LUS Fiber Declares "Financial Milestone"

LUS Fiber called a press conference this morning to trumpet the fact that the startup business is now cash-flow positive, calling it "a financial milestone" and pulling in the city-parish's auditor, LCG's CFO, Lorrie Toups, and Terry Huval, utility head to make the case.

The Gist
The gist of the story is pretty straightforward: LUS Fiber has, since February of this year, been bringing in more in revenue than it spends each month. That's what's colloquially known as "successful." The utility is no longer dipping into reserves to pay for day-to-day expenses. All current purchases, salaries, and "notes" are being paid for out of current revenue. The caveat is that this isn't, not exactly, "profitable." Any well-run business has to also save some money—for replacing worn-out equipment, for expanding the business, for setting aside cash to pay for unexpected 'disasters," and finally for handing over profit to the owners...this last bit gives "profitability" its name and pleasant implications. LUS Fiber is now starting to put money away—just not yet enough to completely cover depreciation and planned upgrades. The kicker here is that LUS Fiber is not being run to generate a profit...so it won't ever have to be profitable in the sense that many private companies need to. A good utility makes enough money to set aside reserves for planned upgrades and the inevitable, especially in hurricane alley, rainy day. But it does not have to send any of its hard-earned income out of the city to satisfy far-away investors—instead LUS Fiber as a community-owned asset can return value to its citizen-owner-customers by keeping the service reliable, robust and cheap. Lafayette's citizen-owner-customers take home their profit in the form of more reliable, faster, and cheaper services.

The Longer Story
Huval started the press conference with a small bit of context—pitching LUS Fiber as a utility, not the sort of government that consumes money. Instead LUS Fiber is supposed to pay its own way from the fees that user hand over to pay for the services it provides. This is the way that the current electric and water services work.

Financial Highlights: click to enlarge

The big announcement was that the fiber division is currently able to pay its mortgages, all daily expenses and begin to set some money aside. By the end of the fiscal year, according to Huval, LUS Fiber will have about a million dollars in cash on hand. By 2014-2015 LUS Fiber will be fully profitable, able to completely fund any upgrades and replacements from its reserves.

Huval, and later Toups, used a car analogy to point out that, though depreciation sits on the books looking like a loss no outflow of actual cash is involved. In Huval's version a $25,000 car depreciated $3,000 dollars in value the moment you rolled if off the lot. An unsympathetic commenter could say that you've just lost $3,000 dollars. But that big initial bump is a book keeper adjusting for what you could get if you sold it on the open market—not what its value is for getting the job done. That value hasn't "depreciated" at all. Yes, you have to save up to buy an new car down the road. But only the accountant thinks you've lost money today.

The conversation then got pretty number-heavy with charts and graphs and numbers embedded in an orange-themed power point presentation. You can take a look for yourself...It shows actual numbers and downstream projections that support the basic tale: LUS Fiber is making enough money to be above water and need do nothing but continue to add customers at the current rate to be stable indefinitely.

Huval closed with a more general appeal to the public that they consider LUS Fiber a community resource, and now that it is clearly on the road to success they should get out and support it.

Lorrie Toups, LCG CFO, basically reiterated the story Huval told, fleshing it out with additional numbers and projections and a more extended variant of the car metaphor that focused on a taxi driver's business. She wanted to reassure the public that her office had staff that monitored he fiber business on a daily basis; the fiber division does not go unsupervised.

Toups gave way to CPA Kolder, the same accountant whose intemperate "$45,000 a day loss" remark lead to a similarly intemperate Advertiser headline. That number, unsurprisingly, was not mentioned today; instead Kolder emphasized that he agreed with Toups that the new utility was still in start-up mode, was on track to full profitability and emphasized that he'd said as much in his presentation to the council. Kolder pretty clearly overstepped best practice when he sensationalized LUS Fibers anticipated losses in a way that embarrassed the client and overshadowed the more substantial critiques he had a responsibility to make. Those critiques focused on Lafayette Consolidated Government's declining reserves and the need to either increase revenues or cut services. What was different today was that Kolder emphasized a point both Huval and Toups had earlier mentioned: that profit from the current LUS utilities fund a substantial portion of LCG's general fund. LUS Fiber will, if it continues on its current path, grow enough to contribute substantially to funding local government—and keeping Lafayette's tax burden relatively small. LUS Fiber is a part of the answer to LCG's current fiscal predicament; not a cause of it. 

