New report shows municipal network fails to generate sufficient revenue to pay for operations and debt service
The City of Monticello has put bondholders on notice that the municipal broadband network once hailed as a national model is unable to meet its financial obligations with revenue generated from FiberNet Monticello customers. Instead, city leaders now will discuss how to restructure payment of $26 million in revenue bonds to save the faltering broadband network.
A financial report prepared for the Monticello City Council meeting on May 14th acknowledges that FiberNet “continues to operate at a loss. For the quarter, FiberNet lost around $100,000, not including its 2012 debt payments.”
A blunt letter sent to Wells Fargo Bank in March indicates the City does not have an obligation to continue making up the losses incurred by FiberNet. “Revenues of the System are not sufficient to pay both operation costs and debt service payments on the Bonds,” Jeff O’Neill, city administrator wrote. “The City has no obligation to make supplemental payments and is considering whether to continue making supplemental payments after June 30, 2012.”
At current rates, the city projects that FiberNet’s red ink will climb to $2.1 million for 2012 with the inclusion of June ($882,668) and August ($943,670) debt payments on the once highly touted network. Meantime, the total number of customers for the video, phone and broadband services offered by FiberNet remained flat —3,484 subscribers, one more than the previous reporting period.
While Monticello is considering implementing additional steps to improve its bottom line, “none of the potential changes are likely to result in sufficient Net Revenues in the near term to fund required debt service payments,” according to the letter to Wells Fargo Bank.
In March the Freedom Foundation of Minnesota reported that FiberNet ran a $2.6 million loss in 2011 with cash from the profitable liquor store enterprise fund used to subsidize operations. Some city officials have raised the issue of alleged “predatory pricing” by private providers as a factor in FiberNet’s failure to capture more subscribers. From the outset, the city said its triple play service would be priced 15 percent below the competition.
FiberNet bonds are currently being traded on the market at approximately 32 percent of their initial issue price, according to Electronic Municipal Market Access (EMMA). In the last five weeks, FiberNet bonds have lost about 50 percent of their value. A proposed call with bondholders set for the end of March was postponed temporarily, but is expected to be rescheduled. “The City is interested in engaging in discussions with Bondholders regarding a possible restructuring of the Bonds. Development of a restructuring plan is likely to have a bearing on whether the City determines to continue supplemental payments,” according to O’Neill’s letter.
FiberNet Monticello’s $26.4 million in outstanding bonds contributes to total city debt of $55.1 million, a debt of about $4,600 per resident of the Twin Cities suburb. The city’s financial report acknowledges that the per capital debt is “high for a City of our size” but “does not mean the City is in bad financial health.”
FiberNet Monticello is closely monitored by those in the telecom industry and local government, due to the publicity and expectations that accompanied the network’s debut.