Monday
Aug312009

PEELING THE ONION

FCC and Pew Research Weigh in on High-Speed Internet Services

In July the FCC released its bi-annual High-Speed Services for Internet Access report which summarizes market activity through June 30, 2008, while in June the Pew Research Center released its yearly Home Broadband Adoption report which includes data through April 2009. The FCC report detailed high-speed Internet access services by technology type and provider at both the national and state level.  The Pew Research Center report is a compilation of its Internet Project surveys which statistically sampled broadband access technologies used by households.  Both reports come to the same expected conclusion, Americans are increasingly valuing faster Internet speeds.

The FCC classified high-speed Internet lines as lines with speeds of greater than 200 kbps of service in either direction (upload or download).  Most of us would call that a really slow Internet connection and the FCC is currently in the process of redefining connection speeds as part of the Broadband Stimulus Plan.  It is a safe bet that future versions of the FCC report will reference faster connection speeds.

For now though, according to the FCC, the growth of high-speed Internet service slowed during the first six months of 2008 and a larger percentage of the growth came in the higher speed tiers.  Roughly 70% of the high-speed lines added came in a subset the FCC calls the advanced services lines—lines with more than 200 kbps in both directions.  Within the advanced services lines subset, 46% of the growth came in connections with speeds of 2.5 mbps or greater in one direction—up from 35% at December 31, 2007.

The Mobile Wireless segment continued to be the fastest growing provider of overall high-speed Internet connections in the FCC report.  This can be a bit misleading however.  The majority of the mobile wireless high-speed connections in the FCC report exceeded 200 kbps in only one direction while the majority of DSL and Cable Modem lines offered speeds greater than 200 kbps in both directions with speeds up to 2.5 mbps and 10 mbps in one direction.  If the FCC increased its high-speed threshold slightly, a large share of the mobile wireless connections would fall off the report.

The Pew survey, which surveyed household Americans above the age of 18, revealed growth of home broadband adoption regained steam in the first four months of 2009 after stagnating throughout 2008 as more Americans were willing to pay a premium for higher speed services.  As a result, the average monthly cost for household broadband service increased from $34.50 as of May 2008 to $39.00 as of April 2009.  Notably, the greatest broadband growth came from population subgroups with historically below average usage rates, including senior citizens, low-income Americans, high-school only graduates, Americans ages 50 to 64, and rural Americans. 

Another interesting finding in the Pew survey was more than twice as many respondents cut back or cancelled cell phone service plans or cable TV service to save money during the recession than those that trimmed back on Internet service.

Both reports highlighted an increase in consumer choices for high-speed services. The number of zip-codes in the FCC report with more than one provider of high-speed services increased while a higher percentage of respondents in the Pew survey reported more than one high-speed service provider in their home area.  

What about the non high-speed Internet users at home?  In the Pew survey, 7% of Americans identified as dial-up Internet users, of those 32% said the price of high-speed Internet would have to fall for them to switch while 20% said nothing would get them to change.  Of the 21% of American adults that are non-Internet users, 36% percent said they were either not interested in getting online, didn’t need the Internet, were too busy or think the Internet is a waste of time while 10% said it was too expensive.

Monday
Aug312009

$28b in Stimulus Funding Requested for Broadband Projects

2,170 Applications Seeking BTOP and BIP Loans and Grants Filed

Reacting to “overwhelming” response, the National Telecommunications and Information Administration (NTIA) and the Rural Utilities Service (RUS) extended the deadline for filing applications for funding under the NTIA Broadband Technology Opportunities Program (BTOP) and the RUS Broadband Initiatives Program (BIP) from the original due date of August 14, 2009 until August 20, 2009.  To “avoid problems”,  documents supporting submitted applications were accepted provided they were postmarked, hand-delivered, or transmitted by “appropriate electronic delivery” no later than August 24, 2009. 

On August 27, 2009, NTIA and RUS announced they had received almost 2,200 applications requesting nearly $28b in funding for proposed broadband projects reaching all 50 U.S. states and territories and the District of Columbia.  According to the NTIA and RUS, applications came from a diverse range of parties including state, local, and tribal governments; nonprofits; industry; anchor institutions, such as libraries, universities, community colleges, and hospitals; public safety organizations; and other entities in rural, suburban and urban areas. For this first round of applications, the RUS has announced the availability of up to $2.4b for loans, grants or loan/ grant combinations while the NTIA will make as much as $1.6b available. Remaining funds available under the $7.2b broadband stimulus program are expected to be made available later this year and early next year. 

