PREPA offer to bondholders based on pessimistic consumption projections

The Puerto Rico Oversight Board’s offer to the bondholders of the Puerto Rico Electric Power Authority is based on a pessimistic projection for electricity consumption, with its best interests test offering two scenarios for recovery that range from nothing to 59%.

PREPA continues working toward an agreement with bondholders and the bankruptcy mediation process was recently extended to April 28.

The board’s projections showed continuous reductions in PREPA electricity consumption through fiscal year 2051, with demand plunging 51% in the period.

The Puerto Rico Oversight, Management, and Economic Stability Act requires a “best interest test” showing what other “available remedies” would yield and how they compare to the plan of adjustment.

The test assumes the bankruptcy case is dismissed, the bondholders name a receiver of the authority, the Puerto Rico Energy Bureau continues to regulate rates, LUMA Energy will terminate its role in transmission and distribution, and no other private entity will step forward to take the role.

In one scenario, the board assumes the local government would succeed in capping any bondholder-proposed increase and bondholder recovery would vary from nothing to 59%.

In the second scenario, with neither the local government nor the board interfering in bondholders’ receivers’ actions, recovery would vary from 42% to 59%.

The board’s current proposed plan of adjustment offers a base of a 50% recovery to bondholders.

The board projects that in July — the court’s goal for executing a restructuring — $8.266 billion of bond principal and $2.959 billion in bond interest will be outstanding.

The board made the projection with a related projection for available cash flow for paying PREPA bonds.

The board continues “underestimating future revenues and inflating current costs,” said Puerto Rico Clearinghouse Principal Cate Long. “They have used this gambit repeatedly to reduce the ‘resource envelope’ available to creditors. It is a prime example of them not negotiating in ‘good faith.’ “

As an example of inflating current costs, Long points to COBRA, which was listed as a current expense ($393 million) but will be almost fully “reimbursed by FEMA.”

While the board plans “to exempt the poorest people from rate increases,” Institute for Energy Economics and Finance Director of Finance Tom Sanzillo said, the majority of residents “will be expected to bear unsustainable rates.”

But, he added, “One positive note in this disclosure is that the estimates now include a zero-debt service scenario. That is the most logical and realistic outcome.”

Advantage Business Consulting President Vicente Feliciano said the electric projection “probably rests on assumptions as to technological change and the rate at which PREPA would lose customers to other alternatives. … To assess how realistic this is, a review of the assumptions would be necessary.”