2 citizens spoke at public hearing. Also, GM tells board growth is continuing, and system may not need all of 2010 subsidy.

By DAVID BORAKS
DavidsonNews.net

MOORESVILLE – The MI-Connection Communications System board of directors voted Thursday to send Davidson and Mooresville a recommended 2010-11 budget of $15.5 million, including a formal request for a subsidy totaling $6.46 million. But in a bit of good news, the board heard that growth this spring is continuing, and the company may not need all of the $576,000 subsidy it requested for the current fiscal year.

The news and budget vote came during the board’s regular monthly meeting Thursday at 7:30 a.m. at MI-Connection headquarters in Mooresville.

RELATED NEWS: Bill at N.C. legislature would limit towns’ broadband efforts.

At the meeting, the board also formally adopted a restated budget for this fiscal year, which ends June 30, that incorporates several accounting changes. The most noteworthy was the board’s decision to classify monthly fee discounts as subtractions from revenue, instead of as a marketing expense. Board treasurer John Venzon of Davidson said the move would provide more transparency and a more accurate picture of the system’s actual revenues and marketing expenses. It also brings the current year’s budget and accounting in line with the proposed budget for the new year, he said.

PROPOSED BUDGET

Thursday’s vote on the proposed budget is not final. The towns of Davidson and Mooresville first must adopt their own budgets in the coming weeks, incorporating the subsidy for MI-Connection. Once those figures are formally adopted, MI-Connection’s board will give final approval, likely in late June.

Mooresville and Davidson borrowed $92.5 million to buy the former Adelphia Commuications system in 2007 and to upgrade the obsolete network over the following 18 months. The system now has fewer customers than it started with in 2007, but it has begun to show some growth over the past year, particularly in selling telephone and internet services to existing customers.

This fiscal year, MI-Connection is expected to lose $7.1 million. The proposed 2010-11 budget anticipates that loss to narrow by about one-third, to $4.8 million.

The big debt is now the main drag on the system as it looks for a path to profitability. Debt service in the coming year will rise to about $7.3 million, from this year’ $4.6 million, as principal payments kick in.

The two towns would split the $6.46 million subsidy requested in the 2010-11 budget according to their relative ownership, 31.25 percent, or $2,018,641 for Davidson, and 68.75 percent, or $4.44 million for Mooresville. Davidson has cut jobs in Town Hall, slashed expenses and will dip into its reserves for its share. Mooresville’s budget envisions paying for most its share by tapping reserves.

MI-Connection General Manager Alan Hall presented the board with two budget options, one he called a “base case” and a second with more aggressive growth targets, that he referred to as a “community budget.” The MI-Connection board is recommending that the towns adopt the “base case,” which projects 19.9 percent revenue growth for the coming year, about double the experience in recent months.

The latter “community budget” projects even higher revenues (38.7 percent growth) and a smaller loss, as well as a lower subsidy from the towns. But it is more risky because it envisions broad adoption of MI-Connection’s services across the community at a rate nearly four times the “base” budget. Board chairman John Kasberger said Thursday he hopes the system can aim for the more aggressive targets in the community budget, even if it’s not the system’s adopted plan.

Some citizens in recent days have expressed concern that even the 19.9 percent growth target might be unachievable. On Thursday, Mr. Hall gave a bit more insight into the company’s thinking about how it might hit that number.

In recent months, MI-Connection’s revenues and  have been growing at a significantly faster rate than the past, as more customers added second and third services – primarily telephone and internet. In April, the company announced revenues for the quarter that ended March 31 were up 9.4 percent from a year earlier.

Growth is continuing, Mr. Hall said Tuesday. Although he gave no revenue figures, he said the number of individual services the company has sold was up 10.7 percent from a year earlier, to 24,584. (Each separate cable, telephone or internet service sold is called a “revenue generating unit,” or RGU.) The biggest improvement came in telephone lines, which rose to 1,847, from 271 a year earlier, when the company had just begun to offer telephone service.

Also in April, the total number of customer relationships grew, reversing a trend of losses. The company added a net 74 customer relationships, compared with a year earlier, to 15,270.

