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Last Updated: Feb 13, 2017 - 1:45:37 AM |
 Nassau, New Providence - Communication by Hon. Philip E. Davis, Q.C.
Member Of Parliament (Cat Island, Rum Cay, and San Salvador) Deputy
Prime Minister and Minister of Works & Urban Development announcing
Management Services agreement between Bahamas Power and Light Company
(BPL) and Powersecure Inc. on Wednesday, 3rd February 2016 House Of
Assembly Commonwealth Of The Bahamas:
It is with great pleasure that I announce here today that the Cabinet of the Government of The Bahamas has given its approval for Bahamas Power and Light Ltd. to enter into a Management Services Agreement with PowerSecure Inc. With this exciting step, PowerSecure is poised to assume management control of BPL in the coming weeks and The Bahamas can enter the next phase of its energy sector transformation.
For many years now, consumers have had to deal with extremely high electrical bills and far from satisfactory services from an inefficient and debt-ridden Bahamas Electricity Corporation (BEC). This agreement is another step in creating a new, vibrant, efficient, and lower cost utility provider.
Before I go any further, I will celebrate with the Bahamian people, something that every pocket must now appreciate. When compared to 2014, the fuel charge is dramatically reduced. In fact, the fuel charge has fallen from 27.7 cents per kWh in October 2014 to 10.9 cents per kWh in December 2015. Less than 40% the earlier rate.
Sixty percent (60%) of our electricity bills was due to the cost of fuel. Notwithstanding the temporary relief to our pockets now, it remains urgent to continue pushing these reforms forward as the cost and reliability of supply of energy has proven to be a deterrent to investors, who feel the cost of coming to The Bahamas was prohibitive.
Indeed, for many years now, Bahamians and investors alike have complained that energy costs are exorbitant. Apart from the cost of energy, the security and reliability of energy supply are also highly frustrating concerns. The single most important factor to driving down costs that encourage investment, entrepreneurship, ownership, and security relates to electricity.
For these reasons and more, The Government embarked on an ambitious energy reform process in August 2013, the objectives of which were to realize significant and sustainable reductions in the cost of energy, a financially healthy electrical utility company, increased energy security, improved reliability of energy, better customer service, more responsible environmental attention, and, ultimately, increase our competitiveness and marketability as a country. It is a process of true reform.
From the Request for Proposals (RFP) for the Management of BEC, which was initially issued in August 2013 to the announcement of PowerSecure as the preferred bidder and execution of the Transition Services Agreement in July 2015, to the approval of an investment grade BPL Business Plan and passage of the compendium of Electricity legislation in November 2015, this Government has kept foremost in view the need to aggressively embrace a realistic and permanent solution for a viable future.
The Need for Change
Mr. Speaker,
As we are all too aware, BEC is a completely unsustainable operation and unable to continue to operate under its existing structure. In particular, BEC is close to being insolvent without the support of a Government Guarantee.
We have all been witness to the resulting hardship that the dire state of BEC’s existing generation assets have caused residents and businesses – as well as the environment through high CO2 emissions and other hazards. Its disparate system design requires major capital investment of at least $450 million over the next 5 years to resolve the many issues faced.
We also know that BEC continues to incur $20-30 million in losses every year due to an archaic rate structure – a financial and operational situation that is impossible to sustain. In fact, the situation is such that BEC is now unable to obtain a credit rating, and therefore has no leverage with lenders or suppliers.
Indeed, over the past few years, BEC has been in a precarious position with its fuel suppliers in particular as well as many other suppliers, which was only temporarily resolved in November 2014 through a refinancing of existing debt. This scenario has culminated in the fact that BEC cannot borrow money without further Government Guarantees to undertake the necessary capital improvements and maintenance overhauls.
Not only this, but our country’s foreign currency reserves have been depleted to the tune of over US$300 million a year in the purchase of imported fossil fuels for generation and other equipment, services and supplies.
The proposed restructuring of BEC, commencement of operations of BPL, and dealing with the legacy liabilities, now present the opportunity to remove the current $240 million guarantee as part of the reform process, as well as reducing the strain on our foreign reserves.
The new 100% owned operating subsidiary, which is now called Bahamas Power and Light Company, Limited (BPL), will operate under private sector management by PowerSecure, in a manner consistent with this Government’s National Energy Policy.
