FairPoint Goes Bankrupt, Creating Bigger Uncertainties on Verizon-Frontier Deal

The FairPoint bankruptcy certainly casts a “dark cloud” on the Frontier deal, said Stifel Nicolaus analyst David Kaut. The Democrat-controlled FCC already would have subjected the deal to more-intense scrutiny, but FairPoint’s problems likely will intensify that review, he said. FairPoint’s woes were known before Monday’s announcement, but the word “bankruptcy” carries an extra “toxic” association, he said. A FairPoint bankruptcy could deepen skepticism about the Verizon-Frontier deal, said Brian Washburn, Current Analysis research director-network services. Washburn expects regulators to look at how FairPoint investors would be treated, loss of leverage by state regulators, potential impact on FairPoint’s broadband deployment obligation and other areas of concern, he said. Broadband will remain a high priority despite the bankruptcy filing, a FairPoint spokesman said. The company will continue the deployment and expects no interruption on its broadband obligation, he said.

The previous FCC didn’t “look as closely as they should have” at competitors’ concerns about the FairPoint deal, said Willkie Farr attorney Thomas Jones, who’s representing TW Telecom and three other CLECs that fought the FairPoint deal. “The wheels really fell off very quickly,” he said. Competitors expect the Frontier deal to get tougher regulatory scrutiny, because the new FCC seems to be “operating very differently” than the preceding eight years, showing more interest in competitive concerns raised by acquisitions, he said.

The Frontier regulatory proceedings are moving along, said Verizon CEO Ivan Seidenberg on the company’s earnings call Monday. Three or four jurisdictions are getting closer to decisions, he said. “Frontier has done a very good job at differentiating why this transaction is different than any of the previous transactions. So we're still confident that this will get closed on time,” he said.

FCC Commissioner Michael Copps criticized the scrutiny given the FairPoint deal when the FCC under Chairman Kevin Martin approved it in January 2008. In a dissenting statement, Copps said the order relied “almost entirely on the assertions of the applicants and [made] no endeavor to get under the hood to confirm that these promises are realistic.” The FCC “gave little credence” to concerns raised about the deal, dismissing them as “speculative.” But concerns at least deserved “in-depth analysis,” he said. The FCC didn’t return a request for comment.

Frontier Communications argues that its deal to acquire Verizon lines differs in many respects and won’t end like FairPoint’s. Earlier this month, Senior Vice President Steve Crosby said his company is larger and more experienced with converting acquired systems, and that Frontier expects the deal to improve its debt-to-equity ratio by bringing in Verizon revenue (CD Oct 8 p10). Last week, Frontier CEO Maggie Wilderotter sent a letter to “reassure” Senate Commerce Committee Chairman Jay Rockefeller, D-W.Va. Wilderotter said Frontier is “ready, willing and able to serve all of West Virginia. We want to increase our presence, provide high-quality services and a greater customer experience to all West Virginians.”

Day-to-day FairPoint operations won’t be affected by the bankruptcy, said FairPoint CEO David Hauser. The company also filed motions with the court to provide for employees to continue to receive compensation and benefits as usual and to maintain customer programs. During reorganization, suppliers and contractors should expect to be paid for post-petition purchases of goods and services in the course of business, the company said.

FairPoint’s move was no surprise to state regulators, whose reactions generally were proportionate to the company’s presence in their states. Vermont’s Public Service Board declined to comment on FairPoint’s move into Chapter 11 on grounds that the board is engaged in proceedings involving the company.

New Hampshire’s Public Service Commission planned to respond to FairPoint’s move in tandem with the governor’s and state attorney general’s offices, with the attorney general taking the lead on the matter, a spokeswoman for the commission said.

The Maine Public Utility Commission retained special bankruptcy counsel and will participate in the bankruptcy proceedings to protect Maine ratepayers’ interests, it said Monday. The Commission wants to assure Maine consumers that phone network systems -- including the enhanced 911 system -- will continue to operate and the bankruptcy should not be noticeable to customers,” said commission Chair Sharon Reishus. “Dial tones will not be lost.”

Maine’s special counsel will be working to preserve the commission’s authority over FairPoint rates and service quality, and its enforcement authority over commission orders regarding FairPoint and its purchase of the phone network from Verizon, including the requirement that FairPoint make capital expenditures to upgrade the broadband network, the commission said. “The Commission, in its regulatory capacity, continues to analyze and monitor the company’s customer service and back office systems performance,” the agency said. Commission staff and the bankruptcy counsel were to meet Monday afternoon with FairPoint’s management and the staff and counsel of the New Hampshire and Vermont utilities commissions. “FairPoint was granted the authority to buy Verizon’s phone network and operations in January 2008 because Verizon - despite having more financial resources -- was not serving Maine customers well and was unwilling to invest in the northern New England network, and because FairPoint agreed to invest substantially in infrastructure upgrades and expansion of broadband in Maine and the region,” the commission said.

“Commission members have been assured that the this will not affect service to customers,” said David Roundtree, a spokesman for the Alabama Public Service Commission. “We'll be working to assure that this will be the case.”

The Florida Public Utility Commission is watching the situation, a spokeswoman said. She noted that as of the end of 2008 the company was operating 17 exchanges totaling a bit more than 41,000 lines in the state. FairPoint’s New York holdings number is slightly more than 27,000 lines, a spokesman for the Public Service Commission said, and the agency expects service quality to hold steady. “There has been no increase in complaints about the service,” he said. “We anticipate that the company will continue to provide services and operate its New York holdings without problems.”

“FairPoint has about 3,600 residential and 1,000 business customers in Idaho,” a spokesman for the state utility commission told us. “The Commission will follow the proceedings closely and make sure that the company’s claims that this reorganization will not impact customer service. Because FairPoint (which operates as Fremont Telecom in Idaho) is a regulated telecom, any impact on customer rates would have to addressed through a rate case proceeding with the Commission.”

FairPoint operates two local exchange companies in Washington -- Ellensburg Telephone, serving about 19,000 in and around the Ellensburg and Selah areas, and YCOM, serving about 11,900 customers in and around Yelm, the Washington Utilities And Transportation Commission said. It said “the commission looks forward to meeting with FairPoint representatives about the specifics of the Chapter 11 restructuring plan, federal court review of which will determine the scope of the commissions regulatory jurisdiction over the matter.”