Networks Business Unit Review. Public Utility District of Chelan, WA

Transcription

1 Networks Business Unit Review for Public Utility District of Chelan, WA August 2010 Uptown Services, LLC Note: Significant study data sources (costs, operating metrics, contract terms, etc) have been supplied by CCPUD staff. This document is not the result of a system audit.

2 Identification of operating improvements and strategy opportunities to improve the financial returns of the FTTP network Develop a framework for assessing the value and future role of the FTTP network as an asset of CCPUD August 10 2

3 A limited set of operational changes involving wholesale rates and staff levels is recommended to improve cash flows Network expansion excluding the Grant Proposed Funded Service Area is not recommended due to low ROI Divestiture of the network is not recommended Divestiture of the headend to a PSP is recommended The RUS Grant award creates a viable incremental financial opportunity and its implementation is recommended Any opportunity to migrate CCPUD into a retailer role for video and Internet service is recommended Accumulated internal debt owed by the Networks Division should be forgiven August 10 3

4 Market Analysis Subscriber Growth Pricing and Service Value Incumbent Strategies Operating Issues & Opportunities Technology Analysis Value of the Fiber System Financial Analysis Evaluation of Current Strategy Evaluation of Alternative Strategies Sensitivity/Probability Analysis Worst Case Analysis Study Findings August 10 4

5 Market Analysis Subscriber Growth

6 Video penetration, launched 4 years after data and voice service, is substantially below benchmark levels. Since video is the primary source of dissatisfaction among incumbent operators, it is key to strong Internet and voice service growth as well 70% Video Penetration (By Year Since Launch) 60% 50% 40% 30% 20% 10% Annual Wholesale Revenue Opportunity: At 15% Penetration: $500k At 33% Pen. (70% of Benchmark): $1.1M At 40% Pen. (85% of Benchmark): $1.3M 0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Chelan CO, WA Muni Average August 10 6

7 Internet penetration, while stronger than video performance, is also below benchmark levels for an FTTP system 60% Internet Penetration (By Year Since Launch) 50% 40% 30% 20% 10% 0% Annual Wholesale Revenue Opportunity: At 28% Penetration: $1.9M At 31% Pen. (70% of Benchmark): $2.1M At 37% Pen. (85% of Benchmark): $2.5M Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Chelan CO, WA Muni Average August 10 7

8 Voice service penetration is on benchmark, and we do not see it to have incremental penetration growth (consistent with current CCPUD forecast) 25% Phone Penetration (By Year Since Launch) 20% 15% 10% 5% 0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Chelan CO, WA Muni Average August 10 8

9 Video Penetration is significantly below peer levels Currently 15%. Grows to 33% in Penetration increase scenario otherwise remains at 15% Internet Penetration is marginally below peer levels Currently 28%. Grows to 34% per the current CCPUD forecast Voice Penetration is at peer levels Currently 19%. Grows to 20% per the current CCPUD forecast August 10 9

10 Market Analysis Pricing & Service Value

11 20,000 Although an Open Access system, LocalTel holds over 87% of the fiber network subscriber base and generates 74% of the monthly wholesale billing. For this reason, LocalTel is used as the reference PSP in the study analysis 18,612 Total Service Counts and Wholesale Revenue by Retail Provider (Revenue is Monthly) $300,000 15,000 10,000 5,000 0 Subscriber Count Monthly Billing $250,000 $200,000 $150,000 $100,000 1,709 $50, $0 LocalTel & NWInternet Genext/Firefly Envision Technologies Panda Computers/Fibercow NCW Online Computer Park NOANET Zayo Bandwidth ifiber Communications GCI CLINITECH North Central ESD CCPUD Internal Amerion NCI DataCom Chelan County PUD Spectrum Communications US Online OnFiber Communications Douglas County PUD August Broadstripe fka MDM (Millen.) Clear Focus Noel Communications One Eighty Networks

