The sharp decline in oil prices won’t materially boost the economy of Puerto Rico or improve the finances of the Puerto Rico Electric Power Authority (Prepa), Moody’s Investors Service said.
The sharp decline in oil prices won’t materially boost the economy of Puerto Rico or improve the finances of the Puerto Rico Electric Power Authority (Prepa), Moody’s Investors Service said.
The credit rating agency dampened optimism expressed by some economists and investors that oil’s price decline of 60% could finally lift the island’s long-sputtering economy and also improve the finances of Prepa, which is teetering on the edge of default and is amid restructuring talks with its creditors.
“While we believe that the commonwealth economy could benefit in the long run if oil prices stay low for an extended period, we do not expect Prepa or the commonwealth to benefit materially from the low oil prices in the immediate future,” Moody’s said in a report released Friday.
Prepa generates 61% of its electricity from oil, which has dropped in price to $48 per barrel from a high of $115 in June, but Prepa was still paying an average cost per barrel of $99 in October 2014, according to the report.
“While Prepa’s fuel costs have declined significantly since then, Prepa’s financial performance won’t see an immediate benefit from the lower fuel costs because Prepa passes on the savings from lower oil prices to its rate payers. There is an automatic fuel adjustment component in Prepa’s rates. The fuel component is a cost that is passed through to customers’ bills and, when affected by market fluctuations, these fluctuations are passed on as well,” Moody’s said.
In October 2014, Prepa’s average rates were 26.71 cents per kilowatt-hour (kWh), more than double the average US residential rate of 12.43 cents/kWh, according to the US Energy Information Administration (EIA), Moody’s said. Approximately 59% of Prepa’s total rate is made up of the fuel component.
Moody’s view clashes with growing optimism among Prepa creditors and hedge funds considering an investment in the troubled government power utility that the lower oil prices could improve its situation.
This optimism was expressed in a recent column by investor Daniel Irvin, who argued that Prepa’s reliance on oil to produce power means that falling oil prices “disproportionately benefit Puerto Rico’s economy” and could accelerate its recovery.
“Lower oil prices could accelerate economic recovery and be a near-term catalyst for improving credit quality,” Irvin wrote.
Lower oil costs will bring down electricity bills, which should boost Prepa’s ability to collect on $1.75 billion in outstanding receivables, sources have told CARIBBEAN BUSINESS. In fact, lower oil prices are providing an incentive to investors to give Prepa more time to draw up a restructuring plan in the hope that its fiscal situation can improve and investors will take less of a hit in a restructuring of the utility’s more than $9 billion in debt.
Oil’s huge price slide is also prompting some investors to question the wisdom of the Prepa plan to convert its power generation from oil to natural gas to bring down electricity costs and comply with tough federal air pollution standards that kick in this year.
“Is natural gas really the best way to solve the problem. We don’t want [Prepa] to invest in big assets unnecessarily,” one source from Prepa’s group of investors told Reuters News Service.
Moody’s said it believes that the “fuel diversification plan and cost reduction strategy are key to Prepa’s long-term fiscal stability” and cited the historic volatility of oil prices. Federal and commonwealth regulatory authorities have also warned that Prepa must move forward with the plan to comply with new regulations or face stiff fines.
Moody’s did note that lower oil costs could “create room” for Prepa to increase its base rate and help its working capital position.
“Over the long term, however, lower fuel prices will provide benefits to everyone, including Prepa, if the decline helps spur economic growth on the island,” Moody’s said, quoting government officials who describe high electricity prices as “a brake on economic growth and the prospects for recovery.”
“With electricity bills high, the overall economy should benefit as power bills come down and free up disposable income, which could provide some stimulus to the economy. So far, economic indicators on the island still show a weak economy,” Moody’s added.
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