Aboitiz Power on the prowl; raises P3 billion

 Looks like Aboitiz Power Corporation (PSE:AP) is on the prowl again for more acquisitions after its Board approved the issuance of P3 billion worth of peso-denominated bonds through a private placement. Proceeds of the fund-raising exercise will become part of its war chest for acquisitions of power assets.

 In a disclosure to the Philippine Stock exchange, it said it may increase the issue size depending on the market appetite. The offering is handled by BDO Capital & Investment Corp., BPI Capital Corp., First Metro Investment Corp. and ING Bank N.V. and will run up to the end of the year.

 That such a fund-raising campaign is conducted in the middle of a raging financial crisis speaks well of the company. Lesser companies in times like this would rather seal the hatches and ride the storm rather than venture out into the open capital markets.

 But it is precisely these times when energy demand is expected to slow down that one should start top build up the necessary infrastructure. The best time to invest is when there is so much blood in the streets; just ask Warren Buffett, the legendary investor.

 In the past few years, the Aboitiz group has been actively adding power assets to its portfolio by buying assets from the government or other investors. In July, it bested Energy Development Corporation (PSE:EDC) in acquiring the Tiwi-Makban complex, the first geothermal asset sold by PSALM, the government arm tasked to privatize power assets. It is also the first geothermal asset held by the Aboitiz group.

 In a joint venture with SN Power of Norway, Aboitiz Power has taken over the operations of the Ambuklao and Binga hydro plants in Benguet in the middle of the year. Earlier in 2006, it has acquired a significant chunk of ownership in the 232-MW STEAG coal plant in Mindanao.

 Aboitiz Power has a large pool of government assets it can cast its net into. Among the assets scheduled for disposal by the government in 2009 include: 

• the 116-MW Subic and 620-MW Limay diesel plants, both to be sold in January;
• the 246-MW Angat hydroelectric plant, in February;
• the 310-MW Navotas I and II diesel plants, and the 197.8-MW Naga gas and diesel plants, in April
• the 192.5-MW Palinpinon geothermal plant, in July
• the 850-MW decommissioned Sucat and the 112.5-MW Tongonan geothermal plant, in August
• the 150-MW Bacon-Manito geothermal complex, in September and
• the 54-MW decommissioned Cebu diesel plant, in October

  In the first nine months of the year, the company reported a P3.17 billion net income, a 35% net income growth year-on-year on the back of the continued expansion of its power generation business. However, it is likely that the overall income for the whole year will be tempered owing to the costs in acquiring the new assets Tiwi-Makban and Ambuklao-Binga.

 While the Aboitiz group belongs to an old, well established business clan, its power business is run by a new generation descendant in Luis Miguel Aboitiz, who is young, dynamic and has the required academic and business credentials to run a difficult business in trying times.

 Aboitiz Power is one energy company worth watching by investors, consumers and by the energy community at large.

(Disclaimer: The author does not hold any shares in any of the Aboitiz companies and does not intend to invest in them in the near future. He is not connected with the Aboitiz group, and is not tasked to write about them)

Reducing electricity systems losses : hard but doable

Early this month, the Energy Regulatory Commission (ERC) issued a draft resolution for public consultation mandating that, among others, the electricity of a distribution utility (DU) is to be treated as an expense and not part of a systems loss, and lowers the maximum recoverable rate of system loss from 9.5 percent to 8 for DUs and from 14 percent to 11 for electric coops, based on the total kilowatt-hour (kWh) generated, purchased and distributed.

This is a welcome development, for the ERC and previous electricity price regulatory bodies have not adjusted the systems loss caps for almost a decade. The high systems loss cap was also pinpointed as one of the reasons for the high power costs exposed during the high of the controversy between GSIS president Winston Garcia and Meralco.

Earlier, we have proposed a stretch target of 5% and an implied reasonable target of 7%, based on the average systems loss of European Union countries. We also maintain that the cooperatives should be treated like any other private DUs which means that they should also have the same caps.

We also reiterate that these business dinosaurs be sold off to private investors.

As to be expected, the distribution utilities cry wolf, saying that this could lead to huge losses.

Aboitiz Power Corp. president Erramon Aboitiz said that its unit the Visayan Electric Company, the DU servicing Cebu City and province, is within the current 9.5% cap, but reducing this to 8 % the company would have to book losses of some P 100 million.

However, he didn't say that it is not doable. In fact, he said that you can reduce systems loss by investing, but one has to make a decent return. Of course.

This was echoed by another Aboitiz firm Davao Light & Power Co. (DLPC) vice president Bienamer Garcia said the proposed lowering of the system loss "would entail a lot of cost” , but the firm's system loss level as of end-June 2008 already stood at 7.91 percent, just within the proposed 8 % cap.

The Aboitiz units want incentives. Fine. But the incentives (e.g., tax breaks for capital importation) should be for improvements specifically targeting reduction of systems losses at the same time that the systems loss caps are lowered.

Garcia said that there is already a performance-based mechanism in place and all that ERC should do is to align the proposed new cap with this.

“Let businesses figure out how to reduce those losses, then give incentives. When you give incentives, you start seeing what people can do. For me, it’s better to provide incentives to companies to reduce system loss,” Aboitiz said.

Amen.

Was Tiwi-Makban a steal?

If champagne bottles were not popping, there must have been an air of jubilation or a round of backslapping and self congratulations at Power Sector Assets and Liabilities Management Corp. (PSALM) 's office when it was able to sell Tiwi-Makban complex, the first of geothermal assets to be sold. At the very least, there must have been sighs of relief as the asset has been put on the auction block since 2005.

