From ERA

Background Caribbean Utilities Company, Ltd. (CUC) generates approximately 99.99% of its electricity for Grand Cayman by consuming No. 2 Ultra Low Sulfur Diesel (ULSD) in its diesel generator sets.

CUC consumes a large volume of No. 2 ULSD annually. In 2011, CUC consumed approximately 32 million imperial gallons to generate 606 million kilowatt-hours of electricity for Grand Cayman.

Because No. 2 ULSD is a refined oil fraction, its pricing is reliant on the price of oil. Oil pricing is determined in a global marketplace that is sensitive to speculation, global supply and demand and geopolitics. Oil pricing has increased steadily with double digit economic growth in emerging nations like China as well as during wars in Afghanistan (2001 to present) and Iraq (2003 through 2011). The graph below shows Brent Crude pricing experiencing severe price shocks and volatility, most notably during the global financial crisis in 2008.

See Graph Historical Pricing: Brent Crude Spot FOB (Europe) – Graph 1

Because electricity Consumers on Grand Cayman buy diesel-generated electricity they are vulnerable to price spikes and volatility in the global oil market. In 2011, generation expenses passed-through to CUC customers in the monthly fuel factor charge accounted for over two- thirds of the average monthly electricity bill in each tariff category (residential, general commercial and large commercial).1

To help mitigate and manage Consumer exposure to No. 2 ULSD price spikes and volatility, the ERA and CUC agreed to pursue a strategy that could protect against an unpredictable and catastrophic2 increase in the fuel factor charges passed-through to Consumers.

Fuel Price Volatility Management Program On March 22, 2011 the ERA and CUC agreed to guidelines within a Fuel Price Volatility Management (FPVM) Program to assist in preventing catastrophic increases in fuel charges to electricity Consumers on Grand Cayman. The FPVM Program calls for the purchasing of 12- month rolling fuel hedging contracts using heating oil as a proxy hedge for No. 2 ULSD.3

The ERA and CUC utilize heating oil as a proxy hedge for No. 2 ULSD because heating oil and off road diesel are virtually identical in the refining process; therefore, they are essentially the same fuel. To promote transparency in pricing, the ERA and CUC have utilized NYMEX New York No. 2 Heating Oil as the underlying commodity, or proxy hedge, for fuel hedging.

The commodity pricing of NYMEX New York No. 2 Heating Oil is strongly correlated to the United States Gulf Coast (USGC) Platt’s No. 2 ULSD pricing hub which CUC utilizes when purchasing No. 2 ULSD for electricity generation on Grand Cayman. New York No. 2 Heating Oil (Contract 1) is also strongly correlated to the spot price for Brent Crude, which the graph below illustrates.

See Graph Brent Crude Spot FOB (Europe) vs. NY No. 2 Heating Oil – Graph 2

The aim of the FPVM Program is to protect Consumers against catastrophic increases in fuel charges by employing a fuel hedging strategy that is transparent and non-speculative. The ERA and CUC purchase fuel hedging contracts for up to 70% of projected No. 2 ULSD consumption as insurance against catastrophic increases in the fuel charges passed through to Consumers.

For the current FPVM Program, the ERA Board of Directors granted approval to both the ERA and CUC to purchase fuel hedging contracts for 70% of the projected CUC fuel consumption for 2012 at a budget of 1% of projected CUC sales for 2012.

The FPVM Program requires CUC to submit an annual Fuel Price Volatility Management Plan to the ERA by November 30 of each year to seek approval for hedging limits for the upcoming contract period.

For additional information on the Fuel Price Volatility Management Program for Grand Cayman, please contact Caribbean Utilities Company, Ltd. or the ERA.