Seema Balwada, CFA
Puerto Rico Electric Power Authority
(Formerly Puerto Rico Water Resources Authority)
Power Revenue and Power Revenue Refunding Bonds
Please forward this notice to beneficial holders.
U.S. Bank National Association serves as trustee (solely in such capacity, the “Trustee”) under that certain Trust Agreement dated as of January 1, 1974 (as amended, supplemented or otherwise modified from time to time, the “Trust Agreement”), by and between it as Trustee and Puerto Rico Electric Power Authority (the “Authority”) as issuer pursuant to which certain Puerto Rico Electric Power Authority Power Revenue and Power Revenue Refunding Bonds (collectively, the “Bonds,” and holders thereof, the “Bondholders”) have been issued and are outstanding. Reference is hereby made to the Trustee’s prior notices (collectively, the “Prior Notices”). Capitalized terms used and not otherwise defined herein shall have the meanings given to them in Prior Notices or in the Trust Agreement, as applicable.
Further Developments in the Authority’s Title III Proceedings. In the Prior Notices you were informed about the status of the Authority’s ongoing debt adjustment proceedings (the “Title III Case”) pending in the United States District Court for the District of Puerto Rico (the “Court”) under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act, also known as “PROMESA.” A Majority Bond Group, consisting of an ad hoc group of Bondholders (the “Ad Hoc Group of PREPA Bondholders”) and the Mono-lines, continues to be active in the Title III Case, and the Trustee continues to consult with them in connection with the positions it has been taking as Trustee on your behalf. No plan of debt adjustment has yet been filed by the Financial Oversight and Management Board appointed under PROMESA (the “Oversight Board”), and the ultimate recovery upon the Bonds under any such plan remains uncertain at this time. The Authority has not deposited pledged Revenues with the Trustee since the inception of the Title III Case on July 2, 2017. As described in Prior Notices, Hurricanes Irma and Maria in September 2017 were significant adverse developments and power outages and cash flow disruptions persist to this day.
Commonwealth/Authority Post-Petition Financing Motion. On January 27, 2018, the Oversight Board as the Title III representative of the Authority and AAFAF as the fiscal agent for the Authority (together, the “Movants”) filed a joint urgent motion seeking, among other things, an order authorizing the Authority to obtain post-petition financing from the Commonwealth and to grant priming liens in the Authority’s Revenues as defined in the Trust Agreement ahead of the rights of the Bondholders (Dkt. No. 549) (the “Financing Motion”). Specifically, the Financing Motion sought Court approval for the Commonwealth to make direct advances to the Authority in an amount not to exceed $550 million. The interest rate for the proposed loan started at 0% and increased to 3% per annum, but the terms were subject to change without further Court approval. The Financing Motion further sought authorization for the Commonwealth to act as a post-petition lender to the Authority for up to an additional $750 million of indirect loans that it would incur from the federal government or other lending sources and then relend to the Authority. The initial hearing on the Financing Motion was originally scheduled for February 7, 2018 in San Juan, but it was ultimately rescheduled for a single final hearing on February 15, 2018 in New York.
The Financing Motion was supported by declarations filed by the Movants indicating that the Authority was exhausting its available cash reserves in light of the negative operating results caused by electricity production and billing disruptions resulting from Hurricane Maria and the delays experienced by the Authority in addressing those problems. Movants also indicated that the Authority had experienced delays in securing community development loan proceeds from the federal government, either directly or indirectly through the Common-wealth, and that no agreement to make such loans had been reached. Movants further indicated that without an immediate infusion of liquidity the Authority would be required to phase out and ultimately cease operations.
The Trustee, the Ad Hoc Group of PREPA Bondholders, and the Monolines filed objections to the Financing Motion on several grounds, including the following: (1) to dispute the Authority’s need for $1.3 billion in loans, in light of overly conservative projections and large unpaid electricity bills owed to the Authority by various Commonwealth instrumentalities, (2) the lack of a concrete agreement between the Commonwealth and the federal government agencies with respect to the lending terms for funds to be relent by the Commonwealth to the Authority, (3) the insider relationship between the Commonwealth, as the lender, and the Authority, as the borrower, and the lack of arm’s length negotiations, and (4) for purposes of the priming lien, a lack of ade-quate protection of the security and pledge interests of Bondholders that were to be subordinated. Prior to the hearing, the Movants reduced the level of proposed borrowing to $1 billion and submitted a revised proposed order and credit agreement attempting to address some of the objections. Creditors of the Commonwealth’s Title III case also objected on the grounds that the proposed interest rate was too low. On February 14, 2018, certain members of the Ad Hoc Group of PREPA Bondholders and Syncora, one of the Monolines, submitted a competing post-petition financing proposal, which was rejected almost immediately by Movants even though it did not require a priming lien to be granted.
