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 Banks, led by Citibank and Canada's Scotiabank, on Thursday agreed
to a seven-and-a-half month extension of $671 million in credit
lines the Puerto Rico Electric Power Authority (Prepa) needs to buy
oil that is essential to keep it operating.But they also got Prepa
to commit to appointing a chief restructuring officer next month,
and to produce a full restructuring plan in March next year, in an
attempt to get the power company's finances onto a more stable
footing.
Prepa's troubles are perhaps the starkest symbol of the huge debt
burden threatening to overwhelm the U.S. territory. Investors,
including some major U.S. funds, have already lost billions of
dollars on bonds issued by the island's government and the entities
it owns, such as Prepa.
The financial morass has got so bad at Prepa that it has been
borrowing to pay for operating expenses, according to credit rating
agency Moody's Investors Service. Auditors Ernst and Young said in
2012 that Prepa - with borrowings of $9 billion - has more
liabilities than assets since 2011.
Prepa declined repeated requests for comment for this story.
"It's not viable. It's not sustainable anymore," said Sergio
Marxuach, policy development director at the San Juan-based Center
for a New Economy, and a longtime analyst of Prepa's troubles. "They
are essentially at the mercy of their creditors right now and the
oil companies. And the vultures," Marxuach said with reference to
so-called "vulture investors" who may be seeking to profit out of
the island's troubles.
The company will eventually either have to go through a jarring
restructuring, or it will have to turn the power off on a rolling
basis, he warned.
Prepa's considerable list of problems includes an over-reliance on
expensive oil, its aging infrastructure – some dating to the 1960s –
a bloated workforce, and a billing system that is regarded as
arbitrary and difficult to understand.
And all this while the island's population is declining and its
manufacturing base shrinking, reducing demand for electricity.
Puerto Rico has lost around 200,000 people since 2000 and is now
estimated to have a population of only 3.62 million.
Many analysts say that an overhaul of the agency would need to
include a massive haircut for investors in Prepa's debt, big job
losses, the closure of some facilities, and an attainable plan to
reduce its reliance on oil.
RECOVERY ACT
A June report from Prepa said the utility had $137 million in cash
and cash equivalents. That same report said that Prepa spent $196
million on fuel alone that month.
Puerto Rico itself faces $72.6 billion of public debt, including the
Prepa money. That's about $20,000 for every man, woman and child on
a Caribbean island where the median household income was just
$19,429 in 2012. Its pension funds for government workers are
severely underfunded, adding to the stresses.
Many of those closest to the situation see any Prepa negotiations
with creditors as a precursor to a much wider restructuring of
Puerto Rico's debt, including the government and its water and
highway agencies.
The government hastily introduced and passed a law in late June that
gives some of the island's public corporations a legal framework for
a bankruptcy-like procedure. Before that there was no such mechanism
for entities like Prepa.
The so-called Recovery Act shocked investors, who abruptly sold off
the island's public debt, including not just Prepa bonds but even
general obligation bonds and debt linked to sales tax receipts.
Prepa is a monopoly in Puerto Rico. There are two private generating
companies in the south of the island – but they also sell
electricity to Prepa. It is the only electricity distributor, as
well as generating most of the island's power.
Some companies have decided not to rely on Prepa. Rum maker Bacardi,
one of Puerto Rico's marquee companies, began using biogas for some
needs around 2007 and added windmills in 2010. Those two sources
account for about half the company's energy needs on the island.
In a normal year, this gives the company protection in case Puerto
Rico suffers a big hit in hurricane season, but this year the
company is also preparing contingency plans in case it can't get the
rest of its power from Prepa. It may even have to switch the
production of distillates away from the island in a worst-case
scenario.
The company wants to avoid that, said Eduardo Vallado, director of
supply chain and manufacturing for the Americas for Bacardi. "We
need the Puerto Rico claim on our label," he said. "In the end we
need Prepa's energy to operate."
ADDICTED TO OIL
Some other companies and wealthier individuals do have their own
generators – and a few do produce power through alternative means.
Food distributors have been reducing their reliance on Prepa for
years, using solar panels and other sources. "With such a stressed
system, any emergency could put it to the test," said Manuel Reyes,
a executive vice president for MIDA, a food industry group in Puerto
Rico, in reference to Prepa and other economic problems on the
island.
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At the root of Prepa's problems is a long history of inaction that
left the utility so reliant on oil imports. For various reasons,
proposals over many years to build pipelines to bring imported
natural gas from the south of the island to its power plants in the
north – closer to the capital of San Juan - have been nixed.
Renewable energy projects have been so mired in red tape that many
investors have lost interest. Prepa also doesn't hedge, leaving it
exposed to oil price spikes.
Prepa's San Juan, Palo Seco and other plants were built in the 1960s
and 1970s, when running on oil was normal. But, while many utilities
elsewhere have shifted to other fuels, such as coal and natural gas,
Puerto Rico has done little, even as oil prices have tripled in the
past 10 years.
Prepa said earlier this year that about 55 percent of the island's
electricity comes from oil. For the United States the figure is well
below 1 percent.
"The only way to solve this is take away the crack, oil, from Prepa,"
said Luis Fortuno, who was governor of Puerto Rico from 2009-2013
and is now an attorney with Steptoe & Johnson in Washington, D.C.
SLOPPY COST CONTROLS
Power bills across Puerto Rico have been elevated for years. Rates
on the island have reached above 30 cents per kilowatt hour in
recent years, about double the prices charged in much of the U.S.
The company has other high costs, as well: A confidential report by
consultants Alvarez & Marsal in October 2012 for Puerto Rico's
Government Development Bank (GDB) said Prepa had a large fleet of
unnecessary vehicles, obsolete and excessive inventory and sloppy
cost controls, noting a "low sense of urgency for cost management
throughout the organization." The report also recommended slimming
Prepa's workforce, which totaled 8,465 in the middle of last year.
But when Senate President Eduardo Bhatia pushed for an energy reform
bill earlier this year, he faced push back from within his own party
partly because some legislators had relatives or friends employed by
Prepa, according to Senate aides.
Another problem is that Prepa does not charge the authorities who
run the island's 78 municipalities for their power, and there are
many other exceptions that hurt its ability to generate revenue.
POLITICAL FOOTBALL
While just about everyone seems to agree Prepa can't go on the way
it has been, there's little agreement on the way forward. Prepa
reforms have an unsuccessful track record in Puerto Rico,
underscoring the difficulty in overhauling an agency that many say
has become a political football with entrenched interests. The labor
unions, who represent about two thirds of the Prepa workers, are
powerful, with loud voices that have swayed legislators in the past.
The revolving door for governors and their administrations has also
contributed to the crisis. None of the island's last four governors
has served more than one term. It means that energy projects
proposed by one administration have often been abandoned or watered
down by the next.
New projects will take a long time to get off the ground - at least
a year for renewable energy projects, and two-to-three years for
natural gas plants. The permitting process is bureaucratic and
costly. The biggest hope is that a Prepa restructuring would keep it
away from the political machinations that have helped hobble it for
years. A critical test will be how much leeway the chief
restructuring officer gets to come up with a bold reorganization
plan.
Some lawmakers acknowledge that it can't be like business as usual
anymore. "You have to take out the politicians, and the only way you
take out the politicians is bankruptcy," said Rep. Rafael "Tatito"
Hernández Montañez.
(Reporting by Luciana Lopez; Editing by Martin Howell)
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