AES Corp. (NYSE: AES) said in its Aug. 5 quarterly Form 10-Q report that the Puerto Rico Electric Power Authority (PREPA) has lately gotten financial help, but there are still a lot of uncertainties related to PREPA and its contract to buy power out of the coal-fired AES Puerto Rico power plant.
In June 2014, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) was signed into law, which allows public corporations, including PREPA, to adjust their debts. As a result of this event, in July 2014, PREPA entered into a Forbearance Agreement with its lenders in order to permit an opportunity for negotiation of a possible financial restructuring of PREPA.
In February 2015, the negotiating position of PREPA was weakened when a federal court deemed the Recovery Act unconstitutional. The Supreme Court upheld the federal court’s opinion on June 13, 2016. Despite this setback, PREPA managed to extend the expiration of the Forbearance Agreement several times, achieving in December 2015 certain preliminary Restructuring Support Agreements (RSAs). Under these agreements, bondholders would take a reduction in principal after exchanging their bonds for new securities that would be backed by a special charge on clients’ bills. For its part, the utility would receive five-year debt-service relief, while freeing up cash to modernize its power plants.
On June 28 of this year, PREPA authorized the issuance of the restructuring bonds, based on the approval of the Puerto Rico Energy Commission of a transition charge and adjustment mechanism that PREPA had proposed to pay for the utility’s securitized debt. PREPA is expecting to complete this new bond issuance by December 31 of this year, AES noted. As a result of the impending restructuring, Fitch has downgraded PREPA´s bonds to “C”, from “CC”, causing the downgrade of AES Puerto Rico, as PREPA is that subsidiary’s only off taker.
On June 30 of this year, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) out of Congress was signed into law. PROMESA creates a structure for exercising federal oversight over the fiscal affairs of U.S. territories and allows for the establishment of an Oversight Board with broad powers of budgetary and financial control over Puerto Rico. PROMESA also creates procedures for adjusting debts accumulated by the Puerto Rico government and, potentially, other territories. Also, PROMESA expedites the approval of key energy projects and other critical projects in Puerto Rico. The impact PROMESA will have on PREPAs contracts and PPA is uncertain, AES reported.
Other than the downgrade of AES Puerto Rico, there have been no adverse impacts to AES Puerto Rico due to PREPA’s financial challenges. AES Puerto Rico’s receivables balance as of June 30 is $91 million, of which $28 million was overdue. Subsequent to June 30, the full overdue amount has been collected. “If the situation declines, there could be a material impact on the Company,” AES said.