Talks between Burlington Telecom and CitiCapital have officially broken down, forcing the city telecom to return equipment it bought through a $33.5 million lease agreement with the financier.

In a letter filed with the Vermont Public Service Board late Tuesday night, BT's attorney, William Ellis, said the transfer of equipment shouldn't interrupt existing service, but that remains a possibility.

In mid-November talks stalled between the city and CitiCapital. The impasse ocurred when the city refused to agree to terms being offered by CitiCapital to make good on its lease.

"As a result of this impasse, Burlington and CitiCapital have agreed that the equipment lease is terminated. Now that the lease is terminated, the city will obtain replacement equipment either through a partnership or other means, which will allow CitiCapital equipment to be de-installed and returned," Mayor Bob Kiss announced via email early Wednesday.

It's unclear how much time Burlington Telecom and the city will have to un-install the equipment it bought with the borrowed funds and hand over the goods to CitiCapital. It's not yet clear how Burlington Telecom will find the money — or a new private partner — to re-install equipment in order to keep phone, television and internet services flowing to its thousands subscribers.

According to the letter to the PSB, CitiCapital has agreed to let the city return the equipment "as soon as practical."

"The city is presently researching several options," wrote Ellis to the PSB. "Those options include the purchase of replacement equipment, which would allow the CitiCapital equipment to be de-installed and returned, as well as potential partnership opportunities consistent with the city's obligation to propose a cure to the board."

The city was unable to persuade CitiCapital to restructure its lease to more closely match its revenues. Burlington Telecom missed several lease payments this year; CitiCapital dipped into a $1 million reserve fund to cover most of those costs.

"The cornerstone of these negotiations has been a plan to utilize the positive cash flow Burlington Telecom is producing from regular operations to support a lease amendment. However, CitiCapital has been unwilling to make an accommodation the city could support," Kiss said.

The two sides most recently met in Boston on November 15 where CitiCapital once again refused to write off part of its lease agreement, according to Ellis' letter.

"CitiCaptial representatives also underscored their unwillingness to set a restructuring precedent with the city of Burlington that would redound to their and the industry's detriment, if other municipalities took actions simile to Burlingtton," Ellis wrote the PSB. "CitiCapital's refusal to consider the city's proposal for restructuring the lease agreement appears also to be influenced by the belief that a 'higher authority' will somehow find the money to make the payments 'at the 11th hour' if they remain steadfast in their demand for the leased equipment to be returned."

Earlier this year, the city was in talks with the legislature about ways in which statutory language could be changed to allow the city to float a bond to help cover BT's debt. Such a bond would need voter approval. That idea, however, never became law or even a proposed piece of legislation.

CitiCapital wasn't buying any of the city's claims, or its counter-offers, according to Ellis' letter.

"The city made an interim proposal consistent with the legal restrictions on the use of city funds that included returning to the Legislature to reconsider the existing statutory restrictions. CitiCapital remained dismissive of the legal restrictions on the use of city funds and asserted that the city had an absolute obligation to make the scheduled lease payments as set forth in the lease agreement," Ellis wrote.

In other words — the city and its taxpayers are on the hook to repay the money regardless of any legal or license conditions.

Though CitiCapital agreed to let Burlington Telecom and the city to return equipment "as soon as practical" it also wants to be paid in the interim for use of the equipment. The city is trying to renegotiate that condition.

"CitiCapital did agree to an accommodation period to allow continued use of its equipment on the condition that the city made minimum monthly rental payments of $311,000 ,which is well above market rates and beyond BT's cash resources. The restructuring proposal before CitiCapital provides regular and recurring monthly payments without utilizing non-BT revenue. Moreover, it provides CitiCapital a substantial upside in a format that addresses their concern about setting an industry precedent," Ellis wrote.

In the letter, Ellis requested a status conference with the PSB to talk about the lease termination in more detail as well as potential partnership opportunities to fund the replacement equipment and to propose a "cure", or long-term solution, to the board.

Last month, the PSB found Burlington Telecom in violation of several conditions of its certificate of public good.

Despite the setback, the ever-optimistic Kiss said BT would continue to provide services to Burlingtonians.

"Burlington Telecom is an important asset of the City. As always, Burlington Telecom is committed to providing continuing service to the residents and businesses who are its customers in the city of Burlington," said Kiss.

Download a copy of Burlington Telecom's letter to the Vermont Public Service Board: Download Hudson, S ltr 11-23-10-1

The complete statement of Mayor Bob Kiss:

The City of Burlington has been in negotiations with CitiCapital to restructure its lease since early this year.  The cornerstone of these negotiations has been a plan to utilize the positive cash flow Burlington Telecom is producing from regular operations to support a lease amendment.  However, CitiCapital has been unwilling to make an accommodation the City could support.

As a result of this impasse, Burlington and CitiCapital have agreed that the equipment lease is terminated.  Now that the lease is terminated, the City will obtain replacement equipment either through a partnership or other means, which will allow CitiCapital equipment to be de-installed and returned.

The City has requested a status conference with the Vermont Public Service Board to discuss this process in more detail as well as potential partnership opportunities to fund the replacement equipment and to propose a cure to the Board. Burlington Telecom is an important asset of the City.  As always, Burlington Telecom is committed to providing continuing service to the residents and businesses who are its customers in the City of Burlington.