STATE OF MAINE PUBLIC UTILITIES COMMISSION

Transcription

1 STATE OF MAINE PUBLIC UTILITIES COMMISSION NORTHERN NEW ENGLAND TELEPHONE OPERATIONS LLC AND ITS FAIRPOINT MAINE AFFILIATES; FAIRPOINT COMMUNICATIONS, INC.; AND CONSOLIDATED COMMUNICATIONS HOLDINGS, INC., Request for Approval of Reorganization and Credit Facilities Pertaining to the Merger of FairPoint Communications, Inc. and Consolidated Communications Holdings, Inc. (-A M.R.S. 0, 0, 0, and 0) Docket DIRECT TESTIMONY OF MICHAEL C. REED January, 0

2 TABLE OF CONTENTS Page I. INTRODUCTION... II. DESCRIPTION OF THE TRANSACTION... III. INFORMATION ABOUT FAIRPOINT... IV. APPROVAL OF THE TRANSACTION... A. The Reorganization Results in No Net Harm to Customers.... B. The Consolidated Term Loan Facility Was Entered Into in Good Faith and the Pledge of FairPoint Maine s Assets Meets the No Net Harm Standard....

3 MPUC Docket No Page of I. INTRODUCTION Q: Please state your name, occupation, and place of business. A: My name is Michael C. Reed. My business address is Davis Farm Road, Portland, Maine 00. Since 00, I have been employed by FairPoint Communications, Inc. ( FairPoint ) as the State President in Maine. 0 Q: Please describe your other relevant background and experience. A: I have been employed in the telecommunications industry for more than 0 years. Prior to joining FairPoint as the Maine State President, I worked for TDS Telecom for years as Manager of State Government Affairs in the Government and Regulatory Affairs Department. I had responsibility for all of TDS s regulatory and legislative affairs in the States of Maine, New Hampshire, Vermont, New York and Pennsylvania. For years before that, I held various positions with NYNEX Corporation including regulatory affairs, switching and outside plant operations, service quality oversight and maintenance. Q: Have you previously testified before the Maine Public Utilities Commission (the Commission )? A: Yes. I have testified before the Commission at various times throughout my career. Among other proceedings, I have testified recently in Docket Nos , 0-00, and Q: What is the purpose of your testimony? A: My testimony supports the Joint Petition filed on December, 0, by

4 MPUC Docket No Page of Consolidated Communications Holdings, Inc. ( Consolidated ), FairPoint and its Maine incumbent local exchange carriers ( ILECs ) that are seeking Commission authorization to complete Consolidated s stock acquisition of FairPoint. In particular, I provide background information about the Provider of Last Resort ( POLR ) operations of FairPoint Maine and explain how the proposed transaction satisfies all of the applicable statutory standards for approval by the Commission. 0 Q: Please summarize FairPoint s position in this proceeding. A: The acquisition of FairPoint s stock by Consolidated will give FairPoint a new corporate owner, with improved financial and strategic flexibility and with greater operational capacity and scale, while leaving in place and unchanged all of FairPoint Maine s existing operating authority, accounting and billing systems, contracts and agreements, and wholesale arrangements. The transaction will be seamless to FairPoint Maine s POLR and wholesale customers. Importantly, no system cutover is required when Consolidated takes over ownership of FairPoint Maine. II. DESCRIPTION OF THE TRANSACTION Q: Please briefly describe the transaction involved in this proceeding. A: Consolidated and FairPoint are both publicly traded companies. Under an Agreement and Plan of Merger ( Agreement ) dated December, 0, FairPoint s Maine operating subsidiaries that are co-petitioners in this proceeding are: Northern New England Telephone Operations, LLC ( NNETO ), China Telephone Company, Community Service Telephone Company, Maine Telephone Company, Northland Telephone Company of Maine, Inc., Sidney Telephone Company, and Standish Telephone Company, d/b/a FairPoint Communications. In my testimony I will refer to FairPoint Communications, Inc. as FairPoint and I will reference its Maine operating subsidiaries individually by their corporate name or collectively as FairPoint Maine.

