As fiscal board proposes cuts to PREPA’s debt, judge to set new schedule for confirmation
By The Star Staff
U.S. District Judge Laura Taylor Swain on Wednesday will hear the proposals for a new timetable, discovery and proceedings in advance of the confirmation hearing next month of the new Puerto Rico Electric Power Authority (PREPA) debt adjustment plan, which would cut the amount of new bonded debt the utility can pay to $2.3 billion from $5.68 billion, but may still lead to rate hikes.
After suspending the deadline for PREPA’s debt confirmation hearing last week, Swain, in an order Sunday, moved to this Tuesday the deadline for the stakeholders to file a joint status report on a new timetable for the utility’s confirmation hearing. The order came after the Financial Oversight and Management Board certified an updated PREPA fiscal plan.
The oversight board told the court it had to write a new fiscal plan amid further information that showed that load projections (the amount of power in the electrical grid) are substantially lower. In comparison, cost projections are markedly higher than those in the 2022 PREPA Fiscal Plan. The estimated base rate and surcharge for fuel and purchase power costs are substantially higher. At the same time, the board said that the headroom available for debt service charges to customers decreased.
In addition to drafting a new fiscal plan, the oversight board submitted a list of amendments they intend to incorporate in the debt adjustment plan to be presented to the court on or before July 14. It would be the third amended version of the debt deal.
A debt sustainability analysis found that the maximum amount PREPA can reasonably pay to creditors is about $2.5 billion, including some $2.38 billion in new bonds serviceable by rates at or about the 6% share of wallet threshold for the first expected year of implementation, or fiscal year (FY) 2025. The 6% share of the wallet is the number provided by experts as the maximum amount PREPA customers can pay from their yearly household income in electricity.
It also includes an additional $150 million of value the oversight board believes can be provided at a tolerable risk level through additional potential revenue sources and savings.
Based on the debt sustainability analysis, the Title III debt plan for PREPA will reduce the number of new bonds to be issued to $2.38 billion from the $5.68 billion proposed initially as repayment. The total bonded debt is about $8.4 billion. Bondholders are expected to reject the new offer.
About $1.35 billion of new bonds or cash will be used to maintain the settlements with the Fuel Line Lenders, monoline National, the Settling Bondholders, and Vitol.
The treatment of the pension claims will not be amended. PREPA’s pensions will be paid under a “pay as you go” mechanism.
Non-settling bondholder claims and general unsecured claims will be guaranteed a minimum distribution of 12.5% of their allowed claim in the form of new bonds. In addition, they will receive the contingent value instrument (CVI) currently in the second amended plan and another CVI adjusted to the amount of their final allowed claim. The proposed second CVI will be distributed to the non-settling bondholders to compensate if PREPA’s revenue requirements equivalent per kilowatt-hour (kWh) for a specific year are lower than the revenue requirements per kWh projected in the 2023 fiscal plan.
“Once their allowed claim is final, the new bonds and cash remaining, after distributing the guaranteed minimum distributions of bonds and cash to the non-settling bondholders and general unsecured claim holders, will be distributed pro rata between the non-settling bondholders and the general unsecured claim holders based on the non-settling bondholders’ actual final allowed claim and the general unsecured claim holders assumed aggregate allowed claim of $800 million,” the document notes.
Regarding the expected payment of the bonds, the debt adjustment plan says Series A Bonds will extend at most the five years provided in the plan. In comparison, the anticipated repayment of Series B bonds should be about 35 years. The bond interest rate of 6% per year will remain unchanged.
The third amended Title III PREPA plan will also reflect new rights given to holders of the new bonds. The new bonds and the Title III plan’s current CVI will receive payment from, and be secured solely by, a gross pledge of the legacy charge revenue rather than a net pledge.
The new debt plan will keep the proposed legacy charge, which consists of a flat fee and a charge against electricity use, but it will be reduced so rates are not higher than the 6% share of the wallet threshold.
PREPA will no longer be able to use legacy charge revenues to pay operating expenses unless a major event occurs. The new bond trustee will be able to challenge attempts to replace the legacy charge.
The proposed amendments note that PREPA will no longer issue $400 million in Series B-2 Bonds to the commonwealth. The commonwealth, however, will appropriate such funds to pay PREPA’s allowed administrative expense claims.
The treatment of the general unsecured claims will be amended to provide a guaranteed minimum return of 13.5% on their assumed aggregate allowed claim of $800 million in the form of cash or new bonds.
At Wednesday’s hearing, Swain who is overseeing Puerto Rico’s Title III bankruptcy cases, said she would also deal with a motion for a preliminary injunction filed by the Electrical Industry and Irrigation Workers Union (UTIER) to stop the contract with Genera PR, the private operator of PREPA’s power plants, from going into effect. UTIER says the contract violates laws that ban a monopoly in power generation.