Testimony - Stephen Barraclough

STATE OF VERMONT PUBLIC SERVICE BOARD

Petition of City of Burlington d/b/a BT, for a certificate of public good to operate a cable television system in the City of Burlington, Vermont

) ) ) )

Docket No. 7044

PREFILED TESTIMONY OF STEPHEN BARRACLOUGH

ON BEHALF OF THE CITY OF BURLINGTON

March 28, 2014

Mr. Barraclough is BT’s operating General Manager. His testimony discusses the financial condition of BT since he became General Manager in September 2010 and the significant technological value the asset provides to residences and businesses of the City of Burlington. Mr. Barraclough’s testimony will also describe the extent of BT’s plant, the number of Burlington addresses served and unserved by BT, the costs of providing service to currently unserved residences and the impact of such expenses on BT, its ratepayers, and Burlington’s taxpayers. Mr. Barraclough will also address the ability of BT to make certain future payments under the settlement agreement executed in Citibank v. City of Burlington et al., Docket No. D.VT. 2:11-cv-214, and BT’s ability to make payments under a bridge financing term sheet entered into in furtherance of settlement.

TABLE OF CONTENTS 1. Introduction ........................................................................................................................... 1

2. Changes Since 2010 to Manage BT’s Cash Flow & The BT System Today .................... 3

3. Economic Development and US Ignite ................................................................................ 6

4. The Need for Modification of CPG Condition No. 17 ........................................................ 8

EXHIBITS

Exhibit Petitioner SB-1 Resume of Stephen Barraclough Exhibit Petitioner SB-2 Resolution Creating Blue Ribbon Committee and Report Exhibit Petitioner SB-3 BT Financials for FY 2012, 2013, and Actuals for 2014

through Feb. Exhibit Petitioner SB-4 Unserved Public Right-of-Way Streets and Cost Estimates CONF. Exhibit Petitioner SB-5 BT Financial Projections for Balance of FY 2014 Exhibit Petitioner SB-6 BT Balance Sheet as of January 31, 2014 Exhibit Petitioner SB-7 Resolution Adopting BTAB

STATE OF VERMONT PUBLIC SERVICE BOARD

Petition of City of Burlington d/b/a BT, for a certificate of public good to operate a cable television system in the City of Burlington, Vermont

) ) ) )

Docket No. 7044

PREFILED TESTIMONY OF STEPHEN BARRACLOUGH

ON BEHALF OF THE CITY OF BURLINGTON

1. Introduction 1

Q1. Please state your name, occupation and business address. 2

A1. My name is Stephen Barraclough. I am employed by Dorman and Fawcett (“D&F”), a 3

financial advisory firm retained by the City, and have been serving as interim General 4

Manager of Burlington Telecom (“BT”) since September, 2010. My business address is 5

200 Church Street, Burlington, Vermont. 6

7

Previous to my work with D&F, I have been a senior financial and operations executive 8

at several international companies with diverse product lines and business units. A copy 9

of my resume is attached as Exhibit Pet. SB-1. 10

11

Q2. Please explain how D&F became involved with BT. 12

A2. In 2009, the Burlington City Council created the Blue Ribbon Committee (“BRC”), 13

comprised of City Councilors and business leaders to identify all viable options to 14

address BT’s financial situation. The committee was specifically charged with assessing 15

“all available options for the financial structure of BT including but not limited to: a. 16

Docket No. 7044 Prefiled Testimony of Stephen Barraclough

March 28, 2014 Page 2 of 12

Piper Jaffrey financing offer, b. other possible financing options, c. joint venture of 1

equity sale, d. outright sale of BT, and e. other options recommended by consultants.” 2

Resolution Creating the Blue Ribbon Committee attached as Exhibit Pet. SB-2. 3

4

In 2010, the BRC issued its report to the City Council. See Exhibit Pet. SB-2. As part of 5

its report, the BRC recommended that the City retain an expert financial advisor to 6

stabilize BT’s finances and develop short and long-term strategies for bringing about a 7

suitable strategic and financial partner for BT. Following that recommendation, the City 8

engaged D&F as its financial advisor in March 2010. In September 2010, D&F’s role 9

expanded to include an operational aspect as General Manager overseeing the day-to-day 10

management of BT, a role that I have occupied since that time. 11

12

Q3. What is the purpose of your testimony? 13

Q3. My testimony describes the financial condition of BT since I became General Manager in 14

September, 2010, its current plant and operations, and the significant technological value 15

the asset provides to residences and businesses of the City of Burlington. My testimony 16

will also discuss those service addresses in Burlington that are not passed within 300 feet 17

by BT’s plant and the feasibility and estimated costs of providing BT service to these un-18

served service addresses and the impact incurring such costs would have on BT given 19

