Comments & Questions on the FY’17 Annual Report.
I raise these questions because I think it is important that we all understand the current state of our Corporation, and I was disappointed that the Annual Report presented information in a way that was difficult to understand. But, I also recognize that the sale of GIS has already occurred—there is no going back and changing that.I am running for the Board because I feel it is very important that we now focus on the future. I have not heard a clear plan. The Board needs to set a new path forward from where we are today and work to make a stronger NANA to serve our shareholders in the future. I am committed to serve our shareholders and use my leadership skills to help create a brighter future.
In the beginning of the Annual Report in the letter from the President and Chair they talked about being committed to improving communications and being more transparent with shareholders.
As I read through the FY17 Annual Report I have a lot of questions. I know it can be difficult to present information in a way that satisfies both our legal financial reporting requirements and also communicates in a way people can clearly understand. But I think we really need to ask NANA to work on this. If we do not explain things clearly, our risk is that we as shareholders won’t understand what is going on in the company we own.
It is clear the sale of GIS had a huge impact financially on NANA in FY17. As you read through the Annual Report in several places it references the sale as a major, or the primary reason for significant changes from the past few years to the financial results documented for FY17. However, it is very hard to sort through it all and to keep track of the overall impact of the sale.
If we are interested in being transparent, it seems a very clear summary of the transaction and its impact to NANA could be provided, either within the Annual Report, or as a supplement report, to make sure our shareholders understand and can see the impact of the sale.
As we get ready for our Annual Meeting it would be helpful to have some clarity. I am concerned about Shareholders Equity (the value of each share of stock we own). Page 26 shows it has declined 62% in two years (from $245.10 per share to $91.50 per share). We need to make sure we understand the financial impact of the sale of GIS today, but also what the impact of the sale is for the future. Some examples of questions are:
• Page 25 says that they have restated revenues from previous year financials and Annual Reports, “to be more consistent with the FY 17 presentation.”
• Later, page 28 also talks about “transparency”, then goes on to show the Consolidated Revenues. There has been a huge restatement of revenues! Revenues reported in last years Annual Report were just under $1.5 Billion for FY15 and $1.3 Billion for FY16. This years (FY17) report is showing $1.1 Billion for FY15 and $1.1 Billion for FY16—-this is a decrease of close to $400 Million in FY15 and $200 Million in FY16.
• Apparently because of the sale of GIS (that took place two weeks before the end of the fiscal year), the accounting for GIS is included in “discontinued operations”. This caused them to eliminate the revenues of GIS from this year and previous years. This might be a sound accounting decision, but what would be helpful is if they clearly pointed out that the sale of GIS resulted in a decline in consolidated revenues in the $200 Million plus range for FY15, FY16 and FY17.
• The way it is currently presented with the “restatement” it makes it look like we grew in 2017, when in fact we have shrunk, with the elimination of NANA’s ability to sell services to the Oil and Gas industry.
• Since GIS is no longer NANA’s, we have lost the ability to generate revenues in the future in that industry unless we start or grow another company in the same line of business.
• Page 17 says, “NANA’s business strategy has shifted to a more focused concentration on the Alaska Resource Development Industries”.
• GIS was the company NANA owned that had the greatest amount of business and capability, serving the Alaska Resource Development Industry. Now that NANA no longer owns GIS, how are we going to increase our focus?
• Reading through the report, there are all kinds of reference to the impact of the GIS sale, but the information is not presented in a way that makes the impact clear.
• Page 25 notes Consolidated Assets decreased by $31 million and current assets increased by $135 million. In both places it references GIS.
• Page 26 notes Non-current Assets decreased by $105.5 million; intangible assets decreased by $49 million; and that we recorded a $113.2 million loss from “discontinued operations.” In all places it references GIS.
• Page 27 notes Cash flow increase of $26.5 million, mostly tied to sale of GIS and receipt of $45 million, an $5 million in cash flow from discontinued operations, which is where GIS is included.
• Bottom of Page 27 top of page 28–references Mergers, Acquisitions, Consolidations and Divestitures. The report talks about “winding down” NANA Pacific and NANA Australia, but doesn’t show the financial impact of those closures. Are they consolidated into “Discontinued Operations” as well? It also talks about “the sale of companies within its Oil and Gas sector” in September. It must mean GIS, but doesn’t state this here. One paragraph later there is another reference to being committed to “transparency” — yet the way the information is presented doesn’t seem very transparent. If we are wanting to be more transparent we should be going out of our way to make sure everyone understands what the impact of the sale was, and what the impact of the revenue restatement is.
• On page 32 we finally see at the end of the paragraph on Discontinued Operations, that GIS generates $202 million in revenues in FY17 and $264.9 million in revenues in FY16. That is a large amount of revenues (or services provided to Alaska’s Natural Resource Industry) that will not be able to benefit NANA in the future, since NANA no longer own GIS. This section also says we were operating in an unpredictable environment with “no immediate change foreseen in the immediate future” — everyone else in the industry and across the globe has been predicting an improvement in oil prices, and in fact prices have increased. One year ago the West Texas Crude price was $55 per barrel, and this week the price was $65 per barrel. Higher oil prices means increased investment and increased work for companies in the business of supporting the Natural Resource Sector.
• Page 51 includes a chart that shows the changes in value of Property and Equipment on NANA’s books. You can see the huge decline in value, because of the sale of GIS.
• Page 55 notes that NANA still has $260 million in senior secured notes, which is due in March of 2019. How does NANA plan to retire those notes if it has shrunk its business base. The proceeds of the sale of GIS were too low to retire the debt that was taken out to buy the company —this does not make sense!
• It also would be helpful to better understand NANA’s investment policy for its marketable securities portfolio. On the bottom page of 52, it appears that only $500,000 in earnings was generated on our $32 million portfolio. In a year when the US financial markets were averaging 20% to 25% returns, it seems like a $500,000 return is low.
So, sprinkled throughout the Annual Report there is reference to the sale of GIS as the basis for the financial changes, but it is very difficult to track and to truly understand the impact. If we are interested in transparency, we should be better explaining how NANA was impacted by the decision to sell GIS.
Most of NANA’s first businesses were supporting Oil and Gas development on Alaska’s North Slope. There have been many years when work was slow, but also, there were many years when our businesses that served the Oil Sector supported us and employed many shareholders. It may be that NANA now is uncomfortable with the price swings in the Oil and Gas industry and is uncomfortable with riding through the tough times when prices fall and customers slow down their work. That is understandable — different people have different risk profiles — but the question for the future is, what are we going todo as a business to generate income if we are choosing to not be in the Oil and Gas Industry support business? We’ve also sold the hotels, so we aren’t going to be in the hospitality business either in FY 18 and beyond.
The Annual Report talks about focusing on Natural Resources in our Region — but it will take a very long time to develop resources such as the Ambler Mining District or the natural gas that we have been encouraging exploration for. There will be some work for some of our companies like Tuuq Drilling and NMS during the exploration phase, but if you look at the Annual Report you will see that overall NMS does not make much money, and neither does Tuuq Drilling. If at some point in the future those resources are developed, NANA could see a greater return, but that is a long ways into the future. HOW ARE WE GOING TO MAKE MONEY BETWEEN NOW AND THEN?
Something I do note in the Resources discussion is that NANA’s share of the Red Dog royalty will increase from 30% to 35% in 2018 — that is a good thing. Our royalties should be higher in 2018 if the price of zinc holds.
These are some questions I have. I am hoping during the Annual Meeting NANA will present this information in a clearer way. During the Informals this year, there was very little financial detail presented.
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