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1 7712 Stanmre Drive Beltsville, MD (301) January 6, 2010 Mike Mnsn Fred Halenar Re: Reprt n Financial Analysis f Fiber Business Plans Gentlemen: Fllwing is a reprt that describes the wrk that CCG Cnsulting perfrmed in the analysis f varius fiber business plans in Champaign and Urbana. In a separate reprt we discussed the business plan that wuld result if the cities accept the ARRA grant. This reprt lks at the ptins f a business plan if the cities tgether were t becme a retail prvider f services, a whlesale business plan where the cities wuld build a netwrk and then invite thers t prvide service n yur fiber netwrk, and finally, separate business plans lking at the feasibility f each city getting int the fiber business alne withut the ther city. Please call me at if yu have any questins r cmments abut this reprt. Dug Dawsn President CCG Cnsulting LLC 1

2 Executive Summary CCG lked at several additinal scenaris fr perating a fiber business in the Cities beynd the grant-nly mdel. We lked at a retail mdel that cvers bth cities with ne cmbined business, we lked a whlesale scenari where the cities wuld build the netwrk and invite service prviders t bring services. Finally we lked at the feasibility f either Champaign r Urbana ffering services withut the ther city. Sme f the findings frm these studies include: There is a very gd business plan fr prviding retail services fr bth cities cmbined. Such a business culd breakeven with a 35% custmer penetratin in cable TV and data services. At a 50% penetratin the business plan generates $26 millin in excess cash after 10 years and $95 millin f cash after 20 years. The business plan is cnservative in that it assumes sme f the fllwing: The mdel uses the same data rates fr the larger business as used in the grant business plan. These rates can be increased fr greater revenues. The mdel assumes a 5.5% bnd issue n a 25-year bnd. The current market rate fr this type f bnd is belw 5%. The mdel is limited t selling data, telephne and cable TV revenues. Industry experts expect ther new surces f revenue n fiber netwrks ver the next few decades. The mdel predicts n utside revenue surce frm carriers and ther large businesses. As a cmparisn, a similarly sized fiber netwrk in Lafayette Luisiana generates abut $2M per year in fiber sales t carriers, wireless cmpanies and large businesses. There des nt seem t be any reasnable business plan fr perating an pen access netwrk. An pen access netwrk wuld be a business plan where the Cities built a fiber netwrk and then sld access t custmers t ther cmpanies that wuld prvide data, telephne and cable services. We lked at tw ptins ne where pen access was prvided fr all services, and a secnd ptin where the Cities sld retail data services and sld access fr telephne and cable services. Bth business plans did nt generate enugh cash t cver debt service. There is a very slid business case fr Champaign t enter the retail business withut Urbana. Such a business culd breakeven with a 40% custmer penetratin in cable TV and data services. At a 50% penetratin the business plan generates $16 millin in excess cash after 10 years and $78 millin f cash after 20 years. The business plan uses the same cnservative assumptin used in the study fr bth cities cmbined. There is a business case t be made fr Urbana t enter the fiber business withut Champaign. Hwever, such a business wuld require a 51% custmer penetratin rate t breakeven and is thus smewhat risky. At a 50% penetratin the business plan generates $3 millin in excess cash after 10 years and $14 millin f cash after 20 years. The business plan uses the same cnservative assumptin used in the study fr bth cities cmbined. Next Steps. The first step we always recmmend befre thinking seriusly abut a full- City business plan is t cnduct a statistically valid survey t find ut the interest f fiber 2