12 Cable Package Price Discount to Charter Charter LocalTel Charter DirecTV LocalTel w/o rate LocalTel w/ $2 rate Current Post Rate Increase Basic 1 Basic $24.99 $21.24 $ % 7% Expanded Basic 1 Expanded Basic $55.99 $49.99 $51.79 $ % 4% Digital Expanded Basic 1 $60.99 Digital View Digital View Plus Digital Basic Inspirational Tier Family Tier Movie Tier Home Tier Entertainment Tier Education Tier $65.99 $54.99 $59.64 $ % 7% $70.99 $69.44 $ % + 1% Sports View Sports Tier $5.00 $ % Latino View Latino Tier $5.00 $ % HD Ultra View HD Tier $5.00 $4.95 1% August 10 1 Rates applicable to first set to include digital only channels. Additional sets are $5/STB 12

13 Wild Blue Charter (Promo) Charter (Everyday) Verizon (Monthly) Verizon (Annual) LocalTel Discount (Rate Card) Discount (Promo) Sat 512k/128 $49.95 Sat 1M/200; DSL 1M/384; Cable 1M/128 $69.95 NA $19.99 $34.99 $29.99 Sat 1.5M/256 $79.95 DSL 3M/768 $44.99 $34.99 DSL 7.1M/768; Cable 8M/1; FTTP 6M/768k $29.99 $54.99 $54.99 $39.99 $ % 31% Cable 16M; FTTP 12M $39.99 $64.99 $ % 26% Cable 25M/3 $54.99 $79.99 August 10 13

14 Local Local & Statewide Long Distance Local & Nationwide Long Distance Basic Line/Addl. Line Without Calling Features With Calling Features Frontier (Verizon) Charter LocalTel $16.90 $ Feature $ Features Discount to Frontier Discount to Charter $ % 56% $42.99 $ % $ Features $ Features $ % 6% August 10 14

15 LocalTel bundle rates discount levels are not competitive with incumbent bundle offers 3 Play 2 Play Video Frontier (Verizon) Charter LocalTel Charter LocalTel DirecTV Choice 150 Channels Digital Basic 90 Channels Expanded Basic 78 Channels Digital Basic 90 Channels Expanded Basic 78 Channels Frontier (Verizon) LocalTel Internet 7.1M Tier 8M Tier 6M Tier 8M Tier 6M Tier 7.1M Tier 6M Tier Phone Local +Unl LD 5 Features Local +Unl LD 8 Features Local +Unl LD 10 Features Local +Unl LD 5 Features VoIP Phone + $20 for Unl LD Bundle Price $ Year Term $ Year Contract $ No Contract $ Month Term $80.52 No Contract $ Year Term $60.90 No Contract LocalTel Discount + 45% + 6% + 7% + 11% August 10 15

16 Market performance reveals several dimensions where improvements could be made, but these are mostly under the control of the PSPs. As an analysis of the retail offering, the peer group used is retail FTTP Service Attribute Responsible Areas At/Above Peer Performance Voice Penetration Internet Pricing (retail) Voice Pricing (retail) PSPs PSPs PSPs Areas Below Peer Performance Video Penetration Internet Penetration Video Channel Lineup Video Pricing (retail) Bundle Pricing (retail) PSPs PSPs CCPUD PSPs PSPs August 10 16

17 Video Video service requires additional headend investment to remain competitive (channel count, packaging, HDs, VOD) Internet Increase wholesale rates and download speeds to leverage B PON and G PON capacity and improve CCPUD returns. Implement either as a price change or grandfather current subscribers. 6M/384K: $ M/384K: $ M/384K: $ M/1M: $28.35 Multiple Service End Users (Bundles) Discount residential wholesale rates to encourage improved video subscriber growth for PSPs that sell triple play bundles Positions PSPs to become more aggressive in pricing and promoting bundles against the incumbents August 10 17