As this is the first sale of a geothermal asset, necessarily, it has become a benchmark both in pricing and methodology for subsequent geothermal assets disposal. On the queue are the Palinpinon complex, Tongonan I and Bacman which are all slated for bidding in the coming months.

Interestingly, PSALM has not given indications whether the sale proceeds were beyond its expectations as there was no indicative base price given even after the auction.

Was the price reasonable?

One should assume that the bidders have done their homework to arrive at their respective bid price. PSALM would have done likewise.

Below is a tabulation of the results of the privatization efforts of PSALM (prices in million U.S. dollars, $ M):


For comparison, consider the price per MW paid for the coal and big hydro plants. The prices range from $1.15 M for Pantabangan-Masiway to $1.86 M for Ambuklao-Binga. But surprise, for Tiwi-Makban the price is ridiculously low at $ 0.60 M. For comparison, a rule of thumb says that to put up a new geothermal plant that size, the total cost would amount to something like $ 2.5 to $ 3 M per MW.

So, Aboitiz snagged the geothermal complex for a song with nary a whimper from PSALM, and not a finger or eyebrow raised from the usual rambunctious politicians who see dirt at any government auction?

Not necessarily.

The price quoted already inputted the multifarious problems facing the complex-- and there are many.

One, the hardware has been there starting 1979, and considering Napocor has been in a tight financial squeeze for as long as one can remember, one cannot expect that the plants are in good running conditions. In fact, two of the units were supposed to have been rehabilitated prior to the bidding are still sitting idly, from what I gather. Many of the cooling towers, hot well pumps, turbines, and the control room--big components of the plants--are a little more than derelicts of a bygone industrial era.

Two, there is still the nagging issue of the geothermal resources sales contract (GRSC) which is foisted upon the winning investor, which is, based upon the pronouncements of the interested investors prior to the bidding, not exactly a money machine, to put it mildly. So much so that Luis Miguel Aboitiz, vice-president of his family's power unit, insisted immediately after the winning bidder is announced, that the contract has to be negotiated.

Three, while a power sales contract of more than 400 MW has been attached to the sale, the rest of the power generated will have to be dispatched through the wholesale electricity spot market (WESM) at competitive prices. Geothermal electricity from Tiwi-Makban will have to compete with hydro, natural gas and coal for base load requirements. Worse, the steam price is tied to coal prices as stipulated in the GRSC, so geothermal electricity from Tiwi-Makban would have difficulty competing even with coal plants.

And four, while Aboitiz gets to make use of power from Makban field which is one of the most productive fields in terms of power density, Tiwi is another story. There, Aboitiz may be hard-pressed to expand the capacity owing to technical limitations of the field. Its technical staff would soon learn problems associated with mineral deposition, declining pressures, cold water inflow that has ravaged about half of the original field, and acidic fluids, to name a few.

There are more. The Aboitiz group, hard-nosed savvy investor, must have inputted all these risks during its due diligence and came to the conclusion that the assets cannot be at par with the other power plants--coal or hydro-- sold by the government. Hence the seemingly low price.

So, the price must be justified, and PSALM bosses could at last report to their superiors at the Department of Finance that at least they have gotten some amount from a problematic asset to help plug the government's chronic deficit after several tries. For all we know, PSALM may have a secret base price and the winning bid tops it.

So everybody seems happy. End of the story.

But there is a worrisome item that bothers me since. I need to let it off my chest.

If anyone who has the best position to value the assets, it must be Energy Development Corporation (EDC), the losing bidder. It has vast experience in managing geothermal fields, so it knows the ins and outs of the costs involved in operation. It has acquired power plants, so it has a pretty good idea how to run these profitably.

The whiz kids at its finance department must have cranked out all sorts of economic and discounted cash flow models to arrive at the conclusion that it must be pretty good--for itself. For how could you explain the assiduous defense of the contract by the EDC president?

EDC did not come to the bidding table only to lose. So it has come up with a number which to itself must represent a fair market value for the assets: all for $ 368.44 M. That would amount to $ 0.49 M per MW--less than half the price of coal or hydro plants.

It looks like the Abotiz group would have its hands full in the coming months to justify its bid.

Aboitiz group snatches Tiwi-Makban for $ 446.88 M

AP Renewables Inc., a full subsidiary of listed Abotiz Power Corporation, bagged the Tiwi-Makban geothermal complex in a bidding conducted yesterday by Power Sector Assets and Liabilities Management Corp. (PSALM) with a bid of $ 446.88 M.

It outflanked the only other bidder--First Luzon Geothermal Energy Corp. of the Lopez-controlled Energy Development Corporation which came in with a much lower bid of $ 368.44 M.

The Tiwi-Makban assets sold, comprising of 289 MW Tiwi geothermal power plant in Albay 458.53 MW Makban geothermal power plant in Laguna and Batangas, would be the first geothermal asset of the Aboitiz-group portfolio.

PSALM president Jose Ibazeta, obviously delighted with the successful sale, said "[we] have reached the 68.78-percent privatization level", which is close to the 70 % target required to be able to implement the "open access" regime in the power industry as stipulated in the electric power reform law (EPIRA).

For his part, Energy Secretary Angelo Reyes pointed out that this is an important achievement as this is the first geothermal plant bid out by the government.

Yesterday, this corner put out its prognostication on the possible scenario on the sale just hours before the bidding closed. Let's see how we fared. Here is our scenario and the actual outcome:

* Suez Energy will confirm rumors that it is backing out - It did.

* Korea Electric will not bid - It did not show up for the bidding.

* EDC will bid, but it won't be aggressive - It did, and promptly lost to the eventual winner by a margin of close to $ 80 M.

* The Aboitiz group will bid - It did, and won.

* We expressed reservation on the success of the bidding - We were wrong.

Well, you can't win all the time.