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Puerto Rico fuel line settlement ignores reality of island’s poor economy

December 05, 2022
Tom Sanzillo

Key Findings

Puerto Rico cannot pay back 84% of the electric power authority’s debt.

Unrealistic promises made to fuel line lenders signals settlement of authority’s $8.9 billion will repeat mistakes of three failed debt deals.

Federal oversight board is acting contrary to the interests of businesses, consumers.

The Financial Oversight and Management Board (FOMB) last week reached a deal with Puerto Rico fuel line lenders that will extend credit to the island’s electric authority to purchase fuel. The deal occurred as stakeholders continued negotiations on the $8.9 billion debt owed by the authority. 

The fuel line lenders, who have come forward as separate creditors, gave $700 million to the Puerto Rico Electric Power Authority (PREPA) on the condition that it repays at least 84% of the debt at a 6% interest rate. The debt will be secured by a yet-to-be determined connectivity charge and volumetric rate increase for ratepayers. 

Tom Sanzillo, director of financial analysis for the Institute for Energy Economics and Financial Analysis (IEEFA), said:

“This announcement signals the complete breakdown of the mediating process. The fuel line creditors have moved forward on their own. We can only assume that all creditor classes are now free to renegotiate their own deal. When the interests are segmented, no one pays attention to the bottom line—how much it will cost ratepayers. There is nothing good here.

“Moody’s commented earlier this year that the recovery rates at the agency would be less than 35%. Moody’s explained their rationale. The FOMB should at least explain how this deal is affordable, and how they and Moody’s can be so far apart. How does this deal move PREPA toward market access?

“As for the merits of the claims in question. PREPA borrowed money to buy fuel during its fiscal hard times. The concession to repay 84% means ratepayers must now pay for decades of fuel mismanagement, a history of oil scandals and the failure by the FOMB to secure any clear savings from their oversight. This deal has opened the door to a ‘come and get it’ approach to the next round of PREPA’s settlement.

“Puerto Rico’s economy cannot afford to pay back PREPA’s debt at a 6% interest rate. The economy is not growing and mostly facing negative growth. These are financial facts that are before all of the stakeholders. It is sad that the FOMB and the bankruptcy court see this as a solution. The deal means nothing has been learned from the three failed proposals.”

Tom Sanzillo ([email protected]) is IEEFA’s director of financial analysis

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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