THE viability of the Jamaica Public Service Company (JPS) has been questioned, with the light and power company in breach of loan covenants that could see creditors demanding immediate repayment of up to US$430 million ($42.4 billion).
It’s a financial situation that has led to JPS Chief Executive Kelly Tomlin volunteering to a 10 per cent pay cut, as the company works with lenders and shareholders on a short-term solution, and talks with the Office of Utilities Regulation (OUR) about new tariff guidelines.
TOMLIN… our goal is to electrify 100 per cent of Jamaica.
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“Given the macroeconomics that we are facing and given the regulatory environment, our lenders are now saying that they don’t believe they can give us any further waivers,” Tomlin told the Jamaica Observer yesterday.
Auditors noted in JPS’s annual financial statements that the company has, since March 2012 — a month before Tomlin’s appointment — not been compliant with a condition included in long-term loan agreements with international development financial institutions, requiring the firm to maintain a 3:1 Debt to Earnings before Interest Tax Depreciation and Amortisation (EBITDA) ratio.
The violation provides the lenders with the option of issuing notices of default and declaring all principal and interest amounting to US$430 million, as at December 31, 2012, as immediately payable, stated the auditor’s notesaccompanying the power company’s 2012 financial results.
Should the respective lenders exercise their right to demand the repayment of this amount, it would cast significant doubt about the company’s ability to continue as a going concern, without the support of the shareholders or other third parties, the statement said.
Tomlin said yesterday that the company is in talks with creditors for an extension of the waivers while it works with the OUR and shareholders.
JPS in its annual tariff submission to the OUR blamed the breach on “significant under-recovery of fuel costs” experienced in 2011 and 2012, including more than US$30 million last year alone. Against this background, the firm said its “continued viability… will be dependent on a change to the regulatory approach in relation to the recovery of fuel costs.”
A quarter of the electricity that JPS transmits is lost to heat and theft, with the majority due to the latter. JPS contends that the challenge of substantially reducing leakages is socio-economic and largely outside of its control. In its submission to the OUR, JPS urged “regulatory acceptance of that fact” and called for a more holistic approach to combat electricity theft, including social intervention projects.
JPS is asking the OUR to allow the full pass-through of fuel costs on light bills as of the effective billing date of the Annual Adjustment Determination — July 1, 2013. The company said it is essential to ensuring the viability of the utility, given the context that in a typical year, its return on profit “is not likely to be more than two to three per cent of the total cost of electricity, against the background of what it deems as unfair penalties as they relate to the recovery of fuel costs.
The company noted that the losses penalty increases as sales shrink, given that the losses are calculated as a percentage of sales, and increases as the price of oil goes up. JPS reported a 63 per cent decline in annual net profit to US$12.9 million on flat sales last year.
The fuel penalty actually represented four per cent of the cost of fuel, thereby virtually eliminating all of the operating profit of the utility in 2012, the company said in its submission.
According to the light and power company, if approved, this measure would result in “a marginal increase in the average residential customer’s bill of less than 0.5 per cent or $16 per month”.
JPS suggests that customers stand to benefit substantially over the medium term, through a vibrant and viable JPS that can support generation expansion to significantly lower cost and invest in the network to improve service and reliability.
The successful implementation of a sustainable loss reduction programme, aimed at regularising 10,000 – 15,000 households per annum, will ultimately also result in a substantial reduction in the cost of electricity for all, said the company in its submission.
“The problem is everybody is willing to help if they see light at the end of the tunnel, but with this particular regulatory framework, there can be no light at the end of the tunnel because we seriously do not know how to stop crime, and that’s what we are being asked to do,” Tomlin said yesterday.
“We are giving power to everybody; that’s our goal, to electrify 100 per cent of Jamaica, but we all know 100 per cent of Jamaica cannot afford electricity,” she argued.
Meanwhile, Tomlin said that the company has independently executed a number of cost-cutting measures in the face of severe budget constraints.
“Customers don’t want us to reduce our capital budgets, or else you will experience more and more outages. But we have had redundancies and we are doing what we can,” Tomlin said, revealing that, in addition to her 10 per cent pay cut, other executives have volunteered to give up their vacation.
“We are asking everybody to give,” she said. “Unfortunately, our charitable contributions have also been severely slashed.”
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