EDC subsidiary acquires the Palinpinon and Tongonan geothermal plants

No surprise there.
Green Core Geothermal Inc. of the Lopez- group, is set to take over the 192.5 MW Palinpinon  and the 112.5 MW Tongonan geothermal power plants as it posted yesterday a higher bid of $220 million over that of its lone rival, according to the Power Sector Assets and Liabilities Management Corp. (PSALM), the government agency tasked to privatize the power assets of the government.
The other bidder was Therma Power Visayas, Inc., a unit of the Abotiz group of companies which is one of the dominant local players in the power industry, which put in a bid of $200 m. According to PSALM representative Conrad Tolentino, the winning bid topped the government’s reserve price for the assets.
Green Core is completely owned by First Luzon Geothermal Energy Corp., which is in turn a full subsidiary of listed geothermal developer Energy Development Corp. (PSE: EDC). EDC, meanwhile, is majority-owned by First Gen Corp. (PSE: FGEN), the power generation arm of the Lopez group.
From the very beginning and from the nature of the assets, bidding is heavily tilted towards EDC.
The Palinpinon geothermal complex consists of the 112.5- MW Palinpinon 1 and the Palinpinon 2 which counts four 20-MW modular generating units.  All the units have been supplied with steam from the production field owned by EDC based on a steam sales agreement between the field operator and the power plant management (formerly, the National Power Corp., or NPC).
The original supply contract calls for a 75% “take-or-pay” in which the steam supplier is guaranteed payment of this amount whether or not the plant operator could operate the plant at rated capacity. Prior to the sale, the steam sales agreement was modified to become similar to that of the contract between the field and plant operators at Tiwi-Makban.
Many potential investors consider the provisions of the contract “onerous” and a major disincentive to acquisition. EDC, upon acquisition of the plants, will be immune to the effects of the provisions since it is the steam supplier in the first place, and has heavily influenced the final outcome of the contract since it is a party to it.
Moreover, being both the steam supplier and power plant operator, EDC will realize synergistic cost benefits which would be absent for any other acquirer.
As an added bonus, EDC can now operate the plants at its maximum capacity. At present, EDC just supplies steam to the plants at about the contractual obligation of 75% capacity. Owing to some provision of the existing contract--in particular, to the proviso that the power plant operator could use steam at no cost the steam gas ejectors (a necessary component to operate the plant)--it would not make perfect economic sense to supply more than the contractual amount. That constraint is now removed.
The Palinpinon plant has been on the auction block for some time. The sale could not proceed however, since an attached steam sales contract (a necessary sweetener to potential investors) still has to be approved by the Joint Congressional Power Commission, and PSALM had no choice but to move back the auction to 2009. With the steam supplier getting the power plant, that issue has become moot and academic.
For the case of the 112.5-MW Tongonan 1 power plant, it sits in the middle of the EDC-owned steam fields, surrounded by other power plants which are now owned by EDC, but which used to be owned by build-operate-transfer (BOT) foreign contractors. The steam sales contract is similar to that with Palinpinon.
Theoretically, the Tongonan-1 plant steam supply would be dictated by EDC, and could be given less priority in distributing steam, when supply becomes tight. At best, it could be supplied with the minimum contractual steam requirement under trying conditions.
Good if steam is plentiful, but this might not be the case.  According to a recent quarterly report filed by EDC to the Philippine Stock Exchange (PSE), its net income has been severely impacted by capital expenditures associated with augmenting the steam supply at the Greater Tongonan geothermal field.
In the end, all these costs and risks are factored in when an outside investor examines the asset for possible acquisition. The bottom line is, the outside investor will have to place a bid which is low enough if one is to reap returns to its shareholders down the road.  This is likely the reason why EDC lost in the Tiwi-Makban bidding, where the field is operated by another party, Chevron.
No such constraint faces the field operator. It can comfortably bid higher than potential rivals knowing that it could reap cost benefits due to synergy. More importantly, it has the built-in advantage of knowing the nature and the cost of production of the fuel—that of steam.
Foreign investors have probably done their due diligence and didn’t like what they see.
So it seems the Palinpinon and Tongonan 1 geothermal plants have been handed to EDC on a silver platter by PSALM.

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.