Council Communication

AFN Quarterly Report
Meeting Date:	March 15, 2005		Primary Staff Contact:	Dick Wanderscheid, 552-2061 wandersd@ashland.or.us
Department:	Electric & Telecommunication		Secondary Staff Contact:	Lee Tuneberg, 552-2003 tuneberl@ashland.or.us
Contributing Departments:	Finance, Administration
Approval:	Gino Grimaldi

 

Statement: This is the AFN Quarterly Report covering the period October 1 to December 31, 2004
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Background: This report covers the period October 1 to December 31, 2004. Staff has revised the current report format to better provide the Council and Mayor with more and improved information. This report contains targets from the revised business plan that was completed as a result of the work done by Navigant Consulting and input from the AFN Advisory Committee. Staff has continued to implement Navigant suggested recommendations during the quarter and also accomplished a TV Tier realignment and rate increase for both CATV and Cable Modem via Council Action on December 21, 2004. AFN staff has implemented the majority of Navigant ideas, but we continue to work on new and different approaches to some of the same initiatives. So far, we have implemented the following ideas in the first half of FY 04-05: 1. Increased rates (Twice-June 2004 & Feb 2005) 2. Began an active TV promotion designed to migrate users to higher tiers of service and to promote pay per view offerings 3. Mailed out coupons for free movies in exchange for customers enabling their pay per view features 4. Added an intermediate cable modem product 5. Enhanced ISP contracts 6. Promoted a customer service guarantee 7. Bundled our CATV product and cable modem product for the return of SOU students 8. Staffed a booth at the SOU Student Orientation Event 9. Worked with SOU and RVTV to provide an AFN exclusive SOU Homecoming Game Broadcast 10. Participated in the Buy in for Books Program in conjunction with the Ashland Schools Foundation 11. Revised the quarterly report format. 12. Met with the AFN Advisory Committee in December 2004. 13. Worked in conjunction with Finance to develop a more accurate AFN revenue model that can be used for cash flow information and operational decisions. 14. Realigned TV Tiers to improve operational efficiencies and to reduce future programming costs. 15. Added a new staff person in AFN to help with technical issues and to provide more support for the programming and marketing functions of AFN. In addition, a new Network Administrator has been added as per the budget and the revised AFN Business Plan. (1.5 FTE) The previous Quarterly Report tracked both bulk CATV accounts and High Speed Data equivalents but these are not included anymore. This is because the revised plan relies on no significant future growth in either of these product lines. The plan calls for 140 bulk TV accounts for the remainder of the planning period. We currently have 143.3. High Speed data equivalents are shown in the plan remaining at 35 and we currently have 24.12. This dropped from 32.34 in September because the SOU dorm infrastructure costs were amortized as a part of their monthly costs during their initial contract which expired at the end of August. Their new contract only includes port and bandwidth costs which accounts for this reduction. Cable TV numbers for Dec. 31, 2004 stood at 3,209 and showed no growth during the quarter. The Navigant report projects that by June 30, 2005 as a result of the initiatives, we should have 3,532 CATV subscribers. This means we would have to add 323 or about 54 new customers per month throughout the remainder of the fiscal year. Since most of the Navigant recommendations that are related to increasing TV customers and have already been implemented; it looks like achieving the CATV numbers in the revised plan is very questionable. Staff has modeled this number at 3,240 at the end of the fiscal year. On the Cable modem side, we had 3,718 active accounts on Dec. 31, 2004. The Business plan target with Navigant initiatives for June 30, 2005 is 3,842. This means that 124 new customers or about 21 Cable Modem customers would need to be added each month to meet this goal. Staff feels that achieving 3,740 is a realistic conservative goal to use in modeling revenue for the remainder of the fiscal year.
