PSO may acquire govt stakes in NPP, Gepco

ISLAMABAD: Pakistan State Oil (PSO) is likely to acquire government stakes in Nandipur Power Plant (NPP) and Gujranwala Electric Power Company (Gepco) against outstanding due amount of over Rs100 billion, well informed sources in Petroleum Division told Business Recorder.

Sharing the details they said the Cabinet Committee on Privatisation (CCoP) considered the Privatisation Division’s summary regarding “privatisation of Gudu Power Plant (GPP) and NPP” on December 31, 2021 and directed the Privatisation Division to continue the process of financial evaluation of NPP and GPP along with their assets.

In the meanwhile, the Petroleum Division in consultation with the Power Division and Finance Division shall examine the matter of equity transfer to PSO against its receivables and present the issue before CCoE in the first place. Cabinet, in its decision of January 11, 2022 ratified the CCoP’s decision with the stipulation that “the financial evaluation of Nandipur and Guddu power plants would be carried out subsequent to CCoE’s decision.”

Pursuant to the Cabinet decision, Pakistan State Oil Company Limited (PSOCL) has informed that their circular debt has reached around Rs. 591 billion including Rs. 180 billion of power sector. The winter season is posing a greater threat to the country’s supply chain security with the substantial increase in gas related circular debt receivables.

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Therefore, PSO has proposed various non-cash options for the settlement of its receivables in order to unblock its trapped retained earnings from government department and others. The aim is to convert PSO’s non-productive receivables to productive assets while not burdening the government with cash-based settlement.

However, PSO has proposed the transfer of controlling interest in Nandipur Power Plant and GEPCO to PSO instead of GPP against its outstanding receivables from GENCOs/CPPA equivalent to the amount of the asset’s fair market value as mutually agreed between the parties with the following measures: (i) develop modalities of this transaction by carving-out NPP and GEPCO from its respective structure/ NPGCL/ GENCO/ PEPCO and park it under a Special Purpose Vehicle (SPV)/ entity after clearing all active and contingent liabilities on the plant’s books;(ii) PSO will acquire the SPV/ entity, containing the clean asset, at mutually agreed fair value under the receivable-equity swap arrangement. As part of its strategy, PSO will create a “power vertical” and place the said SPV/ entity in that vertical; and (iii) the legal modalities of the transaction shall be determined and structured in consultation with the legal advisor(s).

As regards the proposed acquisitions, PSO may also be allowed to sell 30% of the power produced under B2B arrangement, whereas the rest can be dispatched to the national grid. PSO intends to refurbish the asset subsequently to improve their efficiency and position them for the merchant market based on the proposed transaction structure and modalities for NPP and GEPCO.

According to Petroleum Division, if the proposed option is implemented effectively, it will benefit both parties by reducing the circular debt receivables of PSO without any cash outflow. As the power plants are income-generating assets; therefore, a major portion of its earnings stream will still flow back to the government in the form of dividends and taxes. For PSO, a portion of its non-performing receivables will be converted into productive asset with reasonable market returns, eventually improving its financial condition and economic value and as a result, the market capitalization of PSO will increase substantially post transaction.

Copyright Business Recorder, 2022