| NEW YORK
NEW YORK Aug 15 Puerto Rico managed to keep its
electricity flowing this week - but creditors made it clear that
the crisis enveloping the island's power utility is far from
Banks, led by Citibank and Canada's Scotiabank
, on Thursday agreed to a seven-and-a-half month
extension of $671 million in credit lines the Puerto Rico
Electric Power Authority (Prepa) needs to buy oil that is
essential to keep it operating.
But they also got Prepa to commit to appointing a chief
restructuring officer next month, and to produce a full
restructuring plan in March next year, in an attempt to get the
power company's finances onto a more stable footing.
Prepa's troubles are perhaps the starkest symbol of the huge
debt burden threatening to overwhelm the U.S. territory.
Investors, including some major U.S. funds, have already lost
billions of dollars on bonds issued by the island's government
and the entities it owns, such as Prepa.
The financial morass has got so bad at Prepa that it has
been borrowing to pay for operating expenses, according to
credit rating agency Moody's Investors Service. Auditors Ernst
and Young said in 2012 that Prepa - with borrowings of $9
billion - has more liabilities than assets since 2011.
Prepa declined repeated requests for comment for this story.
"It's not viable. It's not sustainable anymore," said Sergio
Marxuach, policy development director at the San Juan-based
Center for a New Economy, and a longtime analyst of Prepa's
troubles. "They are essentially at the mercy of their creditors
right now and the oil companies. And the vultures," Marxuach
said with reference to so-called "vulture investors" who may be
seeking to profit out of the island's troubles.
The company will eventually either have to go through a
jarring restructuring, or it will have to turn the power off on
a rolling basis, he warned.
Prepa's considerable list of problems includes an
over-reliance on expensive oil, its aging infrastructure - some
dating to the 1960s - a bloated workforce, and a billing system
that is regarded as arbitrary and difficult to understand.
And all this while the island's population is declining and
its manufacturing base shrinking, reducing demand for
electricity. Puerto Rico has lost around 200,000 people since
2000 and is now estimated to have a population of only 3.62
Many analysts say that an overhaul of the agency would need
to include a massive haircut for investors in Prepa's debt, big
job losses, the closure of some facilities, and an attainable
plan to reduce its reliance on oil.
A June report from Prepa said the utility had $137 million
in cash and cash equivalents. That same report said that Prepa
spent $196 million on fuel alone that month.
Puerto Rico itself faces $72.6 billion of public debt,
including the Prepa money. That's about $20,000 for every man,
woman and child on a Caribbean island where the median household
income was just $19,429 in 2012. Its pension funds for
government workers are severely underfunded, adding to the
Many of those closest to the situation see any Prepa
negotiations with creditors as a precursor to a much wider
restructuring of Puerto Rico's debt, including the government
and its water and highway agencies.
The government hastily introduced and passed a law in late
June that gives some of the island's public corporations a legal
framework for a bankruptcy-like procedure. Before that there was
no such mechanism for entities like Prepa.
The so-called Recovery Act shocked investors, who abruptly
sold off the island's public debt, including not just Prepa
bonds but even general obligation bonds and debt linked to sales
Prepa is a monopoly in Puerto Rico. There are two private
generating companies in the south of the island - but they also
sell electricity to Prepa. It is the only electricity
distributor, as well as generating most of the island's power.
Some companies have decided not to rely on Prepa. Rum maker
Bacardi, one of Puerto Rico's marquee companies, began using
biogas for some needs around 2007 and added windmills in 2010.
Those two sources account for about half the company's energy
needs on the island.
In a normal year, this gives the company protection in case
Puerto Rico suffers a big hit in hurricane season, but this year
the company is also preparing contingency plans in case it can't
get the rest of its power from Prepa. It may even have to switch
the production of distillates away from the island in a
The company wants to avoid that, said Eduardo Vallado,
director of supply chain and manufacturing for the Americas for
Bacardi. "We need the Puerto Rico claim on our label," he said.
"In the end we need Prepa's energy to operate."
ADDICTED TO OIL
Some other companies and wealthier individuals do have their
own generators - and a few do produce power through alternative
means. Food distributors have been reducing their reliance on
Prepa for years, using solar panels and other sources. "With
such a stressed system, any emergency could put it to the test,"
said Manuel Reyes, a executive vice president for MIDA, a food
industry group in Puerto Rico, in reference to Prepa and other
economic problems on the island.
At the root of Prepa's problems is a long history of
inaction that left the utility so reliant on oil imports. For
various reasons, proposals over many years to build pipelines to
bring imported natural gas from the south of the island to its
power plants in the north - closer to the capital of San Juan -
have been nixed. Renewable energy projects have been so mired in
red tape that many investors have lost interest. Prepa also
doesn't hedge, leaving it exposed to oil price spikes.
Prepa's San Juan, Palo Seco and other plants were built in
the 1960s and 1970s, when running on oil was normal. But, while
many utilities elsewhere have shifted to other fuels, such as
coal and natural gas, Puerto Rico has done little, even as oil
prices have tripled in the past 10 years.
Prepa said earlier this year that about 55 percent of the
island's electricity comes from oil. For the United States the
figure is well below 1 percent.
"The only way to solve this is take away the crack, oil,
from Prepa," said Luis Fortuno, who was governor of Puerto Rico
from 2009-2013 and is now an attorney with Steptoe & Johnson in
SLOPPY COST CONTROLS
Power bills across Puerto Rico have been elevated for years.
Rates on the island have reached above 30 cents per kilowatt
hour in recent years, about double the prices charged in much of
The company has other high costs, as well: A confidential
report by consultants Alvarez & Marsal in October 2012 for
Puerto Rico's Government Development Bank (GDB) said Prepa had a
large fleet of unnecessary vehicles, obsolete and excessive
inventory and sloppy cost controls, noting a "low sense of
urgency for cost management throughout the organization." The
report also recommended slimming Prepa's workforce, which
totalled 8,465 in the middle of last year.
But when Senate President Eduardo Bhatia pushed for an
energy reform bill earlier this year, he faced push back from
within his own party partly because some legislators had
relatives or friends employed by Prepa, according to Senate
Another problem is that Prepa does not charge the
authorities who run the island's 78 municipalities for their
power, and there are many other exceptions that hurt its ability
to generate revenue.
While just about everyone seems to agree Prepa can't go on
the way it has been, there's little agreement on the way
forward. Prepa reforms have an unsuccessful track record in
Puerto Rico, underscoring the difficulty in overhauling an
agency that many say has become a political football with
entrenched interests. The labor unions, who represent about two
thirds of the Prepa workers, are powerful, with loud voices that
have swayed legislators in the past.
The revolving door for governors and their administrations
has also contributed to the crisis. None of the island's last
four governors has served more than one term. It means that
energy projects proposed by one administration have often been
abandoned or watered down by the next.
New projects will take a long time to get off the ground -
at least a year for renewable energy projects, and two-to-three
years for natural gas plants. The permitting process is
bureaucratic and costly.
The biggest hope is that a Prepa restructuring would keep it
away from the political machinations that have helped hobble it
for years. A critical test will be how much leeway the chief
restructuring officer gets to come up with a bold reorganization
Some lawmakers acknowledge that it can't be like business as
usual anymore. "You have to take out the politicians, and the
only way you take out the politicians is bankruptcy," said Rep.
Rafael "Tatito" Hernández Montañez.
(Reporting by Luciana Lopez; Editing by Martin Howell)