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HomeMy WebLinkAbout6B Fiber Discussion Direction to Broadband(�. PRIO� ti U tr1 \rNNESO�� 4646 Dakota Street SE Prior Lake. MN 55372 ECONOMIC DEVELOPMENT AUTHORITY AGENDA REPORT MEETING DATE: October 10, 2011 AGENDA #: 66 PREPARED BY: Dan Rogness, Community & Economic Development Director AGENDA ITEM: Fiber Discussion / Direction to Broadband Advisory Subcommittee DISCUSSION: At its last meeting, the EDA appointed a Broadband Advisory Subcommittee to include the following members: Mob Morris (Chair), Eric Lampland, Christopher Mitchell, Matt Schmitt and Mary Steinhoff (SMSC). Primary staff support will be provided by Dan Rogness. Before the subcommittee begins to meet, the EDA should provide some direction to their work program. Staff recommends that direction be given to the subcom- mittee to begin developing a RFP that would be used to secure professional ser- vices related to an initial evaluation of broadband feasibility including: • Identify the vision for a community fiber network; • Research current fiber -optic owners and fiber networks in Prior Lake; • Evaluate future plans of existing providers; • Outline governance principals and legal issues; and • Review other community projects and evaluate models. Eric Lampland of Lookout Point Communications has submitted a proposal to Pri- or Lake, which is included for your review. This proposal can be used to help the subcommittee develop a detailed RFP. City staff will also begin to draft a RFP that can be used as a framework for the start of the subcommittee's discussion on this topic. A status report dated March 21, 2011 fiber -to- the -home (FTTH) is also included for North America (97% of all North American activity has been in the United States). This report provides some good perspectives on homes that are con- nected, FTTH providers, and internet speeds being offered. ISSUES: As the subcommittees conduct their business, the staff recommends that they fol- low certain guidelines: 1. Dan Rogness as the primary staff contact should be advised in advance regarding each meeting in sufficient time so that he can attend. 2. While meetings do not need to be posted in accordance with the open meeting law, persons wishing to attend should be allowed to do so and the meetings should be conducted in public facilities such as city hall, fire sta- tion or library. 3. Minutes need not be taken but a committee member should take notes which reflect the discussion at the meeting if a member of the EDA or City Council desires to know. 4. The subcommittee may not expend public funds except in accordance with city purchasing and reimbursement policies. 5. Committees are advisory to the EDA and should make periodic reports and recommendations to the EDA at a public meeting for discussion, consider- ation and action. Committees are expected to address only those topics or parts thereof that they have been directed to address by the EDA. 6. When a disagreement occurs with respect to the meaning of an EDA direc- tion, clarification will be sought by the committee as a body from the EDA as a body and not by individual members of either group. 7. Committees will not create subcommittees without the prior approval of the EDA. If the EDA believes that these guidelines should be modified, it would be appropri- ate to discuss this topic at the meeting. The EDA may wish to adopt the finalized guidelines by motion so they can be shared with committee members at the or- ganizational meeting of each. These guidelines should apply to all committees of the EDA equally. A Proposal to the City of Prior Lake September 2011 Toward a Connected Community Table of Contents Executive Summary ............. 1 Statement of Work ................ 4 Initial Feasibility Estimates ... 11 Submitted By: Eric Lampland Lookout Point Communications 880 Osceola Avenue St. Paul, MN 55105 Executive Summary Advanced communication infrastructures are an essential part of modern life. Throughout the world countries are investing billions to ensure that they are competitive and that their citizens enjoy the vast improvements brought by mobility and high -speed fiber connectivity. In the United States, and elsewhere, these investments have proven a substantial boon to economic development in virtually every municipality that has implemented fiber -based communications to homes and business — attracting business, increasing median incomes, reducing the drain caused by endless commuting, improving education, improving the tax base, reducing unemployment; the list is long. But to achieve these results is difficult — of the thousands of communities that have tried to go here, only a few hundred have made it. This proposal will document an experienced -based approach to success. Lookout Point Communications met with the Economic Development Authority during the spring and summer of 2011 as they began formulating a vision and strategic plans towards a fiber connected community. Further discussions were held with Scott County, various and alternative communication carriers, partnership potentials, and finally estimates were made for possible work elements. All of these discussions were directed at three core assessments. Vision: What vision is being pursued — not just fiber -to- the - home - and - business, but how is it related to overall City goals, the City's view of itself. What is to be achieved and how. Resource What general resources are available — what is the feasibility of FTTH for Prior Lake; who might be potential local participants: are there carrier and electrical services; is there external connectivity to carrier hotels, Scott County fiber, and more. Commitment: What commitment exists that will support Prior Lake in this effort? Finally, the EDA has pursued a number of experienced parties (e.g. providers, other cities, other co- development) and conducted extensive education on their own, some of which has been shared with us. All of this is good and will serve well. Lookout Point has worked with over 100 cities in the last seven years of FTTH involvement and observed many more. From that vantage point, Prior Lake stands in an excellent position to be successful. Lookout Point created a rough feasibility assessment (see Section 3) and found that — with general rules and normal success rates — that an FTTP `fiber- to -the- home- business - govemment- premise) network could be built costing roughly $25 to $30 