BELCO Releases Letter To Shareholders

The Board of Directors has declared a dividend of 38.5¢ per share for the fourth quarter of 2002. It has been two years since our last dividend increase. The performance of all the companies of BELCO Holdings Limited are projected to be very good, especially considering the sale of shares in Fibre.com and Quantum Communications. Considering these factors, the Board of Directors has also declared a 10% stock dividend payable on 31st December, 2002. It is the intent of the Board to continue the present cash payment of 38.5¢ or $1.54 annually for the foreseeable future. The shares you will receive from the stock dividend are not eligible for the cash dividend also paid out on 31st, December. That payment is based on your shareholdings before the additional shares. In some cases, the 10% stock dividend calculation resulted in partial or fractional shares. Where this is the case, a cheque has been issued to you for the cash equivalent of this partial number, and the value of $30.50 has been used in the calculation.

I have observed with interest that there has been a greater demand for our shares than the market has been able to provide. The majority of our shareholders are long-term investors who believe in a buy and hold strategy. However, the receipt of bonus shares might encourage trading of these shares.

As I mentioned, throughout the BELCO Holdings Group of companies, we close 2002 in a strong financial position. Performance throughout the Group has been in line with expectations, and we are very pleased to have ended the year having concluded the sale of our majority interest in the local telecommunications company, Quantum Communications.

You may remember, earlier this year BELCO Holdings Limited was also successful in selling Fibre.com, the company that owns the underground fibre optic telecommunications system in the City of Hamilton which was to be used by Quantum to compete in the local market. Quantum will now be operated by a consortium, offering competitive telecommunications services to the local market.

During 2002 we saw a number of initiatives at BELCO and Bermuda Gas, and an increased scope of activity for BESCO. Throughout the Group of companies our people have been charged with greater responsibility and accountability for achieving better value for our shareholders, better service for our customers, and better employee relations. These initiatives and the imperative to deliver better service to all of our stakeholders have placed greater demand on a number of our management and staff. As we try to meet our objectives, on a day-to-day basis, we are often focused on the exceptions, so while achievements are

expected, they are not always acknowledged in a timely manner. I do, however, want to recognise all those management and staff who have willingly expanded the scope of their work and committed the additional efforts needed to position our companies for the changes

and challenges that will take place in the New Year. In 2003, we will restructure the BELCO organisation, while instituting a new Performance Management programme at both BELCO and Bermuda Gas. Throughout the years, our employees, many of whom are also shareholders, have successfully contributed to increasing shareholder value. They are the backbone of the BELCO Holdings Group of Companies and their talents, efforts and commitment are greatly appreciated.

BELCO

Warm temperatures extending throughout the autumn months have contributed to a 3.3% increase in total kilowatt hour (kwh) sales through November 2002. In fact, the peak demand, which normally occurs in August or September, was recorded on 3rd October at 108,000 kwh, up from 106,200 kwh the previous year.

Demand customer sales increased 4.32% through November, indicating greater activity at several large hotels and a continued increase in occupancy in some of the new large office complexes. Commercial sales were also up 5.61% over 2001 levels. Residential sales, which were down 7.5 % for the first quarter of the year, steadily increased in the latter months, as the longer period of warm temperatures resulted in prolonged use of air conditioning. For the period through November, residential sales were up 1.48%.

During the first 11 months of the year, fuel prices averaged $45.30 per barrel, compared with $49.69 during the same period last year. Operating efficiency is slightly below 2001 levels, at 671.85 kwh generated per barrel of fuel, versus 672.20 per barrel of fuel last year. This is as a result of a greater number of engine overhauls undertaken in 2002.

New Organisational Structure 2003

At BELCO, January 2003 will see a new organisational structure put into place. The traditional organisation chart, based on functional departments, will be replaced by a flatter structure focused on strategic team-based processes. We are consolidating 10 departments into five Groups and reducing the Senior Management Team from 12 to seven, comprising the Executive and those with overall responsibility for the five Groups.

Key departmental functions will become Business Centres, operating within the five Groups. Each Business Centre will have a leader responsible for the day-to-day operational activities, as well as working with teams to streamline key processes and improve efficiency and service levels. This will place greater emphasis on individual and collective responsibility and accountability for results. The Company has identified a number of key processes which affect the strategic imperatives that influence our success as it relates to customer service, employee relations and ultimately shareholder value. These key processes, many of which

extend beyond traditional roles, responsibilities and departmental functions, will be the focus of our energies.

As you will recall from previous correspondence,over the past two years, we have steadily moved toward restructuring BELCO to become a process-driven organisation. The changes taking place in January are a major step forward. This is a defining time for BELCO. By restructuring, instituting Performance Management and moving toward a process team-based approach to business, focusing on outcomes will become a way of life at BELCO. We do not expect to achieve this immediately, but will consistently evolve our people and operations.

We are fortunate to have many talented people who, over the years, have demonstrated their ability and commitment to a collective effort to improve our organisation for the benefit of Bermuda. There will be times over the next several years when some of these individuals may feel stretched, while others feel the pressure of increased responsibility and accountability. This is a part of the change and transition that we must go through to ensure BELCO remains the best organisation to deliver Bermuda's energy products and services well into the future.

