Mayor seems confused about CityWest dividends

General Forums Prince Rupert Forum
19

Gates became the richest man in the world (for a while; he’s been overtaken) by owning shares in a publically trading company whose shares substantially increased in value for several years.

The value of an equity investment can be reflected in the market value of the shares and/or the amount of dividends paid on those shares. A good investment can have high growth in share value but pay no dividends, or a static or low growth share value but pay good dividends, or provide an acceptable combinatinon of those forms of return.

CityWest paid good dividends from 2006 to 2009, but since then has not paid dividends other than $500,000 in 2012 (apparently; that has not been confirmed). It is not expected to pay dividends for at least “two or three years”, according to the Mayor. The shares are not publically trading, so the market value is uncertain; although a 40% decline in the value of the City’s total investment between 2006 and 2011 does not bode well.

For a lender, the value of an investment is measured by the amount of interest paid on the loan, a record of repaying principal through agreed periodic payments, or the likelihood of the remaining principal being repaid at the end of the term. CityWest pays no interest, has only made one principal repayment (in 2011), and $20 million in debt was forgiven because from an audit perspective there was no realistic prospect that it would ever be repaid.

Whichever way you slice it or dice it, CityWest has not been a good investment, either from an equity investor or a lender perspective, for a few years.

[quote=“Dex”]
Are you really judging the performance of a company from a Consolidated Statement of Financial Position, a simple balance sheet ?[/quote]

From the Consolidated Statements and the other components of the financial statements. That is what the statements are for. And that’s why municipal governments are legally required to audit and disclose their financial statements, so that the public is properly informed, among other things, about any investment activities by the elected council involving public funds.

If you don’t want to rely on financial statements, how do you base your decisions about whether elected officials are managing public funds properly?

[quote=“Dex”]
My intention was to be simplistic and not get into accounting principles with my example. My speculation as to the publicly stated reasons may or may not be in error but the result of the $20 million forgiveness is that Citywest was able to form partnerships and grow its business and further expand to other markets. It is very unlikely this would have been possible otherwise, don’t you agree?[/quote]

I have no basis for agreeing with that. There may have been more activity and market expansion, but that is not evidence that the value of the business grew. Again, the numbers go the other way. After the $20 million loan forgiveness the value of the City’s investment further declined, from $31,401,399 in 2008 to $28,036,763 in 2011.

[quote=“Dex”]
Citywest has expanded its operation laying a fibre optic backbone from Prince Rupert to Prince George (450 miles 722 kilometers). It has grown from a telephone company in 2005 to what is today Citywest GoC, expanding in other markets such as Kitimat, Terrace/Thornhill, Houston, Smithers/Telkwa, Stewart, and Hazelton. Upgraded its cable networks in local markets. Improved services such as 24/7 hour call support, Video on demand, more HD channels,fast unlimited internet. I am starting to sound like a Citywest salesman so I will stop here, but it would be disingenuous to say Citywest hasn’t seen significant growth and a future market potential.

One thing I am impressed with though, is your ability to judge the performance of a company from a simple balance sheet.[/quote]

Again, activity does not necessarily translate into ‘significant growth’ in the value of an investment and ‘future market potential’. There can be ‘a race to the bottom’ where businesses dig themselves into deeper holes.

We will have to see what happens. Public sector accounting rules require that the City’s 2012 audited financial statement (which should be provided in a few weeks) show the bare bones of CityWest’s financial performance.

For the present, things are not looking good. In 2006 the expectation was that CityWest would pay $2,000,000 a year in dividends. That expectation was revised to $1,000,000 a year. This year the council is disappointed that the City will not be receiving a $500,000 dividend, and no one can say when dividends will be paid again. In the absence of a dividend (or loan repayment) this year the council is having to consider tax increases, service cutbacks and staff layoffs. Where’s the good news story in that?

As for the balance sheet and the other parts of a financial statement, they’re not “simple” documents, but they are legally required to better ensure transparency, because without that information all that we are getting may be just a bunch of talk.

20

So we are all in agreement then, the lack of dividends is in no way an indicator of the share value and/or a measure of any benefit to the shareholder.