The Court held an evidentiary hearing on the Financing Motion, as revised, on February 15, 2018. After hearing the evidence, the Court ruled that the Movants had failed to satisfy their required burden of proof with respect to the proposed $1 billion priming lien secured lending facility that was the subject of the Financing Motion, but indicated a willingness to approve an unsecured, post-petition facility in an amount not to exceed $300 million to be treated as a super-priority administrative expense claim. In the hours after the hearing, the Commonwealth revised its offer and the Movants submitted revised proposed terms, including a $300 million re-volving loan facility bearing interest at 5% per annum, for approval on application to the Court. After additional opportunities for the parties to be heard and revisions to the form of the proposed order and credit agreement, the Court entered an order on February 19, 2018 approving the $300 million loan facility (Dkt. No. 744) (the “Financing Order”). The Financing Order provides that the amounts owing by the Authority under the approved post-petition facility are to be treated as though they constitute Current Expenses under the Trust Agreement. Movants have indicated that they may seek additional post-petition loans for the Authority in subsequent Court proceedings, but none are pending at this time.
Proof of Claim Deadline Order. On January 16, 2018, the Oversight Board filed a motion seeking an order establishing deadlines and procedures for submitting proofs of claim in the Authority’s Title III Case and in the other related Title III proceedings (Dkt. No. 2255) (the “Bar Date Motion”). On February 15, 2018, the Court entered an order (the “Bar Date Order”) granting the Bar Date Motion and establishing 4:00 p.m. (Atlantic Standard Time) on May 29, 2018, as the general deadline to file a proof of claim. A copy of the Court’s Bar Date Order is available at http://dm.epiq11.com/#/case/PR1/documents. Please be advised that the Trustee intends to file a proof of claim on behalf of the Bondholders in the Authority’s Title III Case with respect to all principal, interest and other amounts owed under the Bond documentation as of the commencement of the Title III Case. If the Trustee receives a distribution on that claim it will make a further distribution to Bondholders pursuant to the terms of the Trust Agreement. Accordingly, there is no need for individual Bondholders to file duplicative proofs of claim in the Authority’s Title III Case for amounts owing on their respective Bonds. Please note, however, that if you believe that you may have separate or additional claims against the Authority other than the claims with respect to principal, interest and other amounts owing on your Bonds or have claims against other Title III debtors or other persons or entities concerning your Bonds or otherwise, you should consult with your legal professionals regarding those claims and take appropriate action within the applicable time period.
Position of Authority as Reflected in Draft Fiscal Plan. On January 24, 2018, the Authority submitted a re-vised draft of the fiscal plan to the Oversight Board providing for the ultimate sale of the Authority’s genera-tion assets to private parties and the creation of a private party consignment arrangement for its transmission and distribution assets. The draft fiscal plan has yet to be certified by the Oversight Board. The proposed fiscal plan is fundamentally inconsistent with the Authority’s future performance of its obligations under the Trust Agreement and the consummation of any sale or consignment arrangements contemplated by the Authority’s draft fiscal plan could have significant adverse consequences for Bondholders. As noted above, no plan of debt adjustment has yet been filed by the Oversight Board and the ultimate recovery upon the Bonds under any such plan remains uncertain at this time. The Court has previously indicated that it lacks jurisdiction under Section 305 of PROMESA without the consent of the Oversight Board to enter orders that interfere with the Authority’s operations or revenues, including granting relief form the automatic stay to permit Bondholders to seek the appointment of a receiver. Court approval, however, would be required for the confirmation of any plan of debt adjustment in accordance with the standards set forth in PROMESA.
Constitutional Challenge to PROMESA. On January 10, 2018, the Title III Court heard a Constitutional challenge to the appointment of the Oversight Board on the grounds that the provisions in PROMESA governing the appointment of the members of the Oversight Board violated the Appointments Clause of the U.S. Con-stitution due to a lack of Senate confirmation. The Trustee has taken no position with respect to this litigation, but notes that the outcome could affect the pending Title III Case. No ruling has been issued to date.
Mediation Process. The Trustee continues to be a participant in a mediation process being conducted by the mediation team consisting of Judge Barbara J. Houser and four other federal judges in connection with the Title III Case and related cases. Information provided to the Trustee in connection with the mediation process is sub-ject to confidentiality restrictions.
