Lebanon Utilities Telecommunications Division Profitability

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Lebanon Utilities publicized early in 2013 that its Telecommunications Division, known as iLines, is “profitable.” Analysis of the pertinent data brings into sharp focus how the Lebanon Utilities definition differs from the private sector definition of what constitutes a profitable enterprise.

The following spreadsheet shows that as of November 30, 2012, iLines had a net loss of $1,084,611 since its 2004 inception. This net loss had been funded by three equal notes payable loans from the Lebanon Utilities Electric, Water, and Wastewater divisions that totaled $1,525,289.

From January 1, 2010, through November 30, 2012, iLines reduced its notes payable obligation to the Electric, Water, and Wastewater divisions by $98,693. At this repayment rate, it will take iLines a whopping 45 years to pay off the remaining notes payable total of $1,525,289. A 45-year return on investment most certainly does not define “profitability” in the private sector!

The weak performance of iLines resulted in yearly “Going Concern – Telecommunications Utility” notes by the State Board of Accounts starting with its 2007 Annual Financial Report for Lebanon Utilities. The latest State Board of Accounts note expressing substantial doubt about the ability of iLines to continue as a going concern is listed next in italics.

State Board of Accounts
2011 Lebanon Utilities Annual Financial Report
Note H. Going Concern – Telecommunications Utility

Since its formation in 2004 and through 2010, the Telecommunications Utility suffered recurring losses from operations and had a total net asset deficiency of $1,173,840 at December 31, 2011. This raised substantial doubt about its ability to continue as a going concern. During this period the losses were apportioned equally among the other three divisions of the Utilities – Electric, Water and Wastewater. Cash flows were reinforced as a loan from the three Utilities to the Telecommunications Utility. The loan accumulated to an amount of $1,623,982 as an ending balance on December 31, 2009. Since 2010, the Telecommunications Utility has created Net Margin and positive cash flow and began repaying the loan with no further borrowing. In 2010, it repaid $29,753 and in 2011, $38,940. It is expected to make Net Margin in 2012 and carry out further contributions this year toward repayment of the loan.

The improvement in its position is a result of restructuring that took place in 2008 involving the cessation of the Broadband-Over-Powerline business and focusing on the wireless service and fiber optic connectivity and internet business. Capital, operating and maintenance expenses are made in smaller and more manageable segments yielding tighter inventory management. Expenditures have been closely controlled.

Upgrades are taking place in the wireless network as cash flow permits each phase of the improvements to occur which has enabled segmentation in customer pricing. Pricing segmentation based on the level of internet speed desired gives the customers more choice and increases the possibility for revenue growth as level of service is tailored to customer budgets. In addition, since 2008 through 2011 the customer base has been expanded with major business customers having been added in this time frame with fiber optic connectivity and internet service as well as growth in the wireless internet service sector.

While the Telecommunications Utility is now on profitable footing and repaying the loan, competition has increased as a fiber-to-the-home provider has entered the market in 2011 and during 2012 has resulted in some erosion in the fiber internet and connectivity-side of the business and some of the in-city wireless. Long-term contracts have been established to protect the fiber optic business market as much as possible. The next 2-3 years will be important as the Telecommunications Utility seeks to grow its revenues and enhance its present profitable position in the face of this heightened level of competition on the fiber optic side. A major portion of the wireless-side business is in the County, where competition is minimal to nonexistent and the market growth opportunities are available. This is favorable to the telecommunications long-term growth prospects despite the competitive threats in the fiber optic segment.

The biggest failure of iLines, the broadband-over-powerline business, thankfully ended in 2008. The iLines operations are now focused on (1) a fiber optic connectivity and internet business within Lebanon and (2) wireless internet services in rural Boone County.

Lebanon Mayor Huck Lewis and Lebanon Utilities General Manager Mike Martin were asked during a March 8, 2013, meeting why iLines should stay in business. They cited three reasons – (a) operations should continue as long as enough revenue is being generated each year to pay down the notes payable loans, (b) the overhead costs shared by iLines would have to be assumed by the Electric, Water, and Wastewater divisions, (c) our Lebanon Utility Service Board members Dan Lamar, Tom Temple, Mike Thrine, James Urban, and Allen Woods would terminate iLines if it is no longer able to pay down the notes payable loans.

