IEEFA: Prepa Restructuring Deal Won’t Restore its Financial Health
SAN JUAN – After analyzing the Puerto Rico Electric Power Authority’s debt restructuring deal, the Institute for Energy Economics and Financial Analysis found that it will lead to higher electricity bills, worsen the economy and halt the development of renewable energy.
The analysis, by IEEFA’s director of finance, Tom Sanzillo, and Cathy Kunkel, an IEEFA energy analyst is contained in a report titled: “PREPA Debt Restructuring Deal Won’t Restore Agency to Financial Health.”
“While the deal is aimed ostensibly at preparing PREPA for a healthier financial future,” Sanzillo said, “it fails abysmally to do so. We find that it will most likely have the opposite effect and that the process of restructuring is being mismanaged.”
Prepa is the first government agency in Puerto Rico to attempt to restructure its debt, which totals $9 billion and came about due to the unnecessary result of poor fiscal practices, unwise acceptance of increasingly risky bond deals, ill-advised political interference in decision-making, an outdated agency framework, and an onerous rate design, according to the report. In February, Puerto Rico enacted the Electric Power Authority Revitalization Act to allow for the restructuring of PREPA’s debt and to reform its operations and rate structure. The law also effectively reduced regulatory oversight by the Puerto Rico Energy Commission (PREC), an agency created two years ago to improve oversight of the utility, the report notes.
The IEEFA report’s executive summary details five problems with the deal. The first is tat transparency is lacking and the restructuring is weighted too heavily in favor of bondholders and consultants. A weak law, secretive bond negotiations, and inconsistent and opaque reporting on the refinancing are working collectively to impair the ability of PREC to ensure electricity rates are just and reasonable.
IEEFA’s findings and analysis are the result of a review of three separate PREC dockets—the Integrated Resource Plan, the Rate Case and the Transition Charge Case, a dozen forbearance agreements, various Securities and Exchange Commission filings and PREPA’s unaudited monthly reports.
“These documents lack transparency. They do not present a cogent, transparent profile of PREPA’s finances. The documents often conflict with each other and require cumbersome and inherently error prone cross-walking in order to derive quantitative and qualitative data that can support external review and analysis,” the researchers said.
Additionally, PREPA lacks the financial expertise to participate in bond negotiations on its own behalf, meaning that much of the restructuring has been done by outside bond consultants.
The report also noted that deal won’t meet its goal of restoring PREPA to fiscal stability. The arrangement is supposed to lower debt and debt service costs and allow PREPA to re-enter the bond market as a solid entity.
“While PREPA claims it is reducing debt levels by 15 percent, that assertion distorts the truth. At the outset of the deal, it reduces PREPA’s indebtedness by 11%. But over the life of the deal, due to additional borrowings and activities, PREPA’s indebtedness will fall by only about 1%,” the report says. While the underlying operations budget that supports the debt deal relies on a number of new savings initiatives at PREPA, the outcome of these initiatives is in question because the purported savings are poorly documented and PREPA’s track record is one of frequently missed budget targets, the researchers said.
“Further, fees being charged by financial consultants and lawyers are excessive, harming PREPA ratepayers and damaging the integrity of the deal,” the report states.
The deal does not include a viable plan for getting PREPA back into the bond market. The absence of a re-entry strategy—which is crucial if PREPA is to recover—will place additional stress on PREPA either to produce new revenue from ratepayers or to abandon new investments, adds the report.
IEFFA says the agreement will impose increasingly unaffordable electricity rates on Puerto Rico’s struggling economy. “While PREPA itself estimates that electric rates will increase by 55% over the next five years, reaching 25.6 cents/kWh in 2021, rates will most likely increase more than that for a number of reasons. First, PREPA’s forecasted operational savings are not likely to materialize. Second, electricity sales in Puerto Rico will continue to fall as the economy contracts. Third, PREPA ratepayers are on the hook for far more bond consultant and lawyer fees than they should be paying. Fourth, PREPA may be entirely unable to access the bond markets, putting it in the position of having to raise rates to pay its bills,” the report states.
The agreement is also hindering Puerto Rico’s transition to renewable energy. PREPA, principally dependent on oil-based power generation, is planning now to turn almost entirely to natural gas by way of a new $2.4 billion investment that gives “renewable energy exceptionally short shrift and that undermines energy security by relying on one source of fuel.
“Despite a legislative mandate to diversify Puerto Rico’s energy mix by increasing investment in renewables, PREPA’s plans include no timeline or financing for developing specific renewables projects. The centerpiece of PREPA’s investment strategy is a proposed offshore liquefied natural gas (LNG) import terminal and related infrastructure. This commitment will merely convert the island’s power system from overreliance on imported oil to over-reliance on imported natural gas. The cost of this program, combined with the high levels of legacy debt imbedded in unsustainable rates, will crowd out any potential future investment in renewable energy,” the report found.