5 MPUC Docket No Page of 0 Consolidated will acquire 00% of the equity in FairPoint in exchange for Consolidated stock valued at approximately $. billion. Consolidated will contribute all of FairPoint s equity interests to a directly, wholly owned Consolidated subsidiary, Consolidated Communications, Inc. ( CCI ). CCI has formed its own subsidiary, Falcon Merger Sub, Inc. ( Falcon ), solely for the purpose of this transaction. At the closing, Falcon will merge with and into FairPoint, whereupon Falcon will cease to exist and FairPoint, as the surviving entity, will become a wholly owned subsidiary of CCI. FairPoint will continue to exist and will continue to be the direct owner of its existing subsidiaries, including FairPoint Maine. Consolidated, as the ultimate upstream parent corporation, will be the indirect owner of FairPoint and its subsidiaries. The combined company will retain the Consolidated Communications name. A diagram of the transaction is included in the Joint Petition filed in this proceeding on December, 0. 0 Q: What does the transaction mean in practical terms for stakeholders of FairPoint s operations in Maine? A: The transaction will be seamless to FairPoint Maine s POLR and wholesale service customers, including competitive local exchange carriers ( CLECs ) that are parties with FairPoint Maine to interconnection agreements and Rural Local Exchange Carriers ( RLECs ) with whom FairPoint Maine has longstanding network arrangements. The transaction will also leave undisturbed all pole agreements to which FairPoint Maine, utility companies and other entities are parties. The transaction does not require the certification of any new providers of

6 MPUC Docket No Page of 0 communications services in Maine. The existing FairPoint Maine operating entities will continue to provide POLR and wholesale services under their existing authority and will continue to be a party to all existing contracts and agreements, including its collective bargaining agreements with union employees. The transaction does not require any change in the rates, terms or conditions of POLR or wholesale services. The transaction also does not require any system cutovers, so customers and carriers will experience no change and no disruption in their FairPoint Maine accounts as a result of the transaction. In practical terms, the transaction will create a combined company with greater scale and strategic flexibility than FairPoint has as a standalone company, without requiring any changes in FairPoint Maine s existing operations. FairPoint will have a new corporate owner with an overall stronger financial position and will eventually have its services rebranded under the Consolidated Communications name. 0 Q: Does the proposed transaction differ from FairPoint s 00 acquisition of Verizon s landline business in Maine? A: Yes, the present transaction differs markedly from the Verizon acquisition both structurally and financially. When FairPoint acquired the landline assets of Verizon New England, which the Commission approved in 00 in Docket No. 00-, FairPoint did not acquire Verizon s back-office systems that supported the network, daily operations, customer service and billing. Instead, Verizon agreed to continue providing those back-office functions on a transitional basis after the closing until FairPoint could develop a completely new back-office system and then cutover

7 MPUC Docket No Page of from the legacy Verizon systems to the newly developed FairPoint systems. In the transaction presently before the Commission, there are no transitional services and there will be no cutover required by the transaction. Again, the transaction will be seamless to all stakeholders of FairPoint Maine s operations in Maine. Unlike in 00, no new Maine operating authorizations or approvals of customer transfers are required from the Commission to complete the present transaction. 0 Another important distinction is that the 00 acquisition was structured as an asset purchase that required significant borrowing by FairPoint to meet the purchase price for the Verizon assets. The transaction occurred just as the U.S. credit markets were beginning to show the effects of the global economic downturn. The final piece of FairPoint s 00 transaction financing for the Verizon acquisition was closed at very high interest rates that ultimately proved unsustainable, and FairPoint entered bankruptcy protection in 00. By contrast, the present acquisition is an all-stock transaction that requires no transfer of assets. Consolidated is assuming FairPoint s existing debt and has announced that it has already secured the requisite financing so that no part of the debt will be subject to late-breaking changes in market conditions. The new financing is at a lower interest rate than FairPoint s existing debt and extends maturity from 0 to 0. 0 Q: Does the proposed transaction meet the challenges of the changing telecommunications industry? A: Yes. The industry has experienced significant changes in technology, regulation and competition since the Verizon merger. Wireline companies like FairPoint Maine

