Last night I attended the public meeting of the Joint Powers in Sibley County to hear about their progress towards getting broadband in their area. They have been working on this for quite a while. The local governments (cities and county) have been working together through the Joint Powers to pursue a solution that would bring fiber to the area – and by area I mean cities, townships and farms.
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.
- 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
- 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
- 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
- Continue pre-sale and marketing
- Finalize deals with partners and a financial model
- Develop policies
- Bonding process (should take 90 days)
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.
- 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.
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
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.
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
- 75% of units in three retail communities
- 63% of single-family
- 83% of total Internet market
- 70% cable modem penetration
- 42% of business connected via direct fiber
- 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.
- 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.
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.
- Sent out 2 mailings
- Held community meetings
- Had booths at county fairs
- 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.