A critical component of the twin mandates of the Power Sector Assets and Liabilities Management (PSALM) Corporation is optimally liquidating the National Power Corporation’s (NPC) financial obligations, including stranded debts and stranded contract costs, by implementing an efficient liability management program that conforms to the provisions of Republic Act No. 9136, the Electric Power Industry Reform Act (EPIRA).
These financial obligations consist mainly of: (1) domestic and foreign borrowings; (ii) accountabilities under the independent power producer (IPP) contracts; and (iii) other NPC debts which were transferred and assumed by PSALM pursuant to the EPIRA.
PSALM’s liability management program includes: (i) refinancing to ensure that the Corporation will meet all its outstanding debts and contractual obligations; (ii) hedging to mitigate foreign currency and interest risks; (iii) tariff rate application to update the cost of electricity generation to its current level and to implement the Universal Charge pursuant to the EPIRA; and (iv) monetization to guard against liquidity risks and match privatization cash flows with maturing debts.
PSALM’s Debt Profile
Before the enactment of the EPIRA, the electric power industry, through the NPC, accumulated debts of USD16,387 million at the end of 2001. The EPIRA, which was passed in 2001 primarily to resolve the industry’s debt woes, authorized the privatization of the government’s power assets to restructure the sector and to reduce, if not eliminate, NPC’s enormous financial obligations.
Had the government completed the privatization of its power assets in 2001, the debts of NPC would have been reduced to zero. However, the power privatization program started only in 2004 because of several factors such as existing market environment at that time and various plant-specific issues that needed to be resolved. As a result, NPC incurred new debts to effectively maintain the operation of its power plants.
The following graph shows the movement of the financial obligations of NPC/PSALM from 2001 to 2011.
The graph below shows the movement of the financial obligations of NPC/PSALM from 2001 to 2011.
Total Debt and IPP Obligation
As of 30 September 2011
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DRIVERS OF FINANCIAL OBLIGATIONS
The following are the year-on-year capsules of the total financial obligations:
2001: At the passage of the EPIRA, NPC’s financial obligations amounted to USD16.39 billion broken down as follows: (i) NPC debt - USD5.97 billion; and (ii) IPP obligations - USD10.42 billion.
2002: NPC’s obligations increased to USD19.23 billion because of the commissioning of new IPP plants (Ilijan, Kalayaan Units 3 and 4, and Bakun). The implementation of the cap on the Purchase Power Cost Adjustment (PPCA) pegged at PhP0.40 per kilowatt-hour (kWh) and the mandated rate reduction of Php0.30 per kWh also contributed to the increase.
2003: NPC’s liabilities peaked to USD22.35 billion driven primarily by the increase in IPP obligations due to the commissioning of the San Roque Plant which cost USD1.8 billion.
Moreover, NPC could not fully recover actual operating costs because it continued to implement the mandated rate reduction. Thus, NPC resorted to additional borrowings to cover both the actual and projected shortfall from its operations.
2004: Pursuant to the EPIRA, the government absorbed PhP200 billion of NPC’s debt to reduce its accountabilities to USD19.49 billion from USD22.35 billion the previous year. Contributing to the reduction was the provisional authority granted by the Energy Regulatory Commission (ERC) to NPC for rate increases in September 2004.
The impact of the debt absorption, however, was mitigated by the depreciation of the peso from PhP51.40 in 2001 to PhP56.27 in 2004. As a result, the debt was reduced by only USD3.554 billion when the absorption plan was implemented in 2004, USD0.336 billion less than the projected USD3.890 billion if the program was administered in 2001.
The debt absorption notwithstanding, NPC still posted an actual cash flow deficit because of the continued implementation of the mandated rate reduction and the PPCA cap that resulted in more borrowings.
2005: NPC posted a net income of PhP85.9 billion (USD1.62 billion) comprising non-cash revenues amounting to PhP98 billion (USD1.86 billion) broken down as follows: PhP78.74 billion (USD1.48 billion) from foreign exchange gains when the peso appreciated to PhP53.07 in 2005 from PhP56.27 in 2004, and PhP19.26 billion (USD0.363 billion) from depreciation and bad debts.
While NPC’s total financial obligations decreased by USD0.53 billion to USD18.96 billion from USD19.49 billion in 2004, its actual debt level increased because of additional loans to cover its shortfall in the payment of its liabilities. NPC continued to incur cash deficits because of its inability to recover costs from the regulated rates.
PSALM started its privatization program and received proceeds amounting to USD5.2 million from the sale of small hydro electric power plants including Agusan, Talomo, Barit, Loboc, and Cauayan.
