Saturday, December 03, 2011

LUS Fiber Seeks to Complete Bond Sales

CouncilThe Advocate reports that LUS Fiber is going before the City-Parish Council Tuesday evening seeking final approval to bond out the remaining $14.5 million of the bonds of the $125 million the voters approved back in 2005. Articles in the Advocate and the Advertiser report parallel stories. The tale boils down to Huval explaining that the new utility is paying its operating expenses but isn't yet generating enough income to comfortably pay its ongoing debt service to the bondholders while at the same time acquiring new customers.

That's going to seem counter-intuitive to some; after all, new customers is supposed to be what every growing business needs, right? Yes, but there's the long run and the short run—and laws and regulations that simply stink. We need to dig a little deeper to even begin to understand what is going on here.

Customer acquisition costs
Here's a term to store away: "customer acquisition costs." It's an update on the old saw: "It takes money to make money." In the world of telecommunications networks this is particularly true; it takes a lot of money to make money. The biggest chunk comes from simply paying to build the network; but even then there will be a continuing capital cost for paying to supply each user with their own fiber link, putting an expensive Optical Network Terminal on each house to support video, voice, a IP translation onto copper wiring, bringing wiring into the house, and to set most users with an nifty light-weight computer in the form of a set-top box. That part of the "start-up cost" is taken each time a customer signs up. Estimates for the cost of supplying a household after "passing" them with the basic network are variable but start at 650 dollars per customer and range up from there to figures like a 1000 dollars.

It will typically take years to payback that extra cost; it's a great (and absolutely necessary) investment since you're not going to make money in the long run unless you have plenty of customers but each customer you pick up means years of short-term debt load. It's worth noticing that all of LUS Fiber's competitors long ago paid off all these costs. It's a testament to the basic business plan that the community utility is able to offer generally better services to the city at a lower cost than the private competition.

Still, why not go ahead and take out the whole amount that the citizens authorized? Why take some early and then take more later? Doesn't that just sound bad—like LUS didn't anticipate the need?

The economy, smart business and lousy politics
It's perfectly possible, and even probable that LUS didn't anticipate the need: the long legal delays imposed by the incumbents lawsuits skewed their initial estimates and nobody anticipated the Wall Street crash and subsequent financial chaos and recession. Cable lost a record number of subscribers this year largely as a consequence of that recession according to analysts. Not the best market in which to begin a new network.

But there are also some smart business reasons to not put all of your financial eggs in one basket of borrowing. First, and most obviously, it's a good practice not to borrow money before you really need it—you just end up having to pay interest for a longer period of time so it is cheaper to space borrowing. But there are also federal regulations to take into account. According to the Advertiser's interview with Huval the IRS wants to be reassured that municipal bonds are actually being spent on building what they are supposed to build—in this case a fiber-optic utility—and they want to see the product that the bonded indebtedness is meant to build built within about three years or the issuer faces penalties. (Presumably this is meant to prevent using tax-exempt bonds to "arbitrage" or leverage the purchase of taxable but higher-yielding investments thereby defeating the purpose of having tax-exemptions for municipalities to build basic infrastructure instead of using the piles of money to invest in the open market.) But a fiber-optic network has a longer period of capitalization than your typical road or damn construction; as already noted each brand-new customer imposes a large acquisition cost. So it makes smart business sense to split out some of that downstream capitalization and only use it when it becomes necessary; you get an additional three years of capitalization for the investments you have to make in bringing late-adopters online.

So while it might be lousy politics to go back to the well, it can be smart business.


(Note: The Advertiser has their article running in the print edition but it's not appearing online yet...look for an update here when the on lie copy appears. —Here you go.)

4 comments:

Anonymous said...

the bond debt and interest will be about $10,000,000 per year, equipment replacement and depreciation will run $5,000,000 per year. That's a total of $15,000,000. Net Operating income is running 68% of gross revenue. That means LUS will have to double their sales to be able to make debt repayment. Do you really think they will do that in the next 2 or 3 years?

John said...

I don't have any reason to believe anyone outside of LUS has any idea what the numbers are and I especially don't have any reason to believe what some anonymous commenter choose to put up. Particularly when such commenters deliberately choose to leave out factors any honest person who did have the numbers would include. Come on show a little gumption and a smattering of pride.

Anonymous said...

Ok, This is what LUS says, not me. Form the Bonds

2011: 13,199 customers, Net Op. Income -1,733,666

2013: 24,605 customers, Net. Op. Income 12,893,585

At 24,605 customers, that assumes they will have 42% of the total market. So if bonds and LUS interfund loans need $10,000,000 that only leaves $2,800,000 for additional equipment, which is depreciating at $9,000,000 per year, and they are budgeting only $750,000 to $600,000 per year. By the end of 2013, our liablities will exceed our assets by some $50,000,000. And by the way, LUS “hook up” cost is $2,000 per house, not $650. Just go look on page 34 under the Com. System Capital Improvement Plan.
So the source is not anonymous, its LUS. But you already know this, because you think its "smart business", right?

John said...

I'm increasingly impatient with Anonymity. It looks a lot like our community is coming around to a position long held on this site that real discussion comes from having real identities. KATC, the Advertiser, and the Independent had instituted real name policies. I think it has already improved the level of discourse.

The latest comment is nothing but saying the same thing with more specific numbers and handwaving at sourcing. That doesn't raise the credibility of the claims anono makes at all.

Two things are necessary to make a claim that would be worth wasting time disproving or agreeing with: 1) A real person with a real reputation to dispute with. Until that happens I bear all the cost and the anonymous person is freeloading on the reputation I establish...I am through subsidizing unfair sniping. 2) REAL references with real links or at the very least references to title and where/how to get the materials that people vaguely reference. I do much better than that on this blog and again I am no longer willing to subsidize the bad practices of others by allowing them to trade on the quality of referencing that this site has established.

Notice is hereby served.