million and that such a network would pay for itself. Indeed, that after ongoing operational and bonding expenses, such a network would likely begin returning profits to the City in three to four years, under the assumptions made. Excellent opportunities exist for partnerships, external connectivity, and for support of the EDA vision. In terms of commitment, natural hesitation was found. This is a very big effort, so how does Prior Lake proceed before everything is known? Hesitation is absolutely common to others that have tried. Those that won solved this. Commitment is the first focus; you have most everything else. Without at least some level of commitment, Lookout Point recommends that you not proceed. Cities have myriad responsibilities and, in general, proceed cautiously in new endeavors, as they should. But the path that many cities have pursued became formulaic, replacing process for thoughtful content, replacing process for commitment. Lookout Point has worked with many of these cities. We have been involved with what doesn't work. And we've been involved with what Lookout Point Comm unications©2011 page 1 has worked. This proposal contains our recommendation on how to proceed in building commitment, in reinforcing commitment for an ever larger audience, while ensuring that tasks necessary to successfully build an advanced fiber -based communications network are efficiently and effectively completed. And importantly, that tasks are done in a manner that allows early exit should something arise that requires the City to change course. Keys to success in the experienced -based approach are: • Do specific tasks versus "boiler - plate" tasks Begin with the intention to proceed to the next level (do better design early and gain more solid information versus doing the same work multiple times). This costs slightly more upfront on a per task basis, but reduces overall cost and significantly improves decision - making and schedule. • Do only what you need Significant expense can be avoided by not doing. For example, most cities proceed with feasibility studies containing market surveys and complex financial analysis. Market studies conducted before you really know what you are doing are rarely helpful. Feasibility and market studies with lengthy reports on other's successes were perfectly understandable in the early days of municipal FTTP. Consultants did not know whether municipal FTTP would work. Cities did not know how this would improve their communities. We know those things now. And can provide this level of detail easily and cheaply. Lookout Point created a rough financial analysis showing a very positive outcome for Prior Lake. We put the summary of this in Section 3; the detail of that analysis we will happily share. Don't spend money and time unnecessarily. • Do tasks when you need it. Much of the political confusion that harms these efforts stem from trying to know everything in order to gain commitment. Rather, seek commitment on intention, proceed with success in mind, but have clear milestones, decision points with exit strategies. Make sure that what you are doing builds on itself and is useful later as you proceed. • Set milestones and timelines. Establish milestones that must be met. Ensure that decision points — including exit strategies — are defined and included. Coordinate target dates with other aspects of related city projects and purposes. Often this creates a "working backward" schedule. There is obviously some realism that needs to be understood. Drive the FTTP worts aligning with City requirements. • Pay for purpose. You need certain things — a good "how much" number, an effective Council education process, partnership outline (possibilities), an outline of legal issues, financing methods and alternative governance structures. Those are the first elements. Later you will need a marketing survey (maybe), but marketing plans for sure. You will need to put together an operational framework, partners, monetization, and so forth. These and other elements will come forward as you progress. It is only natural that as you learn more there will be areas you wish to (and maybe should) explore. With these caveats in mind, Lookout Point recommends that Prior Lake retain our services in a multi -phase effort. Three phases are identified in the Statement of Work section. The purpose of listing these major phases is to provide a look at the entire path to achieving FTTP. Individual phases will be segmented with milestones to be established in the first "vision and plan" document. At each milestone a benefit analysis will be provided and thoroughly discussed. Commitment will be sought from all major stakeholders. Stakeholders will increase as the project moves forward, building an ever - larger base of support. Initially the EDA, Mayor and City Staff, need to be involved as the first "vision and plan" document is assembled; you may wish to send Council an activity report along with a brief review of feasibility and benefits being pursued. Next, engage the Council with workshops, education, Lookout Point Comm unications©2011 page 2 costs and benefits. Then add partners, add citizens, add business — at each appropriate stage. At defined milestones more benefit(s), more "how- to(s)," and better knowledge can support a go-no -go decision. Each milestone and phase builds upon itself. Each phase builds commitment. Initially Lookout Point would assist the new EDA sub - committee in concretizing a connected community vision and speck implementation plan. This plan will further define subsequent decision milestones, target dates and funding sources through a full city -wide implementation of FTTP. If the decision is to proceed, further refinement to the vision is made by grounding that vision in organizational and market issues: governance, "must- have" negotiation elements, local service offerings, legal issues, perhaps with additional financial modeling. Next, explore bringing in partners by creating an "Attractiveness Plan." Partners need to be sold and an "Attractiveness Plan" identifies benefits to them — usually money — and staffing and other costs to secure those partners. The plan will capture refinements to the financial models reflecting monetization models to be offered. This may also be a point to seek grants or other funding support. Phase One will provide a firm and grounded vision defining what is to be built, what benefits will be achieved, who might