The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The successful bidder(s) for the Bahamas Electricity Corporation (BEC) will inherit potentially massive environmental liabilities, it was revealed yesterday, in addition to a $350 million debt mountain and $81 million employee pension fund deficit.

Simon Townend, a KPMG (Bahamas) partner and managing director of its corporate finance arm in the Caribbean, said liabilities arising from oil spills and other pollution inflicted by BEC “could be over $100 million”, yet were currently unknown.

KPMG is a key adviser to the Government on BEC’s restructuring/partial privatisation, and Mr Townend indicated to a Bahamas Institute of Chartered Accountants (BICA) conference that the winning bidder(s) could face a massive unknown exposure.

Whether that will impact the pricing proposals that the six remaining bidders are supposed to submit by today’s deadline, let alone their willingness to bid, remains to be seen, but Mr Townend expressed confidence that some “fairly robust” offers would come in.

“We have these very significant environmental issues, not least at Clifton Pier, but elsewhere. These environmental issues have built up over many, many years,” Mr Townend said.

“It’s going to take a lot of work and money to figure out what the damage is. It could be $40 million, it could be $80 million, it could be over $100 million to sort out the environmental issues. But we don’t know what the figure is until the work is done.”

Mr Townend later confirmed to Tribune Business in an interview that the Government is hoping to use BEC’s split into two, a generation and transmission/distribution entity, to get some $223 million in debt it has guaranteed on the Corporation’s behalf off its balance sheet.

At the 2013 half-year, data from the Central Bank of the Bahamas showed that the Government had guaranteed some $222.79 million in debt on BEC’s behalf, some 37.5 per cent - the largest single chunk - of its total $594.864 million in contingent liabilities.

Getting this off its balance sheet would allow the Government to create the appearance of a decent reduction in a national debt approaching $5.5 billion.

Mr Townend said the remaining six BEC bidders - four on the generation side, two on the distribution side - had all been asked to assess how the Corporation’s existing debt could be refinanced without a government guarantee.

He broke its “legacy debt” load down into $180 million that had been guaranteed by the Government; $90 million worth of term loans backed by revenues from street lighting; and a $40 million deficit involving its bond sinking fund.

This, Mr Townend indicated, had come resulted from a bond sinking fund that held $60 million against some $100 million in outstanding bond principal.

“One thing the Government doesn’t want to have is any charge on the Consolidated Fund arising from this process,” Mr Townend told Tribune Business.

“That debt has to be refinanced, and we’ve asked the bidders to look at that and see how that can be done without a government guarantee. Ultimately, it’s going to come down to ideally no charge on the Consolidated Fund, and secondly, the lowest possible cost of debt servicing.”

Tribune Business has previously reported how the Government’s requirement that the winning bidder(s) refinance BEC’s existing debt was causing concern among the remaining six, as the absence of a state guarantee would inevitably lead to them incurring higher interest (debt servicing) costs - something that would have to be passed on in their bid pricing and to consumers.

Mr Townend, though, said KPMG, as the Government’s financial advisers on the energy reform process, had proposed a number of creative options for BEC’s refinancing, including rate reduction bonds.

These are normally issued by a special purpose vehicle (SPV), set up for a particular purpose, and securitise (monetise) cash flows generated from fees charged to utility consumers.

In such a scenario, BEC clients would be charged a fee to service the refinanced debt incurred by the split entity’s new partners.

“Things like rate reduction bonds are an option to be considered,” Mr Townend told Tribune Business. “That type of bond is a direct, legitimate charge on the tariff. They are usually ‘Triple A’ rated, and are instruments that can be used to partially offset the level of debt.”

Mr Townend further told this newspaper that BEC’s existing debt load would be split between the generation and transmission/distribution sides, but the intention was not to financially cripple them from the outset.

“What we’ve proposed is a portion of the debt goes into the transmission and distribution company, but at a very low level of leverage for that company,” Mr Townend told Tribune Business.

“The idea is both companies start life with a solid financial footing.”

As for the pension fund deficit, Mr Townend said addressing this was not impossible, a similar situation having been dealt with when the Bahamas Telecommunications Company (BTC) was privatised in 2011.

He acknowledged, though, that the BEC situation had “additional complications” because the Corporation was being split into two, with staff going one of two ways.

“We’re looking at ways to structure that,” Mr Townend told Tribune Business when it came to filling the pension hole.

BEC’s last financial statements, from 2010, revealed that the pension plan - which is 100 per cent funded by the Corporation, with no employee contributions - had $151 million in assets, and $221.357 million in liabilities.