With debt deal on ice, PREPA’s transformation advances

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Even as the bankruptcy process for the Puerto Rico Electric Power Authority has largely been frozen for 18 months, the transformation of the authority’s operations moves forward and is expected to continue in the coming year.

While debt restructuring is on hold, PREPA is exploring public-private partnerships for energy generation, looking to use more renewable energy options, rebuilding facilities that were hit by hurricanes with FEMA dollars, and navigating the ongoing COVID-19 repercussions.

In recent months, the authority has reached an agreement with New Fortress Energy to provide natural gas to some of its plants near San Juan. The plants are being converted from just being able to burn diesel to being able to burn diesel or natural gas. The latter is cheaper and better for the environment, Fernando Padilla, who is PREPA’s project management officer, said.

Tom Sanzillo, director of Institute for Energy Economics and Financial Analysis, said he expects the conversion will lead to about $20 million in savings in fiscal year 2022, which starts on July 1, 2021.

The authority has been renegotiating power purchase agreements concerning a broad range of its generating facilities. According to Padilla, some of them have been reached, and some of them still require approvals from the federal bankruptcy court and/or the Puerto Rico Oversight Board. The authority is hoping to achieve these in the next 12 months.

An Integrated Resources Plan, which the Puerto Rico Energy Bureau approved in August, will guide its future and its plans to shift to use renewable resources.

Padilla said PREPA in the next year or two expects to support releasing a request for proposals for a public-private partnership for new renewable energy projects.

Moody’s Investors Service Senior Analyst Jennifer Chang told The Bond Buyer the authority’s adoption of renewable sources would lead to lower costs in the long run. However, to get there PREPA has to make investments up front. She also said renewable sources are not as reliable as conventional sources and as a result, the authority would also have to build energy storage facilities.

Padilla said the financial impact of the move to renewable energy would depend on how the transformation and revenue streams are organized in the next five to 10 years.

The authority has been working and continues to work on restoring the Costa Sur power plant, damaged in January’s earthquakes. The plant, on the island’s southwest coast, was one of the most cost-efficient of the power plants and had supplied the island with about a quarter of its power, according to Moody’s Investors Service. The natural gas plant's loss led to 10% to 20% higher fuel costs for PREPA in the first three months of 2020.

The authority managed to bring back the plant’s Unit 5 on Aug. 1, Padilla said. He said the authority is continuing to repair Unit 6 and expects to have it back in service by Dec. 23.

The authority’s goals with all these agreements are generally to lower costs.

But the larger debt deal negotiations hang overhead.

In May 2019 the Puerto Rico Oversight Board and the body representing the local government, the Fiscal Agency and Financial Advisory Authority, filed a joint motion in the authority’s bankruptcy to approve the negotiated debt deal — the Restructuring Support Agreement. In court terminology this was a Rule 9019 Motion.

Costa Sur power plant for PREPA before January 2019 damage
PREPA is working to repair its Costa Sur power plant, shown here in a photo before it was damaged by a earthquake in January.

At stake is something similar to the $9.89 billion of total debt the authority had in May. Moody’s Investors Service believes the authority has about $3.8 billion of unfunded pension liabilities.

The government parties repeatedly delayed the hearing to approve the RSA and related deadlines due to motions by outsiders for further time to conduct discovery, to find and analyze evidence. Then, in December 2019 the government parties asked for a delay for time to gain the necessary legislative approvals for the RSA. In February they asked for delay in light of trying to figure out the impact of the earthquakes on the authority. Since then, they have repeatedly asked for delays based on the unknown impact of the COVID-19 pandemic on the authority and the island’s economy.

On Nov. 4 Puerto Rico bankruptcy Judge Laura Taylor Swain rejected the Unsecured Creditors Committee’s motion to terminate the government parties’ Rule 9019 Motion. She said as far as she was concerned, the RSA was still alive.

On Sept. 25 the government parties said the Oversight Board “continues to conduct diligence into the RSA and the affordability and sustainability of electric rates on the island given the still changing economic landscape and effects of the COVID-19 pandemic, as well as to analyze the optimal means of implementing the RSA transactions.

“This diligence and analysis will help inform the government parties’ determination regarding whether the RSA should be renegotiated and the parameters and the parameters for doing so,” the government parties continued.

While the board has considered altering the debt deal, the authority has continued forward with operational and other transformations.

Other deals have been undertaken to address PREPA's and the island's energy needs and challenges forward. In June it announced a deal to have LUMA Energy take over the management of its transmission and distribution grid.

On Aug. 10 PREPA and the Puerto Rico Public-Private Partnership Authority released a request for qualifications from private entities to run the electric authority’s power generation assets. The deadline for submissions passed Sept. 15.

In a court filing, attorneys for the board, PREPA, and FAFAA said the response to the RFQ was “strong” with more than 10 “world class” respondents.

The Integrated Resources Plan approved in August for the electric authority is a binding document guiding its practices in the near and long-term future because the bureau is the authority's regulator. In September the bureau gave final approval to it.

Among the plan’s key provisions were that the power authority was to convert old steam plant infrastructure to synchronous condensers, which are used to stabilize a power system during rapid fluctuations of demand. The bureau also directed the authority to maximize its energy efficiency measures, aggressive expand its solar power capacity, increase its battery energy storage to support its renewable power system, and harden its transmission and distribution system.

The bureau rejected the electric authority’s plan to build 400 megawatts of new fossil fuel peaking resources. Peaking plants are used only when electricity demand is unusually high.

The bureau also ordered the electric authority to include so-called microgrids into all of its transmission, distribution, and resource planning exercises and deployment actions. A microgrid is a part of an electrical system that includes power generation, transmission, and distributions systems. It exists in a comparatively small geographic area and can potentially operate autonomously from the rest of the system. The bureau said these are a “critical part of the resiliency solutions” for the commonwealth.

In still other PREPA developments, the Federal Emergency Management Agency recently disbursed large sums of hurricane-related aid.

In late September President Trump said he was releasing $9.6 billion in already congressionally approved hurricane relief aid for the purpose of repairing the authority’s transmission and distribution grid. Moody's Chang called this a credit positive. This would improve system reliability, a substantial problem for the authority.

The grant equals more than half of the costs of modernizing the authority’s grid over the next 10 years.

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