Bondholders say Puerto Rico utility overstates extent of hurricane damage
SAN JUAN – The Ad Hoc Group of Puerto Rico Electric Power Authority (Prepa) Bondholders and fuel-line lenders joined the utility’s governing board, its trustee, and the Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) in opposing the appointment of a chief transformation officer (CTO) to oversee the public corporation.
The groups argued that the federal Promesa law does not grant the island’s Financial Oversight and Management Board the authority to take control over the management of the electric utility through a CTO.
For its part, citing a history of mismanagement, the Puerto Rico Institute for Competitiveness and Sustainable Economy (ICSE by its Spanish initials) supported the fiscal board’s appointment of Noel Zamot as CTO.
The Puerto Rico Energy Commission (PREC), meanwhile, had no position on the controversy, and asked the court to order the fiscal board to work with the commission, which is Prepa’s regulator, on protocols that “preserve compatibilities” and avoid conflict.
On Oct. 26, the fiscal board presented a motion to appoint Noel Zamot as Prepa’s CTO with the intention of improving the utility’s slow response in restoring power in the aftermath of Hurricane María and what critics have called “incomprehensible” decision-making. The utility, for instance, granted an up to $300 million contract to Whitefish Energy, a Montana firm with reportedly two employees at the time it was hired and with a limited track record. The government opposes the board’s decision.
In a motion, the Ad Hoc Group said it was “clear” that after six weeks, Prepa was not capable of promptly restoring energy and that preparations ahead of the hurricane were inadequate. Well before Maria, the group and other creditors sought to have a receiver appointed for Prepa, which was denied by a judge.
“The Oversight Board now publicly recognizes the need to install someone with receiver-like powers to oversee PREPA’s operations. However laudable the Oversight Board’s motives may appear, it has chosen an improper means to pursue this goal,” the bondholders said, adding that Promesa does not allow for the appointment of a CTO.
“The Oversight Board has also chosen the wrong person for the role. While accomplished, Mr. Zamot has no electric utility experience, which must be a key prerequisite for anyone overseeing the operations of the nation’s largest publicly owned utility,” the bondholders said.
Not that bad
The Prepa creditors added that the public corporation exaggerates when it says the grid’s restoration will take months to fix as a result of the hurricane. The Ad Hoc Group noted that the remarks are just an excuse to justify the slow pace of power restoration. The utility says it is generating nearly 40% of it capacity 45 days after the hurricane hit.
While the group said there is no question María did extensive, widespread damage to Puerto Rico, “it is now clear that the vast majority of the assets of the PREPA system weathered the hurricane well and remain substantially intact, such that the electric system could expeditiously be restored to pre-hurricane conditions with industry standard and responsible efforts.”
The Ad Hoc Group sent a team of energy industry specialists to Puerto Rico in the weeks following the storm to conduct an assessment.
“Preliminary analysis of the data indicates that the generation units that were operational prior to Hurricane Maria are still operational, that 95% of transmission structures are intact, and that the vast majority of the distribution system is in serviceable condition,” the group said.
While the damaged sections of the transmission and distribution systems will require a significant amount of effort to repair, “there is no truth to hyperbolic assertions that the electric grid has been ‘flattened’ or ‘destroyed’ as Prepa claims,” the Ad Hoc Group added.
The creditors told the court that instead of appointing a CTO, it should order Prepa to post all of its contracts and keep Zamot apprised of its restoration efforts. Prepa’s bond trustee, U.S. Bank Trust National Association, joined the Ad Hoc Group’s motion.
In its motion, Prepa’s governing board, which had approved a resolution opposing the CTO, noted that under local law, it is in charge of leading the strategic management of the utility’s operations, including appointing the executive director, and creating and defining the officer roles. The governing board, which was appointed earlier this year, noted that Prepa’s transformation does not require the appointment of a CTO.
