Monday Update – March 26, 2018

Welcome to your weekly Title III update for March 26, 2018. Again, not much happened in the cases, but other things have come up.

Continuing with the Board’s statement on the March 7, 2018 Omnibus hearing, it filed an update on PREPA’s need for financing and said:

“PREPA’s budget reporting since the closing of the postpetition facility has indicated materially better actual liquidity than originally forecasted. Barring unforeseen circumstances, PREPA does not currently anticipate a need for supplemental postpetition financing before May 15, 2018, and possibly not until several weeks after that. PREPA therefore expects any motion for approval of supplemental or replacement postpetition financing would be filed on or after April 23, 2018.”

It is interesting that the Board continues to push PREPA’s alleged need for financing when its numbers belie the need for any financing. It seems like the Board does not want to look more foolish than it did when no disaster struck the Puerto Rico Government or PREPA in spite of Mr. Jaresko or Mr.  Bienenstock’s dire warnings. In any event, I doubt PREPA will be asking for another loan any time soon.

Why does this matter?  It goes directly to the heart of a looming question:  How and when will Puerto Rico get access to the Community Disaster Loan (CDL)?  The General Fund balance is now just above $1.4 billion, and they will not have access to the facility unless the cash balance drops below $1.1 billion.  This raises two important questions: 1) How does the Puerto Rico Government spend over $300 million to drop the cash balance? And 2) will the Federal Government just turn over hundreds of millions of dollars, just because the governor and the Oversight Board purposefully depleted the General Fund.  It all seems a bit fishy.

Also, this past week many parties filed requests for interim compensation which will be discussed on the next omnibus hearing. Millions of dollars are being spent in the PR Title III proceedings and many more will be spent. I wonder if the money spent will bring any actual benefit for PR.

There were several motions pending for the rejection or acceptance of executory contracts and their discussion was postponed several times and Judge Swain apparently got tired and dismissed them without prejudice of them being filed again. The Judge has too many things on her plate to be dealing with motions that the parties do not seem to want resolved.

The UCC, PREPA and Whitefish came to a stipulation which was accepted by the Court for the former to conduct discovery on the latter’s contract. It will be interesting to see if the Committee finds any impropriety that will result in another adversary proceeding.

Many of the filings this past week were related to the March 27, 2018 hearing on the PR Energy Commission request for an injunction, which I discussed last week. The U.S. Bank National Association, solely in its capacity as Trustee under the terms of that certain Trust Agreement with the Puerto Rico Electric Power Authority filed a motion to intervene in the same capacity as some PREPA bondholders and the request was granted by the Court. The Energy Commission filed its reply and the case is ripe for argument and adjudication on Tuesday, March 27. I will be there.

On an unexpected development, six credit unions filed an adversary complaint against the Commonwealth, AAFAF, the GDB, COSSEC, and members of the Board. The basis of the complaint is that the Government forced them to buy bad bonds and that fraud was involved. The credit unions averred that bond counsel, underwriters and others involved in the bond sale, identified as John Doe, are also liable to them. Moreover, they claim that pursuant to Section 105 of the Bankruptcy Code these debts are not dischargeable but given that Section 523 of the Bankruptcy Code was not adopted in PROMESA, I don’t see Judge Swain granting that. The complaint, however, is the harbinger of other complaints that will be filed if COFINA is deemed invalid or unconstitutional. Let’s see what happens.

Around midnight of March 23-24, 2018, AAFAF made public the PREPA fiscal plan filed on March 21, 2018, obviously to prevent the press from discussing it until Monday of the Holy Week. The PR Government is into transparency. It is important to note that in February AAFAF provided the Board with another fiscal plan but never made it public. This means that the previous one was also found wanting by the Board. In addition, AAFAF also made public a March 21 Commonwealth fiscal plan. I will discuss the highlights.

The PREPA fiscal plan has the usual caveats and reservations, including that the information does not come from audited financial statements. Allegedly, the Board ordered the financial statements to be completed by December 2017. Seems that everyone forgot. At page 14, we see the mention of the appointment of Mr. Higgins as executive director. If AAFAF knew of this, then the governor had to know, including about information regarding Mr. Higgins’ salary.

Why then did the governor order the PREPA Board to explain? At page 22, discussing the historical challenges, it mentions above-market benefits in collective bargaining agreements with evergreen provisions, underfunded pension obligations (over $3.6BB), significant losses of experienced personnel. This is a recurring theme in the fiscal plan. The fiscal plan continues stating that if PREPA were to cover all its liabilities (obviously including the $8.3 billion debt bond debt) the cost of the kilowatt hour would be 30 cents, pages 28-30.

PREPA is aiming to reduce the cost of its medical plan (page 38) and will present a new Integrated Resources Plan (page 54). The fiscal plan complains bitterly about the Energy Board and its interference with PREPA, complaining about it asserting jurisdiction over budgets approved by the FOMB and at page 97 wants to revamp it with new legislation. Let’s see if the FOMB allows it.

PREPA’s unions are also criticized by the fiscal plan;

“All union contracts are arguably in effect continuing under a questionable evergreen clause; PREPA Management believes work rules and CBA articles hinder efficiency.

