By the end of January, about 300 Lakefield residents will enjoy a range telecommunication services powered by fiber-optic cables.

And here’s the tidbit that caught my eye this morning…

Personalized higher speed Internet up to 1000 Mbps is available to customers upon request.

I love my house and my neighborhood – but 1000 Mbps could have me checking out open houses!

• Bingham Lake,
• Brewster
• Heron Lake
• Jackson
• Lakefield
• Okabena
• Round Lake
• Wilder

The project has been going very well – and even hooked up their first customer in December. So that part of Southwest Minnesota is going strong.

Unfortunately, according to Watch Dog, not all of Southwestern Minnesota is faring as well..

The recipient of a major federal stimulus grant and loan in southwestern Minnesota appears to be having second thoughts about proceeding with a broadband project spread out over three counties. The $15 million project which planned to expand broadband service in 15 communities may be in danger of going into the financial red zone, apparently due at least in part to the escalating costs of fiber optic cable.

Woodstock Telephone Company was approved by the Rural Utilities Service (RUS) to receive a $10.6 million grant and a $4.5 million loan from the American Recovery and Reinvestment Act (ARRA) to expand its fiber network by installing Fiber-to-the-Premise (FTTP) to an additional 3,600 premises in Lyon, Pipestone and Rock counties.

While there’s evidently been no formal announcement, the Minneota city administrator told the Freedom Foundation of Minnesota (FFM) that Woodstock Telephone informed her the company no longer intends to build a key facility in their community to house equipment for the network. FFM calls to Woodstock Telephone had not been returned at the time of this post.

I haven’t spoken to Woodstock, but I spoke to others who also indicated that Woodstock seemed as if it was running into some roadblocks.

Last night was an opportunity for the public and elected officials to hear from the various project partners. Each partner gave a presentation on their role and progress and/or plan for their role in the project.

There were well over 100 people there. Closer to 150, I’m sure – despite the fact that it was a bitterly cold night.

I took outline-type notes on the presentations – mostly because I thought it might inform and inspire other communities who are (or should be) looking at creating broadband options. Towards inspiration, I wish that I had a camera on Gary Evans from HBC, he spoke passionately about the need for broadband. I’ll paraphrase just one of his remarks…

“Broadband is an essential utility for a community. And the window for bringing it in to remain vital is closing.”

Here are some of the quick takes from the project…

Their plan is to bring FTTH. If all goes well, they’d like to build the backbone this year and start bringing it to residents next year. The estimate cost is $50 million; they are looking for revenue bonding for $70 million. (Revenue bonds are paid back from revenue from the project – not with taxes. However, parties involved (Joint Powers and members) are responsible for keeping the reserves replenished throughout the project.)

The project is expected to have a positive margin by the end of year two. There are a couple of wildcard factors. First: take rate – the business plan assumes a 65% penetration rate where customers subscribe to at least two services (of the triple play offering). Second: interest rate – they need to get better than 6% interest rate.

There are other wildcards – such as ensuring other numbers are correct, and assuming there are no roadblocks, such as a lawsuit – but I think these that the take rate and interest rate are two biggies because they are outside the scope of the partners to a large degree.

Not surprisingly, attendees seemed most concerned about mitigating risk – starting with the bonding but also with potential lawsuits. They were clearly up on the history of Monticello’s project – but a lawyer has determined that the situation here is different, in part because as a countywide project they can escape some roadblocks set out for municipalities.

Here are more complete notes…

 1. Welcome & Call to Order – Mayor Jim Kreft, City of Arlington & Commissioner Swanson, JPB Chair

 2. Doug Dawson, CCG Consulting

Doug Dawson of CCG Consulting will provide an update regarding the financial model for the project.  Doug will discuss his thoughts regarding the project given the progress that has been made in marketing, management, project finance, and the estimation of construction cost.

