By NEIL HARTNELL
Tribune Business Editor
The Christie administration doomed PowerSecure to failure by failing to complete Bahamas Power & Light’s (BPL) $600 million refinancing “within six months” of the management deal.
The BPL ‘business plan’, tabled in Parliament yesterday, openly warned the former government that a combination of political interference and failure to move swiftly on addressing its financial needs would block the much-needed reforms craved by all Bahamians.
In a section entitled ‘Risks to Executing the Business Plan’, which turned out to be spot on, PowerSecure said the $600 million Rate Reduction Bond (RRB) that was critical to refinancing BEC’s legacy liabilities had to be placed within six months of the March 2016 management services agreement (MSA) being signed. It is now September 2017, and neither the RRB nor any other form of refinancing is close to being completed.
And top of the identified ‘risks’ is ‘political risk’, with PowerSecure demanding “strict adherence to disconnection policies” - something that is especially ironic given the furore that erupted this week with the revelation of a ‘don’t disconnect’ list for politicians and top public officials.
Realising that itself and BPL would likely be susceptible to political interference, PowerSecure wrote: “Political risk exists as BPL executes on key performance improvement initiatives, including but not limited to, collection processes including strict adherence to disconnection policies and pre-pay requirements, staffing levels and reduction in workforce initiatives.
“In other words, political interference with the execution of the business plan will impair making BPL a viable and solvent entity.” That warning went unheeded, with the former government both blocking PowerSecure’s bid for a base tariff increase and tying its hands by failing to refinance the utility.
It is also unclear whether BPL received $75 million in interim or ‘bridge’ financing that its now-former management partner said was essential “immediately” to begin work on 140 Mega Watts (MW) of new generation capacity.
“If the rate reduction bonds are not underwritten or fully subscribed whereby the BEC debt is paid in full, pension liability is funded and approximately $140 million of equity is funded into BPL within the first six months of the MSA, then BPL will not be able to execute its performance improvement initiatives in a timely manner,” PowerSecure warned.
Acknowledging the difficulties and risks associated with such a major refinancing, the PowerSecure-authored ‘business plan’ suggested several steps that could be taken to ensure the RRB was placed and subscribed for by Bahamian and international investors.
The US utility operator also included what in effect was a ‘poison pill’ deadline regarding the RRB, adding that it would be entitled to its full $3 million annual performance fee if the bonds were not issued by March 2017.
Arguing that this treatment should extend for every year the RRB was not placed, PowerSecure wrote: “In the event that the rate reduction bonds are not underwritten or fully subscribed within the first year, then PowerSecure should not be held responsible for the impact such delay or failure has on the operational performance initiatives, and be entitled to the entire performance incentive fee for the first year of the MSA. The same arrangement would exist for each subsequent year.”
Many observers are likely to frown at such a ‘penalty clause’, but the BPL business plan reiterates in numerous places how vital the refinancing of the Bahamas Electricity Corporation’s (BEC) legacy debts is to turning the utility monopoly around and reforming the energy sector.
“PowerSecure’s ability to execute the modernisation strategies rests on the ability to raise the financing required to fund more than $450 million of capital investments,” the BPL business plan said.
“Any delays in the interim financing ($75 million) or Rate Reduction Bond issuance will delay the plan as designed, and limit the options available to reduce the cost of service” to Bahamian businesses and households.
The Christie administration is thought to have baulked at placing the RRB because it would likely have resulted in a small increase in Bahamians’ electricity bills, something that was not desirable prior to a general election.
The BPL business plan suggests that the $600 million bond, earmarked for placement in January 2017, would have added a $0.03 (three cent) per kilowatt hour (KWh) charge to consumer bills for the first five years to meet interest payments to investors. This charge would then rise to four cents per KWh for the remaining 20 years of the 25-year bond.
Another $100 million RRB tranche was planned for January 2018, which would have added a smaller charge to BPL customers’ bills in order to meet the investor repayments.
The former government is also understood to have encountered difficulty in arousing investor interest in the RRB, with institutions viewing the 6.85 per cent interest rate as too low for the risk they were taking, amid calls for BPL to fix its underlying problems before they would invest.
Desmond Bannister, minister of works, previously told Tribune Business that the Christie administration appeared to have abandoned the RRB option. But, taking a similar stance, he reiterated to this newspaper that the Minnis administration would not support a refinancing solution that raised electricity costs for Bahamians.
The BPL ‘business plan’ confirmed that the RRB proceeds would be used to pay off BEC’s $315 million in legacy debt, and fill the $110 million ‘hold’ in its employee pension plan.
The remaining $140 million balance would be transferred to BPL, which would use the monies to pay off the initial $75 million in ‘bridge’ financing.
“BPL will use the interim financing ($75 million) to set up the planning, engineering and design of the generation modernisation capital investment at Clifton Pier,” PowerSecure said of its intentions to build a new 140 MW power plant, which were never fulfilled.
This would leave $65 million for “working capital and capital expenditure”, and the business plan added: “Through the financial modernisation strategies presented above, more than $140 million of capital will be available to support the working capital and modernisation strategies.”
PowerSecure said the $140 million capital contribution from the refinancing would have given BPL $670 million of net equity, adding to $520 million in net assets on an “unencumbered balance sheet” with no liens or security attached.
With $105 million in “positive working capital”, PowerSecure said BPL would have been “on track to generate, or have generated, $70 million of EBITDA” by 2016 through executing the initial components of 60 performance improvement initiatives.