Co-author Morgan M. Gerard
Renewable energy industry participants are hungrily eyeing the tiny U.S. commonwealth of Puerto Rico, trying to determine whether the island’s debt crisis-driven troubles – which recently put a halt on development activities on the island - are at an end. Until recent issues arose, the island was a hotbed of renewable energy activity. High energy prices, high insolation and the promise of 20 MW-plus deals with a government-backed utility generated excitement throughout the solar community. However, the widely reported debt crisis on the island, which has seen the government default on debt obligations, has caught the nascent solar industry up in its wake.
Despite Puerto Rico’s financial crisis, unreliable electric grid and overwhelming poverty, early movers are contemplating a return to the island betting on the idea that, when push comes to shove, the United States wouldn’t allow the island – and 3.5 million American citizens along with it – to sink into the financial sea. A bill that would provide some relief, the Puerto Rico Oversight, Management, and Economic Stability Act or “PROMESA” (House Bill H.R. 5278 / Senate Bill S. 2328), is currently on the table. PROMESA is in the stage of reconciling the different drafts passed by the House and Senate for presentation to President Obama, and its implementation could have far-reaching ramifications for the debt-ridden island and help drive renewed activity in the development of badly needed renewable energy resources.
Puerto Rico and PREPA’s Debt Crisis—A Primer
The purpose of PROMESA is to establish an Oversight Board as a method for Puerto Rico “to achieve fiscal responsibility and access to the capital markets.” In recent years Puerto Rico borrowed money through the issuance of $70 billion worth of municipal bonds to combat declining government revenues and finance the operations of the territory. More than $9 billion of the Commonwealth’s climbing debt is owed by the government-owned public utility company, the Puerto Rico Electric Power Authority (PREPA).
Established in 1941, PREPA is government-instrumentality and the island’s monopoly energy utility with approximately 1.5 million citizens in its service territory—one of the largest operating areas in the United States. However, until 2014 PREPA was an unregulated entity with very little fiscal or operational oversight which some complained was used for political purposes. Poor financial decisions were made by the utility and politicians, including the incentivization of large corporate customers by providing essentially “free” power and turning a blind-eye toward widespread electricity theft by citizens. Thus, according to Reuters, PREPA’s 2014 operating income was just $223 million against $1.6 billion in accounts receivable.
Given the circumstances surrounding the island’s revenue versus debt payments, Governor Alejandro García Padilla acknowledged in a statement last year that the debt was “not repayable.” As it became clear that PREPA would similarly be unable to meet its obligations, the local legislature established a utility regulatory, the Puerto Rico Energy Commission (PREC) and passed the Puerto Rico Corporation Debt Enforcement and Recovery Act (Recovery Act), which sought to allow PREPA to restructure its debt. While PREC is actively trying to reign in PREPA and establish new norms for the utility, the Supreme Court struck down the Commonwealth’s attempt to modify its debt obligations ruling that Puerto Rico, as a territory, is not entitled to Chapter 9 bankruptcy protection, which is reserved exclusively for use by States.
Although the ruling disallowed Puerto Rico from authoring its own bankruptcy plan, the government developed a plan to transfer PREPA’s debt to a new entity. Under the Puerto Rico Electric Power Revitalization Act (Revitalization Act), the government created the PREPA Revitalization Corporation, which issued its own bonds and exchanged these new bonds for outstanding PREPA bonds. Uninsured bondholders wishing to participate in this exchange agree that “Revitalization Debt” issued by the revitalization corporation will have a lower interest rate and a five year delay on the payment of principal. This bond issuance and exchange will provide some relief for PREPA and enable a securitization to help finance $400 million worth of the new Aguirre liquefied natural gas facility.
To further this end, the Revitalization Corporation filed a petition with PREC to create a new structure of raising revenue in lieu of taxes for cities though a hike in utility rates. On June 21, 2016, PREC ordered the creation of a “transition charge” that will provide security to bondholders that PREPA will pay its outstanding obligations, and hopefully provide enough stability to allow some liquidity into the starved utility market. This “transition charge” will not in-and-of-itself raise rates on customers, but rather signifies which monies are being set aside by PREPA for bond repayment. A separate rate case will weigh the wisdom of raising utility rates—it is anticipated that PREPA will raise rates for the first time since 1989.
The Revitalization plan is seen as something of a stop-gap to calm investors; however, more work needs to be done to shore up the Commonwealth’s credit. Notably, since Puerto Rico is not a country, it cannot access assistance from the International Monetary Fund (IMF). With no true independent long-term means of debt relief, the responsibility over Puerto Rico’s fate shifted to the U.S. Congress.
