2020-2025 Rock Island Business Plan · 2020-2025 Business Plan ... and customer interest to gain market share ensures that we protect the company against future financial risks and

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November 15, 2019

2020-2025 Rock Island Business Plan

November 2019

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November 15, 2019

Contents Executive Summary ............................................................................................................................................................... 3

Key Business Takeaways .......................................................................................................................................................... 3

2019 YTD and Projections for Year End ................................................................................................................................... 4

2020-2025 Business Plan ...................................................................................................................................................... 6

Onboarding Goals 2020-2025 .................................................................................................................................................. 6

Projects ..................................................................................................................................................................................... 7

Debt .......................................................................................................................................................................................... 8

Finance ................................................................................................................................................................................ 12

Income Statement .................................................................................................................................................................. 12

Network Management ....................................................................................................................................................... 13

Support................................................................................................................................................................................ 14

3

Executive Summary Key Business Takeaways

Fiber - Any opportunities to accelerate the deployment using new strategies, joint opportunities and customer interest to gain market share ensures that we protect the company against future financial risks and all competitive threats. Projections for future years have been reduced for subscriber (subs) counts to more accurately model the true churn rates we are seeing. However, Rock Island is projected to improve revenue by 2023 above our 2019 plan.

LTE- We have driven the success of Rock Island by strategically partnering with T-Mobile. They have graciously overextended their initial contract and deployed multiple phases of upgrades; the latest of which delivers enough increase to satisfy our LTE needs for some time to come. It is important to consider and support the value of these investments to realize the most benefit to our residents in San Juan County. The proposed upgrades for LTE provide essential capacity for long-term success and delivers on our principle to maintain the health and advancement of our fixed wireless network to meet growing needs.

Business Services - As we continue to ramp up Business Services to members of our community, we simultaneously assist many members to improve their economics by letting us leverage their technology for them. Through a resilient relationship with our parent company, we continue to refine the structure of this department to meet business needs around the service territory. We strive to deliver internet, voice, and data communications products and services of the highest quality through the most appropriate technologies to meet the subscribers needs. Constantly evolving the product and service offerings is integral to providing the highest value proposition and address the unmet needs of the community. The high monetary value of these types of services are predicated on our ability to invest larger portions of capital upfront and dedicate appropriate resources to support these services, while always balancing the net present value of the recurring revenue. Time to market is critical in order to reduce risk from our local incumbent striving to offer these same services.

Financial – Rock Island maintains healthy financials as it enters its 6th year of business. We have achieved the milestone for operations cashflow positive in Q3 of 2019 and are on track to achieve $6.8M in revenues by YE 2020 and net income positive by Q1 2022. We are fine tuning our strategies for investment toward immediate returns on revenues in joint projects to ensure long-term debt loads do not increase unnecessarily.

Reliability – Rock Island’s long-term strategy is to provide enough capacity to meet the needs of OPALCO’s membership and maintain reliable communication services. The 2020 budget completes the installation of propane generators to provide back-up to critical active sites during power outages as well as additional transport circuit opportunities for off-island redundancy.

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2019 YTD and Projections for Year End

Today, we are transitioning as many subscribers as possible to FTTP, especially in the population centers, focusing on high-density markets in order to mitigate current competitive threats and future-proof our customer base. An additional benefit of this approach is that it frees up capacity within our existing LTE system.

Gross Onboarding Fiber remains on track for gross onboarding to plan through the end of the year closing with an estimated 601 gross connections--61 subscriptions over our 2019 goal. Net fiber subscriptions are forecast to be behind plan by approximately 40 subscribers due to higher than planned churn rates in the category of subscribers who have moved out of the territory, or to a location where the service was unavailable.

