Business Page – June 20, 2004

GT&T: A slumbering giant Part III As GT&T goes up, so does ATN

Introduction

Today we return to our series on Guyana Telephone & Telegraph Company Limited (GT&T), the country's monopoly telephone service provider. Because the company refused Business Page's request for a copy of the company's 2003 annual report, this review is limited to GT&T's financial statements for the year 2002 which were audited by Deloitte & Touche, and the Form 10-K Report filed by GT&T's parent company ATN with the US Securities and Exchange Commission. It is one of the ironies of the GT&T tale that the government as minority shareholder, and the PUC as the utilities regulator, can find far more information on GT&T by going to the parent's filing in the US than from a review of the company's financial statements.

The 2002 financial statements assure the reader that the accounts comply with International Accounting Standards. The absence of such an assertion in the auditors' report (which is a requirement in auditing standards and common among the other major public accountants in Guyana) does not exonerate the auditors from several cases of non-compliance which any serious review of those statements reveals. These include such basic issues as the date the financial statements were approved for issue, and the number of employees, movement in fixed assets and better disclosure of accounting policies on key areas of the financial statements such as turnover. The approval is particularly important where the board includes minority shareholder representatives who may not always be satisfied with the decisions of the majority and find the consideration of the financial statements an opportune time to express their discomfort.

Interestingly, while the company has chosen the US dollar as its functional currency, no US Dollars financial statements are presented. International Accounting Standards do allow for a choice of functional currency in defined circumstances, but it may be argued that for statutory tax and reporting purposes, such statements are not acceptable since they may be contrary to the laws of Guyana. The justification it uses is that "the majority of the company's transactions are denominated in US dollars," a case which could apply to a number of companies in the export business such as Guysuco.

In addition to the requirements of the Companies Act and by extension International Financial Reporting Standards, GT&T has reporting obligations under both the Public Utilities Commission Act and the GT&T Licence. Section 48 of the PUC Act provides that "the Commission may by rules prescribe the forms of all books... accurately and faithfully in accordance with internationally accepted accounting principles in Guyana..."

And Section 20 (2) of the licence requires the company to maintain separate accounting for "the activities of the Supplemental Services Business, the Systems Business and the Apparatus Supply Business," while Condition 20.2 (c) of the GT&T Licence requires the licensee to "procure in respect of each of those accounting statements prepared in respect of a complete financial year of the Licensee a report by the Licensee's Auditor stating whether in his opinion that statement is adequate for the purposes of this condition" (ie relating to separate accounting).

20.2 (d) requires the licensee to "deliver to the Director a copy of each of the accounting statements and of the reports relating thereto... as soon as reasonably practicable and in any event not later than six months after the end of the period to which they relate."

I have asked the PUC in writing whether such statements are in fact submitted to them and whether they receive any opinion from the auditors in respect of 20 (2). I am awaiting their response. There is however nothing in the financial statements or the report of the auditors to indicate compliance with any orders by the PUC or under licence. In other words, the audited financial statements do not provide the information required by the licence.

One of the principal defects of the financial statements is the incredible and unacceptable absence of information on related parties, including their names and the volume of transactions either as an amount or as an appropriate proportion of outstanding items. By now, readers of this column would be aware of the importance of adequate disclosure of transactions with related parties - a condition that assumes great importance in regulated utilities. The financial statements of the parent company show several companies that would meet the definition of related parties including ATN, the parent company, Call Home Telecom, Llc, a wholly owned subsidiary of ATN established in 2002 in the US Virgin Islands to provide United States distribution and termination of international outbound collect calls from Guyana, and ATC another wholly owned subsidiary of ATN which operates the Call Centre at Beterverwagting utilising GT&T's circuits in the Americas II fibre optic under-sea cable. The financial statements of GT&T do not identify any income to GT&T for the use of its facilities which could mean that GT&T's consumers are bearing costs for which there is no matching revenue.

In fact, ATN and all its mini-subsidiaries contribute very little to the group and in its statement to SEC, ATN admits that "substantially all of the company's consolidated revenues and operating income" are derived from GT&T operations. This makes it all the more reasonable to understand why the PUC would have ruled since January 1997 that the company cease paying advisory fees to ATN and seek to recover over $3.5B paid to ATN between 1991 and 1996. Not only has the company managed to stall this matter in the court, but it has also continued to pay such fees at the rate of over $3/4B per year without any action on the part of the PUC since 2001.

