rev2

Workshop: Using the NewBBC Multi‐District Financial 

T l #6Tool #6

Steven S. RossEditor‐at‐LargeEditor at Large

steve@bbcmag.comeditorsteve@gmail.comeditorsteve@gmail.com

1

Some modeling philosophy2

Some modeling philosophy

G h d il b fi i d• Get enough detail, but not too fine‐grained. • Detail increases as you gain operating experience.• Model key leverage points more carefully than anything else.y g

• Make sure all your uncertainties are not in the same direction!same direction!

• Make the models easy to modify – to open rows and columns insert new stuff without breakingand columns, insert new stuff without breaking existing formulas.

Why you need to model fiber3

Why you need to model fiber

• FTTH is different – higher capex, generally lower opex, MUCH higher revenue potential p , g pthan copper.

• The times are unusual capital can be costly• The times are unusual – capital can be costly or hard to get.

• Time to cash‐flow break‐even varies from 1 to 7 years in builds we’ve written about.7 years in builds we ve written about.

• Rules of thumb? Are you kidding?

See all the tools!4

See all the tools!

MSO ILEC i i l l T l #1• MSO, ILEC or muni investor calculator, Tool #1• Rural MSO/ILEC/CLEC investor calculator, Tool #3• MDU/PCO investor calculator, Tool #2• Customer monthly revenue calculator, Tool #4• 18‐month operational cash flow calculator, Tool #5• Multi‐neighborhood investor calculator, Tool #6• View and download them at  www.FTTHAnalyzer.com• Coming:More quick calculators; next is more detailed g q ;

management G&A and variable expense calculator. But Tool #5 will handle those needs pretty well.

Use them free!5

Use them free!

l d h bl d• Placed into the public domain• Use/modify at will y• We like credit, and it is ethical, but not necessarynecessary

• I’m happy to help with a little free guidance –typically on the phone for an hour or sotypically on the phone for an hour or so.

• Need more help? Need it explained to community or company audience? We’ll charge you, but at very reasonable rates.

Ask your questions as each slide is 6

discussed!!!h f ll l d d l d d hThe following slides are quite detailed and this 

is a workshop! So I will not wait until theis a workshop! So I will not wait until the end for questions.

REMEMBER: 1 In the models cells for user input are green1. In the models, 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

Populating the models7

Populating the modelsTh id i t th d l h fi t id i• The idea is to use the models when first considering a network or network expansion. Why should, for instance, a community hire a consultant for $50,000 or more to discover that the numbers don’t work anyway?

• Communities, especially, should have more confidence in a model when they fully understand what goes into itmodel when they fully understand what goes into it.

• New build? Go to our FiberVille.com database of roughly 1000 FTTH builds (including almost 200 community builds), fi d it i i t th tfind a community near you or in same circumstance that has built or is building a network. Call for their basic numbers. Other good sources include equipment vendors, firms that supply labor for network builds, some state telecom offices (in states that do not encourage only big carriers).)

WARNING!!!8

WARNING!!!Th T l #6 fil li d h ll f l l k d!• The Tool #6 file as supplied has all formulas unlocked!

• You or anyone else can accidentally overwrite them!• Use the Format command on the home menu (in the ExcelUse the Format command on the home menu (in the Excel 

ribbon menu) to lock specific cells or ranges of cells… or to lock entire sheets and unlock only the cells you want to fiddle with!fiddle with!

• We did this because users have had trouble with earlier tools, which were supplied with formulas locked, and ppbecause a multi‐sheet model tends to require more exceptions.

• It is wise in use to format cells with your exceptions using• It is wise, in use, to format cells with your exceptions using a different color. This promotes transparancy and makes for easier auditing.

Tool #69

Tool #6D i d f f ibilit d li h b ild fi i• Designed for feasibility modeling where build or financing  must be done in phases, or where a build covers varied districts with different financial dynamics.

• Similar to Tool #1 but includes better modeling of service expenses.

• Supplied with sheets for three districts but can be easily• Supplied with sheets for three districts but can be easily expanded to 50 districts or more. Only limit is computer memory. 

• Great for showing citizens, as well as bankers and other sources of capital.

• Easy to understand; “Stimulus” submittals ran 70 pages, which no bankerEasy to understand;  Stimulus  submittals ran 70 pages, which no banker would ever look at to start!

