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posted 7 May 2020, 22:42 by Gerry Kangalee   [ updated 8 May 2020, 08:37 ]
Gerry Kangalee
I must say from the start that I am as ignorant as a Donald Trump supporter trying to make America great again, when it comes to the discipline of Accounting/auditing. I know nothing about how financial analysts go about their business. I didn’t even pass GCE O Level Maths (shows you how old I am).

But when I saw the glowing reports by Michael Quamina, the Chairman of the Board of Heritage and the Minister of Energy, Franklyn Khan, about the state owned petroleum producer/exporter’s profit attributable to shareholders of $1.4billion, my spider sense, as Man Man Edward would say, began to tingle.

I decided to take a cursory glance at Heritage’s Consolidated Financial Statements 30 September 2019. Cursory it had to be, because examining the report for more than minutes would end up in bad, bad headache.

In an advert published in several daily newspapers, Chairman Quamina claimed “2019 results have been accomplished while funding a capital program of $193 million and contributing $821 million to the Government of T&T in related taxes, licenses, royalties and levies due for the period.”

He went on to say “that the company also had to simultaneously ensure that quarter-on -quarter production continued to trend upward and settle the debt obligations to lenders which originated in legacy Petrotrin in a timely fashion.”

Don’t get me wrong, Mr. Quamina is member of a respected legal firm and often represents the Prime Minister in his litigation affairs, but I in town so long, to paraphrase Chalkdust, that without conscious effort, my cynicism comes to the fore.

In newspaper report Minister Khan confirmed that Heritage’s cash flow was able to service all of the debt of the legacy oil company.

In the Independent Auditors’ Report To the Shareholder of Heritage Petroleum Company Limited. Report on the Audit of the Consolidated Financial Statements prepared by KPMG, we come across this statement “We viewed written confirmation of a key assumption on the remission from payment of Supplemental Petroleum Tax liabilities from the Minister of Finance in the Government of The Republic of Trinidad and Tobago for a two-year period with effect from 1 July 2019”.

What this tells us, it seems to me, is that Heritage paid no Supplemental Petroleum Tax for the period under review. But didn’t Mr. Quamina claim that Heritage contributed “$821 million to the Government of T&T in related taxes, licenses, royalties and levies due for the period.”

Getting a little excited I plunged on into the mass of figures, hoping I could clear up this seeming confusion. The presentation went on to say that with the vesting of the operational assets and liabilities of the predecessor “The Group has tax losses amounting to $387 million as at 30 September, 2019 of which all was utilised as part of the deferred tax asset.”

So, not only, it seems, did Heritage not pay Supplemental Petroleum Tax, it has suffered “tax losses”, whatever that means. We are also introduced to the concept of “deferred tax asset” which it seems, in accounting jargon can be also referred to as “deferred tax liability.” Doh vex with me I didn’t make this up!

Heritage spuds first well | Loop NewsIn its consolidated Statement of Comprehensive Income, it is stated that profit before taxation amounted to $1.4billion. Now remember Quamina had said that that $821 million was contributed to the government by way of taxes, royalties etc. So you might expect that sum to be deducted from profit before taxation (if you were a layman that is), but the line item taxation expense says this: - -. I suppose that means zero!

In its consolidated statement of cash flows, the line item Income Taxes Paid shows, once again - -. It seems in the Accounting world more means less and less means more. In the notes to the statement dealing with Income Tax Expense there is a line item called Deferred asset not recognised which carries a figure of $2.2 billion dollars. Make of it what you will!

Now remember the chairman of Heritage said that it settled the debt obligations to lenders which originated in legacy Petrotrin in a timely fashion. Let’s see what we can glean from the report about who owes who what and how that affects the humongous debt service obligations that citizens of T&T are ultimately responsible for.

Related party transactions. This is where it gets murky. Parties are related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

According to the presentation “Heritage enters into transactions concerning the exchange of goods, provision of services and financing with affiliated companies and subsidiaries as well as entities directly owned or controlled by the Government of the Republic of Trinidad and Tobago.”

Heritage’s related parties include Trinidad Petroleum Holdings Ltd (TPHL), Petrotrin, Paria Fuel Trading Company Limited, Guaracara Refining Company Trintomar and Trinidad Northern Areas (TNA).

Most significant transactions concern: the exploration for and production of crude oil and natural gas through joint arrangements; Payment of insurance on behalf of TPH.; Processing fee for pipeline and marine revenue to Paria; Restructuring costs from Petrotrin; Cash advances to Petrotrin; Loan and interest payments on behalf of Petrotrin and TPHL; Transfer of assets and the liabilities directly associated with those assets from Petrotrin.

Now, Heritage is a Guarantor (as are Paria and Guaracara) on TPHL’s senior secured loan issuances, comprising a US$603 million term loan facility with a Syndicate of banks led by Credit Suisse and a US$570 million loan due to be liquidated in 2026. Incidentally 
Wendell Mottley, former Finance Minister in the Manning Administration, worked as an investment banker at Credit Suisse for 15 years including as Managing Director and Senior Advisor. 

Wendell Mottley
es, the same Mottley who said that he hoped the World Bank would come to Trinidad and make the unions disappear, The very Mottley who served on Rowley's Energy Committee in the lead up to the Petrotrin Massacre. This loan gives its lenders a security interest in and continuing lien on all of Heritage’s right, title and interest in, to certain of the Group’s assets (excluding Heritage’s reserves, equity and licenses). 

Heritage is required to maintain two (2) pledged accounts with a Bank - a Debt Service Reserve Account (holding three (3) consecutive months of interest, fees and expenses related to these secured loans. which must satisfy this Reserve Requirement as well as a Collection Account whereby at least 70% of Heritage’s net revenues must flow through.

There are also restrictions on Heritage’s ability to create liens, limitations on additional indebtedness, dividends and/or restricted payments, asset sales and sale and leaseback transactions, limitations surrounding capital expenditure and investments, transactions with Affiliates (including Petrotrin), negative pledges as well as conditions for mandatory prepayments. It is clear that international capital are the ones who call the shots at Heritage, Paria, Guaracara, TPHL. On top of that Heritage is also a Guarantor on TPHL’s senior unsecured US$62.2 million series international Notes which come due in 2022.

The new notes and the loan facility are secured by substantially all of the property of TPHL and its subsidiaries, including offshore oil and gas receivables generated by Heritage Petroleum Company Limited, excluding oil reserves.

Heritage has obtained a letter of financial support from its ultimate Shareholder, the Government of the Republic of Trinidad and Tobago which can be called upon, if needed, to meet its legal and financial obligations as they fall due. So, it seems international capital is paying the piper and the citizens of Trinidad and Tobago are, for all intents and purposes, responsible for meeting the loan obligations.

In the cash flow statement there is a line item headed Change in related parties with a figure of negative $1.27billion. After listing a number of transactions between Heritage and its related partners. Under financial risk management, the report has an item entitled due from related parties $1.47 billion. It goes on to list due to related parties $2.7 billion.

By this time many of you, like me, may feel your heads spinning. I had to stop; it seems I was just confuffling my brain. I was becoming disoriented. Maybe you can help by examining and understanding the Heritage financial statements, the files of which are attached at the end of this article. I hope you have better luck than me.
Gerry Kangalee,
8 May 2020, 08:32
Gerry Kangalee,
8 May 2020, 08:32