The Takeaway

The intended takeaway was clearly that LUS Fiber is on the predicted path; it has turned a major corner and should be considered a tentative success by the community—one with huge downstream potential.

"Audit: LUS making progress"

Here's a striking contrast.

Stories on LUS Fiber that start with "Audit:" the Advocate's new story "Audit: LUS making progress" and the Advertiser's "Audit: LUS Fiber lost $45,000 a day."

We're talking the same audit. I've already commented on the Advertiser story—and on an Advocate story that actually focused on the core of the audit and was published on the same day. I felt (and feel) that the story out of the Baton Rouge paper focused on the whole audit and accorded LUS Fiber its appropriate space while the Advertiser went for an inflammatory headline.

Now, several days later the Advocate does a follow-up story that highlights the LUS Fiber portion of the audit story. What's instructive is that Burgess, the reporter for the Advocate, goes back to the auditor for a followup story, the city's chief financial officer and Terry Huval, head of the new utility. A very different story emerges. From the story:

Kolder said in an interview Thursday that despite his note of caution, he did not intend to present a “doom-and-gloom” scenario. 

He said that based on his review of LUS Fiber’s finances, he agrees with City-Parish Chief Financial Officer Lorrie Toups that the service could break even by late 2014 or early 2015. 

“Normally, most start-up businesses lose money the first three to five years,” Kolder said. “... It would be expected.”

And:

Toups noted that the $28.8 million deficit cited in the audit for LUS Fiber at year-end 2011 includes about $21 million in accumulated depreciation since 2009. 

Depreciation is not the loss of actual cash but rather writing off the value of equipment and infrastructure as it ages. 

Huval comments:

Huval said that when the depreciation expense is factored out, LUS Fiber, as of April, was making enough money to cover all operating expenses and to set money aside to help repay the more than $100 million borrowed to start the enterprise.

That's what's commonly known as "cash flow positive." And it is a big deal for any startup. It means that you no longer have to borrow new money—or dip into the money you've banked at startup—to pay for day-to-day expenses or debt service. With a debt as large as LUS Fiber's the latter concern is a large one. It's not the same as profitability, of course—to claim that you also have to be able to pay for expansion, replacement, and upgrades. In LUS' case there is no further expansion beyond the city in the works; there won't be much in the way of replacement beyond new trucks, tools and the like; and upgrades will be common enough—but since LUS Fiber is, by dint of being fiber, well oversupplied with capacity most upgrades in the future will be merely to replace older equipment with newer, more capable, and almost certainly cheaper equipment.

LUS Fiber is over the hump. Every additional subscription from here on out adds to the cushion that will  predictably allow the utility to say that it is profitable. Being cash flow positive means the business plan has proved out and the great mass of costs are being absorbed the current subscribers and the (notably low) prices that LUS Fiber is currently charging. There won't be a need for a radical restructuring of the business plan, merely the usual periodic adjustments to account for increased costs — issues that by and large the utility's competitors will also face.




Lagniappe: Interested readers may wish to travel over to the KPEL site where they can get many of the points made in this story directly from the horses' mouths. The radio station has posted an audio stream of an interview with Durel and Huval that the two gave in response to the initial Advertiser story.

"Durel – Huval Defend LUS Fiber Earnings"

 Yesterday morning, the day after a questionably crafted story:  Audit: LUS Fiber lost $45,000 a day ran in the Advertiser Durel and Huval got up early and went to KPEL's ‘Mornings With Ken & Bernie’ show to dispute the report.

The online recording shows Durel opening the segment by saying that the "headline was so misleading and distorted" that he felt compelled to clarify. The audit took place early in the new ventures life; when LUS Fiber was about 2 years old and long before there plan called for a break-even point. The audit was the 2010-2011 fiscal year starting  on November 1st so the data in was between 18 and 6 months old when it was presented to the council so things have changed. Even working with the old figure Durel and Huval point out that 2/3rds of the scary 45,000 dollars was in "basic depreciation." They explained it by analogy to new car depreciation— the value lost through depreciation is an accounting tool that deals with what you can sell the asset for; it does not mean that the actual assets are worth any less to the user or that that much real money is being poured into the business.