• Good for ILEC/CLEC builds as well as municipal

At a glance10

At a glanceB i• Basics

• Analysis• Cash Flow• Cash Flow• Investment 

considerationsconsiderations

Covers 5 years.Y fill iYou fill in green and orange boxes; sheet calculates the restFrom data onFrom data on “neighborhood” sheetsbelow

Starts with four worksheets11

The tab labeled “Analyzer” summarizes all the information on other sheets.It is “programmed” to aggregate all data on all sheets starting with one named “Dist1” (for “district 1”) and ending on “Dist 2 ” You can insert any number ofDist1  (for  district 1 ) and ending on  Dist 2.  You can insert any number of new worksheets by inserting a new tab anyplace between Dist1 and Dist2and copying any existing sheet (in this case, Dist1, Dist2, or Wireless) ontothe new tab. Find the names Dist1 and Dist2 too distracting? You can leavethe new tab. Find the names Dist1 and Dist2 too distracting? You can leave them empty. You can also delete sheets except for Dist1 and Dist2. Best way to copy a sheet: 

‐Set cursor outside model areaC l A C l C‐Ctrl‐A, Ctrl‐C‐Right click on a tab to right of Dist1, insert new worksheet‐Go to blank sheet, set cursor on cell A1, hit Ctrl‐V to copy model sheet

I E l d E l l kb k ill h t dj tIn some Excel and Excel clone workbooks, you will have to adjustcolumn widths and (sometimes) row heights. That’s it! You are ready to enter ormodify data into the new sheet.

Typical “district” 12

or “ i hb h d”“neighborhood” 

sheetsheet

N t th t t tNote that you enter mostof the information on thedistrict sheets rather than on the summary “Analyzer”on the summary  Analyzer  sheet at the top of the deck.

Cells in orange carry data fromCells in orange carry data fromThe top sheet (as a convenience)but can be overwritten with dataspecific to this part of the build.specific to this part of the build.

Basics13

Example: XYZ Project: 20% Equity/80% Debt Year 1 Year 2 Year 3 Year 4 Year 5 NotesTotal homes and businesses passed 4,500 7,500 10,000 11,500 11,500 Sum of all sheetsTotal subscribers at year end 1,750 3,550 5,100 5,850 7,100 Sum of all sheetsAverage subscribers for year 875 2,650 4,325 4,700 6,475 Half of row above

TOOL 6: Multi-Neighborhood Financial AnalyzerSummation

g y 875 2,650 4,325 4,700 6,475Total system construction cost 12,250,000 19,250,000 25,250,000 31,250,000 31,250,000 Sum of all sheets Equity 7,550,000 7,550,000 7,550,000 7,550,000 7,550,000 Sum of all sheets Debt, principal not including financing fees (see row 33) 30,200,000 30,200,000 30,200,000 30,200,000 30,200,000 Sum of all sheetsCumulative cost to purchase and install customer premises equipment, using year-end customer total 875,000 1,775,000 2,550,000 2,695,000 3,195,000 From year-end customersCumulative cost to purchase and install central office equipment, outside plant and fiber cable, excluding CPE 11,375,000 17,475,000 22,700,000 28,555,000 28,555,000 Total cost-row aboveexcluding CPE 11,375,000 17,475,000 22,700,000 28,555,000 28,555,000 Total cost row aboveDirect costs per subscriber (color indicates value is picked up by other sheets) 500 500 500 400 400 Picked up by all sheetsCash on hand at year-end, exclusive of investment return 23,215,500 18,897,500 13,152,000 7,215,500 6,979,500 Calculated on each sheetInvestment return on cash on hand (color indicates value is picked up by other sheets) 0% 1% 1% 1% 1% Picked up by all sheetsTotal cash on hand at year-end 23,215,500 19,086,475 13,283,520 7,287,655 7,049,295 Includes investment income

On the “Analyzer” sheet (the top‐sheet summary), most of the data is pulled in from sheets representing separate neighborhood builds. THOSE sheets do automatically pick up CPE per‐customer costs and also interest earned on deposits (entered here in the orange rows). You can OVERRIDE those orange entries on any other sheet but ALWAYS KEEP A SHEET WITH NO OVERRIDES available fororange entries on any other sheet, but ALWAYS KEEP A SHEET WITH NO OVERRIDES available for copying into a new tab if needed.

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 slide after the next one).

