The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light’s (BPL) outgoing Board yesterday pushed back against the Davis administration’s bid to kill-off the utility’s $535m refinancing by defending it as the “optimal solution”.

The departing directors, headed by chairman Dr Donovan Moxey, issued a statement reiterating that fuel price reductions and electricity generation efficiencies stemming from the proposed rate reduction bond’s (RRB) placement will - “within three years” - produce savings that outweigh the costs imposed on BPL customers from this refinancing.

Suggesting that the bond’s debt servicing costs would initially increase energy bills by between 15 percent to 18 percent, slightly less than the 20 percent suggested by Prime Minister Philip Davis last week, the outgoing Board said this would amount to a rise of between $27 and $32 per month on the average consumer’s $180 bill.

Pointing out that BPL’s $321m legacy debt is not going anywhere, and represents a “significant burden” to the utility’s cash flow worth $2m in monthly interest costs, the statement affirmed that the Government (meaning Bahamian taxpayer) is having to pump cash into the state-owned monopoly to keep afloat because it is unable to borrow funds by itself.

The outgoing Board argued that removing this debt by paying it back through the RRB proceeds, which will remain off BPL’s balance sheet, would leave the utility free to finance transmission and distribution and other key infrastructure developments while persisting with a hedging initiative said to have already reduced customer fuel costs by between 38-44 percent.

Describing the RRB bond’s placement as critical to unlocking cheaper electricity prices and stable, more reliable, energy supply, the departing directors said the $535m raise was also a critical component in their plan for BPL to achieve “an annual operational profit of 5 percent to 7 percent of gross revenues”.

Whether this plan will receive the go-ahead is now subject to doubt, though, after the Prime Minister last week said the “20 percent” rise in electricity costs - which will be produced by customers having to service the bond debt via their monthly light bills - “cannot be justified” given that so many businesses and households are struggling to recover from COVID-19’s devastating fall-out.

Michael Halkitis, minister of economic affairs, subsequently said it was safe to interpret the Prime Minister’s comments such that BPL’s RRB was effectively “dead in the water”, at least for the moment. However, the outgoing Board said the bond issue had been viewed as “the optimal solution” for BPL’s woes for six years - starting when Mr Davis had ministerial responsibility for it.

The Rate Reduction Bond Act 2015 was passed by Parliament when Mr Davis was then-deputy prime minister, and the now-immediate past Board said: “Solving BPL’s financial issues while investing in its people and infrastructure is not an easy task. BPL’s mandate, however, requires the supply of energy to be reliable and its costs to be low and stable.

“Energy price stability is key to supporting investment in new businesses ventures, and allows business owners to better manage their operational expenses. A Rate Reduction Bond coupled with a comprehensive generation, infrastructure and human resource development strategy, is perhaps the best solution to achieve this objective.”

The statement bore BPL’s logo and appeared as an official press release, but Tribune Business inquiries established it was sent out by the outgoing Board rather than the successor selected by the Davis administration.

With BPL mired in debt and strapped for cash, the departing directors explained that the RRB was one element in a strategy that also involved a fuel hedging initiative covering all fuel types; investment in new generation engines capable of running on liquefied natural gas (LNG) and reducing carbon emissions by 40 percent; and renewable energy investments.

Other key components included reaching a 25-year power purchase agreement (PPA) with an independent power producer (IPP) to supply New Providence’s baseload electricity needs at a far lower cost than BPL was capable of doing, meaning the long-running talks with Shell that have yet to conclude, plus investments in smart grid technology.

With BPL’s balance sheet carrying $246m in debt when the Minnis administration took office in 2017, the statement said another $75m was added in early 2018 to finance the voluntary separation (VSEP) initiative to reduce BPL’s workforce. This was intended to help the utility better manage expenses and improve operational efficiencies.

“With the additional debt that was taken on, the company is now $321m in debt. This debt presents a significant burden to the company’s cash flow; debt service obligations average about $2m per month,” the outgoing Board said.

“The Government has had to inject cash into the company in order for it to be able to operate because it has reached a state where the company cannot borrow money on its own..... The debt that BPL has accumulated can best be removed via the kind of non-recourse funding that the Rate Reduction Bond provides.

“This will clean BPL’s balance sheet and allow it the opportunity to operate without financial encumbrances, as well as provide the necessary funding to support key infrastructure investments.

“Understanding that the imposition of the RRB would increase customers’ bills by about 15 percent to 18 percent which translates to an additional $27 to $32 per month on the average consumer’s $180 bill, BPL embarked on a strategy to minimise this impact to customers via the use of fuel hedging.”

The former Board said this strategy had reduced the fuel rates facing BPL customers from 17-19 cents per kilowatt hour (kWh), when it was first brought in during 2020, to 10.5 cents per kWh - a 38-44 percent saving.

This hedge is due to remain in place until June 2022, although it fuel costs will rise slightly due to increases in global oil prices. It was designed to last until BPL’s ‘Station D’ at Clifton Pier was completed and the new 230 Mega Watts (MW) of baseload electricity generation transitioned to LNG as the primary fuel source.

“It is intended that BPL will hedge LNG moving forward, and it is estimated that the fuel charge will be reduced to a range of 8 to 9 cents per kWh, providing additional savings to BPL’s customers and thus essentially eliminating the impact of the RRB fee to its customers,” the outgoing Board said. 

“This can all be achieved within three years of the closing of the RRB transaction. Thereafter the impact of the RRB fee will essentially be eliminated on customer bills.” Mr Davis, though, is arguing that the short-term pain inflicted on consumers by the RRB-induced hike in electricity bills cannot be justified in COVID’s immediate aftermath even though there are long-term gains.

“Additionally, the increased operational margin that will be realised by BPL due to the lower fixed cost of generation via the long-term baseload PPA, as well as lower costs of generation in the Family Islands due to increased use of renewable generation... will allow BPL to operate for a longer period, perhaps up to an additional seven to ten years, without the need to ask for a rate increase from its regulator,” the outgoing Board said.

“The base load PPA is intended to be in place for at least 25 years, and this will provide the company with sufficient time to ensure that it works to streamline its operations as much as possible, earn an annual operational profit of 5 percent to 7 percent of gross revenues, and invest these funds into initiatives that continue to improve infrastructure, reduce costs, and maximise operational efficiencies.

“Additional annual profits would also come to BEC/BPL via its planned equity stakes in the Independent Power Producer (IPP) and the LNG terminal facility.” The RRB was to be structured such that the new $535m debt was to be kept off BPL’s balance sheet by having it issued through a special purpose vehicle (SPV), the Bahamas Rate Reduction Bond Company Ltd.

This would have allowed BPL to start afresh with a debt-free balance sheet, enabling it to invest in upgrading its own infrastructure without the need for taxpayer support. BPL customers, via a new charge added to their monthly bills, would be responsible for servicing the interest due on the RRB debt to investors who had purchased the bonds.