Investment Profile: Income & Expenses

All environmental/social/political issues aside, the proposed PNW coal export terminals come with a price tag, and a hefty one at that. Investment for the proposed port near Longview, WA, by Millennium Bulk Terminals, totals $643 million. Three projects proposed along the Columbia River near Portland represent around $1 billion in privateinvestment. That is a lot of money building a foundation for economic development in the Pacific Northwest economy.

This week we have been focusing on understanding financial statements: the messengers illustrating financial health of an organization. It is important to me that if a company is pouring millions in investment into a new venture (especially one in my region), that they are financially stable so they will not be walking away bankrupt 6 months or 2 years into the project. It only seemed fitting to dig up a set of financial statements for some companies proposing the coal terminal investment.

Millennium Bulk Terminals, the company referenced above, is an entity owned 62 percent by Ambre Energy’s U.S. division, and 38 percent by St. Louis-based coal firm Arch Coal Inc. Their plan would invest roughly $600 million to turn a former Alcoa smelter near Longview, Washington, into a private coal export terminal with initial capacity of 25 million metric tons. The project is projected to create 300 full-time jobs and another 2,750 in construction and other indirect positions over two years. (Sustainable BusinessOregon, 2012)

I wanted to gain insight into the longer term health this investment’s backers, so I investigated Ambre Energy, the majority shareholder of the company. I easily found Ambre’s previous 5 years of annual reports, with the 2011 financial statements carefully included starting on page 55 of the 110 page document. I was most interested in inspecting their income statement, partially since this is the one I am most familiar with, and it would give me insight what direction their expenses and revenues were headed as Ambre continues to invest in the Longview project.

From my initial observations, the company appears to be slipping. Revenues are declining while benefits and other expenses are increasing significantly. However, as I continue sifting  through the pages of financial metrics I different parts of the story unfold. I see that the consolidated statement of cash flows paints a completely different picture comparing 2011 to 2010. Through the annual investing, financing and operating activities, the net cash in hand at the end of the year is significantly higher in 2011 (10,980.040 compared to 2,909,037).

As I work through the statements, I am drawn to lines that I understand: revenue, employee benefit expense, total comprehensive income. Since I recognize these, they make me want to dive in deeper, and further understand what was behind the numbers, and potentially understand why they are so varied between 2010 and 2011. For example, employee benefit expense.

Since revenue decreased 2010 to 2011, but employee benefit increased, I was curious about what contributed to this number. It turns out that the little “19” next to that item connected me exactly to that answer. In the notes (which is FAR longer than the financial statements themselves) I learned that two specific variables had dramatically increased for employees: wages and salaries, and annual leave. To me that says people got paid more and took time off! Sign me up! What would have helped my understanding further would have been information on employee counts etc. so I went back to the annual report. This time I learned some additional items that help my understanding of the financials presented in this report:

“We are proud to announce that in 2011, Ambre Energy transitioned from a development company to an operating company with the acquisition of key assets. In January 2011 the company acquired what is now known as Millennium Bulk Terminals-Longview (MBTL) in Washington State, USA, providing potential access to growing Asia-Pacific markets for US thermal coal. “ (page 8)

 Takeaway: this was a development year rather than a revenue focused year…that gives some perspective on one reason why revenue shrank in 2011.

 

“A number of key specialist appointments were made in 2010-11, to increase the technical competence in mining and geology available in-house in Australia. In the US, there was also a strong focus on expanding the team to secure a skills base to finalize port and mine acquisitions, and prepare for operation. Reflecting the stage of Ambre Energy’s growth, a significant investment was made in 2010-11 to buy-in the specialist skills required in the short term, to supplement existing resources and to take proposed projects to the next development stage.” (page 43)

 

Takeaway: investment in people was a high priority as well. This is reflected in the dramatic increase in wages (tied to new hires with specific skills and/or advancement for people with new skills)

My understanding of these financial statements is clearly very elementary. There were significant sections that I did not even bother reading because the words and associated numbers on the page mean nothing to me. At this time, I still don’t have a solid evaluation of Ambre’s financial health, but I have learned that they are taking the time to invest in the future viability of their company through the acquisition of assets (both physical and human capital). This alone leads me to feel slightly less critical of the company’s intentions. I could spend many more hours diving into the financials and annual report and still not see what experienced economics eyes would find. What insights can you share about your impressions of a company based on their financial statements? And how does investigating these companies change or influence your opinion of their role in a complex, controversial issue like the proposed coal terminals?

