Tuesday, May 14, 2013

LCG Audit reveals LUS Fiber progress; subscriber numbers to be released

Screen shot from Advertiser Video
The headline news from the LCG audit is that the city-parish has brought its rainy-day cash cushion back up to a level that could keep the government running  for 81 days; the last audit had revealed a mere 7 day cushion.

But that's not the reason this blog is reporting the Advocate story by Richard Burgess — the secondary story is the health of LUS Fiber, the city's local telecomm utility:
The audit released on Monday also offers a close look at the finances of LUS Fiber, the city-owned fiber optic telecommunication service that launched in 2009.  
That’s enough to cover debt payments on the more than $100 million the city borrowed to build the fiber optic system and to cover nearly all operating expenses with the exception of depreciation... Factoring out depreciation, LUS Fiber made enough money to roughly break even by the end 2012, according to the audit figures.
LUS Fiber operating revenues rose from $17,010,937 in 2011 to $24,041,236 in 2012, according to the audit. 
As nice as that news is the real news for avid followers of fiber is the final paragraph:
That's continuing good news. LUS Fiber is paying all its bills—ongoing expenses, cable contracts, debt service, the whole schmear. What it can't say it is doing is storing away enough cash to replace or upgrade the equipment. Even that is a bit misleading. LUS Fiber is, in capital turns, mostly a huge investment in equipment which is scaled to serve the whole city. That hardware is almost all installed upfront before the customers begin to be served in any numbers. The equipment is brand new and it is being depreciated at a steady rate based on its expected useful life. In reality those parts won't begin to fail for a long time. So there is this huge mass of capital investment that is being depreciated on paper each year. Until growth catches up to the amount the accountants want to see being socked away as savings for the eventual day it is needed LUS loses money on the spreadsheets. But it is in no sense that any real businessman would acknowledge "losing money."
The city has never made public the number of customers served by the fiber optic system, citing laws that allow it to keep competitive information secret, but Huval said he plans to release the numbers later this month.
That's a good thing. I've long argued that keeping stuff like this secret is pointless: Cox knows quite well when a customer leaves for the competition and if it wants to spot check to confirm its estimates all it has to do is ride down the streets and look for houses with fiber optic cable running into the home. Cox knows exactly how many customers LUS has to within a small percentage of error. The only ones who don't know are the public—and hiding those numbers looks, well it looks like LUS has something to hide. It is much better in terms of public relations to simply be upfront about it.

Lagniappe: The Advertiser doesn't yet show its article on the audit but it does have a nice video up that has Huval explaining EBITA, Cash Flow Positive, and Profitable to our community. It's a tad surreal to realize that these terms are now useful terms that the citizen-owners of the new telecomm utility have good reason to understand. And you can see him promising to release subscriber numbers.

KATC had a badly mangled story up that Joey Durel immediately blasted in its comments section. Durel wrote:

Wrong. Please try again. I will make the independent auditor, Chief Financial Officer, and Director of Utilities available to your reporter to try and get an accurate accounting of the facts. As disappointing as it may be to someone there, the communications division of LUS is on the right track and continues to grow into the asset this community VOTED with confidence for it to be for Lafayette.
That sounds like the Durel of the fiber fight—an immediate feisty response. And he was right. The article, which has since been pulled, was an unsigned mishmash that confused In Lieu Of Taxes (ILOT) (which LUS Fiber does not yet pay) with an internal "loan" (where LUS Fiber is forced to pay market rates for a loan that returns to them money that they earned) and made the thinly veiled claim ("But that can't be taken at face value") that the auditor and Terry Huval were lying. It showed an embarrassing lack of understanding of the fiscal issues involved and revealed that someone at the station is drinking the anti-fiber cool-aide. KATC was wise to get its mistakes out of the public eye.

Update: The Advertiser story with full text is now available.

Update 2, 5/14/13  The Independent has a story up with the provocative title: "Lafayette’s ‘sinking ship’ is cash flow positive." That title refers to councilman Theriot's strange ideologically-fueled rant last year. Some fun bits:

On some marketing research:
"And what we’ve learned is that of the people who have not bought our services yet, about half of those probably aren’t going to buy our services because they’re against the idea of the government providing these types of services. But the other half that do intend to buy our services just haven’t gotten around to doing it. And if we end up with a big percentage of those who just haven’t gotten around to hooking up, we think the numbers that we have now will probably increase those by 60 to 90 percent in revenues, so it’s pretty significant.”
I have no doubt that there are significant parts of the population who see the city's telecomm utility as a new, risky idea. But that will be true only for as long as the fiber utility is new and risky. As it incrementally morphs into a stable fixture on local scene those concerns will drop away—and folks will buy according to what's best for them from all the established providers. Time will cure this ill.

Concerning the climb to profitability:
Says Huval, “We’ve gotten past that dark hour, but we knew it was going to be this way, if you look back at our feasibility study. We did the whole city. From the beginning, we didn’t discriminate. The poorest parts were hooked up just as fast as the wealthy. We promised that.”
Huval's remark tying the time to profitability to the political commitment to serve all demographics immediately reflects his understanding that doing so, rather than serving high-income, high take-rates first as Google is doing, kept LUS Fiber from getting over the hump faster. That points to one difference between public and private providers.

The take-away really ought to be that things are going roughly according to plan. Advocates of fiber always said that it would take awhile to get to profitability on any enterprise that required huge upfront capital investments. None of this was unanticipated and those that want to pretend that something scary is going on because a startup loses money that it always said it would lose in the first years is not being "fiscally responsible"—they are playing some other game.

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