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HomeMy WebLinkAboutJuly 18, 2002THE MINUTES OF THE TELECOMMUNICATIONS COMMISSION FROM THURSDAY, JULY 18, 2002 The meeting was called to order at 7:00 p.m. by Dennis Stroik, Chairperson. ROLL CALL: Commission Members Council Representative: City Representative: Legal Counsel: AT & T Broadband Rep Dennis Stroik, Dave Mahoney, Bob Buboltz„ Reuben Ruen, Brad Peterson, Dan Swee Bruce Nawrocki Linda Magee and Jean Kuehn Stephen Guzzetta Kathi Donnelly-Cohen Also present was Todd Hartman, Legal Counsel for AT & T Corp. APPROVAL OF MINUTES Motion by Bob Buboltz, second by Dave Mahoney, to approve the minutes from the meeting of June 20, 2002. All ayes. OLD BUSINESS A. Channel Check B. Everything was ok except for the following blank channels: 14, 18, 20, 28, 61, 68, and 69. All of the channels were former analog channels that have had their programming switched to digital, except channel 18, which is the educational access channel and is the responsibility of the school district. Correspondence Log and Complaint Follow Up. Complaint by Audra Legler, 3839 Hart Blvd #318-She thought she was being billed for service she had cancelled, but she actually had a credit balance that will be refunded to her. She was contacted and her billing was explained to her the same day. Kathi Donnelly-Cohen reported on the Digital Converters Safety Bulletin that was issued-We were notified 7/15/02 that Motorola Digital Converters may have a potential fire risk. This affects converters installed from April 1 to June 7. The company is sending out notices to those customers who may have had a converter installed during this time period. They are scheduling service calls at the customer's convenience to replace the converters. It should be noted that no fires have occurred thus far. C. Status of Cease and Desist Order to AT & T Steve Guzzetta stated that they are still waiting to review the new language being drawn up. Kathi reported that Dave Seykora and Thomas Creighton met and came to an agreement on this issue. She will report back to the Commission at a later time the details of the resolution. TELECOMMIUNICATIONS COMMISSION MINUTES July 1$, 2002 Page 2 E. D. AT & T's Current Reporting of Telephone Statistics Kathi has been working with Tim Finnerty on an acceptable format for reporting of telephone statistics. They have also been working with the call center to establish the most accurate detail for the reports. E. Old Business There was no other new business. NEW BUSINESS A. Resolution Denying without Prejudice, the Application of AT & T Corp for Approval of the Transfer of Control of the Cable Franchise of AT & T Broadband At this time we called Garth Ashpaugh, the CPA, who performed the review of the figures on behalf of the city. He was put on speaker phone so he could participate in the discussion that took place. Steve Guzzetta made his presentation first. He explained that the Commission's purpose is to make a recommendation to the City Council regarding the transfer of control from AT & T Broadband to a new corporation called AT & T Comcast Corporation. He explained that this is a merger of the #1 and #3 cable system operators in the country. He also explained that his law firm and Ashpaugh's Firm are separate and have no vested interest in each other or in each others findings. Steve then passed out an index of the materials reviewed. Motion by Bob Bubaltz, second by Brad Peterson to accept the attorney's index list as presented and enter it into record..411 ayes. AT & T's legal counsel stated there were some discrepancies in the index presented from the index they had in their records. However, amendments can be made to the index as necessary in the future. Guzzetta went on to state that reports from Creighton, Bradley &Guzzetta and from Ashpaugh & Sculco, CPA's were enclosed in the agenda packets. The analysis was prepared from detailed financial information provided by AT & T. He noted that not all the information requested was provided. The reports were prepared without projections on the performa of the new company. And there was a difference of opinion regarding the debt that will be incurred after the merger. AT & T claims that no new debt would be incurred. And Ashpaugh states in his report that significant debt would result by the merger of the two companies. Guzzetta stated that AT & T is asking the Franchise holders to base their decisions on reports done by Wall Street Analysts, such as Bernstein, Morgan Stanley, Bear Stearns, and Merrill Lynch. Guzzetta felt the analysts doing the reports have a vested interest in the outcome of the transfer. The reports were prepared for investors, not for the Cities considering a merger, and each of the entities they represent stand to receive compensation as investors. Morgan Stanley had been contacted with questions of what they were basing their report on, and they failed to respond. TELECOMMUNICATIONS COMMISSION MINUTES July 18, 2002 rage 3 Guzzetta stated that other consultants working on this merger have questioned the financial ability of the two companies merging and moving forward as one. Even though they didn't go to the length of denying the transfer, none of them actually recommended approval either. Based on the information provided, it is evident there will be a negative cash flow for several years. They have a large debt load and will need to make further capital expenditures over the next few years. On page 18 of the May 29, 2002, Report submitted by CBG LLC, Ashpaugh responded to 13 questions regarding availability of funds for capital and operating expenditures, for upgrades, for support of access channels, for training of personnel and customer service staff, for improvements to call centers, maintenance