Two major safety valves in the financial house of cards that is New England's largest landline telecommunications service provider blew last week, leaving FairPoint Communications in a position of significant weakness, even as the company admits that its financial picture will worsen in the short term.
The North Carolina-based company, which bought Verizon's northern New England operations last year, had always made questionable assumptions when arguing it had the financial wherewithal to do the deal. (See "No Raises For Seven Years," November 16, 2007, and "No Raises — It Gets Better," November 20, 2007, both by Jeff Inglis.)
Regulators at the Maine Public Utilities Commission and its counterparts in New Hampshire and Vermont were so concerned that when they approved the $2.3 billion deal, they specified several limitations intended to preserve FairPoint's long-term financial stability.
But recent documents filed by FairPoint with state and federal regulators show that "stable" isn't exactly the right word for its current status.
The company has asked regulators in Maine, New Hampshire, and Vermont for permission to miss a March 31 $11.25 million quarterly payment to creditors, saying that while the states' public-utilities commissions had required the payment as a condition of the Verizon purchase, FairPoint's actual lenders don't require any money until the end of June.
"FairPoint is essentially reneging on the agreement," says Wayne Jortner, senior counsel in Maine's Office of the Maine Public Advocate, a state agency charged with defending customers' interests in utilities regulation.
The company is promising to make up the payment by the end of the year, to meet its state-mandated obligation of paying $45 million annually to reduce the heavily leveraged company's debt load. And Jeff Nevins, FairPoint's Maine spokesman, says the request will allow "more financial flexibility." But that flexibility may not help it keep that promise, based on the company's March 4 filing with federal securities regulators.
In that document, the company announced that it is suspending dividend payments entirely, and offered no date on which they may resume. This is alarming for two reasons. First, FairPoint is a holding company designed and intended to pay shareholders the kind of significant dividends earned from operating telecommunications companies (in previous quarters, it has paid as much as 36 percent). The company lost $68.5 million last year — down more than $100 million from a $32.8 million profit in 2007 — but had nevertheless been projecting paying out $93 million in dividends in 2009. The Maine PUC, through spokesman Fred Bever, calls the move "consistent with the commission's order" because it protects "customers against financial issues FairPoint might encounter." It nevertheless is a shift in the company's business model, though Nevins is quick to note that the company intends to continue "returning cash to shareholders over the long term."
But perhaps more important, ordering a reduction or elimination in dividends was one of the tools state regulators had in reserve to force FairPoint to strengthen its financial position if the regulators believed the company was in trouble. Now that tool is no longer available — and therefore, the means by which state officials could try to protect telephone customers is weakened.
"Our biggest concern is that this is not the start of something bigger," Jortner says. "We really need to get some reassurances." He expects to get that data and have formed an opinion based on it by March 13, and the Maine PUC may hold a hearing on March 16.
The picture gets worse. FairPoint is losing customers at a steeper-than-expected rate, which is, in turn, reducing its income. At the same time, FairPoint has warned federal regulators that its troubled transition to a new billing system — which meant delays in sending out bills, leading to receiving payments later than projected — could mean further cash shortages, even taking into account the suspended dividend.
And that's actually a best-case scenario. While Nevins says the billing system is now working properly, dozens of other systems still need to be transitioned. And buried in pages of boilerplate warnings about the future (such as the non-startling "the price of our common stock may fluctuate substantially"), the March 4 filing warns that "Due to, among other things, the size and complexity of our Northern New England operations, . . . we may be unable to integrate the (former Verizon) business in an efficient, timely and effective manner."
Even if they get it working, there will be far fewer customers to serve than FairPoint was hoping for. While numbers are not yet in for the first quarter of 2009, which includes the first months that FairPoint was actually running the show, 97,000 Maine residential customers have dropped their landlines since January 2007, when the sale was announced. Residential subscriber numbers dropped 7.3 percent in 2007, but as the sale approached, the decline accelerated, with an additional 10.5 percent of residential customers dropping service in 2008.
Many of them have gone to cellular phones or telephone service provided over the Internet, often via phone-Internet-TV packages sold by cable television companies. And FairPoint has recently re-emphasized its longstanding position that the key 21st-century telecom technology, fiber optics, is not in its plan — the company told the Wall Street Journal that a private plan for several Vermont communities to build their own fiber network "isn't necessary." Rather, FairPoint plans to bring them much-slower DSL service — eventually.
Other related stories:
“Will FairPoint Run Out of Money?” September 19, 2008
“We Told You So,” July 4, 2008
“A Bad Idea Triumphs,” February 29, 2008
“No Raises — It Gets Better,” November 20, 2007
“No Raises For Seven Years,” November 16, 2007
“Internet Disconnect,” August 24, 2007