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.