Financial and Management Audit of Young Brothers, LLC as per Order No. 37280, Docket No. 2019-0117
Final Report September 9, 2021 (excerpts)
Editor’s Note: Shifting expenses to a regulated subsidiary is a typical but fraudulent business model for firms which have a mixture of unregulated (trans-Pacific cargo) and regulated (inter-island cargo) commerce. Saltchuk and Foss transferring expenses to YBs books makes YB seem less profitable, thereby fraudulently ‘justifying’ PUC rate hikes.
Additionally, YB management agreed to a 2015 give-away contract to ILWU which also milks YB for money and thereby ensures ILWU/mafia political support for the rate hike. Media coverage is focusing on the ILWU thus obscuring the role of Saltchuk management in directing this Kabuki.
But Saltchuk executives are not heading to prison. The Hawaii PUC has fallen for the con, resulting in 46% rate hikes approved August 7, 2020.
Here are some key quotes:
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…Following several years of increasingly deteriorating financial performance that resulted in substantial operating losses. Young Brothers (YB) found itself facing a severe financial crisis in 2020, when the fallout from COVID-19 dramatically reduced the volume of freight and associated revenues. As a result of the accumulating losses suffered by YB in previous years ($21m losses from 2018-19) the ultimate parent company, Saltchuk, was not prepared to inject any more funding and, through the immediate parent company, Foss Maritime^ withdrew all financial support for the struggling company. YB found itself unable to obtain any commercial borrowing facilities (previously the parent had provided all borrowing facilities) and cash quickly running out, while trying to operate the essential intra-island tug and barge freight services with dwindling revenues. All other requests and efforts for State/Legislative/Federal support or subsidies had also been exhausted.
To avert bankruptcy, and with no other viable options, YB filed a request for a 46% emergency rate increase (ERI) with the Hawaii Public Utilities Commission (HPUC). Faced with the dire prospect of a shutdown of YB’s essential inter-island operations the HPUC granted YB an emergency temporary 46% across the board rate increase on August 17, 2020. One of the conditions of the order, was an independent audit of YB noting that “. ..the Commission's expedited review of Young Brothers' Motion for Relief has highlighted financial and management practices that have contributed significantly to YB's current financial condition and remain a concern to the Commission...
An important early finding was that, though the 2020 financial crisis faced by the Company was blamed on the impacts of the 2020 Covid 19 pandemic, in fact the root causes were much deeper and had been growing for several years. Since 2016, YB’s settled rate increases had not kept pace with the Company’s labor costs, which were growing at over 10%/year as a result of the 2015 Collective Bargaining Agreement with its predominant ILWU workforce. As labor accounts for almost 60% of total YB operating costs, this had a major impact on financial performance from 2016 onwards.
Despite mounting losses, it appears that previous YB management had made minimal effort to make strategic changes during this period either to address operating efficiencies or to contain costs. Company leadership appeared to base this on the premise that their costs were fixed and instead focused their efforts on growing revenues by carrying more unregulated cargo. This had the net effect of growing overall revenues, but also resulted in additional costs such that operating losses continued to grow.
This focus on growing unregulated business has led to an inherent structural imbalance in the business where unregulated cargo now represents 65% of the volume but only 35% of the revenues, while the regulated cargo is 35% of total, but generates 65% of the total revenues. The business has been scaled to carry the combined volume of freight (i.e. 3 times the regulated volume). This effectively has created an inverse relationship where regulated customers would be responsible for financing the downside if unregulated volume drops but the Company benefits as volume increases. It is essential that there is now a renewed focus on servicing the core regulated customer base on an economic basis….
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And here are the specifics of how Foss and Saltchuck milked YB to justify rate hikes by making its balance sheet less profitable:
“During this period, Saltchuk also adopted a more centralized, group-wide, approach to providing more shared services to all group Companies, including YB. These services, provided by Saltchuk Marine Shared Services (SMSS) began to expand, as did the intercompany charges for the services. The Commission also expressed concern over the increasing costs for these being claimed by YB. … There have also been recent changes in corporate philosophy at Saltchuk, which led to a reversal of the decision to centralize support services under SMSS. Delivery of most of these services is reverting back to the individual companies”
“In addition to the agreement for services with SMSS, YB has an agreement with Foss Maritime company Hawaii (Foss Hawaii), another Saltchuk company, to provide administrative and management support services to Foss Hawaii, and obtain maritime services, including harbor support tug service, from Foss Hawaii. These affiliate transactions are covered by a separate CAM.” ….
PDF: The complete Young Brothers audit report can be found here.