Many of the biggest names in the Internet business have indicated they intend to take a pass on the initial round of funding.  According to a recent article in the Washington Post, industry behemoths such as Verizon Communications (NYSE:VZ), AT&T (NYSE:T) and Comcast (Nasdaq:CMCSA) were not expected to be in the ranks of those applying for funds.  “Their reasons are varied. All three are flush with cash, enough to upgrade and expand their broadband networks on their own.  Some say taking money could draw unwanted scrutiny of business practices and compensation, as seen with automakers and banks that have taken government bailouts.  And privately, some companies are griping about conditions attached to the money, including a net-neutrality rule that they say would prevent them from managing traffic on their networks the way they want.” 

While we’ve gained some clarity regarding which players may be staying on the sidelines, at least for this first round of applications, we’re also starting to get some clarity regarding who is seeking funding and for what type of projects.  Informal discussions with representatives of rural telephone companies indicate tepid interest in obtaining funding for in-area broadband initiatives but apparent strong interest in competitive broadband initiatives, particularly those leveraging 700 MHz spectrum assets.  The NTIA and RUS intend to make available a web-based, searchable database that will allow users to review summaries of proposed projects.  But in advance of that information, public announcements by those who have applied for funding provides a taste of the types of projects on the drawing boards.

FairPoint Communications (NYSE:FRP) applied for a $37.8m federal grant to expand online access for Northern New England customers.  FRP indicated that it would use any grant money received to expand its network to reach more unserved and underserved regions in Maine, New Hampshire and Vermont.  FRP submitted five applications for grants in Northern New England. In Maine, broadband access would be provided to 19,300 homes and businesses in Aroostook and Washington counties. In New Hampshire, 8,600 homes and businesses would benefit in Coos and Grafton counties.  In Vermont, broadband access would be available to more than 2,900 new households and businesses in Essex and Caledonia counties. 

Greenwood Village, Colo.-based Wildblue Communications, which currently provides satellite-based broadband service to approximately 400k subscribers, has applied for $30m to help subsidize satellite broadband connections for about 10k homes in Colorado and Wyoming and another 10k in Arizona that are out of reach of high-speed cable, fiber and DSL lines. Wildblue has indicated that it will invest $8m of its own funds and contribute “in-kind services” to the initiative, which intends to provide satellite-connected speeds of 768 kbps (downstream) for $19.95 per month. 

Omaha, Neb.-based KeyOn Communications (OTCBB:KEYO), a provider of wireless broadband, satellite video and VoIP services, submitted “multiple applications” for federal funding totaling $150m under the RUS Broadband Initiatives Program. KeyOn is looking to expand its 4G WiMax wireless broadband network, which currently addresses 2.5m people, to cover as many as 16 states and provide wireless broadband access to as many as 6.5m people. KeyOn holds a nationwide license in the 3.65 GHz band. 

Cricket Communications, the prepaid wireless effort of Leap Wireless International (Nasdaq:LEAP), announced that it had teamed up with non-profit One Economy and applied for $8.6m of funding from NTIA to help expand a program called Project Change Access.  The project, first launched in Portland, Ore. last fall, helps low income residents get online to improve their access to education, job training programs, health care and social assistance.  Leap and One Economy are looking for the government to pay for 80% of the cost of expanding the program to five other cities.  The project plans to provide high-speed wireless Internet access to 23,000 low income families in Baltimore, Houston, Memphis, San Diego and Washington, D.C. 

And plenty of municipalities are getting into the mix as well.  The city of Boston, Mass. has applied for $15m of funding for three projects the city says are meant to “bridge the digital divide” and expand its municipal network from city buildings out into the community, where it hopes to offer free broadband access to “underserved” communities.  Boston will put up $4.2m of its own money for the three programs – the Boston Broadband Network, a public computing center and a Sustainable Adoption Program.

