After clearing one hurdle in Puerto Rico's legislature, the island's power utility and its creditors are focused on the next potential obstacle to their $8.4 billion bond restructuring—winning approval for a rate increase.
The legislation passed this month to overhaul the territory's energy sector gives the Puerto Rico Energy Commission 180 days to issue a decision on higher rates, once the Puerto Rico Electric Power Authority files its petition for a review.
"This is an extremely short time considering that most public utility commissions in the U.S. have between 9 and 12 months to complete a similar process," commission Office of Public Affairs director Marilyn Vicens said in an email.
While analysts including Moody's Investors Service's Richard Donner are optimistic the restructuring deal can come to fruition, the rate increase is just the first of several potential obstacles. A source in the bondholder group said that the effort may be followed by another challenge, as the restructuring deal hinges on winning investment grade rating on securitization bonds to be exchanged for current bonds.
PREPA and its creditors signed a revised bond purchase agreement in late January that specified that PREPA would file a petition with the Energy Commission by March 1. This would request permission to create new securitized bonds to replace PREPA's existing bonds.
PREPA will be seeking commission approval of the calculation methodology and adjustment mechanism for the new securitization bonds, according to PREPA.
The bondholder source said he expected a rate petition would be filed in the next few weeks. The Restructuring Support Agreement signed by all parties to the restructuring deal requires PREPA to file the rate petition by April 22.
Rates have declined to an average of 18.91 cents per kilowatt hour today, from 23.52 cents a year ago, Donner said. This gives PREPA room to increase the rates while still maintaining lower rates than a year ago, he said.
At this point it seems likely that the restructuring deal will be carried through, said Donner, who covers PREPA at Moody's. The fact that the various parties have worked together for 18 months and have been willing to extend deadlines repeatedly makes it seem probable that the negotiated debt restructuring will be completed, he said.
The securitization of cost recovery bonds has been done many times in the past, another reason to hope the current securitization will be completed, said Moody's senior vice president Luisa De Gaetano. However, since these would be the largest utility cost recovery bonds in history, there would be some challenges, she said.
Puerto Rico's government adopted a bill reforming PREPA on Feb. 16. The passage of legislation like this act was part of the forbearing bondholders' deal requirements at least since these bondholders reached a deal with PREPA in September.
A source close to the PREPA forbearing bondholders said the forbearing bondholders were reviewing the legislation and were primarily interested in whether it would please the ratings agencies and the Puerto Rico Energy Commission, which will approve all future rate increases. He said that the bondholders believed that it will satisfy the agencies and the commission, but they have not yet made a final determination about their position on it.
Right now, the bondholders are focused on the impending petition for an electric rate rise to the commission and on getting an investment grade rating on the planned securitization bonds, which is a little further away, the bondholder source said.
The bondholders source said he expected the commission to approve the rate increase. Rejection would jeopardize the restructuring deal, he said. If that happened, the forbearing bondholders would review the commission's reasons before deciding what they would do.
It remains unclear when PREPA will seek an investment grade on the securitized bonds from the major ratings agencies, the bondholder source said.
The bondholders and PREPA still have to settle the relationship between the existing maturities and the maturities of the securitization bonds. This will be done closer to the exchange date, the bondholder source said.
Also beyond the next few months, PREPA will make a cash offer for non-forbearing bonds. The authority will also seek to attract non-forbearing bondholders to accept the new current interest or convertible capital appreciation bonds. For the deal to go forward, it will have to be successful to the extent that no more than $700 million of legacy bonds would remain outstanding.
PREPA also plans to create a business plan for capital expenditures, environmental compliance, fuel diversification, and financial performance. Discussions with the United States Environmental Protection Agency on how PREPA needs to alter its plants to meet Mercury and Air Toxics Standards have been "constructive," according to the PREPA source.
In spring 2015 PREPA chief restructuring officer Lisa Donahue said she was trying to reduce the authority's annual costs by $200 million to $400 million.
"PREPA has identified and implemented one-time operational savings of $150 million and recurring annual savings of $162 million," a PREPA source said. "As new operational initiatives are phased in, we expect additional one-time savings of $185 million and recurring savings of up to $280 million. We are looking forward to helping PREPA make these savings a reality."
PREPA has had very large receivables, particularly from government clients in recent years. Donahue has said these must be reduced. "Progress has been, and continues to be, made, though collections from government customers can be challenging given the commonwealth's situation," the PREPA source said.
Finally, in the next 18 months PREPA expects to issue a request for qualified bidders to submit proposals to invest in and modernize the authority's infrastructure.