18 Active branding and marketing of the services by CCPUD ( Intel Inside approach as a trusted and local brand) Co operative marketing program with PSPs with execution and investment requirements both for media advertising and tactical sales programs Among the following list of potential providers, who would you prefer to receive broadband service from? (n = 2,000) 65% 62% 55% 53% 55% 16% 8% 3% 5% 5% 2% 4% 5% 14% 8% 5% 9% 10% 8% 4% 24% 19% 19% 21% 21% Incumbent Cable Provider Incumbent Telco Provider The City or Local Electric Provider A provider that is new to the area Don't Know August 10 18

19 Market Analysis Incumbent Strategies

20 The underlying technology of FTTP (Fiber to the Premises) is superior to incumbent networks in terms of bandwidth and data transport capacity. Neither Charter nor Frontier are expected to upgrade to FTTP in Chelan County CCPUD FTTP Charter Frontier (Verizon) Architecture Fiber to the Premises Hybrid Fiber Coax Twisted Pair Likelihood will Upgrade Not Required Low No fiber deployment initiative. DOCSIS 3.0 to 50% of footprint Low No fiber deployment initiative and declining capital spending Bandwidth Capacity (Data) BPON: 1Gbps GPON: 2.4Gbps DOCSIS2.0: 38Mbps Up to 25Mbps (distance sensitive) Internet Downstream Speed BPON: 20Mbps GPON: 100 Mbps+ Currently: 16Mbps DOCSIS 3.0: 50Mbps Currently: 7.1Mbps Bandwidth Capacity (Video) Analog/QAM: 870 MHz Analog/QAM: 870 MHz Has begun conversion to All Digital (13 channels) NA Deployed Services Video/Internet/Phone Video/Internet/Phone Internet/Phone August 10 20

21 Current CCPUD video bandwidth is near full capacity. This is a typical situation in the industry for a QAM headend, but Charter is beginning to significantly differentiate its video service Service Attribute / Functionality Charter LocalTel Price Channel Count High Definition Channels Higher rate card. But extensive use of promotional offers and retention discounts. 226 Channels excluding premium and music. Currently 8 15% cheaper for most packages. 180 Channels excluding premium and music. LocalTel Advantage? 42 channels 37 channels No PPV/VOD 9 PPV channels and VOD Only PPV No Yes No Adult Content 5 PPV channels and adult VOD content Not Offered (by LocalTel) No Optional Tiers 11 sports and 20 Latino channels 8 sports and 8 Latino channels No August 10 21

22 Operating Issues and Opportunities

23 Staffing Level Review Review current and planned organizational structure and staffing levels Complete activity based staffing plan Determine staffing levels to be used for each scenario alternative Non Labor Operating Expenses Review Review all non labor expenses listed in the current Networks budget Identify areas for improvement and suggest different approaches where possible Contracts Review Review existing service and maintenance contracts Identify areas for improvement and suggest different approaches where possible August 10 23

24 Three primary scenarios evaluated Build out system to 95% of households (current plan) Freeze system footprint, but continue to hook up subscribers CCPUD as retail provider within existing footprint ( what if ) Activity based staffing model used to derive appropriate FTEs Model used to determine the number of personnel by function Tasks broken down for all key processes including outside plant construction, provisioning/dispatch, drop installation, maintenance, service calls and engineering Staffing plans developed for each scenario Recommended staffing levels reviewed with Networks staff Additional factors considered Final staffing recommendations developed and used as inputs for financial analysis August 10 24

25 Networks Staffing Allocations Reduced After Construction Completion Engineering, System Administration and Field Technicians Allocations to Networks eliminated as positions transition to other CCPUD departments Approximately 8.2 full time equivalent positions removed from year five of the plan Contract Services NoaNet network operations center monitoring to be brought in house ASAP Vendor support contracts cut back or eliminated for some equipment Benchmarking Staffing levels benchmarked against similar sized system in Tennessee Long term staffing levels in line with relatively mature system August 10 25

26 Technology Analysis

27 Current Wireless Technologies Satellite WiMax 3G Cellular Long Term Evolution Wireless Will be adopted by cellular carriers like Verizon and AT&T Estimates for maximum throughput per subscriber range from 4M to 12.5M Summary No current or future wireless technology will offer the pure bandwidth per user of FTTP No current or future wireless service will be able to deliver the bandwidth required for future triple play services like 3D TV August 10 27