Friday
Jul312009

PEELING THE ONION

Debt Maturities Ramp Up in 2011

While the effects of the credit crunch of 2008 and the resulting economic crisis are still being felt nationwide—and are certain to continue to have some impact on the business environment for the next several years—the ILEC industry appears to be relatively well positioned, based on debt levels, debt-to-cash flow ratios, and—perhaps most importantly—the timing of big maturities over the next five years. 

That said, there are a few companies in our analysis with hefty obligations coming sooner rather than later, and then there are those that have been making big capital investments in new infrastructure, leading to negative free cash flow and the likelihood that additional credit will be necessary.  For those, the availability and cost of credit in 2010 and 2011 could have a disproportionate impact on future success. 

Overall, the public ILECs were carrying $164.6b in long-term debt at the end of last year, or about 1.9x operating income before depreciation and amortization (OIBDA).  Excluding the $127b in debt outstanding at AT&T (NYSE:T) and Verizon (NYSE:VZ), which we felt skewed the analysis somewhat, the remaining public ILECs had just more than $37.7b in debt outstanding as of December 31, 2008, or about 2.9x 2008 OIBDA.  Fairpoint Communications (NYSE:FRP) topped the list with its worrisome 7.9x debt-to-OIBDA ratio, but was closely followed by Otelco (Nasdaq:OTT), at 7.6x.  But despite the similar debt-to-OIBDA ratios, a major difference becomes evident when scheduled maturities are examined, along with the ratio of scheduled maturities to free cash flow. 

Where FRP averaged just $12.2m in free cash flow (which we’ve defined as OIBDA less capital expenses) over the past two years—and maturities are $45m both this year and next—OTT has no principal repayments due until 2013 and beyond.  FRP has been scrambling to stay in compliance with debt covenants this year and is currently effecting an exchange offer for its 13 1/8% Senior Notes of 2018 designed to help reduce interest expense later this year.  The company said earlier this month that it has also made amendments to the restrictive covenants on the notes that would modify default provisions.  Nevertheless, Moody’s downgraded FRP’s credit rating further into junk range (to “Caa2”) in late June and said that it sees a “high probability of default.” 

At the other end of the spectrum, WVT Communications (Nasdaq:WWVY), Telephone & Data Systems (NYSE:TDS) and Shenandoah Telecommunications (Nasdaq:SHEN) all come in with debt-to-OIBDA ratios of under 2x, at 1.6x, 1.3x and 0.6x, respectively.  Both SHEN and TDS should have no problem meeting their obligations over the next several years, considering the highest percentage of average free cash flow to maturities that we calculated was about 45% for SHEN in 2010.  In WWVY’s case, despite the fact that ILEC operating cash flow has been negligible for the past two years, its 8.1% ownership in the Orange County – Poughkeepsie Limited Partnership providing cellular service to Orange County provides ample income to cover its obligations.  (We’ve included WWVY’s equity income in calculating free cash flow in our chart.) 

Crunch Time in 2011? 

Again, leaving out T and VZ, the remaining ILECs’ collective maturities for this year total less than $950m, or about 11.9% of run-rate free cash flow.  Next year the percentage of maturities to collective free cash flow jumps to 38.1%, and in 2011 nearly two-thirds of the group’s free cash flow will be needed to service principal repayment.  Admittedly the forward ratios are based on trailing free cash flow, but given the difficult economy, recent history and the competitive environment, we’re not clear that growth in free cash flow is guaranteed—and for some the painful reality could be that FCF declines rather than grows. 

In 2012 we estimate about 39.9% of ILEC free cash flow will be required for debt service, barring refinancings, and the figure jumps again to more than 65% in 2013. 

Moving to stay ahead of the curve, NTELOS Holding Corp. (Nasdaq:NTLS) announced earlier this month that it was launching a refinancing of its existing first lien term loan.  The company said that wholly-owned subsidiary, NTELOS Inc. “has begun arranging a new $635m first lien term loan, together with a $35m revolving credit facility,” and that it intends to use the proceeds to refinance and extend the maturity of its outstanding $603m first lien term loan and for general corporate purposes.” 

NTLS’ outstanding first lien term loan matures in August 2011 with four required quarterly debt repayments of approximately $149m commencing on December 31, 2010.  Closing of the new first lien term loan and revolving credit facility is expected to occur in mid-August 2009, subject to market and other customary conditions. 

