Q & A – Feasibility Study

Dated: October 12, 2020

Q: Who is paying the interest on the bonds that are issued for this project?

A: On pages 73-76 of the broadband feasibility study, the 20-year pro forma shows the bond principal and interest payments, as well as projected revenues per year. The revenues generated by the broadband network indicate paying for the principal and interest which is calculated in the overall End of Year Cash Flow Final. The study indicates that working capital from bond proceeds and interfund loans are needed to ensure a positive cumulative end-of-year free cash flow until the utility can be self-sufficient. The study also indicates the City could provide the interfund loans to fund any shortfalls and recoup the loan when the broadband utility supports itself with its own revenues in time. (Reference: Broadband Feasibility Study)

Dated: September 11, 2020

Q: Do the results of the feasibility study allow those who are located in the extraterritorial jurisdiction (ETJ) and outside city limits to subscribe to any service?

A: The broadband feasibility study includes residential premises only located within City limits and does not include any estimated costs or services for premises located in the extraterritorial jurisdiction. Proceeds from the City’s general obligation bonds can only be used to finance infrastructure improvements within City limits. The City may be able to enter into an interlocal agreement with another local government (perhaps a county or a school district) to construct the fiber optic system on behalf of the other governmental entity – but lots of legal issues associated with ownership and intended use of any such system would have to be vetted before the City’s Bond Counsel could adequately advise on this question.  (Reference: Stephanie Leibe, Bond Counsel at Norton Rose Fulbright; Broadband Feasibility Study)

Dated: September 1, 2020

Q: Has the City considered any funding strategies to discover hidden opportunities and modeling the use of city funds differently from the bond’s working capital in the financial model? Are there any legal or fiduciary hurdles with this?
A: Generally speaking, the City of Lucas tends to be fiscally conservative and risk adverse due to the fiduciary responsibilities associated with managing taxpayer dollars. The City currently has no formal business plan related to the project.  Should the bond election/project be approved by voters, staff would need to gain approval from the City Council on the next steps in the broadband initiative which would include the development of a formal business plan where build out strategies and additional funding strategies would be considered. In regard to internal borrowing between city funds, the City may authorize the use of reserves as “loans” between funds.  Council’s direction for the feasibility study was that borrowed funds would be repaid at a rate consistent with current market conditions.  Feasibility study projected that the loans will be repaid within ten (10) years.  The loan will be considered an investment of working capital reserves by the lending fund. (Reference: City of Lucas Fiscal and Budgetary Policy, Section: Debt Management – Types of Debt) 

Q: If re-engagement with Magellan Advisors is not possible, could the City run official analyses manipulating only the “standard accounting” portions of the financial model?

A: The City is currently not considering any additional analyses to manipulate portions of the financial model due to the infinite financial scenario possibilities.  Any official information related to the broadband project should be derived from the broadband feasibility study and documents posted on the City’s broadband webpage at https://www.lucastexas.us/departments/lucas-broadband-project/.  (Reference: City Council Direction, City of Lucas Broadband Project Webpage)

Dated: July 24, 2020

Q:    Have other cities that created an Internet Utility had the same home density as Lucas or were they high density communities?
A:    Many cities that have done this have done so in areas more rural than Lucas, however in some cases those deployments are funded through state and federal grants targeting rural underserved/unserved areas that meet certain economic indicators. In other cases, the rural electric coop, or rural telephone provider would make the investment. As is outlined below, the cost per passing in Lucas is far greater than every other projection summarized.

(Reference: Courtney Violette, Gillian Violette, and Scott Moehnke, Magellan Advisors)

Q:    What was the average internet city speed prior to the utility launch for the different cities that you prepared reports for?
A:    Most work we’re doing today, including planning for the entire Navajo Nation, have typical internet speeds in the 1.5 Mbps to 100 Mbps range. This would include our work in Dayton, as well as work in Waterloo IA, Hillsboro OR, Boulder CO, etc. In each of these markets gigabit over cable is available very sparsely, and a significant amount of slower speed DSL is still in place. There were no fiber services available market wide prior to the City’s consideration to deploy, and still aren’t today.  (Reference: Courtney Violette, Gillian Violette, and Scott Moehnke, Magellan Advisors)

Q:    Have any other studies that went forward and you consider a success produced a required monthly rate of $115 or higher?
A:    Although the $115 rate for a 1 Gbps service can be considered a high rate, the financial requirements dictate that rate along with a 55% residential uptake is needed. It is the highest 1 Gbps rate this project team has determined on any project previously, but we are only recommending it because sustainability requires it.  However, the final rate could be less. If the capital expenses can be reduced, through new grant or outside investment, the reduction could be used to reduce borrowings and possibly allowing lower rates than the current modeled rates.  (Reference: Courtney Violette, Gillian Violette, and Scott Moehnke, Magellan Advisors)

Q:    Is your objective of this study to see if this is a wise financial decision or to produce a proposed rate to make this possible?
A:    This study aims to present what rates and customer uptakes would be needed to create a sustainable broadband utility based on projected CapEx, OpEx, debt service, etc. It is up to the individual city, its leaders and the voters to decide whether the decision to go forward is in the community’s best interest or not. If the City of Lucas feels that broadband investments are required, and it is ready to make those investments where others will not, then this study aims to inform City leadership of the decisions they’ll need to make. City leadership, including the Finance Director, and their advisors can help the City determine whether this concept is a wise financial decision or not, as compared to the long list of other City priorities we’re sure you have to contend with.  As for the rate to make this possible reference, based on the current SOW of our engagement, the data we’ve compiled to date, and what we can project, we believe at a $115 rate and 55% uptake the City can build and deploy a profitable, financially sustainable utility.  (Reference: Courtney Violette, Gillian Violette, and Scott Moehnke, Magellan Advisors)

Q:    How do you define “feasible” as you use it? What parameters are you using when you employ the word feasible in your report?
A:    The deployment of a broadband utility to every home and business in Lucas appears to be feasible, as modeled, if 55% of the users took service. Feasible is defined as executing the deployment of a FTTH in a financially sustainable way – over the long- term. If the City believes the voters want it, and the voters agree, then it must be clear that the utility must hit 55% to be successful.  Magellan has modeled and recommended take rates from 35-50% in recent years, Magellan believes you can get to the 55% target and beyond, if the public supports the project. You also have the ability to look toward other recent projects previously documented, including Waverly, Indianola, Cedar Falls, Mont Belvieu, Newport and others, community based services can be successful and a much better option than is available in Lucas today.  (Reference: Courtney Violette, Gillian Violette, and Scott Moehnke, Magellan Advisors)

Q:    How many of your client cities have you told it was not feasible? Percent please.
A:    As detailed above, we strive to show our clients what parameters are needed to create a sustainable entity. Each client has a different environment to contend with, including public expectations, therefore it is up to them to determine if the rates/uptakes, etc. that are documented in this Study are valid and acceptable for their community. We have several times during meetings stated that the $115 rate is considerably higher than other clients, but Lucas is a unique city with a much higher cost/passing and higher income per capita. We find that 10-25% of our customers find that there are not feasible solutions. However, some choose to build backbone networks connecting city facilities and community anchors, and in some cases they build full fiber-to-the-home networks. City and community needs and networks are not one-size fit all. (Reference: Courtney Violette, Gillian Violette, and Scott Moehnke, Magellan Advisors)