The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamians have been burdened with a $150m bill due to the mishandling of Bahamas Power & Light’s (BPL) fuel hedging strategy, it was revealed yesterday.

The full cost, branded “a significant unbudgeted liability” for the Government, was revealed in the just-released Fiscal Strategy Report, which said BPL’s arrears must be paid off to prevent electricity supplies being interrupted.

“The recent disclosure of approximately $150m of payment arrears of Bahamas Power & Light (BPL) represents a significant unbudgeted liability of the Government,” the report said. “To ensure continued provision of essential electrical services to the public, the Government has committed to ensuring payment of this liability by the corporation.”

This means the unpaid bills will have to be picked up by Bahamian households and businesses, either as taxpayers or BPL consumers. The report’s revelation is the first time that the full cost of the decision not to execute the trades underpinning BPL’s fuel hedging initiative, and not adjusting the energy monopoly’s fuel charge sooner, has been publicly disclosed.

To-date, only the $90m unpaid fuel bill owed to Shell, BPL’s supplier, has been disclosed. The Fiscal Strategy Report thus indicates that a further $50m-$60m of costs and payment arrears has been incurred, some of which may relate to loans advanced to BPL by the Government to enable it to hold its fuel charge at 10.5 cents per kilowatt hour (KWh) until October 2022.

BPL’s customers are now paying-off these arrears via fuel charge hikes that will peak at a 163 percent increase over last October’s bill between June and August this year, when consumption is at its peak due to the summer months. Much of the burden will fall on consumers using over 800 KWh per month, meaning that businesses and higher-earning households will likely take the brunt.

Michael Pintard, the Opposition’s leader, yesterday told Tribune Business that the $150m sum identified by the Fiscal Strategy Report “seems to be consistent with what we’ve been saying”. The revelation coincided with another attack launched by Mr Pintard on Alfred Sears, minister of works and utilities, in the House of Assembly over the increased energy costs inflicted on Bahamians by the Davis administration’s decision not to execute the purchase of cut-price fuel.

The Free National Movement (FNM) leader asserted that “no amount of moonwalking or back-pedalling will rescue you” from the consequences, but Mr Sears successfully persuaded House speaker, Patricia Deveaux, to strike Mr Pintard’s use of the word “conceal” from the record after he claimed the Government sought to cover-up its handling of the fuel hedge.

Mr Sears vehemently denied that he deliberately attempted to mislead the House of Assembly, only for Mr Pintard to charge that he “counted” eight occasions in the House of Assembly where the minister responsible for BPL had denied he was briefed on the fuel hedge only to later confirm he did receive such materials.

BPL’s fuel hedging initiative, rather than being a gamble or bet as some have portrayed, was designed by the utility’s former Board and management as a mechanism to counter global oil market volatility and spikes by providing stable, predictable fuel charges and rates for consumers. It was designed to give the utility, and its consumers, some breathing room while they waited for BPL’s $535m bond refinancing and new power plant deal with Shell North America.

The status of those latter two initiatives remains unclear, although the bond appears to have been shelved for now until global market conditions improve. The fuel hedge was thus part of a much wider strategy designed to transform BPL, and which Tribune Business understands was presented to Mr Sears upon taking ministerial office so that he was aware of all key issues facing the utility.

Under the Minnis administration, BPL exploited low global oil prices at COVID-19’s peak to lock in cheap fuel costs via a hedging strategy. The Davis administration and BPL have repeatedly said the initial fuel hedging structure, put in place by the Inter-American Development Bank, remains in place, which is correct. The December 2020 hedge covered a total 3.565m barrels of oil for BPL that were priced at $40 each and split into three tranches.

This transaction hedged 75 percent of BPL’s fuel needs for 2022, 50 percent of its requirements for 2023, and 25 percent of 2024’s needs via the IDB’s upfront hedge. These were were not hedged 100 percent because BPL needed to monitor global oil price movements so that it did not end up hedging at a price above market costs and thus end up losing money.

BPL was supposed to hen support the original hedge by purchasing the extra fuel volumes to fully address its needs through 2022-2024. This was to be done via a series of trades, known as call options, that would have enabled BPL to obtain fuel - covering the 20 percent balance for 2022, 50 percent for 2023 and 75 percent for 2024 - at prices below then-prevailing oil market rates had they been executed.

It was these trades, scheduled to have been executed in tight windows in September 2021 and December 2021 just after the Davis administration took office, that were not carried out. As a result, BPL was increasingly buying fuel at higher market spot rates, and its fuel charge needed to increase to cover the costs.

Instead, this was artificially held at 10.5 cents per kWh through to October 2022 via the combination of government support and $90m Shell non-payment. Whitney Heastie, BPL’s former chief executive, had sought to get in front of the required fuel charge hikes by raising this to more than 13 cents per KWh in early 2022, but this was rejected by the Government in a decision that has only made the magnitude of the correction greater.

However, Tribune Business was also told that the Government and BPL last year lacked the $40m in free cash needed to finance the cut-price oil purchases that would have saved electricity consumers millions. Officials said the cash-strapped position at both the Public Treasury and BPL in September 2021 meant there was simply no liquidity available to finance the acquisition of more below-market oil to further underpin BPL’s fuel hedge.

While the Opposition has attacked the Government’s failure to execute the trades for costing Bahamian businesses and households higher electricity costs they did not have to incur, this newspaper was told that this does not account for the bigger picture BPL faced at that time with a $246m loan due to mature in February 2022 and no funds to repay it.

Well-placed sources said there were some “fundamental points” justifying the Ministry of Finance’s advice to policymakers not to execute the trades that were being strongly advocated for by BPL’s then-Board and management. These concerns related to the availability of necessary financing, as well as the actual design of the hedge and the costs associated with it and the actual transaction.

UPDATE: In a voice note circulated on Friday, PLP chairman and Minister of Foreign Affairs Fred Mitchell called it "lies from the pits of hell" that any decisions associated with the hedge fund strategy were responsible for the $150m debt. Mr Mitchell did not dispute the debt, which is detailed on page 59 of the report - but rather that the decision not to proceed with the hedge fund strategy had anything to do with that sum.

He added: "The basic fact is not using the FNM's fuel hedge strategy was not responsible for the $150m fuel bill. Let's make it clear, the FNM's fuel hedge strategy was itself a failure period due to changes in the market, breakdown of equipment because of lack of maintenance, the FNM's fuel strategy was of no use to the BPL and the Finance Ministry under the PLP did not agree with the use of the FNM fuel hedge strategy. It was ineffective. The PLP followed sound advice by the ministry, did not follow that bad strategy."

He concluded: "Any assertions to the contrary about that FNM fuel hedge strategy are lies from the pits of hell."