RECO Odyssey Comes to Conclusion
More ups and down expected before smooth waters

April 1st, 2008
by Thomas Tomczyk

[private]

In a convoluted and drama-filled vote, several hundred RECO shareholders put their faith in their community leaders and cast ballots in cardboard boxes of Kleenex and Bleach. They decided to sell 52% of Roatan Electric Company to an American Billionaire Kelcy Warren. The process remains in question as some dispute the wisdom and legality of disregarding a national committee which gave Kelcy Warren the third highest score of six participating bidders. The heart of the matter is whether the Honduran government committee was only evaluating who the winner should be, or whether it was selecting who the winner would be. We will never know "what could have been," as under pressure from local politicians, the Honduran government washed its hands from the determination of most islanders to sell the shares to Warren. "It took time for the government to realize that the evaluation committee recommends, but the shareholders will decide," said Evans McNab, president of RECO board.

In a convoluted and drama-filled vote, several hundred RECO shareholders put their faith in their community leaders and cast ballots in cardboard boxes of Kleenex and Bleach. They decided to sell 52% of Roatan Electric Company to an American Billionaire Kelcy Warren. The process remains in question as some dispute the wisdom and legality of disregarding a national committee which gave Kelcy Warren the third highest score of six participating bidders. The heart of the matter is whether the Honduran government committee was only evaluating who the winner should be, or whether it was selecting who the winner would be. We will never know "what could have been," as under pressure from local politicians, the Honduran government washed its hands from the determination of most islanders to sell the shares to Warren. "It took time for the government to realize that the evaluation committee recommends, but the shareholders will decide," said Evans McNab, president of RECO board.

Many energy customers on Roatan still take their energy prices for granted. The current price of energy paid by Roatanians is less than half what Utilans and Guanajans are paying. While the RECO price of Lps. 3.6/Megawatthour has remained the same since 2006, on Utila it is 128% more expensive, or Lps. 8.2, and on Guanaja Lps. 7.4.

Two entities created the failure of RECO and its subsequent placement under emergency government control in early 2007: the old RECO board’s poor administration and the patronatos leaders’ mortal grip on RECO to maintain fuel surcharges even though world fuel prices skyrocketed. As recently as a year ago, patronato leaders and RECO board members held one another at a standstill through mutual accusations of endangering the future of Roatan’s electricity–a standstill which by February 2007 could only be remedied through government intervention.

13 months later, after the government saved Roatanians from this failure, patronatos and RECO board have decided to disregard the findings of a government-sponsored evaluation commission. Instead, they have decided to give the right of a 52% share purchase to someone who already once passed on the share-purchasing opportunity.

In October 2007 Warren, a businessman with experience in natural gas pipelines, demanded a 60-day due diligence without guarantying purchase. The government decided that 60 days was too long and began a bidding process that lasted 141 days and was expected to finalize somewhere around March 31. “It was the biggest mistake for the government and Warren. Maybe if he [Kelcy Warren] had asked for 30 days we wouldn’t have had to go through the bidding process,” said Evans McNab, current RECO board president.

After receiving six bid offers, the national evaluation committee decided that Punta Cana, an energy producer from Dominican Republic, had the highest number of points in the bid. Honduran Fredy Nasser’s Terra Group came in second, and Warren’s offer was ranked third.

After much drama, meetings and voting, on March 5 the government finally gave in to the demands of the local leaders and RECO board. Honduran officials wanted to wash their hands of any legal consequences that could follow. “We went through this process, but it was complicated and convoluted. … We are not intervening in the board of shareholders. You will decide this [who will win the bid], but under your own responsibility,” said Aristides Mejilla, Minister of Defense and President of the RECO intervention commission.

Mejilla made it clear that the Honduran government reserves a right to intervene in RECO in case of mismanagement, natural disasters, etc. as energy production and distribution is a strategic enterprise vital to Honduras’ economy and image. “This company has an enormous importance to the economy of the country,” said Mejia.

So began the RECO shareholders’ meeting that would conduct two votes: to accept or reject the evaluation committee’s results, and then, if the vote was to reject, to whom to award the 52% share buy-out option.

The quorum of 43,500 shares could not be produced and another meeting on the following day was called. According to RECO constitution, shareholders can decide and vote without a quorum a day after the original meeting. On March 6, the final day of the meeting turned into a melee as hundreds of voters and spectators turned in to cast their RECO votes.

