Puerto Rico and its Utility at the Financial Brink

A mismanaged government-owned electric utility is a major contributor to Puerto Rico’s debt crisis, which has burst onto the U.S. scene just as Greece’s financial travails have jumped onto the world’s agenda. Puerto Rico, a U.S. territory with strange legal ties to its governmental parent, a fruit in the victory of the U.S. war with Spain at the end of the 19th century, owes creditors some $72 billion. Its governor, Alejandro Garcia Padilla, says the debt is “not payable.”

Of that staggering debt, the commonwealth’s electric utility, the Puerto Rico Electric Power Authority, or PREPA, owes $9 billion. A $400 million PREPA debt payment is due today (July1). At this writing, it is unclear whether the payment to a string of creditors would be made or whether the parties will negotiate a deal to stretch out the payment.

How big is PREPA’s unpaid debt that overhangs the utility? According to CNN, Detroit’s debt when it went into bankruptcy was $7 billion.

PREPA’s financial ball-and-chain dragging the utility to its knees appears to be a result of historical circumstances, major mismanagement, and vagaries of U.S. law that prevents Puerto Rico (and PREPA) from taking advantage of bankruptcy to restructure the crushing debt.

First the history. Puerto Rico’s original source of electricity was hydro, but that proved to be inadequate as the island economy grew when freed from a Spanish colonialism that concentrated on exploiting its rural and agricultural economy. As the 20th century proceeded, the island relied on oil-fired generation for its state-owned electric utility’s electric capacity. Today, according to the utility’s web site, PREPA serves about 1.5 million customers with generation that is 68% fuel-oil, 15% natural gas, 15% coal, and 2% hydro. According to the utility, total generating capacity is 5,839 MW.

The five major PREPA generators are: Costa Sur, 990 MW, burning #6 oil; Aguirre, with 900 MW from #6 oil and a 592-MW gas-fired combined-cycle plant; San Juan, 400 MW from #6 oil and 440 MW from a combined-cycle gas plant; Palo Seco, 602 MW in oil #6 capacity; Cambalache, with 162 MW from oil #2.

As to mismanagement, as recently as 2012, PREPA was telling the world that it was in solid financial shape. A company presentation at a regional conference at the time painted a picture of a utility aiming to shed its expensive oil-fired capacity and restructure its generating portfolio. Otoniel Cruz, PREPA’s executive director, and Nelson Morales, the chief financial officer, offered what now appears to be a misleading picture of the company’s financial situation. Their presentation bragged that PREPA “has a downward sloping debt service profile with no variable rate risk or put risk on its senior lien.” Three years later, it is unable to make its debt payments.

The same year, Cruz resigned and PREPA installed new management. On June 21, Caribbean Business reported another management shakeup, with Juan Alicia, PREPA’s latest executive director, and several other high-level officials, said to be ousted as the utility’s inability to make its July 1 payment loomed.

As for U.S. law, a government-owned utility in a U.S. state would be able to restructure its debt, much as Detroit did, through a court-organized proceeding. But the law specifically excludes territories from access to the law, so neither Puerto Rico nor PREPA can use U.S. bankruptcy provisions to write down their debt and come to a deal with creditors.

Puerto Rico and the Obama administration are trying to get Congress to make a technical fix to the law to accommodate a deal with its creditors. Political commentator Errol Lewis, writing in the New York Daily News, said, “Now it will be Washington, not Wall Street, that must fashion a solution to the Puerto Rican crisis. Congress should pass a law allowing the island to declare bankruptcy the way cities like Detroit have, and get about the business of restructuring its debts. President Obama, whose administration has been nearly silent, needs to step up and broker a deal to resolve the crisis.”

That’s a long shot. Congress has shown no interest to date in the issue. Puerto Rico barely appears on the political radar in Washington, as its citizens, who are Americans, cannot vote in presidential elections and have no voting representation in Congress.

It’s likely, but far from certain, that PREPA and the holders of its debts today will agree to put off the payment for a short time in order to see if a settlement is possible. Stay tuned.