BPL was incorporated in September 2015 and its Board of Directors was appointed in the weeks that followed. The new Board comprises the following well-known business people:
- Mr. Nathaniel Beneby, Chairman
- Mrs. Donna Smith, Deputy Chairperson
- Mr. Deepak Bhatnagar, Executive Director
- Mrs. Patricia Hermanns, Director
- Mr. Andrew Rogers, Director; and
- Mrs. Daphne Simmons, Director
The Board has also been very ably supported in its deliberations by the General Manager of BEC, Mr. Kevin Basden and his team.
The Board’s first task was the consideration of a high quality, all-encompassing investment-grade Business Plan, which was presented to Cabinet in November 2015 and approved by the new BPL Board and Cabinet.
Since then negotiations have continued on the details of the contract with PowerSecure, culminating now in a Management Services Agreement approved by Cabinet for signing.
I would like to take this opportunity to thank the Board, Mr. Basden, the advisors and all Government departments including the Attorney General’s office, and my office, for their dedication to this project over the past few months, the extremely hard work and long hours invested by them to get us to the point at which we now find ourselves.
PowerSecure
Mr. Speaker
I invite you and Members to recall that I have previously introduced the company chosen to assist us in managing BPL. However, for the record’s sake, I will again say that PowerSecure is a public company traded on the New York Stock Exchange (NYSE: POWR) and headquartered in Wake Forest, North Carolina. It has total assets of almost $300 million, shareholders’ equity of $162 million, trailing 12 month revenues at November 2015 of $375 million, and market capitalisation of $240 million (February 2, 2016).
PowerSecure’s 33-year energy veteran and Founder, Mr. Sidney Hinton, serves as its President and CEO. Under his leadership, close to 1,000 employees across the United States operate and maintain approximately 1 GW of Distributed Generation capacity. It reported 98.4% reliability for these systems in 2014, which is one of the best in the industry.
Its three-prong operations take in Utility Services (engineering and infrastructure solutions), Power Generation (distributed energy and solar installation and management) and Energy Efficiency (including production of its own LED lighting systems). The company serves many of the largest utilities in the United States.
PowerSecure specialises in Utility Scale Solar Power through its subsidiary PowerSecure Solar; and has provided both solar and storm hardening services to multiple utility customers. Of particular note is its efficient mobilisation of resources for every named storm in the US in the last 5 years. Not only that, but when The Bahamas faced the recent devastation of Hurricane Joaquin in our southernmost islands, PowerSecure immediately mobilised utility support to assist our islands in the recovery.
With its credits, the Government of The Bahamas is satisfied that PowerSecure has the technical and financial capacity required to effectively manage BPL. We are satisfied that value will be extracted from the existing New Providence and Family Island generation, transmission and distribution assets and that the company can provide the advanced asset management, efficiency retrofits, improved operating schemes, fuel selection and purchasing schemes that are required to set BPL on course to profitability.
We are very pleased that the company has the ability to manage the building of new, major generation in New Providence; as well as the ability to procure and/or manage the building of renewable energy projects on the Family Islands. In sum, and more importantly, we are satisfied that residents and commercial clients of BPL will have the customer experience that we all deserve.
This Government has never questioned the qualification and capability of BEC’s management and staff. We are keenly aware of their material challenges. With this in view, we are confident that the PowerSecure team, in consultation with experienced colleagues at BEC, will collaborate effectively to plan, design, procure, and construct generation, transmission, distribution, substation projects, and utility communication projects for BPL.
MSA Key Terms
Mr. Speaker
The BPL Board has negotiated a solid agreement with PowerSecure, supported by the Government’s financial advisors, KPMG, as well as its legal advisors, the Attorney General’s office and Hogan Lovells, and also input by DNV GL.
Under oversight of the BPL Board, the agreement gives PowerSecure full management and operational control of BPL and responsibility for all electricity generation, transmission, and distribution, procurement, and customer service. The MSA has an initial term of 5 years, with the option to be extended for an additional 5 years upon mutual agreement of BPL and PowerSecure. On an ongoing basis, PowerSecure will be required to prepare a comprehensive Business Plan and financial model each year for approval by the Board.
BPL will be managed by an executive management team comprised of PowerSecure and Bahamian employees. Further information on the management team will be forthcoming in the next weeks. PowerSecure will also appoint 2 members to serve on the BPL Board together with the Government’s 6 appointed Board members.
For its services, PowerSecure will be entitled to a base management fee of $2 million per year, adjusted for inflation annually. In addition, PowerSecure has the opportunity to earn a performance compensation bonus of up to 150% of the base fee.
