DMCI Holdings bags Calaca coal-fired plant for $361.7 M

In a terse, one-sentence announcement, publicly-listed DMCI Holdings (PSE:DMC) said today it has acquired the 600-MW coal-fired power plant from the Power Sector Assets and Liabilities Management Corporation (PSALM), the government agency tasked with the privatization of power assets, for $ 361.7 million which is the highest among the participating bids.

DMCI Holdings, controlled by the Consunji family, has interests in construction, tollway operation, water services, coal mining and real estate among others. Its subsidiary, Semirara Mining Corporation (PSE:SCC), is the largest coal producer in the country and supplies coal to local power plants including Calaca.

At the Philippine stock exchange, share prices of DMCI Holdings ballooned to P7.10 per share, up P0.50 or 7.58% while that of SCC climbed P3 to P38, up 8.57%. Apparently, investors have cheered the move since there is expected to be a synergy gained from the Calaca acquisition with SCC a major fuel supplier.

It can be recalled that the present winning bid is much less compared to the earlier winning bid of Suez Energy at $787 million for the same asset. Since then, Suez Energy backtracked on the project, losing a $14 million bid bond in the process.

The current bid is also not much higher than the highest bid at $280 million during the first auction of the asset, which was however rejected by PSALM because the price did not meet its base price. It is also at par with the last privatization, which is that of Tiwi-Makban geothermal complex when the Aboitiz group paid $0.6 million per MW. On a per MW basis, the price paid by DMCI amount exactly to the same amount.


The per-MW price is also reasonable compared to the construction of the similar 232-MW STEAG coal-fired plant in Mindanao at $305 million, or $1.31 million/MW.

It would appear then that our contention that Suez Energy merely cut its potential losses when it returned the assets to PSALM was justified. Including the forfeited bid bond, Suez Energy aborted a potential loss of $420 million if its bid is compared to that of the present winning bid.

At least, some sense of sanity has returned in valuing the power assets for sale by the government.

Can PSALM sell Calaca?

After Suez Energy backed out from the sale of the 600 MW and forfeiting close to $15 million bid bond, the Power Sector Assets and Liabilities Management (PSALM) Corp. which is tasked to privatize government’s power is now in a quandary what to do with the plant.

The failed sale effectively stalled the power sector reforms under the Electric Power Industry Reform Act (EPIRA) because the failure sets back the level of privatization to only 54%, well below the 70% threshold for the open-access regime to take off.

“We will try to re-bid Calaca this year despite the financial market uncertainties,” PSALM president Jose Ibazeta told reporters at the sidelines of a congressional hearing on the failed biddings. He said PSALM, after two failed biddings, has now the option to enter into a negotiated sale with any interested buyer.

Good luck. PSALM needs a lot of it.

Suez’ bid of $787 million through its corporate vehicle Emerald Energy Corp. (EEC) puts the price at $1.31 million per MW of installed electricity which is at the high end of recent privatization sales of power assets.  It is only topped slightly by the similar 600-MW coal-fired Masinloc plant at $1.45 million/MW.

But Calaca is much older, and the two 300-MW units are severely battered that PSALM advertised it on an “as-is-where-is” basis which is a polite euphemism of an asset close to junk. The generating plants have been in operation since 1985 and 1995, respectively and are now close to end of their useful life. The former National Power Corporation (NPC) has been notorious for running down the plants under its wings—and it is not only due to lack of funds for proper maintenance.

Apparently, the interested bidders pinned their hopes on the eventual restoration of the units to full capacity which could probably economically justify the acquisition. Six hundred MW running continuously, the generated power easily sold at the wholesale electricity spot market (WESM) and a rosy 5% projected growth in GDP year in, year out—how can you not see green, as in green bucks, all around?

This is asking too much.

The 232-MW coal-fired power plant of STEAG AG in Mindanao was recently built at a cost of $305 million; that puts it at $1.31 million/MW which is exactly equal to the acquisition price of Suez Energy.  On this basis, it would have been more prudent to construct a new state of the art, more efficient and less polluting coal-fired plant from scratch.

Even if the units were restored to full capacity, there have been reports that the dispatch of its maximum power would pose some tricky problems due to transmission line limitations. Again, the price could have been hinged on a major upgrade of the transmission line capacity which might not come on line at the proper time based on NPC’s track record or a lack of it.

Suez blamed the deterioration of the plants since the bidding date as its main reason for backing out. And this is supposedly due to the exclusive use of local Semirara coal on the units. Unit 1 of Calaca was designed to use imported, high heating value coal while Unit 2 was designed to use a blend of local and imported coal. Still, it is doubtful if it is the only reason.

So, how much would you buy Calaca for?

During the first round of bidding, the highest bid was $288 million which was rejected as below the (secret) floor price set by PSALM. The plant was originally built at a total cost of $590 million, so the selling agency would have been looking at around this price, including a premium and if some depreciation is considered. This price would also be acceptable to politicians--most of whom have no idea on how to value such assets—and should conform to some silly rules which say in effect that one should not dispose government assets at a loss.

