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  • The San Juan Daily Star

Latest PREPA debt plan would add ‘legacy’ charge to power bill

David Skeel, chairman of the Financial Oversight and Management Board for Puerto Rico

By The Star Staff

The latest adjustment plan filed late last week to restructure the $10 billion Puerto Rico Electric Power Authority (PREPA) debt would create a “legacy” charge added to customers’ bills to pay bondholders for 35 years, would eliminate the workers’ pension system and would pay more to bondholders who settle their claims.

Gov. Pedro Pierluisi Urrutia said in a reaction over the weekend that the plan is a positive step but noted that it must create an accessible system and respect the determinations of the Puerto Rio Energy Bureau, which is the regulator of the energy industry and is the entity in charge of approving rate hikes and charges.

The debt adjustment plan (PAD by its Spanish acronym) filed by the Financial Oversight and Management Board last Friday after two postponements has the support of at least two major classes of PREPA’s creditors, which are fuel line lenders and Vitol, a fuel supplier. The oversight board, meanwhile, announced last week an agreement in principle with monoliner National.

The plan proposes to cut PREPA’s unsustainable debt by 48%, to approximately $5.4 billion, and should provide the financial stability necessary to invest in a modern system, the oversight board said.

“Bankruptcy held back the transformation of Puerto Rico’s energy system,” the oversight board’s chairman, David Skeel, said last week. “The Plan we filed today is a big step forward, but it is not the last step. We will continue to negotiate with creditors on the path to confirmation of the Plan by the Court.”

The PAD identifies 12 classes of claims and accounts for the potential outcomes of pending litigation. It would encourage settlement of bonded debt claims by its inclusion of two separate classes for bond claims. The first, which is for bondholders and monoline Insurers desiring to settle, would recover about 50% to 100% of the value of their investment. The second, which is for bondholders desiring to vindicate their purported rights through litigation, would provide a lesser recovery.

The PAD has four scenarios depending on whether the oversight board prevails on litigation that seeks to disallow any secured claim held by the bondholders beyond the estimated $16 million in funds actually deposited in the Sinking Fund, and limit any potential recourse, secured or unsecured, to the monies deposited in the Sinking Fund. If the board prevails on the lien and recourse litigation, “the Non-Settling bondholders will receive only their pro rata share of amounts deposited in the Sinking Fund.”

Nonetheless, the oversight board does not dismiss a cramdown as the Puerto Rico Oversight, Management and Economic Stability Act and the Bankruptcy Code provide that the Title III Court may confirm a plan of adjustment that is not accepted by all of the classes if the plan is determined to be “fair and equitable.”

Bondholders and monoline insurers who choose to settle their claims will receive fixed and two types of outcome-dependent contingent payments. Their fixed payment will be Series B bonds in the face amount of 50% of their allowable petition date claims. Non-settling bondholders will receive only their pro rata share of amounts deposited in the Sinking Fund. Settling bondholders, on the other hand, will receive additional Series B bonds as the first type of contingent payment. In this scenario, settling bondholders may receive up to 100.00% of their prepetition claim.

General unsecured claims will get about $800 million.

Because many bondholders did not participate in the mediation, and have not had the opportunity to settle, the oversight board intends to send a settlement offer with a restructuring support agreement containing such terms to all bondholders on or around Dec. 28.

To fund the new bonds issued under the PAD, a temporary, hybrid transition charge, called the “Legacy Charge” will be added to PREPA’s rates to allow for sufficient net revenues to provide a source of repayment for the new bonds issued by PREPA under the PAD.

The legacy charge may involve both a volumetric component based on customer class and a customer’s electricity use, and/or a flat monthly connection charge for being connected to PREPA’s electricity grid, based on customer class. The flat fee component is designed to provide a relatively more consistent and predictable cash flow while charging customers for access to PREPA’s electricity grid not based on usage in any given month.

“Revenues from the volumetric component are projected to decrease with time as demand for electricity decreases on the island,” the PAD states. “The quantification of the Legacy Charge added to a given customer’s bill will be determined considering factors such as a customer’s rate class. For example, the most vulnerable customers or subsidized residential customers are not intended to be assessed any connection charge and would only be assessed a volumetric charge if their consumption exceeds approximately 500 kWh [kilowatt-hours] per month.”

Other customer accounts would be subject to a connection charge, a volumetric charge for consumption up to around 500 kWh, and an equivalent or higher volumetric charge for consumption over about 500 kWh. Based on electricity demand projections pursuant to PREPA’s 2022 certified fiscal plan, the legacy charge is expected to generate some $5.4 billion of revenue over the next 35 years.

In regard to PREPA’s retirees, the utility’s Employment Retirement System will receive the same treatment provided to other pensioners as part of the bankruptcy. PREPA’s defined benefit pension system will be frozen as of the effective date of the PAD and cost of living adjustments, or COLAs, will be eliminated. PREPA will deposit monies in a PREPA PayGo Trust sufficient to pay retirees all pension benefits.

The PAD is not expected to impact subsidies. PREPA customers currently enrolled in one of PREPA’s existing subsidy customer classes, such as those for the elderly, students, customers that depend on lifesaving medical equipment, customers with disabilities, and participants in the Puerto Rico Nutrition Assistance Program, among others, will continue to receive their existing subsidies from PREPA without interruption and may or may not be exempt from the legacy charge.

The PAD is also not expected to impact payments to LUMA Energy for operating PREPA’s transmission and distribution system. Whitefish, which performed work for PREPA, is also expected to be paid.

Oversight board member Justin Peterson voted against the plan because he believes it treated bondholders unfairly, and was predicated on financial analysis produced to solve for a desired outcome – to pay as little as possible.

“The Oversight Board’s unilateral approach to mediation was disappointing,” Peterson said. “It prevented a global deal with all bondholders that was within reach. For as long as I remain a member of the Oversight Board, I will continue to stand up for the rights of bondholders who have been treated shabbily throughout this process.”

The speaker of the island House of Representatives, Rafael Hernández Montañez, rejected the PREPA PAD on Sunday, charging that it will increase the rate paid by residential and commercial customers and thus would perpetuate LUMA’s inefficiency as an operator of the electrical system.

“In the House we have been consistent from day one, by approving legislation (HB 1387 and HB 1429) that restructures PREPA’s debt, protecting the consumer without imposing increases in the bill and with zero cuts to pensions,” Hernández Montañez said.

He added that if the plan proposed by the oversight board is approved, the commercial and industrial competitiveness of the island and the investment possibilities for economic development will be adversely affected.

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