An MBTA board is considering hedging up to 70% of the T’s diesel fuel usage to protect against rising prices, a much higher rate than the 50% set since 2020, as more volatility is expected at the pump this year.
Assistant Treasurer Christina Marin said the cost of diesel fuel rose between $1 to $3.17 from December 2021 to December 2022, and while prices are recovering now, they’re still high and expected to fluctuate by about 40% in 2023.
Marin said the purpose of the fuel hedge is to improve predictability and certainty in the MBTA’s operating budget, especially in the face of volatility.
“Volatility was high last year when we placed the hedge and we expect it to continue to be high this year, due to a forecasted recession, supply disruption and the war risk premium with the situation in Russia,” she told the Audit & Finance subcommittee.
Marin said the MBTA has historically used a fuel hedge on its $60 million a year diesel budget for commuter rail and buses. That hedge has been 50% since fiscal year 2020, but was much higher prior to 2019, at 90% in 2016 and 75% in 2017.
She recommended that the board implement a 50% fuel hedge again this year, noting that the current hedge has resulted in net payments of $1.28 million from the three banks the MBTA is working with: Morgan Stanley, Goldman Sachs and Citi. The T made one small payment to the banks in December, she said.
The way the fuel hedge works is simple. If the price of fuel goes up, the bank pays the MBTA. If prices go down, the T pays the bank on the hedge.
“We seek price stability in the market, rather than on the fuel contract itself for greater flexibility and better optionality and agreement,” Marin said. “The fuel hedge ensures that our budget is protected from the ups and downs of the changing market prices.”
Based on historic usage, and adjusted for lower ridership, the MBTA is budgeting for 18.85 million gallons in fuel purchases between its commuter rail and bus in fiscal year 2024, Marin said.
Hedging 50%, or 9.4 million gallons of that anticipated diesel usage, would reduce potential budget vulnerability to $8.5-$17 million, compared to $24 million of potential variance the MBTA could be exposed to without a hedge, she said.
Her presentation slides categorized the hedge as a “win-win,” but there’s still a risk with locking in a high percentage of fuel costs ahead of time. Marin said traders are expecting diesel prices to continue to fall. If fuel prices plummet, the MBTA could be locked into those higher rates.
However, citing the MBTA’s past practice of hedging a higher percentage of fuel, the subcommittee requested that the agency’s financial team consider a proposal to the full board this Thursday that would cap the hedge at an even higher rate.
Betsy Taylor, board of directors and subcommittee chair, suggested that a 60% or 70% cap be considered, to give the T some flexibility. She spoke favorably about implementing a hedge in general.
“I, for one, think this is very financially prudent,” Taylor said. “I think there is, as we can all see from our own electric, oil or gas bills, tremendous volatility. And I think it is very prudent to shield the MBTA for a goodly portion, but nowhere near all of our diesel fuel costs.”
The subcommittee voted to recommend to the full board that the MBTA enter into a fuel hedge, but opted not to set a percentage cap.
After the MBTA receives board authorization, it will enter into a competitive bid process run by its hedge advisor, Blue Lacy. A bank will be chosen based on the price and the provider’s credit rating, according to the presentation.
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