Belco Releases Letter To Shareholders

"The Board of Directors has declared a dividend of 38.5¢ per share for the fourth 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 December 18, the market price per share was $35.00.

Unquestionably, 2003 is a year that will long be remembered for the challenges it presented to Bermuda, our economy and our Group of Companies, especially BELCO. Expenses resulting from Hurricane Fabian, as well as subsequent loss of sales, have affected projected net earnings for the year. Fortunately, our overall strong performance in the months preceding the hurricane has softened the effect. Excluding the profit derived last year from the sale of Fibre.com, 2003 net earnings projections are anticipated to be approximately 5% below 2002.

Throughout our Group of Companies, our employees' response to Hurricane Fabian, including preparation, restoration and rehabilitation, has been nothing short of admirable. Each of our companies supported the others as needed, and it was evident that many of the initiatives we have put into place over the past years' clearly produced positive results. We are very thankful for the efforts made by all and the support and patience shown by our customers.

BELCO

While Hurricane Fabian had an Island-wide impact, our organisation suffered its first upset earlier in the year with the injury and subsequent death of our colleague and friend, BELCO employee Malik Blyden, resulting from a tragic accident at our Light House Hill Substation. The cause of the accident has been investigated by Government, and our own health and safety personnel, and reports are with the Coroner in preparation for an inquest in 2004. This event has had a profound impact on our organisation. Given the nature of our business, safety is of paramount importance and is built into our operational procedures and training, however, until a tragic incident occurs, much can be taken for granted. Therefore, in the New Year we will further highlight and reinforce the importance of safety in all of our activities. As an organisation, we have a responsibility to the memory of Malik to ensure that safety is foremost in our minds.

Strong sales in all customer categories during the eight months preceding Hurricane Fabian have resulted in total kilowatt hour (kwh) sales through November 2003 being 3.14% ahead

of the same period in 2002. Through November, Residential sales were 4.33% ahead of the previous year. Demand customer sales were up 2.17% for the period, and Commercial sales were 2.56% above the same time last year.

Since Hurricane Fabian, Demand customer sales have been impacted the greatest due to hotel closures resulting in declining monthly sales in September, October and November of 3.32%, 4.03% and 7.86%, respectively. Due to the Residential and Commercial billing cycles, the effects of Hurricane Fabian were only realised with the October results. Residential sales during the month of October were 5.36% behind the same month in the previous year and Commercial sales declined 7.51%. Both Residential and Commercial sales recovered in November.

Throughout much of October, November and December, BELCO has been in system rehabilitation mode, moving throughout the Island strengthening the electricity distribution system, weakened by Fabian, in preparation for the winter storm season. The emphasis has been on the main lines and large branch lines, as well as making permanent the temporary repairs effected during the three-week restoration period following the hurricane. In order to move through this as effectively as possible, a dedicated Process Team mapped out a programme for scouting and recording detailed system information, coordinating site preparation and systematically scheduling outages for system rebuilds. The process includes a debris removal team that moves in, immediately after the rebuild, to clear the area of left over materials. The programme has worked extremely well and many of those involved view it as testimony to the value of instituting Process re-design throughout the organisation.

A highlight of the BELCO year was the opening of our new Operations Centre in May.

Hurricane Fabian provided the first major test of the Operations Centre in controlling and monitoring generation, transmission and distribution systems under critical conditions, as well as serving as the hub for restoration planning and coordination. The experience confirmed that having all control facilities and key restoration personnel working in tandem in one facility provides great benefits.

Process will continue as a major initiative in 2004 at BELCO as we move through our key operational activities to determine better ways to get specific jobs done. A Process Office, established during this year, is working with each operational group to determine areas where Process re-design can effect improved customer service, cost reductions and greater employee satisfaction. Dedicated Process Teams, seconded to work with the Process Office for periods of up to three weeks, are assigned to review and re-design specific elements of work and make recommendations for improvements, which are then brought to life through an implementation team.

