PREPA bankruptcy enters new phase
Bondholders & oversight board battle over billions in pledged revenues
By THE STAR STAFF
The Puerto Rico Electric Power Authority (PREPA) bankruptcy process is heading toward a pivotal courtroom confrontation as bondholders and the Financial Oversight and Management Board advance sharply divergent accounting theories that could determine how much of the utility’s cash belongs to creditors holding $8.3 billion in legacy revenue bonds.
In simultaneous motions for partial summary judgment, both sides asked U.S. District Judge Laura Taylor Swain to resolve the long‑running dispute over PREPA’s net revenues, a central issue in the Title III case that will shape the size of the collateral pool available to bondholders and influence the structure of any future debt restructuring.
Bondholders, led by U.S. Bank National Association as trustee and a coalition of major institutional investors including Assured Guaranty, GoldenTree Asset Management, Syncora Guarantee, National Public Finance Guarantee and the PREPA Ad Hoc Group, are pressing for a sweeping declaration that their lien attaches to all net revenues PREPA has generated since entering bankruptcy in 2017. They contend that PREPA accumulated at least $2.85 billion in post‑petition net revenues that should have been deposited into the Sinking Fund established under the utility’s 1974 Trust Agreement.
Their filing accuses PREPA of diverting pledged revenues to cover municipal electricity subsidies, administrative costs and capital projects, in violation of the Trust Agreement and federal bankruptcy protections governing special revenues. The creditors are also seeking immediate transfer of roughly $1 billion in liquid cash currently held in PREPA accounts, arguing that the utility has no legal basis to retain funds subject to their lien.
Beyond the cash turnover demand, bondholders want a court‑ordered audit of PREPA’s finances from the petition date forward, asserting that the utility’s disclosures have been clouded by inconsistent accounting adjustments. They also are asking Judge Swain to adopt a narrow reading of Section 928(b) of the Bankruptcy Code, limiting “necessary operating expenses” to the Trust Agreement’s definition of current expenses -- a move that would exclude capitalized or extraordinary costs from the net revenues calculation.
Finally, they seek affirmation of PREPA’s historic use of accrual accounting, arguing that the oversight board cannot retroactively shift to a cash‑basis model to reduce or eliminate net revenues.
The oversight board, in a counter‑motion filed last Friday, urged the court to adopt eight accounting determinations that would significantly narrow the revenue base available to creditors. The board argues that the Trust Agreement requires revenues to be measured on a cash basis while expenses must be calculated on an accrual basis, a split approach that would reduce net revenues.
The board also seeks categorical exclusions for federal disaster relief funds, energy sector reserve monies, and municipal offsets under the Contribution or Payment in Lieu of Taxes, or CILT, program, all of which bondholders have argued should count as revenue. Additional determinations would prevent creditors from using PREPA’s annual budget as a cap on allowable expenses and clarify that PREPA’s monthly operating reports do not constitute binding net revenue calculations.
Responses to the motions are due Oct. 23, with replies on Nov. 6. Swain is expected to hear arguments on Nov. 18. The outcome could redefine the financial contours of the PREPA restructuring and determine how much bondholders can ultimately recover.
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