DavidsonNews.net

One of the key issues in this fall’s election is the August decision by Davidson and Mooresville to purchase the former Adelphia cable TV/internet service. Evan Webster, a Davidson commissioner who is running for re-election, has provided a written response to questions voters and candidates are raising. Mr. Webster has been studying the issue for two years and is the unpaid volunteer chairman of the MI-Connection cable consortium, which will take over the service Dec. 19. Read on for more about the system, Evan Webster’s comments and links to public documents about the cable system’s financial projections.

What if cable loses money?

BY EVAN WEBSTER

Citizens have been asking: What happens if MI-Connection loses money? It is a legitimate question and expresses a real concern.

The short answer is that the business plan does show that MI Connection will lose money the first few years; however, the business plan also shows that Davidson and Mooresville will not have to contribute taxpayer dollars. The loss in the short term is due to investments in system upgrades in the first two years.

As a practicing CPA, I will point out that it is possible to lose money and still have a positive cash flow. At the end of the day, cash in the bank trumps “making or losing money.” MI Connection’s business plan shows that cash never goes below $1 million and that no taxpayer money is necessary.

At the public hearings, five-year cash flow statements were handed out with the materials made available to the public. These statements showed the cash collected and expenses paid, as well as capital improvements and debt service.

CABLE IS PROFITABLE

The former Adelphia system was making money and continues to make money. Last month the MI Connection system generated $1.16 million in revenue ($14 million per year). The industry averages positive cash flow of 30% of revenues; that qualifies cable companies as “cash cows.”

WHAT WE’RE BUYING

The former Adelphia system is a used car with some mileage; we know that - we’ve had engineers go over the entire system. We have an $8 million budget to upgrade the entire system plant by the end of calendar 2008. At that point we will have a Lexus. As we upgrade the system plant, we can offer more channels (high definition) and expanded services (video on demand and telephone service). We are getting a system with over 10,000 subscribers and an under-served population.

WHAT THE BUSINESS PLAN SHOWS

The business plan shows that the system will lose money the first three years, break even in year four, and make money from year five on. The business plan shows that the cash balance will not go below $1 million and that the Towns will not have to contribute taxpayer money. The business plan is very detailed and reflects staffing levels, capital improvement budgets and revenue detail. The assumptions used were conservative: lower population growth than the historic rate and slower rate increases than the industry norm.

WHO REVIEWED THE BUSINESS PLAN

The business plan was developed by a consultant, who has been involved in dozens of acquisitions, and the staff at Bristol Virginia Utilities (the outside company hired by the towns to run the system). They were initially reviewed by another financial consultant, as well as the staffs and elected officials of all five Towns and Mecklenburg County. In preparation for presentation to the Local Government Commission, a third consultant was hired to review the business plan and to issue a written report on the underlying assumptions. Bank of America, the bond underwriter, has also reviewed the business plan, as has the staff of the Local Government Commission.

The towns and elected officials have done their due diligence and satisfied themselves that the chance of MI Connection needing taxpayer money is remote. When you combine that with the potential to give our citizens the best cable and internet experience in the area and the ability of the Towns to use MI Connection as an economic development tool, you have hit a home run.

TECHNOLOGY POSTSCRIPT

Citizens have also expressed concerns about technology, specifically wireless. Wireless has never been intended as a substitute for the video portion of the cable system.

Wireless does not pose a significant threat to cable internet access for two reasons: reliability and speed. Have you ever had a call dropped or seen people walking around an office to find some bars? The same problems go with wireless internet. Cable internet is currently 10 times faster than wireless. That is why Blackberry users have difficulty with large attachments.

There is also the cost element. Philadelphia and San Francisco, who both announced free wireless systems, have scaled back because the technology requires more access points than anticipated (again, walking around the office for bars). Wireless is fine for texting, downloading small files, but it is not going to replace cable.

DOCUMENTS & LINKS

Five-year cash flow projections for MI-Connection, provided by Davidson Town Manager Leamon Brice (Requires Adobe Reader software)

Slides about MI-Connection financial assumptions, from Aug. 6, 2007, public presentation by Davidson Town Manager Leamon Brice. (Requires Adobe Reader)

Oct. 5, 2007, DavidsonNews.net, “Quit cable deal? Think twice supporters say.”

Other DavidsonNews.net coverage of the cable deal.

ONE MORE ITEM: TAX RATE IMPLICATIONS

Additional reporting by David Boraks, DavidsonNews.net

Town Manager Leamon Brice told the Local Government Commission in Raleigh recently, and repeated to DavidsonNews.net Friday, that he does not expect the system to go under completely.

But, we asked in theory, what if it did, and all 10,500 subscribers were gone, leaving the town with no revenues?

If that happened, Mr. Brice said the town would be liable for $2.7 million a year in debt payments. (Mooresville, which is splitting the costs with Davidson, would face a similar bill.) For Davidson taxpayers, that translates into a potential additional property tax of 26 cents per $100 of assessed value. That would be $520 on a $200,000 home.

But Mr. Brice reiterated that the system is not in danger of failing.

For now, the purchase costs taxpayers nothing. The system pays for itself. “Right now we collect enough subscriber revenue to pay for everything,” Mr. Brice said. “Let’s say we didn’t collect anything – that’s not realistic – but it would cost 26 cents” per $100 of valuation.

Filed under: Cable TV, Election 2007, Links