Puerto Rico’s P3 Authority in Landmark Agreement With LUMA for Operation of PREPA’s T&D System
June 22, 2020
Cleary Gottlieb advised the Puerto Rico Public-Private Partnerships Authority (P3 Authority) in a landmark transaction intended to transform Puerto Rico’s electric sector.
The firm advised the P3 Authority in the successful procurement and entry into a 15-year agreement between LUMA Energy LLC (LUMA) and the Puerto Rico Electric Power Authority (PREPA) whereby LUMA will operate, maintain, and modernize Puerto Rico’s transmission and distribution (T&D) system. LUMA is a Puerto Rico company formed by Canadian Utilities Limited (CUL), ATCO Ltd.’s energy company, and Quanta Services Inc. (Quanta), which will work in conjunction with Innovative Emergency Management Inc. (IEM) to assist with the administration of federal funding.
The agreement with LUMA, announced by the P3 Authority on June 22, 2020, is the culmination of a more than 18-month process and represents a historic milestone in the Government of Puerto Rico’s objective of providing modern, affordable, resilient, and reliable power to the island, which will help serve as a driver of economic recovery and growth. The T&D system agreement with LUMA is also the first transaction of its kind since the Government of Puerto Rico enacted Act 120, a new legal framework for infrastructure PPPs, in June 2018.
Since the fall of 2018, Cleary has been representing the P3 Authority, which is tasked with leading the transformation of PREPA, Puerto Rico’s vertically integrated electric service provider. PREPA is one of the largest public electric utility providers in the U.S. by customers served, with approximately 1.5 million customers. PREPA has nearly 6,000 employees and generates approximately $3.5 billion in annual revenues. Cleary is assisting the P3 Authority in pursuing a multipronged strategy to rebuild the island’s energy system utilizing PPPs, beginning with the T&D system that interconnects PREPA’s power plants with major switching and load centers and faces major challenges.The P3 Authority launched the T&D transformation procurement process with the objectives of delivering low-cost electricity, increasing T&D resiliency and reliability, deploying new technologies, and implementing industry best practices and operational excellence through managerial continuity and long-term planning. The P3 Authority was keenly focused on implementing a robust, competitive, and transparent procurement process to identify the private partner best positioned to accomplish the project’s objectives, resulting in the selection of a world-class partner like LUMA.
The T&D transformation process has taken place against a background of unique and unprecedented challenges: the utility’s infrastructure was devastated by Hurricanes Maria and Irma, and later its generating assets were significantly impaired by a series of earthquakes in late 2019 and 2020; PREPA is in its third year of a prolonged and, at times, contested bankruptcy process; the utility has been seeking billions of dollars in federal aid, much of which has yet to be deployed; there was an unexpected change in government during the process; and strict shelter-in-place measures and other restrictions were put in place on the island in mid-March to prevent the spread of COVID-19.
Nonetheless, Cleary and other members of the advisory team have worked with the P3 Authority and other stakeholders, including PREPA, the Financial Oversight and Management Board for Puerto Rico (FOMB), the Puerto Rico Energy Bureau (PREB), and various proponents interested in the transformation, on developing and sustaining a robust and highly competitive procurement process, and have helped design flexible and innovative transaction structures tailored to meet the project’s objectives. The transformation will involve the separation of the T&D business from PREPA’s generation assets, which itself is expected to undergo further changes led by the P3 Authority as the island transitions to greater reliance on renewable energy. The T&D process is a landmark transaction that will set the stage to transform the island’s energy system and, over time, deliver to island residents first-class energy services.