Caribbean Cement shareholder demands probe of operating lease to TCL
Michael Subratie, a minority shareholder of Caribbean Cement Company, has asked the Jamaica Stock Exchange (JSE) to investigate whether the operating lease paid to parent Trinidad Cement Limited breaches accounting rules.
Subratie, who is also managing director of Musson Jamaica, is contending that the operating lease over the cement plant's assets, which are owned by TCL, distorts its profits and stifles shareholder value, that it appears to contravene Generally Accepted Accounting Principles - GAAP - and should be replaced with a finance lease arrangement.
The JSE appears to be looking into the claims but is not saying whether it believes they have merit. Chief regulatory officer Wentworth Graham said only that it was policy for the JSE Regulatory & Market Oversight Division not to disclose details on investigations that it undertakes.
Caribbean Cement last paid a dividend in 2005, amounting to a total distribution of around $60 million at seven cents per share. Subratie holds just over four million CCC shares in his own name, and is now the tenth largest shareholder of the Rockfort, Kingston-based operation with a 0.48 per cent stake.
In 2014, Caribbean Cement paid $2.42 billion to TCL as operating lease. This year, it is projecting payments of $2.34 billion.
Between 2015 and 2018, the Kingston-based plant expects to pay out a total of $9.95 billion or the equivalent of US$87 million to TCL under the lease agreement.
New rates will be negotiated for January 2019 to December 2028.
"The operating lease arrangement seems completely unfair to the minority shareholders as the true situation seems to be that of a finance lease as the equipment leased are permanent structures/equipment located at CCC in Jamaica," said Subratie.
He is also contending that amounts already paid by Caribbean Cement, combined with the payments scheduled to 2018, more than equal the cost of equipment and structures.
Under operating lease contracts, the owner permits use of an asset for a particular period which is shorter than the economic life of the asset, without any transfer of ownership rights. A finance lease is a commercial arrangement where the lessee pays a series of rentals or instalments for the use of the asset and has the option to acquire ownership.
Caribbean Cement told the Financial Gleaner that it has two operating lease agreements with TCL, covering Clinker Kiln 5 and Cement Mill 5.
Those structures were part of an expansion programme financed by TCL with a US dollar loan from external sources. The operating lease charge is accounted for on Caribbean Cement's financial statements as an expense.
Without that expense, Caribbean Cement's Ebitda would be boosted by around $2 billion per year.
Regarding Subratie's concern, the cement maker responded via email that its accounts, which are audited by Ernst & Young, conform with International Financial Reporting Standards and the requirements of the Companies Act.
Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases, said the cement producer. Payments made under operating leases are charged to the statement of comprehensive income over the period of the lease on a straight line basis.
Portions of Kiln 5, which was completed and commissioned in December 2008, are owned by TCL and the rest by Caribbean Cement. The operating lease for that asset began on December 1, 2008, and runs for 20 years to 2028. The operating lease for the portion of Cement Mill 5 owned by TCL dates from its commissioning in January 2010.
The arrangements were negotiated under the chairmanship of Brian Young, who stepped down from the board in the summer of 2014 along with other directors during a shareholder revolt in Trinidad against the board and CEO at TCL that spilled over to Jamaica. Caribbean Cement is now chaired by Christopher Dehring, and Anthony Haynes has been replaced as general manager by Cemex executive Alejandro Vares.
Caribbean Cement also quoted EY's audit report on the veracity of its 2014 accounts.
"We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit. In our opinion, proper accounting records have been maintained and the financial statements are in agreement with the accounting records, and give the information required by the Jamaican Companies Act in the manner so required," the auditor said.
Still, Subratie says he sought guidance from a number of accounting sources before penning the JSE, and believes he has a strong case.
TCL owns 74 per cent of Caribbean Cement and as the situation now stands, it is the only shareholder benefiting from payouts from the Rockfort plant, he said.