2002 performance

Total operating revenue in 2002 fell by $2.3B or 15.4% to $12.7B with the largest decline taking place in international long distance revenue ($4.2 B) or 36 per cent. Local network services produced revenue of almost five billion dollars - an increase of $1.8B or 59% over the preceding year. The reduction in the settlement rate for US - Guyana traffic from 85 US cents per minute to 23 US cents per minute resulted in a substantially reduced profit margin on inbound traffic from the United States but an increased margin on outbound traffic to the United States. Another reason for the decline was the virtual elimination of the highly profitable audio-text service which was widely criticised as immoral and improper and which had generated unexpected windfall profits to GT&T and ATN.

On the other hand, revenue from local network services increased by 59% from $3.1B to $4.9B, mainly as a result of greater usage by consumers and an 8% increase in fixed subscriber access lines. However, it was in the provision of mobile cellular telephone service that GT&T saw its largest volume growth as the number of cellular subscribers increased from 39,206 at January 1, 2002 to 79,915 by the end of the year - an increase of over 100 per cent. The financial statements do not contain relevant information to permit the measurement of the profitability of this service but it is clear that the cellular service is a major focus of the company as another forty thousand subscribers were added in 2003. By way of contrast, fixed subscriber lines in 2003 increased by a mere 7.5 per cent.

Total expenses fell from $9.8B in 2001 to $8.1B, in 2002 as international long-distance expenses fell by 78% and customer operations expenses by 25 per cent. Corporate operations costs increased from $947M in 2001 to $1.1B in 2002 while the advisory fee which is calculated as a percentage of revenue reflected the reduction in revenue.

After Corporation Tax of $2.1B (or almost 20% down from 2001) net income is $2.2B compared with $2.8 B in 2001. Even after this reduction, the corporation tax paid by GT&T was almost twice the combined tax paid in 2002 by the five top private sector companies in Guyana - Banks DIH Limited, DDL, Demerara Tobacco Company Limited, GBTI and NBIC!

The balance sheet

Current assets, ie those assets held in cash or expected to convert into cash within twelve months of the balance sheet date amounted to $6.2B of which cash represents $2.6B, though there is no indication of the country and currency in which the balances are held. Current liabilities which are those liabilities due for payment within twelve months amount to $3B, meaning that the company's liquidity position is extremely healthy.

There is no indication of what other long-term assets of $341M represents, a figure that is not only significant in itself but also having regard to the reduction from $1.1B at the beginning of the year. An almost similar shortcoming is in respect of Accrued Liabilities where accrued interest of $710,000 is identified while Other is stated at $916M. Net fixed assets are shown at approximately G$17 B or US$85M while the total shareholders equity is $18 B.

Dividends

Dividends declared and paid in 2001 amounted to $2.8 B representing 100% of the net income for that year while dividends for 2002 of $3.2 B represent 148% of 2002 net income.

Mr Joseph Tyndall, telecommunications expert, in 2001 had cautioned the government against euphoria over the company's first payment of dividends after ten years of highly profitable operations. He attributed the change in policy to a strategy to weaken public reaction to the expected rate increase following the cessation of its 'audio-text binge' and the government's announced intention to bring to an end the monopoly.

As Mr Tyndall has pointed out, GT&T has employed other means of paying itself - including the 6% advisory fees which the PUC had ordered stopped. GT&T has refused to provide information to refute publicly expressed concerns that this is an effective giveaway since AT&T pays all the costs involved in the provision of services. Other means used by ATN to extract cash from GT&T were the charging of prohibitive interest on loans and GT&T's audio- text operations.

Conclusion

The accounts of GT&T are not the best for presentation and disclosure, nor do they facilitate analysis. Business Page considers that they do not meet the basic requirements of the PUC Act and the Licence nor do they conform with International Financial Reporting Standards. While Deloitte & Touche audits substantially all of the revenue and assets of the group, ATN is audited by PriceWaterhouseCoopers which replaced the disgraced Arthur Andersen as the parent company's auditors in 2002, and one can only speculate on the degree of co-operation between the two firms to ensure that the financial statements of GT&T are complete in every respect.

These statements clearly require a thorough examination by the PUC and possibly a hearing on it so that any deficiencies are identified and remedied.

To be continued

 (Back to top)