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Ascendant’s potential sale should be a big concern

Since our last report in late January on the Ascendant developments, its inflated stock price, its lack of interest in including renewable energy in the Integrated Resource Plan, many new developments have occurred.

Our principal concern is that emerging process may not engage the Regulatory Authority and the Government with Ascendant in a timely manner before a bidder/purchaser is chosen only by Ascendant.

It appears to us that obtaining the highest price for Ascendant's shareholders is the driving force and motivation of the Ascendant board despite recent general statements released by the board of its interest in reducing the consumer costs of electricity and welcoming the bold recent government policy statements recited in Parliament with respect to including renewables and favouring the consumer in setting electricity rates.

Our belief is based on the following developments:

One of Ascendant's largest shareholders, Talbot Babineau, IBV Capital's founder and chief executive, urged the company to list its shares on a stock exchange in Canada or the United States, if it does not receive an adequate buyout offer based on a price that reflects a multiple of the Ascendant current book value — at present in excess of $28 per share. He presented to The Royal Gazette readers and Ascendant shareholders misleading information by trying to equate Bermuda's mounting commitment to renewables — supported in the Throne speech, Walter Roban's strong public statements, and in about 900 submissions to the Regulatory Authority — as comparable to Ontario's mistakes in embracing renewables.

He stated: “We have the highest-cost electricity of any province in Canada because of decisions made on renewable energy that have locked us into the poor position we are currently in.”

In a subsequent letter to The Royal Gazette, the quoted statement was flatly rejected as “not true” by the CEO of Saturn Power. Both he and Saturn Power are Ontario residents and very familiar with Bermuda's power needs, having won the bid to do the solar project for Ascendant at the finger at the airport.

In addition, in reviewing the sources of Ontario's energy supply, only 1.9 per cent comes from solar power and less than 0.9 per cent came from oil and diesel in 2016. There is simply no comparison of Ontario to Bermuda when determining the high cost of electricity.

A Toronto Globe & Mail article detailing the cause of the high cost of electricity in Ontario said this in 2018: “The short answer is that a series of policy decisions — most significantly, upgrading infrastructure and signing fixed 20-year deals with private companies to produce electricity — have increased prices over the past decade.”

It had nothing to do with Ontario moving to renewables.

A recent ZBM News report stated that an existing Belco employee provided information that Ascendant had already explored trying to list on the Toronto Stock Exchange as Mr Babineau suggested, but did not have recent favourable financial statements and other facts in their favour to support an offering price, as the IBV founder suggests.

The report went on to state Ascendant was accepting indicative bids from power companies for a potential buyout instead. If the Belco insider's statement is incorrect, we have yet to hear Ascendant deny it. We imagine that details of the aggressive stock repurchase plan and its impact on market value would also have had to have been disclosed in regulatory filings for any North American public offering, much to the detriment of trying to secure a high offering price.

In his letter to Ascendant shareholders urging them to hold out for the highest price, Mr Babineau's inclusion of a list of stock-price ranges for mostly mature North American electricity companies based on multiples of book value — the highest being two times book value — is hardly a fair comparison in valuing Belco with all of the problems it faces.

Belco's antiquated equipment and grid, large debt on yet-to-be replaced generators — for which the Government stated no rate increases would be allowed even when completed — and recent labour problems are just a few of the concerns Ascendant faces that make it non-comparable to the list of companies Mr Babineau used. The declining use of electricity in Bermuda reflected in Ascendant's recent financials and the continuing sluggish economy in Bermuda are very dangerous indicators to bidders and Belco customers alike that an overpriced buyout can become a recipe for disaster for both parties and for the island.

