POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT

(PSALM)

CREATION
Section 49 of Chapter VI of RA 9136 or the Electric Power Industry Reform Act (EPIRA) provides:

SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation. There
is hereby created a government-owned and -controlled corporation to be known as the Power
Sector Assets and Liabilities Management Corporation, hereinafter referred to as the PSALM
Corp., which shall take ownership of all existing NPC generation assets, liabilities, IPP contracts,
real estate and all other disposable assets. All outstanding obligations of the NPC arising from
loans, issuances of bonds, securities and other instruments of indebtedness shall be transferred
to and assumed by the PSALM Corp. within one hundred eighty (180) days from the approval of
this Act.

Meanwhile, under the EPIRA Implementing Rules and Regulations (IRR):

Section 1. Creation of PSALM. Pursuant to Section 49 of the Act, a government-owned
and -controlled corporation known as the Power Sector Assets and Liabilities Management
Corporation, hereinafter referred to as the PSALM Corp. or PSALM, was created to take
ownership of all existing NPC generation assets, liabilities, IPP contracts, real estate and all other
disposable assets. All outstanding obligations of the NPC arising from loans, issuances of bonds,
securities and other instruments of indebtedness shall be assumed by the PSALM, within one
hundred eighty (180) days from the approval of the Act. NPC and PSALM shall take such measures
and execute such documents to effect the transfer of the ownership and possession of all the
assets, rights, privileges, and liabilities required by the Act to be transferred by NPC to PSALM.

PURPOSE
SEC. 50. Purpose and Objective, Domicile and Term of Existence. The principal purpose
of the PSALM Corp. is to manage the orderly sale, disposition, and privatization of NPC generation
assets, real estate and other disposable assets, and IPP contracts with the objective of liquidating
all NPC financial obligations and stranded contract costs in an optimal manner.

The PSALM Corp. shall have its principal office and place of business within Metro Manila.

The PSALM Corp. shall exist for a period of twenty-five (25) years from the effectivity of
this Act, unless otherwise provided by law, and all assets held by it, all moneys and properties
belonging to it, and all its liabilities outstanding upon the expiration of its term of existence shall
revert to and be assumed by the National Government.

Under the IRR:

Section 2. Purpose and Objective. The principal purpose of the PSALM is to manage the
orderly sale, disposition, and Privatization of NPC generation assets, real estate and other
disposable assets, and IPP contracts with the objective of managing and liquidating all NPC
financial obligations and stranded contract costs in an optimal manner.
POWERS
SEC. 51. Powers. The Corporation shall, in the performance of its functions and for the
attainment of its objective, have the following powers:

(a) To formulate and implement a program for the sale and privatization of the NPC
assets and IPP contracts and the liquidation of NPC debts and stranded contract costs,
such liquidation to be completed within the term of existence of the PSALM Corp.;

(b) To take title to and possession of, administer and conserve the assets transferred to
it; to sell or dispose of the same at such price and under such terms and conditions as
it may deem necessary or proper, subject to applicable laws, rules and regulations;

(c) To take title to and possession of the NPC IPP contracts and to appoint, after public
bidding in transparent and open manner, qualified independent entities who shall act
as the IPP Administrators in accordance with this Act;

(d) To calculate the amount of the stranded debts and stranded contract costs of NPC
which shall form the basis for ERC in the determination of the universal charge;

(e) To liquidate the NPC stranded contract costs utilizing proceeds from sales and other
property contributed to it, including the proceeds from the universal charge;

(f) To adopt rules and regulations as may be necessary or proper for the orderly conduct
of its business or operations;

(g) To sue and be sued in its name;

(h) To appoint or hire, transfer, remove and fix the compensation of its personnel:
Provided, however, That the Corporation shall hire its own personnel only if
absolutely necessary, and as far as practicable, shall avail itself of the services of
personnel detailed from other government agencies;

(i) To own, hold, acquire, or lease real and personal properties as may be necessary or
required in the discharge of its functions;

(j) To borrow money and incur such liabilities, including the issuance of bonds, securities
or other evidences of indebtedness utilizing its assets as collateral and/or through the
guarantees of the National Government: Provided, however, That all such debts or
borrowings shall have been paid off before the end of its corporate life;

(k) To restructure existing loans of NPC;

(l) To collect, administer, and apply NPCs portion of the universal charge; and

(m) To restructure the sale, privatization or disposition of NPC assets and IPP contracts
and/or their energy output based on such terms and conditions which shall optimize
the value and sale prices of said assets.
Under the IRR:
Section 5. Powers. PSALM shall, in the performance of its functions and for the
attainment of its objectives, have the following powers:
(a) To formulate and implement a program for the sale and Privatization of the NPC
assets and IPP contracts and the management and liquidation of Stranded Debts and
Stranded Contract Costs of NPC, such liquidation to be completed within the term of
existence of the PSALM;

