Implementation of Prepa fiscal plan faces numerous challenges
SAN JUAN – While the draft of the fiscal plan of the Puerto Rico Electric Power Authority, which had to be submitted to the Fiscal Oversight & Management Board Tuesday, contemplates using Title VI to implement the restructuring support agreement (RSA) for its $9 billion debt to bind all creditors, the utility’s transformation is still contingent on numerous risks and assumptions.
One of these is the implementation of the new rate structure program, which assumes Prepa will be able to carry out a bond exchange over the summer and that Prepa’s Revitalization Corporation starts collecting the transition charge to pay for the securitization in September.
According to a rate projections graph within the fiscal plan, the utility rate by 2018, including the transition charge and formula rate mechanism, will be 22 cents per kilowatt-hour (kWh); 23.8 cents per kWh by 2019; 25.8 per kWh by 2020; and 26.3 per kWh by 2021. After that, the graph shows that rates may come down.
The Puerto Rico Energy Commission has ordered full rate cases every three years, with updates during the interim years based on submitted fiscal year budgets. An abbreviated process to address any amendments to the proposed fiscal year 2017 revenue requirement is slated for 2018.
According to the fiscal plan, the utility’s transformation also entails the successful completion of all validation proceedings related to the securitization or bond exchange authorized by the Prepa Revitalization Act. The plan says there were seven lawsuits against the utility that include four Revitalization Act challenges and three bond resolution challenges.
Prepa has obtained a favorable ruling in the validity of the Revitalization Act and the restructuring order in a lawsuit filed by the Irrigation & Electrical Workers Union (Utier by its Spanish acronym) and expects more favorable rulings as other cases have been dismissed or denied.
“Accordingly, due to these recent developments, we are no longer seeking the Oversight Board’s intervention in the Validation Proceedings, which was previously suggested as a vehicle to consolidate and expedite the pace of the Validation Proceedings,” the fiscal plan reads.
The utility also expects the consummation of debt restructuring consistent with the existing RSA through Title VI of Promesa or another mutually agreeable mechanism to bind all creditors. To that effect, utility officials are also revising terms with creditors that could help reach more than $795 million more in savings to the RSA. The original deal cuts the debt by 15%.
However, the utility has not dismissed other mechanisms through Promesa. These include using Title III of Promesa to adjust financial debt consistent with the RSA, but also adjusting other obligations. Only certain specified claims would be impaired.
Another scenario involves using Title III to adjust financial debt and other obligations, which may seek to adjust financial debt differently than as contemplated by the RSA. Another scenario calls for the use of Title VI to effect the debt exchanges and securitization contemplated by the RSA and Title III to adjust non-financial obligations
The implementation of the fiscal plan also entails the transformation of the current pension system to a more “stable and efficient” benefit plan through either legislation or consensual agreement with its unions, non-unionized employees and retired employees. Prepa’s retirement system is significantly underfunded, by as much as $2.2 billion with annual funding requirements at approximately $164 million.
The public corporation has an outstanding debt of $62 million with the Retirement Systems, resulting from a contribution shortfall in previous fiscal years, the plan says. Its defined benefits plan contemplates negotiating with unions or through legislation.
Prepa’s transformation is also subject to the execution of a financing deal that is pending further negotiation with the Department of Energy for $413 million in connection with the construction of the Aguirre Offshore GasPort project. The Energy Commission, however, has ordered Prepa to conduct a study of other financial alternatives. The commission plans to analyze the project in a separate process.