Puerto Rico utility plan may lead to downgrade -analyst

A turnaround plan by Puerto Rico utility PREPA suggests restructuring debt in way that might lead to a downgrade, and discussions with creditors could center on sharing the costs of a gap of about $1 billion identified by the utility, analysts said on Tuesday.

PREPA proposed a plan on Monday that requires investment of at least $2.3 billion and seeks a "restructuring" with creditors by June 30 to create what the utility called a "sustainable capital structure."

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Creditors were skeptical about the proposal, with one bondholder representative calling parts of the plan "unworkable."



"This plan seems to suggest the need or the intent to restructure debt," S&P analyst Jeff Panger told Reuters. "Any restructuring of debt which would result in less than full and timely payment of (PREPA's) scheduled debt service would result in the rating being lowered to a 'D'."

S&P currently has PREPA rated at CCC-. Panger added the plan's reference to an upcoming July 1 payment to bondholders was nebulous because it was unclear if it would be before or after the planned restructuring. PREPA is due to make a payment of about $400 million on that date.

A focus for discussions with creditors is likely to be a gap PREPA identified between its rates and costs of around $1 billion a year that it proposes sharing among stakeholders, according to the plan and Fitch analyst Dennis Pidherny.



PREPA is the main source of electricity in Puerto Rico and its rates are about two times higher than those charged by mainland U.S. utilities.

PREPA's said in its plan that the existing rate structure was not sufficient to cover costs and current debt service requirements, but the deficit "cannot be borne by the ratepayers alone."



It calculated that a proforma rate of 29.2 cents per kilowatt hour (kwh) was required to cover its current cost base, compared with the current rate of 21.4 cents per kwh. Excluding proposed savings leaves a gap of 6.2 cents per kwh, which PREPA wants to fill with what it called "Required Burden Sharing."

"The heart of the issue for bondholders - related to this plan - is how much of the Required Burden Sharing they are expected to share," said Pidherny in an email.

He said he suspects this would "be the focus of discussions going forward."

Pidherny calculates the 6.2 cents/kwh is roughly equivalent to $1 billion a year for PREPA. (Reporting by Megan Davies; Editing by Chris Reese and Andre Grenon)

By Megan Davies

UPDATE 1-Puerto Rico utility plan may lead to downgrade -analyst