million special dividend to shareholders in 1997. BTC say the payout was from accumulated earnings. Ahmed ElAmin reports Faced with consumer anger over a move to double local telephone rates, the Bermuda Telephone Co. Ltd. (BTC) has defended a handout in 1997 of $29.7 million as a special dividend to shareholders.

The broadcast media, consumers and Government insiders have criticised the special dividend, saying that BTC knew its revenues were going to be affected in the future and should have saved the money for a rainy day.

BTC executives claim the company is losing $33,000 a day since January 1 because of a Government directive forcing them to reduce fees to international carriers. The order is part of Government's policy of rebalancing rates so that charges are in line with costs. Executives argue if the drain continues the company will be unprofitable. BTC has applied to increase local phone charges, sparking consumer anger.

Telecommunications Commissioners yesterday had reportedly come to a decision over whether or not to allow BTC to double its standard phone charges. An announcement is due to be made this week.

On March 31 1997 BTC paid an extra dividend of $15 a share to each shareholder in the form of 7.75 percent 15-year notes. The handout amounted to $29.7 million plus $2.3 million a year in interest payments. The company at the same time reduced its regular dividend payout by 40 cents a year for a total of $792,000.

BTC said by issuing the note the company had effectively borrowed the proceeds of the dividend back from shareholders, retaining cash reserves for strategic investments.

The company bought Internet provider Logic Communications last year for $9 million, paid out of cash reserves.

BTC chief financial officer Gary Edwards said the dividend payout was from accumulated earnings and represented funds held on deposit and belonging to shareholders.

The note issue should not be confused with the current situation the company was finding itself in due to rate rebalancing.

"We believe from our point of view that the price of international calls is above cost,'' he said. "But the price of offering local service is below cost. It's about $30 to $35 a month for which we get $16. The question is would the company do anything different today had it not issued that dividend and the answer is categorically no. The issue isn't about the past. It's about the future. The company is faced with profit degradation right now and is taking its action according to that.'' He also disagreed with the proposal that BTC had managed to accumulate the $29 million because it had been making too much money by charging high rates. He said BTC's rate of return on shareholder's equity was between 12 to 15 percent, about the same as larger companies in the North American market.

"The rate of return is very normal for a company this size,'' he said.

"Dividends to shareholders were inadequate over the years.'' Local investment analyst Randy Somerville agreed that the special dividend payout and the rebalancing of rates to jack up local costs were two separate issues. A balance sheet represented a snapshot in time of the company's financial affairs. The money was simply being returned to shareholders in the form of a note.

"Shareholders were entitled to the money,'' he said. "They had built up excess capital and had come up with a way to give it to shareholders. On the issue of local rates they have to look at what they have to do currently. They have to charge enough to ensure they are profitable.'' Mr. Somerville is vice president of investment services at First Bermuda Securities Inc.

Meanwhile, analyst Cameron Renaud, a governor of the Bermuda Society of Chartered Financial Analysts said he could not see a justification for the note issue since BTC knew its revenues were going to be eroded by competition and rate rebalancing.

BTC existed in a monopoly situation and in a regulated market. While shareholders have a right to expect profits in such a market, the company also had a social mandate to provide a modern service at affordable prices.

"As a phone consumer I concur with the general sentiment against the application to raise local rates,'' he said. "How has the issue of the note facilitated the provision of telephone service on the Island? The notes are a nice surprise for the shareholder. But the company's mandate was also to provide good service at reasonable cost. The note was a gift.'' He said the question remained was how the note issue affected the company's bottom line.

"The note issue was an unusual move,'' he said.

Gary Edwards