The V.I. Public Services Commission voted to let National Rural Utilities Cooperative Finance Corporation (CFC) take ownership of Vitelco telephone and Innovative cable television companies Wednesday, marking a major milestone in the drawn-out bankruptcy of Innovative Communications Corporation, parent company of both utilities.
The Rural Telephone Finance Cooperative (RTFC), a private, nonprofit lender to rural utilities, is the largest single lender to ICC and holds a $525 million judgment against it. Efforts by the court-appointed Chapter 11 trustee to auction the component companies were hampered in part by the global financial crisis. In January of 2009, RTFC's financial arm, CFC, announced it would make a credit bid¬—a bid financed by what Vitelco owes it—to acquire Vitelco, local cable companies and the other ICC-owned companies.
The PSC has regulatory power over utilities and must give approval before any utility can transfer ownership or control. Wednesday was the second day of hearings on the transfer of Vitelco and the two Innovative cable television companies. On Tuesday, PSC Hearing Examiner Ronald Belfon summarized his findings and endorsed the transfer of control. On Wednesda,y the PSC staff and PSC's contracted telecommunications consultants, Georgetown Consultants, gave their support, too.
All echoed one another, concluding CFC was qualified, had plenty of capital and its proposed plan for the companies would serve the public good by improving the phone, cable and internet infrastructure, giving customers more and better services, consolidating Vitelco debt on good terms and offering the cable and phone companies a route toward profitability.
"We do think it will be beneficial to ratepayers," said Jim Madan of Georgetown Consultants. "We anticipate substantial improvements in service."

Technical upgrades are critical to the companies' bottom lines. As Vitelco has fallen behind on maintenance and upgrades, customers have been leaving and revenues have been dropping. In 2008, Vitelco had a ratebase of $60.2 million, "a decline of more than $40 million in the last five years of the previous management," said PSC attorney Boyd Sprehn, reading from the PSC staff report. That decline is one indication there has not been any serious investment on the infrastructure since at least 2003, Sprehn said.
CFC has agreed to invest a minimum of $15 million a year for the next four years on upgrades.
Increased investment in service upgrades are the best option for turning that slide around and putting the company back on track, the staff report concludes.
At the same time, Vitelco may be internally solvent, but it took on massive debt under former ICC owner Jeffrey Prosser.
"By the time that the trustee took over Vitelco, it had already been stripped of its equity, leaving the company with debts exceeding its assets," said Sprehn.
To help reverse this, phone and cable rates will be frozen and no dividends will be paid to stockholders over the next four years.
"This freezing of the dividends will begin to move the equity ratio back to where it should be," said Madan. "It may not get where it should be. Some companies have 50-percent equity ratios. This company is not going to get to that point in four years. But freezing the dividends … will help bring equity back in balance."
If CFC should fail to meet its obligations at any point, the PSC can call an immediate rate hearing at which it can set Vitelco rates and determine its income, said Sprehn when asked how the agreement could be enforced. But he and Madan said CFC had an enormous incentive to improve infrastructure and to strengthen the companies' bottom lines because increasing the value of Vitelco is the only way CFC can later sell it at a price that will lessen its losses on its loans to ICC.
CFC Vice President Stephen Lilly agreed his company has a financial incentive to increase the value of the companies, but said CFC had enough set aside so it could weather even a complete loss.
"For our exposure here we have provided a loan-loss reserve of $618 million," Lilly said. "And out of $20 billion, this is our only non-performing loan."
When Belfon held hearings last November, one sticking point in negotiations was how to treat $85 million in Vitelco preferred stock sold by bankrupt former CEO 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.
Madan and Georgetown Consultants, argued last fall at the hearings it was not clear the obligation to pay the terms of the preferred stock should be on Vitelco's books in any form—even at the discounted value of $30 million cash.
Since then, CFC offered a comprehensive debt package, consolidating that $30 million into a package of $113 million in existing and anticipated debt, all financed by CFC itself at the rate CFC gives its members. Of that, $50 million replaces existing Vitelco debts to the Rural Utilities Service and the Federal Financing Bank; $30 million replaces the preferred stock; $20 million would be in reserve to pay for future capital improvements; $8 million goes to pay off the pension funds and $5 million replaces other existing debt.
While a court might rule the preferred stock was invalid and Vitelco owed nothing, that would take years, and Vitelco also might have to pay the full $85 million, plus tens of millions of dollars in dividends and interest, so on the whole, the debt package was a good deal for Vitelco, Belfon said after the meeting.
Voting to approve the transfer were PSC members Joseph Boschulte, Donald Cole, Verne David, M. Thomas Jackson, and Elsie Thomas-Trotman. Sirri Hamad was absent. No one voted nay. Afterwards, the PSC voted by the same tally to approve two docket-specific assessments payable by Vitelco: one for $150,000 to pay for the PSC investigation of the transfer of control, and a separate unrelated assessment of $8,000. By statute, the PSC finances its regulatory activities by assessments against the entities it regulates.
The PSC approval is the last regulatory hurdle for CFC to take ownership of Vitelco and the cable companies. Next, U.S. Bankruptcy Court will hold an omnibus hearing June 11 on this and other issues in the ongoing ICC bankruptcy. Assuming the court approves the sale, a final closing is expected by July 1.