We figure more ILECs will be looking to opportunistically refinance over the next couple of years.  Alaska Communications (NYSE:ALSK) has a big slug of principal due in 2012, as does Cincinnati Bell (NYSE:CBB).  D&E Communications (Nasdaq:DECC) is another with a big payment due in a couple of years, but that company’s pending sale to Windstream (NYSE:WIN) nullifies the situation.  Pro forma, WIN’s free cash flow should be adequate until at least 2013.

Friday
Jul312009

Rules for Broadband Stimulus Applications Announced

NOFA Outlines Application Requirements and Timeline

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law.  The essential goal of ARRA is to provide a “direct fiscal boost to help lift our Nation from the greatest economic crisis in our lifetimes and lay the foundation for growth.”  ARRA identifies five overall purposes:  1) to preserve and create jobs and promote economic recovery; 2) to assist those most impacted by the recession; 3) to provide investments needed to increase economic efficiency by spurring technological advances in science and health; 4) to invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits; and 5) to stabilize state and local budgets.  Recognizing the dire economic climate at the time of its passage, ARRA instructs the President and the heads of federal departments and agencies to manage and expend ARRA funds to achieve these five purposes, “commencing expenditures and activities as quickly as possible consistent with prudent management.” 

In recognition of the growing importance of access to broadband services to economic development and to the quality of life of all Americans, ARRA has provided $7.2b to the Rural Utilities Service (RUS) and the National Telecommunications and Information Administration (NTIA) for the purpose of expanding access to broadband services in the United States.

Notice of Funds Availability

On July 9, 2009, a joint Notice of Funds Availability (NOFA) was issued by the RUS and NTIA outlining general policy and providing procedures and guidance for those interested in applying for stimulus funds provided by ARRA.  The 121 page NOFA outlines the grant and loan/grant programs of NTIA and RUS, sets forth important parameters for defining what types of broadband initiatives qualify for stimulus funds, summarizes procedures by which funding applications will be evaluated and scored, and sets an overall timeline for initial funding applications and disbursements.

The NOFA principally addresses procedural matters necessary to qualify for funds including the requirement that applicants submit a complete application and are able to finish the project quickly (a project must be “substantially complete” within two years of receiving funds and complete within three years).  Not surprisingly, the NOFA requires that a project allow the applicant to offer service meeting the definition of “broadband” as defined in the NOFA (advertised speeds of at least 768 kbps downstream and 200 kbps upstream), and that the project be “technically feasible” (applicants will be required to submit a system design and project timeline, certified by a professional engineer, if more than $1m of funds is requested).  Also, applicants must commit to certain “nondiscrimination and interconnection obligations” set forth in the NOFA.

The following is a summary of selected definitional requirements of the RUS’s Broadband Initiatives Program (BIP) and the NTIA’s Broadband Technologies Opportunities Program.  JSI Capital Advisors intends to include a regular feature in The ILEC Advisor over the next several months as the BIP and BTOP programs work their way through the pipeline.

RUS Broadband Initiatives Program

As a result of the passage of ARRA, the RUS now has $2.5b of budget authority to extend loans, loan/grant combinations, and grants to projects where at least 75% of a proposed project’s area is in a rural area that lacks sufficient access to high speed broadband service to facilitate rural economic development.  RUS has set aside $2.4b of its $2.5b of budget authority to fund opportunities presented under this initial NOFA.

BIP grants are to be used exclusively to fund projects serving remote, unserved rural areas.  Loans and loan/grant combinations are for projects serving non-remote and underserved rural areas.

So to qualify for BIP funds, the project must serve a “rural area,” which is defined as any area not located within 1) a city, town or incorporated area that has a population of more than 20,000, or 2) an urbanized area contiguous or adjacent to a city or town that has a population of greater than 50,000.

To qualify for a BIP grant, the project must serve a remote and unserved rural area.  A “remote area” is defined as any unserved, rural area 50 miles from the limits of a non-rural area.  An “unserved area” is defined as any area where at least 90% of households lack access to either fixed or mobile facilities-based, terrestrial broadband service.

The RUS will not fund more than one project in any given geographic area.  If two applicants seek funding for overlapping areas, the application with the highest score will be funded.  The NOFA outlines in detail the point system the RUS will use in scoring applications.

