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.

The U.S. also bails out its renewable energy industry

Buried within the 400 or so pages of sweeteners that were added to the recent $700 billion bailout package for the U.S.  financial sector that has been signed into law by President George W. Bush is a provision which breathes life to an anxious nascent renewable energy industry.

This is the extension of the Production (PTC) and Investment Tax Credits (ITC) which was unexpectedly passed as part of the Emergency Economic Stabilization Act of 2008 (H.R. 1424), as the bailout plan is officially known.

For months renewable energy practitioners--developers, investors, manufacturers and would-be users--could only wring their arms in anguish as they watch the spectacle of legislators bickering among themselves whether to extend or not the tax credits.

They view these tax credits as a lifeline to the whole renewable energy industry--solar, wind geothermal, and now the marine energy technologies--before it gets to its own maturity. The provision will extend the PTC for one year and the ITC for eight years.

The other highlights of the package include:

• Eliminating the $2,000 capon the residential ITC
• Allowing utilities to obtain ITC
• Authorizing $800 million for clean energy bonds for generating facilities using renewable sources
• Creating an ITC for so-called marine energy technologies which include tidal, wave current and ocean thermal

The solar energy industry is particularly ecstatic. The legislation "will enable (solar) companies to continue to invest in American production, American jobs and America's energy independence," said Mark Finocchario, president of SCHOTT Solar.

The wind industry considers the tax credits essential to the growth of the industry. In the geothermal sector, these credits encourage aggressive growth and support rapid deployment strategy for building geothermal plants within the decade, said Brent Cook, CEO of geothermal developer Raser Technologies.

That such incentives are vital to the industry can be seen in recent history. In 1999, 2001 and 2003 when Congress didn't renew the tax credits, wind power installations dropped by 93% in 2000 and by 74% in 2004.

Prior to the signing into law of the bailout package, wind developers have been putting projects on hold because financial institutions have been reluctant to fund these projects with only a glimmer of hope that the tax credit will be renewed, said Leon Steinberg, CEO of National Wind, a leading wind energy developer.

The solar industry relies on a 30% credit on new investments. If the credits were not renewed, the solar market could collapse, and solar-technology firms could end belly up,  according to an industry insider.

Our honorable senators and House representatives should take heed of the lessons from the U.S. situation. Their dilly-dallying of passing the renewable energy bill has cost the country enormous amount of opportunity losses.

Now that the bill will become law upon its signing, our legislators should realize that their job has only begun. We need to put some substance into the skeleton bill that they have just passed.

New kids on the geothermal block

 The Department of Energy (DOE) last week granted a geothermal service contract (GSC) to partners Aragorn Power and Energy Corp. (APEC) and Guidance Management Corp (GMC) to explore a potential geothermal area in Kalinga-Apayao. This was announced by the listed APC Group, the parent company of Aragorn Power, in a disclosure to the Philippine Stock Exchange (PSE:APC).

 This brings to three the number of new entrants to the geothermal sector recently awarded a GSC by the DOE.

 Earlier, PSE-listed firm Basic Energy (PSE:BSC), was awarded a geothermal service contract to developed the Mabini, Batangas geothermal prospect while Biliran Geothermal Incorporated (BGI) was awarded a similar contract to explore and develop the geothermal potential of Biliran island province.

 At present the major developer and operator of geothermal fields comprise of Lopez-owned Energy Development Corporation (EDC, formerly PNOC-EDC) and Chevron Geothermal (former Philippine Geothermal Inc.).

 Who are these new kids on the geothermal block, and how serious are their commitments to develop these resources?

 APEC was formed as the vehicle of the parent’s foray into the energy sector. The APC Group was formerly into oil exploration until new investors transformed it into a holding company.

 Its partner, GMC, composed of American, Australian, Spanish and Filipino investors, has committed to initially invest $8 million for surface geological and scientific exploration prior to drilling of exploration wells. The investment could go up to $300 million or more to develop geothermal resources in the country, according to GMC chairman Joaquin Rodriguez.

 GMC itself has been awarded the rights to develop a target 40 MW geothermal power plant at the Amacan geothermal prospect in Compostela Valley.

 Basic energy is aiming to develop 20-40 MW geothermal generation at Mabini prospect which covers 3,841 hectares.

 The third company, Biliran Geothermal Inc. (BGI), will spend $15 million to scour a total area of 22,394 ha. for geothermal resources. It hopes to put up at least 100 MW of electric generation if the exploration results prove its feasibility.

 BGI is a joint venture company formed between Filtech Energy Drilling Corp. (Filtech) and Envent Holding Philippines, Inc.

 Envent is controlled by Reykjavik Energy Invest, which is the energy investment arm of the Reykjavik Energy (Iceland) and Geysir Green Energy, also an Icelandic energy firm which is globally focused on green and alternative energy investments.

 Aside from the Philippine project, the Icelandic group has geothermal development initiatives in Indonesia and Djibouti, Africa, among others. It also participated as a partner to the Lopez-group in taking over PNOC Energy Development Corporation from the government through Red Vulcan Holdings but has already divested from the latter.

 Filtech meanwhile, was formed by a group of former executives of EDC.

 The entry of new investors in the geothermal sector is viewed by industry insiders as a positive development to restart the momentum of geothermal development in the country which has been in the doldrums in the last few years with not much capacity being added.

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.

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.