The Examiners: Prepa Restructuring Will Impact Many Stakeholders

Puerto Rico’s Prepa utility has until mid-December to come up with a new business plan and early March to propose a debt-restructuring plan. What should these plans consider?

While Puerto Rico’s Prepa utility struck a deal to fend off key creditors for a few months, it has far from solved its financial woes. Prepa—headed by its new chief restructuring officer—has several months to come up with a five-year turnaround plan to rebuild its business model and a plan to restructure $9 billion in total debt. Puerto Rico’s weak economy, 14.1% unemployment rate and $73 billion in debt make a restructuring particularly challenging. A turnaround plan for a distressed utility within the even more economically troubled commonwealth of Puerto Rico faces operational, fiscal and political hurdles.

As a struggling utility company with outdated oil-burning plants, Prepa must forgo short-term solutions and think about long-term sustainable solutions. Prepa needs a business model, which starts with revamping its infrastructure so it can generate electricity from cheaper sources: alternative fuel options and/or renewable energy. This brings us to the next challenge. Where does a utility company, drowning in $9 billion of debt, obtain new money to fund a complete overhaul of its obsolete infrastructure?

Prepa must consider tightening its internal controls for increased efficiency, finding funding for capital improvements and maintaining a cost structure sustainable by the pricing it can charge for the services provided to invest in renewable energy projects. Prepa should also consider emulating the cost-cutting techniques found in turnaround plans of other companies in the energy sector. Earlier this year, Tokyo Electric Power Co. (known as Tepco) included in its turnaround plan a provision for setting up a joint venture with other utility companies to cut costs and purchase alternative fuels such as liquefied natural gas. Oil shipments from overseas and obsolete operations systems translate to lower cost-efficiency. While the government-run company might need to roll out a complete overhaul over time as opposed to making all of the capital expenditures immediately, completing a total overhaul is likely necessary to achieve long-term fiscal stability.

Politically, Prepa’s chief restructuring officer will have to strike a balance between the utility’s investors on one hand and its board and the union on the other. Bondholders have already agreed to extend payments on their debt and will oppose restructuring. The union will likely be especially sensitive to labor-related cost reductions in light of the commonwealth’s high unemployment rate. Prepa’s board and the union have already said they won’t support privatization or job cuts. The chief restructuring officer will have to assist all stakeholders in arriving at a happy medium, as her actions are subject to both the approval of Prepa’s board and to the cooperation of investors.

The bottom line is that something has to give: bondholders will likely be forced to take a writedown, and Prepa will have to consider labor-related changes. If Prepa’s current board refuses to conform, it may become clear that Prepa would increase its likelihood of financial survival under the thumb of more progressive, and perhaps private, management.

Sharon Levine is vice chair of Lowenstein Sandler LLP’s national bankruptcy, financial reorganization and creditors’ rights practice. Follow her on Twitter at @LevineSharon.