3 prducts in the cmmunities. We have fund that residential surveys are a very gd indicatr f hw a well-run fiber business will succeed in terms f custmer penetratin rates. Retail Mdel After lking at the grant mdel, CCG then lked at the feasibility f building a FTTH netwrk t serve all f the hmes and business in bth cities. The mdel assumed that this wuld be a jint business wned by bth cities. The business plan assumed that yu wuld begin building the additinal FTTH netwrk at the end f the three year grant perid and that yu wuld get yur first new custmer utside the grant area in the year after starting cnstructin. The new business wuld be a full retail mdel where the new business will sell vice, vide and data t custmer Results f the Study The retail mdel prduced the fllwing results: EBITDA psitive in 2015, the third year after getting the bnd. EBITDA (Earnings befre interest, taxes, depreciatin and amrtizatin) psitive means that perating revenues are greater than perating expenses. Net Incme psitive in 2017, the fifth year after getting the bnd. This means that revenues are greater than all expenses including depreciatin and interest. Cash psitive in 2018, the sixth year after getting the bnd. This means that the revenues cver all expenses, debt service and capital additins. Cash Generated by Year 10 - $26 Millin Cash Generated by Year 20 - $95 Millin Assumptins in the Study Fllwing are sme f the key assumptins in this mdel: Cash Basis. Revenues are presented n a cash basis, when earned. Prperty and Depreciatin. Prperty is recrded at riginal cst. Majr prperty will be bked using wrk rders, meaning that sme amunts f installatin labr and verhead will be recrded as part f the asset value. Additins and majr replacements are capitalized. If an asset is sld, retired r therwise dispsed f, the frecast fllws Federal Cmmunicatins Cmmissin Part 32 accunting rules whereby an equal amunt f depreciatin reserve is retired alng with the riginal bk value f an asset. This preserves any gains r lsses assciated with retirements n the bks fr future ratepayers. Depreciatin expense is calculated using straight-line rates based upn expected useful lives fr each majr categry f asset. 3

4 Taxes. The business wuld be frm State f Illinis and federal incme taxes, s the frecast cntains n incme tax prvisin. Many f the revenues cllected by the business are subject t taxatin. The frecast assumes that such taxes will be added t custmer bills, as is the standard in the cmmunicatins industry, and that amunts cllected frm custmers will be ruted t the apprpriate taxing authrity. Since the frecasted financial statements assume that the business will have t submit taxes nly as actually cllected, such taxes are nt reflected in the frecast. Bnd Financing. The mdel assumes bnd financing f $100 Millin. The average interest rate is assumed t be 5.5%. The bnd includes 3 years f capitalized interest. The bnds als include a bnd reserve fund equal t ne year f bnd payments. Obviusly the terms f an actual bnd issue can be different than this, but this is typical fr the current bnd market. Mst cities that have gtten int the fiber business have financed the prjects using revenue bnds. These are bnds that are backed by the revenues frm the prject and nt by the ther tax revenues f the City. The bnd issue t finance the prject is estimated as fllws: Equipment $ 68.0M Sftware $ 1.2M Inventry $ 0.5M Bnd Fees $ 0.8M Wrking Cash $ 5.0M Capitalized Interest $ 16.6M Bnd Reserve Fund $ 8.4M Ttal Bnd $100.5M Asset Additins. Frecasted assets additins are as fllws: Vice & Fiber Electrnics CATV Other Ttal _ 2013 $9,742,848 $4,145,787 $4,190,000 $4,276,127 $22,354, ,072,952 1,773, , ,153 14,964, ,255,280 4,276,018 1,202, ,613 21,078, ,274,454 3,689,624 1,776,010 79,500 10,819, ,063,470 5,241,624 1,929, ,500 13,336,332 Assets purchased thrugh 2015 will be funded with the bnd financing. Assets after 2015 will be funded by cash generated frm peratins. The assets included in each categry abve are as fllws: 4

5 Fiber Builds frm the backbne fiber created by the grant and builds fiber feeder cables t get t each neighbrhd frm the fiber backbne, and fiber drps t cnnect custmers t the fiber netwrk. Electrnics Includes electrnics needed t distribute the services frm the headend t each custmer s lcatin. Vice and Cable TV Includes a vice switch, a cable TV headend and cable settp bxes. Other Includes a building at the headend, vehicles, furniture, cmputers, sftware, inventry and test equipment. Fr depreciatin purpses, asset lives are estimated as fllws: Building 25 years Vehicles 5 years Cmputers 7 years Furniture 7 years Vice Switch 8 years CATV headend 8 years FTTH electrnics 7 years Fiber 25 years Other Assets and Liabilities Accunts receivable are assumed t equal ne mnth f custmer revenue. Inventry includes spare fiber and electrnics sufficient t make rutine repairs t the netwrk. Accunts payable are assumed t equal ne mnth f cash perating expenses. Custmer Penetratin Residential Custmer Assumptins The cable TV service penetratin rate is assumed t be 50 percent f residential husehlds by 2018 and is arbitrarily set at that level thereafter. The telephne service penetratin rate is assumed t be 42 percent f residential husehlds by 2018 and then decreases each year thereafter. The high-speed Internet and data service penetratin rate is assumed t be 51 percent f husehlds by Business Custmer Assumptins The telephne service penetratin rate is assumed t reach 48 percent f the businesses by 2018 and grws slwly thereafter. 5