Applicants will be required to demonstrate that their project is “fully funded,” which means that they will need to submit evidence of all funding, other than the requested stimulus funds, necessary to support the project.

Also, the RUS will fund only those projects which it determines are financially feasible and/or sustainable.  Applicants looking for loan funds must demonstrate that the project will generate sufficient revenues to cover expenses, have sufficient cash flow to service debt, and meet a minimum TIER of one by the end of a five-year forecast period.  If an applicant is looking for a grant, the initiative must be able to generate a minimum current ratio of one by the end of the five-year forecast period and the applicant will need to demonstrate that the initiaitve will be able to maintain a positive cash balance throughout the forecast period.

NTIA Broadband Technologies Opportunities Program

The NTIA now has $4.7b of budget authority to provide grants for broadband initiatives throughout the United States, including unserved and underserved areas.  NTIA is tasked to spur job creating, stimulate long-term economic growth and opportunity, and narrow gaps in broadband deployment and adoption.  NTIA has set aside $1.6b of its $4.7b of budget authority to fund opportunities presented under this initial NOFA.  Budget authority not awarded pursuant to this initial NOFA may be used to fund subsequent NOFAs.

The definition of an unserved area for BTOP funding is consistent with the definition set forth above for BIP funding.  The definition of an “underserved area” depends on whether the funding request is categorized as a “Last Mile project” or a “Middle Mile project.”  A Last Mile project is defined as any infrastructure project the predominant purpose of which is to provide broadband service to end users or end-user devices.  A Middle Mile project is defined as any broadband infrastructure project that does not provide broadband service to end users or end-user devices, and may include interoffice transport, backhaul, Internet connectivity, or special access.

An underserved area, for purposes of a Last Mile project, is defined as any area where 1) no more than 50% of households within the area have access to facilities-based, terrestrial broadband service at greater than 768 kbps downstream and 200 kbps upstream, or 2) no fixed or mobile broadband service provider advertises broadband transmission speeds of at least 3 mbps downstream, or 3) the rate of broadband subscribership for the area is 40% of households or less.

Application and Award Timeline

Applications for loans or grants must be submitted within a relatively narrow and near time frame.  The RUS and NTIA began accepting applications on July 14, 2009 and all funding applications filed under the initial NOFA must be filed no later than August 14, 2009.  Subject to a 30-day window where incumbent providers can challenge an applicant’s determination that a particular area is eligible for funding, and due diligence by the RUS and NTIA, awards are expected to be announced by November 7, 2009, with funding disbursed to successful applicant within 60 days of the award announcement.  Accordingly, if all goes as scheduled, funds awarded as a result of this initial NOFA should start hitting bank accounts around the beginning of 2010.

The $3.2b of joint authority not addressed in the initial NOFA will be made available in two subsequent NOFAs, which are expected to be issued in late 2009 and late Spring of 2010.

Tepid Enthusiasm

While there was keen interest in securing stimulus funds by many of the established players in the communications sector earlier this year, based on media reports and discussions with companies and consultants actively engaged in the application process, we would conclude that interest has waned somewhat now that the specific requirements and conditions outlined in the NOFA are known.  That’s not to say we don’t think there will a significant number of grant and loan requests filed.  But the rules and requirements outlined in the NOFA have apparently spooked many of the potential applicants. Anecdotally we would conclude those whose interest may have waned the most are those best positioned to meaningfully advance broadband availability and those with significant skin already in the game.

Although we won’t know who actually filed applications for funding for a few weeks, a number of key players have refrained from publicly acknowledging their intent to participate.  Qwest Communications (NYSE:Q), which actively lobbied that higher speed requirements be built into the definition of broadband and whom many believe serves the most unserved and underserved areas eligible for funding, has played its cards close to the vest, indicating publicly that it has not yet determined whether it will submit any applications.  Statements made by representatives of Clearwire Corp. (Nasdaq:CLWR), whose high-speed WiMax wireless service is often touted as perhaps the most economically viable alternative for delivering high-speed broadband services to remote and rural areas, seem to indicate CLWR may not actively participate in the process.  One report indicated that CLWR believed its business plan and future success was contingent on quickly establishing a presence in larger markets and that pursuit of rural markets, even if subsidized by cheap or free government money, was an inadvisable distraction.

