An MI-Connection service truck rolls through downtown Davidson.
By DAVID BORAKS
DavidsonNews.net
The MI-Connection cable and internet system, owned by Davidson and Mooresville, finished its first fiscal year June 30 with better-than-expected financial results, the system’s chief financial officer said Thursday. At a meeting in Mooresville, the general manager also told the system’s board that a badly needed system upgrade is on track to be completed by March. In some places, customers could see improvements even sooner, including better TV picture quality and internet speeds, and new services, including local telephone, video on demand and extra high-definition channels.
From Dec. 19, 2007, when the towns bought the system, through the June 30 end of the fiscal year, MI-Connection had an operating profit of $1,447,337, which was $432,082 more than projected. Operating profits (in financial lingo, that’s earnings before interest, taxes, depreciation and amortization, or EBITDA) are a common measure of sustainable financial health, showing if a company has sufficient revenues to cover basic operating expenses.
With the added expenses of interest, taxes, etc., the system showed an overall loss of $2.58 million, though officials say it currently has the cash to pay those as well. The loss narrower than the $4.28 million that MI-Connection had forecast.
Evan Webster, a Davidson Town Board member and volunteer chair of the MI-Connection board, said the fiscal 2008 results are a positive sign. “We’re sticking to our projections,” he said. “Nothing’s popped up yet that’s caused us to think we’re not going to reach our financial goals.”
“They system’s paying for itself,” he added.
The apparently promising financial picture and prospects for an on-time completion of upgrades are critical to system’s future. The push to replace and upgrade old cable lines and equipment is in some respects a race against time that could determine how well MI-Connection competes against satellite providers and cable and telephone companies.
Satellite services already are a major competitor. Time Warner Cable has begun laying its own cable in some MI-Connection neighborhoods, including in Mooresville. And AT&T is expected to challenge MI-Connection with video services in the near future in parts of its service area.
HITTING TARGETS
MI-Connection’s facilities were in poor condition when Davidson and Mooresville bought the local network last December. That’s why the towns began the upgrade soon after the purchase.
Critics of the towns’ purchase worry the system could wind up costing taxpayers as it faces competition from private companies. So far, that hasn’t been the case. The system has been hitting financial projections, and remains healthy: Officials say revenues are more than enough to cover both operating expenses and debt service on the $92.5 million the towns have borrowed to buy and upgrade the system.
The fiscal 2008 results beat projections in the system’s business plan.
“We were better than budget by 432,000 dollars,” CFO Stacey Bright told the board Thursday. “That’s cash. That rolled over from June 30th operations, (and) we’ll still have it available for us coming into this fiscal year. So I think for the first nine months of the system in operation, based on what we knew when we compiled the budget, we did very well. As we learn more about the system, we’ll be able to budget better.”
The system already has added 37 new channels, even before the upgrades are completed. Those included sports – the NFL Network and Mid-Atlantic Sports Network (MASN). (Updated Tuesday, Sept. 30, 4:40 p.m. to correct the name of MASN)
Meanwhile, the local origination channel this fall began showing local high school football games from Iredell County. (The system is in talks to get permission to show Mecklenburg County public high school games as well.) The channel also will be showing other local programming, including Christmas parades, Mr. Webster said.
As of early September, the system had 15,993 cable TV customers, up 167 for the year. And 8,737 customers were subscribed to MI-Connection’s internet service, which was about flat since the year began, according to a spokeswoman.
BACKGROUND
Davidson and Mooresville began talking about buying the system several years ago, when previous owner Adelphia Communications fell into bankruptcy and a financial scandal involving executives. Adelphia did little to modernize the system, and faced complaints of poor customer service.
Time Warner and Comcast, two of the nation’s largest cable companies, bought Adelphia’s assets, and Time Warner took over the Lake Norman area cable system temporarily. But area towns had clauses in their contracts with the cable company that gave them the right to buy the system if it were up for grabs. After a legal battle with Time Warner, the bankruptcy court affirmed the towns’ right to buy the system.
Initially, a group that included Huntersville, Troutman, Cornelius, Mecklenburg County, Davidson and Mooresville was considering buying the system. Huntersville, Mecklenburg County, Cornelius and Troutman all later dropped out, but Davidson and Mooresville decided to go ahead with a smaller deal. Cornelius and Mecklenburg County agreed to sell their subscribers to the new system. The towns completed the $59.7 million purchase last December.
The towns are not managing the system themselves. Instead, they’ve hired a management company, BVU Focus of Bristol, Va., to run it for them. BVU had expertise running a cable system in Bristol where it faced multiple competitors.
NEW EQUIPMENT AND CABLE
MI-Connection’s upgrade plans call for laying new fiber-optic cable; expanding the number of neighborhood network connections, or “nodes”; upgrading software; expanding the main network control center, or “head end,” in Mooresville; and adding a smaller network control center, or hub, in Davidson.
