While Puerto Rico Aqueduct and Sewer Authority (PRASA) has already lost a subsidy from the commonwealth worth $70 million annually, the entity is now threatened by the likelihood that cash-strapped Puerto Rico Electric Power Authority (PREPA) will pull the plug on the deeply discounted rates it grants to the water utility, according to a recent Debtwire research report.
As it stands PREPA forgoes $42 million a year through preferential electricity rates to PRASA, while staring down a debt restructuring. That figure is set to almost double to $80 million in FY17, a number that if paid in cash would amount to about 17 percent of PREPA’s income before taking into account interest, depreciation and amortization.
When push comes to shove, PREPA – which recently inspired Puerto Rico to pass a measure similar to a bankruptcy law in case it needed to reorganize – could move to end the subsidy in order to improve on its gloomy financial picture. And PRASA, facing its own financial problems, would likely be reluctant, or unable, to pay a higher rate for electricity.
PRASA has fared better financially, or at least received less attention than PREPA, in part because of a 68 percent rate increase that boosted its top and bottom line. While the rate hike offered a short-term lift, the company now charges about 60 percent more for water than the national average, which limits its ability to further raise prices. Furthermore, almost 60 percent of the water PRASA produces never gets billed because of loss through aging pipes, theft, or incorrect billing, compared with an average water loss rate of about 16 percent on the mainland.
Compounding the problem, the company has been free cash flow negative for the past five years. With its leaky pipes, PRASA faces another headwind: it’s under a federal mandate to spend almost $400 million to update its system and will need another $1 billion for additional capital projects over the next five years.
To fund its capital expenditures, PRASA will need to issue bonds. But tapping the market won’t be easy with existing junk-rated debt trading at distressed levels and carrying a negative outlook.
For PRASA to continue servicing its existing debt, it will need to set its own rates well above the national average and maintain the preferential electricity rate it receives from PREPA. Likewise, PREPA, already under a bondholder forbearance agreement, may need to scrap the preferential rate in order to reduce haircuts on its own debt as it works on its restructuring.
Both are playing a zero-sum game that neither can afford to lose.
Suneet Chandvani is the head of research for Debtwire Municipals. As an analyst Suneet is a generalist, currently focused on distressed credits in Puerto Rico. He can be reached at suneet.chandvani@debtwire.com
Simone Baribeau is a senior reporter covering US territories, non-profit hospitals, stadium financing, and Florida for Debtwire Municipals. She can be reached at simone.baribeau@debtwire.com.
By Suneet Chandvani and Simone Baribeau
Puerto Rico's Utility Siblings Prep For Subsidy Fight
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