28 Wireless service options are all at least 4X the cost per Mbps of FTTP Retailer offerings FTTP services are clearly a better value for broadband subscribers Download Throughput $75 $75 Internet Downstream Throughput and Price per Mbps (Wireless Alternatives vs. FTTP Retailers) $66 $57 $50 $42 $40 $37 $27 $27 $6 $4 $80 $70 $60 $50 $40 $30 $20 $10 $ Monthly Price per Mbps Download Throughput $/Meg August 10 28

29 Video Channel Capacity Video system is close to capacity on channels Major cable companies are moving forward with the elimination of most analog channels Freeing up analog spectrum makes more room for digital channels (mostly HD) Digital channel can also be used to stream video on demand services Video On Demand (VOD) In a perfect world VOD systems should be deployed by retailers, but. If CCPUD remains the head end owner, it would make sense to own the VOD system Deploying VOD involves virtually all facets of the video operation including head end, transport network and back office The biggest challenge regarding VOD is the development of a compelling mix of content Content would be the responsibility of the retail video provider(s) August 10 29

30 Current video bandwidth is near full capacity 860MHz split between analog and video (50MHz to 550MHz is analog) For each 6MHz of bandwidth you can transport: 1 Analog Channel 10 Digital Channels 2 Digital HD Channels Potential technologies to increase video transport capacity 100% digital video: Deployed in 70% of Comcast s footprint. All TVs require Digital to Analog converter IP Video (with RF overlay): Video is sent out over the same wavelength as data as IP traffic Switched Digital Video: Charter deploying to 50% of its footprint. Enables multicasting of only the video channels being viewed in a service group 1GHz Digital video: RF capacity has been 870 MHz since Expanding to 1 GHz is now possible (40% increase in HD channel capacity) All require investment at the headend, at the customer premise (Set Tops), or both August 10 30

31 All Digital Conversion New Set Top Box Requirements An all digital system will require that all subscriber televisions be connected to a set top box Digital transport adapters (DTAs) are low cost ($35 $50) set tops used by Comcast DTAs can be installed by the subscriber CCPUD would provide enough DTAs to convert an average of 2 TVs per video HH ( 9,200) Assuming no remuneration from retailers DTAs would cost approximately $460,000 VOD Deployment Costs VOD system (catchers, video servers, storage and licenses) $200,000 RF Overlay upgrades including GQAMs and 1550 transmitters $150,000 Back Office and Integration Costs $190,000 Back office upgrades to ETI and DNCS as required Integration and other professional services as required Actual costs subject to detailed engineering and RFP Results August 10 31

32 The video headend is not a shared asset and is not part of the FTTP network infrastructure Not last mile distribution plant From an ownership standpoint, it is inconsistent for CCPUD to own/operate the video headend and not the voice switch The video headend is not a natural fit for a video services wholesaler Channel lineup decisions drive headend investment needs and are best evaluated by a video services retailer Technical and programmer contract realities make a single channel lineup much more realistic Ideally, a single PSP would own the video headend and make the incremental investments required to best compete with Charter August 10 32

33 Networks should seek to shed video head Video head end is typically the responsibility of the retail video provider Video upgrades will be required in the near future to grow subscriber base Return is minimal for CCPUD given wholesale revenue levels from video line of business Executing the proposed strategy will be difficult given history The dominant video provider on the network would be the logical buyer The resulting video model will probably cease to be open access Smaller providers would either exit the video business or be bought out Some type of long term lease would need to be executed for the head end facility New rates and policies should be considered for the video line of business If shedding the head end isn t possible now, then steps should be taken to improve the video economics Develop bifurcated rate structure for video that splits transport from head end services Establish minimum wholesale revenue levels for video service providers August 10 33

34 Fiber capabilities will not be challenged by wireless Video system will need upgrades in the future to keep pace in market CCPUD should consider changing video rate structure August 10 34

