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.

Tiwi-Makban sale: D-day

The day of reckoning is here.

In a few hours, the Power Sector Assets and Liabilities Management Corp. (PSALM) will bid out the 289-megawatt Tiwi and 458.53-MW Makban geothermal complex.

According to PSALM, the bidding will close at 12 noon, followed by the screening of the documents at 1:30 p.m.

How would this bidding turn out?

PSALM vice president for asset management and electricity trading Froilan Tampinco earlier said there are four pre-qualified bidders for the Tiwi-Makban assets which he declined to name, but the Philippine Star quoted its own sources that these are Aboitiz Power Renewable, Korea Electric Power Co., Suez Energy and Lopez-owned Energy Development Corp.

While sources said Suez Energy is contemplating on backing out from its bid for Tiwi-Makban, Tampinco considers the European power firm still part of the list of bidders. Suez Energy would probably confirm the rumors and back out altogether.

Korea Electric Power Co. would probably get cold feet and would not place its bid, despite its assumed exhaustive due diligence efforts.

Aboitiz Power Renewables, upon the recommendations of its presumably foreign technical consultants, would post a bid, but its bid would likely be below government projections. The Aboitiz power group has been active in acquiring hydro assets and earlier, distribution companies. As the name of its vehicle suggests, it is coming strongly into renewables, especially if the renewable energy bill is passed.

That would leave Lopez-owned EDC the strongest contender. It is of course drolling over the Tiwi-Makban assets, as the acquisition would put it the undisputed leader in geothermal development in the Philippines and would enhance its image as capable of managing such concerns not only here but also abroad.

Should EDC acquire the Tiwi-Makban assets, it won't be operating the field. That job is for Chevron Geothermal Holdings Phils., the current operator. And, in an ironic twist of fate, it would be holding the other side of the GRSC stick--similar to the very contract which its president and CEO tenaciously clings to in the case of Palinpinon.

But the Lopez group wouldn't be as aggressive this time compared to how it has acquired EDC from the government. In that bidding, First Gen bid about P 9.20 per share for the government shares, a large premium from the market price of around P 6 a share, and way much higher that the other competitive bids.

Since then, the Icelandic partners of First Gen in Red Vulcan Holdings, the corporate vehicle used by the Lopezes to acquire EDC, have divested from it, and First Gen is now contemplating, or is in the process of disposing of at least 40 % Red Vulcan Holdings formerly held by the Icelandic interests, as reported in the papers.

After all, it has to pay for a portion of the financing for EDC which is not a paltry sum.

Apprehensions are rife that the bidding for the Tiwi-Makban geothermal power facilities may be pushed back anew due unresolved issues on geothermal supply contracts which have been discussed in this spot earlier.

The sale has been attempted since late 2005. The attempt this year was first set on June 4, then to June 27 and finally today.

PSALM, however, tries hard to put up a brave face saying it would gain the full support and participation of the qualified bidders after it attached more than 400-MW of power supply contracts to the sale of the Tiwi-Makban power facilities. It is however silent on the contentious issues surrounding the geothermal resources sales contract for Tiwi-Makban.

Based on the above scenario, one cannot have much confidence in the success of today's bidding.

This time, I fervently wish that I am completely dead wrong.

Keeping fingers crossed on Tiwi-Makban sale

If we are to believe the Power Sector Assets and Liabilities Corp. (PSALM), the Tiwi-Makban geothermal plant complex should be bidded out on July 30.



PSALM vice-president for asset management and electricity trading Froilan Tampinco said that it is all set for the bid date with four pre-qualified bidders as the agency has approved the final transaction documents.

Tampinco confirmed there are four pre-qualified bidders for the Tiwi-Makban assets but he refused to name them. However, the Philippine Star reported that industry sources said the four potential bidders are Energy Development Corp. of the Lopezes, Aboitiz Power Renewable, Korea Electric Power Co. and Suez Energy.

It added that sources said Suez Energy is likely to back out from the bidding, but Tampinco said the European power firm is still in the game.

But from the way the statements are issued on the sale, PSALM looks guardedly optimistic at best.

Apprehensions still linger that the bidding for the Tiwi-Makban geothermal power facilities may be pushed back much later due to some unresolved issues on geothermal supply contracts as in the case of Palinpinon.

