Minutes for the Special Meeting
Ashland City Council and Citizen's Budget Committee
Thursday, March 18, 2004 - 7:00 p.m.
Civic Center Council Chambers, 1175 E Main Street
Call to Order
Mayor DeBoer called the meeting to order at 7:00 p.m. in the Civic Center Council Chambers.
Councilor Laws, Amarotico, Jackson, Morrison and Hearn were present. Councilor Hartzell was absent. Budget Committee members Dave Williams, Jim Moore and Ray Olson.
New & Miscellaneous Business
1. The Ashland Fiber Network
Electric and Telecommunications Director Dick Wanderscheid introduced Navigant consultant Nelson Hyde.
Hyde presented suggested discussion points as project's objective, project team, approach and analysis conducted, Ashland market profile and AFN's position, benchmark results, market survey results, recommended new initiatives and financial implications and modeling.
He explained the three main purposes of the project as 1) Review and update as appropriate AFN's financial projections, 2) Identify new revenue-generating opportunities and 3) Evaluate AFN operations, policies and procedures for potential enhancements, plus and new needs.
The project team consisted of Navigant Consulting and the Advisory Committee. The project assessed three different areas of impact for AFN's financial model and future. These areas are revenue-generating opportunities, AFN base-case financial assumptions and AFN internal development opportunities. The process involved a series of analyses and detailed investigations. Multiple perspectives and data-points to establish realistic forecasts were used.
Hyde indicated Ashland's market profile in comparison to all network competitors. Ashland's Cable Television (CATV) penetration is on par with the national average and the modem penetration is close to three times the national average for cable modem and DSL combined. He pointed out that AFN dominates the cable modem market, and was almost matching Charter for CATV at this fiscal year's beginning.
A graph indicating AFN's market position compared to other peer overlay systems - CATV showed stronger competitive CATV forces in Ashland, impact AFN's overall penetration of the market. AFN sets the pace for cable modem penetrations among the overlay systems studied. He stated that Ashland achieved these results despite some significant and unique conditions in Ashland.
Hyde explained that market research was one key point of reference for future trends. The survey conducted showed slowing adoption of services, and point to AFN competitive advantages of service and value. The survey also revealed AFN's market advantages in customer service and value for the price.
He reported that simple staffing benchmarks against peers suggest AFN has fewer staff proportionally.
Hyde stated that the project developed new forward-looking assumptions for the base-case financial projections. Among the variables evaluated and updated were household and business growth, future technology adoption by new customers, shifting market share, upgrades and migrations by existing customers, institutional and large customer high-speed data market, operational expenses and capital expenses. He explained that revenue-generating initiatives then add incrementally to the base-case. Navigant worked with the Advisory Committee to detail the opportunity for 13 new initiatives.
Hyde reported on the AFN internal review. The project examined performance and practices in customer service, marketing, advertising and sales, engineering, technical and operations. Recommendations were customer service training and guarantees; marketing and sales - better customer information for targeting, more support; programming - incorporate more "business case" factors; and technical - convert second full DS3 to a fractional DS3, more support. He indicated the implications as 1) Staff: ¼ clerical and ½ technical FTE and 2) Financials: savings offset costs.
The resulting assumptions represent one reasonable future for AFN under the "Keep and Enhance" option. The project developed the analytical basis for making forward-looking assumptions as: Realistic, Conservative and Achievable. The project linked these to dynamic market drivers that can be updated as conditions evolve, identified new initiatives and specific, detailed next steps for enhancement and provided one basis for evaluating any and all options that AFN has.
On request, Hyde gave examples of initiatives as new offerings to customers and expansion of AFN outside the city limits. He stated that some initiatives are ways to stimulate the market. Comment was made that the initiatives seem to favor cable television.
Comment regarding the Program Committee providing information for financial purposes was noted as encouraged.
Hyde stated that a written detailed report on assumptions would be provided to the council. He noted that the Advisory Committee had spent a great deal of time going over these assumptions.
In reference to the survey, the difference between switching and adoption behavior was explained and examples given. He stated that the question of why a customer would not switch was not asked through the survey but gave several reasons why he felt there was some resistance and how to address this resistance.
