The Tribune

• Draft Cabinet paper told of $21 per barrel ‘premium’

• Projected $46m energy cost savings to January ‘22

• Raises new questions on now-soaring fuel charge

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A draft Cabinet paper seemingly prepared for the Prime Minister advised that Bahamians could enjoy a further $22m in savings if trades were executed to continue Bahamas Power & Light’s (BPL) fuel hedging at discounted prices.

The memorandum from the Ministry of Finance, dated September 30, 2021, said BPL was seeking approval from the Davis Cabinet to execute further oil purchases at a $50 per barrel “strike price” representing a significant discount to then-oil market prices of $75. It suggested that “premiums ranging from $17 to $21 per barrel” could be obtained if the trades were executed.

The disclosure of the draft Cabinet memorandum, a copy of which has been seen by Tribune Business, comes as the Government faces increasing pressure over allegations that its failure to execute the trades supporting BPL’s fuel hedging initiative have cost Bahamian households and businesses more than $100m that they did not otherwise have to pay.

With the Government’s already-precarious financial position leaving it unable to further prop-up BPL’s fuel charge, it has moved to right the latter’s finances through imposing a series of rolling increases that will peak at a 163 percent hike in the electricity supplier’s fuel charge between June 1 and August 31 next year. A portion of the increase will likely go to repaying the $90m debt incurred with BPL’s fuel supplier, Shell, and to repaying the Government’s financial support.

However, the draft paper provides further evidence this financial pain could have been avoided if the Davis administration had followed the Ministry of Finance briefing and executed the necessary trades - known as “call options” - just weeks after being elected to office on September 16, 2021.

No date and copy number are included at the top of the document, although there is notation for a “past reference” of ICC 13(20)1. It says the paper is “for PED”, which is the same initials as the Prime Minister, Philip Edward Davis KC, although it does not prove he received or read it. Mr Davis has consistently denied being provided with recommendations on BPL’s fuel hedging trades, as did Alfred Sears, minster of works and utilities, who has responsibility for BPL.

However, the draft Cabinet paper’s existence raises further questions of who knew what, and when, and why the advice to execute the trades was not followed. It suggests that Mr Sears was himself briefed, as it states: “The Ministry of Finance has also shared this Cabinet memorandum with the minister of works and utilities to provide his comments at the [Cabinet ] table.”

The document, which requested that Mr Davis in his capacity as minister of finance give the necessary approvals, said: “This memorandum seeks Cabinet’s approval for the Ministry of Finance to facilitate plans by BPL to extend its fuel hedging programme in ongoing efforts to stabilise its fuel costs for its customer base, and the country at large,

“Colleagues would be aware that BPL’s fuel costs constitute a significant portion of total costs for the company (averaging between $175m and $225m annually), and is a 100 percent pass through to customers. By implementing a fuel hedging programme, BPL would be able to reduce its exposure to volatile and potentially rising fuel costs and soften the consequential impact on the final cost to the consumer.”

The paper acknowledged that a fuel hedging initiative does not automatically result in lower costs, but acts as a safeguard to oil (and electricity bill) price volatility and turbulence resulting from market spikes, while allowing BPL to exploit instances when costs are low to lock-in future prices.

This occurred when the fuel hedge was first initiated by the former Minnis administration in 2020. BPL, working with the Ministry of Finance, Inter-American Development Bank (IDB) and other advisers, was able to take advantage of low fuel costs at the peak of the COVID-19 pandemic to execute four hedging contracts covering between 31 percent to 80 percent of its “total fuel requirements”.

These structures were executed “at a uniformed strike price of $40 per barrel for a collective $79.2m in premiums”, the Cabinet paper said. “Based on the performance of the hedges, the initial contract resulted in savings of approximately $24.1m as of August 31, 2020,” it added. “BPL projects that, if current fuel prices hold through the end of the contract period (January 2022) savings could increase to nearly $46m over the 18-month hedge horizon.”

The draft paper made clear that BPL’s fuel hedging did not add to the Government’s debt, or impact its loan balances, as all transactions were executed using existing facilities with the IDB. All costs associated with the fuel trades were passed on to BPL, meaning there was no exposure for Bahamian taxpayers.

