The Puerto Rico Electric Power Authority's chief restructuring officer, Lisa Donahue, is optimistic that an agreement can be reached with its creditors.
"I believe PREPA and its stakeholders will ultimately agree on a consensual plan that will allow the utility to operate efficiently and have a debt structure that will allow it to pay its debts as they come due," Donahue said, clarifying a comment made earlier in an exclusive interview with The Bond Buyer in the AlixPartners office in New York on Thursday.
PREPA last year hired Donahue, a global co-leader at AlixPartners, and a small AlixPartners team on a temporary basis to help guide a transformation of the authority. Among other things, the power company needs billions of dollars in capital investment to upgrade its plants and other facilities.
PREPA's troubles became apparent in early July 2014 when it announced that it had drawn on its debt service reserve to make a debt service payment on July 1. In August it reached forbearance agreements with its bondholders and insurers, its bank creditors, and the Government Development Bank for Puerto Rico.
Donahue said that she and PREPA had achieved a great deal of the necessary transformative and adaptive work, though she could not estimate when PREPA would make the full transformation plan public.
PREPA is in discussions with the forbearing bondholders to extend the agreement beyond the current April 15 expiration, she said.
Donahue said she expects PREPA and bondholders to bridge differences over details of the transformation plan. The forbearing bondholders have offered a plan including $2 billion of new capital investment, which Donahue said was roughly the amount needed.
"The PREPA bondholder group welcomes Lisa Donahue's most recent comments and remains committed to engaging in a collaborative dialogue and providing substantial new investment capital towards the modernization and improvement of PREPA," said a spokesman for the forbearing bondholders. "We continue to believe the situation can be resolved consensually and productively with continued payment of PREPA's debt and interest obligations as they come due and will do everything in our power to reach that outcome - for the benefit of PREPA, its many stakeholders and the island as a whole."
Michael Comes, vice president of research and portfolio management at Cumberland Advisors, which holds some insured PREPA debt, said a solution must involve bringing expenses in line with revenue and improving liquidity. "We think a comprehensive solution to low address collection rates, fuel-only power generation portfolio and governance issues is needed," he said.
PREPA has been trying to reduce costs by $200 million to $400 million per year, she said. Donahue said she expected this effort to succeed and that the authority has already saved $120 million in the current fiscal year.
PREPA is working on promoting cash generation, collecting outstanding receivables and reducing its costs, she said. Its success at these endeavors will help it make its debt service payments going forward.
Donahue noted that she had done electric utility restructurings in the past but that "the stakes are much higher" this time. PREPA affects all 3.5 million Puerto Rico residents, she said.
Fitch Ratings and Moody's Investors Service have said that a PREPA default on its bond debt is probable. A default on its $8.3 billion in bond debt would be the largest bond default in United States municipal history.
PREPA's next bond debt service payment of $400 million is due on July 1.
Donahue said her team is working with several goals in mind. It wants to assure sustainable power. The utility currently depends to a degree on oil fired power plants that are 40 to 50 years old. These burn high cost fuels.
Because cash shortages have plagued the authority for years, preventing necessary capital investments, PREPA has had to put up with unplanned breakdowns in the plants. Since PREPA has to expect forced plant outages, PREPA cannot adequately deliberately turn off plants for necessary maintenance.
To improve system reliability the authority also needs to build plants that run on two fuels and are combined cycle, she said.
Donahue said that PREPA's transformation would entail creating a new business plan that would address capital expenditures, environmental compliance, fuel diversification, and financial performance.
In addition, she said the planning anticipates Puerto Rico legislative and governmental changes, including ground work for greatly improved collections of accounts receivables from government bodies next year. The authority is planning changes to the contributions in lieu of taxes from municipalities. And legal counsel will introduce a PREPA omnibus bill to the legislature at some point, she said.
PREPA is working to create a healthy capital structure with a manageable debt burden. It is working to modernize the existing trust agreement, she said.
The rate structure is being revised so that it fully captures actual operating costs, new capital spending costs and all revenue possibilities.
And governance and organization are being changed from the current system in which the PREPA's leadership changes every four years as a new governor is elected, disrupting the authority's planning process.
The authority is also working to introduce best practices for utilities and benchmark performance markers; communicating with key stakeholders including the Puerto Rico Energy Commission and the U.S. Environmental Protection Agency; and implementing operational improvements.
These include operational efficiencies and safety improvements. The authority is introducing customer service improvements backed by key performance indicators. It is overhauling its information technology platform.
Donahue said the transformation of PREPA is in an early part of the second of three phases.
The first phase was characterized by laying the groundwork to work on improving collections and changing the contributions in lieu of taxes. It also involved developing a cash flow plan for forbearing creditors, improving safety, and finding opportunities for savings.
Phase II is characterized by studies, analysis, and the development of the plan. In the near future Siemens will submit an integrated resource plan concerning generation, distribution and fuel. This will look at various "unit dispatch profiles" to assure reliability. These profiles examine the utility's generation types, where the generators are located, where the consumers are located, and costs and how these may be changed to be optimized.
The Siemens plan will also make suggestions about how the EPA's Mercury and Air Toxics standards can be achieved and how the necessary changes can be financed.
Navigant later will submit a rate analysis and review. Along with changing the rates, PREPA is planning to simplify the rate structure so that consumers can better understand them. The base rate has not changed since 1989, Donahue said.
Following the rate analysis the authority will turn to the Energy Commission to seek a rate change.
In Phase III there will be negotiation and implementation. At an early stage PREPA will finalize the business plan. A little later a regulatory compliance agreement will be adopted. Finally, PREPA expects that the Energy Commission will review and approve the new rates.
Donahue said the forbearing bondholder plan presented in March was helpful in continuing the dialogue between the authority and the bondholders. "There are aspects of the plan that are not feasible for technical reasons," she said.
For example, she said the plan's use of a 50/50 blend of number two and number six oils as a route to compliance with the Mercury and Air Toxics standards would not work in the authority's system.