6 The cable TV service penetratin rate is assumed t be 15 percent f the cmmercial custmers by High-speed Internet and data service penetratin rate is assumed t be 51 percent f the businesses by The fllwing table shws the ttal assumed custmers. CAT Phne V Data ,780 4,226 5, ,920 10,292 12, ,868 16,262 18, ,973 22,211 24, ,992 23,810 25, ,657 23,926 26, ,303 24,058 26,607 Revenues and Expenses Fllwing is a descriptin f the significant revenue and expense assumptins: Operating Revenues Telephne services are frecasted based upn an assumed basic residential mnthly rate f $17.45, a 15% discunt frm existing rates. A lng distance with unlimited minutes will als cst an assumed $20. In additin t basic telephne service, the financial frecast assumes an array f features, the ability t cnnect IP telephnes t the netwrk and advanced business features. The frecast predicts n increases in telephne rates int the future. Cable TV rates are frecasted based upn a 15% discunt f the varius rates f the incumbent prvider, Cmcast, as f December In additin t basic service FiberNet will be ffering advanced features such as Vide n Demand. The frecast assumes that cable rates will be increased by 4% every secnd year. Interest incme is calculated n the bnd reserve fund and the perating cash fund at 2%. Assumed data rates in the frecasted financial statements are as fllws: Residential and Business 5 Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ The frecast assumes ver time that speeds will increase but that rates will be held cnstant, with n increases. Operating Expenses 6

7 The business wuld be perated by a direct emplyees hired by the new business. The business plan assumes that the business will acquire cable TV prgramming thrugh NCTC, the Natinal Cable Televisin Cperative. NCTC sells prgramming t a large number f cable prviders and its rates are significantly lwer than buying prgramming directly frm the prgrammers. A significant expense is labr. The business is prjected t launch with 16 emplyees, grwing t 74 emplyees five years after adding retail custmers initially the plan assumes the use f external helpdesk emplyees, with this grup brught in huse when there wuld be a savings. Breakeven Case The business must btain Internet access. The frecasted financial statements assume that this will be prvided free fr five years as part f the matching funds fr the grant. After that the business will pay fr the bandwidth. The mdel assumes that there will be a lcal strefrnt that will huse the custmer service representatives and that will give a place fr custmers t make lcal cntact. Rent is assumed t cst $17.50 per square ft fr rent and utilities. The remaining expenses are bet estimates fr the rutine csts f perating a fiber netwrk and wuld include such csts as vehicle expense, cmputer expense, maintenance and repairs t assets, training, etc. One questin that is always asked fr any business plan is hw prly can the business perfrm, in terms f custmer penetratin and still remain self-sustaining. I have created a versin f the business plan with lwer custmers and that still retains a decent wrking cash balance f just ver $500,000. One thing t nte abut a breakeven scenari. When bnd funds are used t finance a prject thse funds can mstly nly be used t finance infrastructure. Thus, if the business did mre prly than anticipated, there wuld be unspent bnd mney. The cvenants f mst bnds require that leftver bnd mney be put int the bank and used t retire bnds. This cash cannt be used t supprt the peratins f the business. In this scenari there was $5.3 Millin unused bnd prceeds that I shw being used t reduce principle. The breakeven case has the fllwing custmer penetratin rates: Residential telephne service penetratin rate reaches 29% by 2015 and decline thereafter. Residential cable TV service penetratin rate reaches 35% by 2014 and remains there fr the life f the bnds. Business telephne service penetratin rate reaches 50% f the businesses by Business cable TV service penetratin rate never exceed 22% by the end f the bnd payment perid. Residential high-speed Internet penetratin rate reaches 38% by the end f 10 years. Business high-speed Internet penetratin rate reaches 38% by the end f 10 years. 7

