The Puerto Rico Electric Power Authority today will sell $800 million of fixed-rate revenue bonds to help support improvements to the island's electrical system and refund $100 million of previous debt to generate savings for the authority.

JPMorgan will kick off the transaction and Squire, Sanders, and Dempsey LLP is bond counsel.

The bonds will not carry insurance, according to Luis Alfaro, executive vice president and director of financing at the Government Development Bank for Puerto Rico, the commonwealth's financial adviser.

Fitch Ratings assigns its A-minus rating to the sale. Standard & Poor's and Moody's Investors Service rate the deal BBB-plus and A3, respectively.

The transaction consists of Series WW new-money debt for $700 million and Series XX current refunding bonds for $100 million. Preliminary plans include the Series WW bonds offering serial bonds out to 2028 along with two terms maturing in 2033 and 2038. The smaller, refunding portion includes serial bonds from 2011 through 2017.

Puerto Rico has a net present value savings threshold of 3% and Alfaro said the Commonwealth, depending on market conditions, may have to pass on refunding bonds that do not meet the savings minimum.

"The market wasn't not doing well [yesterday], but we estimate to go out to refund $100 million in bonds that are currently refundable," Alfaro said. "And it's going to be about 3% to 3.5% net present value savings."

New-money proceeds will help support the authority's initiative to add new pipelines that will supply natural gas to electric plants on the island's southern coast and eventually in the north as well, along with other infrastructure improvements. The transaction will also allow PREPA to pay roughly $200 million in private bank loans to Citi and JP Morgan.

Of the new-money portion, $84 million is attached to a basis swap with Goldman Sachs Capital Market. Officials peg the net present value of the basis swap at $84 million, with those earnings then set to pay down fixed-rate bonds of an equal amount. Goldman will pay 62% of the London Interbank Offered Rate plus 29 basis points along with an annual fixed payment of .4669% in exchange for quarterly floating-rate payments from PREPA based on the SIFMA index.

"The swap generates $84 million in present value and we're just going to monetize that by issuing bonds," Alfaro said.

While Moody's takes into account the value of the basis swap that falls in the authority's favor, "the basis risk in any given year could result in net payments by PREPA," according to a Moody's report. "Additionally, if PREPA's rating fell below Ba1, an event of default under the agreement, the swap is subject to termination, which introduces additional risk to PREPA should its credit substantially deteriorate."

PREPA's strengths include the authority serving as the island's sole electric supplier, having the ability to raise rates to offset increasing fuel costs, and strong management. Conversely, all three credit agencies pointed to unpaid bills the central government and governmental agencies owe to the authority, roughly $242 million. The government last paid PREPA $91 million in April.

"The goal for the government is to continue paying the companies, PREPA and [the Puerto Rico Aqueduct and Sewer Authority] to get them up to speed," Alfaro said. "It's a priority."

On the other hand, PREPA will need to pay the government $109 million in total through 2018, with the first payment of $2.4 million in 2010 to help the government absorb new tax benefits included in the island's economic incentive law. Under that initiative, businesses can apply a percentage of their electric costs towards their taxes.

In looking forward, the authority will invest roughly $2.1 billion in the next five years, including $1.5 billion from bonds to help upgrade PREPA's system and add capacity. The authority has $5.7 billion of outstanding debt.

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