Requirements that all applicants commit to certain nondiscrimination and interconnection obligations adherence to the FCC’s August 5, 2005 Internet Policy Statement, net neutrality and limitations on network management policies, should provide consternation to those who already have significant infrastructure and operations. 

While there appears to be considerable efforts on the part of rural telephone companies to secure funding, those efforts appear somewhat less enthusiastic now that potential applicants have had an opportunity to review and digest the NOFA.  According to one observer, the requirement that most rural telephone companies submit their applications to the RUS for BIP loan/grant funds rather than directly to NTIA for BTOP grant funds is one obstacle.  If the RUS denies the BIP funding request, the RLEC can resubmit its application to NTIA for BTOP funding but that will likely have to occur as part of a subsequent NOFA.  Unless a rural telephone company can secure a meaningful amount of grant funds, the ability to fund a broadband initiative through the use of RUS borrowings, an alternative already available to most RLECs, typically is not enough incentive to encourage RLECs to accelerate or modify their plans.

Unanswered Questions

It is easier to envision how the $4b of initial stimulus funding made available as a result of this initial NOFA will address the objective of preserving and creating new jobs than to predict how effective the program will be in enhancing the long-term availability of broadband.  Given the short time frame for awarding funds and completing projects, there will clearly be a surge in employment over the next few years as projects selected for funding move towards completion.  In fact, when considered in concert with all of the other spending programs launched as a result of the $789b ARRA, it is sometimes hard to comprehend where we’ll find the bodies to do all the work.

In the near-term, our concern is whether the Government, with respect to all stimulus funding, and the RUS and NTIA, with respect to the $7.2b available under the broadband stimulus program, will be able to rise above the inevitable politics and adequately police the selection and oversight of funding recipients.  In the long-term, our concerns are more fundamental.  What happens when the money runs out?  Are we doing nothing more than juicing the economy with a “sugar high,” pushing the inevitable crash a few years into the future?  Will all this money stoke inflation?  And, what about the deficit?

Specific to the communications industry and the BIP and BTOP programs, will all these new dollars truly enhance the Nation’s broadband infrastructure or will they do nothing more than fund unsustainable projects?  Was the bar set too low in defining minimum broadband speeds?  Will competition fueled by stimulus funded initiatives discourage existing providers from enhancing or expanding their networks?

The Bottom Line to ILECs

Whether or not you intend to seek stimulus funds, you owe it to yourself to monitor the BIP and BTOP programs.  If you intend to seek a grant, loan or loan/grant combination under the first round of funding, you’ve got a considerable amount of work to do between now and the filing deadline of August 14.  If you’re considering filing for funds in one of the later rounds, watching first round applicants cut their teeth on the NOFA rules will facilitate your application efforts down the road.  And even if you’re not planning to apply for stimulus funds, you should nonetheless monitor the process in the event someone else applies for funds to develop a broadband infrastructure encroaching upon your existing service area.

Tuesday
Jun302009

REGULATORY UPDATE

FCC Issues LNP Order: Shortens Porting Interval

In May, the FCC released an order reducing the time allowed for wireline companies to complete "simple" wireline and intermodal ports from four days to one business day. 

"Simple" ports are those that: 1) do not involve unbundled network elements; 2) involve an account only for a single line; 3) do not include complex switch translations (e.g., Centrex, ISDN, AIN services, remote call forwarding, or multiple services on the loop); and 4) do not include a reseller.  The shortened interval applies to all simple wireline-to-wireline and intermodal ports, unless a longer period is requested by the new provider or the customer elects otherwise. 

To implement its new ruling, the FCC charged the North American Numbering Council (NANC) with developing new local number portability (LNP) provisioning process flows.  The Commission instructed NANC to take the shortened porting interval into account and submit revised provisioning flows within 90 days after the order's effective date. (The order becomes effective 30 days after publication in the Federal Register; thus, the deadline for NANC to submit new process flows will be no sooner than mid-September.) 

Included among the items NANC will decide are how a "business day" should be interpreted in reference to the porting interval and whether companies should be required to use a mechanized interface in the porting process.  Once NANC develops the new process flows, all companies not qualifying as "small" will have nine months to implement the shortened interval; "small" companies will have 15 months to comply.

- Original story written by John Kuykendall

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