8 Whlesale Mdel Attached is a whlesale mdel. What I mean by whlesale is that the Cities wuld wn the cre netwrk but then sme ther carrier r carriers wuld prvide service n the netwrk. In a whlesale mdel the Cities wuld be selling access t the netwrk and I have used the industry term f selling lps t describe this revenue stream. I first lked at the cncept f allwing the retail prviders t sell the triple play. Under this scenari the City might cllect smething like $30 fr a lp. This scenari lst tens f millins f dllars and there was n lp price that ever made this business plan cme clse t a breakeven. One might ask why this idea fails s dramatically? The issue is ne f generating enugh revenue t cver debt service. Under a whlesale mdel the Cities still need t build the entire fiber netwrk including all f the drps and electrnics. There is sme savings frm nt having t cnstruct a cable TV headend and a vice switch, but this lwers capital requirements nly arund $5M. Thus, the size f the bnd under a whlesale mdel is nly a little smaller than a bnd under the retail scenari. Because the bnds are s large there are still significant annual debt payments required. The reasn this business plan desn t wrk is bvius when ne takes a quick glance at the difference in revenues maybe $100 per custmer n average with the retail mdel with smething much smaller, say $30 with the whlesale mdel. That is nt enugh revenue t generate the cash needed t make the debt payments. One might ask abut raising the lp rate higher than $30, but this still des nt slve the prblem. If the lp rate is t expensive, then the whlesale prviders are ging t engage what is knwn as cherry picking. Fr example, if the lp rate is raised t $50, then the whlesalers will nly sell t custmers wh will buy an expensive package f prducts. This kills the business plan since the custmer penetratin rate is s lw. The scenari we are describing is the identical scenari that was in place in the Prv, Utah municipal netwrk. Prve sld $30 lps t whlesalers and never earned enugh mney t make bnd payments. The City had t subsidize the system fr a number f years befre they finally sld it. I then cnsidered the scenari where the City cntinues t be the prvider f data services and smebdy else prvides vice and cable TV services. This scenari reduces the size f the brrwing frm ver $100M in the retail mdel dwn t $84M. I then lked at varius lp prices. I started by lking at a $15 per mnth lp t give a whlesaler access t a custmer. At that lp cst the business lses arund $2M dllars per year. I then started increasing the lp price. At $30 dllars per lp it lks like the mdel culd wrk, assuming a 50% penetratin. Hwever, here is where the catch 22 kicks in and this is exactly the same dilemma faced by Prv Utah. The higher the lp price, the smaller the sales by the retail prviders. If the retail prviders must pay $30 t get nt the netwrk, then they are nly ging t want t cherry pick and sell services t the hmes wh buy big packages. 8

9 Thus when I say that this wrks with a $30 dllar lp I must mdify that and say that it wrks with a $30 lp and with selling cable TV t a 30% custmer penetratin. Hwever, that is nt a realistic penetratin rate when cnsidering that lp cst. In my experience, n mre than 15% f the custmers in any twn will buy an expensive package f the triple play prducts. With a $30 lp rate the whlesale prvider is nly ging t want t sell the mst expensive cable packages and will nt cntemplate selling basic cable t anybdy. This is exactly what happened t Prv. They had lps f arund $30, but they nly gt abut half the custmers n the netwrk that were needed t break even. The whlesale prviders selling n their netwrk were cherry picking nly the best custmers. I call this a catch 22 because it has a classic n win scenari. If we charge a small amunt fr lps the netwrk desn t generate enugh cash t make bnd payments. Hwever, if we raise lp prices, then the number f the custmers n the netwrk will drp dramatically and there is still nt enugh cash t cver debt payments. There des nt seem t be any lp price that ffers a hpe f success with this business plan. This finding differs frm the advice that I gave in the grant-nly reprt. In that reprt I said that the Cities shuld try t sell lps t whlesale custmers n the grant netwrk. The reasn this wrks in the grant business plan is because the grant pays fr the netwrk and there are n debt payments needed. The reasn the whlesale mdel desn t wrk in a whle-city netwrk is that the lp csts dn t generate enugh revenue t cver debt payments. This means that if the Cities allw a whlesaler t get nt the grant netwrk that yu must be very careful t make it clear that this same right is nt ging t extend t any netwrk that yu build using bnd mney. There is ne scenari that might make the whlesale mdel wrk, and that wuld be t have the retail prvider pick up the $1,300 cst t get t each custmer. I dn't believe a retail prvider exists wh wuld dump that much capital int smebdy else's netwrk, but such a scenari wuld lwer the risk f the business plan. One City Mdels Finally, I was asked t lk at a mdel t see if Urbana alne r Champaign alne culd g int the retail FTTH business. Fllwing are my findings frm thse tw scenaris. Champaign Only Scenari It lks like Champaign culd successfully enter the retail FTTH withut Urbana. Results f the Study The retail mdel prduced the fllwing results: EBITDA psitive in 2015, the third year after getting the bnd. EBITDA (Earnings befre interest, taxes, depreciatin and amrtizatin) psitive means that perating revenues are greater than perating expenses. Net Incme psitive in 2017, the fifth year after getting the bnd. This means that revenues are greater than all expenses including depreciatin and interest. 9

