The Tribune

• Ex-CEO letter briefed key Cabinet minister

• Trades vital to stop ‘large fuel charge’ swing

• Sears denied receiving or seeing document

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Opposition’s leader yesterday charged that key policymakers in the Davis administration were given “sufficient meat” to understand the fall-out if the trades underpinning Bahamas Power & Light’s (BPL) fuel hedge were not executed.

Michael Pintard told Tribune Business he “does not believe for a moment” that Alfred Sears, minister of works and utilities, and Prime Minister Philip Davis KC were unaware of the multi-million cost burden that could be inflicted upon BPL consumers if the hedging strategy unravelled. The consequences are the up to 163 percent increase in BPL’s fuel charge that businesses and households must endure in summer 2023 at peak consumption.

The Free National Movement (FNM) leader spoke out after he published a six-page letter sent by former BPL chief executive, Whitney Heastie, to Mr Sears that was entitled “fuel hedging programme justification” and set out the rationale for implementing the initiative as well as technical details on how it worked.

Mr Sears, though, denied seeing or receiving the October 18, 2021, letter which was written to him just over one month after the Davis administration was voted into office. He also described Mr Heastie’s letter as a technical, theoretical document rather than a recommendation to conduct the purchases necessary to maintain BPL’s fuel charge at 10.5 cents per kilowatt hour (kWh) or at a level close to that.

However, the Government’s position on the issue began to subtly shift on Wednesday night as Mr Pintard tabled the letter to Mr Sears in the House of Assembly. The Prime Minister, while confirming that recommendations had been made on executing the BPL fuel purchase trades, said he had never seen them because they were still being assessed by the “technical people” inside government.

This represented a change from Wednesday morning, when Mr Pintard challenged both Mr Davis and Mr Sears “to say they have not seen” advice and Cabinet papers recommending that the trades be executed. “I continue to hear this diatribe of what we did not respond to, or what the advice was that we did not follow,” the Prime Minister replied.

“I received no advice, received no recommendations and saw no papers in that respect. It never reached my desk. It never happened.” Mr Sears also said such advice and recommendations were “not provided” to himself, instead adding that the main BPL issue presented to him upon taking office was whether to proceed with the state-run utility’s $535m rate reduction bond (RRB) refinancing.

However, Mr Heastie’s letter provides the first tangible evidence that at least one Cabinet minister was briefed early during the administration’s tenure about the fuel hedge, which was designed to provide price and electricity rate stability to BPL’s long-suffering consumers. It also raises questions as to whether the Government has been fully transparent with Parliament on an issue that is set to unnecessarily cost Bahamians millions of dollars.

Mr Pintard, suggesting that the Prime Minister had “sought to insulate” himself from the controversy on Wednesday night by saying that the fuel hedge recommendations never reached him, while not denying they existed, said of the Heastie missive: “I think there was sufficient meat in that letter alone that provided a guide as to what any decision-maker should do.

“There clearly was substantial information in the letter to make them aware that the programme in place was working, and if one continued such a programme they would continue to get similar pricing on the fuel charge of 10.5 cents per kilowatt hour (kWh) or slightly higher.”

Mr Heastie’s letter was headed “response to the financial secretary”, which indicates that Simon Wilson, the Ministry of Finance’s top official, had concerns over the BPL fuel hedge and how it was structured although these were not detailed in the document.

“The major intent of the programme is to smooth the peaks and valleys that the market is subject to over time and provide a stable and, if possible, a lower fuel charge to customers. The pricing of the fuel purchases is subject to market conditions,” the then-BPL chief executive wrote to Mr Sears.

Explaining that BPL had leveraged the Inter-American Development Bank’s (IDB) top-tier credit rating and existing loans to the Government to obtain “a far more competitive rate” and pricing with the hedge, he added: “To be clear, our agreement with the Government indicates that BPL is responsible for all fuel hedging-related expenses, we are not aware of any other charges or fees that the Government must pay in order to support this programme.”

Mr Heastie explained that the initial hedge was executed in summer 2020, exploiting low global oil prices as a result of worldwide economic activity being constrained by the COVID-19 pandemic. “Given the ‘low’ price of oil during the initial stages of the COVID-19 pandemic, it was strategically important to BPL and its customers to buy low and purchase as much as was financially possible realising that pre-pandemic the oil prices was averaging in the mid-$60 range,” he said.

“IDB, once engaged, went to the markets and provided BPL with pricing options of which a strike price of $40 and a premium of $8.99 - for an all-in cost of $48.99 - was the most favourable in both the oil price and premium cost. It should be noted that, at an all-in-cost of $48.99, BPL saw ‘losses’ as the price of oil on the open market was less than the all-in-cost.

“However, understanding that the strategy was not to beat the market but to provide fuel price stability, BPL executed the hedges and today is seeing the huge benefits given the price of oil on the open market which, as of today, is at $85 per barrel.”

Mr Heastie then explained why it was necessary to execute the rolling series of trades, known as call options, that had been structured to enable BPL to purchase fuel at advantageous prices. “To prevent large movement in the fuel charge, timely fuel hedges are executed. These periodic purchases provide ‘layering’ of the hedges that will result in a smoothing effect to the fuel charge to customers over time,” he wrote to Mr Sears.

“The execution of contracts is based on quotes obtained from the market by the IDB and passed on to BPL. The options have a strike price, and with each strike price is a corresponding premium that is paid, along with the transaction fee, to the IDB..... For the period August 1, 2020, to January 31, 2022, BPL has hedged just under 90 percent of its fuel at a strike price of $40 per barrel for a premium of $8.99 per barrel. In essence, we have locked in this fuel at $49 per barrel.”

The Davis administration and BPL have repeatedly said the initial fuel hedging structure, put in place by the IDB 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.

The Government, though, is not giving the full story. BPL was supposed to “backfill” the original IDB hedge by purchasing the extra fuel volumes to fully address its needs. This was to be done via the series of trades, known as call options, referred to by Mr Pintard 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 has increasingly been buying fuel at higher market rates with the fuel charge artificially held at 10.5 cents per kWh via the combination of government subsidies and $90m Shell non-payment. This can no longer be sustained, and consumers must pay up as a result.

Mr Pintard yesterday accused the Davis administration of being “asleep at the wheel” over the issue, and said of Mr Sears: “He cannot say he did not understand the implications of the existing policy, and the clear implications of what could happen if he did not act. The document is clear.”

Pointing out that the Government access to advice from BPL’s fuel hedging committee, the Deloitte & Touche accounting firm and Tony Lopez, the former Grand Bahama Power Company chief financial officer who served as a consultant and put BPL’s fuel hedging strategy in place, the Opposition leader added: “I do not believe for a moment they were not aware of the implications were. They made a choice and it backfired, and that will cost the Bahamian people.”