Puerto Rico Faces Blackouts Again, This Time Due to Bankruptcy

Feb. 21, 2018
Officials are preparing to implement rolling blackouts

(Bloomberg) Power outages plagued Puerto Rico for months after Hurricane Maria. Now, the financial tempest of bankruptcy may bring them again.

Officials are preparing to implement rolling blackouts if the utility runs out of money to pay for fuel after a federal judge rejected the commonwealth’s request to lend $1 billion to the Puerto Rico Electric Power Authority to keep it operating. Government officials responded on Friday by shrinking the size of the request by more than a third, hoping to keep the lights on about six more weeks.

Puerto Rico officials warned that without a swift injection of funds energy outages would begin as early as the middle of next week. That would deal a fresh setback to the island’s recovery from the September storm that devastated the electricity grid so badly that tens of thousands of residents went without power for months. Even now, the island is generating only about 84 percent of the power it needs.

While Puerto Rico has money it can lend to keep the utility temporarily afloat, it needs the approval of the court overseeing its record-setting $74 billion bankruptcy.

U.S. Bankruptcy Judge Laura Taylor Swain indicated Thursday she’s willing to approve a smaller loan. She advised Puerto Rico to cut it down to $300 million and make other changes to mollify creditors, including making the loan unsecured by collateral. The judge said Puerto Rico and its federal oversight board can seek a larger loan after bolstering their case that any new debt should be given higher priority than outstanding bonds.

The power company, known as PREPA, will prepare to shut down some generators to conserve cash, officials said in their renewed, smaller loan request, which they are seeking to have approved on Tuesday. But even if it gets the $300 million, the money is projected to last only until about the end of March.

The interim money will tide it over while PREPA waits for President Donald Trump’s administration to release disaster-recovery loans approved by Congress. During the court hearing Thursday, attorneys and financial advisers for Puerto Rico and its utility painted a dire picture.

"PREPA will cease operations, 6,000 people will be out of work and the island will be plunged into darkness," said Joseph P. Davis, an attorney for the commonwealth. "What nature brought in the storms in September, human shortsightedness will bring back."

Bondholders opposed the $1 billion loan, mainly because it would be paid before them at the end of PREPA’s bankruptcy. PREPA, the commonwealth and other Puerto Rico agencies were put in bankruptcy last year by the federal oversight board to restructure $74 billion debt and about $49 billion in pension liabilities.

Hurricane Maria caused the longest outage in U.S. history, the commonwealth said. By January, most customers had their service restored, but PREPA could bill only 35 percent to 40 percent of accounts.

PREPA has been running dangerously low on cash, its chief financial adviser, Todd Filsinger, testified Thursday. As of Feb. 2, the agency had about $194 million, he said. It costs about $50 million a week to keep PREPA running, according to Davis, the Puerto Rico attorney.

The company made contingency plans that would shut off its most expensive generators and reduce power to residential and commercial customers in phases, Filsinger said. Hospitals, gas stations and emergency services like police and fire departments would get priority, he said.

Under the rationing plan, customers would initially see electricity for limited hours and eventually whole areas would experience blackouts, Filsinger said. Without cash to buy fuel and pay employees, eventually the entire grid would shut down.

Bondholders acknowledged the seriousness of the crisis, but insisted it was created by the Puerto Rico government and could be solved without damaging creditors. Both sides said blackouts would be a man-made crisis to rival Hurricane Maria.

Creditors have long complained about mismanagement at PREPA. In court Thursday, they pointed to about $200 million in uncollected electric bills owed by various government-controlled corporations, like hospitals.

“We don’t want the lights to go out,” bondholder lawyer Thomas Mayer said in court Thursday. “PREPA was used as a piggy bank, and that’s why we’re here.”

The case is In re: Puerto Rico Electric Power Authority 3:17-bk-04780, U.S. Bankruptcy Court, District of Puerto Rico (San Juan)

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