Part of what has changed is that LUS Fiber has continued to grow since the auditor closed his books. The new venture is now raking in 57% more revenue and has 50% more customers on its books than it did last year at this time. Those are the kind of growth figures that any start-up would be thrilled to have in year 3.  And that sort of growth has important consequences: without depreciation LUS Fiber has turned a very real corner and as of the April books is taking in in excess of 2 million dollars a month and can pay both debt service and operating expenses out of current revenues. Pause for a second: this is very big news.  It means that there is no further drain on borrowed money. From here on in they simply have to keep expanding and start saving for the inevitable periodic upgrades. Baring an unlikely contraction in the user-base the community can consider that their new utility has turned the corner. To quote Huval: "We did what we said we were going to do..." and LUS Fiber is "On the path of being a very self-sufficient business."

This whole process is not a new one for Lafayette. Huval, at one point in the interview, read from a 1901 newspaper article—6 years after LUS' electrical utility was launched—that bemoaned the constant drain on the city's coffers but offered encouragement about the services and savings from which the community benefited. Starting up a capital-intensive utility has always been a tough business.

In a short aside Huval also mentioned that of the 25 million dollar loan portion of the total debt that LUS Fiber took from the larger utility business that almost all of it was a cost forced on the utility by state law—it was a transfer of fiber already bought and paid for by LUS to the new division. Only 5.8 million was anything like what we conventionally mean by a loan and even a portion of that covered the same law's "imputed taxes"—a state-imposed injustice of which regular readers will be familiar. The Louisiana legislature's subservience to corporate interests was not a new feature developed during the current legislative session.

Durel wrapped up the discussion with his take on what drove some people to oppose the fiber plan: basically "ideology." He said: "There are people driving this that just want LUS Fiber to fail." But he claimed that not only was the fiber network going to pay for itself but it was going to make money, save customers money, and put money into the general fund. That's certainly been our experience with the electrical and water utilities.



*Do take the time to listen to the interview on KPEL. There's even a great radio pic of Durel and Huval. But be aware that the audio is locked up in a pretty nasty Adobe wrapper that will not let you access it directly or start and stop the feed. Just let it play; I went through several irritating restarts of the lead-in music when I tried to pause the download to take notes. Beware. Be patient.

** I'm going to take a moment to complain: today's good news that the utility is going cash flow positive is really, honestly, GOOD news. LUS Fiber has turned a very important corner and from here on out the chance of failure is vanishingly small. But the public is not getting the message that it should. LUS is simply not handling its PR very well. This should have been announced at press conference where the city and our utility could present it cleanly as the high point that it actually is. Having it come out in an early morning radio session under the shadow of an article like the Advertiser's is poor message management. Frankly I think that is mostly due to an excess of silence; those running the utility are engineers, not marketers (and thank heaven for that) but their instinct that not talking about the utilities successes or failures is always to be preferred simply leads to situations like this one.

***Early on I criticize about the Advertiser article that touched this off. You can find that article on the Advertiser site until it goes behind a paywall and you can find my longer critique on the blog.

Theriot Attacks Fiber Obscuring Council's Role in Larger Fiscal Debacle

The Lafayette City-Parish council heard a disturbing report from its auditor last night, the core of which was that Lafayette City Government had run out of the savings it had been coasting on since 2008 when the budget last actually balanced and was now faced with a fiscal crisis. 

So we get this headline: Audit: LUS Fiber lost $45,000 a day. Say whaaat? 

The Advertiser has returned to the days of coverage that sacrifices informed, informative reporting for sensationalism. 

This sort of story misses the real news to focus on sensational headlines and personality politics. Honestly, the real story is contained in the last paragraphs—that LCG as a whole has been living beyond its means every year since 2008. Not mentioned in this story is that the core critique was that LCG lost 9.7 million dollars in the last fiscal year which finally depleted reserves. The audit notes that LCG should be keeping a minimum of $14.5 million in a reserve, 'rainy day,' savings account but that the City-Parish is down to 3.8 million.

Durel, no doubt knowing this audit was coming, has been upfront about this in last few weeks saying that the crunch was coming because the city-parish council (which has responsibility for the budget) has run out of savings.

That Theriot, who is an officer of the council, should froth and foam about LUS Fiber rather than deal seriously with the actual problem that the council faces is predictable. He'd rather attack the supposed fiscal mismanagement of a public utility than face his own role in the fiscal mismanagement of LCG. He'd rather his ideological allies and followers do the same and skip lightly over his own failure to fix the very sort of problems he was elected to fix.

