By DAVID BORAKS
DavidsonNews.net

MI-Connection and the Virginia company that operates the communications system have agreed in principle to reconfigure their relationship through a new contract that eventually could give the towns of Davidson and Mooresville more oversight and control of the system they bought in 2007.

Bristol Virginia Utilities, or BVU, has run the system for the past three years under contract with the towns, hiring the system’s manager and all its employees and making most day-to-day decisions. The towns oversee BVU through a citizen board that over the past year has taken an increasingly active role in seeking a path to erase big financial losses.

In a press release Thursday, the companies said they signed a memorandum of understanding (MOU) on Wednesday, Dec. 1 – a roadmap that could lead to an eventual agreement. The new 3-year contract would replace the original 2007 operating agreement and would reduce BVU’s role in running the system to more of a services vendor. MI-Connection would become a stand-alone entity, taking on BVU’s local employees and increasing local management of the system, which offers cable TV, high-speed internet and telephone service to about 15,300 customers in the north Mecklenburg and south Iredell area.

The memorandum says local staff in MI-Connection’s Mooresville office – about 40 current BVU employees – would become MI-Connection employees. MI-Connection would take over payroll and finance. And its employees would report to local management and ultimately to MI-Connection’s board, instead of to executives in Bristol, Va.

BVU, meanwhile, would continue to provide services to MI-Connection, including customer service, billing and technical support.

MI-Connection said it hopes a new agreement can be reached by the “second half of 2011.”

BVU employees assigned to MI-Connection were told of the memorandum and possible changes at a lunch meeting at the Mooresville headquarters Thursday. Also attending were MI-Connection board members and BVU’s senior management.

SOME SAVINGS, LOCAL CONTROL

The two towns bought MI-Connection in December 2007 and – through BVU – have spent millions of dollars to upgrade it to a state-of-the-art system. Those upgrades have allowed the company to boost internet speeds, expand TV channel lineups and add telephone service.

But the network has been losing money since the purchase, in part because of costs of the $92.5 million in debt taken on to buy and upgrade the system, and in part because anticipated growth never materialized.

MI-Connection’s business plan originally was based on projections of continued population and economic growth in the Lake Norman area. Forecasts said the system would break even by about 2013. But the weak economy and competition from satellite TV services, telephone companies and other cable providers has kept MI-Connection from growing as fast as expected. Davidson Town Manager Leamon Brice said Thursday he thinks it the break-even point is now pushed back “a couple of years” – to at least 2015.

In the absence of economic growth in the region, the system now must rely on marketing to keep up with the competition and add customers. In recent quarters, the total number of customers has grown little, but the revenues have increased primarily because of sales of higher-profit telephone and internet services.

The system’s financial troubles have begun to cost the towns money. Debt payments now total $7.3 million annually, and the system’s revenues aren’t enough to cover all that cost.

In the 2009-10 fiscal year, Davidson and Mooresville paid $546,000 to cover a budget deficit at MI-Connection. This fiscal year, which ends June 30, they’re expected to provide another subsidy of $6.46 million – $2.02 million from Davidson and $4.44 million from Mooresville.

The moves outlined Thursday could save some money. The current contract pays BVU a “management fee” of $1.5 million a year. The memorandum signed Wednesday proposes a management fee of $300,000 a year. That’s not a windfall for the towns: Most of the savings would go to hiring BVU’s employees and creating the business structure required to establish MI-Connection as a stand-alone company. (MI-Connection currently exists only as a agency of the two towns, created through an inter-local agreement.)

Local officials say that after three years, MI-Connection needs a stronger local focus to boost growth, and it’s time to shift BVU’s management from BVU, in Bristol, Va., to the system’s headquarters in Mooresville.

“After three years of significant improvements to the system we inherited, an almost double-digit growth in our customer base in the past 12 months and a 7 percent revenue gain in 2010, we feel it’s time to forge a bridge of independence from BVU,” John Kasberger of Mooresville, MI-Connection’s chairman, said in a press release. “While we have benefited greatly from BVU’s guidance and expertise over the past three years, we feel the need to move toward becoming self-sufficient in our operations.”

Mr. Brice said Thursday the towns, through MI-Connection’s board have been seeking to strengthen oversight and improve returns as the system.

“We obviously are trying to get the business on more stable ground. So I think the MI-Connection board is looking for every way to make that happen. We’ve gotten really good service from BVU, there are still some things they do very very well. But it comes at a price, obviously,” Mr. Brice said.

“This will allow us to cut some of our expenses, (and) bring in-house some of the things that should be handled more locally, that would be easier to handle than it is for BVU,” he said.

Like Mr. Kasberger, he said the proposed restructuring is part of “maturing.” “I think what this says is that the organization, or the company, is growing, both in terms of revenue and capacity. … We’re maturing.”

In Thursday’s press release, Davidson Mayor John Woods offered similar thoughts. The MOU “is a sign of (MI-Connection’s) growing maturity as a company and a sign of its tremendous potential,” he said.

Added Mooresville Mayor Chris Montgomery: “This memorandum of understanding is an important and necessary step to form a common line of action. A focus on managing costs and building on community spirit provides an exciting opportunity citizens should support.”

MARKET FOCUS

John Venzon of Davidson, treasurer of the MI-Connection board, said he thinks the biggest issue facing the system is marketing. He told DavidsonNews.net that bringing MI-Connection’s leadership and employees in house is “less about control and more about market focus.”

“BVU has been a good partner in building the system,” Mr. Venzon said. “But we’re in different marketplaces.” The competitive Lake Norman market is very different from Bristol, Va., where BVU grew out of origins as the area’s local utility, he said.

While the system has been improved and now is growing again under BVU, he said, “We just have to grow faster.”

To get there, he said, “We need a dedicated management team that’s singularly focused on winning in this market. … We need people who know this market street-by-street.”

CHANGE FOR BVU

Wes Rosenbalm, BVU’s CEO and president, said renegotiating his company’s relationship with the towns is part of a “natural evolution.”

“BVU has always looked at this relationship with MI-Connection as an opportunity to help a sister community grow and offer advanced services, and improve the quality of life and economic development opportunities,” Mr. Rosenbalm said in a telephone interview. “This is just the next natural step in the progression … for them to start taking over the vast majority of those functions on a local level.”

For BVU, a new contract could mean the loss of at least $1.2 million a year in revenues. As part of the deal, BVU also would give up right to a $1.5 million “exit fee” in its current contract.

“Obviously any time you lose a revenue source it has an impact on your operations. But we have been preparing for this for some time. … We will still have some revenue coming in from the operations.”

DOCUMENTS

Dec. 2, 2010, MI-Connection press release, (PDF) “MI-Connection Makes Move Toward Greater Self-Sufficiency.”

Memorandum of Understanding, (PDF) (Note: it’s dated Nov. 10, but was actually signed Dec. 1 by MI-Connection chair John Kasberger).

PREVIOUS COVERAGE

See previous coverage of MI-Connection on DavidsonNews.net, CLICK HERE>

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