Loading...
City Council Minutes 11-16-2011 SpecialMINUTES SPECIAL MEETING — MONTICELLO CITY COUNCIL Wednesday, November 16, 2011— 5 p.m. Bridge Room, Monticello Community Center Present: Clint Herbst, Lloyd Hilgart, Tom Perrault, Glen Posusta, Brian Stumpf Absent: None Others: Jeff O'Neill, Torn Kelly, Gary Evans (HBC), Barry Fick (Springsted) 1. Call to Order Mayor Herbst called the meeting to order at 5 p.m. and welcomed all those present. He stated that this will be an informational meeting but no public input will be taken. 2. Purpose of Meetine City Administrator Jeff O'Neill stated the purpose: a. Update and review current operations and today's financial pressures facing FiberNet Monticello b. Discuss approach for responding to current economic enviromnent to improve financial status of FiberNet Monticello relating to debt and operations 3. Current Operations — Measurements of Success Jeff O'Neill reviewed the goals of the project at its outset as measures for determining the success of the project. He noted that the technology has been applied within budget as designed and is operating successfully and in keeping with expectations established at the outset. The service choice that has been established has resulted in a huge reduction in cost combined with increases in speed and improved service. Monticello is the envy of the nation when it comes to availability of fast and affordable internet. FiberNet customer growth in single and two family settings is near 40% after just over one year of service. In addition, the good retention rates demonstrate satisfaction with exceptional customer service. Kudos to HBC and all City staff for their efforts. Jeff O'Neill pointed out the response to the current Charter Communications promotion has resulted in a very small loss of residential customers. City staff response was immediate with direct conununication to customers. The positive response to FiberNet shows high loyalty and customers like what they have. Jeff O'Neill talked about the substantial impacts on the community since FiberNet has started up. Having choices provided significant telecommunication cost savings due to competition. Consumers saw a 30-40% drop in prices. Total savings is difficult to ascertain but given the number of potential customers the total savings is huge. FiberNet is experiencing good subscription rates, but does need to grow. Operations for just over Special City Council Minutes— November 16, 2011 Page 1 one year show a little over 1700 customers including 91 businesses. There is still market to go after and we do need to grow the numbers. Jeff O'Neill also talked about goals yet to be attained. Revenues and expenses need to balance as envisioned by the original plan. The original business plan, prepared in 2007, needs to be revised to reflect the impact of the TDS lawsuit and current economic conditions. Jeff went on to review factors that have affected the financial picture and business plan. a) Lawsuit against City — Jeff O'Neill noted that the lawsuit created a one year delay in revenues and, during this time, the City could not spend any of the bond money. Some of the bond dollars were eventually stranded after the court ruling with the City unable to spend dollars toward start-up operations after July 1, 2011. The City had liability for a large amount of egal expenses related to the lawsuit. Glen Posusta pointed out that the City did expect a lawsuit but did not expect the project to be shut down for a year. b) General Economy — Jeff O'Neill pointed out that soon after the bond sale, there was a downturn in the economy. Due to the downturn, the City has not experienced the residential growth that was anticipated in the business plan. The economy has also affected ability for discretionary spending. Another impact of the economic downturn is low interest rates and, therefore, only minimal interest earnings on the bond money, which did not match the anticipated earnings in the business plan. He went on to note that the customer base appears solid in the face of predatory pricing, and features stable and growing business customers, but it needs to continue to grow. c) Cash Flow — Jeff O'Neill commented that due to the hurdles placed in front of the program by TDS and the economy in general, use of Liquor reserves are needed in order to sustain payments for FiberNet operations until the system can cash flow. 4. Approach - Response to Current Economic Environment Barry Fick of Springsted Inc. and Gary Evans from HBC were invited to address several areas including: a. Debt service - summary of current situation and options available b. Operations adjustments - explore opportunities for containing costs C. Identification of emerging revenue sources - growing the system Barry Fick spoke about the current system which was built and implemented within budget. It is necessary to improve the operations and add customers to increase revenues. We also want to identify areas where costs can be lowered. Barry Fick also commented on the interest rate market at the time that the debt was issued compared to the current market status where interest rates have declined. Barry Fick explained that Springsted Special City Council Minutes— November 16, 2011 Page 2 advisors have met with the major bond holder (over 50% of issuance) and discussed opportunities to negotiate the terms of the debt and possibly restructure the principal and interest. The City has been current in its payments along with deposits according to the bond documents. There is no default at this time and the City is in a good position to negotiate with the bondholders. The goal will be to positive cash flow, pay the debt, and show a fund balance in the business. This will take a while to achieve as will the process of working with the bondholders. They anticipate working with the bond holders over the next 3 to 6 months. They would keep Council and the Advisory Board informed on a regular basis as to the status of negotiations. Barry