By DAVID BORAKS
DavidsonNews.net

When Davidson and Mooresville bought the local cable TV system in December 2007, officials envisioned it initially would pay for itself, spur economic development and, later, turn a profit. Instead, it is losing money and customers amid the economic downturn and intense competition.

Now, there are signs the system’s financial troubles might soon affect the towns’ budgets. In Davidson, that could mean layoffs at Town Hall.

Davidson Town Manager Leamon Brice said this week he has been telling town staff in recent meetings that MI-Connection’s lack of growth and continued need for capital likely will require a cash infusion from the towns this year. That, and continued weakness in the town’s tax and fee revenues, could require him to trim Davidson’s town budget. In a worst-case scenario, he said that could mean job cuts.

“I basically told them we don’t have any new projections (about the cable system) from the ones we talked about several months ago,” Mr. Brice told DavidsonNews.net. “I told them we were probably going to have to do some budget cuts, and that may require some layoffs in areas where we were slack.”

Mr. Brice said the recent staff meetings were an effort to preempt speculation that might follow bad news from the cable system in the coming days or weeks.

But the meetings apparently haven’t stopped town employees from imagining the worst. Rumors are now circulating about unpaid furloughs, layoffs, or worse. An anonymous email sent to DavidsonNews.net by someone claiming to have knowledge of the recent town staff meetings said town employees are worried the cuts could mean shutting down the Parks & Recreation department.

Mr. Brice said that’s not the case. “There’s no discussion about doing away with Parks & Rec. I never said that,” Mr. Brice told DavidsonNews.net.

Rumors also are circulating that the town plans to cut 7 jobs. That would be a hefty 13 percent of the town’s 54 full-time-equivalent positions. But Mr. Brice said he has not discussed specific numbers of layoffs or how any layoffs might affect individual departments.

“I don’t know what that number might be. … I don’t even know that we’ll need to have them,” Mr. Brice said.

BOARD MEETING THURSDAY

Town spokeswoman Sara-Lynne Levine said the meetings were designed to keep employees informed of how the cable system’s situation might affect the town budget, rather than catch them by surprise with a pink slip.

It’s the first time town officials have publicly suggested the cable system’s financial troubles could take a bite out of the town budget.

The MI-Connection board of directors, whose main voting members are appointed by the Mooresville and Davidson town boards, will be discussing a revised budget at its monthly meeting Thursday morning, Jan. 28. Question marks include a key debt payment due in March and the need for additional capital for expansion, Mr. Brice said.

Mr. Brice does not believe the system will have difficulty making the debt payment. “We have no indication that there’s going to be a problem with that. No one’s told me any different,” he said.

But MI-Connection may need additional capital to pay for extending the cable network to new corporate customers. The system also is considering a proposal to bring some contract work in house. That would save money on operating expenses but require an up-front investment in new trucks and equipment, he said.

Any budget revision could require a cash infusion from the towns, in proportion to their ownership, officials say. Based on the number of customers in each town, Mooresville currently owns and holds financial responsibility for about 70 percent of MI-Connection. Davidson has 30 percent.

Mooresville’s town budget is 10 times the size of Davidson’s, and could more easily absorb additional costs from the cable system. Mooresville finance officer Maia Setzer told DavidsonNews.net her town is not contemplating budget cuts and is prepared to handle a potential cash call from the cable system.

“We anticipate the need for money, but we don’t know how much,” Ms. Setzer said. “And as we have said previously, the town of Mooresville has for several years been banking some money in our fund balance (savings) for capital projects. We have that at our disposal should we need to use that for MI-Connection.”

At least for now, it’s not known publicly how much money the cable system might need. For the past two years, the system has been able to pay for capital improvements, operating costs and debt payments from its operating income and reserves – mainly consisting of unspent borrowed funds. The debt includes an initial $80 million in bonds Mooresville issued to buy and upgrade the system and a second $12.5 million round of financing in 2008 to cover additional costs for the upgrade.

At $92.5 million, that’s more than the two towns’ combined annual budgets. (Mooresville’s budget is around $78 million. Davidson’s is $8 million.)

SEEKING GROWTH

Over the past year since a critical network upgrade was completed, the system has struggled to limit customer losses and market itself to new customers. With the economy at a standstill, the area’s population growth – a key factor in the towns’ projections when they bought the system – has slowed to a crawl.

MI-Connection has about 15,000 customers in south Iredell, Mooresville, Davidson, Cornelius and north Mecklenburg – fewer than it started with in 2007.

Meanwhile, financially strapped customers are dropping cable TV or switching to cheaper satellite services. And some housing developments are cutting discount deals with other providers that can offer cut-rate national contracts – something the tiny two-town system is not equipped to handle.

Alan Hall, MI-Connection’s general manager, said in a presentation to the Davidson Town Board Jan. 12 that the system has seen a continued decline in customer relationships since the July 1 start of the fiscal year. He said that was primarily due to the loss of 81 customers at Willow Creek Apartments in Mooresville, where managers decided to sign a nationwide contract for cable TV services with Time Warner Cable.

The system has responded by trimming expenses, including some layoffs, and by renegotiating the contract with its third-party management company, Bristol Virginia Utilities.

But hidden beneath the overall numbers are signs of growth.

Mr. Hall also said operating revenues in November were $1.34 million, up about 9 percent from the same month a year ago. The system’s biggest success right now remains in adding new services to existing customers. As cable TV subscribers added telephone and internet services, the average revenue per customer continued to climb, from $77.82 to $87.90 per customer per month, he said.

But expenses also were up 9 percent in November, and the system showed a $10,000 operating loss for the month, excluding interest and depreciation, Mr. Hall said.

MI-Connection had an operating loss of $2.6 million in the fiscal year that ended June 30, 2009, and an overall loss – after interest payments – of $6.43 million.

CRITICS CONCERNED

An economic rebound would improve the picture for MI-Connection, particularly if residential construction picks up and the number of households resumes the expansion of the past two decades. MI-Connection currently serves about half the homes its network passes. The assumption is that new homes would translate into new customers.

In the meantime, longtime critics of the towns’ purchase of the system continue to watch closely.

Davidson resident Rodney Graham, who has studied the system’s numbers, said he thinks MI-Connection still needs to bring down its costs. He notes that the system’s revenues are growing, particularly through sales of additional products to existing customers and “triple play” bundles that include TV, internet and telephone.

“My sense is that their growth has come from discounting their service offerings, particularly the ‘triple-play’ option, but their cost structure is such that this additional revenue does not translate into a profit,” Mr. Graham said.

“MI-Connection has an excellent product offering and strong service. They are the only company that can offer a ‘triple-play’ option throughout their service area,” he said. “I think they can price that package such that it provides an incentive to switch, but not so low as to preclude MI-Connection from making a profit.”

Andy Beard of Davidson, who has been a consistent opponent of the cable deal, said the prospect of having to come up with more money for MI-Connection probably “scares the dickens out of” town officials. He thinks they’re in a quandary: “We can’t back away from it now, we’ve got too much in it,” he said.

He’d like the town to seek an investor to buy a partial stake in the system. “If it was me, I’d sell some of it right this minute and just figure out how we make up the difference,” he said.

Thursday’s meeting begins at 7:30 a.m. at MI-Connection’s board room, 420 S. Academy St., Mooresville.

RELATED COVERAGE

See DavidsonNews.net’s past coverage of MI-Connection in the “Cable TV” category.