A key process that will become a way of life at BELCO beginning in 2004 is Performance Management (PM) for bargaining unit employees. The process was developed and implemented with input and participation by the Electricity Supply Trade Union (ESTU), and has been in a pilot phase for the past six months. PM, already in use by Bermuda Gas, provides structured and consistent opportunity for ongoing dialogue between managers and

employees, and is a tool for both evaluating performance and establishing development goals. The PM structure, a web-based format, will be adapted in 2004 to update the format of the assessment process used for all BELCO salaried staff.

In November, we signed a contract with BWSC for two new 14.5 MW medium speed diesel engines to be commissioned by the summer of 2005. The total investment in development of the new generation plant is anticipated to be $45 million. This is an expansion of our East Power Station. The two new units will be installed adjacent to the last two units and will utilise the existing stack. In the interest of safety, and to allow for preparatory work and readying the site for installation of the engines, Government has agreed to close Cemetery Road to through traffic beginning January 4, 2004 for an estimated 16 months. Businesses located on Cemetery Road remain accessible via Serpentine Road or St. John's Road. We recognise the inconvenience this type of construction places on our neighbours. We are sensitive to their concerns and will take actions where we can to minimise the impact.

Bermuda Gas

For the 11 months to November 2003, overall Bermuda Gas sales increased 6.5% compared with 2002. The Service and Parts Department recorded the highest sales increase for the period at 12.5%. Gas Operation sales were 7.2% ahead, and changes to the mix of appliance offerings resulted in a 2.3% increase in Appliance sales through November compared with the same period last year. In an ongoing effort to pique customer interest in new products, Bermuda Gas has recently expanded its line of fire logs and home heating products.

Performance Management (PM) at Bermuda Gas has had a successful start. Training along with the regular evaluations that are a part of the PM process are credited with resulting in a 13% increase in productivity within the Service Department, evidenced by billable time through November compared with the same period the previous year.

The initial phase of converting Bermuda Gas to a Process-driven organisation has begun with the mapping of activities and systems in preparation for re-designing key work elements in the New Year. Additionally, Bermuda Gas is in the process of developing a Catalogue of Training to ensure courses remain current as they relate to both topical information and adherence to codes and regulations.

BESCO

We are pleased to report that in the New Year BESCO will be teaming up with other local companies in the New Venture Holdings group to expand its service and product offering in the local market. New Venture Holdings Limited is the parent company of Air Care, Mechanical Solutions, Holmes Williams & Purvey, the Elite Group and CCS. BELCO Holdings Limited has agreed to sell 49% of BESCO shares to New Venture Holdings to allow for marketing and project partnerships that will enhance BESCO's ability to contribute to

BELCO Holdings Limited's overall earnings. These partnerships will allow for greater cross-customer selling and synergies that BESCO could not realise as a separate entity. BELCO

Holdings Limited remains the majority shareholder, and BESCO will continue operating under the auspices of the BELCO Holdings Group.

Community Support

BELCO was pleased to have recently sponsored Bermuda's first National Sportsmanship Day. Youngsters throughout the Island's schools participated by creating slogans and essays communicating the values of sportsmanship, not only in athletics, but also in everyday life.

This year's Festival of Lights for Charity competition was once again a great success with 39 entries, including several new commercial participants. Entries and winners were published in the newspaper in the lead-up to Christmas so that all could enjoy the festive displays and $10,250 will be donated to charities by BF&M and BELCO in the winners' names.

Employee News

In November, BELCO honoured 45 employees for their long and dedicated service to the Company. The combined service of this year's group is 1000 years. This year the longest serving employee celebrated 50 years, providing a wealth of knowledge and experience that has been greatly appreciated.

As we conclude 2003 and move into 2004, I am grateful for the successes we have managed to achieve in a rather turbulent year. The past has brought with it both challenges and experiences that have served to make us a stronger organisation going forward. I am very proud of the commitment and dedication of our management and staff, and appreciative of our customers' and the community's support of our efforts.

On behalf of the Directors, management and staff of our Group of Companies, I wish each and every one of you a happy, healthy and successful New Year.

Yours sincerely,

Garry A. Madeiros

President & Chief Executive Officer