Entering “Basic” data into typical 14

neighborhood sheet

Example: XYZ Project: 20% Equity/80% Debt Year 1 Year 2 Year 3 Year 4 Year 5Total homes and businesses passed 3 000 5 000 7 000 8 000 8 000

TOOL 6: Multi-Neighborhood Financial Analyzer District 1

Total homes and businesses passed 3,000 5,000 7,000 8,000 8,000Total subscribers at year end 1,200 2,250 3,500 4,000 4,500Average subscribers for year 600 1,725 2,875 3,125 4,250Total construction cost, apportioned this section 7,000,000 12,000,000 16,000,000 20,000,000 20,000,000 Equity 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 Debt, principal not including financing fees (see row 33) 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000Cumulative cost to purchase and install customer premises equipment using year end 600 000 1 125 000 1 750 000 1 825 000 2 025 000Cumulative cost to purchase and install customer premises equipment, using year-end customer total

600,000 1,125,000 1,750,000 1,825,000 2,025,000

Cumulative cost to purchase and install central office equipment, outside plant and fiber cable, excluding CPE

6,400,000 10,875,000 14,250,000 18,175,000 18,175,000

Direct costs per subscriber 500 500 500 400 400Cash on hand at year-end, exclusive of investment return, this section 16,496,000 13,276,000 9,460,000 5,500,000 5,480,000Investment return on cash on hand 0% 1% 1% 1% 1%Total cash on hand at year-end 16,496,000 13,408,760 9,554,600 5,555,000 5,534,800

Note that on the individual sheets for each section of the build, you have more to , yfill in – that is indicated by the green cells. You can override the information that was automatically  filled in for you from the top, Analyzer summary sheet (orange cells).

We’ve left a place in the upper right‐hand corder should you chose to identify the individual districts with more than just their tab name.

Capital costs15

Capital costs• In this illustration, the network deployer provides 20% of network cost and raises 

80%, all in one tranche.  You can just enter different capital flows in different years as well.

• One input would be more typical for municipal builds• Not typical for private 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 equitycharged against money raised, or against initial equity.

• You don’t HAVE to change the spreadsheet coding – you can just adjust the amounts in the inputs and make the explicit cost of capital 0%.

i i l b ild i i h l d i l i l• For municipal builds, it is common to pay the lender interest only or interest plus a small amortization until the system gets to cash‐flow positive, typically around year 4. Here we have started payback in year 1 (using the Excel PMT function for a l l t t ) L d l l l i t tlevel term mortgage). Lease deals are also popular in some states.

• You can override this for the entire build at once (on the Analyzer summary or on individual district sheets). This is especially useful when money is raised over many 

t b ild t ti f th t kyears to build separate sections of the network.

Figuring connection costs16

Figuring connection costsCumulative cost to purchase and install customer premises equipment, using year-end customer total

600,000 1,125,000 1,750,000 1,825,000 2,025,000

Cumulative cost to purchase and install central office equipment, outside plant and fiber cable, 6,400,000 10,875,000 14,250,000 18,175,000 18,175,000

I thi l th t th t t t h ft i it i

excluding CPEDirect costs per subscriber 500 500 500 400 400Cash on hand at year-end, exclusive of investment return, this section 16,496,000 13,276,000 9,460,000 5,500,000 5,480,000Investment return on cash on hand 0% 1% 1% 1% 1%Total cash on hand at year-end 16,496,000 13,408,760 9,554,600 5,555,000 5,534,800

In this example, we assume that the cost to connect a home after passing it is incurred only when a premises signs up to be serviced. 

This is not always the case! In a rural area for instance it might be cheaper to do allThis is not always the case!  In a rural area, for instance, it might be cheaper to do all the drops at once and include them in the cost  to pass a premises. In a multiple‐dwelling unit building, it might be wise financially to install the full equipment, typically a wireless gateway Tool #3 and sometimes Tool #2 are helpful in decidingtypically a wireless gateway. Tool #3 and sometimes Tool #2 are helpful in deciding between the “delay or all at once” alternatives.

Note that in the recession the idea of raising ALL the capital ahead of time andNote that in the recession, the idea of raising  ALL the capital ahead of time, and carrying the debt at 10 or 12%, while getting 0 to 1% for the same cash on deposit was 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 p g ) gcommercial loans at higher (but now, still reasonable in some cases) rates but with more flexibility on receipt of funds.