540 601

516 473

-

100

200

300

400

500

600

700

YTD

Projected YE Gross and Net vs. Goal- Fiber

GrossGoalGrossActualNetGoal

840 798

636

263

-

100

200

300

400

500

600

700

800

900

YTD

YTD Gross and Net vs. YE Goal-Fixed Wireless

Gross Goal

Gross Actual

Net Goal

Net Actual

5

*Nov and Dec are projected values

*Nov and Dec are projected values

35 26

53 47

51 57

68 66

56 54

40 48

-

10

20

30

40

50

60

70

80

-

10

20

30

40

50

60

70

80

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

Gross to Net Comparison 2019 - Fiber

Net Adds Total Gross Net Goal Gross Goal Gross Total

57

43

61 63

78 83

87 90

53

63 60 60

-

10

20

30

40

50

60

70

80

90

100

(20)

-

20

40

60

80

100

120

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

Gross to Net Comparison- LTE

Net Adds Total Gross Net Goal Gross Goal Gross Total

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2020-2025 Business Plan Onboarding Goals 2020-2025

591408 336 300 288 288

840

500420

336 336 312

0

200

400

600

800

1000

1200

1400

1600

2020 2021 2022 2023 2024 2025

Gross Sub Onboarding 2020-2025

Gross Fiber Gross LTE

531348

240 240 228 228

480

9696

-24 -24 -48

-200

0

200

400

600

800

1000

1200

2020 2021 2022 2023 2024 2025

Net Subscription Adds 2020-2025

Net Fiber Net LTE

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Projects

LTE PH2

In March of 2019, Rock Island Staff outlined a plan to the Board to deploy a strategic upgrade to the LTE network. This upgrade was budgeted to include four conversions from a tower bottom configuration to a tower top configuration and other additional improvements.

LTE PH2 2.0

Just after Rock Island’s quarterly meeting with the Board in August, T-Mobile surprised us with a massive increase to the investment they were looking to make in our territory. The scope grew from what was originally in PH2 to add 22 10MHz in the 1900 frequency, as well as the 600 frequency in 2020. This is a 90% increase to the existing capacity of our LTE network. The adjustment to the scope is estimated at just under $1.1M. The T-Mobile value of investment on this scope is just over $2M.

$470,000.00

$1,089,000.00

3300

4470

7900

0

1000

2000

3000

4000

5000

6000

7000

8000

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

MHz

Current Capacity 2019 Budget TMO Approved

Budg

et

Phase 2 LTE Project Scope Comparison

Budget MHz

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Debt

As presented in the 2019 budget, the anticipated borrowings for investment were earmarked for a $1M for debt draw for investment in 2020. With the substantially greater offering from our partners at T-Mobile, it is Rock Island’s recommendation that we co-invest in completing 100% of the project as rapidly as possible to ensure the reliability and sales opportunities for LTE. The projections for LTE sales in this business plan coincide with these upgrades. In addition to the investments that were planned for FTTH and other capital projects, the total borrowings for 2020 would be $2.4M. This would be done by a restructuring of future debt with raising the total debt load for Rock Island.

The 2019 Business Plan (BP) outlined the following investment strategy:

This allowed Rock Island to take down debt up to $27.5M. The adjustment in this plan does not raise the total debt ceiling, but models us maintaining that peak debt load for up to three years, or as needed, to accommodate demand for incentive investment. Alternatively, the Board can elect to raise that total debt load if they feel the demand for services warrants the investment. Staff recommend that we begin this investment in 2019 by drawing down $500,000 of these funds. This will position Rock Island for success in meeting our subscriber targets for 2020.

(1,500,000)

(1,000,000)

(500,000)

-

500,000

1,000,000

1,500,000

2020 2021 2022 2023 2024 2025

2019 BP Funding and Net Profit/Loss

2019 BP New Borrowings 2019 BP Self Investment 2019 BP Net Profit/Loss

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The adjusted plan for investment as proposed in this plan looks like this:

A side effect of the increased speed of the borrowings is a greater depreciation expense than budgeted in last year’s plan. This causes a short delay in the previously projected net income positive timing from YE 2021 to Q1 2022. As an ancillary benefit, it increases our profitability above the 2019 plan in 2023 on through 2025.

