By Aaron Kuriloff 

Puerto Rico's cash-strapped electric power authority faces a key deadline on Thursday to extend lines of credit with banks or face a possible restructuring of about $9 billion in total debt.

Extensions of the loans would help the Puerto Rico Electric Power Authority overcome a short term cash crunch and avoid more uncertainty about its future, which is roiling the market for Puerto Rico bonds.

The authority last month reached deals with Citigroup Inc. unit Citibank and banks led by Scotiabank de Puerto Rico, a unit of Bank of Nova Scotia, to delay some payments on $671 million it owed the banks between July and mid-August. It was the second agreement to postpone payments.

The power authority, known as Prepa, said in a statement that it is prohibited by nondisclosure agreements from providing details on talks with its lenders, bondholders and bond insurers.

"These discussions are fluid and ongoing and have not reached a point where there is anything specific to report," the statement said.

Representatives of Citigroup and Bank of Nova Scotia declined to comment.

The power authority, known as Prepa, is at the forefront of Puerto Rico's long-running financial difficulties. The utility is seeking to find cash to fund operations and make payments to lenders as the island broadly struggles with steep unemployment and a weak economy.

The power authority owes $146 million to Citigroup and $525 million to the syndicate led by Scotiabank on a credit line that matures Thursday, Standard & Poor's Ratings Services said in a report last month cutting the utility's bonds further into junk territory. The agency has already dipped into rainy-day cash to cover its debts, tapping a reserve fund for $41.6 million to make a July payment to bondholders.

"Obviously, they're running out of time," said Peter Hayes, head of municipal bonds at New York-based BlackRock Inc. "They have a solvency issue. And if they get extended or find some other type of private financing, it's going to be very expensive for an entity that's already financially troubled."

Puerto Rico lawmakers in June approved legislation allowing some public agencies, including the island's power, water and transportation authorities, to overhaul their finances. Those three owe a combined $19.4 billion, according to estimates from Barclays PLC. The law doesn't apply to Puerto Rico's general obligation or sales-tax debt.

Prepa's ongoing liquidity problem suggests a growing possibility the agency will restructure its debt under the law, S&P said. Mutual funds managed by Franklin Templeton Investments and OppenheimerFunds Inc. have challenged the law's constitutionality in court, and said in a filing this week that Prepa can meet its obligations without restructuring.

Puerto Rico has about $73 billion in total debt, which is widely held by mutual funds and individuals, and some analysts worry its troubles could cause losses for investors nationwide. The price of some bonds from the power authority fell as low as about 37 cents on the dollar after the island's legislators passed the restructuring law, and some this week were trading at about 49.5 cents on the dollar. The S&P Municipal Bond Puerto Rico Index is down about 0.54% this quarter.

John Miller, co-head of fixed income at Nuveen Asset Management LLC, which oversees about $90 billion in municipal bonds, said that that while Puerto Rico's woes haven't affected the overall market, the problems could spread beyond the power authority to the island's other debt.

"We're still looking at the economy's fundamentals, which are flat with some declines," he said. "Without an economic recovery, the restructuring of these three entities is just the beginning."

Overhauling the island's public corporations has become a priority for the administration of Gov. Alejandro Garcia Padilla as it tries to jump-start the economy, eliminate budget deficits and reassure investors that the U.S. commonwealth's fiscal position is improving.

A report by the Federal Reserve Bank of New York last month recommended strengthening the performance of the island's large, heavily-indebted public corporations. "For any financial reform agenda to be successful, it must confront this issue head-on," the report said.

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com

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