The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Grand Bahama Power Company’s (GBPC) $32 million private preference share issue was last night said by capital markets sources to be “pretty much fully subscribed”, with analysts expecting it to exceed its target.

“It’s pretty much fully subscribed,” one institutional investor told Tribune Business on condition of anonymity, citing the offering’s interest dividend levels and backing from 80.4 per cent majority shareholder, Emera, as reasons for its attraction.

The investor suggested that the GBPC preference shares were priced “extremely high in this environment” of low interest rates, providing investors with a 7.25 per cent interest rate return during the first four years.

“For them [GBPC} it allows them to maintain the cost of capital, and it allows them to maintain the same ownership structure,” the source said, pointing out that the minority Bahamian investors in BISX-listed ICD Utilities would have been unlikely to fully contribute in any rights issue, and this could have seen their equity stakes diluted.

They felt that GBPC was likely to repay the preference share investors before the five-year mark, when the interest coupon rises to 8.5 per cent, given that the company’s net income, which is projected to hit close to $13 million in 2013, would allow it to pay them out via cash flow and retained earnings.

Agreeing with this analysis, the head of another major capital markets institution told Tribune Business of the GBPC issue: “I think it will be an oversubscribed offering. There was an expectation there will be a big demand.”

They, too, pointed to the greater returns offered by GBPC in comparison to rival fixed income instruments such as bank deposits.

They also noted that many fund managers and institutional investors had cash sitting around waiting to invest, given that there had been few major capital markets financings for some time.

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, was contained in the offering document for the $32 million preference share offering.

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.

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.”