–by Alex MacLeod —
There is mounting evidence that OPALCO’s Rock Island Communications continues to be a black hole into which members’ money is being dumped in the hope that one day — some day — it will begin pumping big profits back into the cooperative.
More seriously, there is also growing evidence that OPALCO’s management, with the complicity of its board, is hiding the degree to which Rock Island is failing to meet its most basic financial targets. The deception is egregious and deliberate and needs to be addressed.
Question: How do you make an underperforming business look like it is succeeding and meeting expectations?
Answer: Quietly lower the expectations, a lot.
That is what OPALCO management and its board have done. After having reported Rock Island’s progress against its 2016 budget for a quarter, it quietly changed those targets to different, and much lower numbers, which it now identifies as Rock Island’s “business plan.”
How big are the changes? Well. Rock Island’s planned revenue for 2016 was dropped by more than a half-million dollars, or more than 20%, from $3.211 million to $2.646 million, and it’s not even on a pace to meet this lower expectation.
But by changing the numbers, Rock Island goes from a flood of red ink to what looks like success. Magically, by lowering the target by more than 23%, first-quarter revenues were ahead of plan by about 2%, when otherwise they would have been behind by about 21%.
Curiously, and only because of member concerns about how much money Rock Island has been swallowing, OPALCO’s management has been promising the board and the membership an updated business plan for Rock Island since last November. Prior Rock Island business plans have been used by management and the board to justify the financial sense of the Internet business to the membership, whose electric rates have risen significantly to pay for it. Now, that the rubber continues to not hit the road, the board has chosen not to share this new, more modest, business plan with the membership.
No wonder.
While revenue expectations have been significantly reduced, spending has not. Rock Island has blown through $6.5 million in 15 months of a $7.5 million start-up “loan” from OPALCO that was to last 36 months.
Even under the new plan, operating expenses through the first quarter are running more than 15% ahead of plan ($1,018,000 versus $880,000) and its losses have grown by 30% — from a $377,000 loss to $491,000 — more than the downward-adjusted plan.
Next year, Rock Island is supposed to be financially healthy enough to pay back to the cooperative the $7.5 million start-up loan. Don’t count on it. At best, the “loan” will be repaid only if OPALCO co-signs for it, at which point it is just paper-shuffling.
What all this means to us members is our electric rates will continue to rise. In the material General Manager Foster Hildreth gave the board for its May meeting, five full pages were devoted to weather forecasts for the year ahead, laying the groundwork for arguing, yet again, that lack of electric demand will drive up rates.
As before, that is just a smokescreen to hide the real reason: Something in the neighborhood of $20 million that OPALCO has spent on its Internet business and that we are paying for as if it were electricity and which, in its best-case scenario, will only benefit about a quarter of the membership.
In the meantime, do we get to see Rock Island’s new business plan, or is that another secret management and the board will keep from the coop’s members?
Alex MacLeod is a longtime OPALCO member who lives on Shaw.
Companies restate their anticipated revenues all the time. The fact that a company changes their projections is not a sign of some big conspiracy the pull the wool over peoples eyes. It is a matter of adjusting to the realities of the marketplace.
As to their reluctance to publish updated projections and plans; is it because no matter what they say and do, people take potshots at them from the internet?
No one starting a business can foretell the future. To insist that OPALO’s board and management do exactly that indicates that either the writer is naive about business reality, or has other reasons to criticize.
And “blowing through” loan proceeds doesn’t indicate waste; it indicates moving faster than anticipated. There is no evidence other than the bare expenditure of money that waste is in any wise involved.
It’s a fallacy to say that Rockisland will benefit only a quarter of the membership. This is looking at each individual as a separate economic entity strung to the mainland by cable and fiber. To the contrary, the well being of each person has a positive effect on every other person in our small island economy. Those who would be a drain can become productive. Those already productive can be more so. The effect is at large, and is desperately needed here.
We support schools and other institutions of which we are members. Schools can’t guarantee honor students. Businesses can’t guarantee immediate profits. But the common effort is essential. There was a time when people worked together. This time is no different.
It’s misleading to suggest that restatement of earnings is either a normal or frequent experience. Corporate earnings restatements are often material financial events which have adverse consequences for shareholders, and are associated with poor financial management, either of shareholder expectations or of the underlying business, in my experience. Accounting research published by Wharton accounting professors suggest that earnings restatements tend to be associated with companies that have “poor quality earnings”, for a multitude of reasons. Investors do not respond to corporate earnings restatements as “normal” events, indeed they usually respond by rushing to the exits.
