By DAVID BORAKS
The Mooresville- and Davidson-owned MI-Connection Communications System will continue to need big cash infusions from the two towns over the next several years to cover payments on its massive debt, the system’s board acknowledged in a letter to state officials last week.
In new financial projections that the system describes as “conservative,” the board says it will need a total of nearly $17 million from the towns in fiscal 2011, 2012 and 2013. That includes an already-budgeted $6.46 million this year and new estimates of $5.89 million next year, and $4.51 million in two years.
The board offered no projections beyond fiscal 2013, but it appears from the slow decline in the subsidies that millions of dollars could be needed for years to come, at current growth rates.
The subsidies are divided between the two towns according to their relative shares of the system’s customers. As previously reported, Mooresville this year will contribute $4.44 million, and Davidson $2.02 million.
The new projections available this week are far more conservative than the optimistic ones the system offered last summer, when officials suggested the system could turn a profit by 2012 with better marketing. (See Aug. 17, 2010, “MI-Connection sets new goal: profit by FY 2012.”)
“It’s a conservative plan, intentionally,” MI-Connection board treasurer John Venzon told DavidsonNews.net. “We published the plan we felt confident that we would be able meet or exceed. Last year, we published a ‘stretch plan.'”
RESPONSE TO LGC CONCERNS
The board’s March 4 letter came in response to renewed concerns by the state Local Government Commission, a division of the state treasurer’s office that oversees borrowing by N.C. cities and towns. In a Feb. 4 letter to MI-Connection board chair John Kasberger – the second letter in as many years – the commission said it remains concerned.
“The unit’s audited financial statements indicate that the unit still has serious financial challenges,” Sharon Edmundson, director of the Fiscal Management Section wrote. “We noted various signs of financial weakness indicating that the system will have to take significant additional measures to achieve fiscal stability.” The LGC’s letter noted that the system is continuing to lose money and “may not have sufficient liquid resources to meet its current obligations.”
MI-Connection has 14,660 customers in the two towns as well as Cornelius and other parts of north Mecklenburg and south Iredell counties. Davidson and Mooresville borrowed $92.5 million in 2007 and 2008 to buy and upgrade the system, promising improved services and better customer service. They’ve largely kept those promises, but a weak economy and competition have kept the system from meeting its original growth projections. So far, the system has not been able to generate enough free cash to pay its debts, so the towns have had to provide the subsidies.
LITTLE GROWTH THIS YEAR
MI-Connection officials acknowledged in the letter to the LGC that the system is not growing this year – in part because of the loss of major apartment complexes in recent months. They said subscriber growth – which is currently negative – would grow only about 0.4 percent this year. But the board’s letter says MI-Connection’s average revenue per customer is rising and should continue rising over the next few years.
The board offered these outlooks for the system’s three business lines – cable TV, high-speed internet and telephone:
- The cable TV side of the business will generate “substantial cash flow” although “we project conservatively that it will have flat to moderate growth potential in the next three years,” the letter said. MI-Connection also acknowledges that TV services are “experiencing increased competition from satellite TV and emerging alternative video delivery services,” such as internet-TV.” But the board also noted that MI-Connection is positioned to take advantage of that new growth, saying its own high-speed internet lines are also capable of delivering those service.
- MI-Connection said its high-speed internet service is growing rapidly, both among homes and small businesses, mirroring trends across the industry. That should result in “strong subscriber growth and increasing subscriber penetration.”
- The system also foresees “continued and rapid growth” of its telephone services. Telephone could be a big growth area, the letter says, because “currently a small percentage of potential customers have signed up.” MI-Connection had 2,290 telephone customers as of Feb. 1, out of 14,660 total customer relationships.
The letter also responds to another LGC concern: Whether the cable system has the proper bonding in place for its chief financial official and other employees. The board attached to its letter copies of documents verifying the bonding through Cincinnati Insurance Co.
RENEGOTIATING BVU CONTRACT
The letter to the LGC also outlines the two towns’ plans to renegotiate their relationship with Bristol Virginia Utilities – the management company that has run the system on their behalf since they acquired it in 2007. [According to a December Memorandum (MOU) of Understanding with BVU, the towns plan to set up their own company to run the system. That new firm would take over operations ranging from personnel to finance. They would continue to contract with BVU for technical support, customer service and billing.] The board said:
In the MI-Connection Board’s view the change in operating relationship envisioned by the MOU will be financially and operationally beneficial to the long-term viability of MI-Connection. This anticipated new arrangement will provide more local control, with local knowledge, at a reduced operating cost.
The letter also offers one of the most straightforward acknowledgments to date from MI-Connection on the challenges it faces from competitors. They’re not named, but the letter points to satellite TV and cable and telephone companies. Both Time Warner Cable and AT&T have stepped up marketing of TV, telephone and internet in all or part of MI-Connection’s Lake Norman area territory.
Time Warner snatched away the two large apartment complexes recently – one in Cornelius and one in Mooresville – resulting in a loss of 580 customers. Figures provided to the board last month showed that the system had lost a net 521 customer relationships since July 1. MI-Connection’s board says the system has “stepped up” efforts to hold onto customers and believes it will resume growth in customer relationships in 2012.
The financial forecast includes “re-estimated” numbers for 2011. The board has not approved a formal budget restatement. Those figures forecast system revenues of $15.9 million in the year ending June 30, up from $14.8 million a in fiscal 2010. Operating expenses are forecast to be down slightly, to $16.5 million, from $17 million in 2010.
The 2010-11 numbers also include a one-time refund of $467,672 in state sales taxes. That’s money the system paid in sales taxes on equipment and other capital expenses over the past three years. The towns had claimed the refunds, saying that since they are exempt from sales taxes, MI-Connection should be as well. The N.C. Department of Revenue disagreed, and it took a legislative act last year to force the refund. It’s not clear what will happen with refund claims in future years.
Also this year, MI-Connection is expected to show an operating loss – a loss from day-to-day operations – of $593,676, down from $2.1 million in 2010. Those operating losses would become profits in 2012 ($393,383) and 2013 ($2.1 million), according to the new projections.
The system anticipates spending $2.6 million this year and $2.85 million in both of the next two years, on capital equipment – boxes at customers’ homes, new cable lines and other equipment. The board recently approved spending $75,000 to purchase equipment that would allow MI-Connection to add 10 more HD channels. That would boost its capacity to a total of 46 HD channels, bringing it in line with what other cable and telephone companies are offering.
Controlling expenses and boosting revenues will help MI-Connection continue to grow its profits before non-operating expenses – Earnings Before Interest, Depreciation and Amorization, or EBIDA. The LGC praised the system for boosting EBIDA last year, and the forecasts accompanying last week’s letter project EBIDA will grow from $1.3 million last year to $3 million in 2011, $4 million in 2012 and $5.9 million in 2013.
That money would be available to re-invest in the system, or to help pay debt. For the towns, that will remain the big issue for the foreseeable future. Debt payments will run about $7.3 million annually in the coming years.
MI-Connection’s cash reserves are all but gone. According to the projections given to the LGC, the system had $420,112 as of last June 30. It expects to have $439,051 as of this June 30, $220,206 in 2012, and $450,291 in 2013.
RELATED DOCUMENTS AND LINKS
March 4, 2011, MI-Connection response letter to Local Government Commission (PDF).
March 4, 2011, Attachment to letter with new financial projections 2011-13. (PDF)
Feb. 24, 2011, MI-Connection month-end business summary, (PDF).
Feb. 4, 2011, LGC letter to MI-Connection (PDF), CLICK HERE>
Dec. 2, 2010, “Towns eye relationship changes with cable operator.”