Tool #1 One-Page FTTH System

Financial Analyzer

Steven S. Ross Corporate Editor

steve@bbcmag.com editorsteve@gmail.com

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Background

• Designed for quick feasibility modeling. • Great for showing bankers and other sources of

capital. • Easy to understand; ARRA submittals ran 70 pages, which no

banker would ever look at! • All on one page

• Originally conceived by Fred Cornwall of Municipal Capital Markets, www.municapital.com

• Expanded by BBC, but still relatively simple • Good for ILEC/CLEC builds as well as municipal

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Coming in the Months Ahead: More Tools!

• MDU Financial calculator

• Extra worksheet for rural areas, where take rates are higher – Worksheet will help deployers decide such issues

as whether all drops should be done during initial construction

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AUDIENCE POLL

We’d like to get a better idea of who you are: Municipal official, other than economic development

officer

Economic development officer

Community activist

ILEC management

CLEC management

Consultant

Financial institution (bank, investment bank, broker, venture fund, etc.)

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At a glance

• Basics

• Analysis

• Cash Flow

• Investment considerations

You fill in green boxes;

sheet calculates the rest

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Ask your questions as each slide is discussed!!!

The following slides are quite detailed. So we

will not wait until the end for questions.

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REMEMBER: 1. In the model, cells for user input are green. 2. Calculated cells have a white background. 3. Red-circled items on each slide will be the focus of

discussion

Basics

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In this part of the model, we lay out the size of the proposed network and anticipated number of subscribers added each year. But for cash flow, we need to estimate the AVERAGE number of subscribers in a given period. After year 4, for instance, the numbers entered here project a 50% take rate, about the average for Tier 3 LECs. Key issues: Accounting for “cost of capital” (fees paid to brokers, lawyers, etc), and timing of capital inflows (see next slide).

Capital costs

• In this illustration, the network deployer provides $5 million equity (20% of network cost) and raises $20 million, all in one tranche.

• Typical for municipal builds • Not typical for private builds

• Cost of the equity, 8% in legal and brokerage fees, is calculated further down in spreadsheet. This cost could be counted separately (as in this example) or be charged against money raised, or against initial equity.

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Figuring connection costs

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In this example, we assume that the cost to connect a home after passing it declines by 5% a year. The cost would normally include the drop, customer-premises equipment (CPE) and some tailoring of the customer’s network. Note that in these days, the idea of raising ALL the capital ahead of time, and carrying the debt at 12%, while getting 0 to 1% for the same cash on deposit is a loser’s strategy. Even municipalities (which may be forced to raise all their capital at once using the revenue bond or muni lease mechanisms) might consider commercial loans at higher rates but with more flexibility on receipt of funds.

Analysis Analysis Year 1 Year 2 Year 3 Year 4Construction Costs: Cost to pass one home or business 1,683 1,381 1,337 1,337 Cost to connect one home or business 823 782 743 706

Systemwide Take Rate, Year End, at least one service taken 25.00% 37.50% 40.00% 50.00%Systemwide Take Rate, Midyear Average 12.50% 26.56% 36.44% 45.00%

Debt or Capital Cost - 100% Financing Term of loan, in years 15 15 15 15 Interest rate (capital cost) 12.00% 12.00% 12.00% 12.00%

Capital Cost Calculations Capital cost per subscriber, usung year-end totals 7,555 4,464 4,085 3,380 Capital cost to be financed (80%) 6,044 3,571 3,268 2,704 Cost of issuing debt 8.00% Debt per subscriber 6,528 3,571 3,268 2,704 Debt service per subscriber per year 958.40 524.37 479.82 396.97 Debt service per subscriber per month 79.87 43.70 39.99 33.08

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Note that the model handles almost all of the analysis. The following slide explains the formulas behind those calculations. Users need only to enter loan or lease terms (interest rate or imputed interest, term of the lease or loan, and the cost of getting the funds into the door in the first place.

