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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.”

The publicly traded North Carolina-based telecommunications company, which runs small local phone companies in 18 states (including Maine), has gone to great lengths to assure the public, politicians, regulatory officials, and industry analysts that the deal’s finances will work out. Its chief operating officer, Peter Dixon, told Mainers back in June that the money coming into FairPoint from former Verizon customers’ monthly service fees will be more than enough to pay for FairPoint’s increased expenses, including repaying outstanding loans. But the company’s internal financial projections, summarized in PUC records, say money will be so tight that success depends on, among other specious ideas, the price of gasoline remaining constant for the next seven years. (Another of those specious ideas is that the unions, whose contracts expire in late 2008, will accept zero-percent raises for the next seven years.)

That’s all beyond the fact that FairPoint almost certainly knows (and Verizon definitely does) that the sale price itself is far too high — nearly two-thirds higher than the amount at which Verizon values the assets that are being sold.

FairPoint executives’ financial plans for life after the merger include the assertion that the company will pay down $318 million in debt over the next seven years, though they don’t say how, and have not promised — or disclosed to regulators any possible plans — to do so. Even worse, the company is basing its financial predictions on interest rates being lower than they are today. Even if they are, PUC filings say FairPoint will have to refinance as much as $1.5 billion in debt to extend its repayment period, in order to continue to afford debt payments.

The FairPoint/Verizon deal has come under withering fire in all three states, with Maine’s Office of the Public Advocate recommending 24 conditions be imposed if our Public Utilities Commission approves the sale — including dropping the price by $600 million. Vermont’s Department of Public Service has recommended that state’s Public Service Board impose as many as 56 conditions before the sale is approved, such as requiring state approval before FairPoint can transfer any Vermont revenue to company operations outside the state. The New Hampshire Office of Consumer Advocate has not specifically recommended conditions, but has testified before its state’s Public Utilities Commission that there are major problems with the proposed deal.

FairPoint has countered those criticisms, claiming it will be a financially viable company, and pledging to expand high-speed Internet access in all three states (see“Internet Disconnect,” by Jeff Inglis, August 24).

But its own plans, as described in PUC filings, indicate that its finances will, in fact, be tremendously shaky, and that any expansion of service will have to cost the company nothing beyond the initial investment to install equipment. Another big problem, the documents at the PUC say, is that the broadband service FairPoint is promising as a great boon — to regulators, shareholders, and the public — actually “loses more and more money as time goes on.”

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