“The Governing Board of Prepa takes its duties and responsibilities to the people of Puerto Rico seriously and believes that the relief requested by the Oversight Board would only delay the critical restoration and recovery efforts. The members of the Governing Board do not believe that the ultimate transformation of Prepa requires the appointment of Mr. Zamot as CTO.
“The Governing Board intends to be actively involved in the transformation process working with Prepa management. The members of the Governing Board bring substantial and relevant experience to Prepa’s operations and transformation, including experience leading complex organizations through business and operational changes, the modernization and transformation of utilities; and the identification and deployment of cutting edge energy technologies, renewables and other energy solutions,” Prepa board members said.
By appointing a CTO, “the Oversight Board is seeking authority that is directly and expressly prohibited by Section 303 of PROMESA,” which provides that Title III “does not limit or impair the power of a covered territory to control, by legislation or otherwise, the territory or any territorial instrumentality thereof in the exercise of the political or governmental powers of the territory or territorial instrumentality, including expenditures for such exercise,” the utility board added.
Meanwhile, Scotiabank of Puerto Rico, the administrative agent for fuel-line lenders, and owed about $550 million by Prepa, also noted Promesa does not permit the fiscal board’s move.
“Under the statute, the Oversight Board is intended to perform an oversight function, which is important in itself but different from a management role. To be clear, the Fuel Line Lenders would not object to the engagement of a CTO to help the Oversight Board in effectuating its statutory mandate.
“In particular, if the Oversight Board wishes to engage a CTO for a limited time to aid in supervising the hurricane-recovery effort, the Board’s decision should be respected. But the relief sought by the CTO Motion goes much further: It would allow the Oversight Board to replace and supplant the management of PREPA for all purposes,” Scotiabank said.
Promesa’s Title II describes the responsibilities of the fiscal board, which are to approve fiscal plans and budgets, monitor a debtor’s compliance with such fiscal plans and budgets, analyze a debtor’s pension liabilities, make recommendations on financial stability and management to the governor or the legislature, and intervene in litigation against debtors. Finally, the law also provides the board with the power to file petitions under Promesa, propose adjustment plans and employ professionals.
While the fiscal board invokes a court decision denying Prepa creditors a relief from the stay to appoint a receiver because it would “interfere with its duties,” the decision does not suggest the fiscal board, as trustee, can displace the management of the utility, Scotiabank said.
On behalf of Gov. Ricardo Rosselló, Aafaf said Promesa explicitly reserves Puerto Rico’s constitutional, political and governmental powers to its elected officials.
The government’s financial advisory entity also believes the fiscal board has not explained how the appointment of a CTO would help Prepa or the island recover quicker. Accepting the board’s assertions that it has authority to appoint a CTO to serve a trustee-like function, implies that Prepa or any Puerto Rico entity must surrender its governmental and political powers to the board.
“This is not how Title III works. Promesa gives the Oversight Board powers, but it protects, rather than eviscerates, the separate political and governmental identity of a debtor,” Aafaf said.
For its part, the PREC stressed the importance of its regulatory role and listed the orders it has issued to Prepa, including the rate increase, and said there has to be an order to prevent any conflicts between the fiscal board and its work.
The ICSE supported the board’s request for a CTO. It said proceedings before the energy commission, the fiscal board’s filing of bankruptcy proceedings and what has become public after hurricanes Irma and María regarding the energy infrastructure’s collapse and the controversy over the Whitefish contract are all evidence of the need for a CTO.
National Public Finance, Assured Guaranty and Syncora Guaranty joined in a motion to ask the court to authorize Zamot as an emergency manager to oversee the repair of the island’s grid for a period of 120 days.
“The Court should appoint Mr. Zamot to oversee PREPA on an interim basis, and vest him with the necessary authority permitted by PROMESA—the authority to review and approve contracts, and to coordinate the distribution of federal emergency relief funds all in an open and transparent manner to creditors, and subject to Court review as may be necessary,” they said, adding that Promesa does not provide the fiscal board the powers it seeks. They noted that appointing a receiver should be a long-term remedy.
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