For the planned sale this year, the bidding for Tiwi-Makban was originally scheduled for June 4, moved to June 27, and finally to July 30. However, the facility was originally put up for sale in late 2005, postponed a few times and finally rescheduled for this year.

If successful, this would be the first geothermal facility to be privatized.

In this planned sale the credibility of the privatization process and of the PSALM itself, would be severely tested.

Let us keep our fingers crossed.

The Tiwi-Makban privatization target shifts again

By J R Ruaya

See, I told you? *

Like a moving target in a theater of war, the bidding date for the 289-MW Tiwi and the 458.53-MW Makban geothermal power has been pushed back to an unspecified date next month, according to the state-run Power Sector Assets and Liabilities Management Corp. (PSALM).

The original sale schedule was June 4, but was moved to June 27. The geothermal complex was first put up for sale in December 2005.

The extended bidding schedule should allow for more time to address several concerns raised by the prospective bidders, particularly on the geothermal resources supply contract (GRSC), according to PSALM vice president for asset management and electricity trading Froilan Tampinco said.

PSALM said it has already received letters of interest from nine prospective bidders for the geothermal complex.

PSALM seemed confident of making the bidding exercise a success after it allocated more than 400 MW of power supply contracts to the sale of the Tiwi-Makban power facilities which will provide the new owner a ready market for the electricity that the power complex will produce. 
However, the 400-MW power supply contract and the GRSC are two distinct items. The former is the electricity supply agreement between the power plant operator and the distributor, while the latter is the steam sales contract between the steam field management (in this case, Chevron's geothermal unit) and the power plant owner.

Following the pronouncement of PSALM, the power supply contract seemed to be now in order, and probably acceptable to the prospective investors, but contentious issues remain with the GRSC which may not be resolved with a few more weeks' extension of the bidding date.

The basic issues are:

* The GRSC is between PSALM and Chevron, but the most affected would be the successful buyer who has to abide by it despite not being a party to the crafting of the agreement.

* Certain provisions in the contract like the setting of the base price, pegging the steam price to coal prices and some penalty and bonus clauses may not work in favor of the investors.

* Rehabilitation of two of the generating units which is being passed on to the investors. This was supposed to have been done by then NPC (now PSALM) as part of the compromise agreement between it and Chevron.

Other issues unrelated to the GRSC and the power sales contract like the base price set by the government for the assets, land ownership, and even constitutional constraints to foreign entities like Chevron may derail the scheduled sale.

To make the sale successful, PSALM should step on the shoes on the potential investors.

Some moves it could consider include:

* The GRSC should be considered a transition contract in the absence of a negotiated contract between the winning bidder and the steam field manager and so as not to disrupt operations. The winning bidder should have the prerogative to enter into a new GRSC soon after it takes over the power plant operation while the steam field operator should concur in principle to it before the bidding.

* The issues raised by the potential bidders on the provisions should become the starting point in such negotiations.

* The winning investor should be at the very least partially compensated for the rehabilitation of two of the generating units. He should not be made to shoulder the original responsibility of PSALM.

* PSALM might consider, without violating any government auditing rules, lowering the base price of the assets or scrapping it altogether, letting the market decide the fair value of the assets.

As it is, the investors would have to grapple with basic business decisions like whether the enterprise is reasonable profitable to them given the constraints like the existing GRSC, power sales contract assignment, the wholesale electricity spot market, the unresolved interim open access, country risk, among others.

If we are interested for them to come, let us not erect unreasonable barriers towards fulfillment of the EPIRA mandate of privatization and the liberalization of the electricity market.

The issues surrounding the Tiwi-Makban sale will again surface during the forthcoming sale of other geothermal assets like Palinpinon, Tongonan I, and Bac-man. The Palinpinon sale was earlier waylaid by such issues.**

The sooner PSALM relents on these issues the better.

Otherwise, PSALM's target of selling 70% of the generating assets within the year is but a pipe dream.

_____

* See previous post "Tiwi-Makban sale also pushed back", on May 20, 2008.

** See previous post "Palinpinon power plant sale hangs", May 12, 2008.

Tiwi-Makban sale also pushed back

By J R Ruaya

Energy and Chemistry Consultant

Like the Palinpinon sale, the auction for the 289-MW Tiwi and the 458.53 Makban geothermal power plant complex has been pushed back. Unlike the former though, the sale is moved back by three weeks only, from June 4 to June 27.