Financial Model:

• They went to towns a year ago to introduce this model. This is an update.
• Added 4 new towns (Lafayette, Stewart Buffalo Lake & Browntown)

• 6 year project – to be cash positive by year 5.
• Requires $49.2 million in assets (fiber is biggest ticket item)
• Requires a $69.4 million (will take care of working capital for few first few years)
• Positive margin at very end of Years 2 (Revenues exceed direct expenses)
• Customer savings $970,000 per year by year 4.
• Breakeven penetration rate is 64.5%
• Profits over year after bond retired.

Project will have

• Starts with 7 employees to grow to 15
• Total investment per passing is $5,590
• Assumes private management by owned by cities and county

Financing assumptions

• 30 year bond of $69.4 million
• Guaranteed by overall revenues of the business (not backed by tax dollars)
• Reimburses the cities for the start-up costs
• The project will not cash flow at 6% interest rate

Issues

• Start time will depend on prep (design) complete before bonding.
• It would be nice to start building dark fiber this year – and next year start with customers.
• Need to finalize deal with HBC – figure out headend

Next Steps

• Continue pre-sale and marketing
• Finalize deals with partners and a financial model
• Develop policies
• Bonding process (should take 90 days)

QUESTIONS:

Might we have trouble getting fiber?
There were problems this year – due to ARRA funding and a fire in one of the few fiber factories. We have already pre-order some fiber

Did you budget for equipment upgrades?
In 30 years we assume the electronics will be changes twice.

Does 64% penetration take into consideration the triple play?
We assume that 64% will take at least two services. We think telephone will be dropping eventually.

Who is responsible for changing pledge cards to orders?
The marketing committee will be involved. HBC will probably hire people to help – but the Joint Powers will be involved too.

Do you know how many pledge cards have been collected?
I heard 2900.

 3. Ralph McGinley, Oppenheimer & Co., Inc.

Ralph McGinley of Oppenheimer & Co., Inc. will be summarizing the draft terms sheet that has been presented regarding project financing.  The terms sheet summarizes the obligations of the Joint Powers Board and units of government that are members of the Joint Powers Board if project financing is to be obtained through Oppenheimer & Co., Inc.

Their business is to raise debt capital for projects such as these. We take the bonds to the marketplace to get financing.

We have made a commitment to broadband – and fiber.

We believe FTTH is a very valuable component to communities.

Underwriting Standards

• Need to see clear commitment from community – we’d like to see more than 64% take-rate
• Like to see separate of business from politics
• Need to see a good business plan
• In a market like this we need to see a municipal component and we need to see a conservative pro forma

We will be selling revenue bonds. They will not be backed by tax. They will be backed by revenue from the project.

Bond maturity is 30 years – they will be fixed rate – no payments for first 3 years.

We assume bonds will go to market as an investment grade category. We assume BBB category – conservatively. That is the lowest end.

We are looking at 5% interest rate on tax exempt bonds.

A debt service reserve fund is initially funded by bond. It will be one year principal and interest. It will act as a rainy day fund.

It will also be available for final payments.

A critical component is the debt service reserve fund replenishment guarantee. It means if you have to draw on debt fund – then the participating communities will agree to make up the difference. This is made on an annual appropriations. So the Joint Powers communities will be asked to make up the difference. (So if one community drops out – then the rest will need to make it up to the tune of 1.5 times their originally agreed upon rate.)

Bond holders will want to know that in the event of default – they can step in and take over the project.

We look for investors of high net worth

What’s necessary to complete financing?
Need legal documentation, due diligence, need to get all necessary permits. It’s about a 90 day process.

QUESTIONS:

With revenue bonds what guarantee do we have that cities and county will be sued by investors if funding falls short?
There is no assurance. However bonds will be sold with very full disclosure that these are revenue bonds and there is no pledge by cities/counties to pay bonds with tax. (In fact under MN law you can’t.) The buyers should be aware of what they are buying; we will be clear and they are savvy buyers. Courts have shown in the history that such suits have not been successful.

The Joint Powers board has looked into this issue as well. We have looked at the Amberfield bonds to make sure that we don’t fall into a similar issue.

