By NEIL HARTNELL
Tribune Business Editor
More than $1 billion will likely be required to meet the financing needs of the Bahamas Electricity Corporation (BEC) and its ‘successor’, the Deputy Prime Minister confirmed yesterday.
Apart from the $600 million to take care of BEC’s existing debts and liabilities, Mr Davis told the House of Assembly that its successor, Bahamas Power & Light (BPL), will need to invest $450 million over a five-year period to upgrade network infrastructure.
This takes the ‘new money’ needed to facilitate Bahamian energy industry reform to over $1 billion, with the Deputy Prime Minister giving no indication of how the $450 million ‘tranche’ will be raised.
Confirming that BEC was “close to being insolvent” without the Government’s continued financial support, Mr Davis admitted that the “dire state” of its power generation assets had caused “hardship” for Bahamian residents and businesses.
“It’s disparate system design requires major capital investment of at least $450 million over the next five years to resolve the many issues faced,” the Deputy Prime Minister said.
“We also know that BEC continues to incur $20-$30 million in losses every year due to an archaic rate structure- a financial and operational situation that is impossible to sustain.”
BEC’s inability to obtain a credit rating, Mr Davis added, had left it with no leverage over its lenders and suppliers, and it had been in “a precarious position” with its fuel vendor (Shell Western) and others.
This, he said, was only “temporarily resolved” when a $211 million syndicated loan organised by CIBC FirstCaribbean International Bank (Bahamas) was ultimately refinanced in November 2014.
The answers over where the $450 million will come from are likely to be left to PowerSecure, BPL’s prospective management partner. Among the options at its disposal will be to fund this capital investment, averaging $90 million per year, from cash flows generated by BPL’s electricity customers.
That would probably involve light bill increases, and be unpopular with Bahamians, running directly counter to the Government’s objective of lowering energy costs and enhancing the Bahamian economy’s competitiveness.
Another possibility will be for BPL to leverage the assets on its balance sheet to raise debt financing, as the new Electricity Act’s clause 21 allows the company to issue securities - bonds, preference shares etc - so it can borrow money.
The Act also requires the Utilities Regulation and Competition Authority (URCA), as the new, independent energy sector regulator to take all BPL’s borrowings (debt service requirements) into account when approving the non-fuel portion of the tariff imposed on Bahamian consumers.
This, in other words, means that URCA will allow BPL to recover the costs associated with its borrowings through light bill tariffs, although upgrades to its generation assets could in the long-term ultimately help to lower energy prices.
Mr Davis’s reference to generation assets, as opposed to BEC’s existing transmission and distribution facilities, is also interesting given that this is where the bulk of the Corporation’s assets lie.
It is unclear whether the $450 million figure refers solely to the generation plant that BPL will inherit, but one option would be for it to contract with a ‘third party’, which would then be responsible for a ‘build/own/operate’ deal to build a new, modern power plant.
BPL’s capital investment requirements mean that it will effectively be ‘exchanging’ $600 million in old BEC debt and liabilities for $450 million in new financings.
Mr Davis said around $600 million in Rate Reduction Bonds (RRBs) would be issued to refinance BEC’s legacy bank and bond debts, pension, environmental and other liabilities.
While he did not name the investment bank that would place the RRBs, the Deputy Prime Minister indicated there may be investment opportunities for Bahamian institutional and retail investors.
This is because the RRBs are likely to be split into two currency denominations - $100 million in Bahamian dollars, and $500 million in US dollars.
Mr Davis confirmed that a portion of the $600 million raised would finance the RRBs’ issuance and ongoing administration costs, while financing both BEC’s restructuring and wider energy industry reform.
Acknowledging that the RRBs would not be “an end-all fix” by themselves, Mr Davis added: “Finally, but critically important, the fund will provide BPL initial capital, which will be used to repay an interim financing obtained by BPL, and to facilitate the early stages of the business plan of BPL.”
Tribune Business revealed in August how investment banks were bidding to provide BPL with $75 million in short-term working capital that will allow it to move immediately on restructuring plans.
This ‘bridging’ facility is designed to ‘fill the gap’ between the PowerSecure management takeover and proposed longer-term financing in the shape of the RRBs. The $75 million short-term facility will eventually be replaced, and paid out, by the $600 million refinance.
Mr Davis said the RRB issue would refinance BEC’s existing balance sheet with long-term funding at a “favourable” interest rate.
“This action will cause a reduction in both the ongoing debt service charge and tariff rate to consumers,” he said.
“At the same time, it gives birth to a BPL with a clean balance sheet and increases its borrowing power through its separation with BEC’s legacy debt, allowing BPL to invest in new, more efficient equipment and processes>”