8 MPUC Docket No Page of 0 have experienced significant loss of access lines as competing technologies, from wireless to cable telephony to over-the-top Voice over Internet Protocol providers, have claimed an increasing share of the voice communications market. On the federal side, the Federal Communications Commission ( FCC ) has adopted comprehensive reforms of both interstate access and federal universal service, with resulting pressures on the revenues of landline carriers. At the same time, customers require ever-increasing broadband data speeds to meet the needs of an evolving communications marketplace. FairPoint has so far kept pace with these industry changes by making significant investments in its broadband infrastructure and by adding new services, such as its data center services, to diversify its business offerings. Consolidated s acquisition of FairPoint will create a combined company with sufficient scale and diversification to meet these challenges while remaining close enough to its local communities to respond to the needs of its customers. III. INFORMATION ABOUT FAIRPOINT 0 Q: Please identify the regulated Maine operating entities of FairPoint that are affected by this transaction. A: The seven FairPoint Maine companies are described briefly below: NNETO, an ILEC with its principal place of business at Davis Farm Road, Portland, Maine serving,00 POLR lines as of December, 0 in numerous towns and cities throughout the State; In addition to the seven ILECs listed, the following FairPoint operating subsidiaries also provide service in Maine: Enhanced Communications of Northern New England, Inc. (providing intrastate telecommunications services and Internet services in Maine and interstate communications services under authority granted by the FCC); and UI Long Distance, Inc. (providing intrastate telecommunications services in Maine and interstate communications services under authority granted by the FCC).

9 MPUC Docket No Page of 0 0 China Telephone Company, an ILEC and POLR provider with its principal place of business at Route, South China, Maine serving POLR lines as of December, 0 in the towns of China, South China, and East Vassalboro; Maine Telephone Company, an ILEC and POLR provider with its principal place of business at One Ossipee Trail East, P.O. Box, Standish, Maine serving 0 POLR lines as of December, 0 in the towns of Casco, Naples, Poland, and Raymond; Northland Telephone Company of Maine, Inc., an ILEC and POLR provider with its principal place of business at Route, South China, Maine serving,0 POLR lines as of December, 0 in the towns of Brooks, Eagle Lake, Fort Kent, Freedom, Fryeburg, Island Falls, Kingman, Lee, Liberty, Lovell, Mattawamkeag, Morrill, North Fryeburg, North Lovell, Palermo, Sherman Mills, Smyrna Mills, Stockton Springs, St. Francis, and Washington; Sidney Telephone Company, an ILEC and POLR provider with its principal place of business at Route, South China, Maine serving POLR lines as of December, 0 in the town of Sidney; Standish Telephone Company, an ILEC and POLR provider with its principal place of business at Ossipee Trail East, Standish, Maine serving POLR lines as of December, 0 in the towns of Limington, Sebago, Standish, and Steep Falls; and Community Service Telephone Company, an ILEC and POLR provider with its principal place of business at Main Street, Winthrop, Maine serving POLR lines as of December, 0 in the towns of Green, Leeds, Litchfield, Monmouth, Mt. Vernon, Winthrop, and East Winthrop. NNETO serves Acton Locality, Ashland, Augusta, Bar Harbor, Bath, Belfast, Belgrade, Berwick Locality, Bingham, Blue Hill, Boothbay Harbor, Bowdoinham, Bradford, Bridgton, Brownville, Brunswick, Bucksport, Calais, Camden, Caribou, Castine, Clinton, Columbia, Corinth, Cornish, Cumberland, Danforth, Dark Harbor, Deer Isle, Dexter, Dixfield, Dover-Foxcroft, East Millinocket, Easton, Eastport, Eddington, Eliot Locality, Ellsworth, Fairfield, Farmington, Fort Fairfield, Franklin, Freeport, Frenchville, Gardiner, Goodwin s Mills, Gorham, Grand Isle, Greenville, Guilford, Harpswell, Harrison, Hermon, Houlton, Jackman, Jonesport, Kennebunk, Kennebunkport, Kittery Locality, Lebanon, Limerick, Limestone, Lincoln, Lisbon Falls, Livermore Falls, Lubec, Machias, Madawaska, Madison, Mars Hill, Mechanic Falls, Milbridge, Millinocket, Milo, Monroe, Monson, New Sweden, Newport, North Berwick, Northeast Harbor, North Whitefield, Norway, Oakland, Old Orchard Beach, Old Town, Orono, Orrington, Oxford, Pembroke, Pittsfield, Pownal, Presque Isle, Princeton, Rangeley, Readfield, Richmond, Rockland, Rockwood, Rumford, Sabattus, Scarborough, Searsport, Sedgwick, Skowhegan, South Berwick, South Lebanon Locality, Southwest Harbor, Sullivan, Tenants Harbor, The Forks, Thomaston, Van Buren, Vanceboro, Vinalhaven, Waldoboro, Washburn, Waterville, Wells, West Lebanon Locality, Westbrook, Wilsons Mills Locality, Wilton, Windham, Winter Harbor, Winterport, Wiscasset, Woodland, Wytopitlock, Yarmouth, and York.

