Life After Lisa
BY EVA LLORÉNS VÉLEZ & PHILIPE SCHOENE ROURA
The moment the Ricardo Rosselló administration made public that the Fiscal Agency & Financial Advisory Authority (FAFAA) and the government’s lead financial adviser Rothschild & Co. would lead negotiations with Puerto Rico Electric Power Authority (Prepa) bondholders, observers knew that AlixPartners was finished in its role leading the utility’s restructuring process.
That exit was put on a faster track than expected when a Feb. 1 letter of resignation signed by Prepa Chief Restructuring Officer (CRO) Lisa Donahue established that the firm she leads would not be submitting a contract extension proposal.
Now Prepa, according to a source, is expected to be run by a full-time CRO with the help of smaller consulting firms that will help out in the operations. The government is expected to try to obtain the maximum debt relief possible under Promesa, the Puerto Rico Oversight, Management & Economic Stability Act, after the utility was put under the financial oversight board’s watch. The utility must turn in a fiscal plan by Feb. 21.
While Prepa’s restructuring support agreement (RSA) is slated to expire on March 31, its future remains unclear because it appears the government may have violated its terms when it opted to replace the current professional board with one that at first glance may take back efforts to depoliticize the public utility.
Prior to the resignation, there was speculation that AlixPartners could have its contract extended beyond the Feb. 15 date as long as the RSA remained in place because all operational issues in the utility’s overhaul were under the purview of Alix.
That was not to be.
In December, Donahue approached the board about a contract extension. At least one member of the board, Carlos Gallisá, who represents consumers, objected as he believes payments to Donahue were excessive. At the time, a more professional governing board had taken over with experience in working for other boards in other corporations. “When I explained the background of this contract, they saw. They have a hunch for measuring results. They saw that the fees were too excessive for the amount of work done,” Gallisá said.
He added that Donahue submitted a plan about the work that needed to be completed, divided by areas. In some areas, the work was going to take eight months and in others six months. “There was an intention to keep on getting extensions,” he said.
While Gallisá contended that AlixPartners was having financial troubles and was using Prepa to get money, Caribbean Business found no evidence of the claim. CVC Capital Partners last year sold AlixPartners to an investor group led by the firm’s founder Jay Alix in a deal valued at more than $2.5 billion. The firm recently promoted at least 24 individuals to new positions.
FAFAA takes over
Days before the government announced it was taking over debt negotiations, a member of FAFAA attended one of the board meetings. “A couple of days after, FAFAA said it was taking over,” Gallisá said.
Although Donahue has been pilloried by critics who say the $47 million paid to Alix without closing the RSA was too high a price to pay, there are others inside the organization who believe the complex deal left on the table on the restructuring side and beginning the overhaul of the bankrupt utility are significant accomplishments.
“What we are facing at this point is the implementation of strategies in different areas of the operation in order to continue with the business plan assumptions, continue with the implementation of the IRP [integrated resource plan] and continue with the implementation of the transformation of the rate structure with the new orders from the energy commission,” said another source with knowledge of Prepa’s overhaul.
“AlixPartners brought a high value to that implementation because they led the entire restructuring. They had entire control over that process because all the advisers were under them.”
The level of control that Donahue wielded over the entire process raised concerns among some creditor groups that the deal left in place would be scuttled. In December 2015, the electric utility reached an agreement with insurance companies MBIA Inc. and Assured Guaranty, as well as bondholders to restructure its $9 billion debt, marking a first step to reduce financial obligations that have left the government contending with a mounting fiscal crisis.
Prepa’s obligations were cut by $800 million, with investors taking losses of about 15% by exchanging their bonds for new securities. The transaction was signed about a month later. Since then, the agreement has been extended several times. Prepa has been unable to do the bond exchange because one of the requirements entails getting an investment-grade credit rating, which is highly unlikely at this point.
The agreement also required the imposition of new rates and a transition rate to pay for the new bonds. Critics have charged that this has left Prepa’s customers, namely the residents and businesses of Puerto Rico, with carrying much of the RSA’s financial burdens.
Former Popular Democratic Party Sen. Ramón Luis Nieves, who worked on the energy reform bill that created the P.R. Energy Commission (PREC), which oversees Prepa, said most people have focused on the $47 million (not including 8% in expenses) that have been paid to Donahue and not on the fact that she helped consumers save $1.3 billion in total. “She is the only person who has achieved a debt restructuring with bondholders, saving $800 million,” he said.
Two sources with knowledge of Prepa’s transition on “life after Lisa” told Caribbean Business that there will be a full-time CRO at the utility and “they are thinking about running the utility with smaller individual consulting firms based on the needs. And FAFAA can take over the restructuring effort.”
“While negotiations will be handled between [Rothschild Managing Director Todd] Snyder and FAFAA, they take the lead—there are others who are already inside Prepa and will make certain that the reporting is up-to-date, ensuring the numbers are in place and ensuring the restructuring milestones from the Prepa end are on track and being completed. And making certain that FAFAA has all the added tools and bases of information and implementation of strategy to continue the negotiations,” said the second Prepa source. “Now with the transition, the people on the ground stay, the Prepa-side people remain unchanged.”