2006: NPC continued to experience a shortfall in its cash requirements to sustain its operations even as it posted a net income of PhP89.99 billion (USD1.8 billion) that mainly came from foreign exchange gains amounting to PhP68.74 billion (USD1.4 billion) and other non-cash items equivalent to PhP23.9 billion (USD0.486 billion).
Although its IPP obligations declined, NPC still had to borrow to fund these accountabilities, including maturing debts for the year.
Privatization proceeds collected by PSALM reached USD65.74 million.
2007: This was a breakthrough year as privatization proceeds collected reached USD557 million out of the total income of USD628 million earned. USD87 million of the amount was used to pay NPC’s maturing obligations for the year.
NPC recorded a net income of PhP136.07 billion (USD3.29 billion) that consisted primarily of non-cash revenues from foreign exchange gains amounting to PhP123 billion (USD2.98 billion) because of the peso’s rise to PhP41.40 from PhP49.13 in 2006.
Although NPC did not incur new debts, its obligations increased to USD7.65 billion from USD7.25 billion in 2006 because its financial statement was expressed in the local currency. Thus, in peso terms, the debts were reduced to PhP320.4 billion from PhP376.5 billion in 2006. It must be noted that NPC’s debts are a mixture of yen, dollar, euro, won and peso and are, therefore, affected by the volatility and movement of these currencies in the financial market.
2008: The USD2.4-billion Liability Management Program-I (LMP-I) approved by the PSALM Board in 2007 was implemented. Under the plan, the Department of Finance (DoF) and the Bangko Sentral ng Pilipinas (BSP) signed off to the prepayment of approximately USD1.3 billion in yen and dollar obligations using privatization proceeds. The proceeds were also used to service maturing accountabilities for the year amounting to USD450 million that resulted in a 13% debt reduction, or USD2.58 billion, from 2004 to 2008.
1. The reduction, however, was diminished by the following developments: 2. NPC’s actual operating loss; |
The ERC order to refund PhP27 billion of the Deferred Accounting Adjustment (DAA) effective in the June 2008 power billing.
The ERC order to refund the DAA, together with the delay in the projected receipt of privatization proceeds from the sale of both the Batangas Coal-Fired Power Plant and the transmission business, forced NPC to enter into a PhP20-billion (USD421-million) short-term bridge financing to cover IPP obligations in the last quarter of 2008. The loan was facilitated by the Department of Finance with the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines.
2009: Consistent with the EPIRA, collected privatization proceeds of USD1.99 billion were partly used to service PSALM’s USD821-million debt and USD700-million IPP obligations (a total of USD1.521 billion, leaving a balance of USD469 million).
LMP-I was fully implemented, with PSALM issuing its first global bond offer amounting to USD1 billion. The offer issued in May was internationally recognized by the Asset Magazine in its Triple A Award in Hong Kong as the best publicly-issued bond in 2009. The magazine also recognized PSALM as the best issuer for the year.
The issuance was triggered by the bunching up of maturing debts for 2009-2011. With debt service maturities projected at USD4.5 billion, or 65% of the total debt, and IPP obligations placed at USD2.41 billion, it was imperative for PSALM to address possible liquidity risks (i.e., availability of cash) through what was described as opportunistic financing for liability management purposes.
To address the bunching up of maturities in 2009, 2010 and 2011, the PSALM Board the LMP-II with the following objectives:
Manage liquidity risks in 2009-2011; Match privatization cash flows with maturing debt obligations; Reduce debt volatility by increasing peso component of the debt mix; Reduce cash flow volatility arising from foreign currency obligations; and Reduce cash flow volatility arising from interest rate. |
PSALM completed the Bond Exchange transaction in December 2009. This address the Corporation’s liquidity requirement for 2010 and extended the duration of about USD600 million of bullet maturities from 2010 to 2024.
2010: Implementing LMP-II, PSALM borrowed PhP30 billion to cover its remaining requirements for the year. With the successful execution of its debut domestic issuance in April, PSALM not only increased its peso debt component to 18% but also improved its liquidity position.
Privatization proceeds collected for the year amounted to USD870 million. The amount, together with proceeds collected in previous years, was used to service debts and IPP obligations of USD902 million and USD426 million, respectively. Total obligations from 2004 to 2010 were reduced by USD3.67 billion as a result of these payments.
2011: PSALM continued to borrow to augment its current working capital requirements and to partially refinance its existing financial obligations.
