Puerto Rico Aqueduct and Sewer Authority (PRASA)

Debtwire Municipals: Special Report on Puerto Rico Aqueduct and Sewer
Authority (PRASA)
Source: http://www.acueductospr.com
Informe especial sobre la Autoridad de Acueductos y Alcantarillados
Source: https://www.acueductospr.com/INVESTORS/index.htm
Authored by
Suneet Chandvani
Head of Research
suneet.chandvani@debtwire.com
Contributors
Ellie Ismailidou
Maryellen Tighe
Paul Greaves
Seth Brumby
Simone Baribeau
Reporter
Reporter
Managing Editor
Deputy Editor
Reporter
ellie.ismailidou@debtwire.com
maryellen.tighe@debtwire.com
paul.greaves@debtwire.com
seth.brumby@debtwire.com
simone.baribeau@debtwire.com
Puerto Rico Aqueduct and Sewer Authority (PRASA) Special Report
Executive Summary:
The Puerto Rico Aqueduct and Sewer Authority (PRASA) is a straightforward enterprise. It cleans and delivers potable water
while receiving and treating wastewater. It maintains the infrastructure necessary for those tasks by charging rates to its
customers. But it does not operate in a vacuum, so it’s important to consider its relationships with other government entities
in order to gain a more holistic picture of its credit quality.
One of the most important relationships PRASA has is with the Puerto Rico Electric Power Authority (PREPA), which provides
PRASA with electricity at below market rates. This preferential rate helps stem PRASA’s cash burn, but it will cost PREPA USD
42m annually until FY16, then roughly USD 80m per year from FY17 onward. With PREPA trying to piece together its own
restructuring, a preferential rate for PRASA could become a sticking point.
Removing a subsidy with legislation is not unheard of. PRASA recently lost a portion of its revenue in the form of an
appropriation that the commonwealth provided. The loss of the appropriation has exacerbated PRASA’s cash burn, and it’s
this cash burn that is at the core of PRASA’s troubles.
A significant contributor to the cash burn is leakage – or “non revenue water”. Almost 60% of PRASA’s water production is
lost. The average leakage rates among water utilities in the contiguous US are closer to 16%. Optimizing collections, reducing
leakage and stopping water theft will go a long way toward boosting revenue. Unfortunately, water loss isn’t the only thing
burning through PRASA’s income statement.
Last year, PRASA recognized that it needed to boost revenue if it was to continue operating while upgrading the sewer and
aqueduct system. So it raised water rates 68%, which is approximately 60% above the national average. This will no doubt
reduce the size of its cash burn, but it doesn’t generate enough cash for capital expenditures.
PRASA has approximately USD 1.4bn in capital expenditures over the next five years. This includes USD 405m for projects
mandated by Environmental Protection Agency consent decrees. PRASA will need to access the debt markets. This won’t be
easy: PRASA is junk rated with a negative outlook and its senior bonds are trading at distressed levels.
Future debt issuance and how PRASA pays for it are abstractions. What’s not abstract is PRASA’s dwindling cash. Raising rates
will help, but it’s no panacea. PREPA also has independent rate setting ability and it still entered restructuring negotiations
with its creditors.
For PRASA to continue servicing its existing debt, it will need to set its own rates well above the national average, plus
maintain the preferential electricity rate it receives from PREPA. At this point in Puerto Rico’s restructuring, one corporation’s
gain is another’s loss.
1|Page
Puerto Rico Aqueduct and Sewer Authority (PRASA) Special Report
This represents a snapshot of our recently completed special report on the Puerto Rico Aqueduct and Sewer Authority
(PRASA). The full report has detailed analysis of all the sections listed below and is available to Debtwire Municipals
trialists and subscribers only. This shorter version only gives a glimpse of one of the below sections - Liquidity.
For further information, please go to www.debtwire.com or call (212) 500-1384.
Contents:
Description
Strengths and weaknesses
General economic stress
Sources of stress
NRW reduction and revenue optimization program
Profitability
Liquidity
The PREPA twist: Act 50 and electricity cost savings
Additional debt to be issued and impact of that on existing bonds
The rate-setting ability
Capital structure
Flow of funds
Debt coverage calculations, as per 2012 Amended and Restated Master Agreement of Trust
Recovery Act and Chapter 9 bankruptcy options
Appendix:
Income statement: summary of revenues, expenses, and changes in net position
Growth rate, actual and projections
Scenario analysis for PRASA's senior bonds
Sequence of refinancing
Disclaimer
1|Page
Puerto Rico Aqueduct and Sewer Authority (PRASA) Special Report
Liquidity:
As previously mentioned, PRASA operates at a high net
leverage. PRASA’s total debt has grown by a 9.1% CAGR
Figure 12: Unrestricted and Restricted Cash and Cash
Equivalents (in USD thousands)
1,000,000
855,702
from FY09 through FY13, while revenues during the same
period have grown by a 0.3% CAGR. High leverage (resulting
417,814
500,000
in high debt service) along with high capital expenditures has
182,357
185,425
209,852
resulted in negative FCF (Figures 13 and 14). PRASA has
2,183
12,713
62,630
62,060
101,680
0
been burning cash (negative FCF) for the last five years at an
2009
2010
2011
2012
Unrestricted Cash and cash equivalents
Restricted cash and cash equivalents
average rate of USD 380m per year. With EBIDA declining in
2013
FY13 due to a cut in commonwealth appropriations, cash
burn increased significantly to USD 500m. This has put
considerable stress on the Authority’s cash position, despite
500,000
an infusion of USD 645m in cash by issuing bonds in FY12
400,000
(issuances of Series 2012 A and B revenue bonds and Series
300,000
HH rural development bonds). As of FY13, PRASA’s cash
200,000
position stood at USD 519m (unrestricted and restricted
100,000
cash and cash equivalents, Figure 12) as compared to USD
Figure 13: EBIDA, Debt Service and Capital expenditure
489,740
(in USD thousands)
322,914
151,174
82,744 161,454
91,808
93,437
79,953
2009
EBITDA
As modeled, the cash burn could decline significantly (more
106,992
36,823
2010
Debt service
2011
2012
Capital expenditures
2013
0
0%
2009
reduced preferential electricity rates provided by PREPA.