Analysis17

Analysis: this sectionConstruction Costs: Cost to pass one home or business 2,333 2,400 2,286 2,500 2,500

Cost to connect one home or business 500 500 500 400 400

y

Cost to connect one home or business 500 500 500 400 400

Systemwide Take Rate, Year End, at least one service taken 40.00% 45.00% 50.00% 50.00% 56.25%Systemwide Take Rate, Midyear Average 20.00% 34.50% 41.07% 39.06% 53.13%

Debt or Capital Cost - 100% FinancingT f l i 15 15 15 15 15 Term of loan, in years 15 15 15 15 15

Interest rate (capital cost) 5.00% 5.00% 5.00% 5.00% 5.00%

Capital Cost Calculations Capital cost per subscriber, using year-end totals 6,333 5,833 5,071 5,400 4,844 Capital cost to be financed (80%) 5,067 4,667 4,057 4,320 3,876 Cost of issuing debt 8.00% Debt per subscriber 5,472 4,667 4,057 4,320 3,876 Debt service per subscriber per year 527.18 449.60 390.87 416.20 373.38 Debt service per subscriber per month 43.93 37.47 32.57 34.68 31.11

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 18AnalysisConstruction Costs:Construction 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%The capital cost being financed,, per subscriber,

Debt per subscriber 6,528plus 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 Statement: this section% C t

Cash flow  19

Cost per month services (revenues for various services are listed at negative) Cost

% subscribers using

Gross cost/ subscriber TOTAL

Cost inflation factor

Video 70.00 50% 35.00Voice plus data 15.00 100% 15.00

Security (self monitoring) 3.00 5% 0.15y ( g)Gaming 5.00 15% 0.75

Wireless backhaul -1.00 100% -1.00Smart grid benefits, rents 0.00 100% 0.00Other subscriber services 0.00 100% 0.00

Other monthly income, including pro-rata subsidization from business services, fixed IP, etc 0.00 100% 0.00 49.90 10%Y 1 Y 2 Y 3 Y 4 Y 5Year 1 Year 2 Year 3 Year 4 Year 5

Total monthly income per subscriber 160.00 160.00 160.00 160.00 160.00 Total monthly revenue for this section 96,000.00 276,000.00 460,000.00 500,000.00 680,000.00

Expenses per Subscriber: Cost of content or service 49.90 51.00 52.10 53.20 54.20

Payroll 19.81 21.86 21.86 19.40 19.40 Payroll 19.81 21.86 21.86 19.40 19.40 Management 6.86 3.00 3.00 2.70 2.70 Debt service 43.93 37.47 32.57 34.68 31.11 Total monthly expenses 120.50 113.33 109.53 109.98 107.41

Monthly cash flow per subscriber 39.50 46.67 50.47 50.02 52.59A l h fl b ib 473 98 560 08 605 61 600 20 631 02Annual cash flow per subscriber 473.98 560.08 605.61 600.20 631.02Annual cash flow for system 568,770 966,143 1,741,116 1,875,629 2,681,835Annual EBITDA 1,568,770 1,966,143 2,741,116 2,875,629 3,681,835

Use this section as a checklist of all the possible revenue sources for your network; the list here is hardly exhaustive. You can use Tool #4, which is specifically meant to model revenue, monthly for the revenue rows. The sheet assumes content costs in Year 1 will grow annually. Because content costs rise much faster than revenue, especially for video, the model includes an automatic inflation function for content.  On any sheet, Calculations for monthly cash flow, etc, are on next slide. Warning: Revenue potential is high, but does grow slowly.

Cash flow calculations20

Cash‐flow calculations

Monthly cash flow per subscriber 21.69 32.21 30.50 26.84 25.28 Revenue minus expensesAnnual cash flow per subscriber 260.29 386.53 366.02 322.06 303.32 Row above * 12Annual cash flow for system 455 508 1 024 298 1 583 043 1 513 668 1 964 020 Based on avg subs in a yearAnnual cash flow for system 455,508 1,024,298 1,583,043 1,513,668 1,964,020 Based on avg subs in a yearAnnual EBITDA 1,965,508 2,534,298 3,093,043 3,023,668 3,474,020 Calculated on each sheet

EBITDA – earnings before interest, taxes, depreciation, amortization – is a comfortingEBITDA  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.( ), y y ( ) p

Investment considerations21

Investment considerationsInvestment 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 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

CInvestment 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)EBIDTA divided by the cost

Annual EBITDA as percent of capital cost 9.53%EBIDTA divided by the cost of building the systemEBIDTA divided by debt service per subscriber, times number of

Debt service coverage ratio 0.67times number of subscribers.