On 18 February, PSALM drew on the PhP25-billion short-term loan line from LandBank to service debts of PhP12.2 billion falling due in March and April. The balance of the proceeds was used to service IPP obligations due in March, April and May 2011.
On 28 April, PSALM signed a syndicated term loan facility for the Corporation’s general funding requirements, management of foreign and domestic obligations arising from IPP contracts, and general funding requirements of the National Transmission Corporation (TransCo). LandBank and DBP were the joint lead arrangers for the loan.
Privatization proceeds and utilization
As of the end of 2011, PSALM has successfully privatized 79.56% of the country’s generating plants, the equivalent of 4,102.33 megawatts (MW) in capacity, 3,370 MW of which is generated by the facilities in the Luzon and Visayas grids.
Through the appointment of IPP Administrators and other entities, PSALM has also successfully privatized 76.85% of the contracted capacity produced by IPPs, equivalent to 3,593.91 MW.
The proceeds from the privatization of these power assets, including the concession of the country’s sole transmission business and the transfer of the contracted capacities of IPPs to the private sector, have reached USD10.21 billion. Of this amount, PSALM has collected USD5.328 billion. As shown in the following table, the collection, including income from interest, amounting to USD5.476 billion, was used to settle outstanding debts.
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*Includes income interest |
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Liability Management Program
The reduction, if not elimination, of NPC’s financial obligations primarily hinges on the success of the privatization of NPC assets, including the efficient collection of the proceeds, and PSALM’s effective implementation of its liability management program. The completion of the privatization program will also help PSALM avoid incurring operational losses from expensive power plants and IPP contracts.
As a preliminary liability management exercise, NPC/PSALM executed in July 2007 its very first hedging transaction in the form of a Principal-Only Swap (POS) as approved by the joint PSALM-NPC Boards. The POS targeted to hedge NPC’s 9.625% USD300-million principal obligation maturing in 2028. The built-in prepayment option, i.e., paying 1% of the notional amount, exercised the following year released NPC/PSALM from the obligation of paying the peso portion of the debt in 2028.
Phase I
In November 2007, the joint NPC/PSALM Boards approved a USD2.45-billion refinancing/liability management program intended to:
1. Manage NPC’s foreign exchange risk by converting the power firm’s foreign debt into pesos; and 2. Manage NPC’s liquidity risk in 2009-2011 by ensuring adequate availability of cash. |
PSALM envisioned tapping the domestic markets in executing the program to increase the peso component of NPC’s debt profile. But with the success of the privatization program in 2007, the Bangko Sentral ng Pilipinas directed PSALM to prepay and liquidate debts using only the privatization proceeds.
Complying with the BSP directive, PSALM started the prepayment program without the debt refinancing conversion. This resulted in the utilization of USD1.3 billion of the privatization proceeds to liquidate the more volatile yen obligations (USD1.17 billion equivalent) and dollar debts related to privatized assets (USD126 million) that generated interest and foreign exchange mark-to-market savings amounting to USD376.1 million (PhP18 billion). These obligations had an average remaining life of 10 years.
Due to subsequent intervening events — the slowdown of the privatization process, including the forfeiture of the Calaca power plant sale to Calaca Holdco, Inc.; the cancellation of the remaining prepayment program scheduled for 2008; the delay in the receipt of the TransCo privatization proceeds; and NPC’s DAA refund (as mandated by the ERC). PSALM had to tap the domestic market to raise PhP20 billion for a six-month bridge financing to cover NPC’s IPP expenses and obligations for the period.
With USD1.15 million remaining in PSALM’s LMP-I and with the effectivity of the debt and asset transfer from NPC to PSALM, the Corporation, with the approval of the joint Boards, issued its inaugural USD1-billion global bonds to cover NPC/PSALM’s 2009 projected shortfall of approximately PhP55 billion.
PSALM also prepaid EUR3.5 million of the export credit facility with Erste Bank der Oesterreicheischen Sparkassen AG in December 2009.
Following are the summary of accomplishments under LMP-1:
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Phase II
To address the bunching up of maturities in 2009, 2010 and 2011, the PSALM Board, on 26 August 2009, approved seven financial structures that included refinancing of up to USD3.4 billion under LMP-II with the following objectives:
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On 02 December 2009, PSALM completed its Bond Exchange transaction capped at USD600 million in new money and another USD600 million in exchange to successfully raise USD1.2 billion. This addressed the Corporation’s liquidity requirement for 2010 and extended the duration of about USD600 million in bullet maturities from 2010 to 2024.
