Puerto Rico Utility Moves to Restructure $9B in Debt

A plan to restructure $9 billion in Puerto Rico Electric Power Authority (PREPA) debt-an eighth of the Commonwealth of Puerto Rico's staggering $72 billion in debt-surfaced at the U.S. territory's energy regulator, the Puerto Rico Energy Commission last week on April 7.

The plan filed by the PREPA Revitalization Corp.-a "special purpose vehicle" created through commonwealth legislation in February to manage the debt-would have the Revitalization Corp. sell "restructuring bonds" to existing bondholders. The essence of the plan is to lower the public power agency's debt by about $1.4 billion by securitizing the obligation. Bondholders would get restructuring bonds in place of current revenue bonds.

Lisa Donahue, a finance expert and PREPA's "chief restructuring officer," explained in testimony supporting the restructuring plan that "securitization is the issuance of tradable securities, such as bonds, that are backed not by the credit of the utility itself, which may be poor, or by the utility's physical rate base of assets, which may have little practical value as security, but are instead secured by and paid from restructuring property created by law. That property typically includes the rights to a defined stream of revenues to be paid by utility customers, often called 'transition charges.' "

Donahue said that often "the market views those rights as more certain and more valuable than a claim on the utility or its 'rate base' assets. . . . As a result, the cost of securitized debt will often be lower than the cost of the utility's debt and holders of utility debt will give value for the opportunity to exchange or secure their existing utility debt with securitized debt."

The February legislation created the PREPA Revitalization Corp. "special purpose vehicle" which, according to Donahue, is "free of PREPA's pre-existing obligations and debts and immune from insolvency (and bankruptcy)." That should reduce the risks in the bonds, yielding better credit ratings and favorable financing, she said.

Existing bondholders support the PREPA refinancing, according to the filing at the energy commission.

Created in 1941, PREPA is a commonwealth-owned monopoly serving 1.5 million customers, making it one of the largest public power systems in the U.S. According to the American Public Power Association, PREPA had 2013 revenues of $4.7 billion. It is a member of the Large Public Power Council, a Washington lobbying group of the nation's 26 largest not-for-profit public power systems.

PREPA owns about 4,200 MW of generating capacity and buys 450 MW of local non-utility coal-fired generation from AES Corp. According to the utility, about 68% of its capacity is oil-fired, 15% natural gas, and 15% coal. The largest plant is the Aguirre station in Salinas, with a 900-MW unit burning #6 fuel oil, which went into service in 1975, and a 1977 vintage 592-MW combined cycle unit burning #2 diesel oil.

The largest plant in the Puerto Rico Electric Power Authority fleet is the Aguirre station in Salinas, with a 900-MW unit burning #6 fuel oil. The plant went into service in 1975. Courtesy: PREPA

Over the years, PREPA has borrowed heavily to build generation and buy expensive fuel oil, while freely supplying electricity for economic development projects on the island. A recent New York Times article highlighting PREPA's business practices focused on an ice rink in the tropical city of Aguadilla that was built around free electricity from PREPA's economic development funding. The article noted that PREPA "has been giving free power to all 78 of Puerto Rico's municipalities, to many of its government-owned enterprises, even to some for-profit businesses-although not to its citizens. It has done so for decades, even as it has sunk deeper and deeper in debt, borrowing billions just to stay afloat."

In testimony to the island's regulatory commission, PREPA's Donahue said, "During the past several decades, PREPA incurred substantial debt to fund capital expenditures and, in the case of fuel-related credit facilities, certain operating expenses. Over time, PREPA's ability to access capital markets on reasonable terms, if at all, dried up." Of PREPA's $9 billion debt, a $735 million payment is currently due under its revolving line of credit for fuel. Another $420 million is due July 1 under its outstanding revenue bonds. Donahue said, "PREPA cannot meet these financial obligations absent a financial restructuring and transformation change."

PREPA hopes to get the debt restructuring deal done by the end of June.

-Kennedy Maize is an energy journalist and frequent contributor to POWER.

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