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Prepa’s Restructuring Faces Tough Sledding Ahead

By on February 26, 2016

The enactment of the Puerto Rico Electric Power Authority (Prepa) Revitalization Act is just the beginning of the restructuring of the utility’s $9 billion debt since the “fragile” process still has to comply with several important steps before becoming reality.

The new law calls for the creation of the Prepa Revitalization Corp., which will be separate from the power utility, and would be in charge of issuing restructuring bonds, through a process known as securitization, which will be exchanged for current Prepa bonds.

“This is just starting. We have a long process ahead of us,” a source within Prepa said.

The initial issuance of Restructuring Bonds must receive an investment-grade rating from any rating agency that rates the Restructuring Bonds. Prepa must diligently pursue ratings from Moody’s and Standard & Poor’s, according to the Restructuring Support Agreement (RSA) enabled by the new law.

Before any future issuance of the Restructuring Bonds or incurrence of any other debt, the corporation must provide confirmation to the Prepa Trustee that each rating agency that maintains a rating on the outstanding Restructuring Bonds at that time has confirmed the proposed action will not result in a suspension, reduction or withdrawal of the then-current rating by such rating agency or agencies.

At least one rating agency will maintain the same or higher rating as it originally assigned to the initial series of Restructuring Bonds, the RSA says.

The securitization shall have a debt-service reserve of up to 10% as required to receive an investment-grade rating. The size of the reserve shall be determined by Prepa in consultation with the rating agencies and the Ad Hoc Group, and shall be sized such that, together with the net-interest cost on the Restructuring Bonds, Prepa minimizes its funding costs.

The securitization of Prepa’s debt will not only reduce the utility’s $9 billion debt but also finance $400 million needed for construction of the Aguirre liquefied natural gas plant. The act says the scheduled maturity of the securitization cannot be for more than 35 years.

The costs of the restructuring will be passed on to consumers through a “transition charge,” whose amount is unknown but by law will have to recuperate the costs to restructure the debt. The transition charge can be adjusted to reflect any changes in restructuring costs.

Prepa reached a restructuring deal in December with about 70% of its creditors, which agreed to a 15% haircut on their bonds. The restructuring agreement also grants the power company five-year debt-service relief of more than $700 million on its $8.3 billion debt and up to $462 million of surety capacity to be provided at the close of the transaction.

According to the legislation, the costs of the restructuring, which will be paid through the transition charge, includes legal and accounting costs, management fees and all expenses to design the so-called restructuring bonds for a bond exchange.

“It also includes any other amount paid to the United States to preserve the triple tax exemption of the bonds and to protect and preserve the deposits of the revenues generated through the restructuring bonds,” the law says.

The restructuring does not include additional costs from those contemplated in the restructuring agreement except for the debt incurred in 2016, which does not exceed $535 million.

The corporation created by the bill will be allowed to adjust the transition charge to pay for financing of the restructuring bonds but the adjustment will not need legislative revision. The Energy Commission will only be able to revise that charge to correct mathematical errors.

Prepa to pitch its rate case

The proposed corporation will be led by a board appointed by the governor and selected from a roster of 10 candidates proposed by a headhunter. The Senate must confirm the board members. Board members will receive a salary of not more than $50,000 a year and will have immunity from liability.

However, during its initial stages, the president of the Government Development Bank, the Treasury secretary and secretary of State will be ex-officio members until the board is appointed. They will not receive pay for this role.

The Revitalization Corp. will be in charge of creating new bonds to refinance as well as cancelled Prepa bonds issued before Dec. 31, 2015, but the corporation will not be allowed to issue new debt.

The Energy Commission will review the proposed restructuring resolution or structure to ensure it is not capricious or arbitrary.

After the Energy Commission gives the green light to the restructuring resolution and before issuing the bonds, the Revitalization Corp. will issue a notice to invite people to challenge the validity of the restructuring resolution.

The commonwealth commits itself to ensure that the bonds or any of the property used as guarantee will be exempted from taxes. While the RSA states that the debt will be “legally enforceable” on Prepa, the corporation and customers, the act states that customers will not be responsible for the debt.

Rep. Luis Vega Ramos, who helped draft the wording of the clause, said the disposition in the law is valid because customers are not party to the agreement and cannot be held legally responsible for the debt. Vega Ramos confirmed that Stephen Spencer of Houlihan Lokey, who advises bondholders, was concerned about the debt’s disposition. So far, however, none of the bondholders as of presstime has walked out of the agreement.

Prepa can report delinquent clients to credit bureaus

As part of its restructuring, Prepa must submit to the Energy Commission approval of a new utility-rate structure.

A rate-making mechanism provided to Prepa by Navigant takes into account the upcoming year’s revenue requirements. They comprise all operating costs, including fuel, purchased power, operations and maintenance expenses, revenue-funded capital expenditures, contributions in lieu of taxes (CILT), subsidies, taxes paid, debt service and any other costs expected to be incurred.

Debt service includes principal, interest and debt-service reserves but excludes any debt service recovered through the transition charge. The resulting revenue requirement is compared against revenues calculated using existing rates to determine if rates are sufficient to cover the full costs to provide services.

The design of customers’ billing statement will be transparent and must at least include the transition charge; the base rate charge; the fuel and purchased power cost adjustment (true-up); and CILT and subsidies.

Consumers will be able to challenge their bills except for the transition charge. While Prepa is forbidden from reporting delinquent residential clients to credit bureaus, it will be able to make those referrals when the client has not objected to the amount of the bill.

The legislation also overhauls the Prepa Board, which would be composed of nine members appointed by the governor from a 10-person list of candidates prepared according to objective criteria by a search firm.

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