35 Value of the Fiber System As a Going Concern or a System Sale

36 Financial Value: The total value of the fiber system (to CCPUD and the community) as a going concern exceeds the value of selling the asset by approximately $80M Infrastructure Value: The unparalleled capacity of FTTP will become increasing important as Internet traffic increases 34% annually between , largely due to IP video Source Capital Savings (one time) Operating Cash Flow (annual) Total ( ) Economic Value if Retained Broadband Operating Cash Flow Consumer Savings $2.5M $50M $2.35M $47M Smart Grid $5M (fiber backbone) $5M Economic Value if Monetized System Sale $20M August 10 36

37 Favorable FTTP architecture Unfavorable Existing PSP contracts No clear qualified buyer. A viable buyer would most likely be an operator with a contiguous footprint and significant debt capacity. Current economy and system performance calls for lower valuation multiple Inter mingled asset with electric distribution plant (shared conduit) August 10 37

38 Valuation ranges are broad but congregate around a $20 $25M sale value Metric Range Outcome (Current) EBITDA Multiple 6x to 10x Range: $15M to $24M Per Subscriber Trade Value Range: $2k to $4.5k Likely: $2,500 Range: $19.1M to $43.0M Likely: $23.9M Market Cap Per Subscriber $1,200 to $2,000 per Subscriber $11.5M to $19.1M Distressed Asset (Based upon Verizon FiOS capex) 25 50% of $1,750 per Subscriber Likely: $600 per Subscriber $4.2M to $8.4M Likely: $5.7M August 10 38

39 Financial Analysis Current Strategy

40 Evaluate Variations on the Current Strategy How can the existing business plan be improved without significant strategy changes? Model revenue, opex, capital and financial recommendations for current plan Recommendations based on likely results Evaluate Major Changes to Current Strategy Different business plan approaches analyzed vs. current strategy options Retail and System Sale (Exit) combined with alternative debt service strategy What would need to happen for new strategies to meet or exceed improved business plan? What is the likelihood of achieving success for the recommended strategy Evaluate Impact of Stimulus Grant Award August 10 40

41 Build to 95% Based on current projection developed by CCPUD staff No changes to staffing, expenses, capital spending, pricing or penetration Scenario variation with stimulus funding ($25M) also included ( Buildout Grant ) No Build Out Scenarios Raise Internet average price to $22.39 ( No Build Rev ) Reduce staffing, no NOANet monitoring and cut Alcatel support ( No Build Opex Rev ) Increase video penetration to 70% of benchmark (33%) ( No Build Opex Rev Pen ) Common Financial Assumptions Outstanding bonds = $25.4M Legacy internal debt = $65.7M Cash gaps filled by inter departmental transfers into Networks ( PUD Transfers ) Principal and interest paid per terms on both outstanding bonds Legacy internal debt and PUD transfers amortized over 20 years with interest August 10 41

42 Legacy Bond 2004C Legacy Bond 2004E Legacy Internal Debt Future PUD Transfers Interest Rate 5.1% 5.0% 5.4% 6.0% Amortization Period Interest On Cash Reserves 2% Minimum Cash Reserves $250,000 Total annual PUD transfers amortized the end of each plan year as required Legacy internal debt amortization begins in the first year of the plan Legacy bonds amortized according the remaining term and rate for each August 10 42

43 Build Out No Build Out Five Year Growth in FTTP Passings Buildout Rev Opex Rev Opex Rev Pen 7, Internet Penetration 33.5% 33.5% 33.5% 33.5% Phone Penetration 20.2% 20.2% 20.2% 20.2% Video Penetration 14.9% 14.9% 14.9% 33.0% Internet ARPU $18.10 $22.59 $22.59 $22.59 NoaNet NOC Monitoring / mo $4,032 $4,032 $0 $0 Alcatel BPON/GPON Support $24 per ONT $24 per ONT $12 per ONT $12 per ONT Internet and phone penetration per current CCPUD plan Opex scenarios include reduction of construction related staffing when applicable August 10 43

