A federal judge in Puerto Rico on Feb. 6 struck down a restructuring law passed last year by legislators largely to protect the Puerto Rico Electric Power Authority (PREPA) from its massive debt.
In two cases, the Franklin California Tax-Free Trust and the Bluemountain Capital Management LLC, which hold some of that debt, had filed suit against the law. Judge Francisco Besosa, out of the U.S. District Court for the District of Puerto Rico, on Feb. 6 ruled in part against the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. Before the court were three motions to dismiss plaintiffs’ complaints and one cross-motion for summary judgment. The judge granted in part and denied in part the three motions to dismiss and the cross-motion for summary judgment.
“Because the Recovery Act is preempted by the federal Bankruptcy Code, it is void pursuant to the Supremacy Clause of the United States Constitution,” the judge wrote.
In June 2014, the Commonwealth Senate and House of Representatives approved the Recovery Act, and on June 28, 2014, the Governor signed it into law. The Recovery Act’s Statement of Motives indicates that Puerto Rico’s public corporations, especially PREPA, “face significant operational, fiscal, and financial challenges” and are “burdened with a heavy debt load as compared to the resources available to cover the corresponding debt service.” To address this “state of fiscal emergency,” the Recovery Act established two procedures for Commonwealth public corporations to restructure their debt. It also created the Public Sector Debt Enforcement and Recovery Act Courtroom to preside over proceedings and cases brought pursuant to these two procedures.
The Commonwealth has in part tried to argue that the two debtholders lacked standing to bring their lawsuits (which the court consolidated into one case) and that this matter was “unripe” because the Recovery Act had not been used yet. Based on those arguments, the judge did dismiss the case related to whether the Recovery Act had been used yet.
But the bottom line decision from the judge said: “The Recovery Act is preempted by the federal Bankruptcy Code and is therefore void pursuant to the Supremacy Clause of the United States Constitution. The Commonwealth defendants, and their successors in office, are permanently enjoined from enforcing the Recovery Act.”
PREPA’s heavy debt load is seen as a key impediment to the authority’s ability to make needed changes, including an ongoing plan to convert some of its oil-fired capacity to gas-fired generation for clean-air and cost-of-fuel reasons. That gas would be imported into the Commonwealth as liquefied natural gas. AES Corp. (NYSE: AES), the owner of a coal-fired plant that sells power to PREPA, has said in financial reports that it has been having trouble lately getting paid for its power.
Said AES in a November 2014 quarterly financial report: “Our subsidiary in Puerto Rico has a long-term [power purchase agreement] with the Puerto Rico Electric Power Authority (‘PREPA’), a state-owned entity that supplies virtually all of the electric power consumed in the Commonwealth and generates, transmits and distributes electricity to 1.5 million customers. As a result of macroeconomic challenges in the country, including a seven-year recession, PREPA faces economic challenges including, but not limited to reliance on high cost fuel oil, decline in electricity sales, high customer power rates, high operating costs, past due accounts receivables from government institutions, and very low liquidity along with challenges obtaining financing due to the recent downgrades, and has struggled to honor its payment obligations to electricity generators on a timely basis. AES Puerto Rico’s receivables balance as of September 30, 2014 is $95 million, of which $33 million is overdue and days sales outstanding from PREPA has deteriorated, which has caused our business to start to be delayed in our payments to suppliers. Subsequent to September 30, 2014, overdue receivables of $30 million have been collected.
“In February 2014, all agencies downgraded the Commonwealth of Puerto Rico and it’s public sector companies (PREPA included) to below investment grade,” AES added. “On June 28, 2014, the Governor of Puerto Rico signed into law the Recovery Act, which allows public corporations to adjust their debts in the interest of all creditors, and establishes procedures for the orderly enforcement. With the recent passing of the Recovery Act, the ratings were further reduced. The downgrade on PREPA has had a direct impact on AES Puerto Rico’s bonds, except for Moody’s which rates the bonds above the state-owned corporation given AES Puerto Rico is the lowest cost producer of electricity. We believe that AES Puerto Rico’s unique position as the lowest cost energy producer and cost-effective alternative for PREPA relative to fuel oil generated power, positions the business well and reduces the probability of negative impacts from a potential PREPA restructuring process. However there can be no assurance as to the final terms of any restructuring or potential impacts on AES Puerto Rico.”