By DAVID BORAKS
DavidsonNews.net

MOORESVILLE – Auditors found no accounting concerns in MI-Connection Communications System’s 2009-2010 year-end financial report, though system officials acknowledge that they need to keep focusing on growth. Meanwhile, board members at their meeting Thursday broached the subject of a possible price increase – something the system avoided this year, but is likely to be considered in the coming months.

From an accounting standpoint, the audit found no noteworthy problems, auditor Pete Teague of Dixon Hughes’ Winston-Salem office told the cable system board Thursday.

“There’s nothing particularly unusual or to be concerned about in here,” Mr. Teague said. Pointing to the first two pages, he said, “It’s a ‘clean’ opinion. No exceptions whatever.” He also said the system now appears to have “very good checks and balances.”

That made this year’s annual checkup a good one compared with a year ago, when Mr. Teague warned system officials they needed to restate the system’s financial reports to show how it pays for losses.

Board treasurer John Venzon of Davidson chaired Thursday’s meeting in the absence of chair Jon Kasberger of Mooresville. Mr. Venzon said knowing that MI-Connection’s accounting is on track is important, but the company still needs to work on eliminating losses.

“It’s nice to have a bill of clean financial hygiene,” he said. “But we haven’t taken our eyes off the ball, that we need to address the big deficit.”

Chart compares 2009 and 2010. Click to enlarge.

YEAR-END LOSS

The audited numbers differed slightly from the preliminary report general manager Alan Hall presented in August.

The audit report showed MI-Connection lost $6.17 million in the fiscal year ending June 30, after a $576,000 cash infusion from the towns of Mooresville and Davidson, which own the system.

The towns’ payments were not included in a preliminary year-end report in August from MI-Connection General Manager Alan Hall, when Mr. Hall reported the loss was $6.8 million.

MI-Connection had been financing its deficits through money borrowed previously. But reserves ran out last year, requiring the subsidy from the towns. That subsidy is projected to rise, from last year’s $576,000 to $6.46 million this year. The major problem is that growth at MI-Connection remains slow amid competition and the weak economy. Meanwhile, debt costs are rising: Until last year, the system was paying only interest on its debt; principal payments began Sept. 1.

MI-Connection’s outstanding debt now stands at $86 million, according to the audit report. That’s what remains of an initial $92.5 million borrowed to buy and upgrade the system in 2007-8, plus additional debt taken on in 2009-10. MI-Connection – which is managed for the towns by BVU of Bristol, Va. – said in the report that it added about $5.94 million in debt, primarily “for the construction and purchase of capital assets.”

Mr. Teague noted that the system had little revenue growth in the 2009-10 fiscal year, but also held down expenses.

The audit report did not present operating revenue and expense comparisons to 2008-9. Revised figures provided by Mr. Hall Friday – and based on the audited numbers – show that revenues were $14.84 million in the year ending June 30, up 8 percent from $13.75 million in fiscal 2009. Expenses in 2009-10 – excluding debt payments and other non-operating costs – were $13.6 million, up 1.2 percent from 2008-09.

Mr. Hall’s regular reports to the board and officials in the two towns typically look at day-to-day operating expenses only – earnings before interest, depreciation and amortization, or EBIDA. In August, he reported an operating profit of $1.26 million, up from $312,000 in 2009. The audited numbers put the operating profit at $1.25 million.

Depreciation and amortization aren’t cash expenses, but rather result from accounting practices that write down the value of assets or big expenses over time. The resulting figure is a widely accepted measure of a company’s performance, showing whether it can generate enough revenue to cover day-to-day expenses.

By that measure, MI-Connection’s positive cash flow is encouraging. But it is growing slowly, and from the standpoint of its owners – the towns of Davidson and Mooresville (who are responsible for the debt) – the system is still struggling to generate enough cash to cover its debt payments.

During 2009-10, the system’s total net assets – its assets minus debt and other liabilities – declined to negative $15 million. A year earlier, the figure was negative $8.9 million.

MI-Connection debt payment schedule. (SOURCE: MI-Connection FY 2009-10 audit report)

MI-Connection’s big debt load remains a hurdle. This year’s system budget calls for Davidson and Mooresville to kick in a total of $6.46 million to help pay this year’s costs – $4.44 million from Mooresville and $2.02 million from Davidson. Both towns had to tighten their belts this year to come up with the subsidy. In Davidson the subsidy equals nearly one-quarter of the town budget.

In fiscal 2010, those debt payments are going up, because of principal payments that began Sept. 1. For 2011 and the coming years, interest and principal payments will total about $7.3 million annually. (See chart.)

PRICE INCREASE AHEAD?

At the end of Thursday’s meeting, board members discussed the possibility of generating additional revenue by raising rates. That was prompted in part by news this week that Time Warner Cable – which is beginning to compete in MI-Connection’s territory – would raise its rates beginning Jan. 1.

Mr. Hall noted that Time Warner’s monthly price for basic cable would be rising from $58.95 to $63.99. MI-Connection’s current rate for comparable TV service is $52.49 monthly. Several board members observed that MI-Connection might have an opportunity to raise rates and generate badly-needed revenue, and still remain cheaper than Time Warner.

The auditor’s report included a discussion by management – BVU – of financial trends for the current 2010-11 fiscal year. One item notes that “rates for services are likely to increase.”

When the two towns bought the system in 2007, they pledged not to follow industry practices of hefty annual price increases, and they have kept to it. MI-Connection’s has had one price increase since then, in July 2009.

Critics of the system and the towns’ ownership point out that MI-Connection gets far less revenue per customer than other cable TV companies. That’s partly because its non-TV products – telephone and high-speed internet – remain relatively new and the number of customers getting more than one service is still growing. But it also may reflect pricing.

A consultant the board hired last year also suggested that MI-Connection had room to grow its per-customer revenues.

However, Mr. Hall also reminded board members that the system also faces competition from satellite providers and telephone companies, and that any price increase would have to take those into account as well.

He agreed to put together a proposal that could be delivered to the board in December or January. If the board adopts a rate increase, it could take effect as early as March.

Mr. Hall said price increase would affect mainly customers who buy only one service, and not those who receive discounts by buying a package of services. “My recommendation … would be to raise a la carte rates (prices for individual services) but continue to have aggressively priced bundles,” he said.

Comments Disabled To "MI-Connection audit is ‘clean'; board discusses pricing"

#1 Comment By Rodney Graham On November 19, 2010 @ 5:47 pm

#2 Comment By Andy Stevens On November 20, 2010 @ 9:15 pm

#3 Comment By David Boraks On November 20, 2010 @ 10:09 pm