Important Limitations on Trustee Duties. The powers and duties of the Trustee under the Trust Agreement are expressly limited by its terms. Following an event of default, under Section 804 of the Trust Agreement the holders of not less than 10% of the principal amount of the Bonds outstanding may, subject to providing adequate indemnity under Section 902, require the Trustee to take certain enforcement actions as determined by the Trustee upon the advice of counsel. Under Section 807 of the Trust Agreement, the holders of a majority of the outstanding principal amount of the Bonds may direct the time, place and method of conducting all remedial proceedings to be taken by the Trustee. Further, Section 808 provides direct standing to Bondholders holding not less than 20% of the outstanding principal amount of the Bonds to act for the benefit of all holders of the Bonds in lieu of the Trustee as provided therein.
At this time, events of default exist and are continuing under the Trust Agreement and the members of the Majority Bond Group are active in the Authority’s Title III Case, but are not purporting to act on behalf of all Bondholders. The Trustee is presently not under any direction by Bondholders with respect to the actions it should take on your behalf in the Authority’s Title III Case, but has been taking actions in consultation with the Majority Bond Group.
You may hold claims relating to the Bonds that you have the right to assert directly against persons or entities other than the Authority. Please be advised that while the Trustee continues to evaluate its response to the Bar Date Order, it is not investigating and has no present intention to prosecute claims or causes of action against third parties arising out of (i) circumstances surrounding the purchase or sale of your Bonds, or (ii) any negligence or misconduct of third parties that may have aggravated your potential losses including, without limitation, past and present Authority board members, underwriters or professionals retained by the Authority or other Title III debtors or the Government Development Bank for Puerto Rico. If you want the Trustee to consider the investigation or prosecution of any claims or causes of action against any third party relating to the Bonds including, but not limited to, the above, the requisite percentage of Bondholders under the Trust Agreement will be required to direct and indemnify the Trustee in accordance with the Trust Agreement, and the Trustee will have to determine whether such investigation or prosecution is within the scope of its powers. You are encouraged to get independent legal advice with respect to all relevant claims which either you or the Trustee may have standing to assert and about whether or not providing a direction to and indemnification of the Trustee would be in your best interests. Through the passage of time claims, including claims against third parties, may be lost by reason of applicable statutes of limitation or otherwise and, therefore, if you wish to seek advice from your own attorney regarding potential claims that you may have you should not delay seeking such ad-vice. The Trustee reserves all rights with respect to claims it may assert, and nothing herein is intended as a waiver or release of any kind.
Payment of Trustee Fees and Expenses. The Trust Agreement, including Section 905 thereof, provides that the fees and expenses incurred by the Trustee (including, without limitation, attorneys’ fees), if not otherwise paid by the Authority from the Revenues, are payable from any funds held by the Trustee under the Trust Agreement prior to the payment of the Bonds. The Authority has not paid any of the fees and expenses incurred by the Trustee to date in connection with the Title III Case. The Trustee currently holds limited funds under the Trust Agreement and, pursuant to Section 805 of the Trust Agreement, it has determined not to distribute any funds currently held by it in the Sinking Fund or in any related accounts in order to, among other things, have adequate reserves to pay and reimburse the Trustee for fees and expenses incurred by it in connection with the Authority’s Title III Case pursuant to the Trust Agreement. Funds held by the Trustee under the Trust Agreement include federal interest subsidies on Build America Bonds.
Miscellaneous. The Trustee may conclude that a specific response to particular inquiries from individual Bondholders may not be appropriate either because the disclosure in question may not be in the best interest of all Bondholders or may not be appropriate without equal dissemination of information to all Bondholders. Additionally, the Trustee may be subject to confidentiality restrictions with respect to certain information. To the extent that the Trustee participates in a mediation process, it may not be permitted to disclose information derived from or pertaining to that process.
The Trustee makes no recommendations and gives no investment, legal or tax advice, and Bondholders should not rely upon the Trustee as their sole source of information for any decisions in relation to the Bonds. The Trustee does not report on ratings changes. The Trustee’s duties are limited to those expressly set forth in the Trust Agreement. Funds held by the Trustee under the Trust Agreement may include investment or advisory services provided by it and/or an affiliate. As such, the Trustee and its affiliates receive compensation for the investment advisory, custodial, distribution and other services provided. A schedule that explains the services and costs, including the rate, formula and method of calculating such compensation, is available by contacting the Trustee.
Bondholders with questions regarding this notice, or seeking additional information, should direct them in writing to Julie Becker, Vice President, U.S. Bank National Association, 60 Livingston Avenue, St. Paul, MN 55107. Bondholders with other questions may contact Bondholder Services at (800) 934-6802, option #4; or, at their web site, located at www.usbank.com/corp_trust/bondholder_contact.html
U.S. Bank National Association, as Trustee
If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information
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