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UTUADO, PUERTO RICO - OCTOBER 06: A car passes among dark homes as people
wait for electricity to be restored after Hurricane Maria passed through on
October 6, 2017 in Utuado, Puerto Rico. Puerto Rico experienced widespread
damage including most of the electrical, gas and water grid as well as
agriculture after Hurricane Maria, a category 4 hurricane, passed through.
(Photo by Joe Raedle/Getty Images)
Photo: Joe Raedle/Getty Images
There's a Shady Puerto Rico Contract You Didn't Hear About
Kate Aronoff
October 31 2017, 12:57 p.m.
National outrage has led to the cancellation of a suspicious $300 million
contract doled out to a tiny Montana company that was oddly tasked with
rebuilding large parts of Puerto Rico's electric grid. A separate $200
million contract has faced little scrutiny, but may ultimately be even more
scandalous for what it says about the effort to rebuild the island in the
aftermath of Hurricane Maria.
The deal was inked with a company called Cobra Acquisitions LLC, which
didn't even exist until this year. It's a subsidiary of an Oklahoma-based
fossil fuel company, suggesting that neither the Puerto Rican Electric Power
Authority nor the federal government has much interest in seizing the
opportunity presented by the storm to rebuild Puerto Rico in a sustainable
way that relies on renewable energy rather than imported oil.
Unlike the Whitefish contract, the Cobra deal with PREPA involved heavy
input from the Federal Emergency Management Agency, which - according to a
recent conference call convened by Mammoth Energy Services - was "in the
room" and there "every step of the way" as it was being meted out so as to
be in line with the agency's reimbursement requirements. (Neither FEMA nor
PREPA representatives have responded to The Intercept's multiple requests
for comment.)
"We expect this to be a credit to our corporate margin," an unidentified
Mammoth executive (likely Chief Financial Officer Mark Layton) said on the
conference call. "Quite honestly, we wouldn't have entered this contract if
we didn't think we'd get paid."
"The Cobra contract is less flashy and less obviously crazy," Cathy Kunkel,
an energy analyst at the Institute for Energy Economics and Financial
Analysis, told The Intercept. "But together with [the Whitefish contract]
shows the nexus of PREPA with oil and gas interests - the kind of companies
that are go-to companies for PREPA."
Mammoth, Cobra's parent firm, is primarily an oilfield services company,
with several smaller subsidiaries selling a range of support offerings to
fracking and other fossil fuel extraction operations. HBC Investments, one
of Whitefish's major financiers, owns several fossil fuel holdings. PREPA
itself, like most island energy systems, is also inordinately dependent on
imported oil, generating 47.4 percent of its power from that source alone.
PREPA is currently $9 billion in debt and gives more than $1 billion a year
to off-island oil and gas companies. Yet even as the utility's leadership
has acknowledged that its fiscal sustainability relies on a transition away
from oil, its plan has been to transition not to distributed renewables -
which are more resilient to storms - but to centralized natural gas. In
2010, Puerto Rico's legislature set out a plan to get a full 12 percent of
energy from renewables by 2015. As of 2015, just 3.3 percent of its power
was derived from clean energy. Nearly a third of the island's generating
capacity, meanwhile, came from natural gas, and PREPA's plan for 2035
includes the construction of a $400 million liquid natural gas import
terminal. Currently, all signs point to PREPA rebuilding its energy system
back to the pre-storm status quo - or worse.
There are reasons to be concerned about Cobra beyond its ties to the fossil
fuel industry, though. Cobra's creation is Mammoth's first foray into the
utility sector, the result, Mammoth CEO Arty Straehla said on the call, of
their expectation that it would produce a "stable cash flow" and the
"potential for significant growth," adding later that the utility business
is "less cyclical" and "less capital-intensive" than its other work. Earlier
in the year, he said, "we hired an experienced management team with an
average of 25 years of industry experience at much larger companies to begin
the process of entering the energy infrastructure business," officially
forming Cobra in the second quarter of 2017. Straehla said Cobra is
currently operating 58 fleets across the United States and employs 275
"highly trained professionals" as of October. They hope to have as many as
500 personnel in Puerto Rico in the near future.