Hyde commented and noted emerging new technologies and difficulty in modeling because of the changing pace of technology. He noted that most communities placed the issue of fiber optic before the community, some went over budget, but most communities have all proceeded differently.
Wanderscheid explained the process as taking the 21 initiatives and working these down to 13 initiatives with the help of the Advisory Committee. He explained that the report recently sent to the council was the result of this work.
Finance Director Lee Tuneberg walked the Council and Budget Committee through the Pro Forma and how it was integrated into the project. He explained that the Pro Forma is a one-year plan and he felt that we have a better product that will work with the Pro Forma. He stated this will help to better and continually monitor and report to the council the progress on meeting targets and to use it as a guide to make mid course corrections as circumstances dictate.
Financial Pro Formas were presented on Capital Expenditures, Operating Expenses, Revenue Summary, Debt Summary, Cash Flow Summary and Income Summary. Questions and discussion on various elements of the Pro Formas was held. Tuneberg noted that this is a better Pro Forma than in the past and that independent reviews were used. He noted the importance of ensuring expense tracking with revenue.
Tuneberg explained that the Plan comparison prepared by Navigant for statistical and financials assumptions at 5, 10 and 15 years. This comparison was on the 2001-02 Plan (2001 Ad Hoc) and the 2004-2005 Plan (enhanced programs) and indicated the 10 and 15 year cumulative gain/loss. The assumptions compared on statistics were residential passings, CATV residential percent of passings, CATV residential customer counts, CATV bulk customer counts, cable-modem residential customer counts and high speed customer counts. The assumptions compared on financials, total to date were CATV revenue, bulk cable revenue, cable-modem revenue and high-speed revenue.
Tuneberg noted that we are starting to see an increase of revenue over expenses and subsequent increases over the next few years. He stated that there is still a problem with cash flow.
Hyde noted the necessary length of depreciation and the reason for the twenty years. He commented on how technology changes could affect AFN and how this impact would be based on how aggressive Ashland is on marketing AFN outside the City.
Comment was made that prior Plans presented have always provided less real numbers on revenue and expenses and questioned what the difference is with the Plan before the Council at this time. Tuneberg explained that through known history and modeling, better information has been provided on assumptions through various ways. He feels better about revenue calculations and the bases of these came through good surveys and an Advisory group. He feels more comfortable with a conservative Plan.
Wanderscheid commented that given past Plans that were off target, it was important to keep this Plan conservative. He noted the areas where AFN is growing and the desire to keep up with new technology. Budget Committee member Dave Williams commented that all he wants to know, is that staff believes that AFN will succeed.
Wanderscheid briefly spoke regarding the steps being taken in regards to expansion of AFN. He noted potential strategies that staff is working on in this regard and the ability to grow and gain revenue from customers outside the City. He stated that this Plan recognizes the impact on moral and staff given the amount of customers that are being served.
Comfort level with projections as reported in the Plan was noted, but also the one thing to be most concerned with is keeping up with new technology and the inability to predict the future. Tuneberg referenced the Income Summary Pro Forma at 15 years.
City Administrator Gino Grimaldi indicated that staff was looking for an acceptance of the Pro Forma. Tuneberg explained that staff would come back to Council in May with a recommendation.
Councilor Hearn/Jackson m/s to adopt the revised Pro Forma which will then be used to prepare the FY 2004-05 budget for AFN and allow staff to begin work on other AFN Financial issues. DISCUSSION: Tuneberg explained that he would like to have the opportunity to look at all options for the recommendation to be presented to the Council. Morrison commented that although the numbers presented are truer and more accurate, concern still remains on the debt risk. Hyde suggested looking at an acceptable level of risk that the Council would be comfortable with and go from there. He feels that this Plan is a reliable alternative project. He noted the need to keep in mind fatal flaws, such as new technology and budgetary issues. It was noted that there is a need to keep in mind the benefit to the community. Comment was made that periodic review is crucial and that reports are made to the Council. Voice Vote: All AYES. Motion passed.
Mayor voiced his appreciation to Navigant Consultants, Cow Creek Indian Tribe for their contribution to AFN and staff for their effort and work regarding AFN.
Meeting was adjourned at 9:17 p.m.
Barbara Christensen, City Recorder
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