint Communications bankruptcy reorganization plan, Vermonts Public Service Board has thrown a wrench into the works.

On Monday, the three-member board rejected FairPoints post-insolvency proposal on grounds that FairPoint remains financially unsound.

FairPoint presented us with projections that it maintains show that the company can meet its financial obligations and will improve profitability over time, officials wrote in the June 28 order, which was sent to VON/xchange by an unnamed source before the document was publicly published.

But FairPoint did not support the projections with evidence that showed the reasonableness of its assumptions about future costs and revenues, the members continued in the 96-page filing. This is problematic since in several critical areas (operating expenses, local service revenue, broadband revenue, and access revenue), FairPoint’s assumptions vary substantially from past performance. This variance was not adequately explained, and analysis of FairPoint’s finances, assuming that FairPoint cannot significantly improve its performance in these areas, suggests that FairPoint will face financial difficulties in the future.

The PSB denied FairPoints request even though the service provider has made substantial progress in fixing the billing and customer service problems that came about after the 2008 takeover of Verizon Communications Inc.s landlines and software systems in New England. Indeed, the Vermont board put up the most resistance to the FairPoint-Verizon transaction two years ago, and the latest pushback reflects that.

More work must be done before we can conclude that FairPoint is performing, and will likely continue to perform, at acceptable levels, but the organizational, managerial, and other changes FairPoint has put in place appear to be having a positive effect, the board members wrote on June 28. If FairPoint had demonstrated that it would be financially sound, we would likely have granted the regulatory approvals FairPoint sought on the basis of this progress.

Fortunately for FairPoint, the board is open to a revised proposal and says it will consider any new filings from the company expeditiously. Its unclear whether FairPoint will try again for approvals from Vermont or if it will try to get the federal bankruptcy courts to preempt a state agencys ruling. One industry expert says the latter approach has never been done, raising an interesting and untried question. Michael Smith, FairPoints Vermont president, would only say the company will thoroughly review the boards order and respond once weve evaluated all our options.

Smith said he is disappointed with the PSBs findings, in particular with respect to FairPoints finances.

I would not have come to the same conclusion, Smith said.

The denial comes just a few days after Maines Public Utilities Commission voted 2-1 to approve FairPoints reorganization. That decision included permission to renege on several commitments FairPoint had agreed to when buying the Verizon assets. The conditions pertained to broadband expansion. Indeed, the $2.7 billion deal proved too much for debt-laden FairPoint two years ago transitioning from Verizons back-office and other systems led to billing errors and interrupted services and FairPoint, after months of industry speculation, declared bankruptcy in October 2009.

Vermont is the second state utilities regulator to act on FairPoints reorganization plan. New Hampshire has yet to vote on the matter.

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