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Puerto Rico to Start Privatizing Embattled Energy Company

Puerto Rico Governor Ricardo Rossello said he’s moving to privatize the assets of the island’s electric company, a utility so badly damaged by Hurricane Maria that millions have been left in the dark for months.

Selling the insolvent Puerto Rico Electric Power Authority, the largest U.S. public power utility by customers and revenue, could take 18 months, Rossello said. It will start with legislation to establish a legal framework before the government entertains purchase proposals.

The move could be a major development in the fate of an agency at the center of the ravaged U.S. commonwealth’s recovery. Lack of power is the central obstacle to resuming normal life. But left unanswered is who might be interested in purchasing a badly damaged system and what a sale would mean for creditors and residents.

Rossello in a televised address portrayed a sale as a step toward bringing investment back to the island and preparing for another natural disaster.

“The Puerto Rico Electric Power Authority does not work and cannot continue to operate like this,” Rossello said, addressing the camera from a desk flanked by American and Puerto Rican flags. “With that Prepa, we cannot face the risks of living in an area of high vulnerability to catastrophic events.”

Darkened Island

The Sept. 20 storm was something of a coup de grace for an island already in dire financial straits and navigating a record $74 billion bankruptcy. Since the storm, prices on Puerto Rico debt, including Prepa, have plunged. Prepa bonds maturing in 2032 traded Monday at an average 32 cents on the dollar, down from an average of 54 cents two days before the cyclone, according to data compiled by Bloomberg.

Puerto Rico’s system, which alone owes $9 billion, is decades older than most U.S. utilities, and burns expensive oil that pollutes. It also has most of its generation in the south, despite a population concentration in the north, which forces it to be transmitted long distances -- a vulnerability for a Caribbean island in the path of hurricanes.

While Prepa was generating almost 85 percent of its full capacity as of Monday, only 68 percent of clients have power.

Up For Grabs

The utility was widely criticized even before Hurricane Maria barreled into the island, taking down poles and leaving large parts of the island in the dark. Then, the agency’s former head hired Whitefish Energy Holdings LLC, a little known Montana operation with seemingly little relevant experience and only two employees at the time of the disaster. He later resigned.

Now, federal authorities and the fiscal control board installed as part of the commonwealth’s bankruptcy are closely scrutinizing the island’s financial decisions, presumably including a Prepa privatization.

Potential buyers "could be anybody,” said Howard Sitzer, an analyst at Creditsights Inc. “It could be an investor-owned utility. It could be a private-equity group.”

A prospective buyer would need to assess how much capital would be required, negotiate with bondholders and have the ability to set rates without interference from the commonwealth or what remains of the energy regulatory commission.

“The debts and the creditors are not going away,” Sitzer said.

Hedge funds, mutual funds and bond-insurance companies have been negotiating with the utility for more than three years over how to reduce debt and upgrade the system. 
Prepa fell into bankruptcy last year after the oversight board rejected a restructuring plan.

Fat Target

Rossello fought to keep control of the company, persuading a judge to block a takeover by the oversight board, which had tried to install its own management team. Jose Cedeno, a spokesman for the board, didn’t have an immediate comment Monday evening.

Holders of Prepa debt have also sought to take over the utility, trying unsuccessfully to persuade a court to install a receiver. Dan Zacchei, a representative in New York at Sloane & Co. for an ad-hoc group of Prepa creditors, didn’t have an immediate comment on Rossello’s plan.

Speaking shortly after Rossello’s address, Senate President Thomas Rivera Schatz, who is from Rossello’s New Progressive Party, said he would try to use legislation to protect the jobs of existing Prepa employees, presumably obligating bidders to make a commitment to them.

Kit Konolige, a utility analyst for Bloomberg Intelligence, said any purchasers would be concerned by Prepa’s disrepair.

“It would be a tough sale to most of the U.S investor-owned utilities,” he said.

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