Focusing on LUS Fiber's "losses" is the most obvious sort of misdirection. Anyone who has followed the story of LUS Fiber knows that it is supposed to be losing money now. It's in the business plan, for gosh sakes. You borrow seed money via the bonds in order to build the physical assets that you expect to pay back the loan. Business 101,  Building a fiber-optic network from scratch requires enormous upfront capital. The plan presented to the public made it crystal clear that the division would lose money on paper for years, that was the whole point of borrowing 125 million dollars to buy construction bonds. The story even mentions this truth—in passing. Even Theriot, blinded as he might be by his own ideology, surely understands this basic bit of business management.

 Theriot, the only person interviewed for this story, gamed it all very nicely. He's getting to be quite the politician. Expect a follow-up make-good story that interviews Mayor-President Durel and utility director Huval tomorrow. That's the one where the community leaders have to explain, again, what bond money is and what it is used for. And that story will put off, for yet another day, the real story that the Advertiser should be writing: Audit Finds LCG has Run Out of Savings.

Update: Right after posting this I settled down to read the rest of my morning papers...and found that the Advocate's Richard Burgess had reported the story and reported it well. The title: "Budget cushion dwindling." The story focuses on the real problems the audit revealed and mentions LUS Fiber in the final paragraphs, clearly providing the context needed to understand its fiscal picture. Theriot is not provided a platform—nor is Durel or Huval.

Update #2, 5/25/12: Durel and Huval have responded to the Advertiser's article during an interview on  on KPEL. I covered that interview in a separate blog post.

"Lean Networking" and the Utility advantage

Martin Geddes, one of the brighter guys in a field full of smart people, writes intelligently and simply about what a modern telco company need to do to succeed. It's not easy to write both intelligently and simply about anything, especially telecommunications business models, but Geddes achieves that in an essay entitled "Lean Networking."

The basic trope he uses is to describe modern telecommunications companies as crucially similar to classic, massive, industrial manufacturing plants—they are centrally concerned with keeping the expensive plant running at full capacity all the time. They want to keep their networks full all the time and central to that is not overbuilding and viewing both network queues and QoS devices as fundamentally a way of keeping the pipes full. Quality, in guise of loss and delay, is is conceived of as something that happens after you've assured basic network efficiency, in the guise of full pipes. (You may now have an inkling of the underlying conundrum that AT&T' has created for itself.)

In contrast modern, "lean," manufactories are focused on what constrains the production of quality goods and in eliminating those constraints. Quality, conceived of as low defect and high user satisfaction, is the first focus of lean manufacturing. Efficiency is something that you work up to once you've got the quality where it needs to be to satisfy your market. So keeping the factory running at capacity at all times is not the first priority and is achieved by ruthlessly eliminating any constraints on supplying quality goods as they are needed even if that means plant downtime as the demand ebbs periodically. Maintaining some excess capacity is part of the price of viewing manufacturing in this way. By analogy, the lean network of the title of the essay is one which views minimizing loss and delay by focusing on those parts of the network that constrain the network—chiefly contention—eliminating those, and dealing with ebbs and flows by network planning allows excess capacity in accordance with anticipated large flows.

Geddes take-home idea is that the only way to have both efficiency and quality is to ensure quality first. Focusing on efficiency first results in the big, bulky, plants that have to run at full capacity all the time. And that sort of full capacity can only be achieved by methods which compromise on quality. But if you go for quality first you can adapt to the ebbs and flows exactly by minimizing queuing and other tactics which actually ensure contention. Only the quality-first route can take you to the very most efficient network.

Ok, you may say, but why talk about something so arcane in a blog focused on a local municipal network. Well...

Lafayette—and other fiber municipal or small networks.  
Geddes is focused on advising enormous,vertically integrated creatures like AT&T. As he notes the chief constraint on quality, contention, is worse at the local edges of the network. The solution is to both being willing to refuse to allow new entrants at peak times and to build more capacity to reduce the frequency of such moments. (Like lean manufactories.) The old telephone network that AT&T and its brethren built worked this way: like most utilities it was luxuriously over built and, in those rare moments of contention, new calls were simply refused; you were told "all circuits are busy" on those rare occasions when capacity was challenged. Interestingly, cable companies had their own version of this: they devoted discrete capacity to each channel, classically, each channels full info flowed past your tv's receiver all the time. It was hugely wasteful in terms of efficiency since you could only watch one channel at a time.

