Puerto Rico’s electricity monopoly is worth half its debt
There is a reason that the uninsured revenue bonds of Puerto Rico’s electricity monopoly, known as “Prepa,” have been trading around 60 cents on the dollar. The utility is only worth about half of its 6.9 billion of long-term debt. Caribbean Business reports:
A 2012 confidential report obtained by CARIBBEAN BUSINESS says government utility [Prepa] is worth half its long-term debt…
The Álvarez & Marsal report on Prepa found that the government utility was worth about half of its outstanding long-term debt. Its preliminary value range for Prepa was $3.5 billion to $4.1 billion at a time when its net debt was $6.9 billion. The report also found that its value could be increased by as much as $1.2 billion through a full implementation of performance improvements that would bring one-time savings as well as ongoing operating cost reductions.
I’ve heard street talk for a year of privatizing Prepa, but it always comes down to the fact that the utility has too much debt to be sold as a profitable entity.
Even with the improvements, however, ‘rates would have to be raised or the debt restructured’ for a full privatization of Prepa to take place. However, the report sees a number of opportunities for Prepa to improve its finances and operational efficiency through the employment of private capital, such as the power-purchase agreements it has entered into with EcoEléctrica, AES and a number of smaller renewable energy providers, in which private developers build and operate private plants and sell the power they produce to Prepa at prices established in long-term contracts.
Generally, Prepa operating costs are high and losses have been blistering.
Prepa has been hemorrhaging money since at least 2007, with an average annual cash flow deficit of $330 million since then and a cumulative cash flow deficit of $1.7 billion from 2007 to 2011, according to the report. The utility has managed to maintain mandated debt-coverage ratios of 1.2 times by capitalizing interest and using non-cash revenue and cost savings. The report sees Prepa experiencing a cash flow deficit of nearly $1 billion from 2012 until 2017.
The report found a ‘low sense of urgency’ to control costs throughout Prepa, with an over-budget capital-improvements program, high staffing levels, generous benefits, and excessive inventory and property levels.
All eyes are on the upcoming proposed 2015 Commonwealth budget, which supposedly will give public corporations like Prepa the ability to renegotiate labor contracts, service agreements and long-term debt agreements with creditors. That sounds like Prepa bond restructuring is coming.