The ongoing iLines revenue generating capability depends on maintaining and increasing its customer base. There are now about 20 iLines fiber optic business customers within Lebanon and about 580 wireless internet customers in rural Boone County.

The iLines fiber optic business customer base is not expected to grow because of Metronet, a private sector company which entered the Lebanon market in 2011. It will be a challenge for iLines to keep its fiber optic business customers because of Metronet’s cutting-edge fiber optic cable high-speed internet, full-featured local and long distance telephone, and advanced digital cable television with a wide variety of programming.

Lebanon Utilities strangely does not consider the major cellular data service providers AT&T, Sprint, and Verizon as competitors for its iLines wireless internet business. Hoosier Broadband, a private sector company located in Kokomo and Westfield, is the only competitor identified by iLines management.

Wireless broadband internet service is offered by iLines (with no contracts, usage caps, or overage charges) to mostly rural areas near Advance, Dover, Hazelrigg, Herr, Jamestown, Lebanon, Max, Mechanicsburg, New Brunswick, and Thorntown where customers have line of sight within 4 to 7 miles of a wireless access point mounted on an existing multi-use tower. The iLines service is higher speed than satellite communications from providers such as DISH and Xfinity. However, there is significant iLines competition throughout all of Boone County from the major cellular data service providers AT&T, Sprint, and Verizon in addition to Hoosier Broadband.

The wireless coverage maps of AT&T, Sprint, and Verizon show that much of Boone County is already covered by 4G systems that provide mobile ultra-broadband internet access to laptops with USB wireless modems, to smartphones, and to other mobile devices. The portions of Boone County not currently served by 4G systems are covered by 3G systems. A new Verizon cell tower where CR 850 N crosses I-65 between Thorntown and Mechanicsburg will extend 4G coverage 10 to 15 miles in northern Boone County. Dedicated cell towers hundreds of feet high are not affordable for iLines and Hoosier Broadband to compete with the major cellular data service providers. It will be a struggle for iLines to retain its niche wireless internet business as 4G coverage becomes more widely available in rural Boone County.

There is apparently about $250,000 of Lebanon Utilities shared overhead costs paid by iLines. If iLines went out of business, and its overhead costs share was distributed on the basis of customer count, the overhead costs of the Electric Division would increase $102,000, the Water Division $74,000, and the Wastewater Division $74,000. The total operating expenses of the Electric Division would increase about 0.6%, the Water Division 3.2%, and the Wastewater Division 2.3%. Electric, water, and wastewater rate increases should not be a result if iLines went out of business.

Our Lebanon Utility Service Board does not have a good track record when it comes to managing iLines losses. Even though iLines got out of the broadband-over-powerline business in 2008, it increased its 2009 notes payable loans from the Electric, Water, and Wastewater divisions. A recent positive development is that the

Electric, Water, and Wastewater divisions can no longer legally loan any additional monies to iLines or assume any obligation or liability of iLines as a guarantor, endorser, surety, or otherwise. These prohibitions against using any more Lebanon Utilities customer utility payments to subsidize iLines were in the 2012 Lebanon Utilities electric rate increase approved by the Indiana Utility Regulatory Commission. Our Lebanon Utility Service Board can no longer legally borrow more money from its other divisions if iLines is no longer able to pay down the notes payable loans.

There is a philosophical question of whether a municipal utility should be in the telecommunications business. Carefully regulated electric, water, and wastewater operations are legitimate for municipal utilities because of the threat of monopolistic excess. However, it is inappropriate for Lebanon utility customers to subsidize iLines because considerable private sector competition already exists to economically deliver fiber optic and wireless internet services to Boone County.

In conclusion, the iLines definition of profitability is most certainly not acceptable when compared to the private sector. However, the Indiana Utility Regulatory Commission’s prohibition against the Electric, Water, and Wastewater divisions loaning any additional monies to iLines makes it acceptable that iLines continue in operation as long as it is able to pay down the notes payable loans every year. Our Lebanon Utility Service Board should be ready to promptly end the iLines business and sell off the assets as 4G coverage from the major cellular data service providers becomes available in more areas of rural Boone County.

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This page was last updated on 03/11/13 .