PREPA privatization in the crosshairs of a three-company consortium offering USD 4bn investment

25 April 2018

 
Shell North American LNG, Kindle Energy, and ITC Holdings are floating a bid for the Puerto Rico Electric Power Authority (PREPA) as part of the utility’s privatization, according to documents seen by Debtwire Municipals.
 
The three-company consortium is targeting PREPA’s generation business and its transmission and distribution (T&D) system, one of the utility’s most affected components following Hurricanes Irma and Maria.
 
On the generation front, the consortium has proposed to invest north of USD 4bn of private capital to modernize PREPA’s generation and fuel infrastructure over the next decade.
 
Through stakeholder outreach, the consortium is also looking to make the necessary capital investments in order to rebuild, upgrade, own, operate, and maintain PREPA’s T&D system.
 
It’s unclear when the proposal was drafted or whether it remains current.
 
“The document was making the rounds until recently in the US Congress as part of lobbying efforts undertaken by representatives of the consortium,” said a source close to the matter.
 
ITC, a subsidiary of Canadian utility holding company Fortis Inc., would reportedly be taking charge of the T&D side of PREPA, which Governor Ricardo Rossello has proposed giving away in the form of a medium-term concession, as detailed in PREPA’s latest fiscal economic growth plan.
 
This is not the first time ITC has vied for PREPA. In 2015, the company partnered with NRG Energy and York Capital Management to offer PREPA a multi-billion bid to operate the utility’s generation through a 30-year public-private partnership. The offer fell through.
 
Another company unrelated to the consortium, Fortress Investment Group, has expressed an interest in developing natural gas assets on the northern part of Puerto Rico.
 
“It could make sense for an outside utility operator to work collaboratively with bondholders to address the operational issues that have plagued PREPA,” said a source close to bondholders.
 
“However, without that type of partnership approach they wouldn’t really have a pathway for getting something done,” the source added. 
 
PREPA is one of five entities filed for bankruptcy under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act. The utility has more than USD 9bn of debt, of which a little more than USD 8bn is bonded debt.
 
The specifics: generation, T&D, and fuel supply
 
With regards to generation, the consortium would act both as a generator and developer in Puerto Rico, replacing and repowering existing generation with fuel-efficient, cost-effective, reliable, cleaner, and flexible generation assets at strategic locations, according to the documents seen by Debtwire Municipals.
 
That includes the installation of dual-fuel capable generation units suited to manage intermittent renewable energy generation. The proposal calls for 20%-25% renewable generation online by 2035, as well the implementation of micro-grid and distributed energy capability.
 
Additionally, the consortium would develop and construct fuel gas infrastructure to complement other energy sources.
 
On the fuel supply side, the consortium—led by Shell—would support immediate and longer-term fuel needs via a multi-fuel structure that includes liquid natural gas (LNG), ultra-low sulfur diesel, and heavy fuel oil.
 
Shell would supply the necessary fuels until a fuel source is no longer needed, manage liquid storage contracts, assist with import negotiations, and help with the development of regasification terminals, among other tasks.
 
The fuel price structure would be indexed to relevant market indexes, such as Henry Hub and Brent Crude Oil, and based on competitive market rates.
 
As to T&D, the consortium would analyze the restoration work performed by the Federal Emergency Management Agency and the US Army Corps. of Engineers.
 
Moreover, the group would redevelop PREPA’s 2015 Integrated Resource Plan (IRP) to identify critical facilities for the implementation of micro-grid/distributed generation, utilize energy storage technologies, and increase the use of renewable energy.
 
The consortium would commit to an aggressive, long-term T&D investment plan to upgrade PREPA’s grid and develop facilities able to withstand Category 4 hurricanes.
 
Last week, a local energy watchdog sued PREPA in a local court alleging that the utility is illegally and unilaterally imposing its own IRP via the fiscal economic growth plan submitted to the Financial Oversight and Management Board.
 
ITC, Kindle, and Shell did not return calls seeking comment.
 
By Javier Balmaceda