Shareholder loans to corporations with reduced interest or interest free is common. It is also common for shareholders to pass assets to corporations, either through loan forgiveness or many other ways. Short of seeing the full financials it is difficult to quantify the performance of these measures.

[quote=“BTravenn”]

I can judge the performance of the City’s financial state easier because they are using a different accounting model, Fund accounting, which better focuses on accountability and fiscal responsibility, not profit.

[quote=“BTravenn”]

[quote=“Dex”]
My intention was to be simplistic and not get into accounting principles with my example. My speculation as to the publicly stated reasons may or may not be in error but the result of the $20 million forgiveness is that Citywest was able to form partnerships and grow its business and further expand to other markets. It is very unlikely this would have been possible otherwise, don’t you agree?[/quote]

I have no basis for agreeing with that. There may have been more activity and market expansion, but that is not evidence that the value of the business grew. Again, the numbers go the other way. After the $20 million loan forgiveness the value of the City’s investment further declined, from $31,401,399 in 2008 to $28,036,763 in 2011.

[quote=“Dex”]
Citywest has expanded its operation laying a fibre optic backbone from Prince Rupert to Prince George (450 miles 722 kilometers). It has grown from a telephone company in 2005 to what is today Citywest GoC, expanding in other markets such as Kitimat, Terrace/Thornhill, Houston, Smithers/Telkwa, Stewart, and Hazelton. Upgraded its cable networks in local markets. Improved services such as 24/7 hour call support, Video on demand, more HD channels,fast unlimited internet. I am starting to sound like a Citywest salesman so I will stop here, but it would be disingenuous to say Citywest hasn’t seen significant growth and a future market potential.

One thing I am impressed with though, is your ability to judge the performance of a company from a simple balance sheet.[/quote]

Again, activity does not necessarily translate into ‘significant growth’ in the value of an investment and ‘future market potential’. There can be ‘a race to the bottom’ where businesses dig themselves into deeper holes.

We will have to see what happens. Public sector accounting rules require that the City’s 2012 audited financial statement (which should be provided in a few weeks) show the bare bones of CityWest’s financial performance.

For the present, things are not looking good. In 2006 the expectation was that CityWest would pay $2,000,000 a year in dividends. That expectation was revised to $1,000,000 a year. This year the council is disappointed that the City will not be receiving a $500,000 dividend, and no one can say when dividends will be paid again. In the absence of a dividend (or loan repayment) this year the council is having to consider tax increases, service cutbacks and staff layoffs. Where’s the good news story in that?

As for the balance sheet and the other parts of a financial statement, they’re not “simple” documents, but they are legally required to better ensure transparency, because without that information all that we are getting may be just a bunch of talk.[/quote]

My original post on this subject was to challenge the belief that was going around that we were funding Citywest, and also with the impression the City was out 20 million dollars and lost interest income. These practices are common with shareholders and corporations for benefit. No one here can quantify these practices without more financial information so one cannot say with authority “that the shareholder’s $20 million revaluation and interest reduction for its company has not resulted in a net benefit to the shareholder”. Short of that, maybe our approach and language to our concerns should be modified.

I will say this though, this in no way attempts to excuse the current state of the city. But would any of the recent anger against Citywest exist if the Port’s property wasn’t reassessed and City Council wasn’t “shocked” about the lack of loan payment/dividend.

21

[quote=“Dex”]
So we are all in agreement then, the lack of dividends is in no way an indicator of the share value and/or a measure of any benefit to the shareholder.[/quote]

I don’t know why you draw that conclusion. Dividends are an indicator of share value (eg blue chip stocks usually command high prices because they pay steady dividends) and dividends are also a measure of benefits to the shareholder.

If the City had invested in Microsoft (to borrow your Bill Gates example) the lack of dividends would not have been a problem because Microsoft is a publically trading company and its shares have appreciated substantially in value. Rather than receiving dividends, the City could have sold some shares to receive a return.

Unfortunately, the City did not invest in Microsoft; it invested in CityWest, whose shares do not trade on the stock market and are not easy to sell, and whose asset value has been declining. If the City does not receive dividends (or interest on shareholder loans) there is no benefit to the shareholder.

