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Luma Energy to operate Puerto Rico electric T&D system

By on June 22, 2020

Fiscal board approves concession contract it calls a ‘critical step towards the transformation of Puerto Rico’s energy system’

SAN JUAN – The Financial Oversight and Management Board for Puerto Rico said Monday it welcomed the proposed agreement between the Puerto Rico Public-Private Partnerships Authority (P3A) and LUMA Energy LLC to manage and operate the transmission and distribution system of the Puerto Rico Electric Power Authority (Prepa). 

Prepa will retain ownership of the assets of its transmission and distribution (T&D) system but LUMA Energy will operate the system, including customer service and billing, in the contract for about $70 million the first year and up to $125 million the third year, and includes $25 million in bonuses.

The board’s approval remains subject to the approval of the proposed agreement by Gov. Wanda Vázquez, the fiscal oversight board said, adding that the Puerto Rico Energy Bureau (PREB) approved the contract last week. 

“The selection of LUMA as the future operator of the transmission and distribution system is the beginning of an unprecedented transformation of our energy system. These aren’t announcements, much less promises, this is part of the results and the execution that we committed ourselves to,” Gov. Wanda Vázquez Garced said at a press conference Monday.

The consumer representative on Prepa’s Governing Board, Tomás Torres Placa, denounced how the agreement was reached, claiming it was carried out without the public’s participation.

“The vote on this agreement is one of the most important decisions regarding PREPA, since its creation in 1941. The agreement, and related information, were only discussed on one occasion by the PREPA Governing Board, voting the next business day. There was no interaction between the PREPA Board beyond the private meetings with some members of the Board and the Public-Private Partnerships Authority,” Torres said in a statement, adding that the “approval of the preliminary contract between PREPA and the Public-Private Partnerships Authority, by the Puerto Rico Energy Bureau, took place without any public participation.”

Torres questioned the development and said it “happened because it was planned that way from its conception in Act 120 of 2018, and it was decided to keep that course throughout the process. Act 120 displaced and eliminated all the powers of the regulator (Puerto Rico Energy Bureau) in this process, only allowing the regulatory entity to issue an Energy Compliance Certificate to ‘certify’ that the agreement complies with the regulatory framework.”

Under the agreement, LUMA Energy will operate, manage, maintain, repair and restore the public utility’s T&D “to help the transformation of PREPA into a modern power company able to deliver reliable, clean, and more affordable electricity to Puerto Rico’s households and businesses,” the board said.

“This transformation is important to every individual, every business and every potential investor,” said the chairman of the fiscal board, José Carrión. “The people of Puerto Rico deserve a power system that can withstand hurricanes to ensure they are safe in their homes, and Puerto Rico’s businesses deserve to open every day without relying on backup generators to ensure they can serve their customers. Puerto Rico deserves manufacturing and the service industry jobs created by investors who don’t turn away because its electric power system is unreliable and antiquated.” 

Under the agreement, LUMA Energy will be paid a management fee and an incentive fee “structured to provide tangible improvements to PREPA’s customers,” the board said. “LUMA Energy will work with FEMA [Federal Emergency Management Agency] and the U.S. Department of Housing and Urban Development to deploy efficiently the Federal aid allocated to Puerto Rico’s power systems.”

Prepa employees may work for LUMA Energy without losing the rights they acquired under their Prepa collective-bargaining agreement, and are supposed to be the first to be hired.

LUMA Energy will also bring a lineman school to the island to train employees. It said it will “fund and open a state-of-the-art line worker and technical training campus…operated by Quanta’s accredited postsecondary educational institution – Northwest Lineman College. This facility is intended to provide world class, customized curriculum and training to LUMA utility workers and the next generation of Puerto Rico’s skilled workforce, contributing to sustainable economic development locally.” according LUNA.

“The transformation plan for Puerto Rico’s energy system outlined in the Certified Fiscal Plan is an essential structural reform to foster sustainable economic growth and improve quality of life in Puerto Rico. One of the critical steps in that transformation is for an independent operator to manage PREPA’s transmission and distribution system,” said the board’s executive director, Natalie Jaresko. 

“The Oversight Board’s goal in the process to engage the best operator for Puerto Rico’s power grid is to ensure that the agreement reflects Puerto Rico’s need for short- and medium-term improvements to the reliability of energy supply,” Jaresko said. “LUMA Energy provides technical expertise, the capability to improve reliability, and experience in managing power grids.” 

The contract includes an estimated 12-month transition period before the 15-year contract commences in 2021. The transition period can be extended if Prepa has not completed the bankruptcy-like Title III process under Puerto Rico Oversight, Management and Economic Stability Act (Promesa). 