(b) To take title to and possession of, administer and conserve the assets transferred to
it, including the execution of bilateral contracts to sell power from undisposed assets
and contracts transferred by NPC;

(c) To sell or dispose the transferred assets at such price and under such terms and
conditions as it may deem necessary or proper, subject to applicable laws, rules and
regulations;

(d) To take title to and possession of, and assume all rights and obligations of NPC under
IPP contracts, and to appoint, after public bidding in a transparent and open manner,
qualified independent entities who shall act as IPP Administrators in accordance with
the Act;

(e) To calculate the amount of the Stranded Debts and Stranded Contract Costs of NPC
which shall form part of the basis of the ERC in the determination of the Universal
Charge;

(f) To liquidate Stranded Contract Costs of NPC utilizing proceeds from appropriations,
sales and other property contributed to it, including the proceeds from the Universal
Charge;

(g) To adopt rules and regulations as may be necessary or proper for the orderly conduct
of its business or operations;

(h) To sue and be sued in its name;

(i) To appoint or hire, transfer, remove and fix the compensation of its personnel and
such advisors or other Persons as may be necessary in the sale, Privatization and
disposition of NPC assets and IPP contracts: Provided, however, That PSALM shall hire
its own personnel only if absolutely necessary, and as far as practicable, shall avail
itself of the services of personnel detailed from other government agencies;

(j) To own, hold, acquire, or lease real and personal properties as may be necessary or
required in the discharge of its functions;

(k) To borrow money and incur such liabilities, as may be required to service all
obligations transferred from NPC and loans from ECs assumed from NEA in
accordance with the relevant sections of these Rules, including the issuance of bonds,
securities or other evidence of indebtedness utilizing its assets as collateral and/or
 through the guarantees of the National Government: Provided, That all such debts or
borrowings shall have been paid off or settled before the end of its corporate life;

(l) To restructure existing loans of the NPC;

(m) To collect, administer, and apply NPCs portion of the Universal Charge;

(n) To issue other forms of financial instruments such as warrants, options, convertibles
and to create Special Purpose Vehicles (SPVs) to maximize proceeds and value, as well
as efficiently manage its liabilities;

(o) To structure the sale, Privatization or disposition of NPC assets and IPP Contracts
and/or their energy output based on terms and conditions which shall optimize the
value and sale prices of said assets;

(p) To create and administer STFs under Section 34 of the Act and these Rules;

(q) To operate the generation assets, directly or through NPC, prior to Privatization of
such assets. Towards this end, while PSALM operates the generation assets, it shall
be considered a Generation Company;

(r) To mitigate its potential stranded costs by making reasonable best efforts to reduce
the cost of existing contracts with IPPs;

(s) To ensure that SPUG conduct proper monitoring, accounting andcontrol of

expenditures, and efficient utilization of the missionary electrification funds from the
Universal Charge; and

(t) To do any act necessary or proper to carry out the purpose for which it was created,
including the formation of one or more subsidiaries to maximize Privatization
proceeds, enter into compromise agreements, or take such other acts as may be
determined by the PSALM Board to be necessary, useful, incidental or auxiliary to
accomplish its purposes and objectives as specified in the Act.

PROPERTIES
SEC. 55. Property of the PSALM Corp. The following funds, assets, contributions and
other property shall constitute the property of the PSALM Corp.:
(a) The generation assets, real estate, IPP contracts, other disposable assets of NPC,
proceeds from the sale or disposition of such assets and the residual assets from B-
O-T, R-O-T, and other variations thereof;

(b) Transfers from the National Government;

(c) Proceeds from loans incurred to restructure or refinance NPCs transferred liabilities:
Provided, however, That all borrowings shall be fully paid for by the end of the life of
the PSALM Corp.;
 (d) Proceeds from the universal charge allocated for stranded contract costs and the
stranded debts of NPC;

(e) Net profit of NPC;

(f) Net profit of TRANSCO;

(g) Official assistance, grants, and donations from external sources; and

(h) Other sources of funds as may be determined by PSALM Corp. necessary for the
abovementioned purposes.