The head-end upgrade is to be completed by Dec. 31. The Davidson hub, on leased space at the town’s public works yard at West Walnut and Gamble streets, is to be done by Dec. 1.
The expanded number of neighborhood nodes will have the most dramatic effect on users, according to general manager Junior Miller. TV pictures should be clearer and internet speeds should be faster as the number of nodes grows. Currently, about 400 to 500 homes are connected to each node, which is far more than cable operators typically want. Once all the new nodes are in place, the number of homes will shrink to 50 to 75.
Also, the entire network is being upgraded to handle a larger amount of traffic and TV channels. That will allow MI-Connection to add more high definition TV channels and new services, such as telephone and video-on-demand. (Video on demand allows subscribers to the system’s advanced digital cable service to order and play programming through their set-top boxes.)
IMPROVED SERVICE
MI-Connection officials also showed their latest customer service figures last week, and said they are sticking to their promise to provide better service than customers had under previous operators.
The system is getting close to its long-term goals of reducing complaints and completing service calls within 24 hours, officials said. The system has completed 41 percent of service calls within 24 hours, aiming toward a goal of 50 percent. The number of trouble calls is currently about 5 percent of total customers, approaching the system’s goal of 3 percent, Mr. Miller said.
In customer satisfaction surveys conducted after customers contacted the system with service issues, most gave MI-Connection good grades (4.5 out 5) on five categories of service.
Customer service will be a key to winning new customers and holding on to old ones as competition increases, Mr. Webster said. “The relationships we’re building are important,” he said. “People realize they’re getting better service.”
An improved network also will set MI-Connection apart, he said. When the upgrades are complete next spring, MI-Connection will have a state-of-the-art network, able to offer business customers direct fiber-optic cable connections and offering all customers higher speeds and greater capacity than competitors.
“We want to make sure people realize that we’re months away from having a system that’s better than Time Warner’s,” Mr. Webster said.
DOCUMENTS
Fiscal 2008 operating results for MI-Connection, as reported at the Sept. 24, 2008, board meeting, (Requires Adobe Reader software) CLICK HERE>
If they’re pulling in such an impressive profit, perhaps they ought to cut their rates. If their prices were competitive with satellite, I would consider switching.
That’s great news. Taxes should be dropping any day now.
Why are we in this business! This is a competetive market that government has no business being in. Does everyone understand it takes continuous capital investment to provide advanced services and at the same time be able to provide customer service and keep prices in check. One day soon, we as taxpayers will get the bill. It will be 7 digits and it will be to “stay competetive”. UGH……
Where is the amortization of the $80 + million investment? If GAAP were applied, they would show a tremendous loss.
The EBITDA figure of $1.45M for the six month period sounds impressive until you consider it does NOT include several items. Chief among these is debt service for the $92.2M the town borrowed to purchase the system. Once debt service is taken into account cash flow becomes significantly NEGATIVE. Who makes up the difference?
I think that it is commendable that they have managed to pull this off and still stay ahead of their projections. I still believe that you get what you pay for and I know first hand that the number one goal of this company has been to put the customer first and foremost. They will continue to flourish and grow as long as their customers realize the value of personal service and attention. When you get tired of the automated voice mail loop and long hold times give them a call I’m sure someone who speaks fluent english will be available to help you.
The most telling piece of information I read is that TV subscribership was up just 1%, and the internet subscriber base was flat. It is a rare business that can expect long-term financial health with a stagnant customer base. One of the key assumptions behind the financial models presented when the towns made this acquisition was that they would increase penetration (aka “market share”) by 1% each year. Given that the customer base has remained essentially flat in the context of a growing population, it is safe to assume that MI-Connection’s penetration has stayed flat at best, and most likely dropped slightly. With Time Warner laying cable in Mooresville, and AT&T doing its thing, competition is going to intensify, not lessen. This is a highly leveraged venture (do the math and you’ll realize that $1.45MM over six months does not come close to paying the interest bill on this venture), and you don’t pay off such sums of debt by keeping your customer base flat. While I certainly hope I am wrong, my concern is that in a couple of years John McCain will suspend his activities of being senator from Arizona and fly into Davidson to try to bail us out (no wait, “rescue”) of this venture.
Would it be possible to obtain the list of entities(banks,etc.) that are receiving the large interest payments? Were the bonds offered to the citizens of Davidson and Mooresville? How will MI-Connection compete with the new wireless dish technology that many condo owners might consider? How would a future bailout be structured? If in the future the cash flow is not sufficient to cover the interest payments, would you increase rates, borrow more funds, ask for a bailout from the taxpayers of Davidson and Mooresville, or a combination of all of the above.