Tuesday, November 21, 2017

Fiscal board requests may hinder Prepa compliance with restructuring agreement

By on April 30, 2017

The fiscal board held its seventh meeting on Apr. 28, 2017 in New York City, where it evaluated fiscal plans from several public agencies. (CB Photo)

The fiscal board held its seventh meeting on Apr. 28, 2017 in New York, where it evaluated the fiscal plans of several public agencies. (Screenshot of live stream)

SAN JUAN – The Financial Oversight and Management Board’s directive that the Puerto Rico Electric Power Authority (Prepa) develop a plan within 45 days to enable it to provide service to customers at an average, all-in-rate, of 21 cents per kilowatt-hour (kWh) by 2023, may hinder the public utility’s ability to comply with the terms of its restructuring support agreement (RSA).

“To deliver power at the target rate, Prepa will need to substantially lower the cost of generating power (fuel costs) and improve the distribution grid through unimpeded public/private partnerships agreements and/or fully privatizing energy generation subject to regulated utility standards,” the oversight board noted, adding that the target rate may need to be adjusted to reflect projections of demand, inflation, fuel prices and other external factors included in its fiscal plan.

The new RSA, signed last week, provides for a consensual debt restructuring process under Title VI of Promesa, within a schedule to complete the transactions established by the agreement on or before Sept. 30. Under Title VI, Prepa will also be able to bind all of its creditors to the RSA, which was negotiated with only 70% of the creditors. The RSA also extends the maturity of certain relending bonds purchased in 2016 and calls for creditors to agree to purchase certain relending bonds in the amount of $447 million that may be issued in July. The deal calls for a proposed securitization or exchange of bonds that will be guaranteed by a 3-cent transition charge and adjustment mechanism that will be passed on to consumers.

Establishing a target rate, as the oversight board has proposed, may be in violation of the RSA. The agreement says the rate, which is determined by Prepa’s regulator, the Puerto Rico Energy Commission (PREC), must be sufficient to cover the utility’s operating cost, debt service and maintenance. A source within Prepa said the target rate appears to be a cap that could limit revenue.

“This will definitely have an impact,” noted Carlos Gallisá, who is one of three consumer representatives on Prepa’s Board. He and other sources also said that no studies show privatizing power generation will make it cheaper for customers.

The target rate will not impact consumers, who are paying less than 21 cents for the time being, Gallisá said. As of December, Puerto Rico’s residential electric rate has been 19.79 cents per kWh. Commercial and industrial electric rates in Puerto Rico were 21.45 cents per kWh and 17.91 cents per kWh, respectively.

In January, Prepa approved a hike of about 1 cent per kWh, reducing a temporary tariff implemented the previous year by 20%. The change went into effect in March. These rates are slated to go up later this year when a transition charge and adjustment mechanism of 3 cents per kWh go into effect to pay for a new securitization of Prepa bonds.

The oversight board also amended the fiscal plan to include a requirement to initiate a 60-day process to establish a mechanism for rate approval with the PREC, reflecting the formula rate mechanism (FRM) and rate structures to be determined necessary to meet the target rate, which will need to be consistent with the annual Prepa budgets to be certified by the fiscal board.

While the government said the new RSA also incorporates the “additional estimated savings” of $2.2 billion in Prepa debt service from 2018 to 2022, the deal to restructure the utility’s $8.2 billion debt, brokered by the Puerto Rico Rico Fiscal Agency and Financial Advisory Authority (FAFAA), keeps the 15% debt cut and five-year payment deferral that had been negotiated in the past by AlixPartners.

Gallisá questioned the veracity of the alleged savings. “That is false…. They did the same thing that Donahue did,” he said, referring to former Prepa Chief Restructuring Officer Lisa Donahue, who negotiated with AlixPartners in the past with the utility’s creditors.

Between 2014 and 2015, hedge funds bought Prepa bonds at discount rates of 65%. “The RSA offers some of these bondholders the possibility of swapping their old bonds, some of which were bought for 50 cents on the dollar, for new bonds worth 85 cents on the dollar. They are going to make money,” Gallisá said.

The oversight board also said the fiscal plan had to be amended to establish a path to carrying out needed capital improvements quickly, including a financing strategy for a capital expenditures plan that transitions the generation mix to lower-cost power sources.

It also has to contain plans to implement public-private partnerships or full privatization for energy generation; finance grid improvements;  improve operational efficiency and procurement practices; lower pension costs; and reduce contract spending as well as other costs.

The panel also said the plan must include a detailed elimination of the contribution in lieu of taxes (CILT) to 0% within the next three to five years beyond the 15% reduction included in the plan and a review of assets that could be monetized, “either in the context of public private partnerships or otherwise to fund necessary capital improvements.”

It also amended the plan to include a requirement to provide it confirmation that the composition of the electric utility’s board will be in compliance with the requirement that at least two-thirds of its members meet the qualifications of independence and expertise in energy matters.

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