Another source close to the negotiations, however, alleged that the government is unhappy because the monolines have done little to accept concessions, whereas fuel lines have reduced payment interests and creditors accepted a 15% cut.
Also helping to grind out numbers are advisers Navigant Consulting and Concentric Energy Advisors. Navigant was involved in the preparation of the rate case tied to the transition charge.
Navigant’s Ralph Zarumba recently moved on to Concentric to handle rate issues. Both firms are now working as advisers to Prepa while Rooney, Rippie & Ratnaswamy is the legal adviser dealing with the energy commission.
What can we expect from Prepa over the next year?
The governor recently introduced a bill that would change the composition of Prepa’s board to add two members from the government and increase to three the number of consumer representatives.
A source close to the bondholders says some are not happy with the deal because it sets back Donahue’s efforts to depoliticize the entity and professionalize the board.
Prepa, on the other hand, must turn over its fiscal plan Feb. 21 so the financial oversight board can move on with the restructuring. While sources believe the Promesa board will make a push for further cuts in the debt, they also believe that most certainly, the board will use Promesa to bind all creditors to the deal.
“It is a bad idea. They have no fiduciary obligation,” said the source close to the bondholders.
Under Section 601 of Promesa, if a certain percentage of bondholders elect to participate in debt restructuring, the oversight board can require the remaining bondholders to participate as well. If that result occurs, the debt now considered Legacy Debt, which is the debt associated with the $314 million in debt service, would move out of Prepa’s fiscal-year 2017 revenue requirement and into Prepa’s Revitalization Corp. revenue requirement, to be recovered through the new transition charge, the 3¢ that will be charged to consumers as part of the securitization of the bonds.
Ratepayers would save money because all the debt, rather than only the debt belonging to the creditors participating in the RSA would be subject to the 85% recovery cap, the lower interest rate and the five-year principal holiday called for by the RSA. And to the extent the Promesa process causes existing RSA bondholders to accept additional limits on their recovery, ratepayers will also be better off.
Gallisá revealed that the new government may try to reduce the 3¢ transition charge that will be used to pay for securitization of bonds because that will bring rates to an average of 18¢ per kilowatt-hour.
PREC Chairman Agustín Carbó said the commission is helping Prepa with its fiscal plan and is trying to complete all tasks that have an impact on the rate case so the fiscal plan is not affected.
After PREC approved a revenue requirement for Prepa of $3.4 billion as part of the new rate structure, customers will see these new rates sometime in March or April 2017, because Prepa needs time to calculate the specific rates for each rate class and receive commission approval of those calculations. Because the rates are different from the current provisional rates, the difference will be reconciled on customer bills over the same number of months during which the provisional rates were in effect, starting when the permanent rates go into effect.
Prepa had to submit, no later than Feb. 15, a description of the permanent rate increase for each tariff code and the language it will include in each customer’s bill explaining the increase.
For fiscal 2018 (which begins July 1, 2017) there will be a special procedure to address any amendment to the approved revenue requirement necessary to reflect expected fiscal 2018 actions. This year, PREC will be conducting hearings on Prepa’s performance.
After having a difficult year convincing the energy commission to accept its integrated resource plan, a 20-year blueprint for its future operations, PREC finally issued a ruling rejecting a reconsideration.
Prepa, however, must also go through a separate process with PREC, which will determine whether or not to allow the Aguirre Offshore GasPort to go forward. The energy commission had imposed a $15 million cap on its expenditures but in its latest ruling, it agreed to do a separate procedure on the project, which is essential for Prepa to reduce energy rates.
While PREC is seeking a study from Prepa showing that the Aguirre gasport is the only economically viable alternative for the utility to reduce rates, Gallisá said the federal Energy Department is slated to guarantee financing for the $400 million project.
On the other hand, PREC reaffirmed that Prepa’s Integrated Resource Plan was incomplete and did not meet objectives to reduce costs, increase the use of renewable energy and ensure the system’s reliability.
According to a summary of the resolution, PREC rejected Prepa’s request that the commission rescind an order for Prepa to seek permitting for a large new combined-cycle unit at Aguirre powerplant and repower two units at the site.
While PREC also denied Prepa’s request for new generation at Palo Seco, it granted Prepa’s request for flexibility on the timing of the retirement of Palo Seco Units 1 and 2, Costa Sur units 3 and 4 and San Juan Units 7 and 8, and limited use designations of San Juan’s unit 9 and 10.
While the energy commission insists that Prepa should increase the use of renewables to generate electricity, a source told Caribbean Business that bondholders do not want more renewables because they affect Prepa revenues as they are competition.
“There is an interest in stopping renewables because demand for electricity has been going down,” the source said.
Prepa, however, is also slated to negotiate with Energy Answers a contract to buy electricity from the proposed waste-to-energy plant slated to be built in Arecibo.