44 Build Out No Build Out Buildout Rev Opex Rev Opex Rev Pen Construction Cost per Passing $2,051 $1,132 $1,132 $1,132 Electronics Cost per Passing $992 $274 $274 $274 Fiber Premises Devices $1,000 $1,253 $1,253 $1,253 Fiber Premises Drops $2,098 $1,116 $1,116 $1,116 ONTs / Maximum Services % churned accounts requiring new ONT Year Year Year1 50% Year5 30% Year Year Year1 50% Year5 40% Year Year Year1 50% Year5 40% Year Year Year1 50% Year5 40% Video System Upgrades $0 $0 $0 $1,000,000 ONT ratio increases as fewer services are supported per ONT on average 40 50% of churned accounts will require new ONTs as BPON system is phased out Video head end upgrades will be required to support increased video penetration August 10 44

45 PUD Transfers $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0 $5,000,000 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 Buildout Buildout Grant No Build Rev No Build Rev Opex No Build Rev Opex Pen August 10 45

46 Cash Reserves Less Outstanding Debt $0 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 $50,000,000 $100,000,000 $150,000,000 $200,000,000 $250,000,000 Buildout Buildout Grant No Build Rev No Build Rev Opex No Build Rev Opex Pen August 10 46

47 No variation of the current strategy will support existing debt load Best case scenario requires $104M in PUD transfers over 10 years All scenarios experience escalating debt over 10 years All scenarios require the CCPUD to provide increasing cash transfers over time Alternative debt approach is required for all going forward scenarios Networks would be released from external bonds and internal debt External bonds would continue to be the responsibility of CCPUD and paid Future PUD transfers should earn interest, but not be amortized August 10 47

48 Financial Analysis Debt Forgiveness Scenarios

49 No Build Scenarios Evaluated no build strategy with and without recommended improvements All bonds forgiven at the start of the plan All internal debt forgiven at the start of the plan All ongoing cash requirements funded by PUD transfers All PUD transfers earn interest, but are not amortized during the plan Incremental Grant Overlay Scenario Models costs and strategies used in the grant application / budget No incremental staff added to the No Build Opex Rev scenario Combination of the No Build Opex Rev and Grant Incremental scenarios August 10 49

50 PUD Transfers $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 $1,000,000 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 No Build Sunk No Build Rev Opex Sunk Grant Incremental Combined Rev Opex Sunk Grant August 10 50

51 Cash Reserves Less Outstanding Debt $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 $5,000,000 $10,000,000 No Build Sunk No Build Rev Opex Sunk Grant Incremental Combined Rev Opex Sunk Grant August 10 51

52 Additional Financial Scenarios Retail and Exit Strategies

53 Sell System and Exit Broadband Business Sell system to third party operator Write off legacy internal debt Pay off legacy bonds according to schedule Fund all cash requirements from PUD 6% interest Track total PUD transfers, but do not amortize during the plan period CCPUD as Retailer Seek change in state law that would allow CCPUD to offer retail services Buy out existing retail subscribers Offer retail triple play services under the CCPUD brand Adopt debt approach from Exit scenario August 10 53

54 CCPUD Buys Out Existing Retail Service Provider Subscribers Likely acquisition price based on up to 3 years contribution per service Video buyout per subscriber = $ % of original set top box costs ($250) Internet buyout per subscriber = $ Total buyout budget of $7.6M used in the scenario Penetration and Contribution Same penetration assumptions as No Build Opex Rev Pen Average Video contribution per subscriber = $23.72 Average Internet contribution per subscriber = $30.73 Phone remains wholesale with no change in contribution Cost of Goods Sold (COGS) Internet backbone connectivity required for all retail Internet subscribers Video programming expenses for all video subscribers Internet and Video COGS included in contribution assumptions for each service August 10 54