10 MPUC Docket No Page of Under the Agreement and Plan of Merger, each of these operating entities will pledge its assets as security for Consolidated s debt refinancing. However, the transaction will not require any change in the existing operating certifications for these companies. 0 Q: What is the current regulatory status of FairPoint s Maine ILECs? A: Since FairPoint acquired the landline assets of Verizon-Maine in 00, Maine s communications marketplace has undergone significant transformation. Among other things, consumers have benefitted from changes in technology and additional competitors in the marketplace. In response to the competitive environment, and with the assistance of this Commission through its policy guidance, the Legislature significantly deregulated the telephone industry in 0 through Public Law 0, Chapter. In that deregulation legislation, the Legislature removed nearly all regulation of telephone service except for a new backstop service called POLR. The Legislature determined that it was necessary to make available to any residential or business consumer an affordable, basic level of service, regardless of location or the cost of providing service. In -A M.R.S. () the Legislature required this POLR service to be provided by the FairPoint Maine ILECs and other Maine ILECs throughout the State in each of their respective service territories. 0 Intense competition in the Maine telecommunications market has focused on the high-margin services in the lower-cost areas of the FairPoint Maine ILEC service territories. As a result, NNETO has faced continued obligations to provide low-

11 MPUC Docket No Page of margin POLR service in high-cost rural areas of the State without any support from the Maine Universal Service Fund ( MUSF ). 0 Q: Has the Legislature made any significant modifications to FairPoint Maine s POLR service obligations that are pertinent to this proceeding? A: Yes. In legislation that was enacted in 0 and 0, the Legislature revised Chapter of Title -A in three ways that are significant to this proceeding: () FairPoint Maine s POLR service obligations are shrinking; () FairPoint Maine s POLR service is governed by new service quality metrics and benchmarks; and () FairPoint Maine s POLR service rates are subject to caps and are no longer within the Commission s rate setting jurisdiction. 0 Q: Please explain how the legislation enacted in 0 and 0 affects the scope of FairPoint Maine s POLR service obligation and why that is important to this proceeding. A: The Legislature s revisions to -A M.R.S. created a new framework by which NNETO and other POLR service providers may be relieved of their POLR service obligations. The legislation immediately relieved NNETO of its POLR service obligation in the seven largest municipalities in its ILEC service territory. In addition, Section provides that if NNETO can continue to meet Legislativelydetermined service quality metrics and benchmarks defined in Section -A, then NNETO can obtain relief from its POLR service obligations in additional specific municipalities over the -month period following the effective date of the legislation. In addition to the initial municipalities, NNETO can seek relief from its POLR service obligation in additional municipalities, provided the Commission

