Politically Thinking: FairPoint walks fine financial line
FairPoint Communications’ resort to bankruptcy court to restructure its debts raises important policy issues for state and national legislators and utility regulators. FairPoint, Vermont’s dominant provider of landline communications services, bought Verizon’s landline operations in Maine, New Hampshire and Vermont in early 2008. FairPoint, which had been a small company serving rural markets in southern states, added more than 1 million new customers in the Verizon deal, along with over $2 billion in debt. FairPoint was not able to generate sufficient cash flow to cover its debt payments. It has lost customers in New England, due both to its own service problems and the nationwide switch from landlines to mobile phones. Even if it had not lost customers, the company’s debt load was out of proportion to its assets and income. FairPoint will ask a bankruptcy judge to approve a plan writing down its debt from $2.7 billion to $1 billion and turning over equity ownership of the company to its lenders. Rep. Peter Welch, D-Vt., has noted that the Verizon-Fair Point transaction depended on a tax avoidance device called the “Reverse Morris Trust.” This allows a corporation to spin off a subsidiary that merges into an unrelated corporation tax-free. Verizon spun off its northern New England operations into a new company called “Spinco,” which then merged with FairPoint. Verizon saved $300 million in federal taxes by structuring the transaction in this way. In effect, the U.S. Treasury put up $300 million of the cost of the FairPoint deal, which has now ended up in bankruptcy court. Welch wants Congress to repeal the Reverse Morris Trust provision of tax law.Northern New England utility regulators will need to keep close watch on FairPoint’s operations during its time in bankruptcy protection, and as it emerges from bankruptcy. One of FairPoint’s prime objectives in bankruptcy is to reduce its expenses so it can service its restructured debt. Regulators must determine whether there is a conflict between FairPoint’s need to reduce expenses and the service commitments it made to Maine, New Hampshire and Vermont. Will a restructured FairPoint be able to meet its targets in terms of expanding broadband service, and in terms of responding to the serious service quality issues that have persisted for much of the past year? If FairPoint cannot meet those targets and loses more customers, will it generate enough revenue to cover the interest payments on its new debt?Also, there are some parallels between the Verizon-FairPoint deal and the plans of Entergy Corporation, the owner of Vermont Yankee and five other nuclear power plants, to spin those assets off into a new company called Enexus. Enexus would take on $4.5 billion in debt in order to purchase the nuclear plants from Entergy. As was the case with FairPoint, the Enexus debt is likely to be rated as “junk bonds,” in other words, below investment grade. Vermont’s Department of Public Service, which approved the Verizon-FairPoint deal, has also signed off on the Entergy-Enexus transaction. As part of their review of Vermont Yankee’s continued operation, Vermont’s legislators should insist on an independent financial review of the Entergy-Enexus transaction. Although the Public Service Department has approved the deal in principle, financial consultants not affiliated with the Douglas Administration should examine the assumptions behind the transaction. What level of electric rates at Vermont Yankee will be needed to provide funds to service Entergy’s debt, under various interest rate scenarios, and will there be any money left over to put in to the Vermont Yankee decommissioning fund?Eric L. Davis is professor emeritus of political science at Middlebury College.