Lost in the swirling allegations of “illegal subsidies” and a “criminal cover-up” is an elephant sitting right in the middle of LUS Fiber’s finances. Since launching in 2008, Fiber has missed its initial projections by $70 million. In other words, Fiber has less cash, more debt and has contributed less to the city general fund than was originally projected.
As a result, the system’s finances are vulnerable at a time when its risks are increasing. Not just because Fiber might have to pay back millions in alleged overcharges, but because Fiber faces significant new competition without permanent and experienced leadership in place.
Fiber’s underperformance means that its margin for error has all but disappeared. While it’s not yet failing, it’s fragile. It demands our attention lest we fall victim to the failures of other community fiber networks. Provo, Utah, had to sell its fiber network to Google for $1 just to finish the buildout; it still carries $30 million in debt.
There is time to right Fiber’s ship, but only if we acknowledge the reality of the situation, respect the significance, and formulate a clear plan of attack.
Fiber was projected to be a big financial winner
The initial projections used to justify investing $110 million to build Fiber were prepared in 2004 by CCG Consulting. CCG generated what it described as “conservative” estimates of Fiber’s future financial performance. And those estimates sounded really good.
Here’s a snapshot of what CCG predicted Fiber’s finances would look like in 2020:
- $52 million in revenue
- $5.6 million in ILOT
- $14.5 million in net profit
- $68.8 million in cash balance
- $63.8 million in debt owed
Here’s how that all works together. That $52 million in revenue would enable Fiber to contribute $5.6 million to the city general fund through ILOT— in lieu of taxes payments — and net $14.5 million. Fiber would be sitting on $5 million more cash on hand than outstanding debt. In other words, Fiber would be turning a healthy profit, sitting on big cash reserves and paying off its debts in big chunks.
Fiber, CCG predicted, would be an overwhelming financial success. Because by this year, it’s supposed to be effectively debt free while contributing millions to the city general fund with millions more to reinvest in growing and evolving Fiber’s infrastructure and services.
But that’s not what happened.
The latest audited financials we have for Fiber only run through 2018, but they reveal a troubling pattern of underperforming projections, starting with revenue:
|Total Projected||Total Actual||Net Difference|
|Revenue||$437 million||$262.4 million||-$174.6 million|
So by the end of 2018, Fiber was supposed to have generated a total of $437 million, but it’s only collected $262.4 million, meaning it fell short of its original projections by $174.6 million.
With that much money missing from its projected revenue, it’s not surprisingly the rest of Fiber’s financial performance fell far short of initial estimates:
|2018 Projected||2018 Actual||Net Difference|
|Cash Balance||$47.7 million||$9 million||-$38.7 million|
|Bonds Owed||$70.4 million||$105 million||-$25.4 million|
|LUS Owed||$3.6 million||$26.5 million||-$22.9 million|
In 2018, Fiber had almost $40 million less cash than projected while carrying almost $50 million more debt. That debt consists of revenue bonds that were used to build the network and loans from LUS that helped cover a variety of startup costs. Fiber originally planned to use only $110 million of revenue bonds and $6 million from LUS, but ended up using its fully authorized debt capacity of $125 million and $28.3 million in loans from LUS — a total debt load that at its peak exceeded $150 million.
Fiber also missed on ILOT payments, which in practice means less money to consolidated government, but for Fiber reflects less available cash:
|Total Projected||Total Actual||Net Difference|
|Total ILOT Paid||$30.4 million||$0||-$30.4 million|
Another way of saying it is Fiber should have another $30 million more on its balance sheet.
With almost $40 million less cash, almost $50 million more debt, and nearly $30 million less put into the city general fund, the total shortfall of Fiber’s actual financials vs. projections is close to $120 million — obviously, bigger than the $70 million figure I introduced.
