Broadband in the Berkshires

Massachusetts 'middle mile' internet provider may halt project over money woes

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The company hired to operate the state's $90 million "middle mile" internet connection says it will halt operations within months unless it stops bleeding money.

In a bankruptcy filing Wednesday, KCST USA Inc. said it has been losing more than $3 million a year to oversee the MassBroadband 123 network, losses it blames in part on original delays by the Massachusetts Technology Collaborative in completing the 1,200-mile fiber-optic network.

An outside consultant has been named to help lead a turnaround, the company says. It is promising to prevent interruptions in service to existing customers of the network during the bankruptcy process.

But it warned that if it cannot come to more favorable financial terms with the state, it will discontinue operations after losing nearly $9 million since 2014.

The company said it doesn't have enough money to continue operations without an infusion of rescue capital, in steps that now need the bankruptcy court's approval.

Brian Noyes, a spokesman for the Massachusetts Broadband Institute and the MTC, declined Wednesday to reply to assertions in the filing, saying the groups may comment Thursday.

The company is represented by the Boston law firm Murphy & King. Neither Andrew G. Lizotte nor Harold B. Murphy, the two lawyers handling the bankruptcy filing, were available for comment Wednesday.

The company, formerly known as Axia NG Networks USA Inc., also claims in its filing that its agreement with the state led it to expect that 1,392 community anchor institutions would be initial customers of the network.

Those institutions include town halls, schools and fire and police stations.

Instead, it says it took on management of a network with 944 institutions connected, and with only 600 of them customers, reducing its anticipated revenue by half.

Though he declined to comment on Wednesday's filing, Noyes has said previously that

Axia had not been guaranteed the customer base it now says it anticipated.

"No [community institutions] were 'scheduled' to purchase network capability from the network operator," Noyes told The Eagle this winter. "There was no guarantee as to what they would purchase."

Building delay

The company also traces its financial trouble to an inability to inspect and market the system under the timetable it says was first advertised by the state.

Rather than begin to run smaller segments of the network starting by June 30, 2013, as it says its agreement with the state promised, the network's construction was completed and turned over to it in January and February 2014.

"The Debtor has operated the 123 Network at a substantial loss from its inception," the filing claims, "because MTC did not construct and deliver the 123 Network to the Debtor in accordance with the NOA and related Ramp-Up Plan."

NOA refers to the network operating agreement. The filing claims that the agreement promised the company the ability to gradually build the customer base in 34 segments of the network over the course of a year, rather than all at once, in a "ramp up" process.

With the bankruptcy filing, the company is seeking approval to accept $1.3 million in special outside financing to allow it to continue to operate. The money would come from its original corporate parent, in part because the network operator doubts it could secure other backing, given its poor financial condition.

Of that new money, $860,000 is designed to keep the company running for 13 weeks. If it cannot come to new terms by then, the filing says, "the Debtor will not be able to continue operating the network and will need to reject the NOA."

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At a meeting of the MBI board of directors last July, an employee forecast that Axia could reach break-even status by next January. The bankruptcy filing instead suggests that the losses continue to mount. It says the company anticipates losing $2,800,000 this calendar year.

Steve Darr of Huron Consulting Services LLC has been named chief restructuring officer, according to Ann Murphy, a senior vice president with O'Neill and Associates in Boston. Darr said in a statement provided by Murphy that his goal is to have the firm emerge from bankruptcy proceedings able to run the middle-mile network without losses.

"We intend to work closely with the Commonwealth to restructure its obligations to become economically feasible," Darr said of the company.

In its filing, the company says it told the Massachusetts Technology Collaborative as early as the summer of 2013 that the MTC had breached its network operating agreement.

The two parties were soon clashing in Suffolk Superior Court, as The Eagle previously reported.

Doing deal

Axia NG Networks USA Inc. was a unit of ANMC of Calgary, Alberta, and was formed in 2010. The Canadian company is a global provider of telecommunications services.

Axia signed a deal with the MTC in March 2011 to handle all aspects of the middle-mile network, including sales and customer support.

At the time, the MTC itself oversaw design and construction, hiring G4S Technology LLC to design and build the system.

The $90 million in funding came from federal stimulus allocations and from state backing. The middle-mile network was pitched as a way to bring high-speed internet access closer to unserved communities.

As the middle-mile network manager, KCST USA Inc. contracts on a wholesale basis with firms, like Crocker Communications, that provide connections to individual retail customers.

Matthew Crocker, the company's president, told The Eagle this winter that the middle mile has helped the region's economy and praised the network's wholesale prices.

But others see the network as misguided.

Christopher Mitchell, a national broadband expert, said in January that "dollar for dollar, it was not a wise investment at the time."

"That was basically a bridge to nowhere," said Mitchell, director of the Community Broadband Networks Initiative in Minnesota.

The state's share of the project cost $44.3 million.

Last June, ANMC, which had been Axia's shareholder, transferred assets into the Axia NG Networks Trust, though ANMC remained the sole beneficiary.

At the time, FSM Capital Management LLC was hired as operating trustee.

Today, KCST USA Inc. has six full-time employees. In addition to Darr, the newly named chief restructuring officer, the company is led by Terrence Fergus, its president.

Reach staff writer Larry Parnass at 413-496-6214 or @larryparnass


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