of Emergency Alert Systems, to improve programming and services offered subscribers, how it will affect rates, etc. His response to all of these questions was that there would be a detrimental impact on subscribers, and possibly significantly. Based on the numbers and facts he was provided, he feels subscribers will be negatively impacted in regards to costs, service and technical upgrades. He stated in his supplemental report dated June 28, 2002 that his decision is not based on the recent events involving WorldCom or other companies in the news. It is based on a decision to protect subscribers and limit the adverse affects to their service provided under the current franchises. AT & T claims that revenue growth was not considered for the report. Ashpaugh stated that he was not provided any projections from either company and that because of significant changes during the last few years in the customer base, he was unable to make a meaningful analysis of the numbers without adjusting for the changes. He had to go by the information supplied on the FCC Forms. He explained the burden of providing information is on the applicant, not on the City. AT & T claims their debt will be reduced if they could unload some of the entities they now have. However, they have been trying to sell some of these investments for the last 1 %z years to no avail. So if they have no one willing to buy what they want to sell, this may not be a possible solution to their problem. AT & T currently has a good bond rating, but this can change as soon as the merger takes place. The bond rating means that they have met their debt payments in the past, but does not guarantee future financial stability or the fact that they won't raise rates to help offset those debts. Guzzetta said there is more than a reasonable basis to deny approval of the transfer based on the facts. He feels the large debt load that will come with AT & T will make both companies weaker. Customer Service may suffer due to combining services and personnel, and they are having trouble meeting the minimum standards now. He explained that if the application is denied, AT & T could keep the franchises or sell to someone else, but they are under legal obligation to keep providing service to our system. Todd Hartman, from Roberts Kaplan Firm, the legal counsel for AT & T was introduced. He began by stating that AT & T has completed upgrades to our system and has provided new services to subscribers since purchasing the system several years ago. They are looking forward to partnering with Comcast and combining skills and specialties to provide subscribers with more services. He claims that no new debt will be created, but that they each have large debts that will be combined. AT & T Corp has assigned $15 billion to AT & T Broadband for this transaction for their operations and this amount will need to be re-paid over the next 5 years. The transaction itself does not increase the debt. He stated that this will be the most scrutinized merger to ever be reviewed because both companies are so large. He feels the response to the merger has been favorable by both Wall Street and the MN Public Utilities Commission. 90% of the communities have already approved the merger. He said Ashpaugh, the CPA, who reviewed the information for our system was the only consultant to recommend denial. He feels this was due to a misunderstanding regarding the projection figures and TELECOMMUNICATIONS COMMISSION MINUTES July 18, 2002 Yage 4 other confidential information that cannot be shared by the two companies during the legal process. He said Ashpaugh's report indicates 0 growth and that it has affected the analysis overall. Hartman said the overaii picture does not iake into account the $22 biiiion in investments that could be sold to lessen the debt load. The ability is there, but nothing is in process at this time to do so. He said the debt to equity ratio would actually improve after the merger compared to AT & T's high debt ratio it currently has on its own. He claims rates would be more reasonable as they would be buying a larger market share and would get a better rate. Hartman feels that AT & T Broadband was found qualified to operate this system, and that Comcast has proven to be qualified to operate other systems, so why not together? Kathi Donnelly-Cohen stated that several systems in this area have approved the transfer with conditions. If we deny this transfer, our system could be isolated. The transfer may possibly go through without our approval and how it would affect call centers, customer service, programming, etc. is unknown. Guzzetta again reiterated that AT & T is in a negative cash flow situation, and that this debt will be assumed by the new AT &T Comcast Corp. The favorable reports Mr. Hartman refers to are not specific to this transaction, but to the Industry as a whole. He also read excerpts from some of the other consultant's reports. While they didn't recommend denial, they did question the financial stability of the corporations and how this might adversely affect subscribers once the transfer is complete. He also stated that selling their investments may not solve their problems, as there is no one willing to purchase what they want to sell. It was also noted that in the first quarter 2002, AT & T Broadband has lost 149,000 subscribers, and most analysts do not project much growth. Ken Henke was unable to attend the commission meeting on Thursday evening. He sent the following comments that were read into the record: "Like Tom, I am concerned about the large debt load being assumed by the new combined cable company with no explanation as to how they plan to pay it off. As an analogy I point to AOL and their acquisition of Time Warner. Almost immediately