BT’s finances. Lastly I will discuss BT’s ability to make payments under the Citibank 20

Settlement and the Bridge Lease Financing described in more detail in the Petition and 21

the prefiled testimonies of Mr. Dorman and Mr. Rusten. 22



1

2. Changes Since 2010 to Manage BT’s Cash Flow & The BT System Today 2

Q4. What is the current status of BT’s cash flow situation? 3

A4. As is evidenced by the financials included as Exhibit Pet. SB-3, BT has been managed to 4

a positive cash flow since late fall of 2010 and continues to be managed in that way 5

today. As of the end of February, 2014, BT has accumulated approximately $1,472,869 6

in retained earnings. 7

8

Q5. What changes have you implemented to manage BT’s cash flow? 9

A5. Beginning in the fall of 2010, BT underwent a period of internal reorganization to: lower 10

its costs of operation, including its staffing costs; create an effective internal control 11

environment; identify, define and implement operational best practice; match staffing 12

levels to the size and needs of the business; ensure that staff possessed the skill sets, 13

experiences and qualifications necessary to support the effective and efficient operation 14

of the business. The current senior BT management team of Vivian Pilot (Controller), 15

Amber Thibeault (Division Manager of Regulatory Affairs, Outside Plant & Forward 16

Planning), Stacey Trudo (Division Manager of Customer Service), and Jeremy Patrie 17

(Division Manager of Technical Operations and Commercial Sales) includes only one 18

remaining manager from the fall of 2010. 19

20

Beginning with the preparation of its FY 2010 budget , BT has managed its operations for 21

cash, focusing on cash flow pre debt service, after all costs and capital expenditures. To 22



create the appropriate environment to support this focus BT has made the following 1

changes: First, BT performs an internal monthly closing of its books, within 15 days of 2

the end of the prior month. The GM and Controller then update its full year forecast, 3

based on latest available figures and take whatever corrective action may be required to 4

ensure that its pre-debt service cash flow forecast remains on or above budget. Second, 5

at least once a quarter, BT’s management team reviews all aspects of BT’s financial 6

performance in detail to ensure that BT remains on track and that latest performance and 7

knowledge is shared across the whole management team. Third, all purchases are 8

approved in advance by the GM or Controller through the use of a PO system. Fourth, 9

vendor payment terms and obligations are closely monitored and adhered to, and lastly, 10

there is a keen and ongoing focus on managing the costs of key items of expenditure 11

downwards whenever possible. These changes together with BT’s internal 12

reorganization have enabled BT’s performance and financials to remain on track. 13

14

In October of 2012, the City Council passed a resolution establishing the BT Advisory 15

Board (“BTAB”) in place of the BT Advisory Committee and the Blue Ribbon 16

Committee to provide guidance and advice to BT management, the Mayor, and the City 17

Council on operational matters, potential partners, and issues relating to pending 18

litigation and to report and make recommendations to the City Council on any matter 19

concerning BT for which action is required. A copy of the resolution is included as 20

Exhibit Pet. SB-7. The members of BTAB are the former members of the BRC and are a 21

group of business leaders and City Council members. The current members are: 22



David J. Provost (Sr. V.P., Champlain College) 1 Pat Robins (Chairman/Founder SymQuest) 2 David Parker (Sr. Director, Corporate Development, Dealer.com) 3 Joan Shannon (City Councilor, Ward 5/Council President) 4 Karen Paul (City Councilor, Ward 6) 5 Vince Brennan (City Councilor, Ward 3) 6

As the interim General Manager of BT, I regularly attend the BTAB meetings together 7

with BT’s senior management team. Once every quarter, BT’s operational and financial 8

performance is the primary item on the BTAB agenda. At these meetings, BT provides 9

the BTAB with a detailed review of its actual and forecast performance for the current 10

fiscal year. 11

12

Q6. Please confirm that since October 2010, BT has had sufficient revenue to cover all 13

operating expenses of the system. 14

A6. Yes. BT has been managed to a positive cash flow since late fall of 2010 and continues 15

to be managed in that way today. 16

17

Q7. Please confirm that since December 2010, BT has reimbursed the City within two months 18

of the City’s expenditure for any expenses incurred or payments made by the City in 19

support of services that BT provides to non-City entities. 20

A7. Yes, as discussed in Mr. Rusten’s testimony, since at least December 2010, BT has 21

reimbursed the City’s general fund operating account for all expenses paid by the City 22

since October 2010 in support of services that BT provides to non-City entities. 23

24



Q8. Will there be sufficient cash flow following a closing of the Bridge Lease Financing for 1