2010
2011
2012
2013
-20%
-200,000
the reduced cash burn due to increase in water rates and
(274,370)
-36%
-400,000
PRASA could run into liquidity problems as early as FY15.
Raising additional debt and impact of that on existing bonds is
204,984
166,656
Figure 14: Free Cash Flow (in USD thousands)
than 50%) in FY14, due to 68% increase in water rates and
reduced electricity rates, without raising any additional debt,
364,417
353,651
-
918m for FY12.
However, the Authority may still not be FCF positive. Even with
350,819
-600,000
-40%
(298,674)
-36%
(349,885)
-42%
(469,156)
-61%
-60%
(499,763)
-65%
-80%
FCF after paying DS and capex, and after receiving grants
% of total revenues
discussed in detail further in the report.
PRASA has decent short-term liquidity with approximately 45 days cash on hand and about 181 days including lines of credit.
Lines of credit with the GDB (as of FY13)
Total
Outstanding as of 30 June 2013
Available
To provide funding for CIP
For cash flow needs during transition period after amending MAT
70.0
150.0
17.5
72.3
52.5
77.7
For financing the operating reserve
180.0
0.0
180.0
Total lines of credit
400.0
89.8
310.2
14 | P a g e
Puerto Rico Aqueduct and Sewer Authority (PRASA) Special Report
The full report is available to Debtwire Municipal trial-members and subscribers only.
For further inquiries please go to www.Debtwire.com or call +1 212-500-1384.
3|Page
Puerto Rico Aqueduct and Sewer Authority (PRASA) Special Report
Disclaimer:
We have obtained the information provided in this report in good faith from publicly available data which we consider to be
reliable. This information is not intended to provide tax, legal or investment advice. You should seek independent tax, legal
and/or investment advice before acting on information obtained from this report. We shall not be liable for any mistakes,
errors, inaccuracies or omissions in, or incompleteness of, any information contained in this report, and not for any delays in
updating the information. We make no representations or warranties in regard to the contents of and materials provided on
this report and exclude all representations, conditions, and warranties, express or implied arising by operation of law or
otherwise, to the fullest extent permitted by law. We shall not be liable under any circumstances for any trading, investment,
or other losses which may be incurred as a result of use of or reliance on information provided by this report. All such liability
is excluded to the fullest extent permitted by law. Any opinions expressed herein are statements of our judgment at the date
of publication and are subject to change without notice. Reproduction without written permission is prohibited. For additional
information call Debtwire at +1 (212) 686-5277.
31 | P a g e
Puerto Rico Aqueduct and Sewer Authority (PRASA) Special Report
Puerto Rico Aqueduct and Sewer Authority (PRASA) Special Report
Informe especial sobre la Autoridad de Acueductos y Alcantarillados
Authored by
Suneet Chandvani
Head of Research
suneet.chandvani@debtwire.com
Contributors
Ellie Ismailidou
Maryellen Tighe
Paul Greaves
Seth Brumby
Simone Baribeau
Reporter
Reporter
Managing Editor
Deputy Editor
Reporter
ellie.ismailidou@debtwire.com
maryellen.tighe@debtwire.com
paul.greaves@debtwire.com
seth.brumby@debtwire.com
simone.baribeau@debtwire.com
Disclaimer
We have obtained the information provided in this report in good faith from publicly available data which we consider to be reliable. This information is not
intended to provide tax, legal or investment advice. You should seek independent tax, legal and/or investment advice before acting on information obtained
from this report. We shall not be liable for any mistakes, errors, inaccuracies or omissions in, or incompleteness of, any information contained in this report,
and not for any delays in updating the information. We make no representations or warranties in regard to the contents of and materials provided on this
report and exclude all representations, conditions, and warranties, express or implied arising by operation of law or otherwise, to the fullest extent permitted
by law. We shall not be liable under any circumstances for any trading, investment, or other losses which may be incurred as a result of use of or reliance on
information provided by this report. All such liability is excluded to the fullest extent permitted by law. Any opinions expressed herein are statements of our
judgment at the date of publication and are subject to change without notice. Reproduction without written permission is prohibited. For additional
information call Debtwire at +1 (212) 686-5277.
32 | P a g e