|BEC bidders consider creative solutions to debt woes|
Guardian Business Editor
Published: Nov 15, 2013
Creative solutions to refinancing Bahamas Electricity Corporation’s existing debt without a government guarantee are presently being discussed among would-be bidders in the BEC reform process – with one proposal being the issuance of bonds that will be repaid from a fee charged to utility users.
Simon Townend, managing partner for KPMG Bahamas, the financial advisor for the BEC reform process, revealed that the government is continuing to seek bidders who can find a means to refinance BEC’s existing debt – which stands at $350 million, of which $180 million is government guaranteed – without the need for such a guarantee going forward.
As Guardian Business previously reported, this intention of the government – which would, if successful, see the government able to remove $180 million in debt from its list of contingent liabilities - had raised eyebrows among some participants in the BEC reform process, who viewed the condition as particularly onerous.
To date, said Townend, one means discussed is the issuance of a rate reduction bond (RRB), which typically involves the securitization of a cash flow stream generated from a fee charged to utility customers and an issuance made via a special purpose vehicle that would isolate the bondholders from risk associated with the originator and servicer of the debt.
Tackling this debt burden is just one of the major challenges on the plate of those involved in the BEC reform process.
Addressing the Bahamas Institute of Chartered Accountants (BICA) annual Accountants Week at the Sheraton Nassau Resort yesterday on the BEC reform process, Townend added that other hefty problems to be addressed include financial constraints on the corporation in the form of pensions and other liabilities, as well as the significant environmental issues to be addressed, not only at Clifton Pier.
In addition, arrangements must be made for staff and how they will be “transitioned”, union arrangements, pensions and benefits. The BEC pension plan at present involves an $81 million accounting deficit, noted Townend, while the environmental liabilities “can be best summed up as ‘$XXX?’ due to the level of unknowns at present,” said Townend.
“It’s going to take a lot of work just to figure out what the environmental damage is and once that’s figured out then it obviously needs to be remedied. It could be $40 million, it could be $80 million, or it could be well over $100 million.”
“And then in the Family Islands, there’s 28,000 customers – there’s quite a range of customer levels. Some are very long – Andros, Eleuthera, so to serve these communities that are so spread out... you have to have that transmission and distribution to service all of those communities.”
Meanwhile, the “elephant in the room”, said Townend, are BEC’s fuel costs, which presently make up – in conjunction with the efficiency of generation equipment – over 50 percent of electricity costs.
Bidders are expected to propose how they will reduce fuel costs, and hence, consumers’ power costs. Some observers of the reform process have expressed scepticism to Guardian Business about how bidders could significantly reduce this cost so long as they continue to utilize existing generation facilities.
“Fuel is the biggest problem,” said the KPMG partner in his presentation to BICA.
Breaking down the cost of services, which stood prior to the removal of excise tax from fuel at 42 cents per kilowatt hour in New Providence, and 52 cents per kilowatt hour in the Family Islands, Townend’s figures showed that fuel costs accounted for 22 cents of this cost in New Providence and 26 cents in the Family Islands.
‘Line by line’
Beyond this, bidders are expected to go “line by line” and demonstrate how they can achieve reductions in the cost of each line items currently contributing to BEC’s cost of electricity provided.
Meanwhile, noting that BEC presently has 1,023 employees, Townend said that one of the key points to be addressed is how this “overhead” will be divided between the two entities.
In favor of being able to split BEC into two companies without causing an increase in administrative costs, Townend suggested that BEC is “already quite departmentalized” in terms of its transmission and distribution functions, and that this would minimize the difficulty in achieving the separation of these two portions of BEC’s operations into two entities.
The KPMG partner suggested that all of the above is expected to be addressed by the bidders in their proposals to the government.
“Winning bidders will then have several months in 2014 to refine those plans and get them approved and then implement them.”
Once in place by mid-2014, Townend said that the electricity cost reductions the government is prioritizing are promoted by the fact that bidders will see that their incentives and remuneration will be based on cost savings and “not on some kind of revenue incentive”, meaning that they will have greater urgency to bring down costs as a priority, rather than raising electricity sales, suggested Townend.
Meanwhile, the generation company will be tied into the terms of a power purchase agreement in which it will be called upon to provide power at a fixed cost to the transmission and distribution company, and therefore will need to strictly manage its costs.
“That agreement will be what makes sense not just from a cost perspective but also from a reliability and security perspective,” added Townend.
“You don’t want to have the lowest cost option and then find the power is going out every day. So we want security as well.”
In the Family Islands, Townend revealed that the government is seeking a PPA that will focus on incentivizing improvements in reliability and reductions in cost, while still maintaining the unified tariff for The Bahamas.
With respect to the ownership structure post-reform, Townend reiterated that on the transmission and distribution side, NewCo, the government intends to retain control of the entity, allowing for a situation similar to that at the Lynden Pindling International Airport where it owns the assets but has a management company to manage and develop the airport.
Meanwhile, Townend noted that in the case of JVCo, the generation company, the government intends to maintain an as yet undetermined “quantum of interest” as a joint venture partner.
“It will largely be determined subject to negotiation with the preferred bidder. It will really take into account the level of investment and how that investment is made equity, debt and the ultimate cost of power to the consumer through the PPA arrangements. That will factor into what the percentage ownership of that company should be. Whatever it is the government will have suitable levels of protections given that this will be the major supplier of power to The Bahamas.”
Thirteen companies registered to participate in the request for proposal process, and six bidders to enter the second round of the request for proposal.
With pricing proposals due today, the next step will be to select the preferred bidder for the transmission and distribution and generation side.
“There’s some pretty large teams coming in so we are hoping that tomorrow we’ll get some pretty robust pricing proposals that the government can then choose to move forward with.”
KPMG, along with DNV Keema, the technical advisor, and Hogan and Lovells, the legal and regulatory advisor in the BEC reform process, are expected to choose “preferred bidders” from among those who submit pricing proposals tomorrow. These recommendations will then be reviewed by the government who will make the final determination regarding who they enter into what is expected to be a six- to eight-week negotiation period with.
Townend revealed that there has been little government “visibility” of the proposals put forward by the bidders to date.
Responding to a question from the audience regarding disclosure of the companies involved in the process, Townend said this could occur once preferred bidders are selected, but at the moment the process is governed by confidentiality.