The Power Sector Assets and Liabilities Management Corp. (PSALM) said this was done to give ample time for investors to undertake due diligence activities. According to PSALM, the nine bidders of the two plants located in Laguna and Batangas provinces, have requested for more time to complete their deliverables, including conducting their due diligence.

PSALM said the submission of documentary deliverables was also extended by another week to give foreign bidders more time to secure their authenticated documents from the Philippine consular offices abroad.

It must be noted that PSALM initially offered the Tiwi and Makban plants as a package in September 2005. The bidding, however, was withdrawn by PSALM to consider changes in the bidding procedures and transaction documents that the government power privatization firm has been adopting in its recently sold assets.

Other than these procedural requirements, there are other issues and concerns raised by investor groups, according to published reports.

Let us hope the new schedule is not just another moving target of PSALM.

The Tiwi geothermal field

What is being sold?

Located in Tiwi, Albay province, the Tiwi geothermal power plant complex consists of three plants, namely, Plant A with two 60-MW units, Plant B with two 55-MW units, and Plant C with two 57-MW units. Plant B's Unit 4 was retired or decommissioned in 2003.

The Makban plant complex in Southern Luzon, Bay & Calauan, Laguna and Sto. Tomas, Batangas is situated 70 kilometers east of Metro Manila. It consists of Plants A and B with two 63-MW units each, Plant C with two 55-MW units, Plants D and E with two 20-MW units each, and a binary plant with five 3-MW and one 0.73-MW units.

Therefore, the actual capacity has a total of 747.53 MW, as contained in the bidding papers but Chevron pegs the actual generation capacity at 637 MW, which excludes the two 55-MW units up for rehabilitation.

The Tiwi and Makban geothermal power plants were first commissioned in 1979.

Unlike other geothermal power plants, though, Napocor also owns the steam fields facilities--surface steam pipes, separators, production and injection wells, some parcels of lands where the faclities are constructed--at both Tiwi and Makban. Chevron Geothermal Philippines Holdings Inc., formerly Philippine Geothermal Inc. while under Unocal, merely maintains and operates the fields, produce steam and sell it to Napocor--all for a management fee.

As an example, when the plant requires additional steam, Chevron would have to ask Napocor to drill the well and pay for the capital expense. The prospective bidder is actually buying the steam field facilities, of which he has not much control of, unless a new arrangement is made later on.

Under the original steam sales contract between Chevron and the National Power Corporation (Napocor, or NPC), which have been deemed lopsided in favor of the steam field manager by critics, a serious billing dispute inevitably arose in the past. The case went on to the International Court of Justice at the Hague for arbitration. However, in 2004, Chevron signed a compromise agreement settling the contract dispute.

As part of this agreement, Chevron Geothermal Philippines Holdings is operating the steam fields under a transition agreement with NPC. This transition agreement is expected to be superseded by a new agreement, which will become effective upon completion by NPC of the rehabilitation of the Mak-Ban geothermal plant and the formation by Chevron Geothermal Philippines Holdings of a Philippine company.

Under the new operating agreement, the Philippine company would be granted the right to operate the steam fields under a contract with the Philippine Department of Energy for an additional 25 years. The Philippine company would sell geothermal resources under a Geothermal Resources Sales Contract (GRSC) until 2021, at negotiated prices designed to baseload operation of the Tiwi and Mak-Ban geothermal plants

The contract itself is part of the assets being sold.

Rehabilitation of Tiwi-Makban plants

The rehabilitation of the Tiwi-Makban plants, in particular, Units 5 and 6 at Makban, is among the concerns raised by the investor groups, the expense of which is effectively transferred to the new investors. This should have been done by NPC as part of its compromise agreement with Chevron. Apparently, NPC has been remiss on its part and now wants the burden to be shifted to the new investors.

But there is more to rehabilitation than expense.

Former PSALM president Nieves Osorio noted that for the geothermal resource sales contract (GRSC) to be rendered effective, the rehabilitation of the generation units shall first be accomplished. Such particular development on meeting preconditions for the GSRC is also being watched carefully by prospective investors.

"The GRSC has to be effective and one of the conditions is the rehabilitation of the units" and she added, "Napocor-PSALM has to show it can deliver its CPs (condition precedents)".

