• NGC’s cash flow worrying
• T&TEC a major problem.
• Business model needs changing
Having recorded an historic loss of $316 million for its half-year 2020, two chartered accountants have contended that the real vulnerability lies within the National Gas Company (NGC ) of T&T cash flow.
In an interview with the Business Guardian, Chartered Public Accountant (CPA) Prakash Ramlakhan predicted that the NGC could be in real trouble if it does not do something soon.
“They will consume all their cash, if it stays this course. They will run out of cash in two years if they fail to collect cash.” Ramlakhan said.
According to Ramlakhan who is also a Chartered Financial Analyst (CFA), NGC’s solution to it’s cash problem is to improve on cash collection, especially with large clients.
Ramlakhan continued: “Otherwise, if they don’t collect, then they are going to consume their cash and perhaps by 2022-2023 they could be in a cash deficit position.”
NGC’s chairman Conrad Enill admitted that cash management was a major challenge facing the NGC and it had taken action to address it.
“”Of course it takes cash to run the business, and yes NGC is concerned about the cash flow management in the organisation and that’s why we entered into negotiations to try and reduce the impact of the T&TEC situation by getting the government to guarantee the borrowing so at least we can clear that out, but that’s a short term solution. The longer term problem we are working through,” Enill told the Business Guardian.
NGC’s cash problem was not only revealed in the 2020 half year statements but, the trend was already starting to show in its 2019 annual report.
In its 2019 consolidated statement of Cash Flows, NGC recorded net outflows of cash for its operating ($959million), investing ($1.6billion) and financing activities ($668million).
Whereas in 2020, net cash generated from operating activities stood at $54 million (before adjustments NGC posted a $253million loss from operating activities, but the net cash used for investing and financing activities were posted at $51 million and $81million respectively.
For its half year 2020, the company’s cash and cash equivalents at the beginning of the year dropped by 47 per cent from $6.8billion to $3.6billion.
Commenting on the NGC’s half year 2020 cash flows, Chartered Certified Accountant (ACCA) Ian Narine indicated that the company’s cash flows for the period reflect an evolution of the NGC’s cash flow challenges.
He said: “Last year NGC posted a profit but there were working capital challenges...that negatively impacted the cash flow position.”
According to Narine, these working capital challenges faced by the NGC are related to problems with cash collection as it regard the relationship with T&TEC.
In the NGC’s 2019 annual report, the Group converted trade receivables of $3.5 billion (US$524 million) for unpaid gas sales to a ten-year loan facility issued in two tranches at six per cent per annum.
T&TEC was scheduled to begin to pay the first tranche (with principal amount of $1,776.5 million (US$262 million) at interest rate of six per cent) to the NGC from June 2020 as T&TEC was given a one year moratorium on repayment of principal and interest.
The second tranche (with principal of $1,776.5 million (US$262 million) at interest rate of 6 per cent) commences in 2024 as T&TEC was given a five year moratorium on repayment of principal and interest.
Narine said: “The conversion of a trade receivable to a loan in ordinary circumstances may being into question whether the purchaser is able to pay for goods or services sold.”
However, he highlighted that T&TEC is a Statutory Corporation and therefore operates as an extension of the Government of T&T, noting that it is highly unlikely that a sale to a state authority will be challenged on the basis of collectibility.
Nonetheless, Narine indicated that the issue is one of cash flow and whether NGC can continue to operate efficiently if it is provide a service from which it is not generating cash.
He said: “It is likely that somewhere else in its operations NGC will have to finance this cash short fall and this may be taking place at a cost to the NGC—a cost that is not priced into the existing terms with T&TEC.”
Furthermore, Narine contended that a big challenge for the NGC is the shortfall in payments from T&TEC, which has affected the cash flow of the gas company.
According to Narine, those cash flows carry an opportunity cost to NGC in terms of the company’s ability to undertake expansion and growth projects.
If NGC is successful in some of these initiatives, Narine explained that it can positively impact its business model.
He said: “Cash is a necessary part of this tool kit and working capital challenges will make it even more challenging to navigate the current environment.”
Other challenges highlighted by Narine was that the price for natural gas on the Point Lisas Industrial Estate and the shut down of plants on the estate would have a significant impact on NGC’s operations. He said: “This is just seeks to highlight the importance of cash generation from other areas of the operations to allow for growth and expansion.”
So far for the half year, Narine expressed that the negative cash flow changes to NGC’s working capital has continued due to the operating environment where the company recorded a loss before tax of $252 million.
According to Narine, in times when the operating environment is challenged it is a company’s cash buffers that will help it stay the course.
He added that the company still has some wiggle room but as cash flows decline investment activity can be paused and dividends may be cut.
Enill admitted that if government allowed the company to retain more of its earnings it will be good for the organisation but insisted that this decision was completely out its hands.
Meanwhile, Ramlakhan added that the cash accumulation for prior years supported NGC’s operation in 2019. He argued: “If they have not accumulated sufficient cash in 2019, the NGC would have had to source credit to maintain its spending and going forward, the cash position look very uncomfortable for NGC under existing conditions.”
Ramlakhan added that the cash flow “looks very weak” for the NGC as company is burning more cash than it is generating, noting that part of the cash flow challenges has to do with the receivables that are not being collected on a timely basis, which is placing additional pressure on the NGC.
Going forward, Ramlakhan indicated that NGC would have to relook its business model to ensure that it is competitive, by having sustainable demand, supply and market access and perhaps more participation other than being a supplier.
He said: “They may have to do some JV’s (joint ventures) so that they create value at different levels outside of the supply to enhance profitability for the group.”