Lawmakers Mull Bill to Help Prasa Achieve External Financing
GDB Says not so Fast
With Puerto Rico lawmakers on the verge of approving the “largest securitization in U.S. history” for the P.R. Electric Power Authority (Prepa), another bill seeking the same structure for the P.R. Aqueduct & Sewer Authority (Prasa) is being trumpeted as the utility’s last shot at avoiding a water-rate hike this summer.
House Bill 2786 would establish the Prasa Revitalization Act, whereby a new corporation would be created with the sole purpose of issuing new debt for the utility, backed by a new charge on water bills that would be pledged to cover its debt service.
In essence, the bill attempts to help Prasa regain access to capital markets as it desperately aims to jumpstart capital-improvement projects now on life support, while avoiding a rate hike to maintain financial stability.
After all, Prasa’s board had decided in 2013 to finance a four-year capital improvement plan (CIP) mostly by issuing debt, but not precisely with the utility’s revenues. With no access to external financing at reasonable terms and not enough revenues to cover all costs, there is simply no money to fund these projects under the existing rate structure and revenues.
At first glance, it would seem the lifeline measure could soon be on its way. Popular Democratic Party Rep. Rafael Hernández, co-author of the bill and chair of the House Treasury Committee, has placed high priority on the matter, aiming to move the measure as quickly as possible. During a public hearing held last week, Prasa Executive President Alberto Lázaro strongly supported the measure and Hernández said he had yet to field any concerns at the time of the hearing.
However, the island’s fiscal agent, the Government Development Bank (GDB), submitted a laundry list of concerns in its written testimony on the measure. Although the bank supports establishing a securitization mechanism at Prasa, it stresses that changes must be introduced to the legislation to ensure that at the end of the day, the utility’s customers are not the only ones footing the bill.
In a recent interview with Prasa’s chief, Lázaro explained to Caribbean Business what clients would see on their water bills if the securitization mechanism were to be implemented: “a line on the bill with a description…that it is a financing charge.”
He said that although he can’t be categorical, depending on the financing achieved, the goal would be to use the utility’s revenues to cover this charge inside Prasa’s current rate structure, which was last revised in 2013.
GDB: Prasa clients to carry most of the burden
But the GDB points in its testimony to Prasa’s deficits during the past few years, and paired with the inability to access financing to pay old debt, “it was evident that the rate and operational structure didn’t generate enough cash to cover all its operational, financing and CIP costs.”
What’s more, the bank warns about how these costs are not being shared among all Prasa stakeholders, with clients drawing the short end of the stick and bearing the burden almost exclusively. It notes how in Prepa’s case, this burden was shared among all players, particularly bondholders, as part of its yearlong debt-restructuring talks.
For his part, Lázaro acknowledged that several stakeholders have already taken their fair share of the pain, including clients, employees and even federal agencies. Yet, “the stakeholder we are still missing would be investors, or not necessarily them, but rather debt service itself and everything related to it,” he said.
When asked whether Prasa will seek a restructuring of its debt through the securitization mechanism—such as in Prepa’s case—he said that although a possibility, it may be too early to discuss. So far, the water utility has been out of the commonwealth government’s debt-restructuring plans.
Still, the GDB believes this is a good opportunity for Prasa to restructure its “operations and finances.” The island’s fiscal agent states that a long-term strategic plan should be first agreed to with stakeholders to develop infrastructure projects, implement operational improvements and elevate service standards. This plan should serve as the starting point toward Prasa’s securitization.
Feeling the pinch
Residents of Moca—a small town in the island’s northwest—recently spent four days with no water service. A water-filtering plant had a malfunctioning valve worth $15,000 causing service disruptions in the area. When Prasa called its supplier to fix the problem, the company had 2.5 million reasons to refuse to do so.
A partial payment was made to the supplier and the problem was solved, and while Prasa’s chief told this newspaper there are no similar cases as of this writing, unexpected fixes are often required. With more than $140 million in payments owed to suppliers, timely addressing unforeseen problems could be particularly tough for Prasa.
Meanwhile, the utility’s CIP has come to a complete halt, including about 55 projects that were already under construction and worth more than $350 million. This program is key, not only for the system’s upkeep, but also for compliance efforts with several agreements in place with federal authorities.
Prasa has been on the hunt for external financing since 2013, when its board decided it would pay for the CIP by issuing debt, on the heels of a water-rate hike that pumped in $390 million in additional revenues. It has been a rocky road ever since to get that financing.
To pay roughly $90 million in short-term debt maturing on Feb. 29, Prasa would most likely siphon its Rate Stabilization Fund—money that was supposed to be used to cover operational deficits during fiscal years 2016 and 2017 in a bid to avoid further rate hikes.
Since 2014, Prasa has sought to issue as much as $750 million in new debt, but to no avail, saying that “noise” generated by the island’s fiscal crisis has faded the utility’s prospects of achieving the transaction under reasonable terms. Yet, the GDB believes that like most Puerto Rico residents and businesses, Prasa cannot be alienated from the fiscal woes the island is facing.