Not everyone could vote as they were hoping or even expecting to do. Six years ago Sandra Segarich, for example, an American property owner in Sandy Bay, bought her Sandy Bay property along with one RECO meter and has been paying her electric bill ever since. Effie Tatum, 82-year-old seller of the Sandy Bay property, died in 2006, but according to RECO it is the deceased islander who has the right to cast her vote in the assembly not Segarich. “They told me that RECO assets are not transferable,” said Segarich.

While a line of several hundred people queued to cast their votes, president of the Bay Islands patronatos agitated the voters. “Vote ‘no’ and vote for Kelcy Warren,” Rosa Hendrix shouted through a loud speaker. Regarding Hendrix’s conduct, Governor Thompson said, “This is not right.”

Three of the Punta Cana representatives present at the meeting were visibly upset. The Punta Cana reps were shouted at, booed and waved at not only by some angry RECO shareholders, but even by RECO board members themselves.

“We won the bid, we are the winners,” said Punta Cana representative Oscar San Martin. “I don’t understand why the same people who bankrupted this company are now deciding about its future,” said San Martin. “We might have to come back in two-three months to save you,” San Martin told the RECO board.

Amongst the 142 votes ultimately cast for Punta Cana was Jerry Avarado, Mount Pleasant patronato member. “The patronatos are divided on who to support. We want the decision of the government to be respected,” said Avarado, wearing a Che Guevara t-shirt to the meeting.

Even some local political leaders were skeptical of Kelcy Warren but hesitant to go on record. The politicians who were vocal and outspoken praised Warren and tried their best to present him as the “best choice for Roatan.” “We are confident that we have found a partner who could be a part of this community,” said Evans McNab about Kelcy Warren. Few people have challenged this or questioned the logic of going with an individual rather than a company.

Warren has no personal experience in energy production or distribution and no experience in third world country projects. While Warren is seen as a rescuer of Roatan, a knight in shining armor, it is far from certain how things will turn out. Warren is a businessman. For business reasons, not for the community’s benefit, he asked the government for a 60-day review of RECO books.

When the votes were counted the decision looked like a landslide: 22,146 shares went against evaluation committee recommendation, with only 142 for Punta Cana. It was decided. But as Punta Cana representatives headed to their hotel rooms, they threatened legal action to claim potential profit from an “awarded bid.”

In the days following the vote, Warren began paying off the $1.6-2 million RECO debt to Banco Atlantida. By end of March he is expected to pay off the debt to ENE, National Energy Company, estimated at $8-11 million. The entire purchase price of around $15 million also specifies investment over time. The 52% RECO shares were purchased for $3 million, or $122.75 a share. In 1992, each RECO share could be purchased for Lps. 100, or $15.40. Over 16 years, that translates to a gain of 800% and averages 13.85% cumulative interest gain a year.

When during Semana Santa holiday RECO GM Humberto Mesa took his holiday and went to the coast, the de facto management of the company was left in the hands of Matthew Harper, chosen by Kelcy Warren as RECO’s interim GM.

Harper, who owns his own electrical contracting company, started his career with RECO in 1991, the year the company started. “In short term I feel that I am the right person for the job. I am an electrical engineer by profession, I know the company and the RECO system, I have a good rapport with people, I speak both languages,” said Harper. “I know how RECO used to work when it worked well and I am trying to get it back to that,” added Harper. “I am doing this for four reasons: I love RECO; Kelcy trusts in me; as a citizen of the island I also need dependable power; and I know that I can make a difference.”

During Semana Santa RECO ran on 9.8 Megawatt of power. A majority of the power, 4.9 Megawatt, came from rented units from Nacional de Inginieros company. “For the first time in a long time we didn’t have to ration power,” said Harper. The disruptions and power cuts came when a northern weather front and strong winds brought down several power lines.

Harper said that Kelcy Warren has specified a four- and 12-month plan for the company: “We are sticking to technical proposal and due diligence.” In the first several months the plan is to rent additional generators and perform corrective maintenance. A first machine bought by RECO will run on more efficient and cheaper bunker fuel (HFO). “In this type of

company we need a profit margin of around 10%-15% and by September we should have around 6%-7% [profit] margin,” said Harper.

Another crucial issue is the structure of the company. RECO employees have not received raises for several years, the morale is low and the organizational structure of RECO is inefficient. According to Harper, after reorganization and with additional machines, the work of the current 60 RECO employees could be done by 40 to 50. “We want for people to see RECO as a place to work until retirement,” said Harper. [/private]

ENERGY COSTS IN HONDURAS

  • Rotan $ 0.19/kwhr
  • Utila $ 0.43 /kwhr
  • Guanaja $ 0.39 /kwhr
  • La Ceiba $ 0.16 /kwhr

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