10 Cash psitive in 2018, the sixth year after getting the bnd. This means that the revenues cver all expenses, debt service and capital additins. Cash Generated by Year 10 - $16 Millin Cash Generated by Year 20 - $78 Millin Assumptins in the Study Fllwing are sme f the key assumptins in this mdel: Bnd Financing. The mdel assumes bnd financing f $60.1 Millin. The average interest rate is assumed t be 5.5%. The bnd includes 3 years f capitalized interest. The bnds als include a bnd reserve fund equal t ne year f bnd payments. Obviusly the terms f an actual bnd issue can be different than this, but this is typical fr the current bnd market. The bnd issue t finance the prject is estimated as fllws: Equipment $ 40.4M Sftware $ 1.2M Inventry $ 0.5M Bnd Fees $ 0.6M Wrking Cash $ 3.0M Capitalized Interest $ 9.9M Bnd Reserve Fund $ 4.5M Ttal Bnd $ 60.1M Asset Additins. The business plan assumes the base fiber netwrk is cnstructed using grant funds. Frecasted assets additins are as fllws: Vice & Fiber Electrnics CATV Other Ttal _ 2013 $7,247,534 $ 835,202 $4,260,000 $4,003,358 $16,346, ,257,082 1,565, , ,925 11,541, ,486,014 2,278, ,857 11,333 13,758, ,335,857 2,106,032 1,617,554 68,333 7,125, ,836,133 2,978,440 1,235,090 72,333 8,121,996 10

11 Assets purchased thrugh 2015 will be funded with the bnd financing. Assets after 2015 will be funded by cash generated frm peratins. The assets included in each categry abve are as fllws: Fiber Builds frm the backbne fiber created by the grant and builds fiber feeder cables t get t each neighbrhd frm the fiber backbne, and fiber drps t cnnect custmers t the fiber netwrk. Electrnics Includes electrnics needed t distribute the services frm the headend t each custmer s lcatin. Vice and Cable TV Includes a vice switch, a cable TV headend and cable settp bxes. Other Includes a building at the headend, vehicles, furniture, cmputers, sftware, inventry and test equipment. Fr depreciatin purpses, asset lives are estimated as fllws: Building 25 years Vehicles 5 years Cmputers 7 years Furniture 7 years Vice Switch 8 years CATV headend 8 years FTTH electrnics 7 years Fiber 25 years Other Assets and Liabilities Accunts receivable are assumed t equal ne mnth f custmer revenue. Inventry includes spare fiber and electrnics sufficient t make rutine repairs t the netwrk. Accunts payable are assumed t equal ne mnth f cash perating expenses. Custmer Penetratin Residential Custmer Assumptins The cable TV service penetratin rate is assumed t be 50 percent f residential husehlds by 2018 and is arbitrarily set at that level thereafter. The telephne service penetratin rate is assumed t be 42 percent f residential husehlds by 2018 and then decreases each year thereafter. The high-speed Internet and data service penetratin rate is assumed t be 50 percent f husehlds by

12 Business Custmer Assumptins The telephne service penetratin rate is assumed t reach 52 percent f the businesses by 2018 and grws slwly thereafter. The cable TV service penetratin rate is assumed t be 15 percent f the cmmercial custmers by High-speed Internet and data service penetratin rate is assumed t be 50 percent f the businesses by The fllwing table shws the ttal assumed custmers. Ph CA Dat ne TV a ,756 3,620 4, ,919 9,062 8, , , , , , , , , , , , , , , ,50 1 Revenues and Expenses Fllwing is a descriptin f the significant revenue and expense assumptins: Operating Revenues Telephne services are frecasted based upn an assumed basic residential mnthly rate f $17.45, a 15% discunt frm existing rates. A lng distance with unlimited minutes will als cst an assumed $20. In additin t basic telephne service, the financial frecast assumes an array f features, the ability t cnnect IP telephnes t the netwrk and advanced business features. The frecast predicts n increases in telephne rates int the future. Cable TV rates are frecasted based upn a 15% discunt f the varius rates f the incumbent prvider, Cmcast, as f December In additin t basic service FiberNet will be ffering advanced features such as Vide n Demand. The frecast assumes that cable rates will be increased by 4% every secnd year. Interest incme is calculated n the bnd reserve fund and the perating cash fund at 2%. Assumed data rates in the frecasted financial statements are as fllws: 12