Cobra, then, is an even younger firm than Whitefish, founded when Mammoth
acquired two small transmission and distribution companies for around $8
million total, at which point Mammoth "quickly deployed capital to expand,"
Straehla said on the call. According to Mammoth's most recent SEC filings,
one of those companies - the only one acquired before the filing date - is
Higher Power Electrical LLC, based in Plainview, Texas. According to the
Better Business Bureau, Higher Power had been operating for five years
before its acquisition by Mammoth and its owner's name is listed as Robert
Malcolm. On the conference call, Straehla noted that another firm that was
part of the acquisition was based on the East Coast.
Alongside FEMA, Mammoth negotiated a $15 million payment from PREPA upfront
and will be paid biweekly. The initial contract is for 120 days of work,
though Mammoth stated repeatedly on the conference call that they expect
that to be extended. "We hope," Straehla said, "this leads to additional
work in rebuilding the infrastructure after the emergency situation."
According to a presentation about its PREPA contract, Cobra-employed workers
will in the short-term be tasked with providing a "comprehensive damage
assessment of existing electrical grid", "engineering services to aid in the
design of a new electric utility grid to PREPA specifications,"
"construction services to rebuild the electric grid," as well as housing,
food, and water for all of its employees and contractors so as not to create
"an additional strain on the local population."
The stated expertise and experience may be a bit misleading. By phone,
Wilson clarified to The Intercept that it was four top managers of Cobra
that together hold an average of 25 years of experience in the utility
sector, though he was unable to provide more information as to those
executives' names, which companies or utilities they had worked for, or the
specific nature of their utility experience. While he and executives on the
call said Cobra had been involved in grid restoration work following
hurricanes Irma and Harvey, the company currently has no ongoing
storm-related contracts outside of Puerto Rico. Wilson and executives on the
call also each emphasized that Cobra has a history of working with private,
investor-owned utilities (Cobra's "main customers," according to Straehla),
but provided no details as to which IOUs Cobra has worked with.
Neither Wilson nor the call offered much detail on how the contract
originally came about, either. "Our leadership team went to Puerto Rico
proactively to meet the authorities there and offer our services and
expertise," Mammoth wrote in a statement shortly after the contract was
signed. "We did not have a previous relationship with the team at PREPA. We
flew around the island to examine the situation, presented our expertise in
storm response and utility infrastructure, including working in Texas and
Florida to respond to the recent hurricanes, and look forward to helping
Puerto Rico recover."
Beyond the specifics of either the Whitefish or Cobra Acquisitions contract
is a larger one about why PREPA entered into any agreements at all with
private contractors post-Maria. The standard procedure for near-term
disaster response is for utilities to enter into mutual aid agreements with
their counterparts in other states, facilitated by the American Public Power
Association. Puerto Rico is entitled to these type of agreements, and - with
the Whitefish contract severed - will now begin receiving such aid from
utilities in Florida and New York.
In all likelihood, Cobra Acquisitions' management probably has more
experience getting utilities back online than their counterparts at
Whitefish Energy. The issues surrounding its contract, though, reflect
broader problems plaguing PREPA: a startling lack of transparency, costly
mismanagement, and an abiding fondness for the fossil fuel industry - all
compounded by crippling debt and a catastrophic storm. The fiscal oversight
board and others on the island see the solution to these problems as
privatization. Late last week, that federally appointed body - now in charge
of the island's finances and government - cited PREPA's pursuance of the
Whitefish contract as rationale for wanting to install a Flint-style
emergency manager to oversee the utility, a move many expect will pave the
way for selling it off to the highest bidders.
If PREPA's brushes with private industry thus far have been any indication,
privatization will be anything but a solution to the utility's problems.
