Belco is achieving “abysmally low” returns — and utilities elsewhere in the world posting similar results are in danger of bankruptcy.

That is the view of Walter Higgins, chief executive officer of Belco’s parent company Ascendant Group Ltd.

Mr Higgins was speaking with The Royal Gazette the day after Ascendant announced annual earnings of $5.9 million for 2014 and revealed its intention to ask energy regulators for permission to raise electricity prices.

Ascendant is working on a “cost of service” study that will determine what increase it will ask for in the rate filing it will submit to the Energy Commission later this year.

The amount of electricity Belco sells has fallen for five successive years and last year it sold 11 per cent fewer kilowatt hours than it did in 2010.

Mr Higgins said the company had to balance the needs of customers and shareholders in order to achieve the desired result of a reliable and sustainable electricity supply.

“For reasons of rising costs and reducing sales, our earnings are getting squeezed,” Mr Higgins said.

“The evidence is that our earnings have been going down for about nine years now. They’re abysmally low. There isn’t another utility in the world that’s not in danger of bankruptcy that has returns as low as ours. They’re awful.

“They’re awful in part because we’ve not been seeking increased rates. The company actually passed on a rate increase about five years ago that was already approved. We know the Island has been struggling economically and we wanted to do our best not to add to that problem.

“But we also needed to be able to put forward a case that this is the right thing to do for the Island to ensure the safe, reliable, clean future of electricity in Bermuda.”

Ascendant’s vision for that future will be summed up in its ‘Integrated Resource Plan’ that will be submitted to Government later this year. It includes plans for a conversion to natural gas from fuel oil as its principal source of fuel for electricity generation, “utility-scale” solar energy and an energy conservation programme.

Ascendant chief financial officer Mark Takahashi helped to explain the significance of Belco’s relatively low return on equity (RoE).

“If you look at comparable island or US utilities, they are earning an RoE of about 10 per cent,” Mr Takahashi said. “We earned an RoE of 3.3 per cent last year.”

Determining what the actual RoE target should be required weighing up the utility’s particular circumstances, he added.

“It’s standard practice among utilities to look at objective data — your cost of capital and your asset base — to get a fair balance between the cost of electricity and the return to shareholders, and the reliability and security of the electricity supply,” Mr Takahashi said.

“Lenders and debt capital providers have a prior call on your cash flow and if you can’t pay your lenders you’re at risk of bankruptcy. In a way, we’re lucky as we have very little debt capital, because we are largely funded by equity — that is, shareholder investments. If we were borrowing money, we would be paying interest of 5 or 6 per cent. We’re only making 3 per cent.”

Earnings translated to cash flow on which the company relied to be able to continually reinvest in the plant and the network required to maintain a reliable electricity supply for the Island, he added.

With the economy still struggling to recover after six years of recession, any electricity rate rise is certain to be unpopular — even after most have seen their Belco bills come down as a result of the plunge in world crude oil prices that has translated to the fuel adjustment charge being slashed.

Meanwhile, the squeeze on Ascendant’s profits resulted in the quarterly dividend being slashed by more than half last year and a collapse in its share price to about a fifth of book value.

So, as a regulated utility providing an essential service, does the Ascendant CEO believe his first duty is to customers or shareholders?

“If I don’t take care of the shareholders, eventually they’ll abandon me and I won’t be able to take care of the customers,” Mr Higgins said.

“But if I don’t take care of the customers, nothing else matters. I have to think about customers every single day, all day long.

“What you have to do is try to balance the interests of both customers and shareholders. Thinking daily about customers, but all decisions made with the idea that you’re going to have to go back to investors some day, whether they be people that loan you money — like banks or bondholders — or people who invest in your company.

“And you’re going to have to convince them that this is a good investment. It’s only a good investment if you’re running the business prudently and you’re only doing that if you’re serving your customers in the best way it’s possible to serve them.

“They might not like everything about it — they might not like that we charge 40-something cents per kilowatt hour because we burn oil.

“In the short term we can’t do much about that but in the long term, we can find a better way to do it — i.e. burn natural gas, do solar and do conservation.

“So you have to do what is in the customers’ best interest because eventually that becomes the shareholders’ best interest.”

More than 60 per cent of Ascendant’s shareholders are Bermuda-based, Mr Higgins said. Of those, about two-thirds are ‘mom and pop’ investors attracted by the steady dividend income stream that a utility is expected to provide, while others were institutional shareholders such as insurer Argus Group and investment company Bermuda First.

Mr Higgins explained some of the constraints placed on a regulated utility in return for its monopoly position.

First, Belco was obliged to provide electricity to every customer who paid their bills, however much and whenever they wanted it, unlike a retailer who could cut sales of products which were not profitable, for example.

Secondly, Ascendant investors had ploughed hundreds of millions of dollars into the utility “in return for the right to earn a return on that money, provided we provide the service”, Mr Higgins added.

“The way rates are set is basically by looking at the cost of everything we do and dividing it by the number of kilowatt hours that we sell. The Energy Commission looks at the numbers and says your rate should be x,” Mr Higgins said.

“If the expected sales don’t materialise, then we don’t earn — that’s what’s actually happened. If we don’t manage the costs well, we won’t earn. We’ve done a good job of managing costs, but we can and will do better.

“The utility exists for the convenience of the customers, its rates are set by the Government to be fair to the utility and its investors who put up the money, and to the customers, who don’t have the opportunity to shop down the street.”