FairPoint Communications 2010 Annual Report Download - page 129

Table of Contents
On January 13, 2011, the Bankruptcy Court entered an Order Confirming Debtors’ Third Amended Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code, dated as of December 29, 2010 (the “Confirmation Order”), which confirmed the Company’s Third Amended Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code (as confirmed, the “Plan”).
On the Effective Date, the Company substantially consummated the reorganization through a series of transactions contemplated by the Plan, and the Plan
became effective pursuant to its terms.
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The Company is subject to certain service quality requirements in the states of Maine, New Hampshire and Vermont. Failure to meet these requirements in
any of these states may result in penalties being assessed by the respective state regulatory body. As of December 31, 2010, the Company has recognized an
estimated liability for service quality penalties based on metrics defined by the state regulatory authorities in Maine, New Hampshire and Vermont. The Merger
Orders provide that any penalties assessed by the states be paid by the Company in the form of credits applied to customer bills. Based on the Company’s
current estimate of its service quality penalties in these states, an increase of $11.7 million in the estimated liability was recorded as a reduction to revenue for
the year ended December 31, 2010. The amount recorded during the year ended December 31, 2010 includes $2.1 million related to prior periods. During the
year ended December 31, 2010, the Company paid out $5.8 million of service quality index (“SQI”) penalties in the form of customer rebates, all of which
were related to Maine fiscal 2008 and 2009 penalties. The Company has recorded a total liability of $20.8 million and $27.5 million on the consolidated
balance sheets at December 31, 2010 and 2009, respectively of which $12.5 million and $0.8 million, respectively, is included in other accrued liabilities and
the remainder is included in liabilities subject to compromise.
During February 2010, the Company entered into regulatory settlements with the representatives for each of Maine, New Hampshire and Vermont regarding
modification of each state’s Merger Order (each a “Regulatory Settlement,” and collectively, the “Regulatory Settlements”), which have since been approved by
the regulatory authorities in these states. The Regulatory Settlements in New Hampshire and Vermont deferred fiscal 2008 and 2009 SQI penalties until
December 31, 2010 and include a clause whereby such penalties will be forgiven in part or in whole if the Company met certain metrics for the twelve-month
period ending December 31, 2010. As a result of improvements on certain SQI metrics, the Company expects to receive waivers of 60% in New Hampshire
and at least 80% in Vermont under this clause, and, accordingly, has reduced its accrual by $12.7 million in the three months ended December 31, 2010. The
Company’s SQI penalties in the state of New Hampshire are currently subject to an audit ordered by the NHPUC. SQI penalties in Maine and Vermont may
also be subject to audit, as determined by the MPUC and the Vermont Board, respectively. In addition, the Regulatory Settlement for Maine deferred the
Company’s fiscal 2008 and 2009 SQI penalties until March 2010. Beginning in March 2010, the Company began to issue SQI rebates related to the Maine
2008 and 2009 SQI penalties to customers over a twelve month period.
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As part of the Merger Orders, the Company adopted certain PAPs in the states of Maine, New Hampshire and Vermont. Failure to meet specified
performance standards in any of these states may result in performance credits being assessed in accordance with the provisions of the PAP in each state. As
of December 31, 2010, the Company has recorded a reserve for the estimated amount of PAP credits based on metrics defined by the PAP. Credits assessed in
Maine and New Hampshire are recorded as a reduction to accounts receivable since they are paid by the Company in the form of credits applied to CLEC
bills. Certain credits assessed in Vermont are recorded to other accrued liabilities as they are paid to the Vermont Universal Service Fund, while the remaining
credits assessed in Vermont are paid by the Company in the form of credits applied to CLEC bills. Based on the Company’s current estimate of its PAP
credits in these states, an increase of $2.7 million in the estimated reserve was recorded as a reduction to revenue for the year ended December 31, 2010.
During the year ended December 31, 2010 the Company paid out $7.9 million of PAP credits. The Company has recorded a total reserve of $8.4 million and
$13.7 million on the consolidated balance sheets at December 31, 2010 and 2009, respectively.
The NHPUC has ordered an audit of the Company’s PAP credits in the state of New Hampshire. PAP credits in Maine and Vermont may also be subject to
audit, as determined by the MPUC and the Vermont Board, respectively.
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Under regulatory settlements in each of Maine, New Hampshire and Vermont, the Company is required to make certain capital expenditures in each of
these states. Beginning from the date of the Merger, the Company is required to spend $141.0 million through March 31, 2011 in Maine, $350.4 million
through March 31, 2015 in New Hampshire and $120.0 million through March 31, 2011 in Vermont. The Company is in compliance with the expenditure
requirements with a deadline of March 31, 2011 in Maine and Vermont.
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