Changes abuzz with local utilities


By Mike Kroll

For the typical citizen utility bills are an inescapable financial burden each and every month. Whether we own or rent most of us face bills from AmerenIP (electricity and natural gas), Gallatin River Communication (telephone/Internet) and Insight (cable television/Internet) along with a quarterly bill from the city (water, sewer and garbage pickup). Let us assure you that changes are around the corner.

Madison River Communications, parent company of Gallatin River and founded in 1998, is in the process of going public with a stock sale. This company controls telephone service surrounding Galesburg, Dixon and Pekin along with sister operations in North Carolina, Alabama and Georgia. According to documents submitted to the Securities and Exchange Commission pursuant to a forthcoming Initial Public Offering the parent company had a total of 193,092 voice telephone lines and 40,215 DSL and high-speed data lines resulting in revenues of $194.4 million and net income of $6.325 million at the end of last year. After years of net losses last year was the company's first year of profitability and even then it represented a reduction of 18,448 (nearly nine percent) voice lines since 2002 and longterm debt of nearly $644 million.

The loss of voice lines is a major concern for the phone company as it competes with wireless and voice over IP but Madison River has experienced significant growth in the DSL/high-speed data lines, nearly 340 percent, since the beginning of 2002. The affiliated companies in the southern states have been significantly affected by Hurricane Ivan and even Iraq mobilization from military bases. Additionally, the "persistent weakness in the local economies that Gallatin River serves" coupled with "significant and growing competition" pose real challenges to the economic future of Madison River. Remaining competitive will also challenge Madison River to invest considerably in capitol improvements, upgrading or replacing cable and central office switching gear. As the market for voice lines continues to decline the company will become increasingly reliant on growth in high-speed data lines and their associated revenues.

As part of the pending stock offering Madison River plans to convert about half of its current debt into common stock held by Madison Dearborn Capital Partners; this company provided much of the initial financing for the formation of Madison River. Given the past experience of the company and the risky market in which it exists the success of this IPO seems far from certain but necessary if the company's debt is to be held in check.

For the average Galesburg area telephone customer all this high finance is Greek, what we really care about is the future of local telephone and Internet service. To that end I spoke with Fred Miri (who became president of Gallatin River in September, 2004) last Friday afternoon in Galesburg. Miri has spent his adulthood in the telephone business, most as an executive of Illinois Bell and then Ameritech. Miri left that company when it was bought out by SBC and was subsequently hired by Madison River. A Chicagoan nearly all his life, Miri moved temporarily to Peoria last fall but says he is strongly considering making Galesburg his new permanent home "once things settle down."

In many respects Gallatin River is a new experience for Miri. "We are essentially a rural telephone company serving a mostly residential customer base unlike my experience in Chicago. But this was by design of the company founder who set out to serve this market. Compared to large, urban markets there is less competition here but competition still exists and poses problems for us. Gallatin River will succeed because we know this market and have a track record of serving it well with both traditional and new products. We are also committed to the longterm and we want to grow this market. We are a local company and we recognize the value of that status. We are committed to maintaining local offices with real people to service our communities. I know it sounds like a cliché but we want both our employees and customers to see us as a hometown operation."

Miri acknowledges that voice lines are down and says that this is partly due to competition from wireless carriers and partly due to local economic conditions. "We will be working hard to earn our customer's continued business by both excellent service and the introduction of more bundling packages such as our very popular No Limits packages. Gallatin River is also committed to doing our part in furthering growth in the local economies we serve. Residential and commercial data lines is another growth area we will continue to pursue. New technology is enabling us to expand the portions of our service area where we can offer DSL service and we are aggressively looking toward that direction."

When Gallatin River bought our the former Sprint local telephone service areas they knew that much of the infrastructure had been neglected for years. Miri points to his company's capital investments since acquisition as one sign of its longterm commitment to the area. "Our capital budget has not gone down once since the acquisition and we are committing ourselves to continue upgrading our local infrastructure. The new and upcoming service areas will demand more modern facilities and that is our goal."

