Pacific Update Conference

18-19 July 2016

Suva, Fiji

Marshalls Energy Company Recovery and Reform Efforts since 2008

Outline

1. the Company: overview of MEC

2. the Context: MEC situation before 2008

3. the Crisis: the 2008 energy crisis

4. the CRP: comprehensive recovery plan

5. the Challenges: met and unmet

6. the Course: actions to sustain progress

7. Conclusion2

1. Company: overview of MEC

Main Corporate Principle – Is to provide an

affordable and reliable energy services to

the People of the Marshall Island.

Company Motto: Efficiency Today

Profitability Tomorrow.

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1. Company: overview of MEC

MEC was incorporated in 1985 under the

laws of the RMI. It is governed by a 7

member board of directors.

MEC Provides electricity (thru diesel power

generation as well as Solar) to the whole of

RMI.

MEC is in the Petroleum and Gas business 4

2. Context: MEC before 2008

Financial and operating conditions already

critical leading up to 2008

Generators in poor condition, major losses

and inefficiencies throughout system

Steady decline in assets, little reinvestment

$2.4m average losses FY2003-FY2007

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2. Context: MEC before 2008

By 2007

– $18m total debt, much of it high interest

– $2m in annual debt servicing

– $5m in accounts receivable built up

– Fuel sales no longer providing cushion

Bottom line: MEC basically insolvent

And then came the crisis…6

3. Crisis: the 2008 energy crisis

Fuel prices increasing since 2004, spiked

2008

A tipping point for MEC; major operating

shortfall projected by end 2008

Austerity measures taken

Emergency support requests to Government

and development partners7

3. Crisis: the 2008 energy crisis

High fuel/food prices hit economy hard

Fiscal system already stressed, facing a

structural deficit

First State of Economic Emergency declared

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3. Crisis: the 2008 energy crisis

3. Crisis: the 2008 energy crisis

Short, medium and long term measures to adjust and adapt

Target energy, food, fiscal security

National task force managed response measures

Social and economic impacts clear: by end 2008 CPI had jumped nearly 15% and 1,500 people (3% of pop) migrated to US

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4. CRP: comprehensive recovery plan

Late 2009, New Board of Directors and

Management took over MEC – CRP was

implemented in 2010

Two Main Pillars of the CRP – 2 Cs (Cost

and Culture)

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4. CRP: comprehensive recovery plan

Cost reduction measures were adopted:

I. Operational cost reduction

a. Increase fuel efficiency for the generators

II. Restructuring of long term debt

a. Bank of Guam - $9.5M (7% Interest 5 years to 1.5%

interest 30 years with ADB)

b. RUS debt service deferment – a 2 year deferment

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5. Challenges: met and unmet

I. Operational Reform:

a. Refurbishment of Generators – Complete

II. Institutional Reform:

a. Implementation of New Procurement Policy

b. Implementation of New Employee Manual

c. Implementation of Board Governance Manual

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5. Challenges: met and unmet

I. Rolling out of New Business Strategy:

a. Negotiate a new fuel supply agreement

b. High grading of all accounts for LPG sales

c. Convert fuel sales from a margin to volume business

d. Introduction of cash power meters

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5. Challenges: met and unmet

Ongoing Challenges:

1. 30% System Loss

2. System Reliability

3. Fuel Terminal needs upgrade

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6. Course: actions to sustain progress

Secure financing for the refurbishment of Fuel

Terminal

Finalizing TOR with ADB on formulation of Strategic

and Investment Plan for the next 10 years

Secure funding/financing for reduction of system

losses

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17

$(600,736)

$(1,378,809)

$(3,209,725)

$(3,894,280)

$(2,895,538)$(2,943,881)

$(1,076,710)

$(1,660,957)

$(768,637)

$(451,994)

$2,197,693

$89,401

$1,193,902

$(5,000,000)

$(4,000,000)

$(3,000,000)

$(2,000,000)

$(1,000,000)

$-

$1,000,000

$2,000,000

$3,000,000

FY2003 FY2005 FY2007 FY2009 FY2011 FY2013 FY2015(Prelim)

Total Net Operating Income (Loss)

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-3.3%

-7.8%

-19.8%

-21.9%

-14.0%

-15.9%

-5.4%

-10.3%

-3.2%-2.6%

10.4%

0.4%

5.5%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

FY2003 FY2005 FY2007 FY2009 FY2011 FY2013 FY2015(Prelim)

Total Return on Assets

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$2,934,062

$1,743,841

$1,953,031 $2,022,622

$963,722

$1,191,779

$655,968

$1,063,186

$1,468,986 $1,468,986

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014FY2015(Prelim)

Debt Servicing Forecast

Balance due within one year (as of FY year-end)

Impact

of ADB loanImpact of

RUS

deferment

7. Conclusion

All in all, reforming an organization that has

been under the same management structure

since its formation was a monumental task.

The corporate culture in place that was the

bedrock for almost 4 decades was one of the

main reasons why reform was no easy task.

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KOMMOOL TATA

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