Fast forwarding to September 2021, when the memorandum was written, and it said: “BPL has indicated to the Ministry of Finance that, given current oil prices (approximately $75 per barrel), the company is contemplating another tranche of conservative hedges over the period July 2022 to December 2024 of 10 percent of forecasted annual consumption (aggregating 795,000 barrels). 

“The latest quotes from the market for a $50 strike price suggest premiums ranging from $17 to $21 per barrel. BPL also advised that it does not intend to execute any hedge contract beyond December 2024 because of the possibility of a significant change in the fuel mix with the introduction of liquefied natural gas (LNG).” 

The proposed trades were said to align with BPL’s risk management policy and hedge strategy, and be covered by an existing IDB loan facility. The Ministry of Finance was said by the draft paper “to be supportive of the continuation of BPL’s fuel hedging programme” as it “promotes an efficient approach to risk management and cost containment”.

All that was required was for Mr Davis, as minister of finance, to submit a letter to the IDB setting out the new hedge terms “as agreed between BPL and IDB” and requesting that it be executed. This, though, was never done and, as a result, the trades lined up to secure fuel at below-market prices for BPL, thereby filling in the volumes it required and enabling it to maintain a stable, relatively low fuel charge were never executed.

Mr Sears previously acknowledged the draft Cabinet paper’s existence in a House of Assembly debate, and said the Ministry of Finance ultimately came to the conclusion that the BPL fuel hedging initiative as structured - and the trades to support it - were not in The Bahamas’ best interests.

“BPL, it’s a determination by the Ministry of Finance. The Ministry of Finance, in October [2021], made a determination that the proposal the honourable member is referring to was not supported,” Mr Sears said in reply to Opposition leader Michael Pintard. “Only the Ministry of Finance can support using the Public Treasury’s money in an undertaking. It was not persuaded at that time, before the Ministry of Finance.. it was not in the interests of the country at that time.”

The reasons and rationale for the Ministry of Finance’s decision not to execute the trades, and effectively pull the rug from under BPL’s fuel hedging initiative, was never explained by Mr Sears. However, it backs Tribune Business sources who have revealed that senior Ministry of Finance officials opposed the trades, believing that the hedging strategy was not optimal, could be done better and was effectively “a subsidy for hotels and rich people”.

Prior to that exchange, both Mr Sears and the Prime Minister had denied repeatedly that they received any recommendations relating to BPL’s fuel hedging. And Mr Davis last week maintained that he had no knowledge of the proposals.

“I had no knowledge of it. He (Mr Sears) said the Ministry of Finance had knowledge of it. That’s a big ministry. That was not me,” Mr Davis said. “I saw no documents about that. But this weekend I was provided with information concerning that. I am now assessing to determine all the misstatements about what actually went on. What I do know is that the financial secretary [Simon Wilson] had some views about it proceeding and I think those were the views that were adopted.”

Mr Pintard last night renewed his calls for Mr Sears to resign, arguing that “on no less than eight occasions he denied over and repeatedly that he got any kind of advice or recommendations on the hedge”. Calling on the Prime Minister to act to restore confidence in his administration and its “credibility”, the Opposition leader said Mr Davis’ reference to Mr Wilson and the “adoption” of those views showed he must have received advice and proposals on the issue.

“The comments made by the Prime Minister denying the statement by his minister [Mr Sears] has brought into question the credibility of this administration in a very serious way,” Mr Pintard asserted. “This is a very unusual occurrence in our system of governance where a minister and Prime Minister have both been accused of making a bad judgment call on the hedge and the trades that resulted in an over $100m cost to the Bahamian people.

“They coupled the bad judgment and bad decisions by trying to conceal they were advised properly but decided to go in a different direction. This matter turned out not to be the usual ‘stop, review and cancel’ of a previous administration’s policy; this turned out to have dire consequences for BPL’s liquidity and financial position.”

Mr Pintard said Mr Sears had repeatedly stated that the BPL fuel hedge recommendations had gone to the minister of finance, meaning Mr Davis, as opposed to the Ministry of Finance. And he added that it would not be consistent with the country’s system of governance for such a major decision to be left to civil servants or a group of civil servants.