IEEFA: PREPA’s debt deal represents significant progress but still falls short
By The Star Staff
The Puerto Rico Electric Power Authority (PREPA) debt adjustment plan filed by the Financial Oversight and Management Board on Aug. 25 represents significant progress over earlier board proposals, but still falls short of what is needed, according to the Institute for Energy Economics and Financial Analysis (IEEFA).
While the plan cuts the debt significantly, it will virtually prevent Puerto Rico from going to the markets to seek funding to rebuild its power grid once federal money runs out. It also will set aside $400 million for professional fees but does not provide for paying PREPA’s pensions, said the publication, which examines energy related policies and issues.
The plan, which seeks to restructure some $10 billion in debt, proposes $2.3 billion in new debt issuances, plus hundreds of millions of dollars in bondholder, legal and financial adviser fees to settle the debt.
“The $2.3 billion in bonds are to be financed by rate increases that will last 35 years. PREPA customers would likely pay an average rate increase of 1.6 cents per kilowatt-hour (kWh) over that period,” the IEEFA said.
The amount is a reduction of more than 50% from the previous oversight board proposal, which would have required $5.7 billion in new bonds, financed through higher rates. Puerto Rico ratepayers will pay $5.1 billion over the next 35 years under the new plan, compared to more than $13 billion under a previous plan, IEEFA said.
“Taking into account the total debt load at the time of bankruptcy and the costs from the passage of time since 2014, [the oversight board] put the overall debt burden at $10 billion,” the document notes. “Bringing the debt down to $2.3 billion is a 77% reduction in principal or a 23% recovery rate.”
The reduction results from community, labor, retail, manufacturing, religious, industrial, environmental and professional organizations having spent countless hours pointing out that the earlier plans were unsuitable for the community or the economy.
“Despite this progress, the new proposal still comes at a time when Puerto Rico’s grid is in unacceptably poor physical condition, and most of the grid transformation and rebuilding objectives have yet to be realized,” the IEEFA noted. “The most recent PREPA fiscal plan notes that about $14.2 billion in federal funds have been allocated for the electrical system -- the vast majority of which has not been spent. Yet multiple sources have estimated there will still be a $6 billion gap to rebuild the grid and bring it to acceptable operational standards.”
The $2.3 billion in legacy debt cannot be justified if PREPA still faces a $6 billion gap to rebuild the system, the institute said.
“The gap widens if the federal funds are not spent on capital improvements,” the IEEFA said. “We also note that grid operator LUMA Energy plans to spend almost $1 billion of federal funds on vegetation management, according to the fiscal plan.”
This means PREPA will need to raise additional funds in the capital market at some point to complete the grid rebuilding. Yet the debt deal appears to close the door on that option, the IEEFA said. The new debt deal would give a first-priority lien on the payment of the restructured legacy debt. The new debt deal effectively subordinates any new debt issuances for capital improvements to the payment of legacy debt.
“It remains to be seen whether the 23% recovery rate will actually materialize once the dust settles,” the publication notes. “Bond numbers during negotiations are inherently squishy, and the devil is in the details in this deal. Some bondholders receive more than 23% (fuel line lenders), and future savings initiatives may result in additional payments.”
Pension obligations to electrical system retirees are another urgent operating expense left unresolved by the oversight board’s plan, the IEEFA said.
“The PREPA retirement system ran out of money in April, and a stable funding stream has not yet been found to guarantee future pensions,” the publication notes. “Under the plan, PREPA would distribute $400 million in fees to professionals, and the fuel line lenders are expected to receive an 84% recovery rate, even though they represent an operational expense similar to the pensioners.”
The IEEFA finds the high level of fees to be paid to professionals under the proposal troubling. The plan would require the government of Puerto Rico to set aside as much as $400 million for PREPA to pay the “administrative expenses” (legal fees, etc.) of various parties involved in the bankruptcy case “or any other use determined by the Oversight Board,” the publication notes.
That is on top of the $1.5 billion in debt restructuring fees for the commonwealth and its public authorities paid by the people of Puerto Rico since the inception of the oversight board, according to a recent research report by Espacios Abiertos. In 2021, IEEFA had noted that fees related only to electrical system privatization and debt restructuring had already amounted to almost $500 million. It is also worth noting that $400 million is significantly more than the amount needed to pay PREPA’s pension obligations for a year, the publication said.