Thursday, May 31, 2012

LUS Fiber Declares "Financial Milestone"

LUS Fiber called a press conference this morning to trumpet the fact that the startup business is now cash-flow positive, calling it "a financial milestone" and pulling in the city-parish's auditor, LCG's CFO, Lorrie Toups, and Terry Huval, utility head to make the case.

The Gist
The gist of the story is pretty straightforward: LUS Fiber has, since February of this year, been bringing in more in revenue than it spends each month. That's what's colloquially known as "successful." The utility is no longer dipping into reserves to pay for day-to-day expenses. All current purchases, salaries, and "notes" are being paid for out of current revenue. The caveat is that this isn't, not exactly, "profitable." Any well-run business has to also save some money—for replacing worn-out equipment, for expanding the business, for setting aside cash to pay for unexpected 'disasters," and finally for handing over profit to the owners...this last bit gives "profitability" its name and pleasant implications. LUS Fiber is now starting to put money away—just not yet enough to completely cover depreciation and planned upgrades. The kicker here is that LUS Fiber is not being run to generate a profit...so it won't ever have to be profitable in the sense that many private companies need to. A good utility makes enough money to set aside reserves for planned upgrades and the inevitable, especially in hurricane alley, rainy day. But it does not have to send any of its hard-earned income out of the city to satisfy far-away investors—instead LUS Fiber as a community-owned asset can return value to its citizen-owner-customers by keeping the service reliable, robust and cheap. Lafayette's citizen-owner-customers take home their profit in the form of more reliable, faster, and cheaper services.

The Longer Story
Huval started the press conference with a small bit of context—pitching LUS Fiber as a utility, not the sort of government that consumes money. Instead LUS Fiber is supposed to pay its own way from the fees that user hand over to pay for the services it provides. This is the way that the current electric and water services work.

Financial Highlights: click to enlarge
The big announcement was that the fiber division is currently able to pay its mortgages, all daily expenses and begin to set some money aside. By the end of the fiscal year, according to Huval, LUS Fiber will have about a million dollars in cash on hand. By 2014-2015 LUS Fiber will be fully profitable, able to completely fund any upgrades and replacements from its reserves.

Huval, and later Toups, used a car analogy to point out that, though depreciation sits on the books looking like a loss no outflow of actual cash is involved. In Huval's version a $25,000 car depreciated $3,000 dollars in value the moment you rolled if off the lot. An unsympathetic commenter could say that you've just lost $3,000 dollars. But that big initial bump is a book keeper adjusting for what you could get if you sold it on the open market—not what its value is for getting the job done. That value hasn't "depreciated" at all. Yes, you have to save up to buy an new car down the road. But only the accountant thinks you've lost money today.

The conversation then got pretty number-heavy with charts and graphs and numbers embedded in an orange-themed power point presentation. You can take a look for yourself...It shows actual numbers and downstream projections that support the basic tale: LUS Fiber is making enough money to be above water and need do nothing but continue to add customers at the current rate to be stable indefinitely.

Huval closed with a more general appeal to the public that they consider LUS Fiber a community resource, and now that it is clearly on the road to success they should get out and support it.

Lorrie Toups, LCG CFO, basically reiterated the story Huval told, fleshing it out with additional numbers and projections and a more extended variant of the car metaphor that focused on a taxi driver's business. She wanted to reassure the public that her office had staff that monitored he fiber business on a daily basis; the fiber division does not go unsupervised.

Toups gave way to CPA Kolder, the same accountant whose intemperate "$45,000 a day loss" remark lead to a similarly intemperate Advertiser headline. That number, unsurprisingly, was not mentioned today; instead Kolder emphasized that he agreed with Toups that the new utility was still in start-up mode, was on track to full profitability and emphasized that he'd said as much in his presentation to the council. Kolder pretty clearly overstepped best practice when he sensationalized LUS Fibers anticipated losses in a way that embarrassed the client and overshadowed the more substantial critiques he had a responsibility to make. Those critiques focused on Lafayette Consolidated Government's declining reserves and the need to either increase revenues or cut services. What was different today was that Kolder emphasized a point both Huval and Toups had earlier mentioned: that profit from the current LUS utilities fund a substantial portion of LCG's general fund. LUS Fiber will, if it continues on its current path, grow enough to contribute substantially to funding local government—and keeping Lafayette's tax burden relatively small. LUS Fiber is a part of the answer to LCG's current fiscal predicament; not a cause of it. 

The Takeaway

The intended takeaway was clearly that LUS Fiber is on the predicted path; it has turned a major corner and should be considered a tentative success by the community—one with huge downstream potential.

4 comments:

Anonymous said...

Really , depreciation and amortization don't count? You're lack of understanding of business finances is astounding.. Please as a service to your readers please get professional advice.

B Faul said...

Dear confused anonymous person:

I can't find where in this writeup John said that amortization "doesn't count". The point he did make was that depreciation of equipment is only an accounting number as long as the equipment is performing its business function rather than being liquidated for cash. Real world example for confused anonymous people: the actual resale value of a photographer's camera is irrelevant if the photographer is using the camera to take pictures for his business rather than attempting to sell it for cash. Surely someone with an "astounding" grasp of business finance such as yourself can see why this is true?

John said...

Note: As you will have noted in the text above the comments entry box this site has a real name policy. Further anonymous comments will be deleted.

Substance: What Faul said.

Remarks: Depreciation is real, equipment has to be replaced. In an accountants' debate I'd be will to take the side that depreciation on a GPON system like the one that LUS has built should be adjusted for the raw fact that the parts that will need replacing in the next 40 years are only going to get cheaper and faster. Replacement electronics for the system would be cheaper and more capable to install today than they were when installed. We'll never replace them because they "wear out" but because we upgrade. Same as for most electronics in your home. The most costly part of the system is the massive installation of the fiber itself — depreciation on that is relatively hard to understand. It simply doesn't wear out any more than copper does, even less—no oxidation. Maintenance costs are another thing...but that's an operating cost.

Th other "paper cost" that is included in getting to a scary "cost" number is this nonsense about imputed taxes. This is money that LUS figures up based on a law originally written by ALEC, and sponsored at the lege by AT&T, and Cox that imputes the taxes LUS Fiber would owe (if it paid taxes) and forces it to hand that amount over to the parent LUS utilities so that it appears as a paper loss on LUS Fiber's accounting. NOT REAL. Why you ask? Why so Louisiana's PSC can use it to regulate the price of LUS Fiber's offering—putting a limit on how cheap LUS Fiber can go. (For ALL other entities regulated by the PSC they set an UPPER limit on how high a price a corporation can charge. Go figure.) The imputed tax "cost" line is simply entirely fake. The money remains in the utility; it's just that the entity that made the money loses direct access to its own cash.

I've run a business and kept books. That's a fair part of why I hate the sort of accounting to which LUS fiber is subject.

Kendra Chamberlain said...

Hey Guys,
My name is Kendra Chamberlain, and I am a journalist for The Online Reporter. I am working on a story about LUS taking on heavy weights AT&T and Cox (as part of a small and growing trend across the country), and I would love to use you guys as a source for the story. Can someone please give me a ring at (225) 223 3605 or email me at KChamberlain976@gmail.com or Kendra@OnlineReporter.com? I'm looking to line up some interview today for over the weekend or first thing Monday.