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Project Profile: KentuckyWired

KentuckyWired

photo credit: Kentucky Communications Network Authority

Location

Kentucky (statewide)

Project Sponsor / Borrower

Kentucky Communications Network Authority

Program Areas

P3Alternative Project DeliveryProject FinanceValue Capture

Mode

Telecommunications

Description

KentuckyWired is a 3,200-mile statewide network of major fiber optic cable (also referred to as the "middle mile" or backbone) to provide broadband internet connectivity. The network will be open access, allowing local public or private Internet service providers (ISPs), cities, partnerships, or other groups to connect to the network and extend services to local communities, i.e. the "last mile" to individual homes and businesses. Critically, connectivity will include universities, state government buildings and community and technical colleges. Improved cell phone coverage is also anticipated as part of the initiative. Approximately 85% of the network will be aerial and 15% underground.

The needs for improved broadband connectivity in Kentucky had been apparent for some time. In 2017, the state ranked 47th in the country in broadband speeds and capacity, which has been a major disadvantage for attracting and growing new job and education opportunities. High costs had prevented] private carriers from building out a statewide network. With KentuckyWired, the state is responsible for building out the middle portion of the fiber network and created the Kentucky Communications Network Authority (KCNA) in 2015 to manage the initiative. Ultimately, the state will earn revenue through wholesale leasing of access to the network from satellite companies, large companies, and smaller broadband providers.

The origins of the project date back to 2013 when multiple state agencies had submitted budget requests for increased funding to support fiber networks. It became apparent that the state should develop a coordinated approach to providing this fiber capacity. At the same time, the Shaping Our Appalachian Region (SOAR) initiative, created in 2013 by the then-Governor and a Congressman recommended the development of reliable, accessible, and affordable high-speed broadband. Through a Request for Information process targeting incumbent providers and potential partners, the state determined the P3 concession model to be the best approach for delivery.

The state reached an agreement in 2015 with a consortium led by Macquarie Capital to design, build, finance, operate, and maintain the network over 30 years in exchange for availability payments from the state. Availability payments will be funded in part by budget appropriations already anticipated for existing Internet services to the state. The agreement includes two equipment refreshes prior to years 11 and 21. The upgrade cost will be fully compensated through an adjustment in the availability payments so that the state effectively bears the risk of the refresh. The concessionaire will also share in revenue from the leasing of access to the network.

The complexity of the project and number of entities involved has impacted the aggressive construction schedule established under the initial agreement. Because of delays in obtaining some pole attachment agreements (agreements to allow the project to use existing utility poles owned by various third parties) and easements to bury cables underground on privately-owned land, construction completion has incurred over two years of delay. Approximately 70 telecommunications, electric and municipal utilities across the state are important partners for access to poles. As of January 2018, KCNA had pole attachment agreements for nearly 90 percent needed statewide. The state reached a settlement with the concessionaire in mid-2018 to cover those costs, as they were deemed supervening events according to the concession agreement.

Cost

$324.4 million (closing costs and initially estimated site preparation, construction costs, and third-party oversight)

$88 million (costs adjustment agreement reached to cover overruns for utility pole attachment agreements)

Funding Sources

Public funding

  • Public in-kind equipment contribution funded by general fund appropriation - $30 million
  • Milestone payment at completion of the first segment of the network (Network Ring 1B in Eastern KY) paid with a federal grant from the Appalachian Regional Commission - $23.5 million
  • Additional costs (as of mid-2018) to secure pole attachment agreements funded by general fund appropriation - $88 million

Concessionaire's financing sources for construction

  • Tax-exempt revenue bonds - $232 million
  • Taxable revenue bonds - $58 million
  • Equity - $21 million
Project Delivery / Contract Method

Design-build-finance-operate-maintain Availability Payment Concession (30 years)

Private Partner

Macquarie Capital - Concessionaire

Equity investors at financial close

  • Macquarie NG-KIH Holdings (75%) - Lead developer arranging financing
  • Ledcor (15%) - Design-build partner
  • First Solutions (10%) - Technology consulting services during construction

Equity investors as of October 2018

  • DIF Infrastructure IV (68%)
  • Ledcor (15%)
  • First Solutions (10%)
  • Macquarie NG-KIH Holdings (7%)

Design-builder - NG-KIH DBLLC Contractors

  • Ledcor - 50% participant responsible for design and construction, and the lead Services Provider for the concession term
  • Overland Contracting (owned by Black & Veatch) - 50% participant responsible for outside plant engineering

Fujitsu Network Communications Inc. - Network design, equipment, operations and maintenance, and equipment refresh

Project Advisors / Consultants

To the State of Kentucky

  • Polsinelli - Legal Advisor

To the Concessionaire

  • Macquarie Capital - Financial Advisor
  • Torys - Legal Advisor
  • Insurance - Aon
Lenders

Bondholders

Duration / Status
  • Commercial close reached January 7, 2015
  • Financial close reached September 3, 2015
  • Construction began mid-2015
  • Original completion late 2018
  • Current estimated completion in 2020
Financial Status / Financial Performance

Closed

Innovations
  • KentuckWired will enable private internet service providers and cellular companies to expand their services to areas previously unserved, especially rural regions.
  • Kentucky will recoup costs by owning its own fiber optic "middle mile" network rather than leasing it. KentuckyWired will further spur economic development and generate revenue by leasing half of the fiber in the cable to private companies.
Related Links / Articles

KentuckyWired

"Infrastructure: Statewide Broadband on Track for 2019-20" (The Lane Report, July 2, 2018)

Shaping Our Appalachian Region

Contacts

Phillip Brown
Executive Director
Kentucky Communications Network Authority
Tel: (502) 782-9549
kentuckywired@ky.gov

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