Belco Releases Letter To Shareholders

"The Board of Directors has declared a dividend of 38.5¢ per share for the third quarter of 2003. A cheque is enclosed for shareholders who have requested direct payment. Those who designated a deposit to their savings or current account have been given credit effective today. As of September 25th, the market price per share was $34.00.

At the time of writing this letter, BELCO was in the throes of a massive restoration effort following severe damage inflicted on our system by Hurricane Fabian, on Friday, September 5th. Over a period of some 18 hours, Fabian battered the Island with tropical storm and hurricane force winds, sustained at 120 mph and peaking at approximately 150 mph. Four people were lost at sea when the Causeway, the only road leading to the airport and the east end of the Island gave way and there was extensive damage to many properties. During the course of the storm we lost approximately two-thirds of our main line circuits, affecting some 25,000 customers.

Prior to the onslaught of Fabian, we held a press conference to advise the public of our strategy for managing a worst case scenario. This included lining up a number of U.S. utilities and overseas contractors willing to come to Bermuda should we need them, as well as preliminary arrangements for a U.S. military transport plane with trucks, supplies and manpower should it be required. Also through our membership in the Caribbean Electric Association (CARILEC), arrangements were made to send additional line crews to Bermuda to assist with restoration.

Throughout the storm our Operations Centre was manned by Energy Supply and Energy Delivery staff monitoring our generation stations, damage to the distribution system and dispatching emergency crews where needed. All other essential staff were instructed to report to BELCO following passage of the storm, on Saturday, as soon as it was safe for them to do so.

By noon, on Saturday we were assessing the damage to our system, restoring main lines where we could, and rolling out the restoration plan. As the damage to our system was not as extensive as we had feared, we did not require completing the arrangements for significant U.S. support. Within 72 hours electricity service was restored to 60% of those who lost it during Fabian with priority being given to emergency services, infrastructure, essential services, hotels and guesthouses and large residential areas. By Thursday, the 41 CARILEC linemen from utilities in Cayman, Barbados, Belize, Bahamas, Dominica and Jamaica commenced assisting our crews.

Given the ability of our new Operations Centre's Outage Management System to provide more information than in the past, efforts were made to provide customers with a greater level and quality of information on the restoration as it relates to their service. We attempted to provide customers with a 72 hour restoration forecast, but reduced the forecast projection to one and two days as future projections were based on the previous days' restoration results making projections three days in advance, difficult.

As has been the tradition, employees throughout our organisation have been admirable in meeting the many challenges Fabian left us. Our overhead line crews, underground crews, engineers and support staff worked tirelessly, averaging between 14-17 hours per day. BESCO supported BELCO with generators and installations for emergency situations and Bermuda Gas personnel, some of whom also assisted BELCO, were kept busy ensuring the safety and security of gas systems, as well as meeting immediate demands for supplies. As would be expected in a large restoration effort, procurement and logistics was key to fueling the restoration progress with the necessary supplies, and securing inventory replenishments before they were needed. This included arranging for a charter flight filled with supplies from Tampa, Florida.

Those who were not on the front line were running a large back-room machine to support the requirements of the 250-300 staff, contractors and Bermuda Regiment working out in the field. Two weeks into the restoration 23,800 of the 25,000 customers who lost power during the hurricane had power restored, leaving approximately 1,200 still without electricity. All the main lines and branch lines had been restored and the restoration effort was targeting a large number of small outage areas in an effort to get all customers back on line as soon as possible.

Despite the fact that Hurricane Fabian was stronger and lasted far longer than the last serious hurricane to affect Bermuda, Hurricane Emily in 1987, we had publicly stated that our goal was to restore power to all customers within three weeks. As of September, 25th, the anniversary of Hurricane Emily, we were winding down restoration of the remaining customers and had restored power to all who lost it during Fabian, within three weeks.

