Macquarie’s Milestone 2 proposal has been finally released to the public. Here’s a quick run-down of the most important details.
- The final cost per address is estimated at $22.60 per month. Macquarie estimates that re-working the deal to account for five cities bowing out trimmed the cost by $8.57 per month.
- The revenue split is much more generous than I expected, allowing the cities to keep 75% of wholesale revenue after the first $2M per year. It’s expected to completely cover the debt service by 2021 with just a 24% take rate for premium services.
- The basic level service has also been improved. Instead of 3M/3M service being included at no extra cost, it’s been bumped to 5M/5M. This matches Google Fiber speeds on the free tier. The data cap stays put at 20GB per month.
- Macquarie will still be in charge of operating the network for opt-out cities.
- A public vote will determine if the project moves forward in the opt-in cities.
- Cities are free to determine what, if any, opt-out provisions will be available.
- Users won’t be charged a utility fee until they connect to the network or six months after the network connection is available, whichever comes first.
- UIA and SAA users will not pay any utility fee. If you’re already paying for (or have paid) your network connection, there’s no utility fee for you.
- The UTOPIA NOC would be closed and all NOC operations moved to a Fujitsu facility in Texas. Keeping a primary or secondary NOC in Utah would raise the utility fee by between $1.50 and $1.79.
- Almost all of the network revenues are being driven by Veracity, XMission, and SumoFiber. Other ISPs are very small by comparison.
- The majority of currently connected users are in opt-out cities. This only reinforced that the votes there were “we got ours” selfishness.
Overall, this still looks like a great deal for the cities who are moving forward. It could still be a great deal for cities that haven’t figured out what to do about the network yet (looking at you, Orem).
If you want to read the full report, I’ve attached a PDF copy.
Thanks for posting this! (Where did you find it anyway? I haven’t seen it elsewhere)
I’ve got a lot of thoughts and questions…
I find myself a bit torn as an Orem resident. I showed up to the meetings and encouraged them to vote “yes”, but given the new projected rate, I’m almost positive Orem would’ve backed out at MS2. If it really would’ve come out to $30+ per address that’s well over the $18-20 they were selling at MS1. Even $22/month with a 20GB cap hardly seems competitive with available DSL/Cable (but maybe that’s not the point); compound that with the no-resident-opt-out-option would definitely grate on (Orem) people’s “choice” nerves. It doesn’t make sense to me that the opt-out cities would’ve cost that extra $8, if they really are as connected as it sounds.
– Not having yet read the actual report, when you say that the debt service would be complete in 2021, was that just the debt service for the opt-in cities? (and the opt-out cities are still on the hook for their portions?)
– How realistic is actually reaching that annual 2 million before the 75% revenue sharing happens? (Is there a sharing percentage below that level?)
Thanks again for posting this!
… I also wonder how cities/residents will feel about the NOC here closing? It seems to mean that the jobs associated with the project will only last until the build-out is complete (and I’m not sure those jobs will really be made available to locals either).
The NOC is a very small number of jobs (under a dozen), and there’s not likely to be much of a loss in quality by combining operations in a remote facility. There will still be lots of in-state jobs for installs, maintenance, and management.
People send me things. It’s one of the benefits of being the point man for so long.
What caused the large jump from the opt-out cities was being unable to spread fixed costs between more addresses. If Orem or Murray jumped back in, the cost per address would likely drop quite a bit, probably back under $20. Part of that is that both of those cities require less construction as they have 50-60% completed networks.
Only the opt-in cities are getting the wholesale revenue share. Opt-out cities get to figure out how to pay their bond portions all on their own.
To put the annual $2M in perspective, that works out to around 5500 residential subscribers worth of wholesale revenue. UTOPIA currently has 10K residential subscribers and 1800 business subscribers. It’s already happening.
Just skimmed through the document. As an existing UTOPIA subscriber in Lindon, I was curious to see how Macquarie was proposing to handle subscribers in those cities that opted out of Milestone 2. It appears that they will be charged the utility fee, the same as other users, which is fine. What I didn’t see addressed, was whether citizens in opt out cities who are not current subscribers would have the opportunity to connect to the network (assuming they have fiber available at their address). Do you know what will happen there? Will only existing subscribers in OOC’s continue to have access to the service, or will they continue to enroll other users?
It looks like they’re leaving it up to the cities to figure out. My guess is that most of the opt-out cities will work towards an operational break even point, eat the bond costs, and maintain the $3K install for new homes that have fiber on the curb. To date, not a single one of the opt-out cities has had any plans for expanding or maintaining the network. Murray’s plan to remarket homes with a connection and no service (something UTOPIA has been asked to do by service providers by years) is the only activity I’ve seen.
This might be something that is discussed in more detail in the document (I haven’t read it quite yet). Will the revenue sharing ever go towards eliminating the monthly utility fee? Or is that eliminated first before bond debt is paid? Or is this completely up to the city for fund usage? Hopefully that question is on the voting ballot, because I’d like to be able to say, “this money pays the bond debt first, then goes to eliminating the fee”.
All indications is that it’s up to the city to figure out what to do when revenues exceed bond costs. If they don’t put all of it towards reducing/eliminating the utility fee, the council should be voted out until they do.
I read through a bit of that document, I wonder if the actual “build-out” start will be soon enough to offset any plans by incumbents to push better, and symmetrical, speeds in response. It doesn’t look like any build would start until August at the earliest, that leaves a lot of time for Comcast or even Century Link to respond aggressively.
I wouldn’t put money on CenturyLink doing much. It’s been a very long time since they announced fiber to the press release and there’s maybe a few thousand total addresses that can order service.