A look at wireless for a neighborhood22

Example: XYZ Project: 20% Equity/80% Debt Year 1 Year 2 Year 3 Year 4 Year 5

TOOL 6: Multi-Neighborhood Financial Analyzer Wireless

A look at wireless for a neighborhood

Total homes and businesses passed 1,000 1,000 1,000 1,000 1,000Total subscribers at year end 300 500 600 600 600Average subscribers for year 150 400 550 600 600Total system construction cost 250,000 250,000 250,000 250,000 250,000 Equity 50,000 50,000 50,000 50,000 50,000

D bt i i l t i l di fi i f ( 33) 200 000 200 000 200 000 200 000 200 000 Debt, principal not including financing fees (see row 33) 200,000 200,000 200,000 200,000 200,000Cumulative cost to purchase and install customer premises equipment, using year-end customer total

120,000 200,000 240,000 240,000 240,000

Cumulative cost to purchase and install central office equipment, outside plant and fiber cable, excluding CPE

130,000 50,000 10,000 10,000 10,000

Direct costs per subscriber (NOTE: Not linked to front sheet!) 400 400 400 300 300

Cash on hand at year-end, exclusive of investment return 2,000 48,000 66,000 72,000 72,000

Investment return on cash on hand 0% 1% 1% 1% 1%Total cash on hand at year-end 2,000 48,480 66,660 72,720 72,720y , , , , ,

The financial dynamics for wireless are significantly different than for fiber or other alternatives.  Revenue starts flowing faster, customer premises costs tend to be lower g p(no physical drop), but the cash outlay, while smaller, tends to get spent faster. 

Nevertheless, as we shall see when we “roll up” the debt coverage, switching to wireless to serve a difficult‐to‐deploy area can turn a disadvantage into a small advantage.

Rolling up the debt coverage23

Rolling up the debt coverage7.84%

9.83%13.71%

14.38%18.41%

31 38%39.32%

54.82%57.51%

73.64%

16 38%17.13%

14.38%18.41%

2 001.73

2.19

Investment Considerations: Dist1

Annual EBITDA as percent of debt

A as percent of equity

31.38%

f capital cost

22.41%16.38%

2.481.94

2.00

0% 4 78% 4.64% 7.35%

% 29 42%Annual E

Annual EBITDA as perc

Annual EBITDA as percent of capital

Debt service coverage ratio

Investment Considerations: Dist2

Annual EBITDA as percent of debt

2.74% 5.30% 4.78%

Annual EBITDA as percent of equity

10.97% 21.18% 19.13% 18.55% 29.42%

t of capital cost

5.48% 7.56% 5.31% 4.22% 6.69%

0.64 0.93 0.65 0.52 0.81

Annual EBIT

Annual EBITDA as percent of capital co

Debt service coverage ratioInvestment Considerations: WirelessAnnual EBITDA as percent of debt 67.77% 87.73% 102.40% 101.77% 77.86%Annual EBITDA as percent of equity 271.10% 350.91% 409.61% 407.07% 311.43%Annual EBITDA as percent of capital cost 54 22% 70 18% 81 92% 81 41% 62 29%Annual EBITDA as percent of capital cost 54.22% 70.18% 81.92% 81.41% 62.29%Debt service coverage ratio 4.40 5.06 5.42 6.14 4.70

The model handles this automatically, even if you add 50 or 100 sheets or more! Notice th t i thi l Di t2 ld t b i bl f t di t k b t it d bt

Investment Considerations:

that, in this example, Dist2 would not be viable as a free‐standing network, but its debt service is covered by the larger Dist1 build and by the small wireless build.

Investment Considerations:Annual EBITDA as percent of debt 6.51% 8.39% 10.24% 10.01% 11.50%Annual EBITDA as percent of equity 26.03% 33.57% 40.97% 40.05% 46.01%Annual EBITDA as percent of capital cost 16.04% 13.17% 12.25% 9.68% 11.12%Debt service coverage ratio 1.80 1.56 1.44 1.17 1.32

For More Information24

For More Information

• Steve Ross, steve@bbcmag.com, 201‐456‐5933steve@bbcmag.com, 201 456 5933

www.FTTHanalyzer.com for more PPT files and for Webinar archives

Watch for webinar on Tool #6, coming soon!