On the other hand, Chevron seemed to have done its part in drilling additional wells for the expected increase in steam requirements upon completion of the rehabilitation works

Assigning power supply contracts

Any potential investor would like some assurance that it has a ready market for at least a major portion of the plant output. Past failure in bidding of some power assets could be attributed to the absence of a power sales contract.

To ensure better chances of asset disposal, PSALM said it had assigned power supply contracts on more than 400 megawatts in capacity of the 747-MW Tiwi-MakBan geothermal plant package, which will be auctioned on June 27. The rest of the output, if any, would have to be sold through the wholesale spot market, or to other big users under a bilateral contract.

PSALM said potential bidders for the plant complex would thus be assured of a ready market for that amount of electricity. During one of the pre-bid meetings, PSALM also discussed with nine interested groups the privatization framework that would cover the transition period until the geothermal resources sales contract took effect. Major provisions of the geothermal resources sales contract, such as scope and pricing were also tackled.

PSALM said the potential bidders were also briefed on the existing transition agreement between and among major stakeholders of the plant package, including PSALM, Napocor, Chevron, and the winning bidder.

Filipinizing Chevron Geothermal

The other major conditionality of the compromise agreement between Chevron and now, PSALM is "Filipinizing" Chevron geothermal, or putting up another Filipino company to operate the field.

The prescription for Chevron Geothermal to take in a local partner takes ground from the 1987 Philippine Constitution which limits the participation of foreign investors in the development and utilization of indigenous resources; and geothermal steam is included.

The concluded steam supply arrangement between Unocal and NPC years back, stretching until year 2021, puts mandate on the US firm to tap that local partner; and was blamed as among the reasons why the facilities’ earlier attempt at privatization was stalled.

After concluding that step in the new corporate vehicle to take on the steam supply for Tiwi and Makban plants, Chevron would need to file geothermal resource service contract with the Department of Energy. The current service contracts for Tiwi and Makban are owned by NPC, but if the plants are to be sold, the service contract would have to be "returned" to the Department of Energy.

For its part, Chevron as a matter of corporate policy, seems unwilling to to take on a minority position in any endeavor it is engaged in, based on experience it has shown worldwide. As a Filipino company, Chevron Geothermal can now even bid for the power plants, but with an existing "generous" GRSC, it doesn't have to. Financially, it might not even be to its advantage to acquire both the power plant and the steam field facilities.

The original EPIRA mandate to package both the power plants and the steam field facilities appears to have been resolved by attaching a power sales contract instead, but legal questions still linger.

It would now appear that the concerns raised by investors can be traced largely to the compromise agreement between PSALM and Chevron.

GRSC provisions and the industry structure

The success of the business lies of course, with the GRSC in which the potential investor would have to live with. It would have to be asumed that the investor would have to examine the provisions with a fine tooth comb. How would the provisions affect the cash flow of the enterprise in the future? and other similar questions need to be clarified.

It was also reported that under the GRSC, the steam price, like in the case of Palinpinon (see earlier post " Palinpinon power plant sale hangs" on May 12), is also pegged to coal prices. If so, then the consequences as discussed earlier, would apply here. But since the GRSC for Tiwi and Makban came before Palinpinon's, it would now appear that the latter's GRSC is patterned after that of Tiwi-Makban's.

The investor would have to factor in the current industry structure which is undergoing a major overhaul through the EPIRA. The very success of government privatization of power assets in fact hinges on the active participation of investors. But this situation could rapidly become a Catch-22 stand-off if the bidding process itself becomes unpalatable to investors due to the base price set, unresolved legal questions, provisions of the GRSC, political risks, market uncertainty, steam supply and what have you.

On the positive side, the winning investor would gain a foothold on the important and potentially lucrative local geothermal power sector. The experience gained could very well be transformed into a springboard for other ventures in the geothermal sector worldwide which has undergone some sort of a revival due in part to the surging oil prices and governments' desires for in-country energy security.

In this particular exercise, the winning bidder would have the chance to be partner in exploiting what could be one of the most productive geothermal fields in the world in terms of power density, which is Makban.

But before he could reach that goal, the investor has to tread carefully through a landmine-laden field.

The classic admonition applies very well to the present exercise: Caveat emptor!