“PREPA is bankrupt. Its insolvency and deficit indicators are beyond normal parameters. Based on the interim financial statements for March 2020, PREPA’s total liabilities total $17.215 billion, the net position between assets and liabilities reflects a deficit of $7.954 billion and a deficit for the current fiscal year of $332 million. The proposed debt restructuring agreement (RSA) between PREPA and its bondholders does not solve its insolvency problem, since it only addresses long-term obligations related to bond issuances. This means that if all of PREPA’s long-term debt for bond issuances of $8.3 billion is discarded as part of bankruptcy processes (where, on the contrary, the current agreement only considers a cut between 32.5 and 22.5 percent). Even so, PREPA will remain in insolvency parameters. There is no organization that can operate under these parameters. Therefore, until a restructuring plan is presented that resolves PREPA’s profound insolvency under Title III of PROMESA in federal court, PREPA’s insolvency will continue,” consumer advocate Torres said.

“If it is understood that the operation and maintenance agreement for the transmission and distribution system could bring some type of benefit to PREPA, then executing this alternative in the midst of the Authority’s bankruptcy would not only frustrate this effort, but would also discourage any other future effort,” Torres said, while assuring that “if the operator cannot generate savings that neutralize the additional cost represented by this agreement, the operator will have the right to file a petition with the regulator to increase rates.”

ROI

The P3 selected LUMA Energy LLC (LUMA), which is a joint venture between Quanta Services (Quanta) and Canadian Utilities Limited, an ATCO Ltd. Company (ATCO), in conjunction with Innovative Emergency Management Inc. (IEM) for the 15-year operation and maintenance agreement. Quanta and ATCO each own 50% of LUMA.

This agreement involves the more than 18,000-mile T&D system in Puerto Rico following a transition period.

Duke Austin, Quanta’s president and CEO commented, “We believe this opportunity is transformative for Quanta and supports our ongoing strategy of providing sophisticated and valuable solutions to the utility industry that benefit consumers. By bringing together Quanta’s industry leading electric utility services and project execution, ATCO’s operational excellence and customer service expertise as a utility provider and IEM’s unparalleled experience in federal funds management, we have created a purpose-built and effective operator for the Puerto Rico T&D system and the people of Puerto Rico. We intend to invest our time, expertise and resources in LUMA to operate a world-class electric grid and to develop a modern, highly trained craft-skilled workforce for the future of Puerto Rico.  Through a disciplined, committed approach, LUMA will have the benefit of Quanta’s industry-leading craft-skilled workforce, as well as recognized experts in technical areas such as high-voltage transmission construction, distributed energy resources and microgrid integration. LUMA also will manage the disciplined implementation of targeted investments by PREPA and drive efficient operations to facilitate delivery of a modern, secure, resilient and affordable electric grid for the residents of Puerto Rico.”

LUMA is in the process of mobilizing a team to implement “a tailored, community-first approach for the full transfer of PREPA’s T&D operations to LUMA, which is expected to occur at the end of a transition period targeted for mid-2021,” the company’s release reads. “During the transition period, LUMA will work collaboratively with PREPA and the government of Puerto Rico to complete numerous steps necessary to ensure a smooth transfer and begin the historic opportunity to modernize the T&D system and transform PREPA. LUMA will receive a fixed Front-End Transition Service Fee and reimbursement of labor costs, third party consulting fees and out-of-pocket expenses incurred for transition services.”

Key features and excerpts from the company’s release follow:

  • Purpose-Built Organization. LUMA is designed to help provide the people and communities of Puerto Rico with a resilient, reliable and sustainable electric T&D system and to deliver outstanding customer service. LUMA is committed to high standards of transparency, integrity, safety and operational excellence.
  • People and Safety Focused. LUMA is committed to helping build the workforce of the future for the Puerto Rico electric T&D system through its focus on world-class safety and training to its employees, which will enable a safer work environment and greater efficiency.
  • Long-Term, Transformational Approach. LUMA will take a tailored approach to the operation of the electric T&D system, with a focus on improved reliability and resiliency to severe weather events, through the implementation of emergency preparedness and response plans and the further modernization of the electric T&D system. Additionally, LUMA will leverage IEM’s extensive experience with federal funding procurement, management and deployment to help facilitate the transformation of the system.
  • Community and Customer-Centric. By undertaking this transformation, LUMA is demonstrating its commitment to the people of Puerto Rico. LUMA understands that transforming the electric T&D system and controlling costs will be critical to attracting new businesses, creating job opportunities and improving the quality of life in Puerto Rico.

