The loan, the board, and PREPA

by Mar 1, 2018Puerto Rico0 comments

The loan

On Monday February 19, a Federal Judge approved a loan of $300 million to support Puerto Rico’s Electric Power Authority (PREPA). The loan was approved after Judge Laura Taylor Swain ruled against a $1 billion loan request made by the company on the ground that there was not enough evidence that the company needed the money. However, the judge gave a caveat that the parties would be able to submit another loan request not larger than $300 million. This advice was followed, and the $300 million loan was approved.


Why does PREPA need such a big loan?

PREPA is already $9 billion in debt. The hurricanes destroyed the company’s aging power grid, adding a greater financial burden to the already floundering company. The Financial Oversight and Management Board estimated that the company could see a possible $1.2 billion loss in revenue following the hurricanes. You don’t need to be an accountant to see how much financial trouble PREPA is in.

When the original loan request for $1 billion was submitted, PREPA argued that the company was so lacking in funds that, if they did not receive a loan, they would have to start cutting power to customers within a matter of days. Before hearing of the approval of the loan, Governor Ricardo Rosselló maintained that the company needed at least $1 billion to stay in operation. It is likely that more loans will be requested on the behalf of the company.

In order to curb the financial damage, Rosselló recently announced plans to privatize the company in the next 18 months. Many believe this to be a fiscally responsible solution to a growing problem, others worry about the effects privatization will have on an already financially struggling population.

Government officials also announced that, in order for PREPA to save an estimated $900 million a month, they were reducing the company’s operating reserve by 450 megawatts. They explained that this shouldn’t affect customers, however, there is the potential that it could further destabilize the already damaged power grid.


What’s happening with the privatization effort?

On February 12, the Financial Oversight and Management Board for Puerto Rico appointed Citigroup Global Markets Inc (Citi) as the lead investment banking advisors during it’s privatization process. By the end of February, the board expects to approve PREPA’s revised fiscal plan. Pursuant to a second press release, the board has extended the deadline for the approval of PREPA’s fiscal plans till the 30 of March. Citi will advise the Board on PREPA’s privatization, as well as the restructuring of PREPA’s debt pursuant to Title III proceedings in federal bankruptcy court. Citi will take the lead in identifying private sector solutions that fulfill the vision laid out by Governor Rosselló: a long-term concession for PREPA’s transmission and distribution and privatization of the utility’s generation assets. Ultimately, these elements will be a part of the Plan of Adjustment filed in the Title III case. The Oversight Board has long said that a full operational and financial transformation of PREPA — including private investment — is necessary to deliver the resilient, reliable, and cost-effective power system that Puerto Rico needs for its economic recovery. The Board welcomed Governor Ricardo Rosselló’s call for PREPA’s complete transformation and looks forward to working with the Commonwealth and the utility to rebuild PREPA’s infrastructure, restructure its debt, and attract innovative capital solutions for the Island. The Board expects to certify PREPA’s revised Fiscal Plan by the end of the month of February.