be involved including public and /or private partners, with specific costs, financial plans, governance and legal guidelines, marketing and implementation plans to achieve those results. Phase Two creates the Business Case for the investment community and prepares to seek funding. Critical to this phase is to harden all aspects of architecture and design; selection of vendors and contractors willing to commit pricing and schedules; detail for legal and governance issues; incorporation of public and private partners; establishment of final Financial Pro - forma; and, selection of an investment banker to solicit funding. Phase Three is the actual build and initiation of services. By far the most complex phase, its success is a direct result of the quality of work in the previous two phases. Good planning and clear vision are the keys to success. At the end of each statement of work are expected time frames and costs. And finally, Section 3 Initial Feasibility Estimates contain the assumptions and summary of a financial pro - forma. We include it in part to calm that early hesitation — this is very possible. We will gladly sit down with you and the spreadsheets and detail everything. The data contained within comes from years of experience, recent pricing and City provided data. Naturally, you will wish to refine this to align with actual vision, even more recent quotes from vendors and specific outside plant (OSP) design. We wish you well as you proceed. Please allow us to work with you in refining this approach and achieving your success. Lookout Point Comm unications©2011 page 3 Statement of Work This proposal envisions a multi -phase effort. It is a proposal that speaks to building a very close working partnership. It is a proposal that is mindful of the keys to success. The City is seeking knowledge and information that Lookout Point can develop and deliver, but not in the abstract. Lookout Point needs to understand the City and the City's potential partners in order to build a connected community. Communication networks are about much more than technology. Get the technology wrong and it's a disaster. Getting technology that you don't want or use is probably worse. We discuss three major phases leading to an actual FTTP build. Woven into these phases are work elements that lead to successful results: sound financials, partnership development, marketing the vision, building and funding the delivery and ensuring commitment through close monitoring and information exchanges. Commitment and Vision — Phase One The first task is to build a vision. Much work has already been done by the EDA. This work needs to accelerate — become informed by technology choices; explore with potential partners; refine terms of build cost; identify and monetize services; and document results. This collaborative work can begin immediately upon "There is no substitute for vision: knowing why you are doing a project, what you hope to accomplish, and who you will benefit. If this is done well, the project will succeed. Municipal telecom networks are not for the feint of heart, make sure you have the fortitude to persevere." Gary Evans, CEO of Hiawatha Broadband selection of an EDA sub - committee. Lookout Point would act as an advisor; providing staff augmentation for the completion of the work elements listed below. It is anticipated that Lookout Point will conduct most of the investigations, provide leadership and prepare bi- weekly reports or summations of activities to the EDA sub - committee who may also choose to invite additional participation. Tasks are grouped by general category, not in order of occurrence. Schedules of activity will be provided following agreement on tasks. Initially, it is anticipated that Phase One would be completed in three months and produce the following deliverables: => Deliverables 1. Documented vision for a connected community with measurable targets 2. Competitive market analysis 3. Proposed service offerings and pricing 4. Create an "Attractiveness Plan" for Open Access providers or partners 5. Financial pro -forma including capital costs, operating expense, revenue, cash flows, balance sheets, and income statements 6. Outline of governance principals and legal issues 7. Meetings — Bi- weekly sessions with EDA sub - committee — Council Workshop(s) — Providers, partners, vendors, City and County staff as necessary => Tasks Build a vision — we will: • Conduct committee education on high -level technology and trends — level set members Lookout Poiht Comm unications©2011 page 4 • Document what you seek: triple -play (voice, television and Internet), high -speed business connectivity, city -wide mobility of all services, certain additional services such as educational improvements, healthcare, public safety improvements and other goals such as reduced cost for citizens, business or government; innovative environments and more. • Establish target measures, or directional changes, in each defined vision attribute — define measureable results expected or desired. • Form a basis, or set of criteria, for the network(s) adhere to: • Governance desires (e.g. local control, ability to effect change, improved and /or local customer service, city revenues, open access networks, more) • Integrate public/private participation desires with feasibility; monetize and model • Technical attributes (e.g. the design horizon in years; what technical or service properties are required or desired, general interface requirements, mobility and capacities and more) • Prepare a list of non - negotiable(s) or "must haves" for the network, from providers, for economic development, and more • Obtain early legal soundings concerning Minnesota regulations (65% rule noting favorable recent new PUC rulings, franchise laws, new changes anticipated during 2011/2012, and more) Develop a plan to evaluate the vision — we will: • Rough out a feasibility plan — financial pro -forma • Get some basic equipment quotes: GPON /Ethernet Access; Softswitch; routers and transport; servers; OSS /BSS; 4G LTE/WiFi vendors • Do a OSP evaluation to determine layout, fiber counts, percent of underground rebuild necessary, determine if underground rebuild can include other utilities, develop an estimated materials list and costs and anticipated construction costs • Document the local competitive environment: services offered and pricing • Interview "new technology" vendors: video OTT space, mobility, application (app) and cloud providers, new data center(s) build • Engage with, perhaps visit, successful cities: Chattanooga, Kansas City, etc. • Explore and begin developing partnerships • Create a rough monetization plan and re -model with rough feasibility pro -forma • Re -state the non- negotiable(s) that are required, develop and "attractiveness plan" and prepare for negotiation • Determine backhaul potentials; consider pico -cell technology deployment (LTE Advanced), or wide -area WiFi for tablet, smartphone and laptop support • Solidify Scott County participation • Solidify SMSC participation • Explore Integra, Century-Link, Mediacom • Identify area fiber sources and vendors (Zayo, Century-Link, Windstream) • Identify alternate operating companies or define an operating organization • Explore funding arrangements • Seek foundation support (Bush, Opus, Knight, Blandin, others) • Determine whether Federal grant programs might assist (health care, smart grid, federal NBP pilots, Scott County grants, economic development) • Explore local angel community • Understand investment bankers and revenue bonds • Define a legal structure that would accomplish the governance goals • Create a summary document of findings Lookout Point Comm unications©2011 page 5 Build Governmental Commitments • Create an educational and information structure for the Council and City Staff • Initiate a work session explaining the concepts, benefits, rough financials being pursued and carefully develop feedback • Re -model with feedback as applicable • Develop a status update to inform and educate • Hold a final session prior to a go /no go decision — present justification, financials, approach/govemance, funding methods • Integrate City departments as participants • Define current uses on communication networks and their costs • Define new areas to integrate and their benefit (sensor systems, monitoring, public safety, etc.) • Build educational coalitions — ISD 719 Prior Lake - Savage Schools • Define desirable technology pilots: iPAD /tablet access; distance learning; server support • Define current costs and benefits • Identify early stage marketing efforts and create plans (perhaps engage a local marketing company) The anticipated schedule for Phase One would be three months: October 2011 through December 2011. Following further consultation with the City work elements and costs will be refined. The current projection contains 420 hours, plus outside efforts in legal and outside plant design of $25,000 for an estimated $77,500. In discussion with City staff, this can be partitioned, staged to a degree, accommodating budgets and approval processes. For example, the Scott County grant may initiate work should the City deem that a valuable use: partial work might begin and include a Council workshop. Stressed is the notion of seeking commitment up front and proceeding as if you intend to finish. Phase One will provide a firm and grounded vision defining what is to be built, what benefits will be achieved, who might be involved including public and /or private partners, with specific costs, financial plans, governance and legal guidelines, marketing and implementation plans to achieve those results. Create Executable Plans — Phase Two Following Phase One, Prior Lake is ready to move from conceptual understandings to the refinements that build a platform with forever increasing capabilities. Businesses can have world -class redundant connectivity and affordable high -speed access. Citizens who wish can work from home and children can have the technology and educational access that enables success in the 21 st Century. Government can reduce the cost of certain services while leveraging technology toward community benefits. To make those ideas real requires in- depth work. The primary purposes of this phase are to ensure that technical, marketing and organizational elements are conformant to Phase One goals and objectives and within financial parameters. At the end of this phase, Prior Lake will have contractual agreements in support of the business case and an executable architecture, with component designs, all supporting the goals and objectives developed in Phase One. In short, Prior lake will have a Lookout Point Communications©2011 page 6 Business Case that can support an investment grade prospectus under which funding can be obtained. => Deliverables 1. Finalized Service Offerings and phased rollout plan 2. Competed network design, short of implementation 3. Contractual bidding and selection of all vendors and contractors 4. Partnership Agreements, with monetization plans 5. Governance Documents 6. Marketing Plan 7. Investment grade Business Plan with complete Financial Pro -Forma 8. Meetings — Bi- weekly sessions with EDA sub- committee — Council Workshop(s) — Providers, partners, vendors, City and County staff as necessary => Tasks Technical Desiqn • Document desi n criteri d I t'I' ' th Chattanooga has implemented a new application that scans crime scenes with a wireless laser. The 360- degree scan, which can cover an area the size of a football stadium, re- creates a crime scene with a billion points of data. Rather than sending ten detectives to the scene to record, measure and photograph, often taking several days, the scanner digitizes the scene in 10 minutes, which is then transferred via the fiber network and stored until needed. The city is also using its network for intelligent traffic management. Wireless sensors and cameras mounted on traffic lights or in the road surface measure traffic speeds and patterns and adjust lights based on current conditions. Chattanooga Tennessee has developed the most advanced fiber network in the nation with services few citizens elsewhere are even aware of, much less have. U a an goa s u i lung e outputs from Phase One • Create and issue RFPs for all equipment: — Access (fiber termination and mobility) — Transport, — Routing and switching, — Softswitch (voice), — Video solution (content acquisition, IPTV, OTT and caching), — ISP functionality (peering, email, servers, etc.) — Network Management and backend software (OSS /BSS /EMS, etc.) o Note: Open access approaches will require a more extensive review — Other services as defined during Phase One — (note: individual functionalities may be sub - contracted to specialty houses) — Create testing protocols and specifications, included in the RFPs where appropriate — Create and issue RFP for system integration (two approaches possible) — Internal: Establish job descriptions and teams to conduct integration designs /plans — External: vendor review, evaluation and recommendations Outside Plant Desiqn • Utilizing the Phase One OSP engineering, create a final level of engineering resulting in plans, bills of materials and construction specifications • Conduct complete field engineering (often referred to as a walk -out). • Surveys and subsequent GIS mapping identify fiber routes, services drop entry points, fiber transport, feeder, distribution and service drop designs along with fiber strand assignments and splicing documents. Lookout Point Comm unications©2011 page 7 • Optimize routing and optimum placement of all network elements and support structure • Determine exact position and depth of construction running line • Preparation and submission for all permits and easements • Create testing protocols and specifications • Digitizing all of the above information on GIS systems compatible with City and County requirements\ • Note: please consider that the final engineering surveys, particularly underground portions, cannot be performed effectively during snow cover seasons. Contractual Bidding - Vendor review and evaluation - Equipment and Services: each specific design and integration component will be selected for best of breed and conformant to anticipated budget plans - Contractual agreements for content licensing will be estimated - Outside Plant bidding documents will be evaluated and assessed - Present recommendations and assist best- and -final agreements - Subsequent to decisions from City Staff and Council, issuance of Letters of Intent conformant to funding instrument requirements - Finalize Financial Pro -Forma Marketing Plans • Create a series of low -cost, informal meetings to bring vision to the community and obtain useful feedback • Coordinate with EDA and City efforts to harmonize efforts and ensure objectives are current and in line with community thought and plans • Create a full marketing plan: interim City referenda if applicable; pre -sign up; rollout implementation and customer acquisition • Execute those portions of the Marketing Plan that occur during this phase - Develop customer service approach and structure - Focus groups for service refinement - Marketing survey informed by specifics in service offerings and price. Organization • Finalize governance documents, create legal entity • Create a Board or establish a City Department • Finalize, or at least obtain strong commitments, from all partnerships: services, management, or other offerings • Finalize options for network operation - Internal: define job roles, organizational structure, facilities - External: complete negotiations and agreement(s) The anticipated schedule for Phase Two would be six to nine months; depending most significantly on the extent of Open Access Partnerships pursued. This might be scheduled for January through June or September 2012. Following Phase One and further consultation with the City, work elements and costs will be refined. The current projection estimates are based on like efforts elsewhere and may not be fully comparable with the goals, requirements and aspirations of Prior Lake. That said Lookout Point has estimated certain costs, such as the Outside Plant Design and large portions of the architectural design detail, legal work specifically for Prior lake as it is less subject to variation. For example the largest single work effort relates to OSP survey and design; estimated at $465,000. Other elements include architecture, electronics design and RFP creation $104,315, vendor review and evaluation $78,665, legal $50,000. Along with many variables this targets Phase Two in the magnitude Lookout Point Communications©2011 page 8 of $700,000 to $800,000. This can be modified depending upon the informed needs of Prior Lake. It should be remembered that it is the practice of most FTTP municipal builds to include full reimbursement of all of the above costs in the issued Revenue Bonds. Phase one and two then represent temporary and recoverable expenditures. Revenue bonds themselves are secured by the activities of the eventual FTTP build and do not generally have recourse to tax payers. Phase Two creates the Business Case for the investment community and prepares to seek funding. Critical to this phase is to harden all aspects of architecture and design; selection of vendors and contractors willing to commit pricing and schedules; detail for legal and governance issues; incorporation of public and private partners; establishment of final Financial Pro - forma; and, selection of an investment banker to solicit funding Bond Issuance and Build Supervision — Phase Three Much work needs to be done prior to entering this phase. Work and decisions made over the coming year will dictate the some of this content. Most significantly, are decisions involving the operating organization — retaining an outside company, such as Hiawatha Broadband, a specific carrier, or establishing an independent City monitored organization. Additionally, the election of multiple providers engaged in an Open Access network structure will have impact. Finally, prior to this activity taking place, an investment banker(s) needs to be retained, prospectus created, funds raised and all of the financial management activities organized and executed. Whichever organizational or network architecture approach is taken, Lookout Point can help. We can help facilitate transfer to another organization or can manage the implementation. As such we are not providing costs or schedule information here. The generic costs of "doing things" will be contained within the Phase Two and One financial pro - forma. Lookout Point's charges will be a function of decisions made and we will be involved to the degree that Prior Lake needs and wants our services. Mentioned below are basic tasks that will arise. These need to be anticipated in the previous phase and to a lesser degree in Phase One. The actual construction of a municipal FTTP network has testing, certification, interoperability, marketing, organization and roll out activities that need to fully understood early. Testing and certification apply to ensuring that outside plant construction meets the technical requirements for fiber qualities and, for electronics, meets the criteria evaluated on RFPs. Most construction companies expect that certain oversight and testing