BT to make the monthly payments on that financing of $46,544.33 and continue to meet 2

its ongoing operating costs? 3

A8. Yes. As reflected in CONFIDENTIAL Exhibit Pet. SB-5, we will be able to meet our 4

monthly payment and operational obligations from our cash flow generated by system 5

revenues and maintain a positive cash flow. Furthermore, it is the intent of the bridge 6

financing agreement that BT operate on as close to a stand-alone basis as is commercially 7

practicable. 8

9

3. Economic Development and US Ignite 10

Q9. In its February, 2010 report, the Blue Ribbon Committee recognized that BT is a valuable 11

community development asset to the City. In what ways does BT promote economic 12

development? 13

A9. BT’s fiber-to-the-home (“FTTH”) network is one of the most powerful fiber optic 14

networks in the country. Investment in such networks is increasing exponentially in a 15

number of different areas of the world, particularly in the Asia Pacific Region and parts 16

of Europe. In the United States the development of fiber optic networks similar to BT’s 17

capable of Gigabit and higher speeds, has lagged. This is changing, with Google recently 18

announcing a plan to build fiber optic networks in thirty-eight (38) communities 19

throughout the country, in addition to its recent build in Kansas City, and announced 20

plans for Austin, Texas and Provo, Utah. While many countries and an increasing 21



number of communities within the U.S. are making strides to develop FTTH networks, 1

this infrastructure is already in place in Burlington. 2

3

FTTH networks such as BT’s are regarded as “future proof” and are increasingly being 4

viewed as essential infrastructure for the future. BT’s fiber network is capable of 5

symmetrical speeds of a Gigabit (and more as required) to every premise in Burlington 6

that it passes. The result is that BT’s network is capable of offering speeds beyond the 7

capability of the more traditional delivery infrastructures used by other broadband 8

providers in Burlington. 9

10

In 2013, Burlington was invited to become a member of US Ignite, a nonprofit with 11

support from the White House Office of Science and Technology Policy and the National 12

Science Foundation that strives to create awareness of the future potential of Gigabit 13

fiber networks such as Burlington’s. Its focus is on the development of next generation 14

applications benefitting from high speed symmetrical bandwidth to drive community and 15

economic development and new business opportunities, including by partnering with 16

other US Ignite communities that also possess exceptional broadband networks. 17

Burlington’s invitation to become a member of US Ignite was based on its FTTH 18

infrastructure. The Burlington-US Ignite partnership (“BTV Ignite”) is focused on 19

positioning BT’s powerful infrastructure as a tool, test bed, and accelerator for economic, 20

educational, and community benefit. BTV Ignite is working with and learning from the 21

experience of other US Ignite communities such as Kansas City, Kansas and Missouri, 22



Chattanooga, Tennessee, and Lafayette, Louisiana. BTV Ignites’ goal is to establish 1

Burlington and its surrounding communities as a sustainable Regional Technology Center 2

focused on community betterment and economic development, capable of creating 3

beneficial jobs and attracting next-generation technology entrepreneurs to Burlington. 4

5

4. The Need for Modification of CPG Condition No. 17 6

Q10. How many service addresses does the BT plant pass? 7

A10. BT’s plant (fiber cable) passes within 300 feet of 15,565 service addresses in the City of 8

Burlington. (300 feet is BT’s standard no-charge service fee drop distance as mandated 9

by Rule 8.367 of the PSB Rules for Cable Television). This amounts to roughly 82% of 10

the number of service addresses in the City of Burlington. 11

12

Q11. How many service addresses in Burlington are not passed within 300ft by the BT plant? 13

A11. Currently, BT does not pass 3,257 service addresses. A current listing of the public 14

streets is attached to this testimony as Pet. Exhibit SB-4. 15

16

Q12. Of the service addresses not passed by BT, how many are located on public rights-of-17

way?1 18

A12. Of the service addresses not passed by BT, 1,913 are located on public rights-of-way. 19

20

1 The Board’s October 8, 2010 Order on Motion and Cross-Motion for Partial Summary Judgment in this docket found that Burlington had violated Condition 17 of its Certificate of Public Good by failing to complete the build out by September 13, 2008, to 1,942 service addresses located on public rights-of-way. Burlington will supplement Mr. Barraclough’s prefiled testimony in the event the Board wishes to review the build-out to private rights-of-ways.