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AFN Financial Narrative: AFN's cash position is the most important financial comparison we have. It represents the net relationship between resources and requirements and helps us to monitor how AFN is doing. As of December 31 our cash balance had decreased to $552,000 from the $640,000 amount provided by the debt refinancing done in August. The key reasons for this reduction are: • Total revenues are below the original budget (which included projections from the Navigant study). • Expenses remain high with CATV programming costs higher than anticipated and the City, because of our existing bandwidth contract, was unable to implement a fractional DS3 as soon as hoped resulting in higher costs. It is important to know that cash flow variations are normal (the balance increased to $593,000 in January) however, the City goal is to build cash each month and year to meet debt service requirements. Even though cash rebounded in January and the newly adopted rates will impact cash by March, the short and long-term trends for cash are of concern. AFN has seen some promising changes in specific revenues and expenses but not enough to offset the two items mentioned above. Examples of promising changes are: 1. Cable modem revenue exceeds budgeted amounts 2. A new contract for service to Ashland Community Hospital has been negotiated 3. Staffing costs are below expectations 4. A change in bandwidth costs will soon be realized 5. Capital outlay for the year is expected to be light Any budget comparison should include the changes to revenues and expenses precipitated by the refinancing which included monies to cover issuance costs and an amount to aid in the first debt payment. The following table compares the original budget, the January Supplemental Budget done for the August bond issue and resultant impact (Revised). Actual represents revenues and expenses to date as of December 31: Resources Adopted Sup. Budget Revised Actual Actual to Revised Balance Revenues 2,894,752 2,894,752 1,792,199 44.6% 1,602,553 Bond Proceeds 15,000,000 500,000 15,500,000 15,500,000 100.0% 0 -----Total 17,894,752 500,000 18,394,752 16,792,199 91.3% 1,602,553 Requirements Promotions 222,032 222,032 42,527 19.2% 179,505 Operations 2,415,165 234,636 2,649,801 1,504,514 56.8% 1,145,287 Debt 14,402,000 208,720 14,610,720 14,610,720 100.0% 0 Contingency 75,000 56,644 131,644 0 N/A 131,644 -----Total 17,114,197 500,000 17,614,197 16,157,761 91.7% 1,456,436 Excess 780,555 780,555 634,438 81.3% 146,117 Please note: • After all resources and requirements (including carry forward and refinancing) the original budget projected an Ending Fund Balance of $954,723. • However, AFN started the year with $111,532 less carry over than anticipated, and this will reduce the Ending Fund Balance to $843,191. • Operational expenses for the first six months of the year were $1,300,515 ($16,157,761 minus Debt Service and Bond issuance costs) while operational revenue was $1,292,199, for a net loss of $8,317. • Additional shortfalls in revenue will likely reduce the $843,191 even further. Also: • AFN cash balance was $6,848 at July 1, 2004; cash proceeds from refinancing were $640,000 in August and the balance at December 31, 2004, was $551,743. • Predicted revenues compared to expenses estimate a shortfall of $163,000 in cash set aside for the debt service amount of $802,021due in July. During FY 2004-05, the goal was to closely monitor activities and try and manage expenditures to adhere to projections included in the pro forma and budget. While the majority of Navigant initiatives have been implemented in some form, staff plans to implement the remaining ones during the January-March, 2005 quarter and to re-engineer and re-offer some of the early initiatives during this time frame. The rate increase approved by the Council in January takes effect in February 2005. This should improve cash flow by $85,000 during the February-June period. Also planned is replacing one of our two main internet connections (bandwidth) with a new contract. The old contract expired in December and was costing about $12,000 per month. The new provider will be able to provide equivalent service for about $4,500 per month. Four months of net savings at $7,500 should reduce costs by about $30,000 for the remainder of this year and reduce annual costs in future years by over $90,000. We expect to further reduce future bandwidth costs in August as another Internet connection contract expires and related expenses can be reduced under a new contract. Staff has modeled the remainder of the year in both the revenue and expense sides of AFN's budget and it looks like projected revenue will be about $2,617,380. We project costs of about $2,805,759 which is a short fall of about $188,379. One of the Council highest priority goals from the recent goal setting was to determine a way to provide alternative income to AFN to ensure its financial viability. Because of the upcoming and future debt service payments we need to consider alternate income and /or subsidies to meet our commitments. One source of revenue could be to provide a General Fund subsidy equivalent to the Telecommunication Franchise fees paid by AFN to the City for the first five years of operation. From 2000 through Jan 31, 2005, AFN paid a total of $184,897 in Franchise fees for Telecommunication Services of which $103,736 were for Cable Modems. This is in addition to the $167,271 paid in cable TV Franchise fees. These Telecommunication franchise fees have never been paid by Charter and AFN no longer pays the fee on Cable Modem as of June, 2004 but still pays