Wednesday, September 18, 2019

Prepa Overhaul Faces Obstacles

By on August 23, 2019

Low Appetite for Renewables; Considerable Challenge to Fiscal Plan

Editor’s note: This report first appeared in the Aug. 22 issue of Caribbean Business.

As Hurricane María cut a devastating swath on a diagonal path across Puerto Rico, creditors of the Puerto Rico Electric Power Authority (Prepa)—some in the path of the storm, others from afar—watched with dread as the public utility’s assets were twisted to the ground. In those months after the disaster, concerns over the value of the utility’s assets gave way to taming a humanitarian crisis—it was nature’s stay on negotiations in the context of Title III proceedings under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).

Nearly two years after the historic 2017 hurricanes, the debt game is back in full swing and the utility is in a race against time to overhaul the antiquated power company as it struggles mightily to restructure nearly $9 billion in debt. Prepa Executive Director José Ortiz stressed last week that he expects the Federal Emergency Management Agency (FEMA) to grant the $14 billion requested to repair the electrical grid to make the concession of the transmission and distribution (T&D) system viable.

Ortiz said the funds were needed so bidders for the T&D concessions don’t have “to make up the difference,” adding that U.S. District Court Judge Laura Taylor Swain’s date change to address the debt’s restructuring could also affect the process to attract companies to operate the system. He said proposals should be received around October, and that “it is important that we have agreed on the matter with the creditors.”

Prepa’s restructuring and operations brigades have been very aggressive in their attempts to interconnect a large block of renewables, but two sources with knowledge of the negotiations told Caribbean Business they have not seen much response from the capital markets. “It probably has to do with the costs; the current PPOAs [power purchase and operating agreements] that were negotiated in 2012 were priced at 14 [cents] to 17 cents per kilowatt-hour [kWh]. The market in the U.S. is between 2 [cents] and 5 cents,” explained the executive director of the Prepa Project Management Office, Fernando Padilla. “We can’t compare market to market; there are key differences—labor is higher here; transportation is higher here. So, we have negotiated the PPOAs down from 17 cents to between 9 [cents] and 12 cents—we still think that is a tad high.”

Time will tell

The sources out stumping the capital markets say Prepa could be issuing requests for proposal (RFPs) during the next three or four months to gauge the appetite for new renewables. Having proponents from the realm of renewables interested in the assets is important because meager participation skews the utility’s fiscal plan.

The fiscal plan calls for the submittal of a proposed Integrated Resource Plan (IRP) that will serve as the planning document for new generation investment by private developers. The IRP includes plans to transition to new renewables in the generation mix, primarily in solar photovoltaics and battery storage.

Investment banker Citi was also hired by the Financial Oversight & Management Board (FOMB) to help secure the T&D concession. Prepa is looking to achieve long-term concessions with contracts late in the year, somewhere between October and December, said one of the capital sources, adding that Prepa was down to two proponents on that front.

Once the T&D contract is awarded, Prepa’s overhaul troops will commence work on the generation phase. “We know that there is an appetite for Costa Sur, Mayagüez and San Juan—there is a real appetite for that. And, we also see potential appetite for Palo Seco,” the adviser told Caribbean Business. “As Prepa looks for a potential federal funding structure to secure a 300-megawatt combined-cycle unit at Palo Seco, there is some appetite in Costa Sur, and this is what we think is going to happen—as they ramp up the PPOA for EcoEléctrica, they may launch an RFP for an operation/maintenance contract for Costa Sur.”

The adviser sees the operation brigades at Prepa focusing on wrapping up the EcoEléctrica deal to start addressing matters with the Public-Private Partnerships Authority and the FOMB to begin the sale of Costa Sur.

Naturally gas…

The second source in Prepa’s consulting camp confirmed that a term sheet had been secured with Naturgy Energy Group for the use of natural gas that will help Prepa save upward of $120 million. “So, they secured commercial terms two months ago, but there was a whole array of technical aspects of testing, of new infrastructure—that they had to negotiate to align those commercial deals. So, if PREB [the Puerto Rico Energy Bureau] and FOMB approve this transaction, it would be stating that Costa Sur and EcoEléctrica will remain online and there is no need for a new combined-cycle [plant] in Costa Sur,” the source told Caribbean Business.

Still being debated is whether a new liquefied natural gas (LNG) terminal will be built in Palo Seco or Yabucoa. Conventional wisdom at Prepa, based on independent assessments performed by engineering firm Sargent & Lundy, seem to indicate that Yabucoa is a better fit to develop LNG storage infrastructure than Palo Seco—the harbor is one issue, the population density is another and there is strong access to transmission lines and key generation. “The Department of Energy and some federal stakeholders feel that Palo Seco may be a better fit, but we will have a better outline over the next three months. So, by the end of the year, we should have a better idea of whether we will be pursuing a Palo Seco combined-cycle or storage-generation facility in Yabucoa.”

The Naturgy deal essentially needs to reduce some $108 million in fixed costs of the EcoEléctrica PPOA. To get there, Prepa needs to transform the fuel structure. “They are estimating net savings between the fixed-cost reduction and the new fuel contract is going to be a bit north of $120 million,” the adviser added. “The more you use EcoEléctrica and Costa Sur, the more savings you are going to achieve. Our independent evaluation is that if they cap Costa Sur and cap EcoEléctrica, Prepa could be achieving savings somewhere in the vicinity of $150 million.”