13 Residential and Business 5 Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ The frecast assumes ver time that speeds will increase but that rates will be held cnstant, with n increases. Operating Expenses The business wuld be perated by a direct emplyees hired by the new business. The business plan assumes that the business will acquire cable TV prgramming thrugh NCTC, the Natinal Cable Televisin Cperative. NCTC sells prgramming t a large number f cable prviders and its rates are significantly lwer than buying prgramming directly frm the prgrammers. A significant expense is labr. The business is prjected t launch with 16 emplyees, grwing t 74 emplyees five years after adding retail custmers initially the plan assumes the use f external helpdesk emplyees, with this grup brught in huse when there wuld be a savings. The business must btain Internet access. The frecasted financial statements assume that this will be prvided free fr five years as part f the matching funds fr the grant. After that the business will pay fr the bandwidth. The mdel assumes that there will be a lcal strefrnt that will huse the custmer service representatives and that will give a place fr custmers t make lcal cntact. Rent is assumed t cst $17.50 per square ft fr rent and utilities. The remaining expenses are bet estimates fr the rutine csts f perating a fiber netwrk and wuld include such csts as vehicle expense, cmputer expense, maintenance and repairs t assets, training, etc. Breakeven Case One questin that is always asked fr any business plan is hw prly can the business perfrm, in terms f custmer penetratin and still remain self-sustaining. I have created a versin f the business plan with lwer custmers and that still retains a decent wrking cash balance f just ver $400,000. The breakeven fr Champaign nly is arund a 40% market penetratin in cable and data custmers. This is a little higher than the breakeven fr bth cities cmbined f arund 35%. One wuld expect this result since the fiber business has ecnmy f scale, meaning the larger the business the easier it is t make it wrk. Urbana Only Scenari 13

14 It is als pssible fr Urbana t enter the retail FTTH withut Champaign. Hwever, since this is a smaller business it wuld have a harder time being successful. Results f the Study The retail mdel prduced the fllwing results: EBITDA psitive in 2015, the third year after getting the bnd. EBITDA (Earnings befre interest, taxes, depreciatin and amrtizatin) psitive means that perating revenues are greater than perating expenses. Net Incme psitive in 2017, the fifth year after getting the bnd. This means that revenues are greater than all expenses including depreciatin and interest. Cash psitive in 2019, the seventh year after getting the bnd. This means that the revenues cver all expenses, debt service and capital additins. Cash Generated by Year 10 - $3 Millin Cash Generated by Year 20 - $14 Millin Assumptins in the Study Bnd Financing. The mdel assumes bnd financing f $40.3 Millin. The average interest rate is assumed t be 5.5%. The bnd includes 3 years f capitalized interest. The bnds als include a bnd reserve fund equal t ne year f bnd payments. Obviusly the terms f an actual bnd issue can be different than this, but this is typical fr the current bnd market. The bnd issue t finance the prject is estimated as fllws: Equipment $ 26.8M Sftware $ 1.2M Inventry $ 0.4M Bnd Fees $ 0.5M Wrking Cash $ 2.0M Capitalized Interest $ 6.7M Bnd Reserve Fund $ 2.8M Ttal Bnd $ 40.3M Asset Additins. The business plan assumes the base fiber netwrk is cnstructed using grant funds. Frecasted assets additins are as fllws: Vice & 14

