Belize ~ Analysis of The Fortis and GOB Deal on B.E.L

Saturday, September 5th 2015

By Richard Harrison

In June 2011, the Government of Belize (G.O.B.) expropriated, by force, the Belize Electricity Limited (B.E.L.) from Fortis Inc. control.

At the time, Fortis controlled 70.2% of the common shares of B.E.L. Thereafter, G.O.B. owned 70.2%, and Belize Social Security Board (B.S.S.B.), 26.9%, with small private shareholders holding 2.9%.

On September 1, 2015, World Energy News’ Joseph R. Fonseca wrote:

“Fortis Inc. announced today that it has agreed to terms of a settlement with the Government of Belize (the Government”) regarding the Government’s expropriation of the Corporation’s approximate 70% interest in Belize Electricity Limited (“BEL”) in June 2011. The terms of the Settlement include a one-time US$35 million cash payment to Fortis from the Government and a reduction of the Corporation’s common equity position in BEL to approximately 33%.”

BEL is the primary distributor of electricity in Belize, Central America and is regulated by the Public Utilities Commission.

The utility meets the country’s peak demand of approximately 84 megawatts (MW) from multiple sources of energy, including electricity supply from the FORTIS Corporation’s indirect wholly owned subsidiary, Belize Electric Company Limited (“BECOL”). BECOL is comprised of three generating facilities – Chalillo, Mollejon and Vaca – with a combined generating capacity of 51 MW.

B.E.L. annual reports announced for the respective years:

2014 profits BZ$36.2m, total assets BZ$514.5m, total equity BZ$353.9m

2013 profits BZ$18.7m, total assets BZ$481.4m, total equity BZ$313.2m

2012 profits – BZ$16m, total assets BZ$487.8m, total equity BZ$292.8m

2011 profits BZ$1.9m, total assets BZ$490.5m, total equity BZ$308.8m

2010 profits BZ$3.4m, total assets BZ$476.9m, total equity BZ$286.8m

2009 profits BZ$8.9m, total assets BZ$472.3m, total equity BZ$280.8m

2008 profits – BZ$10.8m, total assets BZ$435.3m, total equity BZ$263m

2007 profits BZ$29.9m, total assets BZ$429.7m, total equity BZ$278.1m

This is an average profit per year of BZ$9.03m or US$4.52m over the past 8 years.

On September 1, 2015, Fortis was willing to accept that its share be reduced from 70.2% down to 33%, for US$35 million in cash, plus 33% of annual net profit perpetually.

On June 25, 2011, The Telegram (of Newfoundland, Canada) reported that Fortis Inc. was seeking compensation based on a book value for B.E.L. of US$125m; which was just a shade lower than the US$143.4m total equity reported in the 2010 annual report. Its claim for 70.2% of the company would thus be US$90m.

If the average profit over the past 8 years is used, Fortis’ 33% would earn US$1.5m per year or US$15m over the next 10 years.

If the average profit over the past 4 years of US$20.4m per year is used, Fortis’ 33% would earn US$6.73m per year or US$67.3m over the next 10 years.

Given the outlook for the price of crude oil, the latter is the more likely outcome going forward, and Fortis would stand to gain US$12.3m over and above its US$90m, not adjusting for time value of money.

The annual reports show that total assets of B.E.L. increased from the 2010 figure of BZ$476.9m, to the 2014 figure of BZ$514.5m, an increase of BZ$37.6m.

These same reports show that total equity increased from BZ$286.8m in 2010, to BZ$353.9m in 2014, an increase of BZ$67.1m. This is not so easy to believe.

At the end of 2014 then, 33% of the total equity in B.E.L. would have been valued at BZ$116.8m or US$58.4m. So, Fortis’ compensation from shares would only leave them with US$31.6m to reach their US$90m claim.

B.E.L. has changed internal auditors several times over the 2010-2014 period, an observation which is noteworthy.

The new Board will have 3 directors representing Fortis, and 9 directors representing G.O.B. and B.S.S.B. Nothing was said about how many each would represent G.O.B. and B.S.S.B., nor the weight that each vote would carry.

Since Fortis’ subsidiary company BECOL supplies 50% of B.E.L. electricity supply, it would be important to know if any changes in the price BECOL charges for its electricity can be expected.

It would also be important to know if any tax concessions were made by G.O.B. on Fortis’ new B.E.L. share ownership, or on its interests in BECOL.

Also of importance would be any agreement made on covering litigation costs since the 2011 expropriation.

The agreement has a clause where Fortis can sell its 33% shares over the next 4 years, and that G.O.B. would have two years in which to make payment for those shares if it were to be the buyer. This is like a deferred sale, perhaps with an already arranged “market price” that meets some portion of the compensation agreement.

These last five items would be important to really understand the full value of this agreement to the stakeholders. However, it appears that this deal has more on the upside for Fortis, than on the downside.

The Government of Belize needed to reach a settlement.

Its forced expropriation of the utility companies was a wrong-headed, politically-driven decision, and has caused Belize much loss by making the country relatively unattractive to vital foreign investments. It was also hurting the macro-economic outlook of the country, in terms of debt-to-GDP ratio, making it appear to be too high, thus increasing the risk of domestic and foreign investments, as well as supplier credit.

The Government needs to proceed quickly with settlement for the Belize Telecommunications Limited (B.T.L.) expropriation.

The G.O.B. can be credited for recognizing the error of its poorly-thought-out, egotistic, corruption-enhancing ways and seeking to make corrections. Better late than never.

All of this will not mean anything if a comprehensive overhaul of the fiscal and judicial systems are not carried out to make Belize much more competitive and productive, by implementing the Mixed Economy philosophy, with a private-sector-lead economy and low-broad-based tax system (with very low or no taxes on fuel and production inputs) conducive to a production-consumption economy rather than the current import-consumption economy.

This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Masters in Business Administration degree from Lancaster University.

The views expressed in this article are those of the writer and not necessarily those of the Belize Media Group.

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