Under the IRR:

Section 11. Property of PSALM. The following funds, assets, contributions and other
properties shall constitute the property of the PSALM:
(a) The generation assets, real estate, IPP Contracts, other disposable assets of NPC, proceeds
from the operation or disposition of such assets and the residual assets from BOT, ROT, and
other variations thereof. The proceeds from the operation and disposition of NPC assets shall
include:
(i) Net profit of NPC;
(ii) Earning before interest, taxes, depreciation and amortization of the Pulangui and Agus
Complexes;
(iii) Net profit of TRANSCO;
(iv) Proceeds from the disposition and Privatization of PSALMs generation, other
disposable assets, and TRANSCO, net of all transaction costs and fees associated with such
disposition and Privatization; and
(v) Net profit arising from the administration of IPPs.

(b) Transfers from the National Government;

(c) Proceeds from loans incurred to restructure or refinance NPCs transferred liabilities:
Provided, That all borrowings shall be fully paid for or settled by the end of the life of the
PSALM;

(d) Proceeds from the Universal Charge allocated for Stranded Debts and Stranded Contract Costs
of NPC;

(e) Official assistance, grants and donations from external sources;

(f) Repayment by ECs of such ECs loans assumed by PSALM. Such repayments must be made
within five (5) years from such assumption of loans by PSALM by ECs who have transferred
ownership or Control of its assets, franchise or operations pursuant to Section 60 of the Act;

(g) Proceeds from insurance claims corresponding to assets transferred to PSALM by NPC; and

(h) Other sources of funds as may be determined by PSALM necessary for the above-mentioned
purposes.
VISION
"A debt-free PSALM towards a competitive and stable electric power industry through transparent and
innovative privatization and efficient liability management."

MISSION
Ensure the orderly privatization of government's power and related disposable assets;
Optimally liquidate PSALM's financial obligations; and
Efficiently administer the Universal Charge.

MANDATE
The principal purpose of PSALM is to manage the orderly sale, disposition, and privatization of NPC
generation assets, real estate and other disposable assets, and IPP contracts with the objective of
liquidating all NPC financial obligations and stranded contract costs in an optimal manner.

Formally established on 26 June 2001, PSALM began operations on 01 July 2001 with the following
functions:
Structure the sale, privatization or disposition of NPC assets and IPP contracts and/or their energy
output based on such terms and conditions that will optimize the value and sale prices of these
assets;
Liquidate NPC's stranded contract costs using proceeds from sales and other properties, including
proceeds from the Universal Charge;
Restructure existing loans of NPC; and
Collect, administer and apply the NPC portion of the Universal Charge.

The successful privatization of these assets will pave the way for the declaration of open access and retail
competition as the EPIRA has conditioned it on the existence of at least 70% of the total capacity of
generating assets of NPC and of the total capacity of the power plants under contract with NPC in Luzon
and Visayas.

Moreover, to strengthen the financial viability of electric cooperatives (ECs), PSALM assumed all their
outstanding financial obligations to the National Electrification Administration and other government
agencies.

PSALM has 25 years from the effectivity of the EPIRA to fulfill its twin mandates unless otherwise extended
by law. After the end of its corporate life, all assets it holds, all moneys and properties belonging to it, and
all its outstanding liabilities will revert to and be assumed by the national government.
MAJOR FUNCTIONS

Privatization of National Power's Generation and TransCo's Transmission Assets

PSALM undertakes a range of activities preparatory to the bid proper, including drafting information
memoranda and transaction documents to be distributed to prospective bidders. PSALM also conducts
due diligence on its assets to determine their readiness for privatization.

The publication of the Invitation to Bid officially begins the bidding process. The notice also indicates
schedules of the pre-bid conference, the start of the conduct of due diligence by the bidders, the
distribution of the final transaction documents, and the date for opening of bids.

PSALM will also appoint, again through public bidding, IPP (independent power producer) administrators
who will manage the energy output of different portfolios of power plants run by IPPs. These IPPs were
contracted in the 1990s by National Power to meet the country's growing electricity requirements.

Liability Management

PSALM manages all existing debt of National Power, capital lease payments to IPPs, and the outstanding
obligations of electric coops to the National Electrification Administration and other government
agencies. This function includes the management of other liabilities assumed by PSALM as well as its
future borrowings. This is to ensure that PSALM will be able to pay all principal and interest payments as
they fall due. Refinancing, whenever necessary, will be obtained at minimum cost. PSALM's liability
management function also requires the mitigation of foreign exchange risks through hedging or other
means since some of the debt are denominated in foreign currency.

Administration of Universal Charge

PSALM, with the supervision and approval of the ERC, administers the collection of the Universal Charge
(UC), which is collected every month by the distribution utilities from all electric consumers. The UC fund
is used to finance, as specified by law, missionary electrification, environmental protection projects, and
payment of National Power's stranded debts.