The Puerto Rico Electric Power Authority is gearing up for a roughly $600 million new-money deal set to price this summer while it works with the island's central government to address unpaid electric bills of $333 million that the commonwealth owes PREPA.

The island's sole power provider plans to return to the market in July or August with a $600 million revenue-bond transaction to help finance capital projects that will upgrade the system and increase capacity. Officials may tag on additional debt if the market offers refunding opportunities. JPMorgan will serve as underwriter on the deal, according to PREPA's executive director, Jorge Rodriguez.

"It's around $600 million of new money and whatever we can refinance, we will refinance," Rodriguez said. "We don't know that number yet."

The authority last sold $2.5 billion of debt April 2007, with $1.85 billion of that transaction refinancing previous debt. JP Morgan priced that sale as well and CIFG Assurance NA, Financial Security Assurance Inc., and MBIA Insurance Corp. insures most of the debt. The Government Development Bank for Puerto Rico serves as the authority's financial adviser.

Improvements to PREPA's infrastructure will help the authority to decrease its dependency on fuel oil. Currently, 72% of its system relies on oil, and officials expect to lower that ratio to 49% in 2010 and 32% by 2017. As the cost of crude oil has risen above $100 per barrel, PREPA has implemented "economic dispatches" where officials use the most efficient and less costly plants to take on the larger energy demands and has promoted an energy savings program throughout the island to educate consumers on ways to make their homes and businesses more energy efficient.

Rodriguez said the higher fuel prices and not increased demand have contributed to the commonwealth falling behind in its payments to PREPA, with the commonwealth and government corporations owing the energy provider a combined $333 million as of January.

The central government is responsible for $160 million of the $333 million amount. Yet officials anticipate the commonwealth will make a $90 million payment in the next few weeks to address the outstanding receipts, an infusion that will help PREPA's cash management.

All three of the credit rating agencies said their ratings already reflect the unpaid receipts the government owes to the authority. Fitch Ratings and Standard & Poor's assign the credit A-minus and BBB-plus, respectively. Moody's Investors Service rates the agency A3. PREPA has approximately $5.7 billion of outstanding debt, according to Rodriguez.

While the $333 million of unpaid receipts is the highest amount the government and its corporations have owed the energy provider to date, Karl Pfeil, managing director at Fitch Ratings, said the increased amount will not change PREPA's rating. Yet Fitch will continue to watch when and by how much the central government pays its electric bills.

"The longer-term implication is that the receivables are always going to be something that we do factor into the rating and we will follow those trends, but at this point in time we think they are appropriately reflected in the current rating," Pfeil said. "We don't see a trend right now that would warrant being a red flag any more than it normally is."

Standard & Poor's analyst Judith Waite also said the central government's unpaid energy bills are incorporated into PREPA's BBB-plus rating.

"It's an ongoing thing and they're managing it and it's one of the issues in the rating of PREPA that we watch on an annual basis," Waite said. "And obviously it's part of the reason that their rating has been somewhat tied to the rating of the government - it's a major client."

The commonwealth carries BBB-minus and Baa3 ratings from Standard & Poor's and Moody's, respectively. Fitch does not rate Puerto Rico.

Pfeil added that Fitch monitors how much revenue the commonwealth generates overall - including Gov. Anibal Acevedo Vila's recent proposal to replace a portion of the island's sales tax with a revamped excise tax - as the more funds the central government has, the better it stands to pay its PREPA bills in a timely fashion.

One major initiative for the authority is to diversify its energy sources. The agency is in the final stages of a potential agreement with Windmar Renewable Energy where PREPA would pay $11 million per year for 20 years in exchange for windmill development in southern Puerto Rico.

The agency is also evaluating sale of pre-paid energy bonds to help alleviate rising energy costs, with Goldman, Sachs, & Co to lead the potential sale.

"That's in the works, we don't have anything concluded yet," Rodriguez said.

PREPA has seven plants serving about 1.5 million electric customers that include a diverse revenue base consisting of 35% residential customers, 45% commercial clients, and 18% industrial customers.


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