Then, Now and Still

As was expected, as soon as the winds subsided and the restoration process began, so did the calls for Bermuda to place all of its electricity distribution underground. As you may have read in the news media, we declined to get into that discussion during this time as our focus was on restoration.

As history and our experience has proven, there is a direct correlation between the rare cases of extended power outages brought about by storms, and the interest and commitment to investing the estimated $250 million it would take to underground the entire Island over a 10-20 year period. This is a far cry from the $20 million, three year programme suggested by a writer in the Bermuda Sun.

After Hurricane Emily, meetings were held with Government to begin dealing with the many issues inherent in embarking on an island wide undergrounding programme. These include financing, compulsory easements and wayleaves over private property for installation of cables and equipment, extensive traffic congestion during the 10-20 year building period, reinstatement of road systems, and perhaps most importantly, a formula for equitable tariffs, given the fact that many residents would not be able to realise the benefit of an underground system for 10 years or more. The thought back then was to start to look at a programme to undergrounding supply to strategic installations. However, as is often the case, Government and community interest and participation in these discussions declined as other pressing issues took priority.

After hurricanes Dean and Karen, once again there were calls for island wide undergrounding. On those occasions, as well as many other times, publicly, we have clearly stated that a private organisation like BELCO could not and would not undertake such a mammoth programme. Should a major, Island wide undergrounding programme ever be considered it would require a total commitment on the part of Government and the community for funding, legislation, land and acceptance of inconvenience.

Despite this, where it is affordable and feasible undergrounding is something we continue to do. We have experimented with large underground projects on public roads, such as North Shore, Shelly Bay. We are working with the St. George's Foundation on projects to underground the old town. We have worked with, and encouraged those who were prepared to pay for undergrounding on private/public property for their own benefit, and we continue to take advantage of opportunities to place our system underground where it can be done in conjunction with other capital project work, the latest example being the Admiralty House Substation project. This aside, our position on a major island wide undergrounding initiative has not changed.

We do not believe Bermuda should invest $250 million on an underground electricity system that will not provide the Island any economic return on that significant investment. There is no country in the world that has a total underground system. We just witnessed Hurricane Isabel pounding North Carolina and Virginia and affecting other states where 5.5 million customers lost electricity. As a community we have a number of competing needs requiring sizable financial outlays, and there are limits to our resources financial and other. Collectively, we need to prioritise our needs and invest our funds in areas where the Island will realise long-term economic benefits. As miserable as being without electricity is, $250 million is a high price for the community to pay for the potential reduction of inconvenience in the aftermath of a storm. Additionally, an underground system is no guarantee against outages, as both Emily and Fabian resulted in damage to our underground system, which takes longer to repair than overhead.

Much is expected of BELCO, and we enjoy the challenge of meeting those expectations, but we have to be realistic. We already invest $21.2 million annually in plant and equipment, based on the last nine years. No other local organisation comes anywhere close to that level of local investment. A further $45 million is to be spent on two new engines over the next 22months, this is in addition to our normal investment commitments. There are also those who feel we should be investing in wind power at a cost of $35 million, and the list goes on. Even if funding were no object, other significant challenges to overcome with a major commitment to undergrounding are system extensions, wayleaves and right-of-ways, traffic hold-up and control.

In the weeks to come, I am sure there will be a post mortem on Hurricane Fabian, and this will include a renewed interest in undergrounding. It is our hope that these discussions will be constructive and weigh the benefits of a major undergrounding initiative versus other island wide needs.

In closing, I would like to thank all of our management, staff and pensioners who took part in the restoration as well as our business partners both here and overseas who offered support in a variety of forms. I would also like to thank our customers, particularly those who did lose power, for their understanding of our plight and support of our crews out in the field. Your kind consideration and praise for our staff in the field and behind the scenes certainly contributed to positive morale and keeping all of BELCO working together and focused on the end result. Thank you. "

Signed by,

Garry A. Madeiros

President & Chief Executive Officer