IEEFA Puerto Rico: New natural gas deal fits same old pattern for choosing contractors

January 22, 2019

Tom Sanzillo and Cathy Kunkel

The government of Puerto Rico is moving forward with plans to convert two units at the San Juan power plant from oil to natural gas. The Puerto Rico Electric Power Authority (PREPA) plans to contract with a third party that will make the necessary upgrades to the power plant to convert it and invest in the fuel delivery and storage infrastructure needed to bring natural gas to the plant. PREPA would repay infrastructure costs, as well as delivery of natural gas, under a five-year contract, with the possibility of extension.

New contractor with little experience.

At the end of November, PREPA announced that it had awarded the contract to New Fortress Energy and would be signing a final contract this month.

While IEEFA has frequently objected to Puerto Rico’s current rush to build natural gas infrastructure projects, since it will crowd out renewable energy investments and leave the island dependent on fossil fuel imports, the San Juan project is more reasonable than other natural gas proposals that we have seen. It reinforces electricity generation in the north of the island (where most of the population is located), and it only obligates PREPA for a five-year supply of natural gas.

NEVERTHELESS, THE WAY THIS CONTRACT HAS BEEN AWARDED RAISES NUMEROUS RED FLAGS, as the Puerto Rico government attempts to move forward with large-scale contracts for the privatization of PREPA this year.

First, the Puerto Rico Energy Bureau allowed PREPA to move forward with the contracting process outside of PREPA’s long-term integrated resource planning process. The project was not included in PREPA’s last integrated resource plan and the bureau allowed it to move forward before the release of the next plan this month. Thus, PREPA has done no analysis of how the conversion of the San Juan units will affect the dispatch of other units on the system and no evaluation of alternative generation options.

Second, publicly available information on the savings that will result to PREPA from the project is confusing and contradictory. In a filing with the Puerto Rico Energy Bureau, PREPA projected fuel savings of $150 million per year from converting from diesel to gas. In a filing with the Securities and Exchange Commission, New Fortress Energy announced that the project is expected to save PREPA $285 million per year. There is no information available on how much infrastructure investment will be required to bring natural gas to the San Juan plant, or how the recovery of this investment through electric rates will reduce the projected fuel savings numbers.

Third, PREPA has chosen to award the contract to a small company established in 2018. The parent company, NFE Holdings, has been in the LNG business since 2014. The company currently has one principal shareholder who is a substantial contributor to the Democratic Party. According to one analyst: “The company is currently unprofitable, with major projects still in the works and full utilization of its facilities are several years away.”

The company has no history of doing business in Puerto Rico. Selling 25 million MMBTU per year of natural gas to PREPA at an approximate price of $10 per MMBTU will generate revenues of $250 million per year, more than tripling New Fortress’s current revenues, according to its SEC filing. According to published reports, New Fortress Energy was selected from a group of other companies that includes ones more established, with reasonable credit ratings, operational facilities and a history of doing business in Puerto Rico.

Any investment in Puerto Rico at this time is quite risky. That PREPA was able to attract several companies with track records and credit ratings is impressive. Those who claimed investment would stop due to Puerto Rico’s fiscal distress are plainly wrong. PREPA cannot finance its own upgrades so it is using third party sources to front the capital. The choice of New Fortress Energy may however add another unnecessary dimension to this already fraught risk profile.

In short, however meritorious the project, the process for the award of this contract does not indicate that much has changed from PREPA’s recent history of awarding politically driven contracts with limited or superficial analysis of the benefits to Puerto Rico’s electric customers. This does not bode well for the privatization contracts that are expected to be signed this year.

Tom Sanzillo ([email protected]) is IEEFA’s director of finance. Cathy Kunkel ([email protected]) is an IEEFA energy analyst.

IEEFA Puerto Rico: PREPA preliminary energy plan modeling says maximize renewables

IEEFA Puerto Rico: A step toward renewables or another scandal waiting to happen?

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures.

Go to Profile