will be conducted by the buying organization. Equipment vendors often help facilitate testing of their equipment. Specific testing equipment needs to be acquired. Proper testing and certification of individual components leads to the next, often complex, phase of testing known as integration or interoperability (e.g. do these elements work seamlessly together?). Lab testing can be performed, next pilot projects meet and assure customer expectations and, when these tests are executed well, roll out plans can proceed upon more sound footing. Roll out plans relate not only to technical implementations and people management, but need tight coordination with marketing. Proper roll out is critical to achieving measured costs and ensuring revenue targets. All of this activity will occur at the same time as Prior Lake is building the organization itself. Hence, careful organization and staffing plans in phase two are important. The organization Lookout Point Comm unications©2011 page 9 may be housed in a new Prior Lake data center, or other suitable building to be constructed. Customer service and marketing offices may also need a physical building and presence. When selecting and establishing a team, outside assistance can be invaluable. Ultimately good execution of Prior Lake's plan is what creates success. There is much to be shared here with ever - increasing detail as we work with you to achieve a truly advanced fiber network. Phase Three is the actual build and initiation of services. By far the most complex phase, its success is a direct result of the quality of work in the previous two phases. Good planning and clear vision are the keys to success. We wish you well. Lookout Point Comm unications©2011 page 10 Initial Feasibility Estimates Lookout Point is providing Prior lake with a very rough, but experienced based, quick look at FTTP feasibility. Intended as a guide, which will be verified and augmented as the work proceeds. The detail for all statements made and associated spread sheets can be made available for discussion. These spreadsheets are extensive and beyond simple display. The intention here is to demonstrate that the feasibility for a Prior Lake FTTP is quite good. The financial analysis of the Prior Lake FTTP network includes the following areas: Individual Spread Sheets used in this pro forma — • Revenue In this area of the financial analysis, the general phasing of the network build was determined, how many homes and businesses the network passed and how many become customers. "Standard" service offerings were quantified, and market priced. Estimates were made of the up -take of these offerings to the customer base. • Cost of Services In this area of the financial analysis, the costs of the services were estimated. The most significant includes the programming costs for provision of video. Estimates were made from recent contracts on other customers. • Operating Expenses (OPEX) In this area of the financial analysis, expenses associated with the on -going operations were determined: day -to -day resources required to operate, service and maintain the network, software upgrades and service contracts, staff education and marketing. Estimates again were determined by Lookout Point experience and include such work functions as support for new customer additions (added and served) and the number of service engines delivered by the entity, management and technical personnel. • Capital Expenditures (CAPEX In this area of the financial analysis, all of the capital requirements for the initial build were determined: also any on -going capital required to either replace equipment or to accommodate additional customers were included. Capital expense includes both the fiber network and all network and services electronics. Depreciation schedules were established and developed so that they could be integrated with the standard financial statements. Capital pricing in this project was determined from "budgetary" prices received from vendors on recent projects. • Income Statement In this area of the financial analysis, three years of monthly income statements and annual statements were developed along with twenty -two years of annual income statements. • Cash Flow In this area of the financial analysis, three years of monthly cash flow statements and annual statements were developed along with twenty -two years of annual cash flow statements. • Balance Sheet In this area of the financial analysis, three years of monthly balance sheet statements and annual statements were developed along with twenty -two years of annual balance sheet statements. • Debt In this area of the financial analysis, debt financing was developed and integrated with all of the financial statements. Two models were created, one financing at 6.5% and one financing at 8 %. Highlight of Key Financial Parameters Lookout Point Comm unications©2011 page 11 With any pro -forma financial development, many assumptions are made to complete the work. Below are the major assumptions made in the development of the financial statements: • FTTP build time: 2 years; 38% complete in year one • Miles built: 46 miles of feeder cable; 164 miles of distribution cable (extrapolated from City provided information, deliberately high) • Revenue and Take Rate Assumption in models: — Total Homes passed 8,600, increasing yearly by 1% — Residential Take Rate (YE = year end) — YE One- 10 %; YE Two- 26 %; YE Three- 38 %; YE Four- 50% • Business Take Rate — Total Businesses 350, increasing yearly by 1% — YE One- 13 %; YE Two- 23 %; YE Three- 34 %; YE Four- 35% — Lower take rates expected due to existing contract terms • Service pricing intentions — Less than incumbents with better features for telephone and Internet — Equal to incumbents with more local content and VOD for video — Modest Over - the -Top (OTT) and ancillary income • Debt/loan assumptions for the models: build and own assumption, $0 down, — Revenue Bonds at $28,000,000 at 6.5 %/8.0% interest Rate, 25 year bond — Fixed Payment schedule with principal payments starting in year 4 — First three years payments are interest only — Normal reserve account assumptions made, Debit reserve is one year P &I Financial Summary With the completion of the financial statements, conclusions can then be made as to the financial viability of model that was analyzed. The following is the financial conclusion: Lookout Point Comm unications©2011 page 12 25 Year Revenue Bond 6.5% Interest 