The Puerto Rico Electric Power Authority is submitting a five-year business plan to investors on Monday as another key deadline in the debt-ridden government utility’s restructuring arrives.
Prepa filing 5-year business plan that includes wide-ranging spending cuts
The wide-ranging plan drafted by a team headed Prepa’s chief restructuring officer, Lisa Donahue, calls for payroll reductions, pared pension benefits, higher electricity rates, closures of outdated generating plants and the elimination of subsidies.
The business plan is the second of three key documents on the path to restructuring that were required under forbearance agreements between Prepa and its creditors and bondholders in August.
The first report, issued by FTI Consulting in mid-October, pointed to more than $1.7 billion in unpaid electric bills owed to the public utility. It said the cash-strapped utility should cut service to public corporations that aren’t paying their power bills. It also said Prepa could outsource collections on some $400 million in inactive accounts and revamp its general collections methods.
The reports are being overseen by Donahue, who was brought on as chief restructuring officer as required by the forbearance agreements. She is heading 10-person team from her firm, AlixPartners, with FTI Consulting working alongside.
As part of its agreements with the creditors group, Prepa committed to complete a five-year business plan (as required in the new energy reform law) by December 15 and complete a full debt restructuring plan by March 2, 2015 that could impact holders of its roughly $9 billion in debt.
Junk-rated Prepa may still undertake the largest debt-restructuring ever in the U.S. municipal-bond market. The Recovery Act, a Puerto Rico law enacted hastily last summer with Prepa in mind, allows ailing public corporations to restructure their debts through a bankruptcy like process in local courts. The law provides two avenues for the public corporations to restructure their debt. A Chapter 2 filing would allow public corporations to create plans that postpones or reduces debt service payments with the consent of a majority of creditors. A Chapter 3 filing would allow public corporations go through the local courts if voluntary repayment plans cannot be reached with a majority of creditors.
Fitch Ratings said last week it is maintaining its low-mid junk grade and negative watch on Prepa bonds pending a review of a restructuring plan due in early March, saying that some sort of debt restructuring remains “probable.”
Fitch said the utility’s financial performance remains weak, noting that for the three months ended Sept. 30, 2014 Prepa reported unaudited earnings before interest and depreciation of $233 million and a net loss of $44 million. Poor performance for the period was characterized by declining energy sales (1.5%), declining customers (0.7%), high concentrations of accounts receivable (26% of revenue), high fuel costs (15 cents/kWh) and an unwillingness to increase base electric rates.
Legal wrangling continues in the lawsuit filed by investment firms challenging the constitutionality of the Recovery Act. Franklin Funds and Oppenheimer Rochester Funds filed the lawsuit in the U.S. District Court in San Juan shortly after the law’s passage, naming the Puerto Rico government and Prepa. BlueMountain Capital Management followed with its own suit.
The plaintiffs claim the law violates multiple provisions of the federal Constitution, arguing that only Congress can approve bankruptcy laws.
Puerto Rico’s public corporations are not eligible to restructure their debts under Chapter 9 of the federal bankruptcy code. And because they are governmental entities, those public corporations are unable to seek relief under Chapter 11. The island and other territories are the only jurisdictions in the U.S. where this is the case.
Prepa and the government counter that the Recovery Act assures restructuring of debt by public corporations where no federal law applies and ensures these public corporations have the ability to continue to provide vital public services like delivering dependable electricity and clean water.
In defending the constitutionality of the Recovery Act, government lawyers have highlighted the fiscal crisis affecting Puerto Rico and the right of the commonwealth government to use its “police powers” during what they describe as an “emergency situation.”
They have also emphasized that the Recovery Act provides similar treatment to creditors and establishes similar procedures to federal bankruptcy law in arguing that this is a legitimate move by Puerto Rico to resolve its fiscal situation, just as other jurisdictions stateside like Detroit have undertaken.
The government has moved to have the lawsuits dismissed, arguing that they are “unripe” because, to date, no public corporation has tapped the Recovery Act.
The business plan is the second of three key documents on the path to restructuring that were required under forbearance agreements between Prepa and its creditors and bondholders in August.
The first report, issued by FTI Consulting in mid-October, pointed to more than $1.7 billion in unpaid electric bills owed to the public utility. It said the cash-strapped utility should cut service to public corporations that aren’t paying their power bills. It also said Prepa could outsource collections on some $400 million in inactive accounts and revamp its general collections methods.
The reports are being overseen by Donahue, who was brought on as chief restructuring officer as required by the forbearance agreements. She is heading 10-person team from her firm, AlixPartners, with FTI Consulting working alongside.
As part of its agreements with the creditors group, Prepa committed to complete a five-year business plan (as required in the new energy reform law) by December 15 and complete a full debt restructuring plan by March 2, 2015 that could impact holders of its roughly $9 billion in debt.
Junk-rated Prepa may still undertake the largest debt-restructuring ever in the U.S. municipal-bond market. The Recovery Act, a Puerto Rico law enacted hastily last summer with Prepa in mind, allows ailing public corporations to restructure their debts through a bankruptcy like process in local courts. The law provides two avenues for the public corporations to restructure their debt. A Chapter 2 filing would allow public corporations to create plans that postpones or reduces debt service payments with the consent of a majority of creditors. A Chapter 3 filing would allow public corporations go through the local courts if voluntary repayment plans cannot be reached with a majority of creditors.
Fitch Ratings said last week it is maintaining its low-mid junk grade and negative watch on Prepa bonds pending a review of a restructuring plan due in early March, saying that some sort of debt restructuring remains “probable.”
Fitch said the utility’s financial performance remains weak, noting that for the three months ended Sept. 30, 2014 Prepa reported unaudited earnings before interest and depreciation of $233 million and a net loss of $44 million. Poor performance for the period was characterized by declining energy sales (1.5%), declining customers (0.7%), high concentrations of accounts receivable (26% of revenue), high fuel costs (15 cents/kWh) and an unwillingness to increase base electric rates.
Legal wrangling continues in the lawsuit filed by investment firms challenging the constitutionality of the Recovery Act. Franklin Funds and Oppenheimer Rochester Funds filed the lawsuit in the U.S. District Court in San Juan shortly after the law’s passage, naming the Puerto Rico government and Prepa. BlueMountain Capital Management followed with its own suit.
The plaintiffs claim the law violates multiple provisions of the federal Constitution, arguing that only Congress can approve bankruptcy laws.
Puerto Rico’s public corporations are not eligible to restructure their debts under Chapter 9 of the federal bankruptcy code. And because they are governmental entities, those public corporations are unable to seek relief under Chapter 11. The island and other territories are the only jurisdictions in the U.S. where this is the case.
Prepa and the government counter that the Recovery Act assures restructuring of debt by public corporations where no federal law applies and ensures these public corporations have the ability to continue to provide vital public services like delivering dependable electricity and clean water.
In defending the constitutionality of the Recovery Act, government lawyers have highlighted the fiscal crisis affecting Puerto Rico and the right of the commonwealth government to use its “police powers” during what they describe as an “emergency situation.”
They have also emphasized that the Recovery Act provides similar treatment to creditors and establishes similar procedures to federal bankruptcy law in arguing that this is a legitimate move by Puerto Rico to resolve its fiscal situation, just as other jurisdictions stateside like Detroit have undertaken.
The government has moved to have the lawsuits dismissed, arguing that they are “unripe” because, to date, no public corporation has tapped the Recovery Act.
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