[quote=“Dex”]
Shareholder loans to corporations with reduced interest or interest free are common. It is also common for shareholders to pass assets to corporations, either through loan forgiveness or many other ways. Short of seeing the full financials it is difficult to quantify the performance of these measures.[/quote]

Shareholder loans at reduced interest or interest free are not uncommon, especially in Ma and Pa businesses where the shareholders also run the business. The problem with interest free loans is that they tend to be forgotten. In effect, there is a hidden subsidy to the business. That may be fine when dealing with a private business, but not when public funds are at stake and where transparency is important.

Posing ‘what if’ questions about how much the City would make if interest was charged helps to measure the value of the return on the City’s investment. The council was shocked that CityWest will not be paying a $500,000 dividend this year, but that is not even equivalent to interest at prime (currently 3%) on its $21.7 million loan to CityWest. In contrast, if the City was receiving a $1 million a year in dividends it would be making equivalent to prime + 1 on its’ debt and a return on the value of its’ equity. When the City is receiving neither interest on the debt nor dividends on its’ equity, that is not a good situation.

There is also an ‘opportunity cost’ to interest free loans. As we now know, the City will not be receiving dividends this year. It also did not receive dividends in 2010 and 2011, and it is not expected to receive dividends for two or three years. The City would be much better off if it had invested the $21.7 million loan to CityWest, and its $6.3 million in equity, in interest bearing securities authorized under section 183 of the Community Charter.

As for assets being passed to corporations by forgiving debts, that is not why assets are written off. Municipal finances have to be audited and auditors are required to ensure that the statements fairly present the financial position of the public body. The $20 million was written off (‘forgiven’) because there was no longer a reasonable expectation that those funds would ever be repaid.

[quote=“Dex”]
I can judge the performance of the City’s financial state easier because they are using a different accounting model, Fund accounting, which better focuses on accountability and fiscal responsibility, not profit.[/quote]

Fund accounting is not an “easier” way of judging financial performance, it is the accounting method that applies to government bodies (and other non-profit entities) in this country. The City’s financial statements as prepared using fund accounting shows that the value of the City’s investment has declined significantly over the years.

[quote=“Dex”]
My original post on this subject was to challenge the belief that was going around that we were funding Citywest, and also with the impression the City was out 20 million dollars and lost interest income. These practices are common with shareholders and corporations for benefit. No one here can quantify these practices without more financial information so one cannot say with authority “that the shareholder’s $20 million revaluation and interest reduction for its company has not resulted in a net benefit to the shareholder”. Short of that, maybe our approach and language to our concerns should be modified.[/quote]

On some of these points we are not far apart. I have not said that the City funds CityWest by, for instance, writing them cheques. I also do not see the Monarch purchase as necessarily having been a problem. The purchase was financed with arms-length debt and the City does not appear to be on the hook for it. Perhaps revenues from cable services are what is propping up CityWest. Or maybe that is where CityWest is doing poorly such that it has missed dividend payments in 2010, 2011 and this year and will continue to do so into an uncertain future.

I agree that more information is needed from CityWest so that we can make sense of why their performance has been so dismal in recent years. Hopefully the company will present its’ audited financial statements at a public council meeting as its’ articles require.

As for the $20 million dollar write down, at one time the auditor was of the opinion that CityWest was worth more than it is currently valued at. Whether the company was accurately valued in the first place may be open to question, but there can be no doubt that in the auditor’s opinion the value of the City’s investment has declined. That should give cause for concern.

If the $20 million write down in 2008 was done to provide CityWest with a benefit, as you suggest, that has not worked out. The value of the investment subsequently declined from $33.9 million in 2009 to $28 million in 2011; almost an 18% decline in only two years. That’s not good news.

[quote=“Dex”]
I will say this though, this in no way attempts to excuse the current state of the city. But would any of the recent anger against Citywest exist if the Port’s property wasn’t reassessed and City Council wasn’t “shocked” about the lack of loan payment/dividend.[/quote]

I would hope so. The City has not been doing well on its’ investment in CityWest. The City would be better off if it had invested in low risk, interest-bearing securities.

