Dive Brief:
- The Puerto Rico Electric Power Authority (PREPA) last week struck a deal with creditors to extend an existing debt-restructuring agreement for six months and skirt default on a $415 million bond payment, Bloomberg reports.
- The utility also won approval from regulators for a new rate structure that would increase electricity prices by about $0.04/kWh — a hike of about 26% rate by 2017, CNN reports. The higher rates are expected to help the utility cover expenses while regulators consider broader reforms.
- The utility deal came as Puerto Rico failed to pay nearly half of the $2 billion in bond payments also due last Friday after President Obama signed 11th-hour legislation to help restructure the financially-challenged territory and stave off potential litigation in case of default.
Dive Insight:
Puerto Rico could have a lifeline after months of bleak financial news, but the situation is still dire.
Just a day before the Friday deadline last week, President Obama signed bipartisan legislation aimed at restructuring the Island's $70 billion debt burden by appointing a control board to oversee the process and halting litigation in case of a default.
PREPA, by contrast, said it needed no bailout and would make its payment deadline, with a group of mutual fund companies and hedge funds that hold 35% of its debt agreeing to buy $264 million of additional bonds, Bloomberg reported.
"We are pleased to have reached an agreement allowing us to make the payment to bondholders and avoid a default," Lisa Donahue, Prepa's chief restructuring officer, said in a statement to Bloomberg. "Today's outcome is another step towards Prepa's transformation. As a result of these agreements, we have preserved our cash position as we continue to implement an operational and financial restructuring."
But that restrucuring could prove costly to Puerto Rican customers. To help cover the utility's cash flow as regulators consider broader reforms to operations and ratemaking, the PREPA secured approval for two series of electricity rate increases totalling $0.044/kWh. That could raise electricity prices by more than 25%
"The interim rate will help cover the PREPA gap in cash flow to continue operating, while the Commission assesses the application of a rate restructuring in the long term," Harry Rodriguez, PREPA governing board chairman, said in the statement.
The restructuring deal is expected to reduce the utility's obligations by $600 million and postpone another $700 million-plus of its debt for five years. The plan also includes new standards for operations and an investment plan.
Under the Restructuring Act, funds made available through the restructuring could be used to move PREPA to more natural gas and renewables generation and away from the dependence on expensive fuel oil-generated electricity that has contributed to its financial difficulties.
