ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) has approved two formulas for transition from London Interbank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR) for 59 Independent Power Producers (IPPs) to be effective from July 1, 2023.
According to the determination, Power Division in a letter of February 16, 2024 informed that Economic Coordination Committee (ECC) of the Cabinet considered its summary on transition from London Interbank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR) and approved the proposals.
The ECC directed that the borrower companies with debt repayment schedules registered with State Bank of Pakistan (SBP) shall notify SBP the revised repayment schedule after incorporating the SOFR) plus the relevant Credit Adjustment Spread (CAS), as recommended by International Swaps and Derivatives Association (ISDA).
As per the ECC decision, all the project lenders were allowed to opt for any of the following options: (i) Daily Simple SOFR plus relevant ISDA recommended CAS (0.26161% for quarterly payment and 0.42826%forsemi-annualpayment); or; (ii) Term SOFR plus relevant ISDA recommended CAS.
Provided however, that all the terms & conditions as mentioned in the respective legacy contracts shall remain unchanged like settlement tenor, ie, three months & six months settlement period will have corresponding settlement periods.
Private Power and Infrastructure Board (“PPIB”) on March 4, 2024 advised power projects with foreign financing to approach Nepra for the replacement of LIBOR with SOFR, to be followed by amendments in the respective Power Purchase Agreements (“PPAs”), Energy Purchase Agreements (“EPAs”), Transmission Services Agreements (“TSAs”), and related financing documents.
Following the decision made by the ECC on February 1, 2024, letters were sent by Nepra on 12 June 2024 to 72 power projects with foreign financing, advising them to formally file tariff modification petitions for the transition from LIBOR to SOFR, in accordance with the Nepra (Tariff Standards and Procedure) Rules, 1998.
In response, only two Independent Power Producers (“IPPs”) namely Harappa Solar(Private) Limited and Gharo Solar Limited complied with the Authority’s directions and filed tariff modification petitions.
Meanwhile, twenty three (23) other power projects merely submitted requests to transition from LIBOR to SOFR, without following the formal procedure to get their tariffs modified. Additionally, five (05) generation projects namely Metro Power Company Limited, Gul Ahmed Wind Power Limited, Jhimpir Power (Private) Limited, Hawa Energy (Private) Limited and Master Wind Energy requested Nepra to exercise its suo motu power in this regard.
Subsequently, the PPIB forwarded a letter dated 20 July 2024, which it had received from RIAA Barker Gillette on behalf of the Pakistan Wind Energy Association, representing several wind energy power producers. In the letter, it was stated that the majority of the association’s clients are partially or wholly foreign-funded, and their lenders have instructed them to seek PPIB’s support for the transition from LIBOR to SOFR.
The letter further argued in favor of NEPRA exercising its suo motu powers to expedite the decision, drawing a parallel to previous instances where Nepra had used its suo motu powers, such as in the discontinuation of the Wholesale Price Index (“WPP) and the change of the base year for the Consumer Price Index (“CPI”).
In addition to the above, on July 30, 2024, several Development Financial Institutions including the Asian Development Bank, British International Investment Pic, DEG, FMO, International Finance Corporation, Islamic Development Bank, Proparco, the Export-Import Bank of Korea and U.S. International Development Finance Corporation, among others, which provide financing to numerous IPPs in the Pakistani energy sector, collectively sent a letter to NEPRA.
The letter requested the incorporation of the transition from LIBOR to term SOFR + CAS as the benchmark interest rate for foreign currency financing facilities in the approved tariff determinations of the relevant IPPs. These institutions stated that as the LIBOR will cease to be published after September 30, 2024.
The Authority considered the above submissions and observed that a uniform look back should be approved for ail IPPs opting for daily SOFR.
Keeping in view the process of filing the tariff indexation with NEPRA, invoicing with CPPA-G and then payments to be made to lenders, the Authority has decided to use following look back periods for power projects opting for daily SOFR: (i) approved the look back period of previous quarter for quarterly repayments, ie, for the quarter Jan-Mar, the look back period shall be the previous Oct-Dec quarter.
Copyright Business Recorder, 2024
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