8% Interest Bond Re uirement $26.7M $28M Build Capital $18.458 $18.458M EBITDA Positive Year 3 Year 3 Annual Direct Expense $1.3 - $1.5M err $1.3 - $1.5 per year Annual Cash Flow Positive Year 4 Year 4 Net Cash from Operations $3.5 in yr 3 and increasing $3.5 in yr 3 and increasin Annual Debt Payment P&I $2.187M $2.593M Debt Coverage 1.6 in yr 3 and increases 1.07 in year 3 and increases Lookout Point Comm unications©2011 page 12 NORTH AMERICAN FTTH STA TUS - MARCH 31, 2011 I. INTRODUCTION AND METHODOLOGY Since 2001, RVA LLC has surveyed North American communications providers in order to determine the growth in fiber -to- the -home. Partnering with the FTTH Council North America, RVA releases two market estimates annually (Q1 in March and Q3 in September). Fiber -to- the -home (FTTH), sometimes called fiber -to- the- premises (FTTP), refers to a type of communications network where fiber -optic cable is installed all the way to the individual living unit. Other systems using fiber optics for only part of the network, such as fiber to the curb (FTTC), fiber to the node (FTTN), fiber to the last amplifier (FTTLA), fiber to the building (FTTB), hybrid fiber coax (HFC), etc., are not included in the data for this report. Such partial systems contain a final leg of the broadband journey via another type of media, typically copper wire or coaxial cable, which greatly limits the bandwidth possible over the system. Because fiber - optic cables allow much faster and more efficient transfer of data than copper does, end -to -end fiber - optic systems facilitate much higher bandwidth capacity in both directions. It is important to note that FTTH does not refer solely to Internet connections. Active fiber can also serve voice services, paid video services, and even meter reading connections, and can be delivered either as a single service, or more commonly, in multiple services to fiber -optic lit homes. The methodology utilized for this study involved a multi- faceted review of the market using extensive primary research. While FTTH vendors were also interviewed, the research primarily relied on a bottom - up methodology based on interviews with representatives of many FTTH providers. To date in 2011, RVA has surveyed more than 360 North American providers and potential providers via Internet, telephone, and mail surveying methods. (Published data from large public providers has also been utilized.) II. REVIEW OF FINDINGS A. FTTH MARKET SIZE Homes Passed FTTH became commercially viable in about 1998. RVA's first survey of the market estimated just over 19,000 homes passed with FTTH in September 2001. The number of homes passed has multiplied more than 1,000 times since that point, and as of March 30, 2011, there are now approximately 20.9 million homes passed in North America. North American FTTH Homes Cumulativ •Homes Passed 5HOW4SMerWed ■H*nMCorwkd is — -- _- u 10 --- ---- -- s o 4- Q P c P o RVA ue Building Fiber -to- the -Home Communities www.ftthcouncil.org r FTTM 4?N K COUNCIL 2 The term "homes passed" in this report means the actual number of homes where a fiber connection is technically available. About 97% of this North American activity has been in the United States to date. Homes Marketed The estimated number of actual FTTH homes marketed to consumers is approximately 19.3 million as of March 30, 2011. The term "homes marketed" refers to the number of homes that are actively being marketed with FTTH. There is sometimes a delay between technically being able to serve consumers and tangibly marketing to them. This is especially true for large builds. In certain instances, providers may choose to avoid marketing to a specific area until the entire area is ready for service. Homes Connected The number of homes actually connected with lit fiber now exceeds 7 million. North American FTTH Homes March 30, 2011 Homes Passed Homes Marketed i Homes Connected ; 5,000,000 10,000,000 15,000,000 20,000,000 RVA !� See Appendix for actual numbers by year. Video Homes Connected The number of homes serviced with traditional paid video channels over end -to -end fiber has now reached 5 million. Verizon and many smaller FTTH providers offer television via fiber. In some cases this is via a channel lineup of RF video. More often, it is via an "IPTV" methodology. FTTH Growth While still relatively strong, FTTH growth has slowed somewhat since 2008. FTTH Homes Passed & Connected Annual Change — North America -!Homes Passed tHomes Connected RVA u Slower growth in the number of homes passed over the past two years is primarily due to Verizon slowing their network build and turning attention to marketing connections as they get closer to their first FTTH project targets. Other factors include general economic conditions, and the fact that the federal stimulus legislation may have had unintended negative consequences in 2009 and 2010. Many interviewed in those years felt the stimulus program caused some projects to be put on hold while the providers evaluated the possibility of public funding. Annual build rates are expected to stabilize and grow slightly in 2011 as U.S. projects from non RBOC www.ftthcciuncil.org a .- Building Fiber -to-the -Hoene FTTH Comeeeuni�es`t` .t couavcii 3 providers accelerate, and fairly large projects in Canada continue to build out. U.S. growth in 2011 is a result, in part, of stimulus money now starting to flow to FTTH projects. Based on data collected from more than 50 random surveys with FTTH ARRA stimulus award recipients, RVA estimates that a total of 38% of FTTH stimulus projects are currently underway, and another 36% are preparing to start. The remainder of the ARRA projects are in various stages of engineering and environmental approval. (A small percentage of those interviewed have actually declined funding due to unexpected factors, such as the high wage rates required under regulations for such Federal grants.) Status of ARRA FTTH Stimulus Grants In Construction Preparing to Start Construction ! _ Awaiting RUS Approval . ..f i Environmental Assessment ! - Engineering Construction Planned in Future Declined Funding 0% 5% 10% 15% 20% 25% 30% 35% 40% RVA uc B. DEPLOYMENTS BY TYPE OF PROVIDER ed competitive or CLEC activity. True facilities -based competitive providers (CLECs) and publicly owned systems (MUNIs) together account for 24% of the total. The remaining builds are from integrators working with developers, MSO /cable TV companies, and electric