Most recently the following flurry of events occurred:

1, The share repurchase programme to keep up the price continued in the first quarter of 2019 until suspended on April 1 with purchases by the company on March 20 and 22 during the time that non-binding, indicative bids had been requested from interested purchasers by the company. The stock price has fallen from $22 per share to $18 since the repurchase plan was suspended

2, Also on March 22, the Government gave strongly worded policy direction to the independent regulator, as follows, to protect customers' interests by quoting the 2016 Electricity Act: “[e] to protect the interests of end users with respect to prices and affordability, and the adequacy, reliability and quality of electricity services. This is self-explanatory; and “[f] to promote economic efficiency and sustainability in the generation, transmission, distribution and sale of electricity. Economic efficiency in these areas translates to lower costs for customers”

3, On March 25, the request by Ascendant for non-binding bids closed for all interested buyers. We estimate that five to ten potential buyers expressed interest, with each stating a price or range that would give the board an idea of what may become the final purchase price. At this time Belco's outdated Integrated Resource Plan remains its forward-looking view of the company's future despite the statement in Parliament on March 22, and despite submissions of about 900 interested Bermudians demanding substantially more renewables to be included in the Belco Plan

4, On April 1, Ascendant announced that it had reduced to a limited few the bids that will be vetted going forward in choosing a purchaser

Over the past few years, two of the most respected known bidders, 21st Century and MacQuarie, as reported in The Royal Gazette on April 3, put a considerable amount of time, financial resources and effort into exploring the true value of Ascendant, with representatives from each company visiting the island many times to understand the lay of the land, our unique culture, the customer's needs and future wishes, including meeting with Bermudian interests favouring renewables in attempting to arrive at a fair, indicative offering price.

While at first we thought it an April fools joke, it now appears to us from the recent silence of these potential candidates that they may not be included in the final shortlist of potential buyers of Ascendant.

Elimination of 21st Century possibly could have occurred because of its unique, forward-looking model, which emphasised use of energy-saving consumer products and the reduction of distribution costs as its strong suit. It does not fit the antiquated Belco model, as described on the utility's updated website and in its Integrated Resource Plan.

But in looking at the MacQuarie track record around the world, its size, quality of reputation, experience with natural gas, fuels, and renewables as electricity generators, it is hard to imagine it being eliminated for any reason other than failing to put in a high-enough price to satisfy the Ascendant board. MacQuarie certainly would meet all other qualifications as a most likely purchaser.

In short, we speculate that both companies were probably eliminated from the final offering process as a result of their caution in pricing, after having done their due diligence in advance to understand the proposed investment, the Bermuda culture surrounding it, the customer needs and various problems as well as our geographic isolation — all of which distinguish Belco from North American electricity companies.

If we are correct about these suppositions, we would like to simply ask of Ascendant how many of the remaining bidders have ever even visited the island and what time and effort has gone in to their indicative bids, or was the non-binding price offered the only factor involved in the Ascendant directors' choice of final contestants for the ownership of the company?

Even more important: is the existing Ascendant Integrated Resource Plan the only one considered by these bidders because the Regulatory Authority has yet to find sufficient time to put out a modified version?

If the modified Integrated Resource Plan is not reviewed and taken into serious consideration in setting a price for the buyout, particularly with the Premier's emphatic statement that no rate increase to customers would occur as the result of the approval on Belco's $118 million investment in the No 1 Power Station and battery storage facility, we can easily foresee a train wreck for all parties involved.

We urge full disclosure by Belco and openly transparent and inclusive discussions among the interested parties, including the regulator, Ascendant and the Government before the process advances farther. As an alternative, delay the process until the new Integrated Resource Plan is fully agreed with Belco.

If this is not acceptable, the Government's only option may be to consider legislation by requiring the new Integrated Resource Plan to be at least approved by the regulator before any sale price for Belco is agreed by the company or before a change of control is considered by the regulator.

Sir John Swan, a businessman, was the former Premier of Bermuda between 1982 and 1995, and a former Belco board member. Michael Murphy, a former attorney for American International Group, was the chairman of the Association of Bermuda Insurers and Reinsurers between 1985 and 2005

Future in the balance: the electricity sector's future is full of uncertainty as work goes on at Belco's new North Power Station (Photograph by Akil Simmons)

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Published April 11, 2019 at 9:00 am (Updated April 11, 2019 at 9:25 am)

Ascendant’s potential sale should be a big concern

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