12 MPUC Docket No Page 0 of determines that those municipalities have sufficient competition and NNETO has continued to meet the service quality benchmarks. I believe it is important to recognize in this proceeding that over the past seven years Maine s telecommunications policies enacted by the Legislature have shifted dramatically away from comprehensive government regulation in favor of price and service quality discipline imposed by the competitive marketplace. I expect this trend to continue after the instant transaction has closed. 0 Q: Please explain how the legislation affects the service quality metrics and benchmarks governing FairPoint Maine s POLR service quality and why that is important to this proceeding. A: The POLR service quality metrics and benchmarks in Section -A were adopted by the Legislature in 0. The Legislature s benchmarks, which reasonably reflect the level of service that customers want and expect from their landline telephone service provider, replaced metrics and benchmarks that were adopted by the Commission in 0 and contained in its Chapter 0 Rules. FairPoint Maine has been meeting the Section -A POLR service quality benchmarks since they became effective during 0, and I expect that those benchmarks will continue to be met going forward. 0 Q: Please explain how the 0 legislation affects POLR service rates and why that is important to this proceeding. A: The 0 legislation enacted Section -A, which governs the rates of POLR service providers. Section -A caps monthly residential POLR service rates as of July, 0 at $0. In addition, beginning one year after Section -A became

13 MPUC Docket No Page of effective, POLR service rates can be increased by no more than % per year. Finally, Section -A removes POLR service from the Commission s rate setting authority contained in Sections 0 and 0. 0 Section -A is significant to this proceeding because pricing is a term of retail service that has historically been regulated by the Commission and has been an important factor when considering a reorganization approval. Here, the only remaining retail service over which the Commission has jurisdiction is POLR service, and the Legislature has imposed price caps on POLR service and removed POLR service from the Commission s rate setting jurisdiction. Thus, when evaluating the regulatory approvals requested in this proceeding, the Commission can be assured that POLR service rates will be governed by Section -A and not be affected by this transaction. Q: Have the FairPoint Maine companies accepted Connect America Fund Phase II ( CAF II ) Funding to aid in the continued expansion of broadband in the State? A: Yes. FairPoint Maine has accepted approximately $. million in annual CAF II funding to further expand and maintain 0/ Mbps broadband service to,00 locations in, Maine census blocks by the end of Q: Is FairPoint Maine a party to any other significant regulatory proceeding at the Commission? A: Yes. NNETO is a party to the Commission s Docket No. 0-00, which is an investigation opened by the Commission to consider POLR service quality for the third quarter of 0 through the second quarter of 0. That proceeding involves

14 MPUC Docket No Page of NNETO s performance under the service quality metrics referenced earlier in my testimony that were adopted by the Commission in 0 and included in its Chapter 0 Rules. The Hearing Examiner has established a schedule for that proceeding and NNETO filed its direct testimony on December 0, 0 pursuant to that schedule. After the closing, NNETO will be an operating company of Consolidated. If Docket No has not been resolved prior to closing of this transaction, it is my understanding that Docket No will continue under Consolidated s ownership of NNETO. 0 IV. APPROVAL OF THE TRANSACTION Q: What statutory standards will the Commission apply in this case? A: The transaction will require approvals under three sets of statutes. First, the transaction involves a reorganization of the FairPoint Maine companies, and therefore requires approval by the Commission pursuant to -A M.R.S. 0. The Commission must find that the transaction is consistent with the interests of FairPoint Maine s POLR and wholesale customers and FairPoint s investors. The Commission applies a no net harm standard and reviews the transaction to determine whether the benefits of the merger are at least equal to any risks. 0 Second, the Consolidated Credit Facility will require approval by the Commission pursuant to -A M.R.S. 0 and 0. A Maine public utility s issuances of notes or other evidence of debts, when necessary for the acquisition of property,