Mr. Speaker
Some $2.5 million of the performance bonus will be based on achievement of eleven target key performance indicators, including factors such as the management of non-fuel costs, fuel volume usage, efficiency and fuel volatility, reliability factors such as average number of outages and the duration of such outages, customer service metrics, financial strength of BPL, and others. The remaining $500,000 will only be earned if they surpass the targets.
I now turn to the BPL Business Plan.
BPL Business Plan
PowerSecure’s five-year business plan for management of the Corporation was developed during July to September 2015, through a process that involved extensive interaction with BEC personnel. To assist its crafting, every Family Island BEC facility was visited.
The planning process was monitored, facilitated, and reviewed by the Energy Reform Transition Committee, with detailed reviews by advisors KPMG Corporate Finance (on the financial and commercial side) and DNV GL (on the technical side).
The plan will create efficiencies which will further allow for significant and sustainable reductions in the cost of energy, increased energy security and reliability, environmental responsibility and increased competitiveness as a country.
The overall improvement approach of the plan includes bringing existing assets up to service standards, thus improving their reliability and capacity, and introducing new highly efficient dual fuel engines with lower CO2 impact at Clifton Pier.
Importantly, economic dispatch measures will dramatically improve fuel mix and engine efficiency, reducing dependence on more expensive fuels. Solar energy systems will also be introduced, primarily in the Family Islands, providing renewable sources of power during peak load periods, while reducing fuel usage and transportation costs.
While these permanent solutions come online, economically sound temporary generation assets will used to support interim energy needs. The plan further aims to upgrade the transmission and distribution system and reduce costly system losses to industry accepted norms through technical optimization of the system, Advanced Metering Infrastructure (AMI), and other initiatives.
However, the plan does not focus on generation and T&D alone. It also aims to improve customer experience with expanded communication and payment options and introduction of prepaid services via the AMI system. Moreover, it would improve the experience of BPL employees through improved job training and safety programs, a stronger and more stable organization, and other measures aimed at making BPL an employer of choice for Bahamian workers.
The only way to bring down your electricity bills is to make the operations more efficient. The major efficiency gains lie in the upgrade and more efficient management of generation, transmission and distribution equipment, and in particular using less fuel to generate the power that the country needs, as well as generation plant that is able to use cheaper more efficient fuels such as natural gas.
Another significant cost if the cost of human resources. There has been much said about the scale of potential downsizing at BEC. I would like to put it on record that the Government and the Board, and PowerSecure are extremely sensitive to this issue. Once PowerSecure have boots on the ground full time, careful ongoing assessments will be made as relates to staffing.
Mr. Speaker
We do not expect any staff reductions in the near future, and if there are to be any this will be done over time in a manner that is fully open with key stakeholders and employees themselves.
Beyond improving system reliability, reducing the cost of electricity, and bettering the experience of customers and employees alike, the changes proposed in the business plan would contribute to the financial strength of the new organization.
BEC’s current annual losses of $20-30 million would be converted to sustainable profit levels, as BPL becomes a fully stand-alone, sustainable entity. Introduction of a rate reduction bond would reduce the cost of servicing BEC’s legacy debts and liabilities, while enabling BPL to use its new, clean balance sheet and stronger financial and operational management practices to establish a strong credit rating going forward.
Once they are on the ground, PowerSecure will be providing much more detail on the business plan.
Conclusion
Before I conclude, I would like to note that this communication is only the beginning of the information flow as we proceed with the handover of BPL management. More information will be coming shortly on key executives, and the business plan as noted above. As I have done in the past, I will keep this House apprised of developments.
Mr. Speaker
The process of energy reform has been a long and complex process. The Government has never shifted its focus from the ultimate goals of developing a long-term, sustainable solution for electricity services in the country, lowering costs, increasing reliability, reducing energy reliance on fossil fuels, rapidly introducing renewable energy starting with solar energy, and ensuring best in class environmental management.
Ultimately, a best in class, lower cost electricity service is critical for all residents of The Bahamas and to promote economic development.
We are confident that the measures we have taken, starting with a new energy sector policy, the passing of brand new state of the art electricity sector legislation (which has been very well received), the restructuring plans in place for BEC and creation of BPL, the appointment of a strong business focussed board of BPL, and the proposed refinancing of significant legacy liabilities.
The imminent signing of a Management Services Agreement with PowerSecure will contribute to meeting our goals that I have just articulated, and most importantly for all residents of The Bahamas, a progressively lower, and sustainably lower, electricity bill each month.
Thank you, Mr. Speaker.
© Copyright 2016 by thebahamasweekly.com
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