Debt service replenishment – can we use that for multiple years (for the next ten year for example)?
Yes. But however – but by the time we take the funds to market, we are clearly on your site of the table. SO we will have the same objective – to have a successful project. But things can go wrong. So if we see that in ten years there’s been a draw every year – well that’s a bad sign. SO we’ll go to operations to adjust what needs to be changed to get the project on track.

Is any individual  community obligated to replenish debt reserve?
It’s up to the community on an annual basis. But we strongly suggest that cities consider it. We ask for 1.5 times is simply a limit to give bond holder some opportunity for recovery. And yes at some point communities will be responsible for reserve replenishment.

What happens if one community says no – and the rest follow suit?
There is the reserve fund for a year. But after that the bond holders may exercise the prerogative – and they can take over the project.

So if a bond deal is made – but before we get funding there’s a lawsuit – can we turn down bonds?
As the underwriter for the Monticello projects – it feels like deja vu all over again. You don’t need to accept the funding. You can choose to put the funds in reserve or choose to turn down funding.

In that event – and say the bond doesn’t close – then the issue is resolved – would it would be tougher to get bonding again?
It’s pure speculation – but probably yes.

Will the excess capitalized interest be available?
If you’re not using up the full interest, things are going really well. SO you might keep the cash for operations for later. Use the capitalized interest, keep the cash.

4. Robert Vose, Kennedy & Graven

Robert Vose of Kennedy & Graven will be discussing the legal authority that the project will proceed under, and challenges that the entities may face in implementation.

He is here as attorney for Joint Powers group; not a public funding expert.

Two kinds of authority:

• Regulatory – PUC cert of authority; local franchise – process is straightforward.
• Institutional  – local governments are creatures of statute. So how do we get into business? Via Joint Powers – so we must share same authority. It’s a way to get bonds

Possibly sticky statutes

Ch 237.19 – does not apply – two tricky terms (municipality & telephone exchange)

• - municipality may provide telephone exchange with super majority referendum if there’s an incumbent.
• - But in this example – we are not a municipality – we are county/Joint Power
• - telephone exchange must include switch – but this will not be a part of this project. There will not be a local switch

Ch 238 – applies and will permit Joint Power to provide cable

• Unless otherwise prohibited by law, any municipality may construct, purchase, and operate cable communications systems
• - municipal here is defined
• - cable communication includes TV, radio and other programs

QUESTIONS

Have there been any litigation to back up these decisions?
Yes – 237 has especially been litigated. (MediaOne has fought this case in Lake County.) There has been much less litigation of 238.)

Are we asking for trouble?
Yes – in the sense that there will be incumbents who will be unhappy? We may hear of opposition.

What would make necessary the referendum?
A change in the law – as counties are not included. You could pursue the referendum – except that if you win – the incumbent may claim that it doesn’t matter since we are a county.

You can’t proceed under 237 given the composition of the group.
Right.

Are townships include in 237?
Yes. Municipality does include townships.

Would it mitigate the risk to write this down?
There will be an opinion regarding authority. Oppenheimer needs permits.

Since the Joint Powers has increased – does the increase the chance of opposition?
Practically – yes because more incumbents will get involved which increases the chance of one of them opposing the deal.

5. Gary Evans, Hiawatha Broadband Communications

Gary Evans, CEO of HBC, will be discussing his company’s experience in building and operating other FTTH networks in Minnesota, the role they will play in implementing and managing the RS Fiber Project, as well as their company values and the importance of customer service in a FTTH operation.

The issue today is all about quality of live issues and rural America as a quality place.

New services – wireless telephone and Internet

We worked with Monticello
We worked in Burlington VT

HBC Differentiators – Local customer services & community involvement

HBC Penetration

• Cable
• 75% of units in three retail communities
• 63% of single-family
• Internet
• 83% of total Internet market
• 70% cable modem penetration
• 42% of business connected via direct fiber
• Telephone
• 68% of business market
• 64% of residential market

We’re not the low cost provider in any community we serve – but we are the dominant.