Comcast is still waiting for finalization of the DOCSIS 3.1 spec. Even with that, they have to somehow split nodes or conserve their limited coax bandwidth to be able to power it. And even then, you’re stuck with a company that has no problems changing the name on your account to “A**hole” if you get a bad CSR.
That is true on both fronts. The end game for me is to get out of Comcast’s grip, and with a provider that doesn’t piss off customers for fun. Also, Gigabit will be awesome. Probably won’t save me money in the short term, but in the long run (as long as that fee is covered by revenues) it will be a lot cheaper.
Thanks for sharing this! I am always impressed by these documents. They are fairly complex, but still easy to understand. For example, Figure 5 really helped me understand how the money flows, including the different service levels (basic and premium).
“It is important to note that there will be significant additional capacity requirements if any of the Opt-Out Cities want be a part of the new network again.”
I want to help everyone understand what “debt service is covered” means. Debt service is similar to your monthly mortgage payment. Within 5-years, the shared revenue is expected to cover these payments. Going past 5-years, revenue is expected to exceed the debt service. Keep in mind that there are still many years of debt service that need to be paid, so this extra money “could” be used to pay off the principle early (although that may not be permitted with their type of debt).
Your version is obviously a DRAFT version (based on the watermark); they didn’t even finish their sentence in 3.4.2. Let us know when the final is released.
Keep up the good work!
Someone in Orem City apparently leaked it. I’m pretty confident that most of it will stay the same, but it gives us an idea of the kind of meticulous work going into this project. This isn’t some bumpkin fresh off the turnip truck.
Hopefully they can move quickly, The sooner I can get my gigabit fiber the better =)
Exactly how I feel. It’s looking like the earliest construction can start is June or July. More than likely August.
The UTOPIA NOC would be closed and all NOC operations moved to a Fujitsu facility in Texas. Keeping a primary or secondary NOC in Utah would raise the utility fee by between $1.50 and $1.79.
I suppose they would also outsource the UTOPIA call center to India or maybe the Philippines!?
I’d much rather see my money was being kept in state and being pumped back into the local economy similar to my isp provider XMission!
“Jim Chanos, president of the hedge fund Kynikos Associates and
another famous early doubter of Enron, has been Macquarie’s most
outspoken critic. In 2007, Chanos told McLean that Macquarie had
”perverse incentive to serially overpay for assets,” and compared the company to a Ponzi scheme.”
That was an interesting read, and if operating broken assets is Macquarie’s M.O. it could be a compelling reason to back out of the deal…
However, I don’t know if I quite understand how the article applies to the UTOPIA situation. In the toll road cases I get the impression that Macquarie owns the roads and collects the tolls, but obfuscates where the money is going (operating at major losses and failing to maintain road quality). This seems like a different model from the proposed PPP in that the cities will collect the utility fee and pass it back to Macquarie. If my understanding of the PPP is correct, it seems that the opt-in cities could withhold their utility collections in the event something is awry (assuming someone is watching the hen-house)…..
Am I mistaken? Or have I otherwise missed your point?
I think you missed that obvious troll is obvious. 😉
Note that the source is a strong proponent of walking and biking over driving. They kind of have an incentive to spin an anti-road narrative any way they can. I’d take the entire article with a grain of salt.
The first example in that article is regarding the Indiana Toll Road. That deal closed in 2006, right before the Great Recession. Macquarie got burned because their debt vehicle required periodic refinancing, which was a problem during the liquidity crisis.
I think Macquarie has learned their lesson, if you read “Section 7: Financing Plan” in the original document that Jesse shared. Here are their stated goals for financing:
“Procure the lowest weighted average cost of financing available in the market, thereby providing the best value for money to the Cities and keeping the Utility Fee as low as possible
“Deliver a financing package that has the greatest certainty of execution and ability to achieve financial close expeditiously following Commercial Close.”
If I understand this correctly, most of the money will come from long term private bonds with an estimated annual cost of 2.5%. Equity is much smaller portion, but has a higher cost of 13% IRR (internal rate of return).
Long-Term private bonds = $225.0 million @ 2.5%
Equity by Macquire and friends = $39.8 million @ 13% IRR
Total External Sources of Funding = $264.8 million @ 4% WACC (weighted average cost of capital)
Oops, I made an error. The 2.5% rate is expected inflation rate. The expected cost of bonds is “5.0% – 6.0% with a mid-point of 5.5%”. Here is my revised version:
Long-Term private bonds = $225.0 million @ 5.5%
Equity by Macquire and friends = $39.8 million @ 13% IRR
Total External Sources of Funding = $264.8 million @ 6.6% WACC (weighted average cost of capital)
Here is the calculation I used to come up with WACC:
I’d be interested in you elaborating on the last point:
“The majority of currently connected users are in opt-out cities. This only reinforced that the votes there were “we got ours” selfishness.”
And you could you clarify the first point as well? Are you saying it would have been $8.57 more if the other cities had not opted out, or $8.57 less?
The cities that opted out have most of the network complete, so they have the least incentive to move forward with a plan that spends more of its effort catching up the other cities. I think it’s really selfish since they got their network at the expense of those opt-in cities and now they’re leaving them out to dry.
If I’m reading the report correctly, the opt-out cities caused an increase in costs of $8.57 per month to the utility fee. If they opted back in, it’s possible that the utility fee could drop down to $14.
Ya, I think you are right. It says it outright in section 2.
I think I’m going to disagree here, reading the report it sounds like the 8.57 was the initial monthly fee assuming ALL the cities were on-board.
Oops… Milestone 3 says that Inital fee was $20, initial increase was the 8.57 when the cities left.
Thanks for posting this, the fine minds that run Utopia have elected not to share this with the employees. Now I know that if this Macquire deal goes through I will be out of a job.