22

[quote=“Dex”]
Citywest has expanded its operation laying a fibre optic backbone from Prince Rupert to Prince George (450 miles 722 kilometers). It has grown from a telephone company in 2005 to what is today Citywest GoC, expanding in other markets such as Kitimat, Terrace/Thornhill, Houston, Smithers/Telkwa, Stewart, and Hazelton. Upgraded its cable networks in local markets. Improved services such as 24/7 hour call support, Video on demand, more HD channels,fast unlimited internet. I am starting to sound like a Citywest salesman so I will stop here, but it would be disingenuous to say Citywest hasn’t seen significant growth and a future market potential.

One thing I am impressed with though, is your ability to judge the performance of a company from a simple balance sheet. :wink: :stuck_out_tongue:[/quote]

It’s growing and yet it’s worth about half of what it was worth 7 years ago? That’s a great measure of the ‘worth’ of a company.

Citywest is performing so well that the City has to raise taxes.

The fact that it is now competing with Telus, Bell, Rogers doesn’t mean it’s doing better. In fact, I’d say that there is much more risk to the City’s investment than ever.

Can you actually buy a modern mobile phone at Citywest yet?

BTW – Microsoft has been paying dividends for a decade or so. However, if Bill Gates had owned Citywest, he would have acted like a real owner. He would have held the company accountable for their seemingly unstoppable slide in value. Or he would have sold it at the first hint of trouble. Going from a virtual monopoly in Wireless to losing the market (via “we asked around and nobody wants it” strategy) would have been the first hint for an owner, if you ask me.

The company is worth about the same price as they paid for Monarch. So, roughly 40-50% contraction in value is “significant growth.” Essentially surrendering a monopoly and getting their butts kicked in Wireless is “making partnerships possible.”

So an honest question, Dex: Citywest’s value has been declining for 7 or 8 years now. At what point do you think that we should all pay attention and think there’s a problem? When it’s worth $20 million (not that far off), $15 million? $5 million? Or when it’s worth less than what it owes? Where is the line, in your opinion, that we should sound an alarm?

The City used to make $2 million per year from Citywest. Then $1 million per year. Then $500,000. Now it actually costs the City, because of interest-free loans, to have Citywest. How much would you be willing to pour into Citywest before you would sound the alarm? What’s your number? If it costs the City $2 million a year, would you be ok with that?

23

Bill Gates became rich not from Dividends but from the shares of his company that he owned before it went public. he owned over 600 million shares in the company from day one of the public offerings, do the math that is how he became rich, and dividends did start about 10 years ago, not because of all the profits that Microsoft was making, most tech companies do not pay dividends, but because the value of the shares were dropping so shareholders started to demand dividends so Microsoft started paying a modest dividend.

24

[quote=“BTravenn”]The Mayor appears to be confused when he says that CityWest management, not the council, decides whether dividends will be paid to the City, as reported in the Northern View’s print edition yesterday.

Under the page 2 header “No recourse for the City” he is quoted as saying: “City West is a separate legal entity with its own board of directors and own management. The City of Prince Rupert can request a dividend, but really it’s up to the management and board of directors whether or not City West uses that money for other things or whether they allow a dividend”…[/quote]

BTravenn, pls correct me if I am wrong, did the City Council appoint Gord Howie to sit as chair on the Citywest Board? If this is the case, it sounds like a communication break down to reporting to council. If there is trimming to do, perhaps our new General Manager’s wages would not increase close to $10,000/yr and to be just under $155,000 in the 2011 budget. Correct me if I am wrong again, but the GM sitting as chair for Citywest and board of directors receive an honourium of some sort?

25

[quote=“Bettyboop86”]
BTravenn, pls correct me if I am wrong, did the City Council appoint Gord Howie to sit as chair on the Citywest Board? If this is the case, it sounds like a communication break down to reporting to council. If there is trimming to do, perhaps our new General Manager’s wages would not increase close to $10,000/yr and to be just under $155,000 in the 2011 budget. Correct me if I am wrong again, but the GM sitting as chair for Citywest and board of directors receive an honourium of some sort?[/quote]

Yes, Mr Howie in his capacity as CAO was appointed to the CityWest board as a director and he was also chair until Jack Payne became chair.