a 5% fee on Data service sales. Cable Modems fees have been ruled illegal by the FCC and subsequently the decision has been upheld by the courts. It would seem appropriate to arrange a credit to AFN equaling these fees. This could come out of the fund balance of the City's General Fund. This would give us a minimum cash balance of about $844,000 on June 30. Any savings of capital expenditure beyond the projections would add to this amount. This strategy would give AFN breathing room to work on identifying and developing a low level City Contribution to AFN as per the Council goal of providing a low level investment in AFN to ensure financial stability. The same model that was used to predict our position on June 30, 2005, is also able to make future year's revenue and expenses. It predicts with a modest 3% rate increase in Cable Modem fees and a 6% increase in CATV fees in January, 2006, that revenue for FY05-06 should be about $2,823,000 and operating expenses should be about $2,556,000. This yields $267,000 to go toward debt service, combined with cash of 844,000, provides $1,111,000 to pay the total of $1,234,000 (including the $802,221) that year. That leaves a $127,000 cash short fall at June 30, 2006, with no set aside for July, 2006, debt service of $432,000. The model indicates that a $400,000 -$ 425,000 subsidy per year will be needed starting in FY 05-06. Third Quarter results and preparation of the AFN budget for FY 05-06 will allow staff to refine this number and provide better certainty with respect to the actual amount needed. Staff has identified a number of potential ways to provide these resources. Listed below are some of those possibilities. 1) Provide for a General Fund subsidy to AFN recognizing the impact of having AFN in the community and the benefit received by citizens. 2) Allocate a portion of the Transient Occupancy Tax not dedicated to tourism promotion to AFN recognizing AFN's contribution to Economic Development. 3) Utilize a portion of proceeds from the sale of City fixed assets or property such as the Imperatrice Property and use it to subsidize AFN. The total of all of these sources would need to be about in the $400,000- $425,000 per year range until such time as other AFN activities or changes are implemented to better match revenues with requirements. Such subsidies could be viewed as paying for equipment upgrades or retiring city debt. If the projected conservative scenarios are exceeded, the subsidy could be reduced or debt service accelerated. Revenue enhancement can also displace all or a portion of the size of any AFN subsidy. For example an AFN increase in 500 CATV customers, 550 Cable Modem customers, 10 Data Customers, and 12 Point to Point Customers would generate the following amounts of additional revenue: 1) 500 CATV Customers --- $63,000 2) 550 CM Customers --- $174,000 3) 10 Data Customers --- $78,000 4) 12 Point to Point Cust. --- $43,000 Total $358,000 While we aren't suggesting this as a likely scenario you should be aware that our efforts to continue to improve revenue by attracting more customers will still be the primary focus of everyone at the City involved with AFN's marketing and operations.
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Related City Policies: The City's current Council Goal document points to improving the performance of AFN and this year's proposed goals also point to AFN's profitability and the City working on developing a low level investment in AFN, until finances stabilize. This quarterly report is specifically devoted to keeping the Council current ion AFN's status.
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Council Options: Not applicable.
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Staff Recommendation: Staff recommends the Council direct staff to develop options or ways to return or credit AFN an amount equal to the Telecommunication Franchise fees and to amend the AFN's Franchise to eliminate Franchise Fees on Data services, and also to schedule a Study Session to work on AFN's reorganization and identifying $400,000- $425,000 of additional annual non AFN revenue which could be provided to AFN for inclusion in the FY05-06 budget.
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Potential Motions: Council moves to direct staff to return with options on ways to return or credit the AFN Telecom Franchise Fees back to AFN, and to amend the AFN Franchise agreement to eliminate Franchise fees on Date services, and also to schedule a study session to discuss AFN's reorganization and work on identifying at least $400,000 - $425,000 in annual non AFN revenue for inclusion in the FY 05-06 AFN Budget.
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Attachments: Please click on the link below to view the following attachments:      • AFN Quarterly Report      • Navigant Report Results Update      • Material submitted by Councilor Silbiger

AFN-Attachments.pdf (279.6KB)

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