The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Grand Bahama Power Company (GBPC) is projecting that its net income will “improve significantly” by 42.1 per cent this year, rising to $12.331 million on the back of cost efficiencies and its ‘return-based’ tariff structure.

The forecast, which shows Grand Bahama’s monopoly power provider generating an estimated $8.676 million net income after tax (NIAT) for 2012, is contained in the offering document for its $32 million preference share offering that launched yesterday.

The $30.875 million net proceeds from the offering, which is private, meaning it is being targeted at specific high net worth and institutional investors, and that ordinary Bahamian investors should not apply, will be used to repay loans made to GBPC by its immediate parent, Emera Caribbean.

These loans financed the construction of GBPC’s new $72 million West Sunrise Plant, and the preference share offering is intended to alter the company’s debt-to-equity capital structure from one that its 76:24 weighted in favour of debt to just 60:40.

Asserting that its three-year turnaround programme was starting to bear fruit, GBPC’s offering memorandum said it had managed to reduce 2010’s $2 million net loss to just $490,000 in 2011.

Now, with the West Sunrise plant expected to generate increased operational efficiencies/cost savings, and the new rate structure allowing for a 10 per cent return on the base tariff, GBPC is projecting that its net profit margin will increase from 7 per cent in 2012 to 10.5 per cent this current financial year.

And, providing some New Year cheer for its ordinary shareholders, GBPC said it expects to be in position to resume dividend payments in 2013.

“Improved operating efficiencies generated from the new plant are yielding significant savings versus prior years, resulting in increased profitability,” GBPC said in the offering document.

“Fuel costs and their correspondent fuel revenues are predicted to fall from $64.1 million in 2011 to $48.9 million in 2013, (a drop of 23.3 per cent), resulting in declining top-line revenue and combined strong growth in gross and operating profits.”

It added: “GBPC’s net profit margins were 7.8 per cent in financial year 2008, and fell drastically to financial year 2010’s low of -1.9 per cent.

“As of financial year 2012, margins are projected to increase to 7 per cent and to further improve to 10.5 per cent in financial year 2013 in the first full year of operating under the new rate structure.”

GBPC’s rate structure, agreed with the Grand Bahama Port Authority (GBPA), has changed radically from the historical model where the electricity provider would apply for ‘cost of living adjustments’ based on the inflation rate.

The new one allows GBPC to earn a 10 per cent return on its base tariff rate, something that is expected to “drive ameliorated earnings for GBPC going forward”.

The offering memorandum said that after falling from 1.99x in 2009 to 1.55x in 2010, GBPC’s debt service coverage ratio (DSCR) is expected to recover to 1.83x this financial year.

“Despite declining profitability over 2008-2011, GBPC never violated any of its bank debt covenants throughout this period and its service cushion is only expected to improve going forward,” the document said.

“With the implementation of its three-year turnaround plan, this highlights the ongoing improvements in GBPC’s financial performance, which should alleviate potential investor concerns surrounding debt serviceability.

“GBPC’s profitability is projected to improve significantly over the forecast period, as the combination of a more cost efficient operation due to the operation of the new West Sunrise generation plant, combined with its new ‘return based’ rate structure that came into effect on July 1, 2012 bear financial fruit.

“The resulting ratios demonstrate this effect across the board with strong margins, profitability returns, lower gearing and even more robust debt coverage levels.”

For the year to end-August 2012, GBPC said net income had increased 51 per cent from $1.103 million the prior year to $1.666 million.

“The August 2012 year-to-date interim financials indicate a return to profitability for GBPC versus financial year-end 2011, driven by continued revenue strength and improved margins,” the offering document said.

“We also note that GBPC’s new return-based rate structure went into effect on July 1, 2012, and this is expected to be the main driver behind GBPC’s improved financial performance going forward. Comparing the August year-to-date results for 2011 and 2012 shows a stronger financial performance in 2012 across all profitability measures.”

Financial analysts spoken to by Tribune Business yesterday suggested that the GBPC preference share issue, first revealed by Tribune Business back in November last year, was priced towards the high-end in the current low interest rate environment.

The 32,000 preference shares, priced at $1,000 each, will carry an interest/dividend coupon of 7.25 per cent for years one-four. This rate increases to 8.5 per cent in years five-seven, and 10 per cent thereafter, with dividends payable semi-annually.

This is provided GBPC has not redeemed them, which it has the option to do after three years.

Elsewhere, the GBPC offering memorandum confirmed that the utility was working with the GBPA to develop a fuel hedging strategy.

It added: “A fuel hedging programme will help manage the volatility in the current electric prices paid by customers and provide a degree of predictability as to future electric prices.

“A review is [also] underway assessing alternative fuel sources, including renewables, and assessing transmission interconnection to neighbouring islands and Florida.”