The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light (BPL) and its predecessor lost almost $1bn in revenues during the 18 years to end-2021 due to the first Christie administration’s decision to cut electricity base rates below cost.

An internal BPL document, prepared by its then-Board and management shortly before leaving office after the Davis administration’s September 2021 general election victory, reveals that the roots of the state-owned electricity provider’s multi-million dollar financial woes lay in the 2003 decision to slash electricity tariffs to a level where they would be unable to cover production costs.

The consequences of this move, which was made when the late Bradley Roberts and the late Al Jarett were, respectively, the minister responsible for the then-Bahamas Electricity Corporation (BEC) and its chairman, were worsened by the failure “to streamline operations” and align costs with the reduced income.

The October 2021 paper, also compiled with help from the EY (Ernst & Young) accounting firm, said: “How did BPL/BEC amass a debt of $321m? In short, without the benefit of a detailed rate study, the electricity rates were reduced in 2003, then in 2005 from a high of 18 cents per kWh (kilowatt hour), and further adjusted in 2010 to what we have today - an average of 12.5 cents per kWh for residential customers when considering the 10.9, 11.9 and 14.9 cents per kWh price points.

“With these downward rate adjustments, BPL lost revenue, and rather than work to streamline operations and reduce costs to match the revenue losses, the company did very little to control costs. As such, the company had to continuously borrow money in order to continue to operate.

“Given the reduction of the tariff rates, it is estimated that BPL has lost just over $980m in revenues over the past 18 years, which is unsustainable for any entity especially if no adjustments were made to streamline operations,” the document added.

“As a consequence, inadequate funds were invested over the years in maintaining and upgrading the assets of the company, hence the multiplicity and crescendo of generation issues that led to the summer 2019 load shedding experience.” Given that further years have elapsed since the October 2021 report, it is likely that the 2003 rate cut has cost BPL over $1bn in revenue.

The paper detailed the Minnis administration’s efforts to refinance BPL’s $321m legacy debt, as well as generate additional capital to upgrade its transmission and distribution assets, network infrastructure and tackle legacy environmental and pension liabilities via the now-abandoned $535m rate reduction bond (RRB) financing.

This would have issued bonds to raise funding from local and international investors, who would have been repaid interest and principal by BPL’s business and household customers via their monthly bills. The Davis administration dropped the plan after global capital markets and interest rates moved against The Bahamas following the COVID-19 pandemic, making the RRB’s debt servicing costs too burdensome for Bahamians.

However, Michael Pintard, the Opposition’s leader, yesterday argued that the Davis administration had a chance to proceed with the refinancing while also admitting that its Minnis administration predecessor - in whose Cabinet he served - “missed the window” to place the RRB itself.

“We missed the window of opportunity by going early in the election, and not moving to resolve the issue,” he told Tribune Business. “As the new leader of the party, we missed an opportunity and all of us in Cabinet at that time take responsibility in that regard...

“But even though we missed the window on the RRB, the PLP came in and interest rates on the global markets, the interest rates in order to execute the RRB were still attractive enough for the PLP government to proceed with the RRB. They had the exact same package of information. We missed the opportunity, and the same opportunity they missed on by dismissing it out of hand.”

BPL’s October 2021 document, detailing a series of delays that hit the planned RRB offering, said: “Due to the March 2020 declaration that COVID-19 had become a global pandemic, the world financial markets became unstable. In addition, the pandemic dramatically affected the Bahamian economy, impacting local market conditions.

“The RRB offering was subsequently put on hold until the markets became more favourable for the RRB offering. This was done to ensure that the Bahamian people get the best possible price for the RRB offering. Citi was asked to conduct a market sounding exercise in the summer of 2020, and it was discovered that there was only interest in the RRB at significantly higher interest rates, and it would be very difficult to fully subscribe the offering with the established bond quantum.

“This would not work for the company because BPL’s debt exceeded $300m, and with a bond offering not fully subscribed there would be no funds available to support investment in infrastructure.” As a result, BPL’s refinancing had to be restructured to focus on privately-placed loans and bonds with CIBC Caribbean called on to gain feedback from potential investors.

“It was determined that there was interest in the transaction that was commensurate with the $535m bond quantum, with an interest rate that was very favourable and comparable to the initial modeling of the RRB costs,” the BPL report added.

“Given this encouraging response, the choice was made to pursue this alternate financing solution, fully recognising that additional amendments to the 2019 Rate Reduction Bond legislation would be needed before the offering could be made to the market....

“There was additional work to package for the market, address the new requirements under this financing option, and refresh documents given the time lapse and developments due to the pandemic. This would represent an increase in costs,” the report said.

“However, given that the bond quantum was fixed at $535m there would be no additional fees levied on the consumer instead the use of proceeds was adjusted to accommodate the additional costs. All legal amendments and offering documents for the revised bond offering were completed in June 2021.

“BPL, along with the Bahamas Rate Reduction Bond Company (BRRBL), went to the Cabinet to seek approval for the required amendments so that the bond could be offered to the market before August 2021. Unfortunately, Parliament was put in recess for the summer before the amendments could be introduced and passed in Parliament.”