As we know the council was ‘shocked’ to learn that CityWest will not pay a dividend this year and (according to a more recent report from Mr Rodin) in 2014. I think though that the shock might have resulted from not replacing Mr Howie after he left at the end of January. The articles provide that a senior management employee of the City will be on the board, but for whatever reason the council did not appoint Mr Rodin in his capacity as CFO and A/CAO to sit on the CityWest board.

That strikes me as a mistake or oversight. When both CityWest and the City are preparing their annual financial statements and the City is also preparing its’ annual budget, having a management employee on the board - even if only temporarily until a new CAO is hired - would have ensured better information flow. The council would have been less likely to be blind sided by CityWest’s announcement that it does not have enough money to pay a dividend.

Perhaps the council was not aware or had forgotten that they have the power to appoint a senior management employee to the board at any time. It simply takes a resolution at a council meeting.

They also appear to have completely forgotten that under the company’s articles they and not the CityWest board declare and authorize dividends, which is one more reason to ensure that a senior management employee of the City is appointed to the CityWest board, even if only temporarily.

As for director remuneration, at their July 10, 2006 meeting the council approved remuneration of $600/month plus up to $200/month in services from CityWest < princerupert.ca/images/edito … July10.pdf >.

From what I recall, the CityWest directors remuneration paid to the CAO is reported in the City’s annual Statement of Financial Information, which for some reason the City does not post on their web site with the rest of their financial reports. The Financial Information Act requires that it be presented to the public, and it is, but only in the agenda package for the meeting where the report is received by the council.

26

The wife and I challenged each other to find a solution to this apparent conflict, Wednesday, with the Mayor and Citywest dividends. Fifteen minutes later it appeared the wife found the answer before me; I’m makin tea for a week :frowning: I believe the answer is …The bank needs to ok dividends. I’ll leave it to the reader to find the evidence… a challenge!!! :stuck_out_tongue:

27

The reason why CityWest does not pay dividends is because at some point a decision was made to use any available cash to make principal repayments on the debt to the City rather than pay dividends. CityWest has not paid a dividend since 2009. In 2011 it paid back $1,000,000 in debt and another $500,000 in 2012.

At that rate of repayment the debt would be entirely repaid (without interest) by 2043. There will be some lean years like this year and next, so it will take longer than that for all of the debt to be repaid - perhaps by 2050s. Then the City should be earning a good return on its’ equity investment in the business.

It’s best to move beyond thinking that CityWest pays “dividends”. CityWest repays debt, when it can. The City no longer makes a return on its’ investment, but it is slowly getting the loan portion of its’ investment back.

Here are background details on CityWest’s financial performance in 2012, which may assist your research and relieve you of tea making duties for a while:

Edit: In his detailed report to council laying out three budget options, Mr Rodin does not refer to CityWest “dividends”. He talks about when “payments” may be received. The lexicon needs to change.

28

[quote=“BTravenn”]

The reason why CityWest does not pay dividends is because at some point a decision was made to use any available cash to make principal repayments on the debt to the City rather than pay dividends. CityWest has not paid a dividend since 2009. In 2011 it paid back $1,000,000 in debt and another $500,000 in 2012.

At that rate of repayment the debt would be entirely repaid (without interest) by 2043. There will be some lean years like this year and next, so it will take longer than that for all of the debt to be repaid - perhaps by 2050s. Then the City should be earning a good return on its’ equity investment in the business.

It’s best to move beyond thinking that CityWest pays “dividends”. CityWest repays debt, when it can. The City no longer makes a return on its’ investment, but it is slowly getting the loan portion of its’ investment back.

Here are background details on CityWest’s financial performance in 2012, which may assist your research and relieve you of tea making duties for a while:

Edit: In his detailed report to council laying out three budget options, Mr Rodin does not refer to CityWest “dividends”. He talks about when “payments” may be received. The lexicon needs to change.[/quote]

For starters my post you are responding to was more in line with the original subject of this thread, that council has final authority to approve/demand dividends from Citywest. I am suggesting the bank also needs to approve any dividend payments. The evidence to support this is out there.

Paying dividends decreases shareholder equity, loan payments increase shareholder equity. I would speculate that during the long recovery periods from the capital expenditures used for infrastructure upgrades and fibre backbone creation, making loan payments to shareholder creditors vs dividends to shareholders would be a wiser choice in light of all the balance sheet investor critics we have witnessed as of late. :stuck_out_tongue:

I believe Citywest and the City is in desperate need of better public relations management though.

