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SAN JUAN, Puerto Rico, Aug 13 (Reuters) - Puerto Rico's electric power authority, PREPA, is likely to get an extension of vital lines of credit in an agreement that could see lenders appoint a restructuring expert at the debt-stricken utility, a financial industry executive familiar with the situation said on Wednesday.
The U.S. commonwealth's restructuring specialists and its Government Development Bank are in talks with banks to extend PREPA's loans of $671 million to March 2015, with an option to shorten the extension to the year end, said the source, who is in contact with the negotiating parties.
PREPA has until Thursday to secure an extension of the credit lines, which it uses to buy oil for its generators. Failure to secure an extension could force it to seek protection under Puerto Rico's new Recovery Act that allows some public entities to enter a bankruptcy-like process.
Another option would be a short-term extension similar to a recent two-week reprieve, said the source, who declined to be identified because the discussions are confidential. Talks are continuing and still may fail to produce a deal.
PREPA is on the hook for $146 million from Citigroup Inc and $525 million from a consortium led by Scotiabank . Citi and Scotiabank declined comment and PREPA was not immediately available for comment on the terms of a possible deal.
"The banks will end up folding and extending the lines until March 2015, with an option to shorten that extension to December 2014," said the source.
The option to shorten a possible extension from March to December would be triggered by a vote of 25 percent of lenders, the source said.
Gary Krellenstein, an energy specialist at Oxford Advisors, said an extension to the credit lines would be a positive development. "It will allow some of the creditors, the commonwealth, and PREPA to negotiate further to see if there are some alternatives available to them," he said.
The banks could also name a chief restructuring officer at PREPA with responsibility for developing a restructuring plan by March, the source said. Such a move would suggest PREPA may eventually restructure over $9 billion in debt as is widely expected.
PREPA gained a two-week extension to the credit lines that expires on Thursday. Reuters reported at the time that banks were asking for 9 percent interest over the London Interbank Offered Rate (LIBOR). Details of the agreement were not published.
PREPA uses the credit lines to buy oil from its supplier, Brazil's Petrobras, and the loss of those lines could complicate operations even if it is able to tap existing funds to pay for operating expenses in the short term.
Hedge funds, that have been buying up Puerto Rico debt lately, are offering to provide PREPA with interim financing, according to two investors currently in Puerto Rico, as well as longer term financing to help convert their old oil powered infrastructure to cheaper natural gas.
The core of PREPA's problems is that it uses high cost oil to generate electricity. PREPA spends almost two-thirds of its operating budget on oil and electricity prices on the island are double those in the mainland United States.
Oxford Advisors' Krellenstein estimates that PREPA could save $1 billion on its yearly $2.6 billion oil bill if it converts to natural gas. (Reporting by Reuters in San Juan, writing by Edward Krudy and Megan Davies; Editing by Chizu Nomiyama, Matthew Lewis and Tom Brown)