Maine Owl

Meanwhile, Maine PUC seeks to grease the skids for FairPoint

The first question you have to ask is: Why? Why would FairPoint Communications want to buy all of northern New England's copper land-line phone systems from the major telecommunications carrier Verizon? FairPoint is a vastly smaller North Carolina concern that serves a nationwide collection of rural phone exchanges and floats above water through profits from the broad-based phone bill charges known as the Universal Service fund. Verizon seems not to think these traditional phone lines are worth their effort any more. So how does it figure that FairPoint will be the DSL Santa Claus in northern New England as they promise--given that the transaction as originally proposed will put them in hock to the tune of $2.7 billion?

It doesn't figure, and red flags are up everywhere. The Maine Office of the Public Advocate and the Maine Public Utilities Commission staff last month caused something of a stir by issuing a report highly skeptical of the deal. But after a mad behind-the-scenes scramble in Maine, the PUC seems by the end of last week to have been assuaged and was poised to approve the deal, after what looks to me like some half-hearted, empty promises from Fairpoint, and debt reduction much less than recommended.

Vermont yesterday appears to have taken a step much closer to the right one: it has for now blocked the deal. (All three of Maine, New Hampshire, and Vermont must approve it in order for it to go through):

Vermont Rejects FairPoint's Purchase of Verizon Lines
By Crayton Harrison

Dec. 21 (Bloomberg) -- Vermont regulators rejected FairPoint Communications Inc.'s plan to buy Verizon Communications Inc.'s New England phone lines, saying the $2.7 billion transaction would load the company with too much debt.

FairPoint fell the most in two years in New York trading after the state's Public Service Board said the carrier would face ``significant financial pressure'' by taking on $2.5 billion in debt to acquire the lines. FairPoint may then slow investments in high-speed Web service to pay down debt, the regulator said.

The decision, which may be reversed if the company addresses the financial concerns and some conditions, may delay FairPoint's expansion and Verizon's efforts to shed land lines and focus on wireless. FairPoint agreed in January to the purchase, which would let it expand to almost 1.6 million lines from about 240,000.

Verizon, the second-largest U.S. phone company after AT&T Inc., will shed about 1.5 million land lines in Maine, New Hampshire and Vermont, focusing instead on building its mobile- phone and television businesses.

The New York-based company plans to spin off the assets. Then Charlotte, North Carolina-based FairPoint, which offers service in parts of 18 states including Ohio and Washington, will acquire the lines through a stock-based merger....

The answer to why this transaction, technically a "merger," is so important right now to these capitalist owners of the basic public telephone system lies in a tax-advantaged construct known as a "reverse Morris trust." That's a big plus for them, but the phone customers and the workers running the system should beware. The Portland Phoenix uncovered some of these facts in an exclusive last month:

Exclusive: No raises for seven years
That’s just one way FairPoint plans to pay for northern New England's Verizon buyout
By JEFF INGLIS - November 14, 2007

If regulators allow FairPoint Communications to buy Verizon’s telephone lines and systems in Maine, New Hampshire, and Vermont, its 3000-plus employees can look forward to seven years without a raise.

Further, FairPoint customers will benefit from no additional spending on telephone or Internet operations for the next seven years. FairPoint has pledged to buy and install new telephone and Internet equipment in all three states, but as of now, the company has no idea how much it will have to spend just to get the existing Verizon equipment working properly--something that must be done before the first upgrade project can even begin. And the company plans to spend the same amount running its systems in the year 2015 as it will in 2008.

Shareholders will be worse off than customers--apparently even more so than they’re expecting. According to filings with the Public Utilities Commission, FairPoint is predicting shareholder equity will decline by $1.1 billion (a figure 25 percent higher than the $900 million drop the company has publicly projected elsewhere).

The company as a whole will also be in bad shape. One possible scenario FairPoint has presented to Maine regulators would leave FairPoint with "essentially no cash left after payment of expenses, interest, taxes and dividends"--leaving it nothing to pay off the $1.5 billion in debt the company will incur in the $2.7 billion Verizon deal, much less the $625 million it currently owes its creditors. (And if that scenario doesn’t happen and there is cash left over, FairPoint has refused to promise regulators it would use the cash to pay off debt.)

If the proposed Verizon-FairPoint telephone merger is approved, the quality--and even the existence--of land-line telephone service throughout northern New England, will depend on FairPoint's ability to make good on several key financial assumptions. But analyses in PUC filings call those assumptions "inappropriate” and assert they “do not reflect reality."

An excellent background piece (pdf) on the motivations underlying Verizon's desire to slough off rural phone lines was published by the Eastern Maine Labor Council/Food AND Medicine in Solidarity News for Summer 2006. Here is a brief excerpt:

Stop Verizon's "Rural Redlining" of Maine, NH, VT
By Steve Early - Solidarity News

For over 100 years, Verizon and its predecessor companies have built and operated a telephone network in northern New England. The construction of this network was financed largely by the rate-payers and its operation was regulated by the states to insure universal service, particularly in rural areas.

Now, Verizon wants to abandon all 1.6 million of its "low-value" landline customers in Vermont, Maine, and New Hampshire. As reported in The Wall Street Journal on May 10, 2006, Verizon is shopping "a package of access lines in three entire states." Its operations in Vermont, Maine, and New Hampshire "could carry a value of some $2 billion to $3 billion."

Directly affected by the sale would be 2,700 members of the International Brotherhood of Electrical Workers (IBEW) and 350 members of the Communications Workers of America (CWA). These Verizon employees work as technicians, clerks, operators, and service reps for business and residential customers. Verizon is abandoning northern New England to invest in broadband elsewhere and expand its stake in wireless. According to The Journal, the impending sale is "part of the New York based phone giant's strategy to delve deeper into wireless and broadband arenas, while getting out of the traditional phone business in U.S. areas that aren’t slated for fiber upgrades--which allow the company to sell more Internet-based services."

Vermont, Maine, and New Hampshire don’t figure into Verizon's plans for new "fiber to the home" technology—so they "are less valuable to the company in the long run." Shedding its landline operations helps Verizon "finance its fiber upgrade as well as pursue buying out Vodafone Group's 45% stake in the two company’s joint venture, Verizon Wireless."

Additional analysis is HERE and HERE:

ILEC Use of Morris Trust: Equity Shareholders Beware
May 31st, 2007 by Gordon Cook

Tom Evslin wrote: The way this plant is removed from the balance sheet is by creating a reverse Morris trust and using it to convey these underperforming assets to a small company before they lose more value and absorb more cash either for upgrade or maintenance. This neatly avoids a writedown of these assets as well. And allows capital be concentrated on fiber.

This is not theory; this is the proposed sale of the Verizon assets in Northern New England to Fairpoint.

Can Fairpoint continue to milk these assets or wring any profit from them at all? ...

What’s Wrong with this Picture? Fairpoint, USF, and Vermont
June 28th, 2007 by Gordon Cook

What's wrong with this picture?

Verizon uses reverse Morris Trust accounting to sell its Northern New England properties to Fairpoint, and reap 1.7 billion in income. While Fiarpoint, a publicly traded corporation pays dividends yielding over 8.5%. It pays more than it earns in dividends and apparently can do this because its companies are rural, impoverished and receive 6 to 7 percent of their total revenues from the Universal Services Fund.

The answer is an awful lot is wrong here. This sale should be blocked on the principle that the traditional phone's and DSL are essential public services and our public agencies should not serve capitalists that want abusively maximized profits through Enron-esque accounting tricks at the expense of the customers who need these services and the workers who make the systems run. Vermont has done the right thing. Maine should reverse course, stop greasing the skids, and follow Vermont's lead.