Puerto Rico Electric Authority, the last government entity to sell debt before soaring yields forced the commonwealth to curtail issuance, is focused on cutting costs by replacing oil as its primary means of generating power.
PREPA is converting its power plants to burning natural gas, which is cheaper and will help the authority to comply with tighter mercury and air toxic standards taking effect in April under the federal Clean Air Act, PREPA executive director Juan Alicea Flores said in an interview on Wednesday.
The efforts come as the rating agencies pressure PREPA to improve its finances and government officials seek ways to cut power costs to boost the economy on the island, which had 14.7% unemployment in October.
"For several decades, the cost of energy has been the main topic our economic development discussion," Puerto Rico Gov. Alejandro García Padilla said in an October speech. "It also represented one of the biggest challenges for Puerto Rican families due to the large portion of their incomes that they have had to spend on electricity."
PREPA has about $8.5 billion in revenue bond debt rated Baa3 by Moody's Investors Service, BBB by Standard and Poor's and BBB-minus by Fitch Ratings. In addition it has about $750 million in operational line of credit debt and other loans and subordinated debt.
The authority has already converted two power units at its Costa Sur plant near Ponce on the southwest coast to gas from oil resulting in 20% reductions in costs, Alicea Flores said.
PREPA plans to convert its Aguirre power plant near Salinas on the southeast coast to natural gas by April 2015. After this it will convert its Palo Seco and San Juan plants on the north coast to natural gas by April 2017. It also plans to convert some of its smaller power plants to natural gas in the next few years.
In addition to converting the plants, PREPA is busy planning and constructing natural gas storage and delivery infrastructure. The authority is on schedule with its plans to construct an offloading natural gas facility in Aguirre by summer 2015, Alicea Flores said.
Conversion of power plants to gas will reduce their operating costs and allow PREPA to lower the rates it charges, Alicea Flores said. PREPA would like to have an average electricity rate of 22 cents per kilowatt hour by the end of 2015, he said, compared to the current 25 cents rate.
The current rate is 2.4 times higher than the average electricity rate in the United States.
To move away from oil, PREPA is also introducing more renewable energy sources. The authority is currently renegotiating terms of contracts with potential providers to lower costs, the executive director said. As of this summer PREPA said 70% of contracted projects' electrical capacity would be solar and 23% would be wind.
Because Puerto Rico is an island, it is isolated from other electrical systems, Alicea Flores said. Because of this, PREPA has to make sure that the island has a reliable source of electricity and relying on renewable sources is a way of doing this.
PREPA plans to integrate 600 megawatts of solar and wind generation by the end of 2014, Alicea Flores said. This would be 18% of its peak hourly load this past fiscal year.
The renewable electricity costs will be lower than those of the oil-fired power plants, PREPA said this summer. However, they may be higher than when these plants are gas fired.
In other business plans, PREPA hopes to expand its offerings beyond electricity, Alicea Flores said. PREPA is looking at four additional types of business, one of which is the provision of broad band internet services. This would be for commercial users and would be available starting in fiscal 2015.
By fiscal 2017, PREPA hopes that the internet subsidiary will generate $50 million a year, said PREPA chief financial officer Luis Figueroa Báez. This would be about 1% of the fiscal 2013's electrical revenues.
PREPA is taking other measures to improve its finances. The ratings agencies have said PREPA must reduce its past due accounts. Government accounts are a bigger problem than residential accounts, Alicea Flores said.
However, PREPA has made progress with the government accounts, he said. Government accounts receivable went from $300 million in March to $236 million in October. PREPA officials continue to converse with the heads of the Puerto Rico departments to address this problem, Alicea Flores said.
A vigorous debate has developed among Puerto Rico politicians about possible changes to the island's electricity structures. García Padilla and senate president Eduardo Bhatia have submitted leading proposals.
The governor's version is based on PREPA's production of electricity whereas Bhatia's proposal emphasizes the private sector, Alicea Flores said. Bhatia's proposal evidences a lack of understanding of the island's electrical provision, Alicea Flores said. The governor's proposal is more complete and better, he said.
Another electrical authority, the Long Island Power Authority in New York, has turned to creating a debt securitization authority to resell its debt. LIPA is hoping to reduce debt service costs and to pass on the savings to its customers in the form of lower electricity rates.
Asked if PREPA might try something similar with its debt, Alicea Flores his authority was considering it but had not yet made a decision.
PREPA was the last Puerto Rico government body to sell bonds, when sold $673 million on Aug. 7.
Alicea Flores said PREPA would not sell any more bonds until the second half of calendar year 2015. It has the necessary capital funds to keep going until then, he said.
In other Puerto Rico energy news, the United States Geological Survey released a report in November on technically recoverable oil and natural gas resources of Puerto Rico. While the report indicated there was none of this onshore, it said oil and gas might be found about 20 miles south of Puerto Rico in the Muertos Deformed Belt. This is part of the Puerto Rico-U.S. Virgin Islands Exclusive Economic Zone.
However, USGS found that there was only a 20% chance that there was recoverable oil or gas in the belt. Its mean estimate of resources in the belt was 19 million barrels of oil, 244 billion cubic feet of gas and six million barrels of natural gas liquids.
The belt is 2,000 to 4,000 meters underwater, said USGS geologist Christopher Schenk, author of study. The only way people will gain a better understanding of what is there in the next five years is to actually drill, he said.
The mean possible recovery values are fairly low, said Charles Ebinger, director of the energy security initiative at the Brookings Institution. However, the oil reserves might be significant for Puerto Rico.
The U.S. Geological Survey report "is certainly something that deserves a thorough analysis of the ability to explore and exploit these natural resources, always keeping in mind if is feasible and manageable from an economic and environmental perspective," Puerto Rico chief of staff Ingrid Vila Biaggi told The Bond Buyer. Puerto Rico's government will be discussing the reserves with the federal government.