55 Staffing Increase Business Advisor and Marketing Specialist to dedicated Networks staff positions Add 4.2 CSRs to front office staff and allocate them to Networks Add 3.0 Communications Technicians to perform in home installations Marketing Direct marketing and advertising budget added to support subscriber acquisitions $100 average budget per new connect for video, Internet and phone services Capital Expenditures Average set top box cost per video connect = $400 based on 1.3 boxes per household Drop cost increase of $75 for in home cabling and materials August 10 55

56 Sale transaction terms System sold for $20M per valuation analysis CCPUD continues to pay new operator for Internal services ($1.9M in 2010) Network operator pays pole attachment fees Net asset value of the system ($62.0M) transferred to new owner Operational transition All Networks staffing, rents, utilities and overhead allocations reduced to $0 over three years Staffing should be transitioned to new positions in other CCPUD departments August 10 56

57 PUD Transfers $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 $1,000,000 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 Combined Rev Opex Sunk Grant Exit Retail Sunk August 10 57

58 Cash Reserves Less Outstanding Debt $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0 $5,000,000 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 $10,000,000 Combined No Build and Grant Exit Retail Sunk August 10 58

59 Exit Strategy System value is subjective and primarily set to what another party is willing to pay System value could be impacted by intermingled assets and continued reliance on CCPUD field staff to access fiber cable in energized electric ducts CCPUD would rely on third party to provide strategic communications facilities CCPUD would give up key backhaul facilities that will likely be required for any future smart grid deployment fiber based or wireless Retail Strategy Retail affords CCPUD more control over the end to end broadband business model Retail has the potential to offer the best financial performance of all options State law would need to be changed to allow CCPUD to offer retail services Implications of Networks Debt Forgiveness and Grant Funding Forgiving debt helps, but Networks will still require additional cash to complete build A grant funded expansion could pay the interest on the PUD transfers Revenue and opex changes must be implemented to achieve projected results for combined case August 10 59

60 Financial Analysis Sensitivity Analysis

61 Business Case Input Values Year 6 Cash Flow (Median = $2,586,610) Scenario = No Build Opex Rev Sunk Best Worst Median Range Average Internet Price Year1 $24.85 $20.33 $22.59 $610,479 Internal Sales Year1 $2,055,900 $1,682,100 $1,869,000 $458,335 Other External Sales Year1 $1,256,200 $1,027,800 $1,142,000 $280,123 Internet Access Penetration Year5 36.9% 30.2% 33.5% $266,218 General Overhead Allocation Year1 $779,729 $953,002 $866,365 $223,535 Fiber Premises Devices $1,002 $1,504 $1,253 $221,723 Average Phone Price Year1 $13.62 $11.14 $12.38 $202,726 Residential Telephone Penetration Year5 22.2% 18.2% 20.2% $194,002 Fiber Premises Drops $893 $1,339 $1,116 $193,366 Annual Churn 9.7% 11.9% 10.8% $180,387 August 10 61

62 $2,900,000 $2,891,767 $2,815,885 Scenario = No Build Rev Opex Sunk $2,800,000 $2,726,702 $2,700,000 $2,720,422 $2,698,378 $2,697,662 $2,687,892 $2,683,612 $2,683,417 $2,676,816 Cash Flow Year6 $2,600,000 $2,500,000 $2,400,000 A027 A042 A037 A011 A122 A180 A022 A009 A181 A014 $2,474,843 $2,475,938 $2,485,166 $2,489,609 $2,490,050 $2,496,430 $2,446,579 $2,454,204 $2,357,550 $2,300,000 $2,281,287 $2,200,000 ID A027 A042 A037 A011 A122 Title Average Internet Price - Year1 Internal Sales - Year1 Other External Sales - Year1 Internet Access Penetration - Year5 General Overhead Allocation - Year1 Best $24.85 $2,055,900 $1,256, % $779,729 Worst $20.33 $1,682,100 $1,027, % $953,002 ID A180 A022 A009 A181 A014 Title Fiber Premises Devices Average Phone Price - Year1 Residential Telephone Penetration - Year5 Fiber Premises Drops Annual Churn Best $1,002 $ % $893 10% Worst $1,504 $ % $1,339 12% August 10 62

