IEEFA Puerto Rico: What does LIPA’s $7 billion bond deal tell us about PREPA’s $8 billion deal?

Many comparisons have been made between the Puerto Rico Electric Power Authority (PREPA)’s debt restructuring process and that of the Long Island Power Authority (LIPA) twenty years ago. The $7 billion LIPA municipal bond deal and the $8 billion Puerto Rico Electric Power Authority (PREPA) municipal bond deal are two of the largest such deals ever. Other than size, it turns out they have very little else in common. What the comparison does show, however, is just how weak the PREPA deal is and, if allowed to go through, how likely it is to lead PREPA into another bankruptcy.

Both deals are about failure to one extent or another. LIPA’s 1998 $7 billion bond deal was implemented to pay for the cost of the Shoreham nuclear power plant, a facility that was constructed, but never used. The PREPA deal addresses more than $8 billion in legacy indebtedness, money that has already been spent, but without a reliable electricity system to show for it.

PREPA is now substantially replicating the LIPA investment model despite vast economic, geographic, and technical differences between the two localities. Part of LIPA’s debt was transferred in 2013 to a bankruptcy-remote special purpose entity, whose sole purpose is to issue the securitized bonds and pay them off with a targeted rate surcharge. This is essentially the same structure that is being proposed for PREPA’s legacy debt. But the similarities end here.

The LIPA deal is widely hailed as successful, and both LIPA and LIPA’s securitized debt are highly rated by the major credit rating agencies. The PREPA deal seems far less creditworthy.

INDEED, MANY KEY STRENGTHS OF THE LIPA DEAL ARE WEAKNESSES FOR PREPA. For example, according to a 2017 Moody’s credit opinion:

• LIPA’s key credit strength is the economy of Long Island, comprising two of the most affluent counties in the United States, with median household incomes greater than $90,000 per year and a growing economy. Puerto Rico’s median household income is less than $20,000 per year. And Puerto Rico’s economy is shrinking, with gross state product expected to decline by 16-18% from 2019 to 2028, according to a September 2018 Moody’s analysis.
• LIPA has an experienced servicer, the entity responsible for collecting the payments from ratepayers. In PREPA’s case, given that the securitization bonds are supposed to be issued before any privatization transaction closes, it appears likely that – at least initially – PREPA itself will take on the role of servicer. PREPA consistently works in financial and operational chaos; its audited financial statements and fiscal plans have been chronically late for the last several years, its most recent financial statement (2016) showed more than $2 billion in misstatements from prior audits, it has an accounts receivable balance of more than $1.6 billion, and suffers persistently high levels of electricity theft. Its ability to accurately enforce and collect a new debt service charge should not be taken as a given.

What is most telling in comparing the two deals is what Moody’s considered a weakness for LIPA: the size of the debt charge as a percentage of the overall rate. On Long Island, 9.64% of the electric rate goes towards paying off the Shoreham nuclear plant debt, a level that Moody’s characterized as “relatively high compared to charges in other utility cost-recovery bond transactions.” In Puerto Rico, the debt charge will start at 2.8 cents/kWh, or about 13% of the rate, and escalate moving forward.

THIS RATE SCENARIO MAKES ELECTRICITY UNAFFORDABLE TO PUERTO RICO RESIDENTS AND UNCOMPETITIVE FOR FUTURE INVESTMENT. If a charge of 9.64% of the rate is “relatively high” for two of the wealthiest counties in the country, it is hard to imagine how imposing a substantially higher charge on Puerto Rico (which has higher utility rates to begin with) can be supported by the island’s economy.

And, indeed, that is the conclusion that Puerto Rico’s Financial Oversight and Management Board drew in 2017 when, prior to the devastation of Hurricane Maria, it rejected a debt deal that would have imposed a charge starting at 3.1 cents/kWh. The Board wrote, “Affordable and reliable electricity is central to Puerto Rico’s economic turnaround, without which customers will seek alternative measures to satisfy their needs resulting in increased pressure to increase the rates to the remaining customer base, thereby inhibiting growth and long-term viability.”

Yet, now, after the 2017 hurricanes weakened Puerto Rico’s economy even further, the Board has signed onto a debt deal with a level of repayment that is not significantly lower than what was rejected two years ago. Just after the hurricane, Moody’s concluded that Puerto Rico’s economy could only absorb a debt repayment arrangement that was about half of what is being considered now.

In short, comparing LIPA’s debt deal to PREPA’s makes very clear that the underlying economic and operational realities of Puerto Rico and its electrical system will result in a much worse outcome for the people of Puerto Rico.

Cathy Kunkel ([email protected]) is an IEEFA energy analyst.

Tom Sanzillo ([email protected]) is IEEFA’s director of finance.

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