PREPA’s debt deal requires keeping contracts with private operators

The Financial Oversight and Management Board

By The Star Staff

The latest debt adjustment plan for the bankrupt Puerto Rico Electric Power Authority (PREPA), which reduces its $10 billion in claims by 80%, will require the utility to keep its contracts with its private operators.

While Gov. Jenniffer González Colón had promised before taking office in January that she would cancel the contracts with LUMA Energy, the private operator of PREPA’s transmission and distribution system, and with Genera PR, the operator of PREPA’s legacy power plants, the plan notes that PREPA as required by the Fiscal Plan and applicable law will “maintain operation and maintenance contracts with private operators for PREPA’s generation assets; and maintain operation and maintenance contracts with private operators for the transmission and distribution system; provided, that such contracts will not adversely impact the tax exemption” on its bonds.

An immediate response from La Fortaleza as to what steps it will take could not be obtained.

The Financial Oversight and Management Board filed the amended plan of adjustment, the fifth since the case began in 2017, last week. The plan will reduce PREPA’s debt by almost 80%, to $2.6 billion in cash or bonds, excluding pension liabilities. The latest plan includes the creation of a “Rate Reduction Fund” to support PREPA’s pensions; the elimination of the legacy charge to repay the significantly reduced debt in previous versions of the plan; and the removal of contingent value instruments. Instead, consenting creditors will share excess payment capacity resulting from litigation with non-settling bondholders.

The oversight board said it is still mediating with creditors through the U.S. District Court’s mediation process to identify funding sources for potential cash or bond recovery for creditors, as proposed in the plan.

“The new PREPA Fiscal Plan clearly shows the Puerto Rico energy system is more costly to keep running than previously projected,” said Robert F. Mujica Jr., the executive director of the oversight board. “Due to the significant resources needed to make the energy system reliable and sustainable, PREPA will not impose additional rate increases for debt service beyond the rates necessary to cover the energy system’s operating costs.”

As a result of the oversight board’s determination that PREPA is incapable of charging increased rates to customers to sustain all expenses and debt service without unaffordable rates, the plan will be supported by contributions from alternative funding sources or “Cash From Non-PREPA Sources,” which will be described in greater detail in a plan supplement to be submitted at a later date.

The document outlines the issuance of two series of new bonds -- Series A Bonds and Series B Bonds -- by the reorganized PREPA on the effective date of the plan. The Series A Bonds will have a principal amount of $650 million and will mature in eight years from the effective date. The interest rate for Series A Bonds is 6% per annum, payable semi-annually in cash. The bonds will be issued on the effective date, but interest will accrue from the deemed issuance date of Dec. 1, 2022.

The Series B Bonds will be issued with a principal amount of up to $1.8 billion and will consist of two maturities: Series B-1 Bonds and Series B-2 Bonds. Series B-1 Bonds will have a principal amount of about $323 million and mature in 11 years from the effective date. Series B-2 Bonds will have a principal amount of up to $1.5 billion and mature in 35 years from the effective date. Both bonds will bear federally tax-exempt interest at a rate of 6% to 7.125% per annum.

The plan divides the creditors into classes and explains how each will be paid. For instance, the fuel line lenders, which have a debt of $700 million, will receive up to the full amount of their allowed claim. The payment will consist of Series A Bonds or cash, as determined by the oversight board, with a face amount equal to 84% of the holder’s allowed fuel line loan claim. They will also get a cash amount equal to the holder’s share of the Series B Bond contingent excess creditor amount. These lenders will recover about 84% of their investment.