Belco Releases Letter To Shareholders

Hamilton, Bermuda:  31^st December 2004 - Belco Holdings Ltd. has today released to the Bermuda Stock Exchange (BSX) its most recent letter to shareholders.

"The Board of Directors has declared a dividend of 38.5¢ per share for the fourth quarter of 2004.  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 16th the market price per share was $42.00.

BELCO

Total kilowatt hour (kWh) sales through November are up 0.64% from the same period in 2003.  Residential sales for the 11 months are 2.31% higher than the previous year.  Demand sales, depressed early in the year due to the extended closures of two major hotels and other businesses continuing Hurricane Fabian repairs, resulted in a 2.44% decrease for the period through November 2004, compared with 2003.

Application for a Rate Increase

On November 19, 2004 BELCO submitted an application to the Price Control Commission for an overall 1.5% rate increase effective January 1, 2005, with a request for Approval in Principle for rate increases of 1.5% in 2006 and 2007.  At the time of writing this report, the Commission had yet to deliberate the application.

It has been nine years since BELCO increased its basic rate.  Over this period, we have been able to successfully finance our operations and continued capital expansion from income growth brought about by higher sales and cost containment efforts.  However, given the continued pressure of rising costs, and the increased levels of capital asset expenditures necessary to meet the growing demand on our system, the Company now needs to apply for a rate increase.

The application is for an increase in the Facilities Charge for all customer categories and an adjustment to the Energy Charge in order to achieve an average 1.5% increase in overall rates. Based on energy usage, the new rate results in increases of between 1%-2% to individual customers. BELCO's rate increase request is approximately 59.5% lower than the present annual rate of inflation (1.5% vs. 3.7%). For the average residential customer using 730 kilowatts, the proposed increase is equal to approximately $3.65 per month.  We are sensitive to the impact any increase might have on low usage customers, who also tend to have less ability to pay. We have, therefore, proposed that the rates for kWh usage be adjusted to have minimal impact on these customers.  

BELCO has spent, on average, $23.5 million annually since 1996 on capital enhancements and refurbishments. In 2005, we will see the addition of two new 14.3 megawatt diesel engines which are needed to meet growing demand.  Additionally, the Company anticipates that, based on its load growth projections and older plant retirements, we will have to consider similar capital investment as early as 2008. 

Our continued upgrading of assets, and the addition of new, more efficient electricity generating plant have resulted in significant increases in our fuel efficiency levels. This has helped to improve the number of kWh generated per barrel of fuel, thereby, containing the quantity of fuel used and, consequently, the cost. Unfortunately, this has not been enough to overshadow the significant rise in the posted prices of a barrel of fuel on the world markets.  This is a major dilemma which BELCO and the country face.  Costs per barrel of fuel have reached record highs and, this in turn, has resulted in the highest ever fuel adjustment rates, which now account  for 20% of a customer's bill.  To temper the impact of high fuel rates, BELCO has waited as long as possible to apply for a rate increase.

Sustainable Development

As has been reported in the local media, in January 2005, the Bermuda Government will put into place a project team to formulate a Sustainable Development Plan for the Island. We are watching this development with interest and will seek to become involved, as the production, transmission and distribution of electricity to all of the Island is integral to any Sustainable Development Plan.

In 1993, as we were planning for the imminent development of the second phase of our East Power Station plant, we embarked on a comprehensive public programme to engage all aspects of the community in dialogue about the need to earmark land, beyond our Serpentine Road location, as a site for future electricity generation plant.  While there was significant public interest in our presentations held at Number 1 Shed, outside of BELCO there has been no serious consideration of the issue since then.

In spring 2005, we will commission two new 14.3 medium speed diesel engines, the fourth, and possibly final phase of a 20 year expansion plan at our Serpentine Road site.  Once again, we will be bringing to the public, and more specifically to Government, the requirements we envision for the Island's electricity system going forward.  

Sustainable development is an all encompassing concept that takes into consideration every aspect of life.  Bermuda's Sustainable Development Plan must be comprehensive, formulated through an inclusive process that leverages the widespread knowledge, technical expertise and social conscience of the community.  We look forward to being part of the process, working with Government and the community to find common ground and arrive at solutions to some of the very complicated issues that are vital to meeting Bermuda's future needs.

Capital Projects

In the fourth quarter 2004, Energy Supply reached a milestone in the E7/E8 East Power Station development with the completion of the building that houses the new engines.  The milestone was commemorated with a roof wetting ceremony on November 5.  Testing of the engines is set to begin in January.  Once commissioned and brought into service, the new engines will bring our capacity up to 180 megawatts (derated to 165 megawatts in summer).  We project that next summer's peak load could reach 121 megawatts, so this addition will allow us to meet demand with comfortable margins. 

Also, throughout the fourth quarter, Energy Delivery continued to work to upgrade the transmission and distribution system, completing trenching and cable laying from the BELCO plant along Serpentine Road and Dundonald Street to Union Street.  This work will continue in 2005, with trenching from King Street to King Edward VII Memorial Hospital set to commence in the second quarter.  At the same time, work is proceeding on the new St. John's Road Substation, which is located on BELCO property.  The new substation is scheduled to be operational by the end of January.  Trenching and cable laying to connect the new substation to the transmission and distribution system has already begun on and near BELCO property.  Starting in the second quarter 2005, trenching and cable laying work will extend to Woodlands Road.

Bermuda Gas

Bermuda Gas & Utility Company's (BGU) sales through the end of November 2004 increased 3.5% over the same period last year.  Gas sales were 5.4% higher and Appliance sales, increased 4.0% for the 11-month period in 2004, compared with 2003.  Service and Parts sales were down 5.2%.

On November 4, BGU launched the Electrolux ICON appliance product line, a first in Bermuda.  Electrolux appliances, well known in European homes and restaurants for over 70 years, have just been introduced in North America. BGU's Electrolux product offering includes high-end, stainless steel, European styled kitchen appliances, as well as vacuums.  An additional 24 Electrolux products will be introduced in the New Year. 

Community Support

We were very pleased to have a record number of entries for this year's Festival of Lights for Charity competition.  Now in its ninth year, the 2004 competition drew 47 entries. To date, $73,500 has been donated to a wide variety of charities by BF&M Insurance Group and BELCO in the winners' names.

November marked the opening of the upgraded laundry facility at King Edward VII Memorial Hospital.  We are pleased to have been able to contribute to the purchase of new equipment, fixtures and fittings to help the hospital meet patients' needs.

Employee News

Last month, BELCO honoured 47 employees for their long and dedicated service. The combined service of this year's group is 870 years, with the longest serving employee

marking 40 years with the Company.  Congratulations to all those who celebrated anniversaries. We are grateful to them for their long term commitment to BELCO.

As we conclude the year, we are thankful that we were spared the wrath of the 2004 hurricane season, and we are proud of our crews who traveled to the Bahamas and Cayman, and worked in difficult conditions, to help others recover from the storms. We are also grateful for the hard work and loyalty of many of our employees, particularly those in Energy Supply who worked all hours of the day and night to ensure we had adequate running plant to meet the daily peak demands throughout the summer.  Working both scheduled and unscheduled hours in the generation plant, many of our people gave up the better part of their summer to complete proactive maintenance and respond quickly to any engine faults.  I am very grateful for their efforts and proud of our management and staff.

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

Signed by,

Garry A. Madeiros

President & Chief Executive Officer