The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government and Bahamas Power & Light (BPL) last year lacked the $40m in free cash needed to finance cut-price oil purchases that would have saved electricity consumers millions, it was argued yesterday.

Government officials, speaking on condition of anonymity because they were not authorised to talk publicly, told Tribune Business the cash-strapped position at both the Public Treasury and BPL when the Davis administration took office 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 failure to execute the trades for costing Bahamian businesses and households more than $100m through 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.

Simon Wilson, the Ministry of Finance’s financial secretary, declined to comment when contacted by Tribune Business yesterday after Alfred Sears KC, minister of works and utilities, said that it was upon his and that ministry’s recommendations that the fuel hedging trades were not executed (see other article Page 1B).

However, 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.

The Davis administration was said to have taken office with the Government faced with a “severe liquidity crunch” as a result of the debt and fiscal deficit blow-out produced by Hurricane Dorian and COVID. Besides the $40m required to fund the latest hedging-related trades, BPL also had “no financing in place to satisfy that obligation” coming due with the $246m loan.

“The primary focus at the tine was to make sure BPL fulfilled its obligations,” one contact said. “The cost of the transaction and the premium was around $40m. That was not an inexpensive proposition. In September, October, November, December, January and February, the first six months of the new administration, if you look at those fiscal challenges, did it have $40m lying around to place in a hedge? The answer is no.”

Interest and penalties on BPL’s $246m loan from Credit Suisse were said to have been increasing every month, making it urgent that this either be repaid or refinanced. Some $186m was refinanced, with a further $84m (including interest and penalties) funded from “reserves”. That latter sum would not have been raised, it was argued, if that $40m had been invested in fuel hedging.

“You could go and do that hedge and be in default on the loan,” one source added. “There was no money. To make the argument that [the hedge] was the right decision ignores the reality facing everyone that there was simply no money for that. The best use of scarce resources was to make sure the Government and BPL met their obligations. The second best use was to bring online more efficient engines. The hedge does not solve BPL’s problems.”

This narrative, though, was yesterday challenged by sources familiar with developments involving BPL’s fuel hedging initiative around the time that the Davis administration took office in September 2021. Speaking on condition of anonymity, they argued that there was no link between the fuel hedging and the $246m loan coming due for maturity.

Pointing out that BPL was paying all the interest costs and penalties for non-payment associated with the loan, they argued that it had not been costing the Government “anything”. And, if the Davis administration had followed through with the $535m Rate Reduction Bond (RRB) refinancing of BPL’s legacy debt and liabilities, as left behind by its predecessor, the $246m loan would have been paid off and be a non-issue.

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 the bond refinancing and new power plant deal with Shell North America.

The status of the latter two initiatives remains unclear, although the bond appears to have been put on the shelf for now - at least 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.

The timing of the general election, and new government taking office, has had consequences for Bahamian households and businesses as a result of the decision not to execute the trades and resulting impact on electricity costs. It admittedly placed the Davis administration in a tough spot, having to make a quick decision on a vital issue as it was still being briefed and getting to grips with the machinery of government.

However, it has since emerged that the Prime Minister and Mr Sears received a full briefing on the matter by BPL’s then-Board and management, which is backed by documents obtained by this newspaper, yet opted to go with the contradictory position taken by Mr Wilson and the Ministry of Finance.

One source said of the ministry’s objections: “They said it was costing the Government money, which it wasn’t. They said it was a bad strategy, but never clarified what that meant. They also said it was giving a subsidy to rich people and hotels, which made no sense, because under the Electricity Act you have to pass the fuel charge on to customers equally.”

The cut-price oil purchases, known as call options, were overseen and monitored by the Inter-American Development Bank’s (IDB) trading desk which advised BPL when suitably-priced fuel became available. The hedging was underwritten by the Government’s existing credit facilities with the IDB, including the “contingent loan for natural disasters”. There were conflicting accounts yesterday of whether there was sufficient room under this facility to finance the September 2021 trades.

However, sources close to the Minnis administration said this was never raised as an issue. And a draft Cabinet paper, dated September 30, 2021, made clear the hedging initiative cost the Government and Bahamian taxpayers nothing as all costs were supposed to be passed on to BPL. The utility, in turn, treats its fuel costs as a pass-through, meaning the bill is ultimately picked up by its electricity consumers.

And Whitney Heastie, BPL’s then-chief executive, told Mr Sears in an October 18, 2021, letter that the fuel hedging initiative was on track to save BPL and its consumers more than $54m over the 18 months to January 2022 if the trades continued to be executed to backfill the utility’s inventory of cut-price fuel.