Admittedly as a shareholder-owned cooperative the consequences are different than for public companies, but the causes of poor forecasting are not usually benign, and it’s well understood by professional investors that earnings restatements often signal underlying problems in the business model.
Well said, Paula. Cannot add.
Paula – Excellent statement.
Bill – Shame on you for comparing the outcomes of a for-profit corporation to the educational outcomes from our investment in our of students.
Investing in our students is not a gamble, it is a service to them and our community. A start-up business based on substantial leverage and significant risk to shareholders is, in fact, a gamble.
Excellent point, Paula, and one that Rock Island’s Gerry Lawlor should understand, coming from Goldman Sachs.
Restatement of earnings is misinformation. So we are all clear, there has been no changes to earnings and nothing has been restated.
We made changes to our future revenue/expenses, our budget. Like any budget, its a best guess, and as we learn more and get more clarity on our pipeline, timelines and delivery dates will adjust accordingly. Nothing uncommon about this in running a business.
So are you saying that restating projected earnings is somehow different than adjusting budgeted earnings?
Sounds like two very similar ducks swimming around the same pond to me?!
OPALCO has made certain projections as to the timing of a positive revenue stream from Rock Island to the parent company. That is, return of the investment made by the members to buy and operate the internet subsidiary. That has now apparently changed/restated. Somehow this whole issue seems to be a slow speed train wreck.
I am wondering at what time, 2017, 2018, or later, does the OPALCO Board pull the plug. If the original projections that Rock Island will provide a positive revenue stream to OPALCO do not materialize, WHEN does the Board conclude that the plan did not work. This venture cannot be open-ended. As a member, I might be willing to support the effort to continue IF the Board will set a decision date for concluding whether or not that effort has been successful.
My biggest concern for a bit player in broadband like OPALCO has always been the potential for it making major, long-term, infrastructure investments…likely funded on borrowed money…based on long-term revenue projections, and having that investment become obsolete overnight due to new technology. Witness Google’s recent announcement of “new cheaper ultra-highspeed wireless technology” which will lower costs significantly.
https://www.usatoday.com/story/tech/news/2016/06/08/google-gets-serious-beaming-wireless-broadband-into-homes/85627086/
How nimble can a rural electric cooperative be…one which has operated as a monopoly throughout its lifetime…in the hi tech and highly competitive marketplace for broadband?
We may have front row seats to see just how that will turn out.
Fred, my understanding is that Google Fiber is targeting urban environments for the rollout, and is cherrypicking neighborhoods within cities to only target higher demand locations. Rural communities like Orcas don’t seem to fit this profile. See https://www.wsj.com/articles/google-fails-to-close-kansas-citys-digital-divide-1412276753
I don’t think technological obsolescence is as big risk to Opalco’s customers as is overly optimistic business projections leading to cost overruns that OPalco claws back through future rate increases.
Paula…you write:
“my understanding is that Google Fiber is targeting urban environments for the rollout, and is cherrypicking neighborhoods within cities to only target higher demand locations. Rural communities like Orcas don’t seem to fit this profile.”
I’m aware of the Google Fiber prototyping back in Kansas two years ago…the article I referenced mentions new wireless technologies applicable to “lower density settings” which I inferred will be applicable to Orcas…I may be wrong.
Here’s the thing; if more than not even 1/4 of member/stakeholders educated themselves on the candidates’ platforms, and voted in the annual elections, and if other candidates than the incumbents won, we might have hope of having a different conversation. I am appalled at the apathy of OPALCO members – only 23% voted in an election this important.
Fred Klein brings up a valid point and he’s not the only one who wondered how quickly this technology, costing millions of dollars – will become obsolete. Someone is going to want to corner rural markets… Then what?
Recently, I saw an OPALCO truck in Eastsound that said,” Rock Island and OPALCO COMPANY”. Nothing ABOUT “COOP”. What does this mean? Is OPALCO now a “company” and not a “COOP”?
Spirit Eagle
Fred, we are deploying what Google is suggesting. We are well ahead of that curve.
Justin, OPALCO is a nonprofit. And I agree that education is the best investment that can be made. Education is usually funded directly or indirectly (grants and tax exemption) by government. Even though OPALCO is a nonprofit, it is directly comparable to a profit organization. Its income is tax exempt because it does not pay its investors stock dividends. Instead it returns its members’ money as refunds of rates they’ve paid. That said, all non-governmental schools and nonprofits have to run like a business or they can’t pay salaries and overhead. This cannot always be forecast any better for nonprofits than for profits.