Analysis: The calculations

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AnalysisConstruction Costs:

Cost to pass one home or business 1,683Total system construction cost/total homes passed

Cost to connect one home or business 823Picked up from "direct cost per subscriber"

Systemwide Take Rate, Year End, at least one service taken 25.00%Subscribers at year-end/homes passed

Systemwide Take Rate, Midyear Average 12.50%Average subs for year/homes passed

Debt or Capital Cost - 100% Financing Term of loan, in years 15 Interest rate (capital cost) 12.00%

Capital Cost Calculations

Capital cost per subscriber, usung year-end totals 7,555

Cost to pass a premises, divided by year-end take rate, plus cost to connect a customer

Capital cost to be financed (80%) 6,04480% of the line above, if 80% is being financed

Cost of issuing debt 8.00%

Debt per subscriber 6,528

The capital cost being financed,, per subscriber, plus the 8% capital acquisition cost

Debt service per subscriber per year $958.40 What it all costs, using PMT function

Debt service per subscriber per month $79.87 Previous line divided by 12

Cash flow Cash Flow Statement Year 1 Year 2 Year 3 Year 4Income per Subscriber:Triple play 150.00 150.00 150.00 150.00Voice plus data - - - - Security - - - - VOD (triple-play required) - - - - Gaming - - - - Wireless backhaul - - - - Smart grid benefits, rents - - - - Other subscriber services - - - - Other monthly income, including pro-rata subsidization from business services, fixed IP,wireless backhaul etc - - - - Total monthly income per subscriber 150.00 150.00 150.00 150.00

Expenses per Subscriber: Cost of content (calculated for video package in triple play) 70.00 73.50 77.18 81.03 Payroll 19.81 21.86 19.40 19.40 Management 6.86 3.00 2.70 2.70 Debt service 79.87 43.70 39.99 33.08 Total monthly expenses 176.54 142.06 139.26 136.21

Monthly cash flow per subscriber -26.54 7.94 10.74 13.79Annual cash flow per subscriber -318.44 95.31 128.88 165.43Annual cash flow for system -796,090 405,055 857,021 1,358,567Annual EBITDA 1,603,910 2,805,055 3,257,021 3,758,567

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Use this section as a checklist of all the possible revenue sources for your network; the list here is hardly exhaustive. The sheet assumes content costs in Year 1 will grow by 5% annually. Calculations for monthly cash flow, etc, are on next slide.

Cash-flow calculations

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Monthly cash flow per subscriber -26.54Monthy income minus monthly expenses

Annual cash flow per subscriber -318.44 Previous line, times 12

Annual cash flow for system -796,090

Except for year 1, uses mid-year customer totals; revenue lags construction by 6 months

Annual EBITDA 1,603,910Annual cash flow, plus (debt x interest)

EBITDA – earnings before interest, taxes, depreciation, amortization – is a comforting number for bankers, but not system operators. Here, it is calculated by “backing out” the interest cost. Obviously, happiness is positive cash flow. In the final section of the sheet (next slide), you see why (aside from banker comfort) EBITDA is included in the first place.

Investment considerations Investment Considerations: Year 1 Year 2 Year 3 Year 4Annual EBITDA as percent of debt 8.02% 14.03% 16.29% 18.79%Annual EBITDA as percent of equity 32.08% 56.10% 65.14% 75.17%Annual EBITDA as percent of capital cost 9.53% 12.70% 13.35% 15.41%Debt service coverage ratio 0.67 0.89 0.93 1.04

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Investment Considerations:

Annual EBITDA as percent of debt 8.02%EBITDA divided by debt (the $20 million in our example)

Annual EBITDA as percent of equity 32.08%

EBITDA divided by the equity ($5 million in our example)

Annual EBITDA as percent of capital cost 9.53%EBIDTA divided by the cost of building the system

Debt service coverage ratio 0.67

EBIDTA divided by debt service per subscriber, times number of subscribers.

Final Q&A

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Webinar Sponsored by the Fiber-to-the-Home Council

Visit www.ftthconference.com to register.

Thanks for Joining!

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To view Broadband Communities’ new website, please visit: www.bbcmag.com. To view this webinar or to view and download this FTTH Tool, along with the slide show you have just

seen, please visit: www.bbcmag.com/FTTHAnalyzer.com MDU Financial Analyzer Web Tutorial – Our next tool will be released in a webinar

Wednesday, October 19, 2 pm EDT. Register NOW at www.bbcmag.com/FTTHAnalyzer.com

Tool #2: MDU Analyzer: Can you maker a profit by serving apartment buildings, condos,

cooperatives, and planned unit developments with high-bandwidth systems? Private Cable Operators do it. Tier 3 ILECs do it – often as CLECs. Real estate developers and MSOs around college campuses do it. High-end “amenity providers” do it. And of course RBOCs do it – although they hardly need our help. This analyzer hits the issues most relevant today:

- Justifying the inside plant’s capital cost with new revenue and new ways to use the network to replace other building systems like security.

- New deployment technology - Reducing churn - Picking the best properties to add broadband