PREPA's Expected Default Is Now Avoidable

Puerto Rico Electric Power Authority's forbearing bondholders announced an offer Wednesday that would avoid expected cash defaults.

The bondholders offered $2 billion in financing for additional capital investments, according to a statement from a public relations firm they have hired. Documents accompanying the statement included an alternative whereby General Electric Corp. would help build and operate a combined cycle power plant on the island to lower PREPA's fuel costs.

"This new capital would allow PREPA to generate electricity at lower and more stable rates, create hundreds of new jobs, stabilize electricity rates below the 2014 average, while continuing to service contractual debt obligations and allow a workout of over $700 million that Commonwealth government entities owe to PREPA," the bondholders said in a press release.

PREPA owes over $8 billion in power revenue bonds and there had been indications in the fall and winter that it would default. Moody's Investors Service and other analysts said the default would come on July 1 when a $400 million debt service payment was due.

Some PREPA bonds rallied after the statement. Three block-sized trades of two PREPA bonds were reported in the secondary market Wednesday, according to Interactive Data. Two trades of PREPA Series A 7.25s of 2030 were priced at 60.250 and 60.000, while one trade of Series ZZ 5s of 2018 was priced at 60.500. The trades ranged from 1.0 to 1.5 points higher than Interactive's evaluated pricing for Tuesday.

A document on the bondholders' plan said its objectives include: "Restoration of capital markets access for PREPA and credit support for Puerto Rico through full repayment of existing revenue bond obligations consistent with contractual commitments."

While the bondholders plan isn't an operational plan for the utility, additional rate cuts could be achieved through the operational plan currently under development, the bondholders said.

The forbearing bondholders are offering PREPA two possible borrowing routes forward. The documents outline a "base case" scenario, which entails less new money being lent to PREPA, and a "power purchase agreement" case.

 

If PREPA elects to take the base case option, the bondholders would lend about $750 million and if it elects the power purchase agreement option they would lend about $2 billion. In either case the money would be lent at mid-single digit rates on a blended cost of debt basis, according to a bondholder source.

The additional money in the power purchase agreement plan would cover 70% of the cost of building a new 800 megawatt power generation unit in Aguirre, where the authority already has major power generation facilities.

GE would advance a large part of the remaining 30% and would construct and ultimately own the combined cycle facility.

Combined cycle plants are commonly fueled with natural gas.

PREPA would enter into a long-term agreement with GE to purchase power from the facility. This arrangement would be similar to one that the authority has with EcoEléctrica, from which it buys power.

Adopting the PPA case would allow the authority over the next decade to charge rates 15% lower than August 2014 rates, according to the bondholders.

The PPA plan would bring about lower long-term electricity rates and greater job creation, the bondholders claim.

Even the base case electricity rate in 2016 would be 22% lower than PREPA's average electrical rate.

The forbearing bondholders also expect PREPA will create 700 megawatts from 25 utility-scale solar facilities. Plus there will be distributed solar generation at roughly 1% of PREPA's customers.

According to relevant documents, the plan includes making energy efficiency investments.

It aims to improve air quality and lower the costs in achieving U.S. Environmental Power Authority Mercury and Air Toxics standards. It seeks to achieve Puerto Rico-legislature-mandated energy efficiency and renewable energy goals.

Finally, instituting the plan is expected to create thousands of jobs making the capital improvements. Some of the jobs are expected to continue at the authority's additional facilities.

"Because the plan provides significant PREPA rate related and broader economic benefits while continuing to service bond debt, it provides a critically needed positive signal to the capital markets," said Stephen Spencer, managing director of Houlihan Lokey, advisor to the forbearing bondholders.

After PREPA chooses between the base case and the power purchase agreement approach, the next step would be the commencement of a PREPA rate case, according to the bondholders' document. This probably would entail PREPA petitioning the Puerto Rico Electric Commission to allow for the rate adjustments.

"A critical component of the plan is that it also supports PREPA's transition into a dramatically greener utility," said Derek HasBrouck, managing partner at PA Consulting, an advisor to the bondholders. "The creditor plan will help PREPA achieve compliance with both EPA air emissions regulations and statutorily required energy efficiency requirements in an efficient manner. Moreover, under the plan PREPA's dependence on oil generated power is projected to decline from approximately 55% today to less than 15% by 2024."

PREPA entered the forbearance agreement with its bondholders last August after drawing on its reserves to make last year's July 1 payment. The agreement had been set to elapse on Tuesday night. On Monday PREPA announced that the agreement was extended 15 days based on its continued discussions with its creditors.

It is now up to PREPA and the Government Development Bank for Puerto Rico to decide on which, if either, bondholder offer to accept.

PREPA didn't immediately respond to a request for comment.

For reprint and licensing requests for this article, click here.
Puerto Rico
MORE FROM BOND BUYER