The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

GRAND BAHAMA Power Company will slash annual debt servicing costs by $600,000 through redeeming 43 per cent of its preference shares, with the benefits passed on to consumers.

The utility, in e-mailed responses to Tribune Business questions, said December 2017's $15 million redemption was part of its commitment to "mine savings" and avoid rate increases to recover Hurricane Matthew's $28 million restoration costs.

The $15 million, out of a total $35 million preference share debt, will be replaced by lower cost bank debt, as GB Power exploits the Bahamas' historically low interest rates to refinance its balance sheet.

"The decision to refinance the preferred shares with bank debt was done after an analysis of our balance sheet and capacity to take on bank debt," GB Power told Tribune Business. "We are redeeming the preference shares so that we can reduce our debt service cost.

"As we committed to following Matthew, we are mining savings out of other parts of our business. This transaction will save us $600,000 annually to help mitigate the downturn in sales being experienced."

GB Power and its 80.37 per cent majority shareholder, Emera, previously told this newspaper that the former's electricity sales were down 10 per cent year-over-year as a result of the Grand Bahama economy's ongoing recovery from Hurricane Matthew's ravages.

Its preference shares are divided into two classes, with $32 million in Series A and the $3 million remainder in Series B. GB Power said the decision to only redeem $15 million, or 43 per cent, of the principal on December 20 was based on an analysis of its capacity to "take on new debt and manage our balance sheet".

GB Power also emphasised that the preference share redemption is not related to the proposed buy-out of Bahamian minority shareholders in ICD Utilities, the BISX-listed holding vehicle for a collective 50 per cent equity interest in the energy utility.

The 19.63 per cent minority are due to vote on whether to accept Emera's offer on November 7, amid questions over the latter's motives and the potential total loss of Bahamian ownership in what many regard as a key Bahamian infrastructure asset.

Royal Fidelity Merchant Bank & Trust, in a note to clients yesterday on the proposed transaction, warned that Bahamian investors could be exposed to currency fluctuations if they accept Emera's Depository Receipts (DRs) - in whole or in part - for their ICD Utilities shares because the underlying securities are denominated in Canadian dollars.

The investment bank, outlining the 'pros and cons' of the options offered by Emera, pointed out that because its shares and dividends are in the Canadian currency, DR holders will be "exposed to the benefit or cost of appreciation or depreciation, respectively, of the Canadian dollar against the US dollar".

The Bahamian dollar is pegged one:one to the US dollar, and RoyalFidelity's client note means that investors who take either of the two options involving DRs will be exposed to currency risk - something few may have accounted for.

This, together with the 25 per cent Canadian withholding tax on dividends that will be paid to Bahamian shareholders, makes the DRs a less attractive option than initially thought, and will likely raise suspicions that Emera's offer is tilted towards nudging investors to accepting the all-cash payout.

Bahamian shareholders in ICD Utilities have been given three 'exit route' options that may generate increased investment value. They can accept a price of $8.85 per share for their holdings, representing a 26.25 per cent premium to the current $7.01 BISX price, and 33 per cent premium to the "24-month volume-weighted average price".

Alternatively, they can trade their ICD Utilities shares for 0.913 Emera depository receipts, enabling them to switch their narrowly-focused investment in GB Power for an international stock with worldwide utility investments.

Four depository receipts will equal one Emera share, giving Bahamian investors exposure to the potential upside generated by the Canadian utility's spread of assets in Canada and the Caribbean. The third and final choice is to take a combination of cash and depository receipts (DRs).

RoyalFidelity, though, said the withholding tax and currency risks were offset by Emera's strong operating and dividend performances, with the majority of analysts covering the company rating its stock highly.

"Emera has a dividend yield of 4.31 per cent for 2017, has increased its dividends on a regular basis in the past, and has already approved an increase of 8 per cent for the next year," the Bahamas-based investment bank said.

While the withholding tax would have slashed the 2017 dividend yield from 4.31 per cent to 3.23 per cent for Bahamian DR holders, RoyalFidelity said Emera's diversified operations throughout Canada, the US and the Caribbean gave locals the chance to invest in a profitable international company.

"Overall, Emera appears to be a fundamentally sound and geographically well-diversified company with room for growth," RoyalFidelity said. "It has an overall positive outlook by the 16 analysts that closely follow the company.

"Eight of 17 analysts rate the stock as a buy, with another eight as a 'hold' and the remaining one as a 'sell'. The average 12-month target price is Canadian$53.79, with a return potential of 10.5 per cent."

Emera's key assets include Canada's Nova Scotia Power, and Emera Maine and Tampa Electric in the US. Pipelines also figure among its properties, with Emera's market capitalisation pegged at Canadian$10.31 billion.

One Bahamian capital markets source, speaking on condition of anonymity, told Tribune Business that ICD Utilities shareholders were being distracted from the merits of Emera's offer by "the noise in the marketplace".

They added that majority shareholder buy-outs of minority interests in the same company were a relatively routine transaction for global capital markets, and expressed concern over recent government comments suggesting the transaction was still being reviewed despite regulatory approvals having already been granted.

"There's too much noise, and people are getting lost in stupid stuff and missing the key pieces," the source said, adding that the premium being offered to Bahamian investors was similar to what Emera granted Barbadian shareholders two years ago.

"This noise in the marketplace about Bahamians being forced out of this asset, which is already 80 per cent owned by Emera, doesn't make any sense to me. What's the difference between zero per cent and 20 per cent? People should be much more aware this [buy-out offer] is the standard, and not try to find fault with what is a straightforward transaction."