Friday, July 20, 2018

Judge to hear testimony on Puerto Rico power utility’s need of emergency loan

By on February 14, 2018

SAN JUAN – U.S. District Court Judge Laura Taylor Swain will preside a hearing Thursday in New York to determine whether she will allow the Puerto Rico Electric Power Authority (Prepa) a $1.3 billion line of credit from the commonwealth to be able to keep the lights on.

Prepa’s cash position on Feb. 16 will be very low, and during the week ending Feb. 23, its cash position will be such that it will find it difficult to sustain operations, one of the utility’s hired experts said. In order to extend its cash, the public utility said it will operate the grid without “customary redundancies,” thereby making it more vulnerable to outages and service issues.

The Financial Oversight and Management Board is expected to present Todd W. Filsinger, Gerardo Portela, Dustin Mondell, and if necessary, Andrew Wolfe as witnesses. The judge gave each about an hour to testify and be cross-examined.

Testifying against the loan will be Stephen J. Spencer, who has previously made court statements in support of the Ad Hoc Group of Prepa Bondholders. There will be time to hear other witnesses whose names were not listed in the court document.

Judge sets final hearing on $1.3 billion Puerto Rico power utility loan for Feb. 15 

The hearing is slated to include opening and closing arguments. Martin J. Bienenstock and Kevin D. Finger will deliver the closing arguments on behalf of the commonwealth government. The objecting parties will identify counsel who will present their respective closing arguments.

Filsinger, who was hired by Prepa’s board as energy and restructuring expert, is slated to testify about the utility’s budget. He will also say he identified and quantified additional sources of funding for Prepa. The first are Prepa insurance claims for damage caused by Hurricane Maria. The second potential source of funding relates to additional Federal Emergency Management Agency (FEMA) reimbursements, of which there are four possible.

One concerns payments made to XGL for services provided in Prepa’s grid-restoration process, for about $20 million. The utility and XGL are embroiled in a dispute over the payment, and XGL is holding Prepa property. FEMA has said it will not consider reimbursing Prepa unless the dispute is resolved.

Other potential reimbursements from FEMA relate to fuel purchases, $48 million in employee overtime and a $25 million deductible on Prepa’s property and casualty insurance policy.

Another potential funding source is related to collections from public corporations, which owe Prepa $233 million, of which $169 million are overdue.

“In my experience, receivables aged over 120 days are extremely difficult to collect. In addition, I understand that many of the public corporations dispute a significant percentage of invoices which form the basis of the receivables. I also understand that many public corporations (like Prepa) are experiencing critical liquidity problems which preclude their ability to pay current debts, much less significantly aged debts,” Filsinger said in a statement.

Another potential source of money relates to possible prepayments by large, primarily industrial, customers. Prepa has already begun talks to explore the accelerated payments.

The economist Andrew Wolfe, one of the former International Monetary Fund officials who co-authored a Puerto Rico macroeconomic report, dubbed the Krueger report, with Anne Krueger, is slated to testify that if Prepa were to cease operating Puerto Rico’s electrical grid for any period of time, the potential consequences to the island’s economy would be substantial and potentially irreversible.

“It is my opinion that the cessation of PREPA’s operations for any material period of time would lead to further outmigration beyond that which was already created by hurricanes Irma and Maria, and that this further outmigration would result in additional reduction of (a) PREPA’s customer base and (b) Government of Puerto Rico taxpayers,” he said in a statement to the court.

Mondell, who works with Rothschild Inc., which advises the commonwealth regarding its debt, is slated to testify on marketing efforts to obtain alternative financing. He is expected to say that the terms from prospective lenders are not as favorable as those provided through the commonwealth’s financing proposal.

Bondholder group allowed to intervene in Feb. 15 hearing to evaluate $1.3B loan to Puerto Rico power utility

He may also dismiss assertions that Prepa can increase its short-term liquidity by making withdrawals from amounts it has on deposit at the Government Development Bank (GDB) because the institution is an insolvent public instrumentality in the process of winding down operations and resolving creditor claims through the recently enacted GDB Debt Restructuring Act.

GDB’s creditors, which include Prepa, are collectively owed more than $7.3 billion. This includes more than $3.5 billion in deposits almost entirely from public entities such as municipalities, public corporations and other government entities, and more than $3.7 billion in publicly held debt. As of Dec. 31, 2017, however, GDB’s unrestricted cash was less than 5 percent of the $7.3 billion in competing claims.

Portela, the executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, is slated to testify that while the federal government provided emergency funds for recovery expenses, Prepa’s revenue continues to deteriorate and the federal government refuses to lend directly to the public corporation.

Since the U.S. government had not provided a loan, the commonwealth government said it believes it must take steps to provide the energy utility with an emergency loan that can ensure its continued operation.

As stated in a Jan. 9 letter, although Prepa applied for a loan to cover operating expenditures, “the current posture of the Federal Government is to disburse CDL [Community Disaster Loans] Program financing directly to the Commonwealth, which could then sub-lend to its various entities,” Portela wrote.

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