With the successful execution of its debut domestic issuance of PhP30-billion fixed rate retail bonds in April 2010, PSALM not only increased its peso debt component to 18% but also improved its liquidity position.
These transactions have shielded PSALM from market volatility that may arise because of uncertainties in the European and world financial markets. They have also provided PSALM with room to work on other equally important activities (e.g., hedging and securitization) to reduce debt volatility and to match privatization cash flows with maturing debt obligations.
CURRENCY MIX OF OUTSTANDING FINANCIAL OBLIGATIONS
As of 31 October 2011
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Two other structures under LMP-II remain pending: the securitization of the TransCo concession fee deferred payment (“securitization program”) and the short-term foreign exchange forwards.
The securitization program aims to initially raise PhP50 billion without incurring additional debts. However, certain commercial and legal issues, including the ownership of the TransCo concession fee, have negatively affected investors’ interest. Under the circumstances, PSALM decided to defer the program until the issues are resolved.
The short-term foreign exchange forwards remain pending, but the BSP allowed PSALM to purchase foreign exchange in advance amounting to USD916.54 million at an average foreign exchange rate of Php45.85 to cover the Corporation’s obligations from January 2010 to July 2010. As soon as it gets BSP and DoF approval, PSALM intends to close short-term foreign exchange forwards transactions for its remaining foreign exchange obligations.
The non-guaranteed issuance seeks to address PSALM’s liquidity risk in 2011 and the issue of the guarantee ceiling under the Foreign Borrowings Law (Republic Act No. 4860) while establishing another structure that other government-owned and –controlled corporations may use. PSALM has initiated talks with various banks on the viability of such a transaction and has met with credit rating firms Standard and Poor’s and Moody’s to ensure a successful execution. PSALM has forwarded to the DoF a letter of concurrence on a standalone structure that PSALM is currently considering.
In the event that the non-guaranteed issue becomes difficult to implement, PSALM may again tap the domestic market and continue pursuing the securitization program to cover the projected shortfall while increasing the peso debt component of the Corporation’s currency mix and match receipts from privatization with the debt maturities.
Phase III
Having addressed the immediate refinancing risks and having covered NPC’s cash operations shortfall in the previous years while improving the Corporation’s currency mix and average debt life from 7.45 years in 2007 to 9.17 years in 2009, the PSALM Board approved in November 2009 LMP Phase III (LMP-III).
LMP III consists of various short- and long-term hedging structures, including authority to buy back debt from the open market. The authority to hedge and close contracts that mitigates foreign exchange, liquidity and interest rate risks is considered as PSALM’s tactical tool in managing its liabilities.
Of the three hedging transactions under LMP-III, PSALM management decided to pursue the currency cap option to partially protect the Corporation from anticipated long-term peso depreciation up to a certain range. PSALM is currently securing the reconsideration of the BSP’s Monetary Board to approve this option after it decided to defer it on 29 April 2010.
Petition for the recovery of Universal Charge (UC): Stranded Debts (SD) and Stranded Contract Costs (SCC)
The EPIRA provides the imposition of the UC on all electricity end-users for the payment of NPC’s SD and SCC. The law defines stranded debts as any unpaid NPC financial obligation that has not been liquidated by the proceeds from the privatization of the generating firm’s assets. Stranded contract costs, on the other hand, refer to the excess of the contracted cost of electricity under eligible contracts over the actual selling price of the contracted energy output of these contracts in the market.
Incorporated by the lawmakers in the EPIRA as one of the responses to liquidate these stranded obligations, the UC for SD and SCC is a revenue measure expected to substantially improve PSALM’s cash flow and to alleviate the need to refinance its existing debts.
PSALM filed its petitions for the recovery of NPC’s SD and SCC portion of the UC with the ERC on 28 June 2011. The aggregate amount sought to be recovered is PhP0.39 per kWh. PSALM determined the final amounts for the UC-SD at PhP0.03 per kWh to be collected over a 15-year recovery period and UC-SCC at PhP0.36 per kWh to be collected over a four-year period in accordance with formulas prescribed under the revised guidelines issued by the ERC.
PSALM, in its petition, proposed to the ERC that the UC-SCC be collected over a 15-year period to mitigate the impact of the power rate increase on consumers. Should ERC grant this proposal, the amount to be collected will be reduced to PhP0.06 per kWh.
The ERC, after hearing the petitions, is expected to verify the reasonable amount and determine the manner and duration of the recovery of the UC-SCC and UC-SD. PSALM endeavors to secure regulatory approval of its UC application in conjunction with its thrust to address its immediate refinancing risks under its liability management program.