Fick recommends the option to establish a working group to negotiate with the bondholders to reduce the debt payments and establish a revised business plan for FiberNet operations. Lloyd Hilgart asked if they were to go to the bond market today what could be expected for interest rates. Barry Fick feels that currently, bonds of this type would sell at 5 %. Hhe noted that revenue bonds would not be sold at the low interest rates of a general obligation bond. However, interest rates are at historic lows. Glen Posusta asked about the timeline anticipated for restructuring the bonds. Barry Fick believes that could be achieved in the next 6 months. Glen Posusta asked who would be involved in the discussions and how Council would be involved. Barry explained that Springsted, HBC and City staff would be involved in the negotiations. Any decisions would come back to Council. Jeff O'Neill asked if it would be possible to include a council member or two. Barry Fick felt that would be helpful because they could provide feedback immediately. Glen Posusta understood that part of previous discussions looked at having HBC take over the operations completely rather than oversee the business as a management company. Barry Fick said that would be one of the options that would be laid on the table. HBC would be amenable to taking on that role if needed. Gary Evans of HBC spoke on behalf of their role as managers of the FiberNet system. He is extremely pleased with the quick start for FiberNet and noted that most telecommunications companies take about six years to reach the point that FiberNet is at in terms of operations. Gary Evans mentioned several other municipalities that they are working with to provide assistance in stabilizing their business operations. FNM is in much better shape than either of those two and has performed well against the original business plan, which is now outdated. From HBC's perspective, there is no question that this project can be successful. However, it will take a significant amount of work to get FNM to be a successful business in its own right. Gary Evans noted that phone service for residential customers has changed dramatically with many customers choosing cell phones over landlines. In the time that FNM project has been operating, HBC has seen a huge increase in television content costs, which has been a hindrance to the operations. In regard to the current marketing efforts by Charter Special City Council Minutes— November 16, 2011 Page 3 Communications in the Monticello market, Gary Evans noted that he informed City staff that Charter Communications ran a similar promo against HBC in Winona. HBC was planning to slash rates to compete with Charter, but they were advised to hold off and maintain their stance, which worked out and they lost very few customers. He encouraged the City to take the same stance against Charter. FNM has realized little impact on their customer counts and this demonstrates the strength of the system. In addition to FNM successfully growing customers and looking at other revenue opportunities, this makes HBC optimistic that FNM can be a successful system. There are a lot of opportunities to market the high bandwidth that FNM has available, which the competition cannot. Gary Evans feels there are some ways to cut costs and believes revenues can be increased by marketing thrusts. Lloyd Hilgart asked about the average dollar amount per customer that FNM realizes; Gary Evans noted that it is about $80. This is about $20 lower than what the original business plan called for. This reduction can be attributed to a great degree to the abandonment of land lines by many consumers. Lloyd Hilgart asked if the rates for various services are lower than originally anticipated. Gary Evans explained that they are somewhat lower than forecast but that is mainly due to economic pressures and not specifically a change to the business plan. Clint Herbst commented that the business plan showed declining phone use but the slide was more dramatic than originally forecast. Gary Evans noted that customers are taking lower level video packages and that might be partially related to higher video content costs. Glen Posusta asked about lowering of the HBC management contract prices. Gary Evans declined to talk about potential prices at this time as they have a lot of negotiating to do with various vendors plus the bondholders. Clint Herbst asked about the timeline for moving forward. Gary Evans commented that HBC is prepared to immediately invest as much time as needed to get the negotiations underway and complete them as quickly as possible. Clint Herbst noted that restructuring of this type is common among businesses. The difference here is that it must be done publicly which may make it appear to be a bigger problem. Clint Herbst mentioned that the meeting held last Friday with City staff, HBC and financial advisors was a positive meeting and headed in the right direction. Lloyd Hilgart asked Gary Evans how many communities that are served by HBC have three providers for telecommunications. Gary Evans replied that all of their communities have at least three providers. For example, Winona has 3 and one -half providers of phone, data and video products. 5. Summary Jeff O'Neill summarized one of the next steps is to develop an updated business plan that incorporates the current economic environment. The plan should include specific options Special City Council Minutes — November 16, 2011 Page 4 for reducing debt, lowering operations cost, and providing detail on opportunities for increasing revenue. City Council directed staff to bring back to Council a tentative timeline and recommendations for committee make -up and responsibilities. 6. Adiournment LLOYD HILGART MOVED TO ADJOURN THE SPECIAL MEETING AT 5:38 P.M. TOM PERRAULT SECONDED THE MOTION. MOTION CARRIED 5 -0. Recorder: Catherine M. Shuman Gjrt>?r Approved: Attest: C1t dministrator Special City Council Minutes— November 16, 2011 Page 5