This winter Gallatin River began offering three new bundled services packages for business customers and Miri says that more is yet to come targeted at small business customers. "Response to our residential No Limits bundle has been fantastic and we are considering creation of other similar packages. I feel it is very important that everybody realize how important maintaining a traditional home telephone line is for safety reasons. Most people don't know that 911 service doesn't work from voice over IP and is severely limited in function from most cellular telephones. We are committed to making residential telephone service affordable and attractive to our customers."

As Miri boasts of his company's commitment to maintaining a local touch it appears that our cable television provider is moving in the opposite direction. The principle managers and investors of Insight Communications are moving toward merging that company with cable television powerhouse Comcast. Insight CEO Michael Willner along with his chief investor Sidney Knafel are currently in the process of purchasing the company's remaining common stock preparatory to a merger with Comcast. Knafel and Willner are forming a temporary private company, New Insight, LLC that will assume ownership of the current Insight Communications presuming their success in purchasing the outstanding publicly held shares at $10.70 per share.

Willner has been meeting with Insight's franchise communities in Illinois, Indiana, Kentucky and Ohio to explain the plan and assure everyone that services will continue as usual during the process. Insight currently boasts of 1.27 million basic customers ranking it as the ninth largest cable operator in the U.S. Comcast is the largest cable provider in the U.S. serving more than 21 million basic cable customers, seventy percent of cable subscribers in the top 20 markets. Comcast also owns several cable content channels and employs over 68,000.

Wednesday morning I attempted to speak with Willner but Insight Spokesperson Sandra Colony said that he was not making comments to the press at this point in time. "Right now all I can say is to confirm that a subcommittee of the Insight board has been formed to study the offer and make a recommendation to the full board. Nothing else will be done until after the full board has considered that recommendation and decided on its course of action. Mr Willner has assured employees that he doesn't expect this process to result in any immediate changes. It should be business as usual even as the buyout and merger go forth."

On an unrelated note, when the latest Galesburg franchise agreement was concluded and during the failed attempt to build a municipal cable system here in Galesburg Insight indicated that the company would someday enter into local telephone service. There is now talk of having such service available to residential customers in Galesburg late this fall. Reportedly Insight officials have informed Galesburg officials that this is on the horizon and Gallatin River's Miri also told us that his company was expecting Insight to become a local competitor later this year. Many urban cable television firms already offer telephone service and third-party voice over IP providers such as Broadvox Direct, Vonage and Sunrise Voice already have customers in the Galesburg area and start at less than $18 per month.

Finally, we cannot leave your electric utility out of the mix, even if the news is tangential to the Galesburg market. Before Ameren purchased Illinois Power Excelon Corporation attempted to buy IP from its parent Dynagy but succeeded only in acquiring its electric generation capacity. This included not only coal and gas powered plants but also the nuclear plant in Clinton. Last week Excelon announced that it was planning to build a new nuclear power plant adjacent to the existing Clinton plant. The Nuclear Regulatory Commission has indicated that it is prepared to "move forward with a streamlined permitting process that could land the company an 'early site permit' by the summer of 2006." If approved this would be the first new American nuclear plant since the 1970s and the 1979 near disaster at Three-mile Island in Pennsylvania.

The former IP Clinton plant sits on 460 acres originally sited to permit a second reactor that IP never constructed. Last week the NRC announced that it had reached an "initial conclusion" that there are no existing environmental problems blocking Excelon's plans for a second reactor. Furthermore, the Bush administration appears to be open to a revitalized nuclear energy program. On the day following the NRC announcement regarding Excelon's Clinton plans President George Bush made a speech encouraging construction of new nuclear power plants in the U.S. and declaring nuclear power "reliable and secure." Critics have noted that Bush didn't use the word "safe" in his characterization and point to the Bush administration's own continued warnings about homeland security threats as reason to move slowly, if at all, toward approving construction of new plants in the U.S.

Excelon is currently the domestic operator of nuclear power plants with 17 reactors in Illinois, Pennsylvania and New Jersey. This number is expected to grow to 20 when three additional reactors in New Jersey are added following a merger now in progress. Excelon officials are assuring citizens, investors and regulators alike that the company is moving cautiously but that increasing demand for electric power and environmental regulations coupled with new technology are making nuclear power plants an attractive alternative once again. At least three other utilities are now exploring the possibility of constructing new nuclear plants in this country.