Home This Week Energy Prepa’s cash-flow situation hits bottom
Issued : Wednesday, June 4, 2014 12:00 AM
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Prepa’s cash-flow situation hits bottom

By : JOHN MARINO
Edition: June 5, 2014 | Volume: 42 | No: 21

Government utility uses capital-works funds to buy oil as it negotiates with bankers

The Puerto Rico Electric Power Authority (Prepa)'s cash-flow situation has hit bottom, forcing the government power utility to explore all alternatives, including raising rates, Prepa Executive Director Juan Alicea Flores said last week.

In fact, Prepa officials announced Friday that its projected accumulated deficit for this fiscal year will be $1.036 billion, and the Prepa board ordered Alicea to develop a new rate proposal for consideration by the new regulatory commission created by the Electric Sector Reform Law 57 enacted by the governor last week.

The downgrade of the government's credit to noninvestment grade, or junk-bond levels, has impacted the public corporation's finances, Alicea acknowledged, but added that alternatives were being explored to ensure Prepa can continue to purchase oil to produce electricity.

He said that Prepa, with the assistance of the Government Development Bank (GDB), is currently negotiating a renewal of its credit lines and using internal resources to buy oil without affecting ongoing projects while negotiations are underway.

Last month, the Prepa board approved transferring up to $100 million from its capital works fund for the purchase of oil pending the completion of the negotiations.

Alicea also said Prepa was increasing efforts to attack electricity theft and collect back debts.

The loan was to pay off a $60 million debt with Petrobras so the company would continue to supply oil to Prepa. The board's approval was conditioned on paying back the internal transfer in 30 days. The $100 million is one-third of Prepa's entire capital improvements budget for the year.

Alicea said that if all Prepa clients paid on time, the public corporation would need about $300 million in cash fl ow each month to buy oil and pay other commitments, but since most customers pay late, the true cash-fl ow needs are more like $600 million a month.

That's why Prepa has traditionally relied on credit lines to purchase oil. The downgrade of the Puerto Rico government's ratings into junk territory, however, enabled lenders to revise the terms and conditions of loans.

Last August, as Prepa prepared its last bond issue, the public corporation reported having two current credit lines worth $750 million, with $550 million due this August and the additional $200 million due in October. However, last week Alicea said one of its five banks—Citibank, to be exact—lowered its exposure to Prepa by $100 million by cutting the size of the loan from $250 million to $150 million.

"Right now, I have nothing. The lines of credit have reached their limits," Alicea told reporters last week.

Refinancing the loans with the banks probably won't provide much of a financial cushion unless they are willing to increase their exposure to Prepa, which most sources have said is unlikely. However, the refinancing would postpone the $550 million payment due in August, which Prepa clearly doesn't have.

"The talk on the street is that current banks that hold those lines aren't too willing to renew, and the GDB is struggling to find takers," one financial industry source told CARIBBEAN BUSINESS. "If Prepa is unable to renew 100% of the line with existing or new banks, the GDB may have to step in with a line of credit, eating up some of the GDB's liquidity."

Last week, Gov. Alejandro García Padilla justified the funds transfer by saying: "Prepa's finances are very fragile. This is one of the transactions that Prepa has been obliged to make to continue providing service. Of course, this has prompted the central government to more closely attend to Prepa's finances."

Alicea said Prepa would keep the lights on despite its financial problems, adding that he couldn't rule out raising electricity rates.

"We can't discard rate hikes in light of the fiscal situation we are facing," he said in a radio interview. "We have to look at all options."

Lawmakers, however, including House Speaker Jaime Perelló, said they would refuse to approve a rate increase or grant the public corporation any kind of bailout.

Alicea said the public corporation is also increasing its efforts to collect on back debts from clients, attacking electricity theft and making other moves to cut costs. He acknowledged that the extended economic downturn in Puerto Rico has crimped electricity sales and eroded the ability of customers to pay.

Government entities owe Prepa $290 million, while other clients owe it $110 million and public housing residents another $50 million.

Cash-strapped government entities appear to be having more difficulty than usual paying Prepa. The $290 million balance owed is more than the $245.4 million reported on June 30, 2013, and the $183.1 million on June 30, 2012.

The increase in government debt has occurred despite Law 239 of 2011, which requires the Office of Management & Budget to estimate annual electricity expenses for each agency so that each month, the Treasury Department can directly pay Prepa the agencies' estimated electricity expenses, as part of efforts to improve Prepa's cash fl ow.

During the past four years, Prepa has had combined operating losses of $1.022 billion, with the public corporation losing $275 million in fiscal 2013 and $346 million in fiscal 2012. The Ports Authority is currently its biggest debtor with $34 million owed. 

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