Q13. Is that the same number of service addresses located along public rights-of-way that BT’s 1

plant did not pass in 2009? 2

A13. No. Since 2009, BT has expanded its facilities to pass an additional 301 service addresses 3

located along public rights-of-way. 4

5

Q14. What would it cost for BT to pass all of the service addresses along public rights-of-way? 6

A14. At my direction, BT has engaged a third-party contractor to provide an up to date 7

independent estimate of the costs of build out. In 2009, before I assumed the role of 8

interim General Manager of BT, BT estimated that it would cost approximately 9

$4,000,000 to pass all remaining service addresses on public rights-of-way. The most 10

current estimate for the cost to complete the build-out to the majority of the remaining 11

1,913 service addresses along public rights-of-way is $3,661,621. See Exhibit Pet. SB-4. 12

13

Q15. Based on BT’s historic average monthly cash flow for FY 2013 and forecast monthly 14

cash flow for FY 2014 (8 months actual and 4 months forecast) of less than $33,000 after 15

debt service, can BT afford to build-out to the service addresses located along public 16

rights-of-way with just BT revenues and still provide service to BT’s current customers? 17

A15. No. BT’s average monthly cash flow after debt service in FY 2013 and FY 2014 is 18

insufficient to complete the build-out to the 1,913 service addresses located along public 19

rights-of-way and still provide service to BT’s current customers. 20

21


March 28, 2014 Page 10 of 12

Q16. What would the financial impact be on BT if it had to complete the build out to all 1,913 1

un-served service addresses along public rights-of-way? 2

A16. Based on the most recent estimate for completing the buildout to the remaining unserved 3

service addresses along public rights-of-way, BT does not have sufficient revenues and 4

resources to do so and also continue to provide service to its current customers. 5

6

Furthermore, BT cannot sustain an investment of $3,661,621 and remain a viable 7

enterprise. First, BT would be unable to raise or borrow the money to be able to make 8

the investment. Second, even if it could, that sort of debt on BT’s balance sheet would 9

destroy BT’s enterprise value. (A copy of BT’s Balance Sheet as of January 31, 2014 is 10

attached as Exhibit Pet. SB-6). BT’s enterprise value is a critical element to the provision 11

of the bridge financing necessary for the City of Burlington to implement the terms of the 12

Citibank Settlement. If BT were forced to take on an investment cost to build out these 13

areas over the next four years, the bridge financier would not fund the project. Third, BT 14

would not have sufficient cash flow after debt service to complete the build-out within 15

that time and the investment would deplete BT’s cash-flow for many years to come. BT 16

would also no longer have the financial capability to make the capital expenditures 17

necessary to remain a viable provider of broadband and telecommunications services to 18

its current customers. 19

20

Q17. What impact would the required build-out have on BT’s overall value? 21


March 28, 2014 Page 11 of 12

A17. Requiring BT to complete the build-out would adversely impact the overall value of BT 1

as the overall cost of doing so would result in a negative return on investment from these 2

service areas. 3

4

Based on BT’s average monthly cash flows for FY 2013 and forecast for FY 2014 of 5

under $33,000 a month (as referenced in Q15, above), it would take more than 9 years to 6

generate enough cash to cover the investment on building out past each premise, before 7

taking into account the additional cost of building to each individual subscriber 8

connection and before contributing any positive cash flow to BT’s operations. This 9

would also deprive BT of cash to maintain its current essential infrastructure and plant 10

and cripple its attractiveness to a potential acquirer and its prospective sale value. 11

12

Q18. Is BT unwilling to do any build out to the remaining 1,913 unserved service addresses on 13

public rights-of-way? 14

A18. No. BT is committed to continuing to build-out in cases where it is able to recoup the 15

value of its investment in a reasonable time frame, as it has continued to do so since 16

2009. 17

18

Q19. Could BT simply increase rates to offset the costs? 19

A19. No. BT operates in a competitive market for cable television, telephone, and internet 20

services. Increasing rates to the level needed to complete the build-out would result in 21

significant losses of subscribers in today’s competitive marketplace. If rates were to 22


March 28, 2014 Page 12 of 12

increase to the level needed to finance the build-out, customers would migrate to one of 1

the alternative service providers available. 2

3

Q20. Finally, how is the Citibank Settlement expected to impact BT’s financial projections? 4

A20. BT’s subscriber count declined to an all-time low in December, 2011. I believe the 5

decline in residential subscribers was driven by the public news of BT’s financial 6

problems and the Citibank litigation. At the end of January 2014, however, BT reported 7

an all-time high subscriber count of 4,579. As a result of the Citibank settlement, I 8

anticipate that residential numbers will continue to increase over the next fiscal year. As 9

a result, revenues are projected to grow for FY 2015 and beyond through pre debt service 10

cash flows after expenditures are expected to remain at around the levels projected for FY 11

2014 as BT’s capital expenditures increase for FY 2015 and FY 2016 to reflect the costs 12

of connecting additional subscribers and overdue infrastructure upgrades of end-of-life 13

equipment. 14

Documents

Testimony - Stephen Barraclough