PREPA and PROMESA—Renewable Energy on the Island
Puerto Rico has few conventional energy resources and, due to PREPA’s heavy investment, shipped in petroleum products are the dominant energy sources for the island. In 2012, 65% of Puerto Rico’s electricity came from petroleum, 18% from natural gas, 16% from coal, and 1% from renewable energy. Given the island’s high insolation rates, Puerto Rico enacted a Renewable Energy Portfolio Standard (RPS), offering generators Renewable Energy Credits (RECs) and requiring PREPA to obtain 12% of its electricity from renewable sources starting in 2015, scaling up to 15% by 2020 and 20% by 2035. To achieve this objective, PREPA signed a number of large scale Power Purchase Agreements (PPAs) with solar developers, which largely fell apart or expired amidst the debt crisis. As the utility’s credit-rating fell so too did the financeability of PREPA offtake agreements. Relevant to developers and investors, PREC has wide latitude over future PPAs signed with PREPA and the Commission may be able to push through new generation through pre-approved or existing agreements.
PROMESA and PREPA Assets
PROMESA, the solution under discussion in the U.S. Congress, is an attempt to quell bondholders and facilitate the long-term financial reliability of the island and its government instrumentalities, which includes PREPA. The focus of the bill is an Oversight Board that will pass its own bylaws to help Puerto Rico implement responsible fiscal policies. The bill may also help facilitate long-term investment in renewable energy projects, potentially stabilizing the utility and providing opportunities to investors and developers. Key components of the plan include:
Oversight Board: PROMESA, as written, seeks to establish an Oversight Board that would have the authority to “enforce fiscal reforms, negotiate and enforce debt restructuring agreements with owners of Puerto Rican debt, force the sale of government assets, establish efficiencies that consolidates (sic) agencies and reduce workforce levels, prevent the execution of legislative acts, executive orders, regulations, rules, the issuance of new debt, and contracts that undercut economic growth or violate [the] Act.” Thus, PROMESA could allow for a forced sale of PREPA assets. Under the bill, it appears that creditors would be the recipient of funds from a forced sale; however, there may be opportunities for developers to purchase and privatize energy assets if such an event occurs.
Debt Restructuring: The Oversight Board may be able initiate a proceeding for debt restructuring of an entity, including PREPA, if the Oversight Board determines that certain criteria have been achieved; specifically: “1) the debtor must have engaged in good-faith debt negotiations; 2) the debtor must be on the path towards producing audited financials, and must have public draft financial statements available that would allow the Oversight Board to be able to make an informed decision in regards to restructuring; and 3) the debtor must have an Oversight Board approved five-year fiscal plan in place.” A debtor would be able to access restructuring in the instance that the debtor meets these criteria, and has not reached a consensual negotiation with its creditors. Five of the seven Oversight Board members must vote in favor of the restructuring. Thus, the Oversight Board could allow PREPA to restructure its debt obligations, likely freeing up capital in the short term to commit to offtake from new renewable energy projects.
Puerto Rico Infrastructure Revitalization: Under the Oversight Board there would be a Revitalization Coordinator that may expedite “critical energy projects” when responding to an “emergency” need for infrastructure. The draft bill’s framework would have a developer identify a project and submit it to the Revitalization Coordinator. The application for expedited permitting services must include: “1) the impact the project will have on an emergency; 2) the availability of immediate private capital or other funds, including loan guarantees, loans, or grants to implement, operate, or maintain the project; 3) the cost of the project and amount of Puerto Rico government funds, if any, necessary to complete and maintain the project; 4) the environmental and economic benefits provided by the project, including the number of jobs to be created that will be held by residents of Puerto Rico and the expected economic impact, including the impact on ratepayers, if applicable; and 5) the status of the project if it is existing or ongoing. In addition to these requirements, the Revitalization Coordinator may require a submission to outline how the project will reduce reliance on foreign oil, improve performance of energy infrastructure and overall energy efficiency, diversify energy resources, support PREC in achieving its goals, contribute to transitioning to privatized generation capabilities in Puerto Rico and promote the development and utilization of energy sources found on the island.
This last provision could provide a foothold for renewable energy advocates to grasp onto, though it remains to be seen how quickly development of financeable projects can be undertaken in the face of ongoing financial issues.
It appears under the most recent draft of PROMESA that the Oversight Board will have considerable weight in determining the future financial position of PREPA, either stabilizing the utility or selling off its assets. Notably, although there are multiple independent generators in Puerto Rico, PREPA is the sole distribution and transmission entity; therefore, its financial health and ability to transmit uninterrupted electricity as well as develop a wheeling tariff are vital to project development. As Congress moves closer to recess, the fate of Puerto Rico could be either determined quickly or delayed until fall. Within the current drafts, much is still uncertain concerning the debt restructuring process. For example, whether or not renewable energy PPAs will be considered imputed debt that falls under the control of the Oversight Board is unclear. Also, it is yet to be determined how the Oversight Board and PREC will cooperate together since much of their authority over PREPA may overlap.
In short, the opportunity may be large for an investor or developer to participate in providing electric service to PREPA’s expansive territory, and PROMESA could offer a fast track to a more renewable future for Puerto Rico if its execution does not become a bureaucratic quagmire. However, much is yet to be determined, and even bullish developers and investors will be watching developments with a wary eye.