utilities and coops. FTTH Non RBOC Deployments by Provider Type ILEC CLEC Municipality /PUD 1 Developer /Integrator MSO /Cable Electric Utility /Co -op i 0% 10% 20% 30 40% 50% 60 70% RVA uc C. OVERALL PENETRATION FTTH has now reached over 18% penetration of U.S. households in terms of homes passed and 6% in terms of homes connected. Regional Bell operating companies (primarily Verizon) represent over 73% of all North American FTTH connections. (It should be noted that total FTTH connections estimated for Verizon includes reported FioS Internet connections, plus an estimate of FioS television -only connections.) While Verizon is the largest U.S. FTTH provider by a very large margin, there is actually a very long tail of other providers. As of March 30, 2011, RVA estimates that there are more than 770 providers of FTTH in North America. Of these non RBOC suppliers, smaller incumbent telephone suppliers (ILECs) account for 61% of the primary base. Most of these are classified as "Tier 3" ILECs with a market concentration in one limited geographic area. Some of these also have associat FTTH Penetration Cumulative — United States Homes Passed ■ Homes Connected RVAa u D. FTTH TAKE -RATES The overall take -rate for FTTH services continues to increase. (Rates declined in a period from March www.ftthcciuncii.org z<\ Building Fiber -to-the -Home FTTH n Communities °`ttr COUNCIL 4 2004 to September 2005 due to the heavy infrastructure build by Verizon with few initial connections. After Verizon began connecting customers at a good pace, overall take -rates turned upwards again.) The overall take -rate for FTTH has now passed 36 %. FTTH Overall Take Rates For RBOCs (especially Verizon FioS), take -rates continue to increase. This is true despite the fact that their service territories generally involve competition from large MSOs with reasonably good product, and a continuing FTTH build which suppresses net take - rates. (Verizon's take -rate in areas where FTTH has been available for two to three years is higher than its average net take - rate.) FTTH RBOC Take Rates For non -RBOC FTTH customers, take -rates have been fairly steady at near 50 %. Take -rates dropped slightly in the past year reflecting the transfer of some Verizon customers to Frontier. FTTH Non RBOC Take Rates Homes Connected vs. Homes Marketed 60% 50% 401,/ 30% 20% 10 01/ RVA, !! While these rates include some cases where the network have been upgraded with fiber for all customers, including voice -only customers (which means essentially 100% take rates), it is important to note that even voluntary take -rates for some individual FTTH projects exceed 70 %. This is especially true in more rural areas that were previously underserved by both Internet and video product. Homes Connected vs. Homes Marketed 35% _.... _... __.. __. _... 30% 25% 20% 15% 5% 0% N a w m o RVA u< In terms of penetration by provider type, Verizon and Tier 3 ILECs have actually penetrated a relatively high percentage of their customer base. These providers — who we may call aggressive ILECs — address roughly one -third of the total U.S. population. Verizon recognized early a need for a new business model, and their strategy appears to have been driven by accurate predictions of how things would play out. Regulatory changes, such as the 2004 FCC Triennial Review and later video franchise rulings, have also played a key role in their decision to move forward. Drivers for FTTH upgrades in the rural independent telco segment include aging copper lines in need of replacement, the opportunity to deliver video given a more robust platform, and a pioneering tradition. In some cases these providers have also been aided by loans and subsidies, such as rural broadband loan programs and universal service funds. Other parts of the U.S. have had more spotty FTTH deployment — mostly from facilities -based CLECs, real estate developers, and public entities such as municipalities and groups of municipalities. (In these other areas, the incumbent telcos, such as AT &T, Qwest, and Tier 2 ILECs, have completed some Building Fiber to-the -Home ComnunMesT � tI www.ftthco iii r= � � uncil.org F TTH „,_ cOUNN I 8 o2 2 2 1 1 8 oo1 P 1 8 8 o2 oo0 E builds of FTTH in new housing developments, but have conducted only limited overbuilding of their existing copper network to date.) Some FTTH builds by cable TV providers in new developments are also now beginning. E. FUTURE FTTH GROWTH PROSPECTS Growth in FTTH after 2011 looks positive. As just one example, non RBOC incumbent telephone companies are already very bullish on FTTH. Most ILECs that have already deployed FTTH plan continued deployment, and those who have not deployed any FTTH are now planning future deployment. Likelihood of Adding FTTH Lines by Current Non RBOC FTTH Providers RVA uc eE moving quickly to FTTH to better compete with cable TV MSOs that are introducing higher bandwidths using DOCSIS 3. F. INTERNET SPEEDS FTTH providers are more aggressively differentiating their service offerings from the competition. Some providers are now offering as much as Gigabit (1,000 Mbps) symmetrical service. Municipal providers are leading the charge here, and now average a top residential offering of over 100 Mbps (influenced by a few offering 1,000 Mbps). Higher bandwidth symmetrical services should continue to fuel growth — especially as new applications increase consumer demand for faster connection speeds. ■Very Unlikely Highest Average Internet Speeds Offered ■Somewhat Unlikely by Non RBOC Provider Typ ■Somewhat Likely ■2010 .2011 ■ Very Likely ■ All Customers have FTTH North American countries outside of the United States also report increasing activity in the next five years. Canada is currently experiencing growth as incumbent telephone companies in some areas are APPENDIX ILEC rlwiM Upload CLEC Muni -� - -- - t. , ILEC Download CLEC Muni , 0 20 40 60 90 100 120 140 RVA au Mbps NDRTH AMERICAN FTTH STATUS (AS OF THE END OFTHE FIRSTQUARTER OF EACH YEAR) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Homes passed 35,700 110,000 189,000 1,619,500 4,089,000 8,003,000 11,763,000 15,170,900 18,249,900 20,914,500 Homes marketed 35,700 110,000 189,000 829,700 3,218,600 6,643,000 10,082,000 13,875,600 16,992,600 19,344,700 Homes connected 10,350 38,000 78,000 213,000 671,000 1,478,600 2,912,500 4,422,000 5,804,800 7,094,800 www.ftthcciuncii.org Building Fiber -to-the -Home F T T N m Comunities r ogetf1 r COUNCIL