Monticello –

• The customer load in Monticello is where it was expected / forecasted to be (despite delays)
• We want to own the employees – that is not the case in Monticello. That was not a good idea. (Also a problem in Burlington)
• The city drops rates. We advised against it. Now the revenue is below what it should be. We are working to negotiate a contract where we have more authority; Monticello has requested this.
• Monticello is successful – customers are paying much less now than before Monticello went into business.
• In Winona Charter charges $30-40 less than other areas where we aren’t a competitor.

“Broadband is an essential utility for a community. And the window for bringing it in to remain vital is closing.”

We have seen populations grow in the communities that we serve.

QUESTIONS

Would you open a field office in this county?
I would open several.

6. Linda Kramer – R/S Fiber Marketing Committee Update

An update on the activities and progress made by the marketing committee for the project will be provided.  Ms. Kramer will also discuss marketing activities that are planned in the upcoming months.

We are getting the word out on the project and gauging interest. We collect the cards.

We are not professionals; but we are passionate.

We have

• Sent out 2 mailings
• Held community meetings
• Had booths at county fairs
• Billboards
• Website et al
• Newspaper ads et al
• Now working with marketing firm

So far we have 2926 cards mailed in – towards a goal or 4220 (That’s 55% of drops)

7. Question & Answer Period

All of the presenters will be available to answer project related questions.  It would be appropriate to take this opportunity to ask questions about financial risk, potential legal challenges, business model, services to be provided, etc

What would the impact be if there was a draw?
We are still looking at that and we need to come up with some policies. We do have an equation for seed funding; that process may be different.

Is there a potential overlap of responsibility for funding with county and city?
We are looking at this.

Does our rate of return of cards compare with other comparisons?
Yes, it’s very cool.

Do you think we’re close to the numbers we need to be successful?
I think we need about 3200; we have 2900 before bonding.

How many projects has Dough worked on?
80 cities have FTTH; I’ve worked on about half – plus more than 100 commercial projects. None have failed. But there have been projects that have failed; I haven’t worked with them and there’s usually a story behind the failure.

Do we have a feel for the impact adding schools and large business could have?
Those businesses will probably sign up – but they are not usually early adopters. They need security and reliability. We have kept our business plan conservative.

Can we see the business plan?
It belongs to the Joint Power Board.

8. Request for Release of Funds

At the recommendation of the Joint Powers Board, a request is being made to each of the participating entities to release the second half of the project seed funds.  Funds will be used to finance additional marketing activities, legal expenses, and administrative expenses associated with continuing to move the project forward.   It is asked that the Joint Powers participants respond to the request by early March.

The City of Arlington and the RS Fiber Joint Powers Board will be hosting a gathering of representatives from the 11 city councils and two county commissions that make up the RS Fiber Joint Powers Board on Thursday, January 19th at the Arlington Community Center.

The focus of the meeting is to update all of the councils and commissions on the progress of the project and discuss next steps for moving forward.

An agenda for the meeting is attached, along with bios for the presenters.

A light supper will be served beginning at 6 p.m. sponsored by the Sibley County Economic Development Commission (SEDCO).

The meeting will begin at 7 p.m.

Representatives from each council and commission will have assigned seating.

The gathering is a work session. No motions or votes will be allowed or taken. If a particular city or county needs to call their group to order, please let RS Fiber JPB Chair Jim Swanson know ahead of the meeting and he will accommodate your request.

There will be five presentations made during the meeting.

During the presentations questions will only be allowed from councils and commissions.

Handouts of the presentations will be available at the meeting.

A general Q&A session will take place following the presentations for the general public.

Cards will be passed out prior to the general Q&A and questions will be read from those cards.

Wade Werner from the AGGW Cable Commission and GFW will be taping the meeting.

Shannon Sweeney from David Drown Associates will moderate the presentations and Q&A.

If you have any comments, questions or suggestions please contact either me or one of the members of the JPB.

If you know of someone you think should receive this email, please forward it to them.

This is a public meeting and everyone is welcome.

The article reports…

In fact, he [SMBS General Manager Dan Olsen] says the pace will run at 250 hook-ups per month until the project is finished at the end of 2012.