This Collaboration is Consistent with Quanta’s Strategic Plan and is Expected to Provide Compelling and Visible Long-Term Financial Contributions

  • Long-Term Addition to Repeatable and Sustainable Characteristics of Quanta’s Operations – Upon full transition of electric T&D system operations and management to LUMA, Quanta will receive 50% of the net fees under the O&M Agreement for a 15–year term. Further, there is opportunity for additional performance-based incentives each year based on certain operational, customer service and financial metrics. This arrangement is anticipated to provide a visible, repeatable and sustainable long-term earnings and cash flow stream to Quanta, with upside opportunity and without requiring additional capital investment from Quanta or LUMA. PREPA is required to maintain certain levels of project funding within restricted project accounts, which will be used to fund the costs associated with the O&M Agreement.
  • Favorable Financial Impact – Quanta believes its ownership interest in LUMA will enhance Quanta’s return on invested capital, positively contribute to free cash flow and be accretive to earnings per share by approximately $0.25 per share annually upon full transition to LUMA, with upside opportunity from performance-based incentives.
  • Transformative Opportunity Validates Strategic Initiative to Capitalize on Programmatic Utility Spending – Quanta believes this collaboration further validates strategic efforts to leverage its industry-leading capabilities and sophisticated solutions that are tailored to deliver on the large, multi-year programmatic investment needs of its utility customers.
  • Significant Opportunity for Electric T&D System Modernization and Transformation – Quanta believes there is opportunity for it to compete for work associated with Puerto Rico’s electric T&D system modernization efforts that are separate from its ownership interest in LUMA. Puerto Rico’s electric T&D system is at a critical juncture after the destruction caused by Hurricanes Maria and Irma. As a result, the government of Puerto Rico, through the P3 and in collaboration with PREPA, have embarked on a plan to rebuild, modernize, harden and “green” its power grid, a majority of which is expected to be funded by U.S. federal disaster relief agencies and managed by LUMA. The P3 estimates that more than $18 billion of electric T&D capital investment could be required through 2028 for this initiative.

Financial Commentary
Quanta’s ownership interest and participation in LUMA will be accounted for as an equity method investment due to Quanta’s equal ownership in and management of LUMA with ATCO. Therefore, Quanta will not recognize revenues and operating expenses related to LUMA on its income statement, but will record its 50% portion of LUMA’s earnings within “Equity in Earnings of Unconsolidated Affiliates” on its income statement. As a result of equity method accounting, Quanta does not expect to include LUMA’s estimated future revenues, of which 50% would be Quanta’s proportionate amount, in its remaining performance obligations and backlog.

Quanta anticipates providing its expectations of LUMA’s financial contribution to the company in 2020 and 2021 as part of its second quarter of 2020 financial reporting, and in compliance with disclosure requirements of the P3. Quanta’s visibility and expectations for 2021 will depend on a number of factors, some of which are not in LUMA’s control, including the final timing and outcomes of the PREPA Title III process, and several conditions necessary for conclusion of the transition period, and commencement of the operations period. These conditions include completion of LUMA’s preparation for operations, as well as the completion of certain governmental responsibilities related to the administration of the contract. Quanta anticipates providing supplemental information regarding its pro-rata portion of LUMA’s operations in its future earnings releases and other public investor communications.

About Quanta Services
Quanta Services is a leading specialized contracting services company, delivering comprehensive infrastructure solutions for the utility, pipeline, energy and communications industries. Quanta’s comprehensive services include designing, installing, repairing and maintaining energy and communications infrastructure. With operations throughout the United States, Canada, Australia and select other international markets, Quanta has the manpower, resources and expertise to safely complete projects that are local, regional, national or international in scope. For more information, visit www.quantaservices.com.

About Canadian Utilities.
With approximately 4,600 employees, assets of $20 billion, and two million customers around the world, Canadian Utilities Limited, an ATCO company, is a diversified global energy infrastructure corporation delivering essential energy services, service excellence and innovative business solutions in Utilities (electricity and natural gas transmission and distribution), Energy Infrastructure (electricity generation, energy storage, and industrial water solutions); and Retail Energy (electricity and natural gas retail sales). More information can be found at www.canadianutilities.com. 

About IEM
Innovative Emergency Management (IEM) is a global homeland security and disaster management consulting firm dedicated to building a safe, secure and resilient world. As the largest woman-owned homeland security and emergency management firm in the world, IEM provides services and expertise at every stage of the emergency management cycle — from preparedness and prevention / protection to mitigation, response and recovery. IEM integrates science, technology and real-world experience to provide customers with solutions that work and outcomes that matter. For more information, please visit www.IEM.com.

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