Belco Releases Letter To Shareholders

Hamilton, Bermuda:  30^th December 2005 - 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 2005.  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 20th the market price per share was $40.35.  This quarter, Holdings concluded the sale of its 51 percent interest in BELCO Energy Services Company Limited (BESCO) to New Venture Holdings Ltd.

BELCO

Total kilowatt sales through November are 3.6% ahead of the same period in 2004. Residential sales are leading, with a 4.6% increase over the first eleven months of last year.  This is attributed to a 1.8% increase in the number of metered connections and an average 2.6% increase in consumption. Demand, or large commercial, sales increased 3.1%, while small commercial sales were also ahead 2.5% over 2004. 

Our major focus this quarter has been on further stabilizing our system from the effects of the July 14, 2005 fire that destroyed two switch rooms containing multiple feeds from the power station to the City of Hamilton, and which also left several engines stranded from our system.  I am pleased to report that we did complete the installation of a temporary switchboard facility by the end of November, as planned. We have also begun construction of a permanent facility that is due to be complete by the end of June 2006.

The cause of the fire was the subject of a forensic investigation by EA Technology Ltd. of the U.K., which reported its findings to the Board of Directors. EA Technology recommendations, as well as a number of other recommendations made following our own internal post mortem, are being worked on. These include working with EA Technology to action their recommendations, as well as working with Nadine International Inc., consulting fire protection and building code engineers in Canada.  

The EA Technology investigation concluded there were three parts to this event. First, there was an electrical failure on the system, specifically within a piece of switchgear.  Second, there was the failure of some of the system protections to isolate the initial electrical failure. Third, a fire suppression system which was deactivated at the time, could have reduced the level of damage caused by the initial fault impact.

The System Fault

The system fault could not have been prevented by anyone.  The EA Technology investigation attributed the failure in the switchgear to moisture ingress, or a void, which resulted in the long-term, gradual breakdown of the insulation within the sealed unit, leading to partial discharge and eventual flashover. The report said that the moisture ingress, or void, possibly emanated from the time of the original installation.

Failure of Some of the System Protection

Almost all of BELCO's equipment has built-in protection systems that disconnect the equipment from service when there is a failure, thereby, isolating the faulty equipment from the rest of the system.  We have over 900 protection systems in service.

There were two components of the protection system associated with the affected section of the switchboard that did not activate to help isolate the fault.  While most breakers associated with the affected part of the system operated correctly, a jammed master-trip relay and a disabled directional earth fault relay (for which we were awaiting a replacement from overseas) allowed the fault to remain sustained for an extended period.

The failure of this protection then impacted other parts of the system, which activated other protection systems related to the network and generating plant that shut down the remaining engines in the power station, resulting in an Island-wide blackout.

Fire Suppression

The fire suppression system did not work because it had been deactivated due to fears of it discharging while employees were working in the facility. Dedicated smoke detectors connected to the suppression system alarm panel had a history of failing in the alarm condition and had, in fact, triggered some false releases.  Therefore, the decision had been taken to remove the system from service.  A separate fire detection system in the facility did, however, detect the fire and raised alarms in the Operations Centre. 

It is important to note, as a matter of record, that fire suppression is not legislatively required in such a facility, nor is it an industry standard to have fire suppression in this type of facility.  That said, we did have it and it should have been in working order.  EA Technology concluded that it is possible that the extent of damage within the facility could have been significantly reduced had the fire suppression system been active and able to extinguish the fire at the time of the initial fault. However, it was also noted that as energy was fed into the fault for a long period after the initial smoke alarms, it is possible that the fire may have reinitiated. 

Other Investigations

In addition to the EA Technology investigation commissioned by the Board of Directors, Government also contracted Technical Standards & Safety Authority (TSSA) to investigate the fire.  Additionally, the Government investigation conducted by TSSA expanded beyond the specific fire incident to include a comprehensive health & safety audit, as well.  At the time of writing this letter, Government's report had yet to be shared with BELCO.

Actions on the many recommendations contained in the EA Technology report and the internal post mortem report will continue well into the New Year.  These include an audit of the BELCO protection system, a strategic review of the BELCO power system, as well as fire prevention and protection studies.

Electric System Planning

Since September 2004, we have been researching and developing an extensive discussion document on options for meeting Bermuda's electricity requirements through the next 20 years. This year's fire at the BELCO plant has served to re-focus on an issue we highlighted 15 years ago: the need for Bermuda to earmark alternative sites for future energy plant development. Government is currently working on its Sustainable Development Plan, of which meeting Bermuda's future energy requirements is a vital component.  In the New Year, we plan to begin presenting projections and options for Bermuda's energy future to Government and the community. We hope to generate wide-ranging discussions to gain consensus. This discussion document will be comprehensive, addressing central plant, distributed generation, renewable energy technology, independent power producers, demand side management, transmission and distribution and planning standards related to building codes.

Bermuda Gas

Bermuda Gas & Utility Company Limited's overall sales to the end of November increased 8.7% over the same period last year.  An 11.9% increase in gas sales is attributed to both the higher price of propane gas and a 2.3% increase in gas sales volume.  Appliance sales are 3.7% ahead of the same period in 2004, due primarily to increased commercial sales which is further reflected in 4.7% improved performance of service and parts sales.

Community Support

On September 29, 2006, BELCO will celebrate it centennial, as marked by the first meeting of Directors and Shareholders. In recognition of BELCO's 100^th Anniversary year, earlier this month we donated $100,000 to the campaign for the Bermuda Aquarium, Museum & Zoo (BAMZ).  The donation will support development of the new Zoo Hospital and Diagnostic Treatment Centre. We have had a long association with BAMZ and the Bermuda Zoological Society, which have a longstanding successful partnership in developing first-class exhibits, educational programs and conservation research. We are very proud to once again support their great efforts, which benefit all of Bermuda. 

In January, our milestone anniversary will be commemorated when the Bermuda Post Office issues BELCO 100^th Anniversary stamps. The stamps, depicting an engine, lineman, bucket truck and BELCO's headquarters building were all photographed by Abayomi Carmichael, an electrical engineer in our Energy Supply Group. The photographs were taken using an infrared camera, which is used as test detection equipment in our power plant. The images are bright and interesting. We hope you will enjoy seeing them. First day covers go on sale January 19, 2006.

This month also marked the 10^th Anniversary of the Festival of Lights for Charity competition. This year the competition attracted 50 entries, and to-date has generated over $84,000 in donations to a wide variety of charities by BF&M Insurance and BELCO who make the donations on behalf of the winners.  Those who participate in the Festival of Lights competition bring a great deal of holiday cheer to the Island, and we are very pleased to continue partnering with BF&M to thank entrants for the beautiful lighting displays.

Unquestionably, 2005 has been a year to remember.  The BELCO fire presented enormous challenges, but fortunately, we were spared the wrath of a very mean hurricane season.  There is much to be thankful for. On behalf of the Directors, management and staff of our Companies, I wish each and every one of you a happy and healthy New Year."

Signed by:

Garry A Madeiros

President & Chief Executive Officer