Liability Management

The Power Sector Assets and Liabilities Management Corporation (PSALM) is taking solid steps toward fulfilling its other function — managing the existing debts of the National Power Corporation — even as it continues to move forward in the privatization of the government’s power assets.

The Electric Power Industry Reform Act (EPIRA) authorizes PSALM to act as the government’s financial manager whose primary responsibilities are to optimize the liquidation of National Power’s debts and stranded contract costs, and rebalance the power company’s foreign obligations through swaps or peso refinancing. The debts include lease payments to independent power producers, and the outstanding obligations of electric cooperatives to the National Electrification Administration and other government agencies.

As financial manager, PSALM’s functions include managing other liabilities it has assumed in the government’s behalf as well as its future borrowings. This is to ensure that PSALM will be able to settle all principal and interest payments as they fall due. Refinancing or derivatives structures, whenever necessary, will be obtained at minimum cost.

PSALM’s liability management function also requires mitigating foreign exchange risks through hedging or other means since some of the debts are denominated in foreign currency.

Regular Debt Servicing

PSALM will assume the repayments of principal and interest of the National Power’s debts (as a result of the implementation of the final debt and asset transfer in October 2008 as approved by the joint Boards).

Prepayment

Prepayment is a liability management scheme that accelerates repayments which PSALM uses to improve National Power’s debt profile by reducing its exposure to foreign currency fluctuations, lowering the total interest payments and achieving the debt service coverage ratio of 1 time as required by the creditors starting 2009.

Pursuant to its EPIRA mandate, PSALM uses the proceeds from the privatization of the generation and transmission assets to prepay the financial obligations of National Power.

On 16 September 2008, PSALM prepaid to Asian Development Bank (ADB) and Japan Bank for International Cooperation (JBIC) the amount of JPY19.76 Billion or an equivalent of USD184 Million for the Masinloc Coal-Fired Thermal Project which was successfully privatized last year.

The September prepayment was the fifth one undertaken by PSALM this year.  On 15 and 18 August 2008, PSALM made an additional prepayment of National Power’s debt amounting to USD126 million and Y10.2 billion, respectively or a total of USD219 million. The amount represented the loans extended by the ADB and JBIC for the above-stated project.

In June, PSALM prepaid a total of Y76.7 billion, or around USD720 million, of National Power’s debt. The amount represented Tranche B of the Miyazawa yen-denominated loans extended in 1999 by the Japanese government to National Power to finance a number of transmission projects and loans relent by ROP for various generation and transmission projects.

In March, PSALM prepaid the three yen-denominated loans of National Power worth Y16.887 billion, or around USD174 million. These loans were extended in 1995 and 1997 by the JBIC-Overseas Economic Cooperation Fund to finance a number of transmission projects.

PSALM’s total prepayment to date has contributed significantly to reducing National Power’s aggregate debts from USD7.01 billion as of end 2007 to USD5.8 billion as of September 2008. The successful prepayments were made possible through the support provided by the Bangko Sentral ng Pilipinas which ensured the smooth processing of the payments.

Aside from savings on interest payments and guarantee fees, the prepayments reduced National Power’s foreign currency debt by 4%, and increased the peso component of the debt currency mix by 2% to 13%.

The following table summarizes the prepayment services that PSALM has undertaken as of September 2008.

List of Prepaid NPC Debts

The following graph shows the impact of prepayment to National Power’s debt as of September 2008 prepayment.