They are also doing a wireless trial in Bingham Lake. So while it’s not earth shattering – I feel like hearing that the ARRA funded project is going well is worth repeating.

The timeline for current construction of the line includes both 2011 and 2012 construction seasons. Initial Middle Mile construction of a 415-mile outer ring construction is nearing completion, according to project manager Lyle MacVey. This includes an outer regional ring as well as community rings located in Duluth, Cloquet, Ely, Hibbing and Virginia. In all, 25 communities will be connected this year. All facilities should be fully online by the end of February into early March, and approximately 160 “critical” institution sites will be connected to the ring starting around March 2012.

New phases of the construction will get under way in spring 2012. This will include connecting the North Shore routes to Grand Portage, McGregor and International Falls. Additional ring development will also take place between Virginia and Duluth and Cloquet and Duluth. Large scale installations of the balance of the critical institutions will occur, and installation of another 400 miles of fiber is projected.

As you may recall the NESC project received$43.5 million in ARRA funding.

Telecommunications history was made in Lakefield last Friday as Southwest Minnesota Broadband Services connected its first working customer.

Southwest Minnesota Broadband Services (SMBS) received ARRA funding to deploy fiber in the area. They broke ground last July and connected the first customer in December. As the article points out the weather was a huge help.

Now they are up and running. Tests continue but they have staff on hand for deployment and customers service.

Great to hear the ARRA networks really come into their own. Also fun to see such excitement from the local press.

[Note, I have linked to an online article, but also had access to a print version, which was slightly different.]

data networking, Internet, colocation, phone and hosting services to approximately 3,600 business and residential customers in the Fargo area.

It seems a sign of a local company looking to serve their customers into the future. The acquisition will add 225 miles of fiber to their regional network. The article goes on to offer HickoryTech’s perspective…

“This acquisition further advances our strategy of growing our business and broadband services,” said John Finke, HickoryTech president and chief executive officer in a press release. “Last year, we extended our fiber network to Fargo. This transaction gives us immediate access to the market, making our entire portfolio of business services available to IdeaOne customers. The completion of our Broadband stimulus route from Brainerd, Minn. to Fargo, North Dakota in 2012 will further enhance our capabilities and services in this market.”

If you were white, middle-class and urban, the Internet was opening untold doors of information and opportunity. If you were poor, rural or a member of a minority group, you were fast being left behind.

She points out that…

While we still talk about “the” Internet, we increasingly have two separate access marketplaces: high-speed wired and second-class wireless. High-speed access is a superhighway for those who can afford it, while racial minorities and poorer and rural Americans must make do with a bike path.

And after detailing how (technically) we can close the gap with cable and fiber she concludes that the issue is a national concern…

The new digital divide raises important questions about social equity in an information-driven world. But it is also a matter of protecting our economic future. Thirty years from now, African-Americans and Latinos, who are at the greatest risk of being left behind in the Internet revolution, will be more than half of our work force. If we want to be competitive in the global economy, we need to make sure every American has truly high-speed wired access to the Internet for a reasonable cost.

With that in mind I want to ask if we to invest in technology that will raise all boats – faster broadband that will facilitate two-way communication requires for telehealth, remote employment, even job interviews – why does the National Broadband Plan perpetuate the digital divide by aiming to provide genuinely high speed (100 Mbps) connectivity to 100 million homes but settle for 4 Mbps for the rest?

Also the Southwest Minnesota Broadband Group (SMBG) is fine tuning their fiber to the home services and are hoping to test in the field as early as next week with a hope to getting families fully up and running by mid-December. Fiber services will offer triple play services (Internet, cable, TV).

SMBG is also testing some wireless options in the area and again hope to pilot some connections in the upcoming weeks. Wireless customers, however, will only have access to Internet services through their connection. A successful wireless product would open SMBG to quicker expansion. It sounds as if there are plenty of residents just outside the original fiber territory who have been clamoring for SMBG to come into their areas.

The article also points out that the project has had an economic impact on the area with up to 70 people doing installations at peak times; that number is expected to decrease to 30 once the ground freezes.