Deal in Focus

Puerto Rico Power To Issue $850M

The Puerto Rico Electric Power Authority Thursday will sell $850 million of tax-exempt, new-money bonds to pay down lines of credit that helped finance capital improvements.

The transaction will kick off $2.1 billion of borrowing during the next few months.

The feast of deals includes this week’s sale, a $375 million taxable Build America Bond deal that will price in Puerto Rico’s local market, a roughly $500 million refunding that is set to price next month in the U.S. market, and another $400 million new-money deal, according to Fernando Batlle, executive vice president of financing and treasury at the Government Development Bank for Puerto Rico. The GDB is the commonwealth’s financing agent.

JPMorgan will price the Series 2010XX bonds for $850 million on Thursday after one day of retail sales. Nixon Peabody LLP is bond counsel.

Batlle does not anticipate using insurance on the bonds.

The Series XX bonds will be fixed rate and may offer both serials and terms. Officials are aiming for maturities ranging from 2032 through 2040, though that could change.

“In terms of this particular transaction where you’re terming out capital improvement financing, it’s more on the longer end of the curve,” Batlle said.

The bonds are secured by system revenue.

Fitch Ratings and Standard & Poor’s rate the transaction BBB-plus with a stable outlook. Moody’s Investors Service assigns an A3 to the deal. The outlook is stable. PREPA has $5.85 billion of outstanding long-term debt, as of Dec. 31.

The authority has implemented layoffs and spending reductions to offset a decline in energy demand as the commonwealth has been in a recession since 2006. While PREPA’s energy sales dropped in fiscal 2008 and fiscal 2009 and it has faced volatile fuel prices, the authority’s dominant role as the sole energy provider in Puerto Rico will help it as it heads to market this week, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott.

“I’m a little cautious about all Puerto Rico debt just because the island has gone through such a tough economic downturn, which started sooner than ours and perhaps may last beyond ours,” Schankel said.

“But that being said, I like the power bonds because it’s a monopoly situation, there’s nobody else really selling power down there. And in general, we like the municipal power part of the world because it’s an essential purchase — people pay their electric bills, businesses pay their electric bills. So I’m positive on this and I think for a triple-B bond it’s probably a decent value if it’s priced right.”

The proceeds will repay Citi and JPMorgan $300 million and $200 million, respectively, for loans extended to PREPA, according to the preliminary official statement. The authority will also repay the GDB with roughly $100 million for its lines of credit. Banco Bilbao Vizcaya Argentaria Puerto Rico will also receive $50 million.

PREPA’s $1.7 billion, five-year capital plan for fiscal 2010 through fiscal 2014 includes the construction of new transmission lines and the improvement of current lines to increase service reliability and distribution.

“Once in operation, these major infrastructure projects will significantly enhance reliability and security margins of the transmission system, and will permit the increase of power transfers from the south coast of Puerto Rico to the northern, central, and western regions,” according to the POS.

PREPA’s net revenue dropped by $51.9 million in fiscal 2009, which ended June 30. Conversely, net revenue increased by $57.7 million from July 1 through January compared to the same period in fiscal 2009 as energy sales rose by 2.3% and officials reduced operating expenses by $54.8 million, the POS says.

The authority anticipates fiscal 2010 net revenue to total $662.8 million and to increase annually to $825.8 million in fiscal 2014. The ratio of net revenue to principal and interest payments is projected at 1.74 in fiscal 2010 and will decrease to 1.52 in fiscal 2014, the POS says.

To help combat fluctuating prices, the authority is trying to reduce its dependency on oil, which makes up 69% of its energy production. Officials are aiming for petroleum to account for 48% of the island’s energy consumption by 2015 and over the long term to reduce that figure to 26%, the POS says. This plan includes converting oil-fired facilities into natural-gas plants, potentially adding new coal-burning facilities, and possible purchase agreements with developers of renewable energy projects.

“It’s all connected — the high fuel costs results in high rates, the high rates result in people not paying their bills,” said Moody’s analyst Rick Donner. “So if you can diversify away from fuel oil, you can try to bring your costs under control and that will help your accounts receivable. I think all of it is tied to fuel diversification and reducing the dependence on fuel oil. That’s the principal challenge that they face.”

Historically, the central government and sister agencies have been the biggest culprits when it comes to delinquent payments. Gov. Luis Fortuño last year pushed for the government and its agencies to make good on their outstanding utility bills.

After recent payments, the government, as of Jan. 15, has an outstanding balance of $28 million, which is an average bill of two months. In addition, the Puerto Rico Aqueduct and Sewer Authority reduced its account receivable to $53.3 million, which it expects to pay off entirely within 18 months.

In looking at PREPA’s upcoming deals, the $500 million refunding will include both a refinancing for savings and a restructuring of prior debt. Morgan Stanley is the senior manager on that transaction.

“A big portion of that is refunding for savings and then there’s another portion of that which is part of a restructuring,” Batlle said. “But we’re still fine-tuning the numbers and seeing where it all fits. So that part we’re still not clear on, what it’s going to end up being, but it’s roughly in that $500 million neighborhood.”

The GDB has yet to select a senior manager for its $400 million new-money sale that is expected to price after the refinancing deal.



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