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The Puerto Rico Electric Power Authority’s fiscal plan

May 01, 2018
Tom Sanzillo and Cathy Kunkel
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Key Findings

PREPA is in a state of severe fiscal distress likely to continue for several years. The Authority must manage a complete overhaul of Puerto Rico’s electricity grid at a time of fiscal insolvency for both PREPA and the Commonwealth government.

PREPA’s historic inability to produce a credible maintenance budget, coupled with the lack of published information on the current state of PREPA’s system, makes it all but impossible to verify PREPA’s forecast maintenance or reconstruction budget.

Over the last ten years, Puerto Rico’s Gross National Product has declined by 20%. This decade-long recession has resulted in lost population, lower incomes (40% of population lives in poverty) and lower electricity consumption.

Executive Summary

The five-year Fiscal Plan and budget for the Puerto Rico Electric Power Authority, as certified in April 2018 by the federal Financial Oversight and Management Board (FOMB) of Puerto Rico, is fraught with significant financial risks. The Fiscal Plan is designed to lay out a road map for the physical and financial transformation of PREPA, and to be the first step in restoring investor confidence in PREPA.

The certified budget for FY 2019 and Fiscal Plan through FY 2023 is out of balance in every year. The one-year budget starting on July 1, 2018 faces a $170 million shortfall, driven in large part by PREPA’s overestimation of electricity demand. Besides that, the FY 2019 budget faces additional downsides risks related to labor savings, fuel efficiency and fuel prices. Budget gaps grow substantially for the remaining years. For the Fiscal Plan period 2020-2023, PREPA’s budget faces the risk of average annual budget shortfalls of $1.0 billion. These are driven in large part by PREPA’s inability to meet renewable energy targets, potential legacy debt payments, fuel costs, pension costs and lower than anticipated federal revenues.

Without recurring budget balance and the demonstrated discipline to achieve it over several years, none of PREPA’s plans for new transmission, distribution or generation can be achieved.

PREPA faces daunting budget and operational challenges. In its FY 2019 budget PREPA (“the Authority”) has acknowledged that its debt levels are unsustainable. It has provided for no payment for debt service from PREPA’s revenues for the next five years. Similarly, the Authority has acknowledged that its overreliance on gas and oil is fatal to its fiscal recovery. There is an urgent need to increase investments in renewable energy and to diversify its generation portfolio.

PREPA’s Fiscal Plan contains a series of ambitious management proposals to bring electricity rates to 20 cents/kWh; increase investments in renewable energy as part of a major overhaul of its generation, transmission and distributions assets; introduce efficiencies; improve contracting; and achieve labor savings through overtime, pension and medical reforms. PREPA’s reform proposals take place against zero growth in the economy and declining demand for electricity over the Plan period. PREPA’s FY 2019 revenues are estimated at $3.4 billion, an increase over last year, which saw service interrupted for most of the fourth quarter due to hurricane damage. Moving forward, revenues are expected to decline modestly through 2023.

Press release: IEEFA Puerto Rico: PREPA’s Approved Budget Faces Five Years of Shortfalls

Please view full report PDF for references and sources.

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.

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Cathy Kunkel

Cathy Kunkel is an Energy Consultant at IEEFA.

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