The union contracts include narrow work rules that, among other things, prevent PREPA management from efficiently deploying and supplementing human resources in an efficient manner

PREPA is understaffed in certain high skilled functions, partially due to a wave of retirements in 2017 (which is spilling over into 2018)(page 74)”

Certain areas of PREPA, including customer service and legal, are earmarked for reengineering and outsourcing (page 75). PREPA will start discussions with the unions on efficiency optimization and if successful, they will be implemented, if not, it will then “develop a restructuring plan under Title III and begin the process to implement the plan” (page 76). What this means is that if the union does not play along, PREPA and the Board will establish the new Rules. The SCOTUS in a case called NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1985), decided that even before the union contracts, which are executory contracts, were rejected by the debtor, it could start modifying the collective bargaining agreement. In reaction to this case, Congress enacted section 1113 of the Bankruptcy Code, but this section was not adopted in Chapter 9 nor in PROMESA. Moreover, the Court in In re City of Vallejo, 403 B.R. 72, 78–79 (Bankr. E.D. Cal. 2009) stated that Bildisco applied to the Chapter 9 case.

As to what will happen with the pensions, at page 78, the Fiscal Plan establishes a timetable and states it must “[d]etermine long-term impact of the following options: reducing benefits for active employees, reducing benefits for active employees, reducing benefits for retirees, increasing contributions, increasing investment return.” You may notice that there is no mention of PREPA making up for the $3.6 billion deficiency. It is all bad for the union members.

Pages 87-91 detail the actual sale and lease of PREPA’s property. Transmission and Delivery will be leased to one entity for maybe 25 years. The generation may be sold to several entities and AES and Ecoeléctrica’s contracts renegotiated. There is a caveat, however, that [t]ransformation structures are illustrative in nature and subject to change based on market input and other considerations.” These private partners (page 93) must, however, show the following:

“Demonstrate experience with best-in-class utility operations, including efficient execution of operations and maintenance and ability to integrate new technologies quickly and cost-effectively to benefit the transformed system, e.g. smart grid solutions

Demonstrate ability to anticipate and address future challenges to current and transformed operating model, including increased distributed energy resources; variable energy resource integration, and changing customer demands for dynamic pricing and innovative services

Transmission and Distribution –Provide expertise and access to sufficient low cost private capital to achieve and maintain over the entire concession term a modern and transformed energy grid infrastructure, including appropriate smart grid technologies.”

These factors seem to disqualify any energy coops that may develop in PR, much to the chagrin of Senators López and Bhatia who were touting them as the solution to PREPA’s problem. The clincher to all this, however, is that [g]iven the context of Puerto Rico’s energy sector transformation and its importance to the Puerto Rican economy, maximizing the proceeds from the sale of PREPA’s generation assets will only be one factor in determining the best bid(s)” (page 93). In other words, neither the Government nor the Board care if the sale will not produce enough money to pay creditors, including bondholders.

All this transformation will cost the tidy sum of $13.7 billion. Really pocket change for the people of PR. I assume the governor assumes this will be paid by the Federal Government. Oh, well.

The Commonwealth fiscal plan also starts with similar disclaimers, making a mockery of the Board’s reliability on its information. At page 22, the fiscal plan insists on a $94.4 billion rescue from the federal government and complains in the next page that is only getting $49.1 billion. Pages 37-39 detail the entities covered by the fiscal plan and those not covered by any fiscal plan. At pages 41, 45 and 55 it touts a $6 billion surplus in 2023 but not a penny dedicated to debt service. Also, there is no mention in the fiscal plan of the $7.1 billion “discovered” by AAFAF in the over 800 accounts.

At page 60, the fiscal plan details an “expedited” procedure in the Legislature for approval of changes in the Government. I am sure Senate President Tomás Rivera Schatz will be very accommodating. The fiscal plan mentions “right sizing” of the Department of Education (page 62) and the Department of Health (pages 81-82) with many Mi Salud recipients having reduced coverage. Policemen will receive the $1,500 a year (page 69) salary increase which will barely cover their new SS payments but there is no mention of a similar raise for teachers. All other agencies transformation will focus on achieving savings by consolidation or externalization of functions or services” (page 70). Pages 113-114 detail the new labor reform, which means that if the plan is certified, PR will have to comply, the governor’s reticence notwithstanding. Finally, page 120 acknowledges that the office of the Chief Financial Officer will be created.

The governor’s representative to the Board once loudly proclaimed in a meeting that there would not be any furlough of employees and that you could take it to the bank. Seems he was right, but instead employees will be forced into retirement or face dismissal. Governor Rosselló accepted this reality in an interview with El Nuevo Día that came out Saturday.  Unfortunately, this is a natural consequence of the socialist experiment PR has undergone since the 1940’s.

Last week, the Board announced it was going to discuss the fiscal plans on Monday, March 26 and I filed the customary request to be allowed to attend. On Friday, this meeting was cancelled. I surmise that since there is no mention of pensions in the Commonwealth fiscal plan, contrary to the PREPA fiscal plan, the governor does not want to accept pension reductions. If no agreement is reached, I am afraid the Board will certify its own fiscal plan, no later than March 30, since Ms. Jaresko made it clear in an interview in El Nuevo Día on Saturday that pensions would be reduced. Let’s see what happens.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.