63 100% 90% Scenario = No Build Rev Opex Sunk 80% 70% 60% The Expected value for Cash Flow Year6 is $2,586,305 50% 40% 30% There is an 90% probability that Cash Flow Year6 will be between $2,065,690 and $3,100,820 20% 10% 0% $1,600,000 $1,800,000 $2,000,000 $2,200,000 $2,400,000 $2,600,000 $2,800,000 $3,000,000 $3,200,000 $3,400,000 $3,600,000 Cash Flow Year6 August 10 63

64 Business Case Input Values Year 6 Cash Flow (Median = $341,866) Scenario = Grant Incremental Best Worst Median Range Cost per Passing $3,200 $4,800 $4,000 $755,493 Average Internet Price Year1 $24.85 $20.33 $22.59 $141,159 Fiber Premises Devices $960 $1,440 $1,200 $106,308 Internet Access Penetration Year5 36.9% 30.2% 33.5% $75,008 Fiber Node Electronics per Passing $299 $449 $374 $69,861 Average Phone Price Year1 $13.62 $11.14 $12.38 $46,647 Residential Telephone Penetration Year5 22.2% 18.2% 20.2% $46,609 ONT Factor Year $45,227 Average Video Price Year1 $9.36 $7.66 $8.51 $23,652 Video Services Penetration Year5 16.4% 13.4% 14.9% $23,633 August 10 64

65 $800,000 $700,000 $724,707 Scenario = Grant Incremental $600,000 Cash Flow Year6 $500,000 $400,000 $300,000 $200,000 $412,388 $395,019 $379,370 $376,796 $365,170 $365,170 A159 A027 A180 A011 A160 A022 A009 $341,866 A179 $353,682 $353,682 $304,361 $306,935 $318,523 $318,561 $330,030 A032 $330,049 A013 $288,712 $296,638 $271,229 $100,000 $0 ($100,000) ($30,786) ID A159 A027 A180 A011 A160 Title Cost per Passing Average Internet Price - Year1 Fiber Premises Devices Internet Access Penetration - Year5 Fiber Node Electronics per Passing Best $3,200 $24.85 $ % $299 Worst $4,800 $20.33 $1, % $449 ID A022 A009 A179 A032 A013 Title Average Phone Price - Year1 Residential Telephone Penetration - Year5 ONT Factor Year5 Average Video Price - Year1 Video Services Penetration - Year5 Best $ % 1.3 $ % Worst $ % 1.6 $ % August 10 65

66 100% 90% Scenario = Grant Incremental 80% 70% 60% The Expected value for Cash Flow Year6 is $339,292 50% 40% 30% 20% There is an 90% probability that Cash Flow Year6 will be between ($97,416) and $740,107 10% 0% ($400,000) ($200,000) $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 Cash Flow Year6 August 10 66

67 Financial Analysis Worst Case Analysis

68 PUD Transfers $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 $2,000,000 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 Combined Rev Opex and Grant Sunk Combined Worst Case August 10 68

69 Cash Reserves Less Outstanding Debt $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0 $5,000,000 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018 CY2019 $10,000,000 $15,000,000 Combined Rev Opex and Grant Sunk Combined Worst Case August 10 69

70 Move forward with No Build Opex Rev Sunk scenario Focus on increasing penetration within existing footprint Stop all non drop construction not funded by line extension revenue now and in the future Implement recommended staffing and operational expense reductions Implement changes in Internet pricing Forgive internal debt and external bonds (CCPUD to pay bonds on schedule) Fund all cash requirements with interdepartmental transfers Move forward with grant funded expansion if the following assumptions hold Relative Opex and pricing changes implemented per No Build Opex Rev scenario No additional staff added beyond the levels identified in the No Build Opex Rev case Fund all cash requirements with interdepartmental transfers Pursue policies that would allow for the eventual sale of the video head end Pursue legal and regulatory relief that would allow CCPUD to offer retail services August 10 70