That’s because we have to grade on a bit of a curve. CCG’s estimates assumed Fiber would start deploying in 2005. But because of a series of lawsuits and political battles, Fiber didn’t actually start deploying and collecting revenue until 2008. So a fairer comparison would measure the projections from 2005 to 2015 against the actual performance from 2008 to 2018, when Fiber was actively in business:
|Total Projected by 2015||Total Actual by 2018||Net Difference|
|Revenue||$296.8 million||$262.4 million||-$34.4 million|
That has a dramatic impact on narrowing the revenue shortfall, but less of an impact when we look at its cash and debt positions:
|2015 Projected||2018 Actual||Net Difference|
|Cash Balance||$20 million||$9 million||-$11 million|
|Bonds Owed||$83.4 million||$105 million||-$21.6 million|
|LUS Owed||$4.4 million||$26.5 million||-$22.1 million|
|Total ILOT Paid||$15.4 million||$0||-$15.4 million|
So even if we grade on a curve, Fiber’s still short $70 million in terms of its financial position in 2018 relative to CCG’s forecast. And it’s not just the feasibility study. LCG remained bullish on Fiber’s performance in annual budgets for several years, in many cases overshooting the CCG numbers in an adjusted year-to-year comparison.
While it’s easy to ding the rosy projections, a lot has changed in the marketplace since 2004. Markets for landline telephone and cable TV services have been radically upended by technology. Think about the number of streaming services and the nation’s pivot to mobile phones. And other telephone and cable companies now compete with Fiber’s speed and cost.
But regardless of how we got here, the fact is this is where we are.
Fiber has no margin for error
Fiber’s finances now have little room to absorb any additional shortfalls.
For example, if former Mayor-President Joel Robideaux’s accusations that Fiber has overcharged LUS and LCG to the tune of $12 million over the last decade prove true, Fiber may not have enough cash to pay all that back since it ended 2018 with only $9 million. That doesn’t mean Fiber will necessarily go bankrupt. The City Council could increase the debt Fiber owes LUS, but that would put additional stress on Fiber’s finances.
Robideaux suggested Fiber’s business model should be profitable without any of the $5 million it gets for services from LUS and LCG. That’s a bit of an extreme position given that municipal fiber networks can generally count on the municipalities that own them to use their services, but it raises an interesting problem. What happens if we do find that Fiber has overcharged LUS and LCG, and Mayor-President Josh Guillory decides to switch to a private provider? Fiber can’t afford to lose $5 million per year in business.
The other thing hanging over Fiber’s head is the need to keep growing its revenue, but there are two problems with that. First, Fiber has limited capital available to fund growth, which is a problem since building fiber networks can be expensive. Second, Fiber is facing increasing competition with 5G wireless and next gen satellite services on the horizon, both of which could lead to Fiber losing customers when it needs to be adding them. So not only does Fiber face limits to its growth, it could conceivably lose revenue over the next few years.
On top of all that, Fiber is facing a whole lot of operational uncertainty, not just because we’re in the second year of Fiber being run by interim leadership but also because Guillory has indicated a desire to reorganize Fiber’s operations. Any time changes of this magnitude are in play it creates risks that things will go wrong and negatively impact Fiber’s bottom line.
Fiber needs to change, we just don’t know how yet
It’s clear that something needs to change. Not only has it underperformed initial forecasts, but in 2018 available cash actually dropped from $12 million at the beginning of the year to $9 million. So that means at least for that year it’s headed in the wrong direction.
Now the question is, what changes are needed to protect one of the city’s greatest assets and largest liabilities?
Should we maintain the status quo but find an experienced telecom executive to be Fiber’s new director? Fiber’s never had a permanent executive with experience managing a competitive telecom; that alone may make a significant difference.
Should we reimagine Fiber as part of a larger IT department, as Guillory suggests? It’s always tempting to find ways to do more with less, despite the many obstacles and unknowns associated with making changes like this.
Or should we consider selling Fiber and taking as much of its liabilities off the table as possible? As it stands today, depending on how it’s valued, Fiber might be worth enough to clear out all of the debt it owes if we were to sell it. But the window for that kind of an exit will close if Fiber’s financial position worsens. There comes a point where selling Fiber could be forced to happen at pennies on the dollar. Once again, consider the $1 Google paid Provo for its fiber system.
Whatever we decide, it’s important to acknowledge that Fiber has not lived up to its initial financial promises. And that Fiber’s financial position is vulnerable and could worsen to a point that our options will be dangerously limited.