 

One final note: The first public hearings for the terminal projects, conducted by the Army Corps of Engineers, are set to begin October 27 in Bellingham, at Squailcum High School.

Unpacking the Problem

Over the past three weeks, I have expanded my understanding, interest and working vocabulary hundred-fold as it pertains to economics. Diving into the details of the US (and following global) financial crisis has opened my eyes to the complexity of our current system, and given me more ideas on how to explore my chosen my focus topic of coal exports from the PNW coastline.

My interest in this topic stemmed from personal experience as I introduced in my initial post. My interest stemmed primarily from the social and environmental impacts, but I am gaining more confidence in discussing and understanding the numerous economic drivers and consequences. My expanded knowledge and language is helping me to zero in on the economic factors of this issue, such as financing, market impact and investment.

I am working to step back from my personal connection with these proposed coal export terminals, and rely on the facts to drive my discussion. Does this mean I will lose sight of the passion and interest I bring to the discussion? I sure hope not! I am working to bring clarity to my readers about the issues, and drivers, while sharing my perspective on how economic decisions impact local communities. 

So what is the core issue at stake here: coal. Coal in itself is not an issue. In the ground it is just fine. Doing no hard. Once it is extracted and burned it becomes a problem. How it is extracted and used as an integral part of human development and existence, and the continued exploitation of it as an energy resource is the challenge we are facing. Spiraling out from coal, we have the drivers of how this resource impacts society. As discussed on my economics’ professor, Norm’s blog, coal is ample and cheap. It is therefore a centerpiece of the world’s electricity production. Electricity production from coal requires mining, transportation, processing, and exportation. This is the simplified production and distribution side of the equation, and is the side that the United State is primarily involved with. Coal use of for the creation of electricity has dramatically decreased in the United States over the past decades in favor of cleaner, more efficient fuels.

On the flip side, developing nations, such as China and India, are still heavily dependent on this cheap but dirty source of energy. They are driving demand for more and more coal and their economies and populations require more electricity. Mitigating the environmental impacts of coal through strategies like carboncapture and storage are not a long term solution, and really are not financially feasible on a large scale. Mitigating emitted carbon (from burning coal) does not seem to be the correct approach. As we look through the history of sustainability initiatives and cultural shifts, awareness eventually evolved most problems from reactionary (clean up, like CCS) to preventive strategy, such as emissions limits on cars. Perhaps we should be asking ourselves (as many people are), why are we positioning ourselves to export ever more of this dirty fuel? Where is the preventative/proactive strategy in that? Wouldn’t we all be better off leaving coal in the ground and focusing on cleaner solutions?

Most people are aware that burning coal is not good for the environment. However, this is not the only issue we are grappling with as a country. What is the #1 issue headlining presidential debates? The economy. It is a big issue overshadowing most decisions the general public will make. When coal export industry analysts report that the new coal terminal will generate $2 and $6 billion to the economy, that catches people’s attention. Proponents explain the benefits of “thousands of jobs, millions of dollars in new tax revenue,” which yes, our economy and communities really do need According an Oregon Public Broadcasting poll, 55 percent of respondents in Washington, Oregon and Idaho support expansion of the coal industry because of the economic benefits.

Clearly, people in the PNW are struggling with this choice. We could take the high road and say our communities will not support the exportation of such a dirty fuel, regardless of the jobs it could create. Many groups in these communities are uniting to protest this, much like a demonstration a few weeks back on the exact beach inspiring my story. One of the realistic factors that need to be considered is this intense, high demand for coal. The market for coal is strong overseas, and demand is expanding with every new appliance and house connected to the grid. This significant market will drive coal exporters to export their product. The real question is, will they succeed in achieving this through the proposed PNW terminals. Will the projects more forward, infiltrating communities trading environmental and ethical concerns for profit and jobs, or will those benefits move on to other towns and cities welcoming this opportunity for economic development.