Andrew Holness, Prime Minister of Jamaica, seems to want to go down in history as the PM who has divested the most government assets through the Jamaican Stock Exchange. While there are clear benefits for the country and investors, major dangers lurk around the corner for many investors.
Rate cut for Wigton’s number 2 turbine to cut profit by nearly $400m.
The local capital market has many challenges for investors and in some cases, it is downright ugly and terrifying. One such is Wigton Windfarm that went to the market with information in the prospectus indicating that all the energy output would be sold to JPS at predetermined prices for twenty five years for each turbine. This publication has reviewed the prospectus and cannot find any information to indicate that the rate on turbine no 2 was to be reduced effective April 2021. That information is critical and could have meant the issue price for the stock might have been inflated. Worse, investors who bought a pile of the stock post IPO around $1 region could be facing serious losses for years to come. Investors are now likely to see their investment stagnate for a long time due to the downward adjustment to the rate for the number two turbine. This is not the way to build a capital market.
The company’s 2021 audited accounts state “Wigton Phase II which was commissioned in December 2010 and supplies 18MW power to the grid. The plant was awarded the avoided rate for the energy it supplies and as per the terms and conditions of the Power Purchase Agreement (PPA), the final rate adjustment for this plant was applied at the end of March 2021. The rate adjustment will translate to approximately fifty percent reduction in the revenue from Wigton Phase II in United States Dollars. This is projected to equate to an overall fourteen percent decrease in revenue in Jamaican Dollars.”
ICInsider.com’s calculation shows the effect of the rate adjustments will reduce revenues by approximately $380 million per annum before tax and will result in net profit coming in around $470 million of 4.3 cents per share for the 2021/22 fiscal year that would put the value of the stock around at the latest price of 63 cents at a PE of 15. That would be fine if there were likely to be growth in sales.
The prospectus list a series of risks and it goes on to state that If one or more of them described in the Prospectus or other risk not mentioned were to arise, Investors could suffer a material loss of their investment.
Electricity is sold by the Company to JPS under three (3) separate Power Purchase Agreements for twenty years each. Wigton one expires in April 2024 but can be extended up to 6 years. Wigton two expires in December 2030, with an extension of up to 5 years and Wigton three expires in May 2036 with any additional period to be agreed.
According to the prospectus, “the payment for energy supplied to JPS by each wind farm is determined by a formula fixed by the relevant PPA. Each formula, while different from the others, essentially determines the price payable by reference to the energy price for the relevant month and the Net Energy Output delivered to JPS. The Company regards the pricing formula in each PPA as highly confidential and disclosure might breach the confidentiality clause in each PPA but would be highly detrimental to the competitive interest of the Company in bidding for future generating capacity”.