29

banks have no say in dividend payments, even if they hold the debt. the directors are the ones that decide if a dividend gets paid or not. yes Citywest is owned by the city, but that makes no difference, I know there has been posted the charter of Citywest when it was incorporated giving the city the right to ask for a dividend, but that is like the biggest shareholder of lets say, Coca Cola, demanding a dividend. they can do that but it is ultimately up to the directors to approve it. of the 6 board of directors how many are appointed by the city? the reason I ask this is because the only influence the city would have is with their appointments. If the city appoints all the board members then yes they can influence them to pay dividends but if the directors vote no then they don’t have too.

30

If you use capital letters in your sentences it will enhance the impact of your point of view. This is a suggestion.

31

I agree with you about the banks having no say on dividend payments, but actually the City as shareholder, not the board, decides whether CityWest will pay dividends and how much.

Boards usually have the power to authorize dividends, but Section 137 of the Business Corporations Act allows companies to structure their articles of incorporation so that powers that would otherwise be exercised by the board can be transferred to other persons (which can include the shareholders).

bclaws.ca/EPLibraries/bclaws … section137

Section 21.2 of CityWest’s articles say that the company will “from time to time declare and authorize payment of such dividends that, pursuant to section 137 of the Business Corporations Act, the shareholders may determine by an ordinary resolution.” The “shareholders” refers to the City as represented by the Mayor and council, and they have the power to “declare and authorize” the dividend; not just ask for a dividend.

The council approved new articles of incorporation in 2009, so those that were in office at that time should know what they approved. I recall the Mayor specifically commenting that dividends would be decided by the council as the shareholder rather than by the board. That was one of his first initiatives after he was re-elected. The Mayor and council may have forgotten that decision, though, which is why I suggest that they may be confused.

32

You had better tell Citywest this information. Jack Mussallem, Corinna Morhart, Anna Ashley, Gina Garon, Christo Holmes, Nelson Kinney, James Kirk, Conrad Lewis, Gabriel McLean, Jennifer Rice, Farley Stewart, Joy Thorkelson, Rob Vallee were all given evidence by Citytel to support this fact.

33

[quote=“Dex”]

You had better tell Citywest this information. Jack Mussallem, Corinna Morhart, Anna Ashley, Gina Garon, Christo Holmes, Nelson Kinney, James Kirk, Conrad Lewis, Gabriel McLean, Jennifer Rice, Farley Stewart, Joy Thorkelson, Rob Vallee were all given evidence by Citytel to support this fact.[/quote]

That’s interesting. For the banks to take that position, they must have viewed CityWest as being very hight risk, perhaps in view of the company’s $3.9 million loss in 2009. Or perhaps CityWest was in default. Presumably if dividends had been paid the lenders would have pulled CityWest’s financing.

34

Could also be a condition of the Partnering Agreement between Citywest and the City.

35

Anyone else getting sucky internet and cable outages on a regular basis for the last week?

36

yep was having major ping spikes playing BF3, anything within BC was good speed according to speedtest.org but going to chicago servers very very slow speeds

37

CityWest has not paid a dividend since 2009, and it has not repaid any principal on its’ interest-free debt to the City since 2011. When they might resume paying anything to the City is unknown. But they are now looking at expanding their services in Houston.

< northcoastreview.blogspot.ca/201 … pects.html >.

What will that cost and why are they considering that investment? Apparently “to provide an alternative to Telus in the area”. Why is that important? To provide a return for the City to keep taxes down and help pay for services? Well, the company has not been doing that for quite a while and no one seems able to project when they will provide a return on the City’s substantial investment in the telecom.

Back in the day when CityTel was a City department providing landline service there was a clear business model that made sense. City residents were a captive market, but service was generally superior and the profits of a local monopoly were reinvested in the community.

But what is the business model today? Over $21 million in City funds tied up with no return while a group of salaried managers enjoy whatever satisfaction comes from going head-to-head with one of the Big Three of the telecom business? If CityWest was a private company, I doubt that shareholders would put up with that situation for very long.