What charges might go on the balance sheets of local utilities was a major concern of V.I. Public Services Commission (PSC) consultants as formal testimony in transfer-of-control hearings for Vitelco phone and Innovative Cable TV companies wound up Wednesday evening.
The phone and cable companies, which are regulated by the PSC, are solvent. But their parent companies, which can be collectively called Innovative Communications or ICC, have been in bankruptcy since July 2006. National Rural Telephone Finance Corporation is the biggest creditor, and its financial arm, National Rural Utilities Cooperative Finance Corporation (CFC), is seeking PSC approval to assume ownership of the regulated utilities.
PSC Hearing Examiner Ronald Belfon has been holding public hearings this week, gathering testimony and information for the PSC’s consideration.
At hearings Tuesday on St. Thomas and Wednesday on St. Croix, CFC officials and their attorneys said once it took ownership, CFC would "adequately fund" the utilities’ underfunded pension plans and invest $43 million in network upgrades. However, without assuming ownership, CFC couldn’t commit that capital; and the phone, internet and cable system would have to struggle by on its internal resources.
While ICC’s new management was investing its internal revenues in some capital improvement—from digital cable boxes and handheld diagnostic computers to new bucket trucks, remote switching stations and billing upgrades—the network needed a major overhaul in order to become competitive and provide similar services as on the mainland. CFC was ready to commit capital if it owned the companies, but not if it remained only an unpaid creditor, officials said.
With no viable bidders coming forward to purchase the companies, "there is really no practical alternative other than sale to CFC," said CFC attorney Kent Bressie.
Consultants with Georgetown Consulting, hired by the PSC for technical advice, argued the PSC should withhold judgment until CFC provided more information on three key issues: how the utilities’ assets were to be valued, who would manage proposed new holding companies that would sit between CFC and the local utilities, and how pension plan shortfalls would be addressed on the books.
One sticking point may be how CFC treats $85 million in Vitelco preferred stock sold by bankrupt former CEO and owner Jeffrey Prosser. The sale of the preferred stock, which was never approved by the PSC, undercut the value of RTFC’s collateral for its loans, triggering a default which led to the bankruptcy of the parent companies. The stock guarantees dividends of 10 percent annually, among other benefits, making it potentially very expensive for the company.
CFC purchased all the preferred stock at a discounted price of $30 million earlier in the bankruptcy. It is offering to transfer only $30 million of the hypothetical value of $85 million in debt onto Vitelco and have the remainder be counted on the books as "common equity" stock held by Vitelco itself.
The consultants were unimpressed by that offer.
"I wouldn’t at this point say the preferred stock is debt," said Jamshed Madan of Georgetown Consultants.
Asked later for clarification, Madan said since the PSC never approved the sale of the stock, and the PSC must approve all sale of interest in the regulated utilities, it was not clear the obligation to pay, according to the terms of the preferred stock, should be on Vitelco’s books in any form—even at the discounted value of $30 million cash. Because the amount of debt affects the value of the regulated utilities, it potentially affects future utility rates, making it a concern for the PSC, he said after the hearing.
"That it is not debt should at least be our starting point as we discuss it," Madan said.
During the hearing, Bressie testified that future rates would be subject to PSC review and that rates were not scheduled to be revisited anytime soon. However, he contended that rates were not an appropriate issue for consideration at a transfer-of-control hearing.
Afterwards, Bressie said CFC could be entitled to the stock’s full value and that CFC informed the PSC before it purchased the preferred stock, suggesting the PSC implicitly recognized the debt obligation the stock represented. He said it would be in the best interest of everyone to retire the debt amicably rather than draw out the proceedings and delay the transfer.
Plans to fund the pensions were another concern for the consultants. According to figures provided by Byron Smyl, who is managing ICC on behalf of Chapter 11 Trustee Stan Springel, the pension plans (as of Aug. 15) had a total shortfall of roughly $16 million, with assets of about $27 million and liabilities of $43 million.
Most pension plans are currently underfunded due to market declines, he said. But these plans also did not receive proper payments from ICC for several years. The Pension Benefit Guarantee Corporation, which insures pension plans, will release liens and stop fining the company if the funds are "adequately funded," with roughly $8 million in cash. CFC is offering to pony up that "adequate funding," if it is put on the books as a loan the cable and phone companies pay back.
Madan argued the ratepayers have already paid for the pension contributions, so it was not clear they should have to pay again in the form of debt against the utilities.
The views expressed were those of staff and consultants—not the PSC—which has not yet rendered any opinion on the transfer.
Public hearings were scheduled for all three islands. Formal testimony concluded Wednesday, and the final hearing Thursday at 3 p.m. in the St. John Legislature Conference Room will be devoted solely to public comment. While invited to speak at all three hearings, no one showed up to speak in St. Thomas, and only one person spoke Wednesday on St. Croix.
The one resident to speak was ICC pensioner Cardinal Connor of St. Croix, who promoted the idea of the V.I. government taking control of the companies by buying out ICC’s existing debt for $603 million. He said he favored local control and knew of a company called "RFG" that would arrange the financing for a fee of $30 million up front and a 2.7-percent "loan origination fee." He made no mention of the terms of the $603 million loan, who would provide the actual funds or how the government would make the payments to an outside lender.
The change of control will be finalized after reviews from the U.S. Justice Department, the Federal Communications Commission and the PSC. Proposed findings and recommendations are due Nov. 21. PSC Hearing Examiner Belfon will submit his findings to the commission on Dec. 2. The commission will then set a time to render a decision in these hearings.