Update on Burlington Telecom Hearings & Next Action Steps

July 25, 2014
Dear Friends,
Here is an update on the Burlington Telecom proceeding (a/k/a Docket 7044) which will have a major impact on the future of BT, its future management structure and the City's long-term ownership position.
We've summarized the Technical Hearing, held by the Vermont Public Service Board on Tuesday, July 22nd in Montpelier, and provided an overview of the proceeding, below. This is a valuable read, since press coverage has been scant. According to our friends in the press, this is because "the issue is just so complicated." We've boiled it down (and included recent press coverage as well), below.
What's Next? There are opportunities to continue public pressure on the outcome of BT's future structure and ownership. The Mayor is planning to expand the BT Advisory Board with additional members of the business community. We will keep you posted so that you can attend the scheduled City Council meeting when the date is finalized in August and provide advice on both the composition of the BTAB and ways to better involve the public in the ultimate decisions about BT's future.
The PSB is expected to release their findings in September (maybe October). Public organizing to influence the future of BT will follow.
Overview of BT Issue and Report on the PSB Technical Hearing: The City of Burlington has petitioned the Vermont Public Service Board, seeking relief from two conditions of its Certificate of Public Good, and approval for a sale of BT assets to Bluewater Holdings, which will help to finalize a deal with Citbank to settle its outstanding $33 million debt.
The City states that it is not able to complete a build out of BT to all parts of the City due to the high cost of reaching the extreme sout end of the City. It has also indicated that it is not likely to pay back $16.9 million of General Funds used to bankroll BT operations in the mid-2000's. The sale-leaseback to Bluewater Holdings will raise $6 million toward a $10.5 million settlement with Citibank (for 30 cents on the dollar).
On July 22, all of parties were in attendance (City of Burlington, Vermont Department of Public Service and the Burlington Access Management Organizations). In an unusual move, indicating the importance of the case, the Vermont Public Service Board's Hearing Officer and Financial Staffer spent several hours cross-examining the City's witnesses.
At the outset of the case, PSB signalled its two primary concerns: whether the Citibank deal and "sale leaseback" to Bluewater is in the best interest of the Burlington, and the ability of the City to recover $16.9 million of General Fund used to bankroll BT in the mid-2000's, in violation of the CPG.

The PSB hearing officer Lars Bang-Jensen, Staff Attorney and Jay Dudley, Utilities Analyst conducted several hours of cross-examination with City witnesses:

The Short Story: Over the course of the day's hearing, the witnesses explained why the Citibank deal was put together, why they believe the "sale-leaseback" to Bluewater Holdings for $6 million is the best way to stabilize BT, while failing to identify how the $16.9 million would be paid back.
In the mid-2000's, the City of Burlington determined, with the help of financial experts (including Dorman and Fawcett), that BT was not worth, and could never recover, the $50 million+ that had been spent on start-up and operations. This included $33.5M owed to CitiBank (who held the lease, and, in effect, owned BT) and $16.9M used from the General Fund to finance opeations (contrary to CPG conditions that precluded use of tax payer funds for BT operations).

In a move toward financial stability, the Blue Ribbon Committee on BT recommended, and the City agreed, to default on the CitiBank loan in order to negotiate another deal and reduce the liability. The City explored a number of options, including revenue bonds (which, apparently, the PSB said they could not do). The City was not successful in finding other lenders or investors because of BT's "distressed asset" status--nor could they find common ground with Citibank to reduce the debt load through negotiation.

Finally, in 2012/13 the City decided to pursue "special interest" financing, i.e. an unconventional lender. The City was able to procure an offer from the Rosemawr Group to help fund a portion of the settlement with Citibank. The Rosemar deal would have provided about $6 million in exchange for BT assets, at a relatively high interest rate (more than 7%), and would have enabled them to direct the sale of BT with a major piece of the proceeds. See comparison of the deals.

The City used the Rosemar offer to show Citibank that they could fund at least $6M of what was ultimately a $10 million settlement. Citibank included the "arms length" sale of BT to a private entity as an additional source of revenue for the final settlement. Citibank will also get 50% of the net proceeds when Burlington finally sells BT in the next 3-5 years. The final deal gets the City out from under the $33M lease and yields approx $10M or 30 cents on the dollar for Citibank. See the: Citibank Settlement (no longer confidential).

The City also used the Rosemar deal to find a more favorable deal with a special purpose entity, which they did, through local Burlington business man Trey Pecor and the Merchants Bank--now known as Bluewater Holdings. The City is in the process of finalizing a "sale-leaseback" with Bluewater, which will pay Citibank $6 million for 7% interest plus a 40% share of the final sale of BT in 3-5 years. The City will continue to operate BT and, ff the City is able to get at least $11 million, it will be able to direct the ultimate sale.

The PSB underscored that the City is, in effect, selling BT to Bluewater for $6 million plus 7% interest. The City conceded that the sale price was arrived at, not through appraisal, but by virtue of the fact that it is all the City "could get" from a special purpose entity.

To recap: When the ultimate sale of BT happens in 3-5 years, Bluewater gets 40%, Dorman and Fawcett gets 10% and the City splits the net proceeds with Citibank 50/50 (or less depending on when the sale takes place).

It is the intention of the City to gain PSB approval for relief from CPG conditions and to seal the deal with Citibank and Bluewater Holdings. They intend to operate BT for at least 2 years "out from under the cloud", before selling, in order to better position it for sale. They believe that it's true value will emerge in that time and a buyer will be found. The City is not precluded from maintaining an ownership interest in the ultimate sale, but it has not documented its intention to do so. Nor does it look like the sale will yield enough money to buy a meaningful ownership state OR repay any of the $16.9 million.

The PSB cross examination centered on:

  • City efforts to find alternatives to the Bluewater "sale-leaseback: (including many of questions about viability of revenue bond, which according to the City for purposes of timing and Citibank was not viable);
  • Future of the $16.9 million and City's ability to recover through current earnings or future ownership stake.

BAMO questions focused on the non-existent public process to date and public process contemplated for next sale to private entity. The Mayor believes that the CIty process has been meantinful and that future public involvement would center on attendance at City Council and BTAB meetings.

The Burlington Access Management organizations beleive that public involvement is critical for assuring the an ownership structure and City ownership state that will assure continued low rates, and enable the City to realize the economic and community benefits of BT for decades to come.

Both Terry Dorman and Mayor indicated a willingness to establish criteria for the selecting the next owner and open the process to public involvement, but no meaningful details were forthcoming in either written or oral testimony. All City witnesses were firm that they wanted no conditions attached to any future sale, maintaining that it would make resale much harder to attain.