15 Fiber Electrnics CATV Other Ttal _ 2013 $4,143,202 $1,533,702 $4,260,000 $3,539,460 $13,476, ,223, , , ,228 6,654, ,870,383 1,185, ,109 8,167 7,854, ,776,414 1,177, ,667 38,167 3,842, ,023,793 1,678, ,455 45,167 4,230,630 Assets purchased thrugh 2015 will be funded with the bnd financing. Assets after 2015 will be funded by cash generated frm peratins. The assets included in each categry abve are as fllws: Fiber Builds frm the backbne fiber created by the grant and builds fiber feeder cables t get t each neighbrhd frm the fiber backbne, and fiber drps t cnnect custmers t the fiber netwrk. Electrnics Includes electrnics needed t distribute the services frm the headend t each custmer s lcatin. Vice and Cable TV Includes a vice switch, a cable TV headend and cable settp bxes. Other Includes a building at the headend, vehicles, furniture, cmputers, sftware, inventry and test equipment. Fr depreciatin purpses, asset lives are estimated as fllws: Building 25 years Vehicles 5 years Cmputers 7 years Furniture 7 years Vice Switch 8 years CATV headend 8 years FTTH electrnics 7 years Fiber 25 years Other Assets and Liabilities Accunts receivable are assumed t equal ne mnth f custmer revenue. Inventry includes spare fiber and electrnics sufficient t make rutine repairs t the netwrk. Accunts payable are assumed t equal ne mnth f cash perating expenses. 15

16 Custmer Penetratin Residential Custmer Assumptins The cable TV service penetratin rate is assumed t be 50 percent f residential husehlds by 2018 and is arbitrarily set at that level thereafter. The telephne service penetratin rate is assumed t be 42 percent f residential husehlds by 2018 and then decreases each year thereafter. The high-speed Internet and data service penetratin rate is assumed t be 50 percent f husehlds by Business Custmer Assumptins The telephne service penetratin rate is assumed t reach 51 percent f the businesses by 2018 and grws slwly thereafter. The cable TV service penetratin rate is assumed t be 15 percent f the cmmercial custmers by High-speed Internet and data service penetratin rate is assumed t be 50 percent f the businesses by The fllwing table shws the ttal assumed custmers. Phne CATV Data ,660 3,606 2, ,247 7,170 4, ,325 8,104 6, ,180 8,162 8, ,025 8,200 8, ,885 8,240 8, ,736 8,290 9,057 Revenues and Expenses Fllwing is a descriptin f the significant revenue and expense assumptins: Operating Revenues Telephne services are frecasted based upn an assumed basic residential mnthly rate f $17.45, a 15% discunt frm existing rates. A lng distance with unlimited minutes will als cst an assumed $20. In additin t basic telephne service, the financial frecast assumes an array f features, the ability t cnnect IP telephnes t the netwrk and advanced business features. The frecast predicts n increases in telephne rates int the future. Cable TV rates are frecasted based upn a 15% discunt f the varius rates f the incumbent prvider, Cmcast, as f December In additin t basic service FiberNet 16

17 will be ffering advanced features such as Vide n Demand. The frecast assumes that cable rates will be increased by 4% every secnd year. Interest incme is calculated n the bnd reserve fund and the perating cash fund at 2%. Assumed data rates in the frecasted financial statements are as fllws: Residential and Business 5 Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ Mbps uplad and dwnlad $ The frecast assumes ver time that speeds will increase but that rates will be held cnstant, with n increases. Operating Expenses The business wuld be perated by a direct emplyees hired by the new business. The business plan assumes that the business will acquire cable TV prgramming thrugh NCTC, the Natinal Cable Televisin Cperative. NCTC sells prgramming t a large number f cable prviders and its rates are significantly lwer than buying prgramming directly frm the prgrammers. A significant expense is labr. The business is prjected t launch with 16 emplyees, grwing t 74 emplyees five years after adding retail custmers initially the plan assumes the use f external helpdesk emplyees, with this grup brught in huse when there wuld be a savings. The business must btain Internet access. The frecasted financial statements assume that this will be prvided free fr five years as part f the matching funds fr the grant. After that the business will pay fr the bandwidth. The mdel assumes that there will be a lcal strefrnt that will huse the custmer service representatives and that will give a place fr custmers t make lcal cntact. Rent is assumed t cst $17.50 per square ft fr rent and utilities. The remaining expenses are bet estimates fr the rutine csts f perating a fiber netwrk and wuld include such csts as vehicle expense, cmputer expense, maintenance and repairs t assets, training, etc. Breakeven Case One questin that is always asked fr any business plan is hw prly can the business perfrm, in terms f custmer penetratin and still remain self-sustaining. The Urbana business plan desn t reach breakeven until arund a 51% custmer penetratin rate fr cable and data services. This is due t the smaller size f the City. I wuld nte that there are municipal systems that have achieved a penetratin rate higher than 50%. Hwever, 17

18 having such a high breakeven threshld wuld put a lt f pressure n this business t succeed and there is n rm fr mistakes in perating the business. 18