This trend corresponds more to the “Aggressive Investment” model presented in the strategies section of the 2019 Business Plan. In that model, when front loading the investment, it tips the revenues projection positively and ensures better market capture and protection against competitive threats.

(1,500,000)

(1,000,000)

(500,000)

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2020 2021 2022 2023 2024 2025

2020 BP Funding and Net Profit/Loss

2020 BP New Borrowings 2020 BP Self Investment 2020 BP Net Profit/Loss

($2,000,000)($1,500,000)($1,000,000)

($500,000)$0

$500,000$1,000,000$1,500,000$2,000,000$2,500,000

2020 2021 2022 2023 2024 2025

Net Profit/Loss

2020 BP Net Profit/Loss 2019 BP Net Profit/Loss

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The debt structure would reshape, but would not increase, beyond the total debt load presented in the 2019 plan, unless the Board elects to accelerate investments further.

$5,000,000$5,500,000$6,000,000$6,500,000$7,000,000$7,500,000$8,000,000$8,500,000$9,000,000$9,500,000

$10,000,000

2020 2021 2022 2023 2024 2025

Revenues

2020 BP 2019 BP

4.00%

3.40%3.59% 3.72%

4.00%4.30%

4.50%

5.00%5.20% 5.30% 5.30%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

Rock Island Debt Projection BP 2020 with Projected Interest Rates

Debt Avg. Interest Rate

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$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

2020 vs. 2019 BP Debt Forecast

2019 BP Debt Model 2020 BP Debt Model

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Finance

Income Statement

2020 2021 2022 2023 2024 2025 TotalBudget Budget Budget Budget Budget Budget Budget

Revenues $6,851,137 $7,611,830 $8,197,117 $8,723,928 $9,183,275 $9,618,648 $50,185,935Broadband Services 5,870,793 6,540,998 7,016,655 7,424,543 7,773,919 8,106,809 42,733,717 IT Services 546,960 631,590 735,000 847,320 950,280 1,045,320 4,756,470 Other 433,384 439,242 445,462 452,065 459,076 466,519 2,695,748

Cost of Revenues 892,033 889,354 906,241 917,472 936,866 949,566 5,491,531 Gross profit $5,959,104 $6,722,476 $7,290,876 $7,806,456 $8,246,410 $8,669,082 $44,694,404Gross profit % 86.98% 88.32% 88.94% 89.48% 89.80% 90.13% 89.06%

Operating expenses 6,217,271 6,174,791 5,994,185 5,717,761 5,564,976 5,547,581 35,216,566 Operating profit/loss ($258,167) $547,685 $1,296,691 $2,088,695 $2,681,434 $3,121,501 $9,477,838

Other income/expenses 1,303,376 1,382,781 1,391,145 1,376,847 1,359,091 1,326,197 8,139,437 Net profit/loss ($1,561,543) ($835,096) ($94,455) $711,848 $1,322,343 $1,795,304 $1,338,401

RIC FY '20 - '25 Working Budget - Profit & Loss (Budget)

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Network Management

Redundancy

We are progressing well in our conversations with off-island transport companies to acquire a new, separated route underground transport to the Westin via Whidbey Island. This would provide fully cable-redundant paths on the mainland, drastically increasing the reliability of the grid. With the addition of the fully implemented Cluster in 2019, roll-over to redundant transports happens automatically and turns noticeable outages from 20-30 min to sub-second during transfer. Once we have the secondary path for off-island transport (expected by March 2020) we will have true protected service for our county.

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Support Onboarding and Support Improvements

Rock Island Support staff continue to maintain very high levels of engagement with our customers. From working them through the connection process to sales outreach where LTE service is available, they are churning enormous metrics for a group this size. We have been so fortunate to have the staff that we do on our front lines.

0

500

1000

1500

2000

2500

3000

3500

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19

Inbound and Outbound Activity

Open Cases Closed Cases Inbound Calls Outbound Calls