15 MPUC Docket No Page of refinancing and other limited purposes authorized by Section 0 are subject to Commission review and approval under Section 0. Section 0 prohibits a utility from making such an issuance until the Commission has authorized the issuance and its amount after concluding that the proceeds of the issuance are required in good faith. 0 Finally, Consolidated will use the proceeds of its new financing commitment to refinance the debt of FairPoint, including FairPoint Maine, and has pledged the assets of FairPoint Maine (and FairPoint and its other subsidiaries) as security. The encumbrance of FairPoint Maine s property that is necessary or useful in providing POLR service must be approved by the Commission pursuant to -A M.R.S. 0. In doing so, the Commission applies a no net harm standard similar to that which applies to Section 0 discussed above. A. The Reorganization Results in No Net Harm to Customers. 0 Q: Please explain how the reorganization contemplated by the transaction results in no net harm to FairPoint Maine s POLR and wholesale customers. A: The proposed transaction involves an indirect change in control of FairPoint Maine through the merger of their parent company, FairPoint, into Consolidated. Approval under Section 0 requires the Commission to find that the transaction is consistent with the interests of FairPoint Maine s POLR and wholesale customers under a no net harm standard. The Commission can readily make these findings in this case. FairPoint s and Consolidated s resources and capabilities complement one another. The proposed transaction, when approved, will create a combined company with

16 MPUC Docket No Page of greater scale and strategic flexibility than FairPoint has as a standalone company, without requiring any changes in FairPoint Maine s existing certifications, systems, and agreements, or in the rates, terms and conditions of FairPoint Maine s POLR and wholesale services. The transaction will be seamless to FairPoint Maine s POLR and wholesale customers and will not require any cutover of the back-office systems that support FairPoint Maine s network, daily operations, customer service and billing. 0 Although it has been challenging for FairPoint Maine to continue meeting its POLR service obligations in the high-cost areas of Maine in the absence of MUSF support, the transaction will create a stronger combined company under the Consolidated brand that will strengthen the ability of NNETO and the other FairPoint Maine ILECs to continue meeting their POLR service obligations. Finally, all of FairPoint Maine s existing agreements will remain in place, including but not limited to, interconnection agreements, labor agreements, and wholesale and retail service agreements. All of the counterparties to those agreements will essentially be in the same position post-closing as they are in today. The transaction is also consistent with the interests of FairPoint s shareholders because they will become owners of the financially stronger combined entity. 0 B. The Consolidated Term Loan Facility Was Entered Into in Good Faith and the Pledge of FairPoint Maine s Assets Meets the No Net Harm Standard. Q: Please explain how the Consolidated Term Loan Facility meets the good faith standard of Section 0 and the No Net Harm Standard of Section 0.

17 MPUC Docket No Page of A: Although I was not involved in the negotiations, it is my understanding that the pledge of the FairPoint Maine operating assets has allowed Consolidated to secure the refinancing of FairPoint s existing debt on very favorable terms. According to its reports, Consolidated s recently secured term loan facility will bear interest at approximately a % interest rate, compared to FairPoint s current facility of about.%. Despite assuming FairPoint s existing debt obligations in this transaction, Consolidated indicates that it will actually improve its own net leverage ratio as a result of the favorable terms it has secured. 0 Consolidated s witnesses who are also filing pre-filed testimony in support of the Joint Petition are providing additional information to explain the details of their term loan facility, including its general terms and amount. Given that the term loan facility will be used in connection with the purchase of FairPoint, and the pledging of the FairPoint Maine assets will enable the procurement of that facility on terms more favorable than FairPoint s current term loan, the Consolidated loan facility was procured in good faith in satisfaction of Section 0 and meets the no net harm standard of Section 0. Q: Does this conclude your prefiled direct testimony? A: Yes, it does.