PREPA, UCC disputes in spotlight at commonwealth bankruptcy hearing
By The Star Staff
The monthly bankruptcy omnibus hearing to start today in U.S. District Court will focus on two disputes related to the Puerto Rico Electric Power Authority (PREPA) and an Unsecured Creditors Committee (UCC) petition to lift the stay on objections to the constitutional payment priority granted to holders of commonwealth general obligation (GO) bonds.
U.S. District Court Judge Laura Taylor Swain is slated to hear PREPA’s request for the court’s permission to reject 27 non-operational and/or above-market power purchase and operating agreements for renewable energy projects. PREPA says the projects have not advanced to a stage of development and are too costly for the utility and the rate payers. Developers of some of the projects, such as Tradewinds, are slated to speak against the petition.
The judge also is slated to hear PREPA’s request seeking to give debt priority to the payments that will be made to LUMA Energy to manage PREPA’s transmission and distribution system.
As part of the contract, PREPA will pay LUMA a fixed annual compensation that will start at $70 million the first year, increasing to $90 million the second year, and to $100 million the third year. In the fourth year and for the remainder of the 15-year agreement, the annual payment to the operator will be $105 million, an amount that could go up to $125 million if LUMA Energy achieves certain performance metrics.
Opponents of the request said the administrative expense priority for LUMA Energy will prioritize millions of dollars worth of payments to LUMA Energy over the claims of PREPA’s pensioners, employees, and other unsecured creditors. PREPA has $9 billion in bonded debt.
Swain will also hear a dispute related to GO bonds. Holders of GO bonds have argued that their $18 billion in claims must be paid before other unsecured prepetition claims and that a plan of adjustment cannot be confirmed unless their bonds are paid first. The UCC says the federal Puerto Rico Oversight, Management and Economic Stability Act contains too many provisions that go against the constitutional debt priority payment and that the distribution of payments as proposed would be unfair.
The court in March imposed a stay on all objections against the GO bonds, including the unsecured creditors’ objection to the payment priority for GOs as it wanted to have a final plan of adjustment for the commonwealth debt.
The UCC, however, argues that the premise of the stay order, namely the settlement of certain GO-Public Buildings Authority issues through the plan of adjustment, has evaporated due to the global pandemic.
The new economic reality post-COVID-19 is that the commonwealth cannot afford to distribute nearly $14 billion in value to holders of GO bonds as contemplated under the proposed plan of adjustment on the basis of a dubious constitutional provision that uses the commonwealth’s full faith and credit to back the bonds, the UCC said.