UTIER, unsecured creditors, energy firms reject priority payments for LUMA
By The Star Staff
The Electrical Industry and Irrigation Workers Union (UTIER by its Spanish acronym), the Puerto Rico Unsecured Creditors Committee (UCC), Cobra Energy Services and Whitefish Energy Holdings are asking U.S. District Court Judge Laura Taylor Swain to deny a petition that would grant priority to the payments the Puerto Rico Electric Power Authority (PREPA) must provide to LUMA Energy for operating the island transmission and distribution (T&D) system starting on June 1.
Previously, the parties also objected to giving priority rank over other debt to the front-end transition payments to LUMA Energy after it signed an operation and management (O&M) contract in June 2020. The contract’s one-year transition period is slated to end June 1. The agreement grants LUMA Energy the right to operate and manage PREPA’s T&D system for 15 years, while PREPA retains ownership of the system. In consideration for managing the system in accordance with the O&M agreement, the operator is entitled to receive a service fee consisting of a fixed fee that starts at $70 million in the first year and increases to $105 million for each of years 4 through 15, and an incentive fee that is payable upon LUMA Energy achieving certain performance benchmarks. The incentive fee starts at $13 million in year 1 and increases up to $20 million for each of years 4 through 15. The agreement also includes a “Front-End Transition Period” and a “Back-End Transition Period” for which the fees are different from the service fees.
The contract has been criticized as being too onerous. UTIER objects because the contract allows LUMA Energy to ignore the union’s collective bargaining agreement.
PREPA recently asked the court to grant administrative expense priority to the payments to LUMA, which is a condition of the contract.
UTIER said payments to LUMA should not be made until there is a debt adjustment plan for PREPA.
“Granting administrative expenses again to LUMA Energy would affect PREPA’s debt restructuring, as this implies that LUMA is paid first, first and completely, in relation to PREPA’s other creditors,” UTIER President Ángel Figueroa Jaramillo said in written remarks. “This is worsened when taking into account that PREPA has a deficit this year of at least $432.8 million, caused by, among other things, the LUMA Energy contract. Therefore, PREPA would not have the necessary funds to pay for said contract, its operations, and simultaneously pay just enough to all its creditors, including the Retirement System.”
UTIER stated that the motion presented to grant administrative expenses in favor of LUMA is on shaky ground to be awarded on its merits because PREPA has not demonstrated that LUMA has met all the conditions for the request.
“We make this statement before the Court because PREPA has not been able to prove that it complies with what is stipulated in the contract. LUMA has not been able to hire the 3,800 employees required to operate the country’s electricity service,” Figueroa Jaramillo said. “It is interesting and significant that the Fiscal Control Board did not want to disclose the number of employees that LUMA has hired to date. That is indicative that they [LUMA Energy] will not be able to assume the reins of the Authority in a responsible manner by the date of June 1, right at the beginning of the hurricane season.”
The union leader said further that Judge Swain’s earlier decision awarding administrative expenses incurred in the transition period was appealed to the U.S. Court of Appeals for the First Circuit in Boston.
“This appeal has arguments that would prevent Judge Swain from awarding administrative expenses in favor of LUMA Energy again,” Figueroa Jaramillo said. “Therefore, PREPA’s motion is not ripe. The motion is not ripe either because the House of Representatives of the Legislative Assembly of Puerto Rico approved a Resolution on April 7 to amend the LUMA contract and postpone its entry until January 2022. UTIER will take all the legal steps necessary to prevent administrative expenses from being granted again in favor of LUMA Energy.”
Swain will hold a telephone hearing on April 28 with UTIER legal representative Emmanuelli Law Firm to clarify the controversy.
The UCC does not oppose the contract between PREPA and LUMA Energy but said it raises concerns.
Specifically, the UCC identified as troubling certain late fees, in the form of penalty interest for late payments, payable under the T&D contract; broad control rights awarded to LUMA Energy with respect to an eventual PREPA plan of adjustment; and LUMA Energy’s right to administrative expense treatment for a $115 million termination fee in the event that the effective date of a plan of adjustment that is “reasonably acceptable” to LUMA Energy has not occurred within 18 months after the commencement of services under the Supplemental Agreement.
On Oct. 19, 2020, the court issued its opinion largely granting the front-end administrative motion and denying a UCC request.
“Because the Motion currently before the Court expressly raises these issues, the Committee now renews its limited objection to the Supplemental Agreement including, specifically, to the Termination Fee (as defined herein) and to LUMA Energy’s broad consent rights to any plan of adjustment for PREPA,” the UCC said.
Cobra said in a motion that it objects to the priority payment request because it will result in unequal treatment for similarly situated creditors.
“Cobra has asserted administrative expense claims in excess of $200 million relating to unreimbursed invoices for extensive work completed over two years ago,” the firm said. “Any progress toward resolving Cobra’s unpaid claims, however, has been stayed at the Government Parties’ request for over 18 months. This stay has caused substantial harm to Cobra, subjecting it to burdens far above what other similarly situated administrative creditors, like LUMA Energy, have faced. Indeed, the Motion, which seeks pre-allowance of an administrative expense claim in favor of LUMA Energy, freely exhibits this different and unfair treatment.”
Whitefish, whose workers came to Puerto Rico to fix the power grid right after hurricanes Irma and Maria destroyed PREPA infrastructure, said that while it completed the job and regulators have found no wrongdoing by the company, it is still owed $138 million.