after the acquisition, the stock prices took a tumble and AOL's rates went up a little bit. Probably not as much as they would have gone up because there are a lot more interset companies out there than there are cable companies. As a counter to the debt load problem, I would ask the question: was there a similar debt load in the other situations where the cable company changed ownership? I don't remember any, but then my memory tends to be a little faulty on such subjects. I don't think that there is any bank or lending institution out there that would provide anyone a loan without some reassurance that the loan would be paid off. In essence the cable company is getting a loan for $32 billion and I see no collateral or means of paying off the loan other than selling off what I would see as questionable assets and the raising of rates to their customers. I am inclined to take the advice of our lawyer and accountant, that this merger is not in the best interest of the Citizens of Columbia Heights." TELECOMMUNICATIONS COMMISSION MINUTES July 18, 2002 Page 5 Nawrocki questioned the financial status of AT & T compared to that of the proposed new company of AT & T Comcast. He asked Mr. Ashpaugh if AT & T continued to run the cable system what his answers to the is questions would be. Ashpaugh responded Thai he hadn't analyzed this prospect, and as he was not provided requested information by AT & T, it would have been hard to do so. He did state that AT & T is not in a good position financially in most facets of their corporate system. Nawrocki asked if AT & T is in a worse financial position than Comcast. The response was, for the most part, yes. Nawrocki felt if this was true, than the merger would help the financial viability of the company to continue providing service better than if AT & T was standing alone. When asked his opinion, Ashpaugh said Charter is in the best financial situation, with Cox and Comcast in the middle, followed by AOL Time Warner, and AT &T being at the bottom financially. Dave Mahoney felt that AT & T wouldn't risk losing their cable system if they didn't think it would work and that they could get their $15 billion re-paid. Brad Peterson questioned whether their Board of Directors and CEO's were receiving huge compensations because of the merger that adds to the debt load of the two companies. Hartman addressed that topic and then went on to explain that the majority of Comcast stock is held by Brian Roberts, CEO of the company, and his family. He said that his reputation, and risk of the family fortune almost guarantee the merger's success, and that he must feel confident about taking on AT & T's debt, and the ability to pay it off. Dan Swee asked about how Columbia Heights would fare when outages occur and repairs are needed with a larger system. He also inquired whether franchise fees would be affected. Hartman responded that customer service and repairs to the system should remain the same and the percentage that franchise fees are based on would not change. Brad Peterson asked if we denied the transfer and the merger went through, would it be a violation of the franchise? AT & T Comcast would not have the rights to provide our service. However, an agreement could be reached to continue service, and litigation would probably be pursued by one side or the other. Because the headend and infrastructure would be owned by AT & T Comcast, a Shared Network Facilities Agreement would probably need to be drawn up. The Bell Phone Systems have operated under these arrangements in the break up of the phone company. As the merger is scheduled to close by the end of 2002, AT & T is hoping to get the necessary approvals shortly and then to obtain the FCC approval. Nawrocki stated that he had spoke with four other attorneys involved in this transfer issue for more information. He also stated that he feels there should be a good reason for denying the application, and in his mind, it boils down to the financial viability of the company to continue to provide service as required by our franchise. He feels the new AT & T Comcast Corp. is in a better position to do so. Swee said if the two companies want to merge, let them. If rates do increase, people will seek service elsewhere. It is a luxury item and if costs get too high, they will lose subscribers. This is already being evidenced by the loss of subscribers over the last year. Motion by Brad Peterson, Second by Bob Buboltz, to recommend the City Council adopt a Resolution approving Transfer of Control of the Cable Franchise ofAT & T Broadband, subject to incorporating the conditions determined by legal counsel and staff. Mahoney, Buboltz, Ruen, Peterson, Swee-ayes. Stroik-nay. MOTION PASSED. TELECOMMUNICATIONS COMMISSION MINUTES July 18, 2002 Page 6 B. Offering of Spanish Channel Package A copy of a letter dated Juiy i, 2002 was enclosed in the packets explaining the changes being made to Digital Services. They will begin offering a special package for Spanish speaking customers July 1, 2002. The package is available on an ala carte basis with any Digital package. The Pay Per View channel Playboy Espanol will not be offered as was originally planned. C. Other New Business There was no other new business. RFPnRT~ A. Report of Commissioners Education-Nothing to report Government- Nothing to report Library-Nothing to report Public-Nothing to report B. Report of AT & T Broadband- Kathi reviewed the reports and answered questions for June 2002. C. Report of the Cable Attorney There was nothing further to report. D. Report of the Assistant to the City Manager Linda had nothing further to report. Motion by Dave Mahoney, second by Brad Peterson, to adjourn the meeting at 10.•25 pm. All ayes. Respectfully submitted, `~ Shelley Hanson Secretary