The advent of Internet Protocol (IP) and associated protocols changed all that; the key term is "best effort"—IP networks are not "all or nothing" networks like the old phone service or the classic cable model; instead they can trade quality for capacity. It's more efficient overall. And there is a strong engineering and financial push in the direction of efficiency; the two mindsets are in agreement on this issue.  The cost-savings occurs at the very edges where Geddes notes there is the most contention. This is at least partly because it is the most expensive part of the network in which to upgrade capacity. It's where the compromises are most profitably made. Old technologies that are more expensive in the long run are given spotty and gimmicky upgrades to extend their life and only the relatively inexpensive core lines are given the newer, more capable, and more easily upgraded fiber treatment.

That (finally!) is where entities like LUS Fiber come in. If the big guys can't see their way toward fixing the edges local folks can...and the end result can—if LUS focuses its bandwidth purchases on ensuring contention-free links at the regional level—result in a user network like the one Geddes would recommend: a network which is built to minimize contention first, and build efficiency on top of that.

It's a utility mentality. And with its LUS Fiber utility Lafayette is a "back to future" sort of place where the local supplier of the most constrained part of the network returns to viewing service as a quality issue and is willing to oversupply capacity in order to get quality...which, if Geddes take-home idea is right, is the only way to get to real quality and maximum efficiency.

LUS' biggest advantage in the modern business environment may well be its oldest attribute: a commitment to running the network like a utility.

"Stuller, LGMC, FiberCorps launch telemedicine clinic"

The Advertiser covers a new telemedicine project at Stuller today. The project at Stuller is the first fruits of a more complex project built on LUS Fiber—LUS' internal 100 meg intraconnection makes the two-way HD video that is the central feature of such a system simply not an issue; any off-the-shelf equipment can be used. Any medical practice that wants to make use of the infrastructure and any business that has LUS broadband can come in at a minimal cost. The hope of the program is to develop more and more varied clinics that rely on off-site expertise using the infrastructure that Stuller is piloting. A company the size of Stuller makes a great anchor tenet for such a project. Once it's up and running reliably and well-staffed adding additional virtual sites is easy—smaller companies coming onboard incrementally won't stress a system that starts with 12000 employees. That's an impressive base number especially since this is not meant to replace your general practitioner or specialist physicians. This is all about palliative care of minor illness and preventive medicine. Expanding the numbers in the program is only sensible business practice; the larger the base, the smaller the overhead maintenance will be.

 There's a perhaps not yet realized potential for the school system as well. New superintendent Cooper has made it clear that he wants to expand the already overburdened school nurse system into something much closer to community clinics either onsite or attached to schools. Telemedicine is one way to practically bring specialists and the children's primary care physicians into the loop without breaking the bank. And the school system is on LUS Fiber at 100 megs per node throughout the parish.

Senior care centers would likewise be prime candidates for expansion of the idea. Patients and caregivers could have much easier and more timely access to advanced care.

There is lots of room for good things to emerge from the ease with which advanced services can be offered when the capacity of the basic network and policy of unconstrained internal bandwidth means that ALL the potential users have easy, cheap, direct access to all the capacity they need. If Lafayette emerges as a leader in practical, widespread telemedicine it will be because all the basic infrastructure is lying here ready to use. The big pipe is open. We only have to connect the dots.

Chattanooga’s smart streetlights include a wireless network

Nifty idea from fellow fiber city Chattanooga: install a wireless network with your actively managed LED street light upgrade. Save money on lighting by using cheaper, longer-lasting lighting and by using the dimming function dynamically to save an extra fraction. Plus you can use it to piggy-back a wireless network for more general use if you want. Why not?

Before & After. Nice color temperature too! (via Sensus)

Once you've got the basic infrastructure in and under your control you can do some amazing things on top of it.

"New Video Explains Community Broadband"

The Institute for Local Self-Reliance has posted a new video that succinctly lays out the case for local broadband. It's not just faster. It's not just cheaper. It's also, and perhaps most importantly, about local self-determination.

And, while you're thinking about it, download their latest and greatest case study of three leading municipal networks: Broadband at the Speed of Light. Yes, LUS Fiber is one of the three examined.