Bermuda Gas

A weaker economy, warmer winter weather and a decline in the tourism industry contributed to a 1.7% overall reduction in demand for propane gas. For the 11 months to November 2002, commercial sales were down 0.2%, and residential sales declined 5.9%. However, the reduction in sales in those two sectors was somewhat offset by a 5.1% increase in small cylinder sales. The increased demand for small cylinder propane is, in part, the result of a switch in the fuel used to run new forklifts intended for internal use. In order to reduce emissions, particularly in internal applications, many new models of forklifts are now being powered by propane, as it is a cleaner fuel.

Due to an expansion in the range of appliance products at Bermuda Gas, appliance sales have increased 3.8% through November 2002, compared with the same period last year. New introductions include Westinghouse, Equator, Brown Stove-Works and Takagi. Additionally, Bermuda Gas has just introduced the Elmira and Northstar lines from Canada. Service and parts sales are 0.8% down from last year due to a number of training initiatives early in the year that resulted in less chargeable time. The benefits of these training initiatives are beginning to be realised.

In the New Year, Bermuda Gas will expand its transportation fleet with the addition of two propane-powered vehicles. Analysis will be done on their performance in relation to propane consumption and maintenance, compared with our diesel fueled vehicles. Information relating to performance and emissions will be shared with the Transport Ministry to assist with research, as Bermuda moves closer to the planned 2006 transportation emissions standards.

BESCO

BELCO Energy Services Company Limited (BESCO) is on target to meet projected earnings and is looking forward to potential growth in 2003 with the addition of services targeted to high-end residential electricity users. A power-quality audit recently concluded by BESCO resulted in a full electrical retrofit within a large office building. Additionally, BESCO recently

installed a new security system at BELCO offices and in the New Year will oversee the installation of additional components of the Honeywell Enterprise Building Integrated control system, including fire-suppression release systems and HVAC automation.

Apprenticeships

Two Trade Information Sessions for potential apprentices for our revised apprenticeship programme were held at BELCO in November and drew standing-room-only audiences, with 240 people attending. We intend to recruit nine apprentices in 2003 and are now in the process of short listing applicants for four categories: Mechanical Fitter/Millwright, Power System Electrician (Generation and Transmission & Distribution) and Lineman.

The successful candidates will receive formal training under the Alberta Apprenticeship Programme, recognised by the International Labour Organisation (ILO) as one of the best trade development programmes in the world. Depending upon the trade, over the next three or four years, the apprentices will spend eight weeks a year studying in either Edmonton or Calgary and 10 months of the year receiving practical training at BELCO.

Worth noting is that this is the first time that the category "Lineman" will have been included in the apprenticeship programme for specific certification. Also, regardless of gender, those who successfully complete the Alberta Apprenticeship Programme in that category will receive the certified designation, "Journeyman/Lineman", which is the neutral term used to identify the trade.

Community Support

BELCO is pleased to have once again been the title sponsor of the Visitor Industry Partnership (VIP) Excellence Awards. This year, 52 people were honoured for their contributions to the hospitality industry. Additionally, for the first time, two awards were granted in a single category. As the objective of the VIP programme is to recognise the contributions of those who work in the industry and encourage new and renewed commitment to tourism and hospitality, the judges granted two awards in the Young Persons category to acknowledge achievement.

BELCO is also proud to have joined forces with Windreach to support the introduction of the "Don't Laugh At Me" educational kit to Bermuda. The educational project was founded by Peter Yarrow of the folk group Peter, Paul & Mary. It disseminates educational resources that

are designed to establish a climate which reduces the emotional and physical cruelty some children inflict upon each other through ridiculing, bullying and, in extreme cases, violence.

Management and staff also stepped into the holiday spirit of giving by donating to the newly established Toys for Tots campaign. Over 80 children's gifts were donated, as well as funds for the purchase of additional gifts.

The Festival of Lights programme was once again a success with 40 entries this year. Entries and winners were published in the newspapers in the lead-up to the Christmas holidays, so that all could enjoy the festive displays.

Employee News

BELCO recently honoured 46 long-serving employees who have collectively given 975 years of service to the Company. The Long Service banquet was held at the Fairmont Hamilton Princess Hotel. This year's anniversary group included four employees with 40 years service and two employees with 45 years service. We thank them and applaud their dedicated support and loyalty.

Also, please join me in congratulating the three employees selected by their colleagues as Employees of the Quarter for the third quarter 2002: Keith Bean of Transmission & Distribution, Juliette Watson of Customer Services and McKeith Wilson of Shared Services. Thank you to them for their efforts and commitment.

In closing, as we end the year and look ahead to 2003, international headlines indicate there could be difficult times ahead. While we have little or no control over what happens on the international scene, as a small community we each contribute, in our own way, to the social atmosphere of our own environment. In 2003, let's resolve to work together for peace, security and happiness throughout our community.

I wish each and every one of you a happy, healthy and successful New Year.

Signed,

Garry A. Madeiros

President & Chief Executive Officer

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