Really, the offers during the first round were already generous—the government should have taken the money and run. At this stage, the possible bidders would already have been doused with cold water after more and more information is revealed on Calaca. The longer the delay, the less chance of a successful sale.

For PSALM to reach the 70% level of privatization once more, it has better chances in Limay co-generation plant and on the geothermal plants slated to be sold this year.

Probably, the asset should now be considered as slightly more valuable that the mothballed diesel plants of the former NPC which have been successfully disposed of.

 

Suez Energy backtracks on Calaca; loses $14-M bid bond

There goes another potential power sector investor.

Suez Energy, the French power firm which bagged the 600-MW Calaca coal-fired power plant in an auction in October 2007, has backed out of the deal, according to the Power Sector and Liabilities Management Corp. (PSALM) last January 25. In the process, the firm will forfeit its $14-million bid bond.

Emerald Energy Corp., the corporate vehicle of the French firm used to acquire the plant, said in a statement that it will “terminate its purchase of the asset due to the deterioration of the power plant since its bidding date” as well as due to other unresolved issues it claimed. There was already a hint of the firm not pursuing the deal when it failed to pay the upfront payment of 40% of the $787 million winning bid price by the payment deadline on November 9, 2008.

Why the sudden change of heart?

When Emerald cited “deteriorating plant conditions”, it was probably referring to the exclusive use of local Semirara coal in Unit 1 which Suez Energy senior vice president of business development for Southeast Asia and Africa Ramani Hariharan claimed was the main cause of “severe” deterioration.

Coal plants are normally designed with specific coal heating value to be used in mind. In this case, Calaca was designed to use blended coal (local plus imported) to compensate for the low heating value of Semirara coal. Why the PSALM operators shifted fully to local coal and why Suez didn’t notice of it remains unclear.

It is not also established that indeed, the shift to lower grade coal for about a year, assuming that it started right after the bidding, could have singlehandedly caused the “severe deterioration”. There’s probably more reasons for the retreat than the official line.

One, Suez seemed to have overbid for the asset.  At $787 million bid, this was far higher than the highest bid of $280 million during the first aborted auction for Calaca. It is incomprehensible how the asset could have appreciated in value during the transition from the earlier to the later bidding in which Suez was declared the winner.

It is likely that Suez has not done its homework well.

Two, Calaca has been the scene of vigorous opposition to coal power plants in general in the Philippines. Being comprising of very old generating units, the claims of polluting the environment with fly ash, coal particles and airborne toxic mercury would be very hard to refute.

Three, there are more acceptable alternatives for investors and consumers to polluting coal plants. The government has resuscitated the nuclear option. The renewable energy bill has become a law which could give renewable energy sources like geothermal, wind and even hydro, the needed push.

Finally, the financial crisis has affected the growth in power demand, and Suez might have gazed at the future and didn’t like what it sees: It might not be able to dispatch sufficient power to make the investment profitable. The firm itself is likely affected by the financial crisis itself. For one, financing would be hard to come by for infrastructure projects.

The botched deal has a far reaching implication than a simple asset disposal failure.  The failure means that PSALM has to miss its target of 70% asset disposal required for the interim open access (IOA) to kick in, which effectively derails the government’s program of full power industry deregulation. The IOA would have allowed bulk users with above 1 MW requirement to choose their power supplier.

It also freezes on its tracks the whole power assets privatization process since the government would have to re-think the valuation of the assets for disposal and the rules of the game.

For Calaca, PSALM would be hard-pressed to get a sale price neat the Suez bid. For the other assets, the base price would have to be deflated if a successful sale were to push through.

Lessons learned

There are a handful of lessons from this episode.

For the investor, he has to be extra careful during due diligence. The phrase “as is, where is” which describes an item for sale, is actually a euphemism for junk, to be honest about it. So you have to price the item accordingly.

PSALM will have to be more transparent in valuing the assets and it should never kowtow to the demands of politicians to inflate values. The assets that have been sold are nowhere near the crown jewels they are purported to be.

It should not expect high premium for the assets to be sold.

After just a few years, Ashmore Investment is looking at a graceful exit from Petron Corporation (PSE:PCOR). The Icelandic groups who partnered with the Lopez conglomerate--which is into all corners of the power industry—in acquiring geothermal developer Energy Development Corporation (PSE:EDC) made a quick exit from the winning consortium which bid way above the next bidder.

Aboitiz Power Corporation (PSE:AP) entered the geothermal business by acquiring the Tiwi-Makban assets but it has yet to show how to profit from its investment. There are more names that could be added to the list like YNN, and—gracious, me!—San Miguel?

So, is Suez agonizing over the loss of $14 million bond?

Unlikely.

It is more savvy than anyone thought. It is likely to be cutting losses at this early stage than drown in red ink later in the day.