Mr Hall explained that the 19.9 percent revenue growth target assumes that current growth rates in the 9-10 percent range will continue in the coming year. “Some of our past success will continue to have dividends, kind of like compound interest,” Mr Hall told DavidsonNews.net after the meeting.

PUBLIC HEARING

The 2010-11 budget vote came after a brief public hearing that had just two speakers. (Some citizens have complained publicly in recent days that the meeting’s early morning hour made it difficult to attend.)

Lynn Burris of Davidson told the board that MI-Connection’s financial. “I know what trauma that created to the town of Davidson and its budget. And that represented nearly 25 percent of Davidson’s annual budget,” Mr. Burris said. He also aid he’s concerned about future years.

Andy Stevens of Troutman was the other speaker. He’s been a frequent critic of the towns’ ownership of the system, though he is not a taxpayer in either town or customer of MI-Connection. He accused the MI-Connection board of proposing a budget in which the “numbers have no rational basis.”

“What you want is a budget that people can believe in,” he said. He questioned how the budget could grow revenues while also cutting expenses. “You should be projecting a bottom line budget that’s no growth and worst case,” he said.

Board treasurer Venzon replied: “We just a have a difference of opinion.” Mr. Venzon noted that MI-Connection now has an experienced staff and third-party operator, in Bristol Virginia Utilities. “We think these numbers are realistic. We think they’re achievable. We think we have a world-class system.”

Mr. Venzon acknowledged that MI-Connection has had hurdles to overcome. “We’ve suffered some reputational damage of the previous operator, and we were delayed in getting our product out,” he said. But “we’re experiencing strong growth now under (General Manager Alan Hall’s) leadership and we’re anticipating and looking forward to a very good year next year.”

Said Mr. Hall: “We recognize that the towns are making a contribution to this thing, so therefore we have a responsiblity to run it as efficiently as possible. We are looking in every direction we can to save money.”

[EDITOR’S NOTE: This reporter also spoke during the budget hearing, only to report some of the comments and questions that have appeared recently on DavidsonNews.net.]

SUBSIDY CUT IN HALF THIS YEAR?

Tuesday’s meeting also included updates on other financial issues facing the system.

The continued growth this spring may help reduce the subsidy the system needs from Davidson and Mooresville this year, Mr. Hall told the board.

Back in January, the MI-Connection board adopted a revised budget that requested a $576,604 from the two towns. Both towns amended their budgets to come up with the money – $180,189 from Davidson and $396,415 from Mooresville.

The appropriations were necessary to meet legal requirements that MI-Connection have a balanced budget. But so far, the communications company has not needed the cash infusion. Mr. Hall said Thursday he thinks the system ultimately may not need half the money it previously requested.

“I would project perhaps half that amount,” he told the board. “We have exceeded the restated budget every month since you passed it.”

SALES TAX DISPUTE

Meanwhile, one of the other big financial issues weighing down the current year’s budget is a dispute with the state of North Carolina Department of Revenue, which has ruled that MI-Connection is not entitled to sales tax exemptions on equipment and supplies it purchases, even though it is wholly owned by two tax-exempt towns. The towns and the system have been fighting the state in hopes of getting a $400,000 refund for this fiscal year.

The system is hoping to reach a settlement with the state, but it also has been pursuing other approaches. System officials have been lobbying in Raleigh for either a change in the Department of Revenue’s ruling or legislation that would specifically exempt MI-Connection from sales taxes – a move the state says it needs.

Mr. Kasberger said Thursday that the system’s lobbyists are hoping that legislation will be passed during the N.C. legislature’s short session this spring that would provide the exemption. “It’s looking positive,” he said. If the legislation passes, the system could get a $400,000 refund in September.

PREVIOUS COVERAGE

May 14, 2010, “MI-Connection publishes budget, sets public hearing.”

See all our previous coverage of the MI-Connection budget under the “cable TV” category,http://davidsonnews.net/category/news/cable-tv/

DOCUMENTS

2010-11 budget summary for MI-Connection – 1 page PDF.

General Manager Alan Hall’s overview statement about the budget – 1 page PDF.

May 27, 2010, re-stated 2009-10 budget for MI-Connection (PDF)

May 27, 2010, April 2010 Stats for MI-Connection (PDF)